<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997.
REGISTRATION NO. 333-32687
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8049 33-0604264
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. LEBOVITZ, ESQ.
SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
<TABLE>
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DAVID R. SNYDER, ESQ. BRUCE D. MEYER, ESQ.
PILLSBURY MADISON & SUTRO LLP GIBSON, DUNN & CRUTCHER LLP
101 WEST BROADWAY, SUITE 1800 333 SOUTH GRAND AVENUE
SAN DIEGO, CALIFORNIA 92101 LOS ANGELES, CALIFORNIA 90071-3197
(619) 234-5000 (213) 229-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger (the "Merger") of FPA Acquisition Corp., a wholly
owned subsidiary of FPA Medical Management, Inc., with and into Health Partners,
Inc. as described in the Agreement and Plan of Merger dated as of July 1, 1997
(the "Merger Agreement"), attached as Appendix A to the Proxy
Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and are in compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
FPA MEDICAL MANAGEMENT, INC.
CROSS-REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K)
<TABLE>
<CAPTION>
FORM S-4
ITEM NO. CAPTION LOCATION IN PROXY STATEMENT/PROSPECTUS
- -------- ---------------------------------------------- ----------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION.
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Facing Page; Cross-Reference Sheet; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................. Summary; Risk Factors
4. Terms of the Transaction...................... Summary; The Merger; The Merger Agreement; The
Payments; Board of Directors and Management of
FPA Following the Merger; Comparison of Rights
of Holders of HPI and FPA Common Stock
5. Pro Forma Financial Information............... Summary; Selected Historical and Pro Forma
Information; Selected Historical Financial
Data -- FPA
6. Material Contracts with the Company Being
Acquired...................................... Summary; The Merger; The Merger Agreement
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters.................................. *
8. Interests of Named Experts and Counsel........ *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... *
B. INFORMATION ABOUT THE REGISTRANT.
10. Information With Respect to S-3 Registrants... Available Information; Incorporation of
Certain Documents by Reference; Summary;
Selected Historical Financial Data -- FPA
11. Incorporation of Certain Information by
Reference..................................... Incorporation of Certain Documents by
Reference
12. Information With Respect to S-2 or S-3
Registrants................................... *
13. Incorporation of Certain Information by
Reference..................................... *
14. Information With Respect to Registrants Other
Than S-2 or S-3 Registrants................... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
15. Information With Respect to S-3 Companies..... *
16. Information With Respect to S-2 or S-3
Companies..................................... *
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies..................... Summary; Selected Consolidated Financial
Data -- HPI; Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- HPI; Business of HPI; Security
Ownership of Certain HPI Beneficial Owners and
Management; Executive Officers of HPI; HPI
Executive Officer and Director Compensation;
Index to HPI's Consolidated Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION.
18. Information if Proxies, Consents or
Authorizations are to be Solicited............ Summary; The Merger; The HPI Special Meeting
19. Information if Proxies, Consents or
Authorizations are not be to Solicited or in
an Exchange Offer............................. *
</TABLE>
- ---------------
* Not Applicable.
<PAGE> 3
HEALTH PARTNERS, INC.
800 CONNECTICUT AVENUE
NORWALK, CONNECTICUT 06854
September , 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Health Partners, Inc. ("HPI"), which, as you have previously been notified, will
be held at 10:00 a.m., local time, on , 1997 at HPI's corporate
headquarters, 800 Connecticut Avenue, Norwalk, Connecticut, and any adjournments
or postponements thereof (the "HPI Special Meeting").
At the HPI Special Meeting, holders of HPI's common stock and preferred
stock will be asked to consider and vote upon a proposal to approve and adopt
the Agreement and Plan of Merger dated as of July 1, 1997 (the "Merger
Agreement") by and among FPA Medical Management, Inc. ("FPA"), FPA Acquisition
Corp., a wholly owned subsidiary of FPA ("Merger Sub"), and HPI. A copy of the
Merger Agreement is included as Appendix A to the attached Proxy
Statement/Prospectus. On the terms and subject to the conditions of the Merger
Agreement, Merger Sub will be merged with and into HPI (the "Merger"), and HPI
will continue in existence as a wholly owned subsidiary of FPA.
THE BOARD OF DIRECTORS OF HPI, AFTER CAREFUL CONSIDERATION, HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS FAIR TO, AND IN
THE BEST INTERESTS OF, HPI AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
At the HPI Special Meeting, you will also be asked to consider and vote
upon a proposal to approve certain payments and benefits (the "Payments") to be
paid to or received by the undersigned. The Board of Directors of HPI has
approved the Payments (with the undersigned abstaining) and recommends that you
vote FOR approval of the Payments.
Upon consummation of the Merger, each outstanding share of HPI common stock
will be converted into the right to receive a number of shares of FPA common
stock equal to the Exchange Ratio, which is based on a formula set forth in the
Merger Agreement and described in the attached Proxy Statement/Prospectus. Based
on such formula, management of HPI believes that the Exchange Ratio will fall
between .43 and .55 shares of FPA common stock for each share of HPI common
stock, assuming a range of FPA Value, as defined in the Proxy
Statement/Prospectus, of $15.65 to $25.00 and based on the number of shares of
HPI common stock and substitute options to purchase HPI common stock issued in
connection with the completion of the Roll-Up Transactions, as described in the
Proxy Statement/Prospectus. STOCKHOLDERS OF HPI WILL BE ABLE TO OBTAIN THE
EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE HPI
SPECIAL MEETING BY CALLING (888) XXX-XXXX.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY EVEN
IF YOU ARE PLANNING TO ATTEND THE MEETING. A RETURN ENVELOPE IS ENCLOSED FOR
YOUR USE AND NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. If you do
attend the HPI Special Meeting and wish to vote in person, you may revoke your
proxy at that time.
Very truly yours,
Charles G. Berg
President and Chief Executive Officer
<PAGE> 4
HEALTH PARTNERS, INC.
800 CONNECTICUT AVENUE
NORWALK, CONNECTICUT 06854
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
To Our Stockholders:
FURTHER NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Health Partners, Inc., a Delaware corporation ("HPI"), will be held at 10:00
a.m., local time, at HPI's corporate headquarters, 800 Connecticut Avenue,
Norwalk, Connecticut, and any adjournments or postponements thereof (the "HPI
Special Meeting"). The HPI Special Meeting is called for the purpose of
considering and voting upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger dated
as of July 1, 1997 (the "Merger Agreement") by and among FPA Medical Management,
Inc. ("FPA"), FPA Acquisition Corp. ("Merger Sub") and HPI. Pursuant to the
Merger Agreement (i) Merger Sub will be merged with and into HPI, with HPI as
the surviving corporation and (ii) each outstanding share of HPI common stock
(subject to the exceptions and limitations set forth in the Merger Agreement and
including shares of HPI common stock issued upon conversion of HPI preferred
stock) at the Effective Time (as defined herein) will be converted into the
right to receive a number of shares of FPA common stock equal to the Exchange
Ratio as set forth in the Merger Agreement and as described in the attached
Proxy Statement/Prospectus. A copy of the Merger Agreement is included as
Appendix A to the attached Proxy Statement/Prospectus. STOCKHOLDERS OF HPI WILL
BE ABLE TO OBTAIN THE EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS
DAY PRECEDING THE HPI SPECIAL MEETING BY CALLING (888) XXX-XXXX. The proposed
merger and other related matters are more fully described in the attached Proxy
Statement/Prospectus and the Appendices thereto.
2. A proposal to approve certain payments and benefits to the President and
Chief Executive Officer of HPI.
3. To transact such other business as may properly come before the HPI
Special Meeting.
The close of business on September 4, 1997 has been fixed as the record
date for determination of stockholders entitled to notice of, and to vote at,
the HPI Special Meeting. Only stockholders of record at the close of business on
the record date are entitled to vote at the HPI Special Meeting.
In connection with the proposed merger, dissenters' rights will be
available to those stockholders of HPI who meet and comply with the requirements
of Section 262 of the Delaware General Corporation Law (the "Delaware Act"), a
copy of which is included as Appendix C to the attached Proxy
Statement/Prospectus. Reference is made to the section entitled "THE
MERGER -- Rights of Dissenting Stockholders" in the attached Proxy
Statement/Prospectus for a discussion of the procedures to be followed in
asserting dissenters' rights in connection with the proposed merger under
Section 262 of the Delaware Act.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY EVEN
IF YOU ARE PLANNING ON ATTENDING THE HPI SPECIAL MEETING. A RETURN ENVELOPE IS
ENCLOSED FOR YOUR USE AND NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
If you do attend the HPI Special Meeting and wish to vote in person, you may
revoke your proxy at that time.
In accordance with the Delaware Act, a complete list of the stockholders of
HPI entitled to vote at the HPI Special Meeting will be open to examination,
during ordinary business hours, at HPI's executive offices for 10 days preceding
the HPI Special Meeting by any HPI stockholder for any purpose germane to the
HPI Special Meeting.
By Order of the Board of Directors,
Charles G. Berg
President and Chief Executive Officer
[date]
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<TABLE>
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FPA MEDICAL MANAGEMENT, INC.
HEALTH PARTNERS, INC. PROSPECTUS
PROXY STATEMENT 6,388,889 SHARES
COMMON STOCK
</TABLE>
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to the stockholders of Health Partners, Inc., a Delaware Corporation
("HPI"), in connection with the solicitation of proxies by the Board of
Directors of HPI (the "HPI Board") for use at a Special Meeting of stockholders
to be held at HPI's corporate headquarters, 800 Connecticut Avenue, Norwalk,
Connecticut on , 1997, at 10:00 a.m. local time (the "HPI Special
Meeting") to (i) approve the Agreement and Plan of Merger dated as of July 1,
1997 (the "Merger Agreement") by and among HPI, FPA Medical Management, Inc., a
Delaware corporation ("FPA"), and FPA Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of FPA ("Merger Sub"), relating to the merger
("Merger") of Merger Sub with and into HPI and (ii) approve certain payments and
benefits (the "Payments") to Charles G. Berg, President and Chief Executive
Officer of HPI. APPROVAL OF THE PAYMENTS IS NOT A CONDITION TO THE CONSUMMATION
OF THE MERGER. As a result of the Merger, HPI will become a wholly owned
subsidiary of FPA. In connection with the Merger, each outstanding share of HPI
Common Stock, par value $.001 per share ("HPI Common Stock"), will be exchanged
for the right to receive a number of shares of FPA Common Stock, par value $.002
per share ("FPA Common Stock"), equal to the "Exchange Ratio." The holders of
HPI Preferred Stock have agreed to convert their shares of HPI Preferred Stock
to HPI Common Stock prior to the Effective Time. See "THE MERGER
AGREEMENT -- The Merger." A copy of the Merger Agreement is included in the
Proxy Statement/Prospectus as Appendix A.
The Exchange Ratio depends on the relationship among (i) the total issued
and outstanding shares of HPI Common Stock (the "Outstanding HPI Stock")
immediately prior to the time at which the Merger becomes effective (the
"Effective Time") (including the total number of shares of HPI Common Stock
issuable pursuant to the Roll-up Transactions (as described in this Proxy
Statement/Prospectus) and the conversion of all of the shares of HPI Preferred
Stock), (ii) the fair value of vested and unvested options to purchase HPI
Common Stock (the "HPI Options") outstanding immediately prior to the Effective
Time (including HPI Options issuable in the Roll-up Transactions) which will be
converted in the Merger into fully paid shares of FPA Common Stock (the "FPA
Option Shares"), (iii) the presumed transaction value of $115 million and (iv)
the FPA Value. The FPA Value will be the average of the closing prices of FPA
Common Stock on the Nasdaq National Market System ("Nasdaq") for the ten
consecutive trading days ending on the date that is two trading days prior to
the date of consummation of the Merger (the "Closing Date"). The "Adjusted FPA
Value" will equal the FPA Value, except that if the FPA Value is less than $18,
the Adjusted FPA Value will be $18 and if the FPA Value is greater than $22, the
Adjusted FPA Value will be $22. Consequently, the Adjusted FPA Value may differ
from the actual market price of FPA Common Stock reported by Nasdaq on the date
of the HPI Special Meeting, the Closing Date or the date the HPI stockholders
actually receive their shares of FPA Common Stock after the Merger is completed.
See "THE MERGER -- Merger Consideration," "THE MERGER AGREEMENT -- Roll-Up
Transactions" and "-- Treatment of Stock Options." STOCKHOLDERS OF HPI WILL BE
ABLE TO OBTAIN THE EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS
DAY PRECEDING THE HPI SPECIAL MEETING BY CALLING (888) XXX-XXXX.
The Exchange Ratio can be represented by the following formula:
<TABLE>
<S> <C>
Exchange Ratio = ($115 Million / Adjusted FPA Value) - FPA Option Shares
---------------------------------------------------------
Outstanding HPI Stock
</TABLE>
HPI believes that the Exchange Ratio will likely fall between .43 and .55
resulting in the issuance of between 5,227,273 and 6,388,889 shares of FPA
Common Stock (assuming a range of FPA Value of $15.65 to $25.00, respectively).
If the FPA Value is less than $15.65, HPI may terminate the Merger Agreement. In
the event that the FPA Value is below $15.65, the Board of Directors of HPI, in
exercise of its fiduciary duties, would consider whether to terminate the Merger
Agreement based on whether the stockholders of HPI would receive fair
consideration for their HPI Common Stock and whether consummation of the Merger
would be in the best interests of the stockholders. See "THE MERGER --
Termination." Except as more fully described in the accompanying Proxy
Statement/Prospectus, in no event will the number of shares of FPA Common Stock
issuable in the Merger exceed 6,388,889. The calculation of the Exchange Ratio
is described more fully in the accompanying Proxy Statement/Prospectus. See "THE
MERGER -- Merger Consideration" and "-- Adjustments to Merger Consideration."
Shares of FPA Common Stock are traded on Nasdaq under the symbol "FPAM." On
, 1997, the last trading day prior to the date of this Proxy
Statement/Prospectus, the last reported sale price of FPA Common Stock was
$ per share. Based on this closing price, and assuming the FPA Value
were $ , the dollar value of the Merger Consideration, as defined in
this Proxy Statement/Prospectus, per share of HPI Common Stock would be
$ and the aggregate Merger Consideration would be $ . This Proxy
Statement/Prospectus and the accompanying forms of proxy are first being mailed
to stockholders of HPI on or about , 1997.
The Payments will be made to Mr. Berg pursuant to his current employment
agreement (the "HPI Employment Agreement") with HPI which will be terminated at
the Effective Time. Stockholder approval of the Payments is required for such
payments to be tax deductible expenses of HPI and to avoid a 20% nondeductible
excise tax to Mr. Berg on such Payments. See "THE PAYMENTS" and "THE
MERGER -- Interests of Certain Persons in the Merger."
To the extent that FPA or HPI waives compliance with material provisions of
or conditions to consummation of the Merger, FPA and HPI will amend this Proxy
Statement/Prospectus, and HPI will resolicit stockholder votes to the extent the
same may be required by law.
In addition, this Proxy Statement/Prospectus also constitutes the Prospectus
of FPA filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of FPA Common Stock to be issued to stockholders of HPI in the Merger.
SEE "RISK FACTORS" BEGINNING AT PAGE 26 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS IN EVALUATING THE MERGER AND FPA.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus in
connection with the solicitation of proxies or the offering of securities made
hereby and, if given or made, such information or representation should not be
relied upon as having been authorized by FPA or HPI. This Proxy
Statement/Prospectus does not constitute an offer to sell, or the solicitation
of an offer to purchase, any securities, or the solicitation of a proxy, in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation of an offer or proxy solicitation. Neither the delivery of
this Proxy Statement/Prospectus nor any distribution of the securities offered
hereby shall, under any circumstances, create any implication that there has
been no change in the affairs of FPA or HPI since the date hereof or that the
information set forth or incorporated by reference herein is correct as of any
time subsequent to its date. All information herein with respect to FPA and
Merger Sub has been furnished by FPA, and all information herein with respect to
HPI has been furnished by HPI.
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1997.
<PAGE> 6
AVAILABLE INFORMATION
FPA is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the offices of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Regional Offices of the Commission: Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials may be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates or from the Commission's Internet Web
site at http://www.sec.gov. Shares of FPA Common Stock are traded on the Nasdaq
National Market System under the symbol FPAM.
FPA has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), on Form S-4 with respect to the securities offered hereby.
This Proxy Statement/Prospectus also constitutes the Prospectus of FPA filed as
part of the Registration Statement and does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain parts
of which are omitted in accordance with the rules of the Commission. Statements
made in this Proxy Statement/Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete; with
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including exhibits filed as part thereof, are available for
inspection and copying at the Commission's offices as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by FPA (File No. 0-24276)
with the Commission pursuant to the Exchange Act, are incorporated by reference
in this Proxy Statement/Prospectus:
1. FPA's Annual Report on Form 10-K for the year ended December 31, 1996
filed with the Commission on March 31, 1997, as amended by Form 10-K/A
filed with the Commission on April 29, 1997.
2. FPA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
filed with the Commission on May 15, 1997.
3. FPA's Current Report on Form 8-K dated March 17, 1997 filed with the
Commission on May 16, 1997, as amended by Form 8-K/A filed with the
Commission on May 30, 1997.
4. FPA's Current Report on Form 8-K dated July 31, 1997 filed with the
Commission on July 31, 1997.
5. FPA'S Quarterly Report on Form 10-Q for the quarter ended June 30, 1997
filed with the Commission on August 14, 1997.
6. The description of the FPA Common Stock contained in FPA's Registration
Statement on Form 8-A dated October 20, 1994.
7. The audited combined balance sheets of Foundation Health Medical
Services and affiliates as of June 30, 1995 and 1996 and the related
combined statements of operations, shareholders' deficit and cash flows
for each of the three years in the period ended June 30, 1996 contained
in FPA's Registration Statement on Form S-4 dated February 13, 1997.
All documents and reports subsequently filed by FPA pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the Effective Time of the Merger shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded
2
<PAGE> 7
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or with respect to FPA in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded, except
as so modified or superseded, shall not be deemed to constitute a part of this
Proxy Statement/Prospectus.
THE PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHICH
THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT CHARGE, ON WRITTEN OR ORAL
REQUEST DIRECTED TO FPA MEDICAL MANAGEMENT, INC., 3636 NOBEL DRIVE, SUITE 200,
SAN DIEGO, CALIFORNIA 92122, ATTENTION: JAMES A. LEBOVITZ (TELEPHONE NUMBER
(619) 453-1000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY , 1997, THE DATE WHICH IS FIVE DAYS PRIOR
TO THE DATE OF THE HPI SPECIAL MEETING.
Some of the information presented in this Proxy Statement/Prospectus
constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 do not apply to forward looking
statements made by HPI. Although FPA and HPI believe that their expectations are
based on reasonable assumptions within the bounds of their knowledge of their
respective businesses and operations, there can be no assurance that actual
results of FPA's or HPI's operations will not differ materially from
expectations. Factors which could cause actual results to differ from
expectations include, among others, FPA's ability to successfully integrate
acquisitions, FPA's ability to manage growth, the difficulty of controlling
health care costs, the reliance of FPA on capitated revenue and FPA's ability to
comply with governmental and other regulations, laws and licenses. Specific
reference is made to the risks and uncertainties described under "RISK FACTORS."
3
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
GLOSSARY OF CERTAIN DEFINED TERMS..................................................... 6
SUMMARY............................................................................... 9
FPA MEDICAL MANAGEMENT, INC......................................................... 9
HEALTH PARTNERS, INC................................................................ 11
THE MERGER.......................................................................... 13
THE HPI SPECIAL MEETING............................................................. 22
FPA AND HPI COMPARATIVE PER SHARE DATA.............................................. 24
MARKET PRICE AND DIVIDEND DATA...................................................... 25
RISK FACTORS.......................................................................... 26
Risks Relating to FPA............................................................... 26
Risks Relating to HPI............................................................... 36
Risks Relating to the Merger........................................................ 38
THE HPI SPECIAL MEETING............................................................... 40
Date, Time and Place................................................................ 40
Purpose of the HPI Special Meeting.................................................. 40
Revocation of Proxies............................................................... 40
Quorum.............................................................................. 40
Vote Required....................................................................... 40
Record Date; Stock Entitled to Vote................................................. 41
Voting of Proxies................................................................... 41
Solicitation of Proxies............................................................. 41
Stockholders' Right of Appraisal.................................................... 41
Security Ownership of Certain HPI Owners and Management............................. 42
THE MERGER............................................................................ 43
Effects of the Merger............................................................... 43
Merger Consideration................................................................ 43
Adjustments to Merger Consideration................................................. 45
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares.... 45
Nasdaq Listing...................................................................... 46
Background of the Merger............................................................ 46
Recommendation of the HPI Board of Directors and Reasons for the Merger............. 48
Opinion of HPI's Financial Advisor.................................................. 50
Effective Time of the Merger........................................................ 54
Interests of Certain Persons in the Merger.......................................... 54
Certain Federal Income Tax Consequences............................................. 57
Accounting Treatment................................................................ 58
Resale of FPA Common Stock by Affiliates............................................ 59
Certain Regulatory Matters.......................................................... 59
Rights of Dissenting Stockholders................................................... 59
THE PAYMENTS.......................................................................... 61
BOARD OF DIRECTORS AND MANAGEMENT OF FPA FOLLOWING THE MERGER......................... 62
Board of Directors of FPA Following the Merger...................................... 62
Executive Officers of FPA Following the Merger...................................... 62
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMPARISON OF RIGHTS OF HOLDERS OF HPI AND FPA COMMON STOCK........................... 63
Preferred Stock..................................................................... 63
Board of Directors.................................................................. 63
Bylaws.............................................................................. 64
Stockholder Meetings................................................................ 64
Indemnification..................................................................... 64
Stockholder Voting Requirements..................................................... 65
Action by Consent................................................................... 66
THE MERGER AGREEMENT.................................................................. 67
The Merger.......................................................................... 67
Effective Time...................................................................... 67
Fractional Shares................................................................... 68
Surrender and Payment............................................................... 68
Treatment of Stock Options.......................................................... 68
Certain Representations and Warranties.............................................. 68
Conduct of Business Pending the Merger.............................................. 69
Certain Additional Agreements....................................................... 70
Roll-up Transactions................................................................ 72
Conditions to Consummation of the Merger............................................ 73
Termination......................................................................... 74
Effect of Termination............................................................... 75
Amendment........................................................................... 75
Waiver.............................................................................. 75
SELECTED HISTORICAL AND PRO FORMA INFORMATION......................................... 76
SELECTED HISTORICAL FINANCIAL DATA -- FPA............................................. 85
SELECTED CONSOLIDATED FINANCIAL DATA -- HPI........................................... 86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- HPI........................................................ 87
Overview............................................................................ 87
Results of Operations............................................................... 90
Liquidity and Capital Resources..................................................... 93
BUSINESS OF HPI....................................................................... 94
Administrative Services Agreements.................................................. 95
SECURITY OWNERSHIP OF CERTAIN HPI BENEFICIAL OWNERS AND MANAGEMENT.................... 96
EXECUTIVE OFFICERS OF HPI............................................................. 97
HPI EXECUTIVE OFFICER AND DIRECTOR COMPENSATION....................................... 98
Executive Officer Compensation...................................................... 98
Director Compensation............................................................... 99
LEGAL MATTERS......................................................................... 99
ADDITIONAL INFORMATION................................................................ 99
EXPERTS............................................................................... 100
INDEX TO HPI'S CONSOLIDATED FINANCIAL STATEMENTS...................................... F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER DATED AS OF JULY 1, 1997 BY AND AMONG FPA,
MERGER SUB AND HPI...................................................... A-1
APPENDIX B -- OPINION OF SMITH BARNEY INC............................................. B-1
APPENDIX C -- DELAWARE GENERAL CORPORATION LAW SECTION 262............................ C-1
</TABLE>
5
<PAGE> 10
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
Adjusted FPA Value........................... The FPA Value as adjusted pursuant to the
terms of the Merger Agreement and used in
determining the Exchange Ratio.
APB No. 16................................... Accounting Principles Board Opinion No. 16, as
amended.
Capitation................................... A per enrollee per month amount paid pursuant
to Payor contracts in exchange for which the
PPM or physician group is financially
responsible to provide the enrollee with all
necessary medical care specified by the
capitation arrangement.
Certificate of Merger........................ The Certificate of Merger to be filed with the
Secretary of State of Delaware in connection
with the Merger.
Closing...................................... The closing of the Merger.
Closing Date................................. The date on which the Closing occurs.
Code......................................... The Internal Revenue Code of 1986, as amended.
Commission................................... The Securities and Exchange Commission.
Delaware Act................................. Delaware General Corporation Law.
Department................................... The California Department of Corporations.
DOJ.......................................... The United States Department of Justice.
Effective Time............................... The time at which the Merger will become
effective as provided for in the Certificate
of Merger or such other time as to which FPA,
HPI and Merger Sub shall agree.
Exchange Act................................. Securities Exchange Act of 1934, as amended.
Exchange Agent............................... American Stock Transfer & Trust Company or
another bank or trust company designated by
FPA acting as an exchange agent.
Exchange Ratio............................... The number of shares of FPA Common Stock
issuable in exchange for each share of HPI
Common Stock in connection with the Merger.
FPA.......................................... FPA Medical Management, Inc.
FPA Board.................................... The Board of Directors of FPA Medical
Management, Inc.
FPA Common Stock............................. FPA Medical Management, Inc. Common Stock, par
value $.002 per share.
FPA Network.................................. Professional Corporations, other providers of
medical services and Payors affiliated with
FPA.
FPA Option Shares............................ The number of fully paid shares of FPA Common
Stock to be issued in respect of HPI Options.
</TABLE>
6
<PAGE> 11
<TABLE>
<S> <C>
FPA Value.................................... The average closing price of FPA Common Stock
as reported on Nasdaq for the ten consecutive
trading days ending on the date that is two
trading days prior to the Closing Date.
Global Capitation............................ A capitation arrangement whereby the PPM or
physician group is financially responsible to
provide enrollees with all necessary inpatient
and outpatient medical care.
HMO.......................................... Health Maintenance Organization.
HPI.......................................... Health Partners, Inc.
HPI Board.................................... The Board of Directors of Health Partners,
Inc.
HPI Common Stock............................. Health Partners, Inc. Common Stock, $.001 par
value per share.
HPI Options.................................. Options to purchase shares of HPI Common Stock
(including substitute HPI Options issued in
connection with the completion of the Roll-up
Transactions).
HPI Preferred Stock.......................... Health Partners, Inc. Series A Convertible
Preferred Stock, $.001 par value per share,
and Health Partners, Inc. Series B Convertible
Preferred Stock, $.001 par value per share.
HPI Special Meeting.......................... The Special Meeting of stockholders of HPI to
be held on at 10:00 a.m. local time
at 800 Connecticut Avenue, Norwalk,
Connecticut, as the same may be adjourned or
postponed.
HPI Subsidiaries............................. Direct and indirect subsidiaries of HPI.
HPI Voting Securities........................ The outstanding shares of HPI Common Stock and
HPI Preferred Stock.
HSR Act...................................... Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
IPA.......................................... Independent practice association.
Merger....................................... The merger of Merger Sub and HPI.
Merger Agreement............................. The Agreement and Plan of Merger dated as of
July 1, 1997 by and among FPA, Merger Sub and
HPI.
Merger Consideration......................... The aggregate consideration to be issued to
HPI stockholders in the Merger.
Merger Sub................................... FPA Acquisition Corp.
Nasdaq....................................... The Nasdaq National Market System.
1994 Securities Purchase Agreement........... The Securities Purchase Agreement by and among
HPI, Foxfield Venture, Inc. (now WellPoint),
Oxford and certain individual investors dated
as of May 18, 1994.
Outstanding HPI Stock........................ The total number of issued and outstanding
shares of HPI Common Stock (including the
total number of shares of HPI Common Stock
issuable in the Roll-up Transactions and the
conversion of all of the shares of HPI
Preferred Stock).
Oxford....................................... Oxford Health Plans, Inc.
</TABLE>
7
<PAGE> 12
<TABLE>
<S> <C>
PPM.......................................... Physician practice management company.
Payments..................................... Certain payments and benefits to be paid to or
received by Mr. Berg in connection with the
Merger.
Payors....................................... HMOs and other prepaid health insurance plans
which provide physician and related health
care services to enrollees.
Professional Corporations.................... Professional corporations affiliated with FPA.
Proxy Statement/Prospectus................... This proxy statement/prospectus relating to
the Merger and the Payments.
Record Date.................................. September 4, 1997
Registration Statement....................... The registration statement filed under the
Securities Act of which this Proxy
Statement/Prospectus forms a part.
Roll-up Transactions......................... The acquisition by HPI of the minority
interests in its subsidiaries which will occur
immediately prior to the Effective Time.
Rule 144..................................... Rule 144 promulgated under the Securities Act.
Rule 145..................................... Rule 145 promulgated under the Securities Act.
Securities Act............................... Securities Act of 1933, as amended.
Smith Barney................................. Smith Barney Inc., financial advisor to HPI
with respect to the Merger.
Surviving Corporation........................ HPI after the Merger.
WellPoint.................................... WellPoint Development Company, Inc.
WellPoint Parent............................. WellPoint Health Networks Inc., the ultimate
corporate parent of WellPoint.
</TABLE>
8
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Proxy Statement/Prospectus. The information
contained in this summary is qualified in its entirety by, and should be read in
conjunction with, the detailed information and financial statements, including
the notes thereto, appearing elsewhere or incorporated by reference in this
Proxy Statement/Prospectus and the documents incorporated herein by reference.
FPA MEDICAL MANAGEMENT, INC.
FPA is a national physician practice management company which acquires,
organizes and manages primary care physician practice networks and provides
contract management services to hospital-based emergency departments. FPA
provides primary and specialty care services to prepaid managed care enrollees
and fee-for-service patients through a network of independent practice
association physicians and owned primary care physician groups. FPA manages all
covered primary and specialty medical care for each enrollee in exchange for
monthly capitation payments pursuant to Payor contracts. Including the effects
of the Merger, FPA will be affiliated with approximately 7,580 primary care
physicians (including obstetrician-gynecologists who contract with HealthCap,
Inc. ("HealthCap") as primary care physicians, the "ob-gyn physicians") and
15,322 specialty care physicians (excluding specialists who contract with
HealthCap), who provide services to approximately 1,316,800 enrollees (including
HealthCap ob-gyn direct access enrollees) of 42 health maintenance organizations
("HMOs") or other prepaid health insurance plans (collectively, "Payors") in 27
states. FPA, through its subsidiary Sterling Healthcare Group, Inc.
("Sterling"), is also affiliated with approximately 1,300 emergency department
physicians and manages the emergency departments of 107 hospitals in 20 states.
FPA's strategy is to increase enrollment by adding new Payor relationships
and new providers to the existing FPA Network and by expanding the FPA Network
into new geographic areas where the penetration of managed healthcare is
growing. FPA believes new Payor and provider relationships are possible because
of its ability to manage the cost of health care without sacrificing quality.
FPA seeks to control the two "gatekeeping" points of entry into the managed
health care delivery system -- the primary care physician's office and the
emergency room -- thereby giving FPA a platform for coordinating all aspects of
patient care under global capitation Payor contracts. FPA is also pursuing
national and multi-state Payor contracts, which facilitate more rapid
development of provider networks in new markets and thus should enable FPA to
increase enrollment in an accelerated manner. FPA has recently entered into
several multi-state Payor agreements, including agreements with (i) Aetna/U.S.
Healthcare ("Aetna") whereby Aetna managed care members in 12 states may access
the FPA Network as specific arrangements are negotiated and approved in each of
such states; (ii) Healthsource, Inc. ("Healthsource") whereby Healthsource
managed care members in three states may utilize the FPA Network; and (iii)
PacifiCare Health Systems, Inc. ("PacifiCare") whereby the FPA Network will be
available to PacifiCare managed care members in certain agreed upon markets. FPA
has recently entered into a letter of intent with Foundation Health Systems,
Inc. ("Foundation") to negotiate long-term global capitation contracts in a
number of states where FPA and Foundation mutually do business.
FPA's relationships with its subsidiaries and affiliated professional
corporations (the "Professional Corporations"), other providers of medical
services and Payors (collectively, the "FPA Network") offer physicians the
opportunity to participate more effectively in managed care programs by
organizing physician groups within geographic areas to contract with Payors. FPA
enhances physician practice operations by assuming administrative functions
necessary in a managed care environment. These functions include claims
adjudication, utilization management of medical services, Payor contract
negotiations, credentialing, financial reporting and the operation of management
information systems. Under these arrangements, FPA, on behalf of the
Professional Corporations, is responsible for the payment of the cost of medical
services, including professional, ancillary and medical management services, and
is entitled to amounts received from Payors in excess of such costs. FPA
believes that its management model is appealing to physicians because it allows
the
9
<PAGE> 14
physicians to retain control of their own practices while gaining access to more
patients through participation in a managed care program.
Except where otherwise permitted by law or regulation, FPA does not engage
in the practice of medicine. Due to the constraints of the corporate practice of
medicine doctrine, FPA cannot own the majority of shares of the voting stock of
the Professional Corporations in most states. FPA has direct or indirect
unilateral and perpetual control over the assets and operations of the
Professional Corporations through the ownership of such Professional
Corporations by certain physicians who are employees of FPA or one of its
subsidiaries. Each shareholder/director of such Professional Corporations has
entered into a succession agreement with FPA which requires such
shareholder/director to sell to a designee of FPA such shareholder/director's
shares of stock in the relevant Professional Corporation for a nominal amount if
such shareholder/director is terminated from employment with FPA.
Agreements with Payors and providers are entered into with, and approved
by, either a subsidiary of FPA or one of the Professional Corporations,
depending on applicable state law. In the states where the corporate practice of
medicine prohibits the ownership of professional corporations other than by
physicians or physician-owned professional corporations, in most cases the
capitation payments are received by the Professional Corporations and are
generally assigned to FPA pursuant to administrative services agreements. Where
subsidiaries of FPA contract directly with Payors, such subsidiaries receive the
capitation payments.
The FPA Network manages all covered primary and specialty medical care for
each enrollee in exchange for monthly capitation payments pursuant to Payor
contracts. Specialty care physician services, inpatient hospitalization and
certain other services managed by primary care physicians are subject to
pre-authorization guidelines and are provided through contracts negotiated by
FPA for the Professional Corporations based on discounted fee-for-service, per
diem or capitation rates. Contracts with Payors and primary care physicians
generally include shared risk arrangements and other incentives designed to
encourage the provision of high-quality, cost-effective health care. Because FPA
is obligated to provide medical services, some of the costs of which are
variable, for fixed capitation fees, its profitability may vary based on the
ability of FPA and its affiliated providers to control such health care costs.
FPA recruits physicians and contracts for their services to provide
staffing of emergency departments. FPA also assists its hospital clients in such
areas as physician scheduling, operations support, quality assurance and
departmental accreditation as well as billing and record keeping. In addition,
FPA has expanded its hospital-based services to include the management of
anesthesiology departments, correctional institutional health facilities and
rural health care clinics.
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA Network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA Network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations or
subsidiaries of FPA have contracts and whose members are patients of physicians
in the FPA Network or (iii) agreements with Payors, physicians and hospitals in
other geographic markets. The process of identifying and consummating suitable
acquisitions of, or affiliations with, physician groups can be lengthy and
complex. The environment for such acquisitions and affiliations is subject to
increasing competitive pressures. There can be no assurance that FPA will be
successful in identifying, acquiring or affiliating with additional physician
groups or hospitals or that the Professional Corporations or subsidiaries of FPA
will be able to contract with new Payors. In addition, there can be no assurance
that FPA's acquisitions will be successfully integrated on a timely basis or
that the anticipated benefits of these acquisitions will be realized; failure to
effectively accomplish the integration of acquired entities may have a material
adverse effect on FPA's results of operations and financial condition. FPA's
ability to expand is also dependent upon its ability to comply with legal and
regulatory requirements in the jurisdictions in which it operates or will
operate and to obtain necessary regulatory approvals, certificates and licenses.
FPA is regularly in discussions with potential acquisition candidates and
may from time to time enter into letters of intent or definitive agreements with
respect to the acquisition of such businesses. There can be no assurance that
FPA will acquire any additional businesses.
10
<PAGE> 15
The health care industry is subject to extensive federal and state
legislation and regulation. Changes in the regulations or interpretations of
existing regulations could significantly affect the business of FPA.
FPA's executive offices are located at 3636 Nobel Drive, Suite 200, San
Diego, California 92122 and its telephone number is (619) 453-1000.
FPA Recent Developments. On September 2, 1997, FPA acquired Emergency
Medical Care Incorporated ("EMC") for cash and shares of FPA Common Stock with
an aggregate value of $18 million, subject to adjustment based on certain
performance criteria. The acquisition will be accounted for as a purchase. EMC
is a physician practice management company ("PPM") engaged in the business of
providing contract management and support services primarily to hospital-based
emergency departments. EMC recruits physicians and contracts for their services
to provide staffing of emergency departments. As of September 2, 1997, EMC
provided PPM services on a contract basis to 17 hospital-based emergency
departments and one radiology department in two states. EMC is currently
affiliated with approximately 125 physicians who provide medical care to
approximately 250,000 patients annually.
On June 30, 1997, FPA acquired HealthCap in a stock-for-stock merger
accounted for as a pooling of interests in which 2,300,000 shares of FPA Common
Stock were issued in exchange for all of the outstanding shares of HealthCap
(including shares covered by HealthCap vested options and outstanding warrants
at the closing of the merger) and FPA assumed certain outstanding HealthCap
options. HealthCap is a PPM that provides management services to physician
networks, including IPAs and professional corporations, which are paid pursuant
to capitation arrangements. HealthCap operates in California, Florida, Georgia,
Missouri and Nevada. As of March 31, 1997, HealthCap had a network of
approximately 1,540 primary care physicians which provided health care services
to approximately 50,000 HMO enrollees under 12 Payor contracts.
On March 17, 1997, FPA acquired AHI Healthcare Systems, Inc. ("AHI") in a
stock-for-stock merger accounted for as a pooling of interests in which
5,678,509 shares of FPA Common Stock were issued in exchange for all of the
outstanding shares of AHI. AHI develops integrated health care delivery networks
and provides managed care infrastructure services primarily in California,
Florida and Texas. As of March 17, 1997, AHI had approximately 9,000 affiliated
physicians (including both primary care and specialist physicians) in 51
operational and 40 developing networks, which provided health care services to
approximately 200,000 enrollees under approximately 22 Payor contracts.
HEALTH PARTNERS, INC.
HPI is a physician practice management company which invests in and manages
multi-specialty physician group practices ("Affiliated Practices") and IPAs.
While HPI does not directly engage in the practice of medicine, certain of HPI's
direct and indirect subsidiaries (the "HPI Subsidiaries") or its affiliated
medical groups or IPAs contract with HMOs and other Payors on a capitated or
global fee basis in selected metropolitan markets to provide services to
assigned enrollees. HPI's strategy is to affiliate with physicians who are
seeking a partner to assist the medical group or network in transitioning from a
fee-for-service oriented health care system to a managed care system. In each
market, HPI seeks to affiliate with a locally prominent medical group or IPA and
assist the medical group or IPA in building a managed care infrastructure and
developing a high quality, geographically strong network of physicians. The
network is designed to increase the number of available primary care physicians,
which provides an opportunity to increase the number of patients served under a
capitated or global fee contract. HPI believes this approach enables physicians
to provide high-quality, cost-effective health care, is highly desirable to both
Payors and patients and is more likely to assist physicians in successfully
adapting to a managed care environment. HPI has targeted major metropolitan
markets with lower HMO penetration. HPI should benefit as managed health care
grows in these geographic markets by an increase in new Payor and physician
relationships.
Since its inception in September 1993, HPI has affiliated with eight
physician group practices and six IPAs representing 1,722 physicians in five
geographic markets, including the New York City metropolitan area, northern
Virginia, Washington, D.C., northern Kentucky and San Antonio, Texas. HPI's
affiliated medical groups and IPAs currently serve approximately 138,000
patients under capitated or global
11
<PAGE> 16
fee arrangements. HPI believes it is the New York metropolitan area's largest
PPM with approximately 1,331 affiliated physicians and approximately 104,000
patients under capitated or global fee arrangements.
As of the Record Date, Oxford Health Plans, Inc. ("Oxford") and WellPoint
Development Company, Inc. ("WellPoint") beneficially own approximately 82.7% of
HPI's outstanding voting securities and each has elected two directors to HPI's
five person Board of Directors. See "THE HPI SPECIAL MEETING -- Security
Ownership of Certain HPI Beneficial Owners and Management."
HPI's executive offices are located at 800 Connecticut Ave, Norwalk,
Connecticut 06854 and its telephone number is (203) 851-2600.
12
<PAGE> 17
THE MERGER
Effects of the Merger...... Pursuant to the Merger, Merger Sub will merge with
and into HPI, HPI will continue as the surviving
corporation (sometimes referred to as the
"Surviving Corporation") and HPI will become a
wholly owned subsidiary of FPA. At the Effective
Time (as defined below): (i) each outstanding share
of HPI Common Stock, except as provided below, will
be exchanged for the right to receive a number of
shares of FPA Common Stock equal to the Exchange
Ratio; (ii) each share of HPI Common Stock and HPI
Preferred Stock held in HPI's treasury will be
canceled and extinguished and will cease to exist
and no consideration will be delivered with respect
thereto; (iii) if applicable, each outstanding
share of HPI Common Stock and HPI Preferred Stock,
the holder of which is eligible for dissenters'
rights to appraisal in accordance with the Delaware
General Corporation Law ("Delaware Act"), will not
be converted into a right to receive shares of FPA
Common Stock, but such holder will be entitled to
only such rights as are granted under the
applicable provisions of the Delaware Act (see "THE
MERGER -- Rights of Dissenting Stockholders"); and
(iv) each share of capital stock of Merger Sub
issued and outstanding immediately prior to the
Effective Time will be converted into and exchanged
for one share of common stock of the Surviving
Corporation.
The Exchange Ratio will depend on the relationship
among (i) the total issued and outstanding shares
of HPI Common Stock (the "Outstanding HPI Stock")
immediately prior to the Effective Time which will
equal 10,545,222, assuming no holders of options to
purchase shares of HPI Common Stock ("HPI Options")
exercise such options between the date hereof and
the Effective Time, which number includes the
8,000,025 shares of HPI Common Stock to be issued
upon conversion of the HPI Preferred Stock and the
871,697 shares of HPI Common Stock to be issued in
the Roll-up Transactions, (ii) the fair value of
options to purchase HPI Options immediately prior
to the Effective Time (including HPI Options issued
in the Roll-up Transactions) which will be
converted in the Merger into shares of FPA Common
Stock (the "FPA Option Shares"), (iii) the presumed
transaction value of $115 million and (iv) the FPA
Value. The FPA Value will be the average of the
closing prices of FPA Common Stock on Nasdaq for
the ten consecutive trading days ending on the date
that is two trading days prior to the date of
consummation of the Merger (the "Closing Date").
The "Adjusted FPA Value" will equal the FPA Value,
except that if the FPA Value is less than $18, the
Adjusted FPA Value will be $18 and if the FPA Value
is greater than $22, the Adjusted FPA Value will be
$22. Consequently, the Adjusted FPA Value may
differ from the actual market price of FPA Common
Stock reported by Nasdaq on the date of the HPI
Special Meeting, the Closing Date or the date the
HPI stockholders actually receive their shares of
FPA Common Stock after the Merger is completed. See
"THE MERGER -- Merger Consideration," "THE MERGER
AGREEMENT -- Roll Up Transactions" and
"-- Treatment of Stock Options."
The Exchange Ratio can be represented by the
following formula:
<TABLE>
<S> <C>
Exchange Ratio = ($115 Million / Adjusted FPA Value) -- FPA Option Shares
---------------------------------------------------------
Outstanding HPI Stock
</TABLE>
13
<PAGE> 18
The following table sets forth the range of the
number of shares of FPA Common Stock that may be
issued in the Merger depending upon the FPA Value:
<TABLE>
<CAPTION>
SHARES OF
FPA COMMON STOCK
FPA VALUE TO BE ISSUED
-------------------------------------------- ----------------
<S> <C>
less than or equal to $18.00................ 6,388,889
$19.00...................................... 6,052,631
$20.00...................................... 5,750,000
$21.00...................................... 5,476,190
greater than or equal to $22.00............. 5,227,273
</TABLE>
Except as more fully described in this Proxy
Statement/Prospectus, in no event will the number
of shares of FPA Common Stock issuable in the
Merger exceed 6,388,889.
The following table sets forth the Exchange Ratio
depending upon the FPA Value and FPA Option Shares
to be issued:
<TABLE>
<CAPTION>
FPA EXCHANGE
FPA VALUE OPTION SHARES RATIO
---------------------------------------- ------------- --------
<S> <C> <C>
less than or equal to $18.00............
$19.00..................................
$20.00..................................
$21.00..................................
greater than or equal to $22.00.........
</TABLE>
HPI believes that the Exchange Ratio will fall
between .43 and .55 (assuming a range of FPA Value
of $15.65 to $25.00, respectively).
The adjustments to the Exchange Ratio are described
more fully in this Proxy Statement/Prospectus. IF
THE FPA VALUE IS LESS THAN $15.65, HPI MAY
TERMINATE THE MERGER AGREEMENT. STOCKHOLDERS OF HPI
WILL BE ABLE TO OBTAIN THE EXCHANGE RATIO BEGINNING
AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE
HPI SPECIAL MEETING BY CALLING (888) XXX-XXXX. See
"THE MERGER -- Merger Consideration,"
"-- Adjustments to Merger Consideration" and "THE
MERGER AGREEMENT -- Termination."
The actual market price of the FPA Common Stock may
vary, which may cause a change in the Exchange
Ratio and the aggregate Merger Consideration. Each
HPI stockholder is urged to obtain updated FPA
market information.
During the 90 day period ending September 15, 1997,
the market price of FPA Common Stock ranged from a
low of $16.75 to a high of $32.00 per share. FPA's
stock price may be affected by a number of factors,
including announcements of new legislative
proposals or legislation affecting the managed care
industry, the performance of, and investor
expectations for, FPA, analysts' comments regarding
the managed care industry generally and FPA in
particular, announcements by FPA of pending
transactions and general economic and market
conditions. As one factor in determining the
Exchange Ratio is the FPA Value, a risk to the HPI
stockholders of such FPA stock price volatility is
that a significant change in the price of FPA
Common Stock could occur between the last day of
the period for which the Adjusted FPA Value is
14
<PAGE> 19
determined (the second business day preceding the
date of the HPI Special Meeting) and the Effective
Time (which is expected to occur on the date of the
HPI Special Meeting).
Since the Exchange Ratio cannot be calculated until
the second business day immediately preceding the
date of the HPI Special Meeting, the number of
shares of FPA Common Stock to be issued to the
holders of HPI Voting Securities, may differ from
the estimates provided in this Proxy
Statement/Prospectus.
No fractional shares of FPA Common Stock will be
issued in connection with the Merger, and in lieu
of any such fractional share, each holder of HPI
Common Stock who would otherwise have been entitled
to a fraction of a share of FPA Common Stock will
be entitled to receive a cash payment equal to such
fraction multiplied by the FPA Value.
Recommendation of HPI's
Board of Directors......... The HPI Board believes that the terms of the Merger
are fair to and in the best interests of the
holders of the HPI Common Stock and HPI Preferred
Stock and has unanimously approved the Merger
Agreement and the related transactions. The HPI
Board unanimously recommends that HPI stockholders
approve the Merger Agreement. See "THE
MERGER -- Recommendation of the HPI Board of
Directors and Reasons for the Merger."
The HPI Board considered a number of material
factors, favorable, neutral and adverse, in its
evaluation of the Merger, including but not limited
to the factors described at "THE
MERGER -- Recommendation of the HPI Board of
Directors and Reasons for the Merger" and "RISK
FACTORS."
Certain officers and all directors of HPI have
certain interests in the Merger that are in
addition to their interests as stockholders of HPI
generally. These interests arise from, among other
things, certain employment agreements, management
retention programs, indemnification arrangements,
registration rights and other matters which FPA
will assume or has agreed to provide after the
Merger. For a discussion and quantification of
these interests, see "THE MERGER -- Interests of
Certain Persons in the Merger." The HPI Board of
Directors was aware of these interests and
considered them, among other matters, in approving
the Merger Agreement and in formulating its
recommendations to the stockholders of HPI that
they approve the Merger Agreement and the
transactions contemplated therein. See "RISK
FACTORS" and "THE MERGER -- Background of the
Merger."
Opinion of HPI's Financial
Advisor.................... Smith Barney Inc. ("Smith Barney") has acted as
financial advisor to HPI in connection with the
Merger and has delivered to the HPI Board a written
opinion dated July 1, 1997 to the effect that, as
of the date of such opinion and based upon and
subject to certain matters stated therein, the
Merger Consideration was fair, from a financial
point of view, to the holders of HPI Common Stock.
The full text of the written opinion of Smith
Barney dated July 1, 1997, which sets forth the
assumptions made, matters considered and
limitations on the review undertaken, is attached
as Appendix B to this Proxy Statement/Prospectus
and should be read carefully in its entirety. The
opinion of Smith
15
<PAGE> 20
Barney is directed to the HPI Board and relates
only to the fairness of the Merger Consideration
from a financial point of view, it does not address
any other aspect of the Merger or related
transactions and does not constitute a
recommendation to any stockholder as to how such
stockholder should vote at the HPI Special Meeting.
See "THE MERGER -- Opinion of HPI's Financial
Advisor."
Effective Time of the
Merger..................... The Merger will become effective at the time (the
"Effective Time") specified in the Certificate of
Merger (the "Certificate of Merger") to be filed
with the Secretary of State of Delaware. The filing
will be made on or as soon as practicable after the
closing of the Merger (the "Closing"). It is
anticipated that the Closing will occur on the date
of the HPI Special Meeting.
Conditions to the Merger... The obligations of FPA and HPI to consummate the
Merger are subject to certain conditions including
(i) obtaining the approval of the stockholders of
HPI, (ii) the effectiveness of the Registration
Statement of which this Proxy Statement/Prospectus
is a part, (iii) the approval for inclusion on
Nasdaq of the FPA Common Stock to be issued in
connection with the Merger, (iv) the expiration or
termination of the relevant waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (v) the absence
of any preliminary or permanent injunction or other
order or decree prevents the consummation of the
Merger, (vi) the receipt by each party of various
legal opinions and other certificates, consents,
reports and approvals from the other parties to the
Merger and from third parties, including assurances
relating to the treatment of the Merger as a
"pooling of interests" for financial and accounting
purposes and the treatment of the Merger as a
tax-free reorganization, and (vii) the accuracy in
all material respects of the representations and
warranties of each party and performance in all
material respects of all agreements, covenants and
obligations by each party. Additionally, the
obligation of HPI to consummate the Merger is
subject to the conditions that (i) FPA shall have
entered into an agreement to provide registration
rights to certain HPI stockholders, (ii) FPA shall
have entered into certain employment agreements and
have taken certain employee-related actions and
(iii) the FPA Value shall be not less than $15.65.
The obligation of FPA to consummate the Merger is
subject to the conditions that (i) the resignation
of the directors of HPI immediately prior to the
Effective Time shall have occurred, (ii) HPI and
Oxford Health Plans, Inc. shall have entered into a
Master Strategic Agreement pursuant to which the
parties shall have agreed to certain strategic
principles for ongoing relationships between
Oxford's health plan subsidiaries and HPI's
subsidiaries and professional corporations, (iii)
FPA and WellPoint Health Networks Inc. ("WellPoint
Parent") shall have entered into a Memorandum of
Understanding pursuant to which the parties shall
have agreed to develop a strategic relationship to
further the delivery of quality cost-effective
health care to enrollees of WellPoint Parent's
health plan subsidiaries, (iv) there shall be no
HPI Preferred Stock outstanding as of the Effective
Time, (v) stock option acknowledgments shall have
been executed by holders representing no less than
80% of the shares of HPI Common Stock issuable upon
exercise of all HPI stock options and (vi) each
Roll-up Transaction shall be complete or the
parties thereto shall have entered into escrow
agreements which
16
<PAGE> 21
will set aside an agreed upon maximum number of
shares of FPA Common Stock which may be issued in
the Roll-up Transactions. Either FPA or HPI may
extend the time for performance of any of the
obligations of the other party or may waive
compliance with those obligations. To the extent
material provisions or conditions are waived,
including, among others, the condition that the
Merger be treated as a "pooling of interests" for
accounting and financial reporting purposes and
that the Merger qualify as a tax-free
reorganization, FPA and HPI will amend this Proxy
Statement/Prospectus, and HPI will resolicit
stockholder votes to the extent required by
applicable law. In the event the FPA Value is less
than $15.65, HPI's decision to complete the Merger
will depend upon the HPI Board's reconsideration
of, among other things, the factors set forth under
"THE MERGER -- Recommendation of the HPI Board of
Directors and Reasons for the Merger." See "THE
MERGER -- Certain Regulatory Matters" and "THE
MERGER AGREEMENT -- Conditions to Consummation of
the Merger."
Termination, Amendment and
Waiver..................... The Merger Agreement may be terminated at any time
prior to the Effective Time by mutual consent of
FPA and HPI, or, generally, by either party if,
among other things, (i) the Merger shall not have
been completed by October 28, 1997, (ii) HPI does
not obtain stockholder approval, (iii) any required
governmental or regulatory approval is not
obtained, (iv) either party materially breaches any
of its representations, warranties or covenants
under the Merger Agreement or (v) the Merger is
prohibited by court order. In the event that the
FPA Value is below $15.65, the HPI Board, in the
exercise of its fiduciary duties, would consider
whether to terminate the Merger Agreement based on
whether the stockholders of HPI would receive fair
consideration for their HPI Common Stock and
whether consummation of the Merger would be in the
best interests of the HPI stockholders. Each of FPA
and HPI may terminate the Merger Agreement if the
respective conditions to each such party's
obligations have not been satisfied or waived on or
prior to the Closing Date. See "THE MERGER
AGREEMENT -- Termination," "-- Amendment" and
"-- Waiver."
Rights of HPI
Stockholders............... Both FPA and HPI are Delaware corporations and the
rights of their respective stockholders are
governed by the Delaware Act and their respective
Certificates of Incorporation and Bylaws. In
addition, the rights of the HPI stockholders are
affected by a Securities Purchase Agreement among
HPI, Foxfield Ventures, Inc. (now WellPoint),
Oxford and certain management investors dated as of
May 18, 1994 ("1994 Securities Purchase
Agreement"). If the Merger is consummated, HPI's
stockholders will become stockholders of FPA, and
their rights will be governed by the Certificate of
Incorporation and Bylaws of FPA. There are certain
material differences between stockholders' rights
under HPI's Certificate of Incorporation and Bylaws
and FPA's Certificate of Incorporation and Bylaws.
The material differences include the rights of each
corporation's preferred stockholders; the
procedures for (i) nominating, electing and
removing each corporation's directors, (ii)
amending each corporation's bylaws and (iii)
calling special meetings of each corporation's
stockholders; the rights of each corporation's
officers and directors to indemnification; and each
corporation's stock-
17
<PAGE> 22
holder voting requirements. See "COMPARISON OF
RIGHTS OF HOLDERS OF HPI AND FPA COMMON STOCK."
Treatment of Stock
Options.................... HPI has granted HPI Options to officers and
employees of HPI and certain HPI Subsidiaries.
Pursuant to the Merger Agreement, each HPI Option,
whether or not vested, shall be canceled at the
Effective Time in exchange for a number of shares
of fully paid FPA Common Stock with a market value
equal to the fair value of such HPI Option as
determined by applying a variation of the
Black-Scholes option pricing model by an investment
banking firm. See "THE MERGER AGREEMENT --
Treatment of Stock Options." The HPI Options will
include substitute HPI Options issued in connection
with the completion of the Roll-up Transactions in
exchange for options to acquire Minority Shares (as
defined herein) in HPI Subsidiaries which will be
canceled in connection with the Roll-up
Transactions. See "THE MERGER AGREEMENT -- Roll-up
Transactions." HPI Options are held by officers and
employees of HPI and certain HPI Subsidiaries. See
"THE MERGER -- Interests of Certain Persons in The
Merger."
Roll-up Transactions....... HPI has affiliated with group practices and IPAs
through the HPI Subsidiaries. The physician-owners
of the group practices or IPAs own shares in HPI
Subsidiaries ("Minority Shares") with which they
contract to provide health care services. In each
case, such shares represent less than a 30%
interest in such subsidiary. Such physician-owners
and other employees also have been granted stock
options in HPI Subsidiaries (the "Minority
Options"). HPI has the right to exchange the
Minority Shares and Minority Options for HPI Common
Stock and HPI Options of equal value (the "Roll-up
Transactions"). HPI has exercised its right in
connection with the Merger. Pursuant to the Roll-up
Transactions, 871,697 shares of HPI Common Stock
will be issued and options to purchase 170,287
shares of HPI Common Stock will be issued
immediately prior to the Effective Time. See "THE
MERGER AGREEMENT -- Roll-up Transactions."
Following the Roll-up Transactions, the holders of
such newly issued HPI Common Stock and HPI Options
will have the right to receive shares of FPA Common
Stock on the same terms and conditions as other
holders of HPI Common Stock and HPI Options at the
Effective Time. See "THE MERGER -- Merger
Consideration" and "THE MERGER
AGREEMENT -- Treatment of Stock Options."
Dissenters' Rights......... Holders of HPI Common Stock and HPI Preferred Stock
who exercise dissenters' rights with respect to the
Merger in accordance with the procedures prescribed
in Section 262 of the Delaware Act will be entitled
to receive cash for their HPI Common Stock if such
stockholders (i) deliver to HPI's Secretary before
the vote on the Merger Agreement at the HPI Special
Meeting a written demand for appraisal, (ii)
continuously hold their shares from the date the
appraisal demand is made through the Effective
Time, (iii) neither vote in favor of the Merger nor
consent thereto in writing and (iv) file a petition
in the Delaware Court of Chancery within 120 days
of the Effective Time demanding a determination of
the "fair value" of their shares. Failure to take
any of the steps required under Section 262 of the
Delaware Act on a timely basis may result in the
loss of appraisal rights. A copy of Section 262 of
the Delaware Act relating to dissenters' rights is
attached to this
18
<PAGE> 23
Proxy Statement/Prospectus as Appendix C. See "THE
MERGER -- Rights of Dissenting Stockholders."
HSR Act Filing............. FPA and HPI made their respective filings under the
HSR Act with the Federal Trade Commission ("FTC")
on July 29, 1997, and the waiting period of their
respective HSR Act filings has expired.
Notwithstanding the expiration of the waiting
period of the HSR Act filings, the FTC, Department
of Justice ("DOJ") or others could take action
under antitrust laws, before or after the Effective
Time, seeking the divestiture by FPA of all or any
part of the assets of HPI acquired in the Merger.
There can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if
such a challenge is made, that it would not be
successful. See "THE MERGER -- Certain Regulatory
Matters."
Material Federal Income Tax
Consequences............... The Merger is intended to qualify for federal
income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Assuming the
Merger so qualifies as a reorganization within the
meaning of Section 368(a) of the Code, in general,
no gain or loss will be recognized by holders of
HPI Common Stock with respect thereto on the
surrender of their HPI Common Stock in exchange for
FPA Common Stock, except with respect to cash
received in lieu of fractional shares, and no gain
or loss will be recognized by FPA or HPI. Each of
FPA and HPI will receive an opinion of its
respective counsel to the effect that the Merger
will constitute a reorganization within the meaning
of Section 368(a) of the Code and that each of HPI,
FPA and Merger Sub will be a party to the
reorganization within the meaning of Section 368(b)
of the Code. For a further discussion of the
federal income tax consequences of the Merger see
"THE MERGER -- Certain Federal Income Tax
Consequences."
Accounting Treatment....... The Merger will be treated as a "pooling of
interests" for accounting and financial reporting
purposes. See "THE MERGER -- Accounting Treatment."
Interests of Certain
Persons in the Merger;
Possible Conflicts of
Interest................... In considering the recommendations of the HPI Board
with respect to the Merger Agreement and the
transactions contemplated thereby, HPI stockholders
should be aware that certain members of HPI
management and the HPI Board have interests in the
Merger that are in addition to the interests of the
stockholders of HPI generally. These interests
arise from, among other things, certain employment
agreements, management retention programs,
indemnification arrangements, registration rights
and other matters which FPA will assume or has
agreed to provide after the Merger. FOR A
DISCUSSION AND QUANTIFICATION OF THESE INTERESTS,
SEE "THE MERGER -- INTERESTS OF CERTAIN PERSONS IN
THE MERGER."
Risk Factors............... Certain factors to be considered in connection with
an investment in FPA Common Stock and approval of
the Merger Agreement are set forth under "RISK
FACTORS." Risks relating to FPA include no
assurance of successful integration of
acquisitions, expanded service offering; risks of
financial leverage; difficulty in maintaining
growth; risks
19
<PAGE> 24
related to intangible assets; difficulty in
controlling health care costs, capitated nature of
revenue; risks related to full risk capitation;
risks related to fee-for-service contracts;
dependence on government and other third party
payors; reliance on certain payors; terminability
of Payor contracts; dependence on primary care
physicians and emergency medicine physicians; risks
related to classification of physicians as
independent contractors; state laws regarding
prohibition of corporate practice of medicine;
possible negative effects of prospective health
care reform; possible negative effects of
governmental regulations; antitrust regulation;
competitive market forces; potential liabilities;
fluctuations in quarterly results; possible
volatility of stock price; dependence upon key
personnel and certain employment contracts; risk of
dilution and additional capital needs; shares
eligible for future sale; and anti-takeover effect
of certain provisions. Risks relating to HPI
include risks related to PPM business generally;
HPI's limited operating history and losses; risks
associated with growth strategy; control by certain
stockholders; concentration of payors and
limitations on reimbursement; and goodwill and
other intangibles. Risks relating to the Merger
include the impact on FPA's financial statements;
no assurance of successful integration of certain
operations; exchange ratio may not fully reflect
changes in the price of FPA Common Stock; need for
additional capital; possible loss of business;
rights of HPI stockholders following the Merger;
federal income tax consequences; and certain
conflicts of interest.
Surrender of
Certificates............... Promptly after the Effective Date, FPA's exchange
agent will mail a transmittal form and exchange
instructions to each holder of record of HPI Common
Stock. CERTIFICATES FOR SHARES OF HPI COMMON STOCK
SHOULD NOT BE SURRENDERED UNTIL SUCH TRANSMITTAL
FORM AND EXCHANGE INSTRUCTIONS ARE RECEIVED.
Resale Restrictions........ All shares of FPA Common Stock received by HPI
stockholders will be freely tradeable, except that
shares of FPA Common Stock received by persons who
are deemed to be "affiliates" (as such term is
defined in the Securities Act) of HPI or FPA at the
time of the Special Meeting may be resold by them
only in certain permitted circumstances under the
Securities Act, other applicable securities laws
and rules related to "pooling of interests"
accounting treatment. See "THE MERGER -- Resale of
FPA Common Stock by Affiliates."
Payments................... In connection with the termination of his
employment agreement with HPI which will occur at
the Effective Time, Charles G. Berg, the President
and Chief Executive Officer of HPI, will receive
certain payments and benefits (the "Payments")
which could be considered "parachute payments"
under Section 280G of the Code. These potential
"parachute payments" include (i) a lump sum cash
payment to Mr. Berg of $350,000 by HPI, (ii) the
acceleration of the vesting of Mr. Berg's unvested
HPI options to purchase 239,150 shares of HPI
Common Stock, the value of which vesting
acceleration is estimated to be approximately
$460,000 and (iii) all or a portion of a $300,000
cash payment to be made to Mr. Berg by FPA at the
Effective Time. Based on Section 280G of the Code
and the proposed regulations thereto ("Section
280G"), HPI may not be able to deduct all or a
portion of the Payments and Mr. Berg may be subject
to a nondeductible
20
<PAGE> 25
20% excise tax with respect thereto unless
stockholders representing 75% or more of the HPI
Common Stock and HPI Preferred Stock (other than
securities owned or controlled by Mr. Berg and
certain of his family members) approve the Payments
and approval of the Payments is made a condition of
the receipt of such Payments. At the HPI Special
Meeting, the HPI stockholders will be asked to
approve the Payments. Unless the Payments are
approved by HPI stockholders in accordance with
Section 280G, such Payments will be forfeited. THE
HPI BOARD (WITH MR. BERG ABSTAINING) HAS APPROVED
THE PAYMENTS AND RECOMMENDS A VOTE FOR THE APPROVAL
OF THE PAYMENTS. SEE "THE PAYMENTS."
21
<PAGE> 26
THE HPI SPECIAL MEETING
Special Stockholder
Meeting.................... The special meeting of stockholders of HPI (the
"HPI Special Meeting") will be held on
, 1997 at 10:00 a.m. local time at HPI's offices
located at 800 Connecticut Avenue, Norwalk,
Connecticut 06854.
Matters to be Considered at
the HPI Special Meeting.... At the HPI Special Meeting, stockholders will be
asked (i) to approve and adopt the Merger Agreement
and (ii) to approve the Payments to the President
and Chief Executive Officer of HPI.
HPI'S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR EACH PROPOSAL.
Quorum; Vote Required...... The presence in person or by proxy of the holders
of a majority of the issued and outstanding shares
of HPI Common Stock and HPI Preferred Stock (the
"HPI Voting Securities") at the HPI Special Meeting
is necessary to constitute a quorum at the meeting.
For purpose of constituting a quorum and for all
matters to be voted upon at the HPI Special
Meeting, the HPI Preferred Stock shall be treated
on an as-converted basis. Approval of the Merger
Agreement requires the affirmative vote of 60% of
the HPI Voting Securities. Approval of the possible
adjournment or postponement of the HPI Special
Meeting requires the affirmative vote of a majority
of the HPI Voting Securities present either in
person or by proxy at the HPI Special Meeting.
Approval of the Payments requires the affirmative
vote of at least 75% of the HPI Voting Securities,
excluding shares that are owned by the President
and Chief Executive Officer of HPI and certain of
his family members. See "THE HPI SPECIAL
MEETING -- Vote Required" and "THE MERGER
AGREEMENT -- Conditions to Consummation of the
Merger."
Record Date; Outstanding
HPI Stock.................. Only stockholders of record of HPI Common Stock and
HPI Preferred Stock at the close of business on
September 4, 1997 are entitled to notice of and to
vote at the HPI Special Meeting. On that date,
there were 1,673,500 shares of HPI Common Stock
outstanding, 25,000 shares of HPI Series A
Convertible Preferred Stock outstanding and 25,000
shares of HPI Series B Convertible Preferred Stock
outstanding, with each share of HPI Common Stock
entitled to one vote per share, each share of HPI
Series A Convertible Preferred Stock entitled to
132 votes per share and each share of HPI Series B
Convertible Preferred Stock entitled to 188 votes
per share, with respect to all matters to be
considered at the HPI Special Meeting.
Security Ownership of HPI
Management............... As of the record date, the directors and named
executive officers of HPI as a group owned
approximately 10.60% of the voting power
represented by the HPI Voting Securities.
Stockholders of HPI with the collective power to
vote approximately 82.70% of the HPI Voting
Securities have entered into voting agreements and
given their irrevocable proxies to FPA, providing
that their shares shall be voted in favor of the
Merger Agreement. Accordingly, approval of the
Merger by the HPI stockholders is assured. See "THE
MERGER -- Interests of Certain Persons in
22
<PAGE> 27
the Merger" and "SECURITY OWNERSHIP OF CERTAIN HPI
BENEFICIAL OWNERS AND MANAGEMENT."
Reasons for the Merger..... The Board of Directors of HPI, after careful
consideration, has unanimously approved the Merger
Agreement and the transactions contemplated thereby
and determined that the Merger is fair to, and in
the best interests of, HPI and its stockholders and
recommends a vote FOR the approval and adoption of
the Merger Agreement.
The HPI Board believes the Merger offers HPI an
attractive opportunity to strengthen its
competitive position and enhance its profile with
physicians and Payors. Furthermore, the Merger will
allow HPI to align with a leading PPM in a
consolidating industry while at the same time
affording stockholders enhanced liquidity due to
the developed market for FPA's publicly traded
shares. Disadvantages include the possibility that
FPA will not be able to integrate successfully
recent acquisitions, the possibility that FPA will
not be able to sustain its growth strategy and
FPA's leveraged balance sheet. See "THE
MERGER -- Recommendation of the HPI Board of
Directors and Reasons for the Merger."
23
<PAGE> 28
FPA AND HPI COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FPA and
combined per share data of FPA and HPI on an unaudited pro forma basis, based on
the assumption that the Merger occurred at the beginning of the earliest period
presented and was accounted for as a pooling of interests. Historical financial
data of FPA has been restated to include the effects of the October 1996 merger
with Sterling and the March 1997 merger with AHI, both of which were accounted
for as a "pooling of interests." Historical net earnings per common share of HPI
have not been presented as HPI is a nonpublic company. The pro forma comparative
per share data gives effect to the Merger assuming the issuance of 5,227,273
shares of FPA Common Stock in the Merger. See "THE MERGER -- Adjustments to
Merger Consideration."
HISTORICAL EARNINGS PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
----- ----- ------ ------------------
<S> <C> <C> <C> <C>
FPA $0.29 $0.03 $(2.56) $(0.40)
</TABLE>
FPA AND HPI PRO FORMA COMBINED EARNINGS PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
Pro forma combined per FPA share $(0.09) $(0.31) $(3.61) $(0.38)
Pro forma equivalent per HPI share (0.04) (0.15) (1.69) (0.18)
</TABLE>
BOOK VALUE PER COMMON SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
1996 JUNE 30, 1997
------------ -------------
<S> <C> <C> <C> <C>
FPA -- Historical $ 4.39 $ 3.68
HPI -- Historical(1) 2.73 2.77
Pro forma combined per FPA share 4.27
Pro forma equivalent per HPI share 2.00
</TABLE>
(1) Assumes the conversion of HPI Preferred Stock into HPI Common Stock as of
June 30, 1997.
24
<PAGE> 29
MARKET PRICE AND DIVIDEND DATA
FPA Common Stock is listed on Nasdaq under the symbol "FPAM." The HPI
Common Stock and HPI Preferred Stock are not traded on any securities market or
exchange.
The range of high and low bid prices, as reported on Nasdaq, for FPA Common
Stock for the periods indicated, is as follows:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter(1)................................. $11 1/4 $ 6
Second Quarter................................... 12 1/2 7 7/8
Third Quarter.................................... 12 1/8 8 7/8
Fourth Quarter................................... 9 3/4 5 7/8
1996
First Quarter.................................... 13 1/4 8 5/8
Second Quarter................................... 20 1/8 12 1/8
Third Quarter.................................... 27 1/8 12 1/2
Fourth Quarter................................... 29 1/2 16 3/8
1997
First Quarter.................................... 28 1/2 18 1/4
Second Quarter................................... 24 1/2 14 7/8
Third Quarter (through September 15, 1997)....... 32 22 7/8
</TABLE>
- ---------------
(1) Prices have been adjusted to reflect a 100% stock dividend of FPA Common
Stock effected April 1995.
The closing price of FPA Common Stock on Nasdaq on July 1, 1997, the last
full trading day prior to the public announcement of the Merger Agreement, was
$23.875 and on , 1997 was $ .
FPA declared no cash dividends during 1995, 1996 or 1997 and has no plans
to declare cash dividends in the foreseeable future. FPA's Credit Agreement with
Lehman Commercial Paper, Inc. and the lenders parties thereto and FPA's 6 1/2%
Convertible Subordinated Debentures limit the ability of FPA to pay cash
dividends.
As of the HPI record date, there were 19 holders of record of HPI Common
Stock, one holder of record of HPI's Series A Convertible Preferred Stock and
one holder of record of HPI's Series B Convertible Preferred Stock.
HPI declared and paid a dividend on its Series A Convertible Preferred
Stock in May 1994 in connection with its exchange into Series B Convertible
Preferred Stock. Also, HPI had a stock split distributed as a dividend to its
common stockholders in May 1994. See note 9 of Notes to HPI's Consolidated
Financial Statements contained elsewhere in this Proxy Statement/Prospectus.
25
<PAGE> 30
RISK FACTORS
In addition to other information in this Proxy Statement/Prospectus, the
following factors should be considered carefully in evaluating the proposals to
be voted on at the HPI Special Meeting.
RISKS RELATING TO FPA
No Assurance of Successful Integration of Acquisitions; Expanded Service
Offering. Over the last two and one-half years, FPA has pursued an aggressive
growth strategy. FPA's growth has been achieved primarily through acquisitions,
several of which have been completed during the last six months. Several of
these acquisitions are large transactions which involve significant risks and
uncertainties for FPA. FPA intends to continue to pursue growth through
acquisitions. The success of past and future acquisitions is largely dependent
on the ability of FPA to integrate the operations of the acquired companies into
FPA's operations in an efficient and effective manner. The process of
integrating management services, which includes management information systems,
claims administration and billing services, utilization management of medical
services, care coordination and case management, quality and cost monitoring and
physician recruitment, as well as administrative functions, facilities and other
aspects of operations, while managing a larger and geographically expanded
entity, presents a significant challenge to FPA's management. In addition,
integration must be carried out so that FPA is able to control medical and
administrative costs. The ability to control such costs is key to the successful
future operations of FPA. There can be no assurance that FPA's acquisitions will
be successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions, including cost savings, will be realized. Furthermore, there
can be no assurance that any cost savings which are realized will not be offset
by increases in other expenses or operating losses. FPA will encounter similar
uncertainties and risks with respect to any future acquisitions it may make.
Failure to effectively accomplish the integration of acquired companies could
have a material adverse effect on FPA's results of operations and financial
condition.
Certain of the companies recently acquired by FPA have recently or
historically operated at a loss. Other acquired companies have experienced
fluctuations in quarter-to-quarter operating results. See "Fluctuations in
Quarterly Results." FPA has commenced the institution of certain measures
intended to reduce these losses and quarterly fluctuations and to operate the
acquired businesses profitably. However, there can be no assurance that FPA will
reverse these trends or operate these entities profitably. If there are
continuing operating losses at the acquired companies, FPA may need additional
capital to fund its business, and there can be no assurance that such additional
capital can be obtained or, if obtained, it will be on terms acceptable to FPA.
FPA is regularly in discussions with potential acquisition candidates and
may from time to time enter into letters of intent or definitive agreements with
respect to the acquisition of such businesses. No assurance can be given as to
FPA's ability to compete successfully at favorable prices for available
acquisition candidates or to complete future acquisitions, or as to the
financial effect on FPA of any acquired business. Future acquisitions by FPA may
involve the issuance of additional shares of common stock, which could have a
dilutive effect on earnings per share, or could involve significant cash
expenditures and may result in increased indebtedness and interest and
amortization expenses or decreased operating income, which could have an adverse
impact on FPA's future operating results.
The integration of acquired entities also requires the dedication of
management resources, which may distract the attention of management from the
day-to-day business of the combined companies. Furthermore, new acquisitions may
expose the FPA Network to new Payors and providers with which it has had no
previous business experience. FPA cannot predict whether it will be able to
enroll into the FPA Network all members currently served by physicians
affiliated with newly acquired entities. Also, there can be no assurance that
there will not be substantial unanticipated costs or other material adverse
effects associated with acquisition and integration activities, any of which
could result in significant one-time charges to earnings or otherwise adversely
affect FPA's operating results.
In addition, as a result of the recent acquisitions of Sterling and EMC,
FPA manages and supports hospital-based emergency departments. The addition of
these new services presents certain risks and uncertainties due to FPA's
relative unfamiliarity with these types of services and the market for such
services.
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There can be no assurance that FPA will be successful in developing and
integrating Sterling's and EMC's operations and services.
Risks of Financial Leverage. FPA's indebtedness is significant in relation
to its stockholders' equity. Giving effect to amounts drawn down pursuant to
FPA's $275 Million Credit Agreement (including the term loan) with BankBoston,
N.A., as Administrative Agent for the Lenders parties thereto, dated June 30,
1997 (the "Credit Agreement"), and the issuance of FPA's 6 1/2% Convertible
Subordinated Debentures due 2001 (the "Debentures") in December 1996, FPA's
indebtedness accounts for approximately 240% of FPA's stockholders' equity as of
June 30, 1997. While FPA believes it will be able to service its debt, there can
be no assurance to that effect. The degree to which FPA is leveraged could
affect its ability to service its indebtedness, make capital expenditures,
respond to market conditions and extraordinary capital needs, take advantage of
certain business opportunities or obtain additional financing. Unexpected
declines in FPA's future business, or the inability to obtain additional
financing on terms acceptable to FPA, if required, could impair FPA's ability to
meet its debt service obligations or fund acquisitions and, therefore, could
materially adversely affect FPA's business and future prospects.
Growth Strategy; Difficulty in Maintaining Growth. The future growth of FPA
is largely dependent on a continued increase in the number of new enrollees in
the FPA Network. This growth may come from (i) affiliations with, or
acquisitions of, individual or group physician practices serving enrollees of
Payors in the FPA Network or of new Payors, (ii) increased membership in plans
of Payors with which the Professional Corporations have contracts and whose
members are patients of physicians in the FPA Network or (iii) agreements with
Payors, physicians and hospitals in other geographic markets. The process of
identifying and consummating suitable acquisitions of, or affiliations with,
physician groups can be lengthy and complex. The marketplace for such
acquisitions and affiliations is subject to increasing competitive pressures.
There can be no assurance that FPA will be successful in identifying, acquiring
or affiliating with additional physician groups or hospitals or that the
subsidiaries and Professional Corporations will be able to contract with new
Payors. In addition, there can be no assurance that FPA's acquisitions will be
successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions will be realized; failure to effectively accomplish the
integration of acquired entities may have a material adverse effect on FPA's
results of operations and financial condition. FPA's ability to expand is also
dependent upon its ability to comply with legal and regulatory requirements in
the jurisdictions in which it operates or will operate and to obtain necessary
regulatory approvals, certificates and licenses.
Risks Related to Intangible Assets. As a result of FPA's various
acquisition transactions, intangible assets of approximately $328.6 million have
been recorded as of June 30, 1997 on FPA's balance sheet. Such intangible assets
totaled approximately 271% of FPA's stockholders' equity as of June 30, 1997.
Using amortization periods ranging from four to 30 years (with an average
amortization period of approximately 29 years), amortization expense relating to
such intangible assets will be approximately $15.8 million per year. Further
acquisitions that result in the recognition of additional intangible assets
would cause amortization expense to further increase. A portion of the
amortization generated by these intangible assets is not deductible for tax
purposes.
At the time of or following each acquisition, FPA evaluates each
acquisition and establishes an appropriate amortization period based on the
specific underlying facts and circumstances of each such acquisition. Subsequent
to such initial evaluation, FPA periodically reevaluates such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the amortization period continues to be appropriate. As the
underlying facts and circumstances subsequent to the date of acquisition can
change, there can be no assurance that the value of such intangible assets will
be realized by FPA. In the past, FPA has recorded charges for impairment of
goodwill, including (i) in 1995, $434,000 related to the sale and closing of
primary care centers and (ii) in 1996, $4.1 million relating to a 1995
acquisition in Arizona (as a result of continuing losses in the acquired entity)
and $14.8 million related to certain emergency room department contracts (which
were terminated after acquisition of the contracting entity). Although at June
30, 1997 the net unamortized balance of intangible assets acquired was not
considered to be impaired, any future determination, based on reevaluation of
the underlying facts and circumstances, that a significant impairment has
occurred would require the write-off of the impaired portion of unamortized
intangible assets, which could have a material adverse effect on FPA's business
and results of operations.
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Difficulty in Controlling Health Care Costs; Capitated Nature of
Revenue. Agreements with Payors typically provide for the Professional
Corporations to receive prepaid monthly fees per enrollee known as "capitation"
payments. FPA's profitability primarily depends upon its ability to control
costs and the ability of the subsidiaries and Professional Corporations to incur
less in medical, hospital and administrative costs than the capitation revenue
received from Payors. Such profitability is achieved through effective
management of the provision of medical services by physicians in the FPA
Network, including controlling utilization of specialty care physicians and
other ancillary providers, purchasing services from physicians outside the FPA
Network at competitive prices and negotiating favorable rates with hospitals.
Agreements with Payors may also contain shared risk arrangements under which
additional compensation can be earned based on the provision of high quality,
cost-effective health care to enrollees but which may require that a portion of
any loss in connection with such shared risk arrangements be assumed by FPA,
thereby reducing FPA's net income. The amount of non-capitated medical and
hospital costs in any period could be affected by factors beyond the control of
the FPA Network, such as changes in treatment protocols, epidemics, disasters,
new technologies and inflation. To the extent that specialty care physicians'
fees or hospital costs have not been capitated and enrollees require more
specialty care than anticipated or have higher than anticipated hospital
utilization rates, revenue paid to the FPA Network by Payors may not be
sufficient to cover the costs the FPA Network is obligated to pay. FPA purchases
stoploss insurance protection which provides thresholds or "attachment points,"
generally $100,000 for inpatient services per year, at which substantially all
financial exposure for inpatient services of an enrollee beyond such threshold
is contractually shifted to the insurer up to a specified level (generally $1
million), at which point the risk of loss returns to FPA. The failure of FPA to
negotiate favorable attachment points in the future could have a material
adverse effect on FPA's financial condition, results of operations and/or
liquidity. There can be no assurance that FPA will be able to negotiate
favorable stoploss attachment points in the future.
Risks Related to Full Risk Capitation. Under capitation contracts
generally, Professional Corporations accept capitation payments and, as a
result, accept the financial risk for the provision of health care services,
including those not normally performed and provided by professional corporations
comprised of primary care physicians under payor contracts (e.g., specialty care
physician services). Under substantially all Payor contracts, the subsidiaries
and Professional Corporations accept the financial risk for the provision of
outpatient medical services ("fully delegated" contracts). Under certain Payor
contracts, a Professional Corporation also accepts the financial risk for
hospital services. Approximately 18.8% and 18.3% of FPA's total operating
revenue for the year ended December 31, 1996 and the six months ended June 30,
1997, respectively, was generated from contracts in which the subsidiaries and
Professional Corporation accepted the financial risk for outpatient medical and
hospital services. In the event that (i) FPA is unable to negotiate favorable
prices or rates in contracts with providers of these services on behalf of the
subsidiaries and Professional Corporations or (ii) the subsidiaries and
Professional Corporations are unable to control effectively the utilization of
these services, FPA could experience material adverse effects on its results of
operations.
Risks Related to Fee-for-Service Contracts. Sterling provides physician
practice management services to hospitals under fee-for-service contracts and
flat-rate contracts. In general, under fee-for-service contracts, Sterling's
revenues are derived from amounts billed to patients and collected for the
account of Sterling. In contrast, under flat-rate contracts Sterling's revenue
is derived from payments of negotiated amounts paid by the hospital. Under
fee-for-service contracts, Sterling accepts responsibility for billing and
collection, and consequently assumes the financial risks related to changes in
patient volume, payor mix and third party reimbursement rates. Any change in
reimbursement policies and practices, payor mix, patient volume or covered
services could materially adversely affect the operations of FPA, particularly
under fee-for-service contracts. Sterling's fee-for-service contractual
arrangements also involve a credit risk related to uncollectibility of accounts.
In addition, fee-for-service contracts have less favorable cash flow
characteristics than flat-rate contracts due to longer collection periods.
Failure to manage adequately the collection risks and working capital demands
associated with fee-for-service contracts could have a material adverse effect
on FPA.
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Dependence on Government and Other Third Party Payors. As a result of the
Sterling acquisition, a significant portion of FPA's operating revenue will be
derived from payments made by government-sponsored health care programs as well
as from other third party payors. For the year ended December 31, 1996 and the
six months ended June 30, 1997, approximately 34% and 27%, respectively, of
FPA's revenue was derived from government Payors. The Medicare and Medicaid
programs are subject to substantial regulation by the federal and state
governments, which are continually revising and reviewing the programs and their
regulations. In addition, funds received under these programs are subject to
audit with respect to the proper billing for physician services and,
accordingly, retroactive adjustments of revenue from these programs may occur.
While FPA seeks to comply with applicable Medicare and Medicaid reimbursement
regulations, there can be no assurance that FPA would be found to be in
compliance with such regulations should it be subject to audit. Continuing
budgetary constraints at both the federal and state level and the rapidly
escalating costs of health care and reimbursement programs have led, and may
continue to lead, to significant reductions in government and other third party
reimbursements for certain medical charges and to the negotiation of reduced
contract rates or capitated or other financial risk-shifting payment systems by
third party payors with service providers. Both the federal government and
various states are considering imposing limitations on the amount of funding
available for various health care services. In recent years, the U.S. Congress
has considered various budget proposals intended to reduce the rate of increase
in Medicare and Medicaid expenditures through cost savings and other measures.
The Balanced Budget Act of 1997, which becomes effective October 1, 1997,
includes, among other matters, Medicare and Medicaid reform legislation. The
Medicare legislation will, among other things, (i) reduce Medicare payments to
managed care plans and alter the payment structure; (ii) require managed care
plans to make medically necessary care available 24 hours a day; (iii) prohibit
plans from restricting provider advice about medical care or treatment ("gag
clauses"); (iv) eliminate the 50/50 enrollment rule and replace it with enhanced
quality and outcome measures; (v) authorize provider-sponsored organizations to
contract directly with Medicare; and (vi) establish a medical savings account
demonstration project. The Medicaid legislation will, among other things, (i)
enable states to require Medicaid beneficiaries to enroll in managed care plans
without receiving federal waivers; (ii) repeal the 75/25 enrollment rule and
replace it with quality assurance standards; (iii) ban "gag clauses"; and (iv)
provide states with greater discretion to set reimbursement rates. FPA cannot
predict the effect that this legislation or current and future proposals
regarding government funded programs would have on its operations. Additionally,
Resource Based Relative Value Scale ("RBRVS"), a system of reimbursement
designed to reallocate medical reimbursement among medical specialties, took
effect on January 1, 1992 and has been phased in over a four year period. Under
the regulations relating to the RBRVS fee structure, the aggregate fee payments
from Medicare for certain emergency department procedures may be reduced in some
circumstances. There can be no assurance that the payments under governmental
and private third party payor programs will remain at levels comparable to
present levels or will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs. Furthermore, changes in
reimbursement regulations, policies, practices, interpretations or statutes that
place material limitations on reimbursement amounts or practices could adversely
affect the results of operations of FPA.
Reliance on Certain Payors. For the year ended December 31, 1994,
CareAmerica of Southern California, Inc. ("CareAmerica") accounted for 11.3% of
FPA's operating revenue. For the year ended December 31, 1995, Foundation Health
Systems, Inc. ("Foundation") accounted for 26.2% of FPA's operating revenue. For
the year ended December 31, 1996, Foundation and PCA Qualicare accounted for
16.1% and 11.3%, respectively, of FPA's operating revenue. For the six months
ended June 30, 1997, Foundation and PCA Qualicare accounted for 19.4% and 12.7%,
respectively, of FPA's operating revenue.
Terminability of Payor Contracts. Contracts with Payors generally provide
for terms of one to thirty years, may be terminated earlier without cause, upon
notice and upon renewal or in a number of other circumstances and are subject to
negotiation of capitation rates, covered benefits and other terms and
conditions. At times, Payor contracts may be continued on a month-to-month basis
while the parties renegotiate the terms of the contracts. Agreements with
hospitals to provide contract management services generally have terms of one or
two years and are renewable automatically unless either party gives written
notice of its intent not to renew at least 90 days prior to the end of the term.
Many of these agreements provide for termination by the hospital without cause
on relatively short notice. There can be no assurance that any of
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such contracts will not be terminated early, will be renewed or that they will
contain favorable terms. Since January 1994, a number of Sterling's hospital
services agreements have been terminated as a result of nonrenewal, termination
by the hospital, termination by Sterling or hospital closure. Future
consolidation in the health care industry may result in future hospital services
agreements being terminated. The loss of any Payor or hospital contract and the
failure to regain or retain such Payor's members or the related revenues without
entering into new Payor relationships or hospital contracts could have a
material adverse effect on FPA's results of operations.
As of June 30, 1997, approximately 33% of FPA's membership was pursuant to
Payor agreements with Foundation. The terms of these Payor agreements are thirty
years with automatic five-year renewal periods. These agreements commit certain
Professional Corporations to, among other things, contract with Foundation for
all benefit programs and to maintain sufficient medical personnel to provide
reasonable and adequate access to professional services for all benefit programs
offered by Foundation, keep care centers open given specified levels of patients
and agree to certain pricing and contracting parameters with Foundation. The
agreements may be terminated in a number of circumstances, including the event
of a material breach or a violation of applicable laws, rules or regulations. A
significant modification to or termination of such agreements would have a
material adverse effect on FPA's results of operations.
Dependence on Primary Care Physicians and Emergency Medicine
Physicians. Primary care physicians are an integral part of the FPA Network, as
they provide and manage medical services offered to enrollees. FPA's growth
depends, in part, on its ability to retain existing and attract additional
primary care physicians to the FPA Network. There can be no assurance that
physicians presently in the FPA Network will not leave the FPA Network, that FPA
will be able to attract additional primary care physicians into the FPA Network
or that the amount of capitation or fee-for-service payments to physicians will
not have to be increased. To the extent that primary care physicians leave the
FPA Network or capitation or fee-for-service payments to physicians are
increased, FPA's results of operations may be materially adversely affected. In
order to provide management services to hospital emergency departments, FPA must
recruit and retain sufficient numbers of qualified physicians. There is a
substantial shortage of board certified emergency medicine physicians, and FPA
competes with many types of health care providers, as well as teaching, research
and governmental institutions, for the services of such physicians. An inability
to recruit and retain emergency medicine physicians could adversely affect FPA's
ability to add new and retain existing hospital clients.
On December 5, 1996, the Thomas-Davis Medical Centers, P.C. ("TDMC")
physicians located in Tucson, Arizona voted to be represented by the Federation
of Physicians and Dentists. On February 13, 1997, the TDMC employees located in
Tucson voted to be represented by the Union of Health and Hospital Care
Employees. TDMC and FPA are in the process of appealing certain aspects related
to such representation; however, there can be no assurance as to the outcome of
such appeals. Although FPA does not expect union affiliations of its Arizona
employees to have a material adverse effect on its results of operations or
financial condition, there can be no assurance that future affiliations and/or
collective bargaining arrangements will not have a material adverse effect on
FPA's results of operations.
Risks Related to Classification of Physicians as Independent
Contractors. FPA's subsidiary, Sterling, generally contracts with emergency room
physicians as independent contractors to provide services to its hospital
clients. These independent contractor physicians are paid on an hourly basis.
Pursuant to such compensation arrangements, independent contractor physicians do
not share in the profit derived by FPA from FPA's operations. Because FPA
regards its contracted physicians as independent contractors and not as
employees, FPA does not withhold federal or state income taxes, make federal or
state unemployment tax payments or provide workers' compensation insurance for
such physicians. There can be no assurance that federal or state taxing
authorities or other parties will not challenge the classification of such
independent contractor physicians and determine that such physicians should be
classified as employees. In the event that the physicians under contract with
FPA are determined to be employees, FPA's results of operations will be
materially and adversely affected and FPA may be subject to retroactive taxes
and penalties.
State Laws Regarding Prohibition of Corporate Practice of Medicine. In
certain states in which FPA conducts or may conduct business, general business
corporations are not permitted to practice medicine, exercise control over
physicians who practice medicine or engage in certain practices such as
fee-splitting with
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physicians. The corporate practice of medicine refers to the rendering directly,
or through employment, of medical services by a general business corporation. As
stated in the Notes to its Consolidated Financial Statements incorporated herein
by reference, FPA believes that it has perpetual and unilateral control over the
assets and operations of the various affiliated Professional Corporations. There
can be no assurance that regulatory authorities will not take the position that
such control conflicts with state laws regarding the corporate practice of
medicine or other federal or state restrictions. Although FPA believes its
operations as currently conducted are in material compliance with existing
applicable laws, there can be no assurance that the existing organization of FPA
and its contractual arrangements with affiliated physicians will not be
successfully challenged in such states as constituting the unlicensed practice
of medicine or that the enforceability of the provisions of such arrangements,
including non-competition agreements, will not be limited. In the event of
action by any regulatory authority limiting or prohibiting FPA from carrying on
its business or from expanding the operations of FPA to certain jurisdictions,
structural and organization modifications of such organization or arrangements
may be required, which could have an adverse effect on FPA's business and
results of operations.
Because certain state laws prohibit general business corporations from
controlling professional corporations contractually or otherwise, FPA has
structured its contracts with the Professional Corporations so that such
corporations retain the right to enter into contracts for the provision of
medical services or make other financial commitments. Such contracts allow the
Professional Corporations to make commitments which could be on terms which may
not be advantageous to FPA. For example, a Professional Corporation could
decline to enter into Payor contracts which are negotiated for it by FPA or,
alternatively, could decide to enter into Payor contracts which FPA does not
believe are financially advantageous. Physicians who contract with these
corporations may also have the legal right to decline to use other physicians in
the FPA Network or specialists having a pre-existing, subcapitated or fixed fee
relationship with the FPA Network. These decisions, if made by a Professional
Corporation or a physician, could have a material adverse effect on FPA's
business and results of operations.
Possible Negative Effects of Prospective Health Care Reform. Various plans
have been proposed and are being considered on federal, state and local levels
to reduce costs in health care spending. Although FPA believes its management
model responds to the concerns addressed by such plans, it is not possible to
assess the likelihood any of these proposals will be enacted or to assess the
impact any of these proposals may have on reimbursement to health care
providers. Any plan to control health care costs, however, could result in lower
rates of reimbursement. Lower rates of reimbursement may reduce the amount
ultimately received by FPA and, accordingly, may have a material adverse effect
on FPA's business and results of operations.
In recent years, legislation has been proposed in Congress to implement an
"any willing provider" law on a national level. These laws, which are in effect
in some states, require managed care organizations, such as HMOs, to contract
with any physician who is appropriately licensed and who meets applicable
membership criteria. Such laws could limit the flexibility of managed care
organizations, such as FPA, to achieve efficiency by controlling the size of
their primary care provider networks and the number of specialty care providers
to whom enrollees are referred. At present, no state in which FPA Network
physicians practice has such a law although "any willing provider" laws have
been proposed in states in which FPA operates. FPA cannot predict what effect
such laws would have on its operations.
Possible Negative Effects of Governmental Regulations. The health care
industry is subject to extensive federal and state regulation. Changes in the
regulations or reinterpretations of existing regulations may significantly
affect the FPA Network. FPA and the Professional Corporations are subject to
federal legislation that prohibits activities and arrangements that provide
kickbacks or other economic inducements for the referral of business under the
Medicare and Medicaid programs. Noncompliance with the federal anti-kickback
legislation can result in exclusion from the Medicare and Medicaid programs and
civil and criminal penalties. The federal government has promulgated "safe
harbor" regulations that identify certain business and payment practices which
are deemed not to violate the federal anti-kickback statute. In addition,
federal legislation currently restricts the ability of physicians to refer
Medicare or Medicaid patients to certain entities in which they have an
ownership interest or compensation arrangement for health care services,
including clinical laboratory services. With respect to the self-referral
prohibitions, the entity and the referring physician
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are prohibited from receiving Medicare or Medicaid reimbursement for services
rendered and civil penalties may be assessed. Many states, including states in
which FPA does business, have similar anti-kickback and anti-referral laws.
Penalties similar to those imposed by federal law are provided for violation of
state anti-kickback and anti-referral laws. FPA believes that its operations
comply with all applicable anti-kickback and anti-referral laws. In addition,
health care reforms may expand existing anti-kickback and anti-referral laws to
apply to all health care payors, not just Medicare and Medicaid. It is unclear
how any reform legislation would affect health care provider networks or other
types of managed care arrangements. There can be no assurance that FPA will be
able to comply with any new laws.
Furthermore, a number of states prohibit sharing professional fees (or fee
splitting) with anyone other than a member of the same profession. There can be
no assurance that such laws will ultimately be interpreted in a manner
consistent with the practices of FPA.
Federal and state laws regulate insurance companies, HMOs and other managed
care organizations. Many states also regulate the establishment and operation of
networks of health care providers. Generally, these laws do not apply to the
hiring and contracting of physicians by other health care providers. There can
be no assurance that regulators of the states in which FPA operates would not
apply these laws to require licensure of FPA's operations as an HMO, an insurer
or a provider network. FPA believes that it is in compliance with these laws in
the states in which it does business, but there can be no assurance that
interpretations of these laws by the regulatory authorities in these states or
in the states in which FPA may expand will not require licensure or a
restructuring of some or all of FPA's operations. In the event that FPA is
required to become licensed under these laws, the licensure process can be
lengthy and time consuming and, unless the regulatory authority permits FPA to
continue to operate while the licensure process is progressing, FPA could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which FPA may not be able to meet. Further,
once licensed, FPA would be subject to continuing oversight by and reporting to
the respective regulatory agency.
Although under the laws of most states the business of insurance generally
is defined to include the acceptance of financial risk and has not extended to
physician networks, the Knox-Keene Health Care Service Plan Act of 1975, as
amended (the "Knox-Keene Act"), a California statute that applies to managed
care health service plans, requires all health care service plans to be licensed
by the California Department of Corporations (the "Department"). The Department
has determined that physician management companies like FPA must apply for and
operate under a restricted Knox-Keene license. FPA's restricted license
application was approved by the Department in December 1996. The loss or
revocation of such license would have a material adverse effect on FPA's
business and results of operations.
In addition, there can be no assurance that regulatory authorities in the
other states in which FPA or its affiliates operate will not impose similar
requirements or that future interpretations of insurance laws and health care
network laws by the regulatory authorities in these states or other states will
not require licensure or a restructuring of some or all of the operations of
FPA.
The National Association of Insurance Commissioners ("NAIC") recently
adopted the Managed Care Plan Network Adequacy Model Act (the "Model Act") which
is intended to establish standards for the creation and maintenance of networks
by health carriers and establish requirements for written agreements among
health carriers offering managed care plans, participating providers and
intermediaries, like FPA, which negotiate provider contracts, regarding the
standards, terms and provisions under which a participating provider will
provide services to covered persons. An NAIC model insurance act does not carry
the force of law unless it is adopted by applicable state legislatures. FPA does
not know which states, if any, will adopt the Model Act. There can be no
assurance that FPA will be able to comply with the Model Act if it is adopted in
any state in which FPA does business or the effects such compliance could have
on FPA's operations.
Antitrust Regulation. FPA's affiliated IPAs and Professional Corporations
are separate legal entities due to legal and regulatory requirements; if they
are deemed to be competitors in specified markets, they may be subject to
various laws which prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and division of market. Alternatively, if FPA's
affiliated IPAs and Professional Corporations, although
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separate entities, are deemed to be part of a single entity or system, they may
be subject to laws that prohibit anti-competitive combinations or activities if
the number of affiliated physicians in specified markets exceeds certain
thresholds. FPA believes that it is in compliance with the antitrust laws, but
there can be no assurance that FPA's interpretation is consistent with that of
federal or state authorities or courts or that such circumstances will remain as
FPA grows and matures and as further regulations are promulgated and
interpretations thereof issued.
Competitive Market Forces. The managed care industry is highly competitive
and is subject to continuing changes in how services are provided and how
providers are selected and paid. Increased enrollment in prepaid health care
plans because of health care reform or for other reasons, increased
participation by physicians in group practices and other factors may attract
entrants into the physician practice management services segment of the managed
care industry and result in increased competition for FPA. In addition, local
physician groups and hospitals are also trying to combine their services into
integrated delivery networks. Certain of FPA's competitors are significantly
larger and better capitalized, provide a wider variety of services, may have
greater experience in providing physician practice management services and may
have longer established relationships with Payors. Accordingly, FPA may not be
able to continue to increase the number of providers in the FPA Network,
negotiate contracts with new Payors on behalf of the Professional Corporations
or renegotiate favorable contracts with current Payors. The inability of FPA to
increase the number of providers in the FPA Network and negotiate favorable
contracts with Payors could have a material adverse effect on FPA.
In addition, as a result of consolidations among Payors, certain Payors are
able to negotiate or are in the process of negotiating significant reductions in
the capitation payments to providers. Further, certain Payors have deleted
shared risk arrangements from their contracts with providers thereby decreasing
the amount of compensation such Payors are paying providers. To date, none of
the Payors has deleted shared risk arrangements from its contract with any
Professional Corporations. If Payors negotiate cost reductions with such
Professional Corporations or eliminate shared risk arrangements in which the
Professional Corporations are currently participating, such actions could have a
material adverse effect on FPA's results of operations.
Potential Liabilities. In recent years, physicians, hospitals and other
participants in the managed health care industry have become subject to an
increasing number of lawsuits alleging medical malpractice as well as claims
based on the withholding of approval for or reimbursement of necessary medical
services. Many of these lawsuits involve large claims and substantial defense
costs. FPA has been named as a party in certain such lawsuits and claims and
will likely be named as a party in similar suits and claims in the future. FPA
maintains an errors and omissions policy relating to its utilization review
activities and is included as a named or additional insured on the policies of
the Professional Corporations. There can be no assurance that insurance coverage
for lawsuits brought or which may be brought against FPA will be sufficient to
cover FPA's expenses or losses. There can be no assurance that insurance
coverage will be sufficient and, if insufficient, that such suits or claims will
not have a material adverse effect on FPA's financial condition and results of
operations. Furthermore, FPA could be held liable for the negligence of a
contracted health care professional if such health care professional were
regarded as an employee or agent of FPA in the practice of medicine. The Texas
legislature has enacted legislation effective September 1, 1997 which provides
that a health insurance carrier, health maintenance organization or managed care
entity has the duty to exercise ordinary care when making health care treatment
decisions and is liable for damages for harm to an insured or enrollee
proximately caused by its failure to exercise such ordinary care or proximately
caused by treatment decisions made by its employees, agents, ostensible agents
or representatives acting on its behalf and over whom it exercises influence or
control. Given the recent enactment of this legislation and the lack of judicial
interpretation thereof, FPA cannot assess the impact this legislation may have
on its operations in Texas; however, if the legislation is utilized by patients
to bring successful malpractice actions against managed care entities such as
FPA, the cost of providing health care as well as the cost of insurance coverage
against such actions could increase, which could have an adverse impact on FPA's
results of operations. In addition to any potential tort liability of FPA, FPA's
emergency department contracts with hospitals generally contain provisions under
which FPA agrees to indemnify the hospital for losses resulting from the
malpractice of contracted physicians.
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An increasing number of health care providers and other entities are
parties to lawsuits alleging fraudulent billing practices under the federal
Civil False Claims Act. The Civil False Claims Act permits a person (generally
an employee or former employee of the health care provider or other entity) to
assert the rights of the government by initiating a qui tam action against a
health care provider or other entity if such person has or purports to have
information that the health care provider or other entity falsely and
fraudulently submitted a claim to the government for payment. Upon filing, the
government has the opportunity to intervene and assume control of the case.
Penalties of up to $10,000 for each false or fraudulent claim presented to the
government for payment may be awarded as well as treble damages. Defendants also
may be excluded permanently or for a period of time from participation in the
Medicare and Medicaid programs. Because of penalties and treble damages, many of
these lawsuits involve large monetary claims and substantial defense costs. If a
qui tam action is successfully prosecuted, no assurance can be made that such
event would not have a material adverse effect on FPA and its operations.
AHI is a defendant in a class action securities lawsuit entitled In re AHI
Healthcare Systems, Inc. Securities Litigation filed in the United States
District Court for the Central District of California, Western Division. The
suit was initially filed on December 20, 1995 against AHI, certain of its
officers and directors, and all of the underwriters of AHI's common stock in
AHI's initial public offering. The suit asserts that AHI artificially inflated
the price of its stock by, among other things, misleading securities analysts
and by failing to disclose in its initial public offering prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's Payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997 the district court (i)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (ii) denied summary judgment on the claims relating to the
proposed acquisition of Lakewood Health Plan, Inc. As a result, only those
claims relating to Lakewood Health Plan and AHI's alleged liability for the
public statements of securities analysts following AHI remain in the suit. Since
the court's ruling on AHI's motion for partial summary judgment, the plaintiffs
have asked the court for leave to amend their complaint to add an additional
claim alleging problems with AHI's medical group operations in Downey,
California. FPA intends to vigorously defend this lawsuit and does not expect
that the outcome of this lawsuit will have a material adverse effect on FPA's
results of operation.
Fluctuations in Quarterly Results. FPA's financial statements (including
interim financial statements) contain accruals which are calculated quarterly
for estimates of amounts assigned by certain FPA subsidiaries and the
Professional Corporations to FPA and paid by Payors based upon hospital
utilization ("shared risk revenues"). Quarterly results have in the past and may
in the future be affected by adjustments to such estimates for actual costs
incurred. Historically, these FPA subsidiaries and the Professional Corporations
and Payors generally reconcile differences between actual and estimated amounts
receivable or payable relating to Payor shared risk arrangements in the second
or third quarter of each year. In the event that these subsidiaries,
Professional Corporations and Payors are unable to reconcile such differences,
extensive negotiation, arbitration or litigation relating to the final
settlement of these amounts may occur. To the extent that the FPA Network
expands to include additional Payors, the timing of these adjustments may vary;
this variation in timing may cause FPA's quarterly results not to be directly
comparable to corresponding quarters in other years. FPA's financial statements
also include estimates of costs for covered medical benefits incurred by
enrollees, which costs have not yet been reported by the providers. While these
estimates are based on information available to FPA at the time of calculation,
actual costs may differ from FPA's estimates of such amounts. If the actual
costs differ significantly from the amounts estimated by FPA, adjustments will
be required and quarterly results may be affected. Quarterly results may also be
affected by movements of Payor members from one Payor to another, particularly
during periods of open enrollment for HMOs. Fluctuations in FPA's quarterly
operating results could result in significant volatility in, and otherwise
adversely affect, the market price of FPA Common Stock.
Possible Volatility of Stock Price. Recently, there has been significant
volatility in the market prices of securities of companies in the health care
industry, including the price of FPA Common Stock. Many factors,
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including announcements of new legislative proposals or laws relating to health
care reform, the performance of, and investor expectations for, FPA, analysts'
comments, the trading volume in FPA Common Stock and general economic and market
conditions, may influence the market price of FPA Common Stock. Accordingly,
there can be no assurance as to the price at which FPA Common Stock will trade
in the future.
Dependence Upon Key Personnel; Employment Contracts. FPA depends on the
active participation of its executive officers and directors, particularly Dr.
Sol Lizerbram, Chairman of the Board, Dr. Seth Flam, President and Chief
Executive Officer and Dr. Stephen Dresnick, President of Sterling. The loss of
the services of Drs. Lizerbram, Flam or Dresnick could have a material adverse
effect upon FPA's future operations. FPA has an employment contract with each of
Drs. Lizerbram, Flam and Dresnick. FPA has not purchased key-man life insurance
on any of its key personnel.
Risk of Dilution and Additional Capital Needs. FPA's expansion strategy
includes acquisitions of, and affiliations with, individual and group physician
practices as well as organizations that provide management services to such
practices. Such acquisitions or affiliations may be consummated using newly
issued shares of FPA Common Stock, or securities convertible into or exercisable
for the purchase of FPA Common Stock, as consideration. The issuance of
additional shares of FPA Common Stock may have a dilutive effect on the net
tangible book value or earnings per share of FPA following such issuance.
FPA's expansion strategy also requires substantial capital investments.
Capital is needed not only for the acquisition of the assets of physician
practices, but also for their effective integration, operation and expansion and
for the addition of medical equipment and technology. In the event that FPA
Common Stock does not maintain sufficient valuation, or potential acquisition
candidates are unwilling to accept FPA Common Stock as part of the consideration
for the sale of the assets of their businesses, FPA may be required to utilize
more of its cash resources. There can be no assurance that FPA will have
sufficient cash resources or will be able to obtain additional financing or
that, if available, such financing will be on terms acceptable to FPA.
Furthermore, an inability to obtain additional capital through subsequent debt
or equity financings may negatively affect FPA's existing operations and its
future growth.
Shares Eligible for Future Sale. Sales of substantial amounts of FPA Common
Stock in the public market, after conversion of the Debentures, or otherwise, or
the perception that such sales could occur, may adversely affect prevailing
market prices of the FPA Common Stock. As of , 1997, shares of
FPA Common Stock were issued and outstanding. In addition, as of ,
1997, FPA had granted options or warrants to purchase, or securities (excluding
the Debentures) convertible into, approximately shares of FPA Common Stock
and 3,107,900 shares of FPA Common Stock were issuable upon conversion of the
Debentures. In addition to the registration rights to be granted to certain
stockholders of HPI in connection with the Merger covering approximately
shares of FPA Common Stock (assuming an FPA Value of $ ) and
assuming the effectiveness of FPA's Registration Statement on Form S-3 to
register for resale 1,940,960 shares of FPA Common Stock issued in connection
with the HealthCap acquisition, approximately 950,000 shares of outstanding FPA
Common Stock are subject to registration rights agreements which obligate FPA to
register such shares. In addition, FPA has granted registration rights to
certain former AHI stockholders in the event that such stockholders are unable
to sell a specified number of shares in accordance with the provisions of Rule
144, although FPA does not believe a registration statement regarding such
shares will need to be filed. All remaining FPA shares are freely tradeable,
without restriction under the Securities Act.
Anti-Takeover Effect of Certain Provisions. FPA's Certificate of
Incorporation, as amended, and Bylaws contain certain provisions that could have
the effect of making it more difficult for a person to acquire, or of
discouraging a third party from attempting to acquire, control of FPA. FPA's
Certificate of Incorporation authorizes the FPA Board of Directors without the
approval of the stockholders to issue preferred stock. The rights of the holders
of FPA Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of discouraging a person from acquiring a majority of the outstanding
FPA Common Stock. There
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are no shares of preferred stock presently outstanding and FPA has no present
plans to issue any shares of preferred stock.
Under FPA's Credit Agreement, FPA may not enter into any merger or
consolidation arrangement or purchase any securities of or any assets
constituting a business unit of another person except, among other things, for
Permitted Acquisitions (as defined in the Credit Agreement). These provisions
could serve to impede or prevent a change of control of FPA or have a depressive
effect on FPA's stock price. FPA has obtained the consent of the Lenders under
the Credit Agreement to the Merger and the waiver of any violation of provisions
of the Credit Agreement which would be violated by the Merger.
RISKS RELATING TO HPI
HPI and FPA are engaged in similar businesses, and thus HPI is subject to
many of the risks described with respect to FPA under the headings
"-- Difficulty in Controlling Health Care Costs: Capitated Nature of Revenue,"
"-- Risks Related to Full Risk Capitation," "-- Risks Related to Fee-for-Service
Contracts," "-- Dependence on Government and Other Third Party Payors,"
"-- Terminability of Payor Contracts," "-- Dependence on Primary Care Physicians
and Emergency Medicine Physicians," "-- Risks Related to Classification of
Physicians as Independent Contractors," "-- State Laws Regarding Prohibition of
Corporate Practice of Medicine," "-- Possible Negative Effects of Prospective
Health Care Reform," "-- Possible Negative Effects of Governmental Regulations,"
"-- Antitrust Regulation," "-- Competitive Market Forces" and "-- Potential
Liabilities." In addition, HPI is also subject to the following risks:
HPI Limited Operating History and Losses. HPI was incorporated in September
1993 and has a limited operating history. From September 15, 1993 (inception of
operations) to December 31, 1993, for the years ended December 31, 1994, 1995
and 1996 and for the six months ended June 30, 1997, HPI experienced net losses
of $1.2 million, $4.4 million, $7.2 million, $9.5 million and $.9 million,
respectively, and there can be no assurance that HPI will achieve profitability.
See "SELECTED CONSOLIDATED FINANCIAL DATA -- HPI" and the Consolidated Financial
Statements of HPI included elsewhere herein.
Risks Associated with Growth Strategy. To date HPI's strategy has involved
growth through the acquisition of the assets of, and affiliation with,
Affiliated Practices and IPAs, and development of managed care networks around
these physician organizations. HPI is subject to various risks associated with
such a growth strategy, including the risk that HPI will be unable to retain
personnel or acquire other resources necessary to service such growth
adequately. Consequently, there can be no assurance that continued rapid growth
would not impair HPI's ability to provide its management services efficiently to
its Affiliated Practices or IPAs and to assure that its managed care network
retains its members. Furthermore, expenses arising from HPI's efforts to
complete or integrate acquisitions, expand existing or develop new managed care
networks or otherwise increase its market penetration could have a material
adverse effect on HPI. In addition, there can be no assurance that HPI will be
able to identify and recruit suitable affiliation candidates in the future or to
integrate and manage the Affiliated Practices and IPAs profitably. The growth of
HPI has also been largely dependent on HPI's ability to form networks of
physicians around the Affiliated Practices and IPAs, to manage and control costs
and to realize economies of scale. Any failure of HPI to implement economically
feasible affiliations may have a material adverse effect on HPI's operating
results. There can be no assurance that (i) HPI will be able to achieve and
manage planned growth, (ii) the assets of physician group practices or other
health care providers will continue to be available for acquisition, (iii) the
liabilities assumed by HPI in any acquisition will not have a material adverse
effect on HPI or (iv) the addition of physician group practices or health care
providers will be profitable for HPI.
HPI's expansion strategy also requires substantial capital investment.
Capital is needed not only for the acquisition of physician group practice
assets, but also for the effective integration and operation of the Affiliated
Practices. HPI also requires capital for marketing, development and operation of
managed care networks.
Control by Certain Stockholders. Oxford and Wellpoint beneficially own
approximately 82% of HPI's outstanding voting securities and each has elected
two directors to HPI's five person Board of Directors.
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Accordingly, if Oxford and Wellpoint were to act in concert, they would control
HPI's Board of Directors and therefore the business, policies and affairs of
HPI.
Concentration of Payors Limitations on Reimbursement. HPI derives net
revenue of consolidated and unconsolidated affiliated medical corporations and
IPAs from contracts between its Affiliated Practices and IPAs and Payors, which
contracts generally are for one to three year terms, may be terminated earlier
upon notice and are subject to annual negotiation of capitation rates, covered
benefits and other terms and conditions. A substantial majority of HPI's
revenues to date has been derived from payor contracts with Oxford. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June 30,
1997, Oxford accounted for approximately 68% (pursuant to two contracts), 62%
(pursuant to four contracts), 69% (pursuant to seven contracts), and 74%
(pursuant to seven contracts) of HPI's net revenue of consolidated and
unconsolidated affiliated medical corporations and IPAs, respectively. There can
be no assurance that the number of assigned enrollees under any payor contract
will remain constant or increase. The loss of the Oxford contracts or the
failure to retain such Oxford covered members would have a material adverse
effect on HPI. In connection with the Merger, Oxford and HPI have agreed to
establish certain strategic principles under which they will enter into
partnership agreements in the future in existing and new markets. See "THE
MERGER -- Interests of Certain Persons in the Merger -- Master Strategic
Arrangement for Private Practice Partnerships." For each of the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
approximately %, %, % and %, respectively, of HPI's net revenues
of consolidated and unconsolidated affiliated medical corporations and IPAs were
derived from the Medicare and Medicaid programs. Reflecting a trend in the
health care industry, these third party payors increasingly are negotiating with
health care providers such as HPI concerning the prices charged for medical
services, with the goal of lowering reimbursement, capitation and utilization
rates. There can be no assurance that any further reduction in reimbursement or
capitation rates would be offset through enhancement of operating efficiencies,
or that any such enhancement of operating efficiencies will occur. Third party
payors may also deny reimbursement for a variety of reasons, including if they
determine that a treatment was not performed in accordance with the
cost-effective treatment methods established by such payors. In addition,
funding for governmental programs, such as Medicare and Medicaid, is under
increased scrutiny. In addition, HPI faces a significant concentration of payors
in many of the local markets that it serves. While HPI has not been adversely
affected by this in the past, this concentration may allow payors with market
power to lower reimbursement or capitation rates. Any loss of revenue caused by
these trends in the health care industry toward cost containment and oversight
could have a material adverse effect on HPI's business and results of
operations.
Goodwill and Other Intangibles. As a result of HPI's acquisitions during
1994, 1995 and 1996, goodwill and other intangibles increased from approximately
$9.3 million as of January 1, 1995 to approximately $23.3 million as of December
31, 1996, resulting in amortization expense on an annualized basis at December
31, 1996 of approximately $.9 million per year. Goodwill is amortized over
twenty to thirty years using the straight-line method as described in the Notes
to HPI's Consolidated Financial Statements included elsewhere in this Proxy
Statement/Prospectus. Such amortization is expected to affect significantly
HPI's results of operations. In addition, future acquisitions by HPI will likely
increase goodwill. Consummation of the Roll-up Transactions will also generate
goodwill to the extent the fair value of HPI's Common Stock issued in connection
with such acquisitions exceed recorded minority interest. See "THE MERGER
AGREEMENT -- Roll-up Transactions." As required under generally accepted
accounting principles, HPI reviews the carrying value of goodwill and other
intangibles at each reporting period to determine if facts or circumstances
exist which suggest that goodwill and other intangibles may be impaired. If
impairment is determined to have occurred, HPI will recognize an impairment
loss. There can be no assurance that impairment of goodwill and other
intangibles with respect to HPI's acquisitions will not occur. Recognition of an
impairment loss, if required, could have a material adverse effect on the
operating results of HPI in the period recognized. See note 2 of Notes to HPI's
Consolidated Financial Statements. Upon consummation of the Merger, FPA will
review the carrying value of the goodwill previously recorded by HPI to
determine if
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facts or circumstances exist which would suggest that HPI's goodwill may be
impaired and that the results of such impairment would have a material adverse
effect on the operating results in the period recorded.
RISKS RELATING TO THE MERGER
Impact on FPA's Financial Statements. FPA expects to incur non-recurring
costs in connection with the Merger aggregating approximately $15.5 million
relating primarily to certain employee termination costs, financial advisory
fees, professional fees and restructuring costs, which costs will be expensed in
the first quarter after the Closing. See "SELECTED HISTORICAL AND PRO FORMA
INFORMATION."
No Assurance of Successful Integration of Certain Operations. FPA and HPI
have entered into the Merger Agreement with the expectation that the Merger will
result in certain benefits for the combined company. Achieving the anticipated
benefits of the Merger will depend in part upon whether the integration of the
two companies' business is achieved in an efficient and effective manner. There
can be no assurance that this will occur. The combination of the two companies
will require, among other things, coordination of the companies' sales and
marketing efforts and operations. There can be no assurance that integration
will be accomplished on a timely basis, or at all. The difficulties of such
integration may be increased by the necessity of consolidating geographically
separated organizations in order to achieve economies of scale. The integration
of certain operations following the Merger will require the dedication of
management resources which may distract attention from the day-to-day business
of the combined company. In particular, the management services provided by FPA
to physicians, hospitals and Payors in the FPA Network, which include management
information systems, claims administration and billing services, utilization
management of medical services, care, coordination and case management, quality
and cost monitoring and physician recruitment, will have to be extended to new
members of the FPA Network. Failure to effectively accomplish the integration of
the two companies' operations could have a material adverse effect on FPA
results of operations and financial condition.
Exchange Ratio May Not Fully Reflect Changes in FPA Stock Price. The FPA
Value at the Effective Time may vary significantly from the FPA stock price as
of the date of execution of the Merger Agreement, the date hereof or the date on
which stockholders vote on the Merger due to, among other factors, changes in
the business, operations and prospects of FPA, market assessments of the
likelihood that the Merger will be consummated and the timing thereof and
general market and economic conditions. Since the actual number of shares of FPA
Common Stock issuable to HPI stockholders in the Merger depends on the FPA
Value, the fair value of the HPI Options and the issuance of HPI Common Stock in
the Roll-up Transactions, there is no guarantee as to the number of shares or
value of the FPA Common Stock that HPI stockholders will receive. Each HPI
stockholder is urged to obtain updated FPA market information. HPI stockholders
will be able to obtain the Exchange Ratio at the end of the second business day
preceding the HPI Special Meeting by calling (888) xxx-xxxx. See "THE
MERGER -- Adjustments to Merger Consideration."
Need for Additional Capital. Upon consummation of the Merger, FPA will be a
larger company and may therefore require additional capital in order to continue
to expand its operations. Failure to secure additional capital could have an
adverse effect on FPA's results of operations.
Possible Loss of Business. Despite the efforts of each of FPA and HPI,
current key independent contractor physicians, employees or clients of HPI may
not continue to contract with HPI or FPA following the Merger. The loss of a
material number of independent contractor physicians, employees or clients could
adversely affect the operations of HPI and FPA. As of June 30, 1997, Oxford
represented 74% of HPI's net revenue of consolidated and unconsolidated
affiliated medical corporations and IPAs and on a combined pro forma basis would
have represented approximately 14% of FPA's revenue as of such date. The
termination of the Oxford agreement or a significant reduction in revenues from
Oxford could adversely affect the results of operations of FPA after the Merger.
Rights of HPI Stockholders Following the Merger. Following the Merger,
holders of HPI Common Stock and HPI Preferred Stock will become holders of FPA
Common Stock. Certain differences exist between the rights of the HPI
stockholders under the HPI Certificate of Incorporation and Bylaws and the 1994
Securities Purchase Agreement, and the rights of FPA stockholders under the FPA
Certificate of
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Incorporation and Bylaws. Among other things, the differences include a
classified board of directors in the case of FPA, different procedures for
calling special meetings of stockholders, different procedures for nomination of
directors and supermajority vote requirements for certain provisions in the case
of HPI. In addition, FPA has a stockholders' rights plan and HPI does not.
Federal Income Tax Consequences. The Merger is intended to qualify for
federal income tax purposes as a tax-free reorganization under the Code. If for
any reason the Merger does not qualify as a reorganization, then among other
effects, the HPI stockholders may recognize gain or loss in such transaction. No
ruling from the Internal Revenue Service has been requested regarding the
federal income tax consequences of the Merger. See "THE MERGER -- Certain
Federal Income Tax Consequences."
Certain Conflicts of Interest. Certain officers and all the directors of
HPI have certain interests in the Merger that are in addition to their interests
as stockholders of HPI generally. The HPI Board was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and in
formulating its recommendations to the stockholders of HPI that they approve the
Merger Agreement and the transactions contemplated therein. These interests
arise from, among other things, certain employment agreements, management
retention programs, indemnification arrangements, registration rights and other
matters which FPA will assume or has agreed to provide after the Merger. For a
discussion and quantification of these interests, see "THE MERGER -- Interests
of Certain Persons in the Merger."
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THE HPI SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the stockholders of
HPI in connection with the solicitation of proxies by and on behalf of the Board
of Directors for use at the HPI Special Meeting. This Proxy Statement/Prospectus
and the related form of proxy for HPI are first being mailed to HPI stockholders
on or about , 1997.
DATE, TIME AND PLACE
The HPI Special Meeting will be held on , 1997 at 10:00 a.m.,
local time, at HPI's offices located at 800 Connecticut Ave., Norwalk,
Connecticut.
PURPOSE OF THE HPI SPECIAL MEETING
At the HPI Special Meeting, the stockholders of HPI will be asked to
consider and vote upon the adoption and approval of the Merger Agreement under
which, among other things, Merger Sub would be merged into HPI, with HPI
surviving the Merger as a wholly owned subsidiary of FPA. Pursuant to the
Merger, each outstanding share of HPI Common Stock will be exchanged for the
right to receive a number of shares of FPA Common Stock equal to the Exchange
Ratio. The Exchange Ratio will vary based on the FPA Value, the Outstanding HPI
Stock and the number of FPA Option Shares. Based upon 10,545,222 shares of
Outstanding HPI Stock (assuming no exercises of HPI Options between the date
hereof and the Effective Time), FPA Option Shares and assuming an FPA
Value equal to $ , which was the closing price of FPA Common Stock on
, 1997, the Exchange Ratio would be . Based upon such
assumptions, HPI's stockholders and option holders would be issued an aggregate
of approximately shares of FPA Common Stock, representing
approximately % of the total issued and outstanding shares of FPA Common Stock
after the Merger. See "THE MERGER -- Adjustments to Merger Consideration."
The HPI Board has unanimously approved the Merger Agreement and recommends
a vote FOR approval and adoption of the Merger Agreement.
At the HPI Special Meeting, the stockholders of HPI will also be asked to
consider and vote upon a proposal to approve the Payments to Charles G. Berg,
the President and Chief Executive Officer of HPI. The HPI Board has approved the
Payments (with Mr. Berg abstaining) and recommends a vote FOR approval of the
Payments. See "THE PAYMENTS."
REVOCATION OF PROXIES
Except for those who have executed irrevocable proxies, any holder of HPI
Voting Securities has the unconditional right to revoke his or her proxy at any
time prior to the voting thereof at the HPI Special Meeting by (i) filing a
written revocation with the Secretary of HPI prior to the voting of such proxy,
(ii) giving a duly executed proxy bearing a later date or (iii) attending the
HPI Special Meeting and voting in person. Attendance by a stockholder at the HPI
Special Meeting will not itself revoke his or her proxy.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
HPI Voting Securities (with the HPI Preferred Stock weighted on an as-converted
basis) at the HPI Special Meeting is necessary to constitute a quorum at the HPI
Special Meeting. Abstentions and non-votes will be included in determining the
presence of a quorum.
VOTE REQUIRED
For purposes of voting at the HPI Special Meeting, the shares of HPI
Preferred Stock will be weighted on an as-converted basis. The affirmative vote
of the holders of at least 60% of the HPI Voting Securities, voting together as
a class, either in person or by proxy, at the HPI Special Meeting is required to
approve the Merger Agreement. The affirmative vote of the holders of a majority
of the HPI Voting Securities present,
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either in person or by proxy, at the HPI Special Meeting is required to approve
the possible adjournment or postponement of the HPI Special Meeting.
The affirmative vote of the holders of at least 75% of the HPI Voting
Securities, voting together as a class, either in person or by proxy, excluding
shares owned by Mr. Berg or certain of his family members, is required to
approve the Payments. Approval of the Payments is not a condition to the Merger.
RECORD DATE; STOCK ENTITLED TO VOTE
The HPI Board has established September 4, 1997 (the "Record Date") as the
date to determine those record holders of HPI Voting Securities entitled to
notice of and to vote at the HPI Special Meeting. On that date, there were
1,673,500 shares of HPI Common Stock outstanding, 25,000 shares of Series A
Convertible Preferred Stock outstanding and 25,000 shares of Series B
Convertible Preferred Stock outstanding. Each share of HPI Common Stock is
entitled to one vote, each share of Series A Convertible Preferred stock is
entitled to 132 votes and each share of Series B Convertible Preferred stock is
entitled to 188 votes with respect to all matters to be voted upon at the HPI
Special Meeting.
In the event the Merger is not approved and adopted by the stockholders of
HPI, the Merger Agreement may be terminated in accordance with its terms. See
"THE MERGER AGREEMENT -- Termination."
VOTING OF PROXIES
At the HPI Special Meeting, abstentions and non-votes will have the effect
of a vote against adoption of the Merger Agreement and against approval of the
Payments. Because abstentions are treated as shares present and entitled to vote
at the HPI Special Meeting, they will have the effect of a vote against approval
of the possible adjournment or postponement of the HPI Special Meeting.
Non-votes are not allowed to vote at the HPI Special Meeting and will have no
effect on the outcome of a proposal to approve the possible adjournment or
postponement of the HPI Special Meeting.
If a holder of HPI Voting Securities does not return a signed proxy card
and does not attend the meeting and vote in person, his or her shares will not
be voted. Shares not voted will have the effect of a vote against the Merger
Agreement and against the Payments at the HPI Special Meeting.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the HPI Special Meeting may be made in
person or by mail, telephone, telecopy or telegram. HPI will conduct the
solicitation of proxies for the HPI Special Meeting and will bear the cost of
the solicitation of such proxies from its stockholders. In addition to
solicitation by mail, the directors, officers and employees of HPI may solicit
proxies from HPI stockholders by telephone or telegram or in person. Such
directors, officers and employees will not be compensated for such solicitation.
STOCKHOLDERS' RIGHT OF APPRAISAL
Holders of HPI Voting Securities as of the Record Date have the right to
demand judicial appraisal of, and obtain a cash payment for, the "fair value" of
their shares (exclusive of any element of value arising from the accomplishment
or expectation of the Merger) pursuant to Section 262 of the Delaware Act. In
order to exercise such rights, such holders of HPI Voting Securities must
perfect their right to exercise the right of appraisal. To perfect this right,
HPI stockholders must (i) deliver to HPI's Secretary before the vote on the
Merger Agreement at the HPI Special Meeting a written demand for appraisal, (ii)
continuously hold their shares from the date the appraisal demand is made
through the Effective Time, (iii) neither vote in favor of the Merger nor
consent thereto in writing and (iv) file a petition in the Delaware Court of
Chancery within 120 days of the Effective Time demanding a determination of the
"fair value" of their shares of HPI Common Stock. The full text of Section 262
of the Delaware Act is attached hereto as Appendix C, and any holder of HPI
Voting Securities desiring to exercise dissenters' rights of appraisal in
connection with the Merger should consult with legal counsel prior to taking any
action in order to ensure that the stockholder complies with the applicable
statutory provision. Failure to take any of the steps required under Section 262
of the Delaware Act
41
<PAGE> 46
on a timely basis may result in the loss of appraisal rights. See "THE
MERGER -- Rights of Dissenting Stockholders" and Appendix C hereto.
SECURITY OWNERSHIP OF CERTAIN HPI OWNERS AND MANAGEMENT
As of the Record Date, directors and executive officers of HPI named in the
Summary Compensation Table had the right to vote approximately 10.60% of the HPI
Voting Securities (treating the HPI Preferred Stock on an as-converted basis).
As provided by the terms of the relevant Certificate of Designations, each share
of HPI Series A Convertible Preferred Stock is convertible into and votes the
equivalent of approximately 132 shares of HPI Common Stock and each share of HPI
Series B Convertible Preferred Stock is convertible into and votes the
equivalent of approximately 188 shares of HPI Common Stock. WellPoint owns all
25,000 outstanding shares of the Series A Convertible Preferred Stock,
representing approximately 34.11% of the HPI Voting Securities. Oxford owns all
25,000 outstanding shares of Series B Convertible Preferred Stock, representing
approximately 48.59% of the HPI Voting Securities. As a result, as of the Record
Date, Oxford and WellPoint beneficially own approximately 82.7% of HPI's
outstanding voting securities. In addition, Oxford and WellPoint have each
elected two directors to HPI's five person Board of Directors. On July 1, 1997,
Oxford and WellPoint entered into a stockholders agreement and related proxy in
which they each granted an irrevocable proxy to FPA to vote their HPI securities
in favor of the Merger Agreement and the transactions contemplated thereby and
to convert their shares of HPI Preferred Stock into shares of HPI Common Stock
prior to the Effective Time. In accordance with HPI's Certificate of
Incorporation, cumulative unpaid dividends at the time of conversion of HPI
Preferred Stock will be canceled. See "SECURITY OWNERSHIP OF CERTAIN HPI
BENEFICIAL OWNERS AND MANAGEMENT."
If Oxford and WellPoint were to act in concert, they would control HPI's
Board of Directors and therefore the business, policies and affairs of HPI. As a
result, Oxford and WellPoint could preclude any unsolicited acquisition of HPI.
Such concentration of ownership could adversely affect the price of HPI's Common
Stock and could force an acquiror to pay a control premium to such stockholders
to the detriment of the other HPI stockholders. However, as described above,
Oxford and WellPoint have each granted an irrevocable proxy to vote in favor of
the Merger Agreement without any control premium for their HPI securities. In
connection with the Merger, Oxford and FPA agreed to establish certain strategic
principles under which they will enter into partnership agreements in the future
in existing and new markets and WellPoint and FPA have agreed to develop a
strategic relationship in the future. If such future relationships unfairly
benefit Oxford and WellPoint, it could have negative consequences to FPA's
stockholders. See "RISK FACTORS -- Risks Relating to the Merger" and "THE
MERGER -- Interests of Certain Persons in the Merger."
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<PAGE> 47
THE MERGER
EFFECTS OF THE MERGER
The Merger Agreement provides that the Merger will be consummated promptly
following approval by the holders of HPI Voting Securities and the satisfaction
or waiver of all other conditions to consummation of the Merger. At the
Effective Time, Merger Sub will be merged with and into HPI, and HPI, as the
Surviving Corporation, will be a wholly owned subsidiary of FPA. Stockholders of
HPI will become stockholders of FPA and their rights will be governed by the
Certificate of Incorporation and Bylaws of FPA.
MERGER CONSIDERATION
Pursuant to the Merger Agreement, at the Effective Time, Merger Sub will
merge with and into HPI and each share of HPI Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of HPI
Common Stock owned by HPI as treasury stock and shares of HPI Common Stock owned
by FPA, Merger Sub or any wholly owned subsidiary of FPA or HPI to be cancelled
in accordance with the Merger Agreement) shall be converted into the right to
receive a number of shares of FPA Common Stock equal to the Exchange Ratio. The
holders of HPI Preferred Stock have agreed to convert their shares of HPI
Preferred Stock to HPI Common Stock prior to the Effective Time.
The Exchange Ratio will depend on the relationship among (i) the total
issued and outstanding shares of HPI Common Stock (the "Outstanding HPI Stock")
immediately prior to the Effective Time which will equal 10,545,222, assuming no
exercises of options to purchase HPI Common Stock ("HPI Options") between the
date hereof and the Effective Time (including the 8,000,025 shares of HPI Common
Stock to be issued upon conversion of the HPI Preferred Stock and the 871,697
shares of HPI Common Stock to be issued in the Roll-up Transactions), (ii) the
fair value of options to purchase HPI Common Stock immediately prior to the
Effective Time (including substitute HPI Options issued in the Roll-up
Transactions) which will be converted in the Merger into shares of FPA Common
Stock (the "FPA Option Shares"), (iii) the presumed transaction value of $115
million and (iv) the FPA Value. The FPA Value will be the average of the closing
prices of FPA Common Stock on Nasdaq for the ten consecutive trading days ending
on the date that is two trading days prior to the Closing Date. The "Adjusted
FPA Value" will equal the FPA Value, except that if the FPA Value is less than
$18, the Adjusted FPA Value will be $18 and if the FPA Value is greater than
$22, the Adjusted FPA Value will be $22. Consequently, the Adjusted FPA Value
may differ from the actual market price of FPA Common Stock reported by Nasdaq
on the date of the HPI Special Meeting, the Closing Date or the date the HPI
stockholders actually receive their shares of FPA Common Stock after the Merger
is completed. See "THE MERGER -- Merger Consideration," "THE MERGER
AGREEMENT -- Roll Up Transactions" and "-- Treatment of Stock Options."
The Exchange Ratio can be represented by the following formula:
<TABLE>
<S> <C>
Exchange Ratio = ($115 Million / Adjusted FPA Value) - FPA Option Shares
---------------------------------------------------------
Outstanding HPI Stock
</TABLE>
The following table sets forth the range of the number of shares of FPA
Common Stock that may be issued in the Merger depending upon the FPA Value:
<TABLE>
<CAPTION>
SHARES OF
FPA COMMON STOCK
FPA VALUE TO BE ISSUED
----------------------------------------------------------- ----------------
<S> <C>
less than or equal to $18.00............................... 6,388,889
$19.00..................................................... 6,052,631
$20.00..................................................... 5,750,000
$21.00..................................................... 5,476,190
greater than or equal to $22.00............................ 5,227,273
</TABLE>
Except as more fully described in this Proxy Statement/Prospectus, in no
event will the number of shares of FPA Common Stock issuable in the Merger
exceed 6,388,889.
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<PAGE> 48
The following table sets forth the Exchange Ratio depending upon the FPA
Value and FPA Option Shares to be issued:
<TABLE>
<CAPTION>
FPA EXCHANGE
FPA VALUE OPTION SHARES RATIO
------------------------------------------------------- ------------- --------
<S> <C> <C>
less than or equal to $18.00...........................
$19.00.................................................
$20.00.................................................
$21.00.................................................
greater than or equal to $22.00........................
</TABLE>
HPI believes that the Exchange Ratio will fall between .43 and .55
(assuming a range of FPA Value of $15.65 to $25.00, respectively).
On , 1997 the closing price of FPA Common Stock was
$ . Assuming an FPA Value equal to such price, 10,545,222 shares of
Outstanding HPI Stock (including conversion of all outstanding shares of HPI
Preferred Stock and the 871,697 shares of HPI Common Stock to be issued in
connection with the completion of the Roll-up Transactions) and FPA
Option Shares, the Exchange Ratio would have been . Based upon these
assumptions, HPI's stockholders and option holders would be issued approximately
shares of FPA Common Stock, representing approximately % of the
shares of FPA Common Stock to be issued and outstanding after the Merger. The
holders of HPI Preferred Stock, which shares will be converted into shares into
HPI Common Stock immediately prior to the Merger, would receive approximately
% of the aggregate Merger Consideration based on these assumptions.
IF THE FPA VALUE IS LESS THAN $15.65, HPI MAY TERMINATE THE MERGER
AGREEMENT. STOCKHOLDERS OF HPI WILL BE ABLE TO OBTAIN THE EXCHANGE RATIO
BEGINNING AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE HPI SPECIAL
MEETING BY CALLING (888) XXX-XXXX. See "THE MERGER AGREEMENT -- Termination."
The actual market price of the FPA Common Stock may vary, which may cause a
change in the Exchange Ratio and the aggregate Merger Consideration. Each HPI
stockholder is urged to obtain updated FPA market information.
During the 90 day period ending September 15, 1997, the market price of FPA
Common Stock has ranged from a low of $16.75 to a high of $32.00 per share.
FPA's stock price may be affected by a number of factors, including
announcements of new legislative proposals or legislation affecting the managed
care industry, the performance of, and investor expectations for, FPA, analysts'
comments regarding the managed care industry generally and FPA in particular,
announcements by FPA of pending transactions and general economic and market
conditions. As one factor in determining the Exchange Ratio is the FPA Value, a
risk to the HPI stockholders of such FPA stock price volatility is that a
significant change in the price of FPA Common Stock could occur between the last
day of the period for which the Adjusted FPA Value is determined (the second
business day preceding the date of the HPI Special Meeting) and the Effective
Time (which is expected to occur on the date of the HPI Special Meeting).
Since the Exchange Ratio cannot be calculated until the second business day
immediately preceding the date of the HPI Special Meeting, the number of shares
of FPA Common Stock to be issued to the holders of HPI Voting Securities, may
differ from the estimates provided in this Proxy Statement/Prospectus.
FPA Option Shares will be issued in exchange for the cancellation of
1,183,500 outstanding HPI Options and 170,287 substitute HPI Options issued in
connection with the completion of the Roll-Up Transactions. The HPI Options will
be exchanged for a number of fully paid shares of FPA Common Stock equal to the
quotient which results when the "Fair Market Value" of such option at the
Effective Time is divided by the FPA Value. The Fair Market Value of the HPI
Options will be determined by an investment banking firm, selected by HPI and
acceptable to FPA, by applying a variation of the Black-Scholes option pricing
model. The FPA Option Shares will not affect the Exchange Ratio when the FPA
Value is between $18.00 and $22.00. As the FPA Value exceeds $22.00, the
Exchange Ratio will decrease as the result of an increase in the Fair Market
Value of the HPI Options which results from an increase in the value of HPI
Common Stock
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<PAGE> 49
with a fixed number of shares of FPA Common Stock. As the FPA Value falls below
$18.00, the Exchange Ratio will increase as a result of a decrease in the Fair
Market Value of the HPI Options which results from a decrease in the value of
HPI Common Stock with a fixed number of shares of FPA Common Stock.
The actual market price of the FPA Common Stock may vary from the FPA
value, which may cause a change in the Exchange Ratio and the aggregate Merger
Consideration (as defined below). Each HPI stockholder is urged to obtain
updated FPA market information. STOCKHOLDERS OF HPI WILL BE ABLE TO OBTAIN THE
EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE HPI
SPECIAL MEETING BY CALLING (888) XXX-XXXX.
ADJUSTMENTS TO MERGER CONSIDERATION
The consideration to be issued to each HPI stockholder in the Merger will
be that number of shares of FPA Common Stock which is determined by multiplying
the Exchange Ratio by the number of shares of HPI Common Stock held by such HPI
stockholder on the Closing Date (the "Merger Consideration"). As described in
the previous section, the Exchange Ratio will vary based on the FPA Value. The
FPA Value may differ from the actual market price of FPA Common Stock reported
by Nasdaq on the date of the HPI Special Meeting, the Closing Date or the date
the HPI stockholders actually receive their shares of FPA Common Stock after the
Merger is completed. The Merger Agreement may be terminated by HPI if the FPA
Value is less than $15.65. If, prior to the Effective Time, the announcement of
a transaction by FPA requires the amendment of the Registration Statement of
which this Proxy Statement/Prospectus is a part, and, as a result of such
amendment, the Closing occurs later than September 29, 1997 and the FPA Value is
below $18.00, for purposes of determining the Exchange Ratio, there will be no
adjustment to the FPA Value. Except as a result of events described in the
previous sentence, in no event will the number of shares of FPA Common Stock
issuable in the Merger exceed 6,388,889. Since the actual number of shares of
FPA Common Stock issuable to HPI stockholders in the Merger depends on the FPA
Value, the number of shares of Outstanding HPI Common Stock and the number of
FPA Option Shares, there is no guarantee as to the number of shares or value of
the FPA Common Stock that HPI stockholders will receive.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of HPI Common Stock into the right to receive FPA Common
Stock will occur automatically at the Effective Time.
As soon as practicable after the Effective Time, American Stock Transfer &
Trust Company or another bank or trust company designated by FPA and reasonably
acceptable to HPI, in its capacity as exchange agent (the "Exchange Agent"),
will send a transmittal form to each HPI stockholder of record. The transmittal
form will contain instructions with respect to the surrender of certificates
representing HPI Common Stock to be exchanged for FPA Common Stock.
HPI STOCKHOLDERS SHOULD NOT FORWARD HPI STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. HPI STOCKHOLDERS SHOULD NOT
RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Until the certificates representing HPI Common Stock are surrendered for
exchange after the consummation of the Merger, holders of such certificates will
not be paid dividends on the FPA Common Stock into which such shares have been
exchanged. When such certificates are surrendered, any unpaid dividends will be
paid without interest. For all other purposes, however, each certificate which
represents shares of HPI Common Stock at the Effective Time will be deemed to
evidence ownership of the shares of FPA Common Stock into which those shares are
entitled to be exchanged by virtue of the Merger.
All shares of FPA Common Stock issued upon the exchange of shares of HPI
Common Stock shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of HPI Common Stock.
No fractional shares of FPA Common Stock will be issued to any HPI
stockholder upon consummation of the Merger. For each fractional share that
would otherwise be issued, the Exchange Agent will pay by check an amount equal
to such fraction multiplied by the FPA Value.
45
<PAGE> 50
NASDAQ LISTING
It is a condition to the Merger that the shares of FPA Common Stock to be
issued in the Merger be authorized for inclusion on Nasdaq.
BACKGROUND OF THE MERGER
FPA's strategy for enhancing long-term value for its stockholders has been
to increase the number of enrollees and primary care physicians in the FPA
Network and to negotiate favorable contracts with Payors to provide physician
and related health care services to enrollees who select FPA primary care
physicians. The FPA Board believes that by doing so, FPA can enhance revenues
and earnings. FPA has grown significantly as a result of several recent
acquisitions. The FPA Board periodically reviews various strategic opportunities
to enhance profitability and increase stockholder value. In this regard, the FPA
Board continually evaluates the acquisition of other entities and medical
practices and has considered longer term acquisition opportunities and other
strategic alternatives. The FPA Board determined that the Merger would enhance
FPA by extending its geographic coverage, especially to the New York
metropolitan area, and by the strategic relationships with Oxford and WellPoint
Parent being developed as a result of the Merger and the transactions
contemplated thereby.
HPI raised $50.0 million under the 1994 Securities Purchase Agreement,
which proceeds were utilized to fund HPI's business plan. In July 1996, HPI
began exploring an initial public offering of HPI Common Stock to raise
additional capital to fund its acquisition and growth plans. In October 1996,
HPI decided not to pursue an initial public offering due to adverse market
conditions in the PPM sector and retained Smith Barney to assist HPI in
exploring other strategic alternatives. HPI did not consider other financial
advisors as Smith Barney is an internationally recognized investment banking
firm selected by HPI based on Smith Barney's experience and expertise in
advising health care and PPM companies. See "THE MERGER -- Opinion of HPI's
Financial Advisor." In analyzing the strategic alternatives, HPI evaluated (i)
additional equity placements with Oxford and WellPoint Parent, (ii) equity
placements with venture capital firms, (iii) debt and bridge financing and (iv)
a merger with a strategic buyer. In evaluating these alternatives, HPI
considered the potential valuation which would be placed on HPI, the return on
investment for current stockholders, the potential dilutive effect on existing
stockholders and the availability of future financings. Management of HPI
concluded a strategic buyer would provide the greatest stockholder return,
provide a higher likelihood that HPI would achieve its projected growth and
provide current stockholders with liquidity. The HPI Board concurred with the
conclusions reached by management. Thus, at the direction of HPI, Smith Barney
initially contacted five potential buyers consisting of four publicly traded
strategic buyers, including FPA, and one financial sponsor as a potential
partner. Between November 1 and November 7, 1996, each of the parties contacted
entered into a confidentiality agreement with HPI and received a confidential
memorandum relating to HPI.
During November 1996, HPI held discussions with the strategic buyers,
including FPA, relating to the operations of HPI. These discussions focused on
the managed care contracts held by HPI Subsidiaries, its Affiliated Practices or
IPAs, the terms and conditions of its administrative services agreements with
the Affiliated Practices and IPAs and the markets in which HPI had operations.
Between December 2 and December 10, 1996, HPI received preliminary
indications of interest from three strategic buyers. During December 1996, the
interested parties, including FPA, conducted their financial and operational due
diligence with respect to HPI. From December 1996 through March 1997, three
interested parties, including FPA, requested additional information to complete
their respective due diligence. During this period, the management of each of
HPI and the three interested strategic buyers held numerous meetings to answer
questions and discuss HPI's current and projected results of operations. On
February 18, 1997, one strategic buyer withdrew from the process.
On April 10, 1997, HPI received a revised term sheet from one of two
strategic buyers. From April 10, 1992 through June 11, 1997, HPI continued to
negotiate offers with both interested buyers. Upon review of the two negotiated
offers, HPI's management determined that HPI's stockholders would receive
greater value from a transaction with FPA due to its strategic fit, its
complementary business plan and FPA's market
46
<PAGE> 51
capitalization and liquidity. The rejected offer, while proposing an aggregate
consideration for HPI within the range offered by FPA, was not as attractive to
HPI's stockholders and management when considering the structure, terms and
conditions, the acquiring company's capitalization and stock trading liquidity.
On June 12, 1997, HPI terminated discussions with the other interested party and
negotiated solely with FPA.
From June 16, 1997 through July 1, 1997, legal and financial advisors to
HPI and executive officers of HPI and FPA held further discussions and
negotiations and finalized the Merger Agreement. During its negotiations with
FPA, management of HPI kept the HPI Board apprised of the parameters of a
transaction with FPA.
At the June 27, 1997 meeting of the HPI Board, Smith Barney reviewed
various financial analyses with the HPI Board and orally rendered to the HPI
Board an oral opinion (subsequently confirmed by delivery of a written opinion
dated July 1, 1997, the date of execution of the Merger Agreement) to the effect
that, as of such date and based upon and subject to certain matters described in
its written opinion, the Merger Consideration was fair from a financial point of
view to the holders of HPI Common Stock. See "THE MERGER -- Opinion of HPI's
Financial Advisor." The HPI Board unanimously concluded in its June 27, 1997
meeting that the transaction was fair and in the best interests of HPI's
stockholders and unanimously approved the transaction. See "-- Recommendation of
the HPI Board of Directors and Reasons for the Merger."
The determination of the Exchange Ratio was based on negotiations between
the managements of HPI and FPA. In negotiations, HPI considered FPA's Common
Stock price, a presumed transaction value for HPI and the objectives of HPI's
principal stockholders. The objectives of HPI's principal stockholders were to
(i) maximize the valuation of HPI, (ii) provide for valuation protection given
the volatility in the general stock market and FPA's Common Stock price, (iii)
provide appreciation if the transaction were viewed favorably by the
stockholders of FPA and (iv) provide for sufficient liquidity for all HPI
stockholders. Management of HPI believes the Exchange Ratio achieves these
objectives.
Using a $ price for FPA Common Stock, the closing price of FPA Common
Stock on September , 1997, the aggregate Merger Consideration would be
$ . The actual market price for FPA Common Stock may vary, which may
cause a change in the aggregate Merger Consideration and the Exchange Ratio.
In considering the overall impact of the proposed Merger, the HPI Board
also considered the background of the Roll-up Transactions and the effects of
the Merger thereon. In connection with each HPI Subsidiary's affiliations with
Affiliated Practices and IPAs, the physician-owners of the group practices and
IPAs own Minority Shares in HPI Subsidiaries with which they contract to provide
health care services. Certain of the HPI Subsidiaries have also granted Minority
Options to purchase shares of common stock of such HPI Subsidiary to certain of
such subsidiary's employees. At the time of issuance of the Minority Shares,
each HPI Subsidiary entered into a shareholders agreement with the holders of
the Minority Shares which provided that HPI had the right to exchange the
Minority Shares for shares of HPI Common Stock. Each shareholders agreement
further provides that the exchange is to be based on the fair value of such HPI
Subsidiary as determined by a willing buyer and a willing seller without giving
effect to the relationship between HPI and such HPI Subsidiary. Each HPI
Subsidiary's stock option plan provides for the cancellation of subsidiary
options in the event HPI exercises its exchange right and the options are to be
exchanged for substitute HPI Options based on the exchange ratio determined in
the Roll-Up Transaction for such HPI Subsidiary. Both the shareholders
agreements and the HPI Subsidiary option plans provide the mechanism for which
the Roll-Up Transactions and exchanges are to occur. See "THE MERGER -- Roll-Up
Transactions."
Finally, the HPI Board considered the effects the Merger would have on its
senior executives both from a financial and operational perspective. The HPI
Board considered contractual and other obligations to its senior management and
the importance of retaining these senior executives to operate HPI effectively
after the Merger. In light of these factors, the HPI Board approved certain
transactions relating to its President and Chief Executive Officer subject to
stockholder approval (See "THE PAYMENTS") and FPA agreed to provide (i) a
severance plan to be implemented for a period of one year subsequent to the
Effective Time,
47
<PAGE> 52
(ii) a management retention and bonus program and (iii) a pool of stock options
for the senior management of HPI.
Each of the directors of HPI has certain interests in the Merger that are
in addition to the interests of HPI stockholders generally. See "-- Interests of
Certain Persons in the Merger." Accordingly, the HPI Board determined not to
appoint a special committee of independent directors for purposes of considering
the Merger Agreement and the transactions contemplated thereby. The HPI Board
was aware of each of these conflicts and considered them, among other matters,
in approving the Merger Agreement and in formulating its recommendation to the
stockholders of HPI that they approve the Merger Agreement and the transactions
contemplated therein. These interests arise from, among other things, certain
employment agreements, management retention programs, indemnification
arrangements, registration rights, and other matters which FPA will assume or
has agreed to provide after the Merger. For a discussion and quantification of
these interests, see "THE MERGER -- Interests of Certain Persons in the Merger."
RECOMMENDATION OF THE HPI BOARD OF DIRECTORS AND REASONS FOR THE MERGER
On June 27, 1997, the HPI Board, after consultation with its management and
financial and legal advisors, unanimously determined that the terms of the
Merger Agreement and the transactions contemplated thereby are in the best
interests of HPI and its stockholders. The HPI Board focused on the impact of
the Merger on its stockholders and determined, among other things, that the
Merger Consideration was fair to the holders of HPI Common Stock from a
financial point of view (which was affirmed by an opinion of Smith Barney
delivered to the HPI Board (see "THE MERGER -- Opinion of HPI's Financial
Advisor")) and provided them with liquidity for their holdings, including
registration rights for affiliates of HPI. In determining whether the Merger was
in the best interests of HPI's stockholders and of HPI itself, the HPI Board
also considered the impact of the Merger on HPI in light of current market
conditions, the relative strengths and weaknesses of HPI and FPA and the
potential for savings and increased profits of the combined entities. The
factors which were considered include the following:
Merger Consideration. Of primary concern to the HPI Board in considering
the Merger was treatment of its stockholders as a whole, without distinguishing
between holders of HPI Preferred Stock and holders of HPI Common Stock. The HPI
Board sought advice from its financial and legal advisors as to the customary
and appropriate methods for determining an exchange ratio. The Exchange Ratio
provides that HPI stockholders will receive, in the aggregate, (i) a an
adjustable amount of shares of FPA Common Stock determined by dividing $115
million by the FPA Value if the FPA Value falls within the target range of $18
and $22 which causes an agreed upon amount of consideration to be paid to the
HPI stockholders, (ii) a fixed Exchange Ratio if the FPA Value is above $22,
which provides additional consideration to the HPI stockholders to the extent
the FPA Value exceeds $22 and (iii) a number of shares of FPA Common Stock if
the FPA Value is below $18 which provides reduced consideration to the HPI
stockholders to the extent the FPA Value is less than $18. However, the HPI
Board may elect to terminate the Merger Agreement without liability if the FPA
Value is below $15.65. See "-- Merger Consideration."
The HPI Board, in consultation with its financial advisor, determined that
the Merger Consideration, realized through the Exchange Ratio, offered the HPI
stockholders a fair price for their shares, particularly in light of the fact
that the HPI Board could terminate the Merger Agreement if the FPA Value were to
drop below $15.65. See "-- Opinion of HPI's Financial Advisor."
Competitive Position of HPI and Industry Consolidation. A significant
objective of the HPI Board was to strengthen HPI's competitive position and
enhance its profile among physicians and Payors. The HPI Board felt that a
combination with FPA would accelerate HPI's ability to achieve these goals. The
HPI Board was concerned with the increasingly competitive pressures within the
managed care sector of the health care industry and noted the resulting trend
towards consolidation among Payors, providers and PPMs. The HPI Board determined
that HPI would be in a much stronger position if it were part of a larger
entity, which would enable it to compete more effectively in this consolidating
environment. The HPI Board felt that it was the appropriate time to utilize the
strength and resources of a larger entity rather than continue trying to compete
on its own.
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<PAGE> 53
Benefits of the Merger with FPA. The HPI Board focused on the specific
benefits to be obtained in combining with FPA. The HPI Board determined that a
combined FPA and HPI, would, as one of the largest national physician practice
management companies, be able to operate more effectively and profitably based
on the size, geographic scope and expertise of the combined entity. In addition,
the HPI Board believed that there would be considerable cost savings and
synergies achieved by merging the companies by combining duplicative operations
and eliminating overlapping development activities in the same markets.
Likelihood of Consummation of the Merger. The HPI Board determined that it
would only enter into an agreement which offered a high likelihood of timely
consummation. On balance, after reviewing the various termination provisions
provided in the Merger Agreement, the HPI Board believed that the Merger would
be consummated in a timely manner. See "-- Termination."
Contributions of Management. The HPI Board believed that one key to its
success has been the contribution of its management team. Therefore, the Board
felt that it was pivotal that management support the Merger and that FPA support
the HPI management team after consummation of the Merger. The provisions in the
Merger Agreement which provide both severance arrangements and management
retention and bonus programs were important to the HPI Board in satisfying these
concerns.
The HPI Board realized that certain members of management had certain
interests in the Merger beyond that of other HPI stockholders. These interests
arise from, among other things, certain employment agreements, management
retention programs, indemnification arrangements, registration rights, and other
matters which FPA will assume or has agreed to provide after the Merger. For a
discussion and quantification of these interests, see "-- Interests of Certain
Persons in the Merger." The HPI Board believed that the payments and inducements
to management, including the Payments to Mr. Berg which the HPI stockholders are
being asked to approve at the HPI Special Meeting, (i) acted to align the
interests of management with those of HPI in negotiating and effectuating the
Merger, (ii) provided the necessary incentives for the key members of HPI's
management team to continue with HPI and FPA after the Merger is consummated and
(iii) after consultation with its advisors, are reasonable based on the size of
HPI and FPA and industry standards. See "THE PAYMENTS."
Desire to Complete Roll-up Transactions. It has been a goal of the HPI
Board (and the holders of Minority Shares and/or Minority Options (the "Minority
Holders")) to eliminate the Minority Shares and Minority Options under the right
circumstances. The HPI Board believes that the Merger represents such a
situation. By completing the Roll-up Transactions and subsequently the Merger,
the Minority Holders would receive freely tradable shares of FPA Common Stock in
place of their restricted minority interests. In addition, because HPI can
compel the Roll-up Transactions, the HPI Board did not believe that the efforts
needed to consummate such transactions would cause any delay in the timing of
the Merger.
Interests of Non-Affiliated Stockholders. The HPI Board believed that the
Merger Consideration and liquidity afforded the non-affiliated stockholders
favorably impacted the HPI Board's decision to approve the Merger.
Potential Merger Risks. In analyzing a combination with FPA, the HPI Board
generally considered the matters set forth under "RISK FACTORS" including:
(a) the effect of FPA's recent acquisitions of Sterling, Foundation,
AHI and HealthCap on FPA's ability to integrate HPI's operations
efficiently into FPA following consummation of the Merger;
(b) the ability of FPA to maintain its current growth strategy; and
(c) the amount of FPA's indebtedness in relation to its stockholders'
equity.
The HPI Board reviewed these risk factors in their totality as well as the
interests of certain officers and all directors of HPI in the Merger that are in
addition to their interests as stockholders of HPI generally, without focusing
on any one individual factor, and concluded that on balance, despite such
factors, HPI would be better positioned to face those underlying risks as well
as accomplish its business plan if it combined with FPA. The HPI Board also
believes that FPA is capable of addressing the issues raised by the integration
of HPI operations following consummation of the Merger.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive, but it does include the material factors, favorable,
neutral and adverse, considered by the HPI Board in the
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<PAGE> 54
evaluation of the Merger. The HPI Board reviewed the foregoing factors in their
totality, without focusing on any one individual factor. Without giving relative
weights to the respective factors, favorable, neutral and adverse, and without
drawing a correlation among the factors, the HPI Board determined that the
factors adverse to the Merger were not sufficient to negate the incentives for
pursuing and potential benefits of the Merger. The HPI Board unanimously
determined that the Merger was fair to and in the best interest of the HPI
stockholders and that HPI should proceed with the Merger.
ACCORDINGLY, THE HPI BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
HPI VOTE "FOR" APPROVAL OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN MEMBERS OF THE HPI BOARD AND
MANAGEMENT HAVE CERTAIN INTERESTS IN THE MERGER THAT MAY CONFLICT WITH AND ARE
IN ADDITION TO THOSE OF OTHER HPI STOCKHOLDERS. THESE INTERESTS ARISE FROM,
AMONG OTHER THINGS, CERTAIN EMPLOYMENT AGREEMENTS, MANAGEMENT RETENTION
PROGRAMS, INDEMNIFICATION ARRANGEMENTS, REGISTRATION RIGHTS AND OTHER MATTERS
WHICH FPA WILL ASSUME OR HAS AGREED TO PROVIDE AFTER THE MERGER. FOR A
DISCUSSION AND QUANTIFICATION OF THESE INTERESTS, SEE "INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
OPINION OF HPI'S FINANCIAL ADVISOR
Smith Barney was retained by HPI to act as its financial advisor in
connection with the proposed Merger. In connection with such engagement, HPI
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of HPI Common Stock of the consideration to be received by
such holders in the Merger. On June 27, 1997, at a meeting of the Board of
Directors of HPI held to evaluate the proposed Merger, Smith Barney delivered to
the Board of Directors of HPI an oral opinion (which opinion was subsequently
confirmed by delivery of a written opinion dated July 1, 1997, the date of
execution of the Merger Agreement) to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated therein, the Merger
Consideration was fair, from a financial point of view, to the holders of HPI
Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of HPI and certain senior officers and other
representatives of FPA concerning the business, operations and prospects of HPI
and FPA. Smith Barney examined certain business and financial information
relating to HPI and certain publicly available business and financial
information relating to FPA as well as certain financial forecasts and other
information and data for HPI and FPA which were provided to or otherwise
discussed with Smith Barney by the respective managements of HPI and FPA,
including information relating to certain strategic implications and operations
benefits anticipated to result from the Merger. Smith Barney reviewed the
financial terms of the Merger as set forth in the Merger Agreement in relation
to, among other things, current and historical market prices and trading volumes
of FPA Common Stock; the historical and projected earnings and other operating
data of HPI and FPA; and the capitalization and financial condition of HPI and
FPA. Smith Barney considered, to the extent publicly available, the financial
terms of certain other similar transactions recently effected which Smith Barney
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations Smith Barney considered relevant in
evaluating those of HPI and FPA. Smith Barney also evaluated the potential pro
forma financial impact of the Merger on FPA. In connection with its engagement,
Smith Barney was requested to approach on a limited basis, and held discussions
with, certain third parties to solicit indications of interest in a possible
acquisition of HPI. (See "THE MERGER -- Background of the Merger"). In addition
to the foregoing, Smith Barney conducted such other analyses and examinations
and considered such other financial, economic and market criteria as Smith
Barney deemed appropriate in arriving at its opinion. Smith Barney noted that
its opinion was necessarily based upon information available, and financial,
stock
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<PAGE> 55
market and other conditions and circumstances existing and disclosed, to Smith
Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Smith Barney, the managements of HPI and FPA advised Smith Barney that such
forecasts and other information and data were reasonably prepared on bases
reflecting the currently available estimates and judgments of the managements of
HPI and FPA as to the future financial performance of HPI and FPA and the
strategic implications and operational benefits anticipated to result from the
Merger. Smith Barney assumed, with the consent of the HPI Board, that the Merger
will be treated as a pooling of interests in accordance with generally accepted
accounting principles and as a tax-free reorganization for federal income tax
purposes. Smith Barney also assumed, with the consent of the HPI Board, and took
into account to the extent relevant to its analysis, that prior to the
consummation of the Merger all outstanding shares of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock of HPI and outstanding
minority interests in subsidiaries of HPI will be converted into shares of HPI
Common Stock. Smith Barney did not express any opinion as to what the value of
the FPA Common Stock actually will be when issued to HPI stockholders pursuant
to the Merger or the price at which the FPA Common Stock will trade subsequent
to the Merger. Smith Barney did not make and was not provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of HPI or FPA nor did Smith Barney make any physical inspection of
the properties or assets of HPI or FPA. Although Smith Barney evaluated the
Merger Consideration from a financial point of view, Smith Barney was not asked
to and did not recommend the specific consideration payable in the Merger, which
was determined through negotiation between HPI and FPA. No other limitations
were imposed by HPI on Smith Barney with respect to the investigations made or
procedures followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED JULY 1, 1997,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN
BY REFERENCE. HOLDERS OF HPI COMMON STOCK ARE URGED TO READ THIS OPINION
CAREFULLY IN ITS ENTIRETY. THE OPINION OF SMITH BARNEY IS DIRECTED TO THE HPI
BOARD AND RELATES ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR
RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE HPI SPECIAL MEETING. THE SUMMARY
OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparable analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Smith Barney made
numerous assumptions with respect to HPI, FPA, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of HPI and FPA. The estimates contained in such
analyses and the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Smith Barney's
opinion and analyses were only one of many factors considered by the Board of
Directors of HPI in its evaluation of the Merger and should not be viewed as
determinative of the views of the Board of Directors or management of HPI with
respect to the Merger Consideration or the proposed Merger.
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<PAGE> 56
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
the following selected publicly traded companies in the PPM industry, consisting
of: (i) Contract Hospital-Based PPM Companies: EmCare Holdings Inc.; and
Sheridan Healthcare, Inc.; (ii) Multi-Specialty/Primary Care PPM Companies: FPA;
MedPartners, Inc.; PHP HealthCare Corporation; PhyCor, Inc.; PhyMatrix
Corporation; and Promedco Management (the "Multi-Specialty/Primary Care PPM
Companies"); and (iii) Single Specialty PPM Companies: American Oncology
Resources, Inc.; MedCath Incorporated; OccuSystems Inc.; Orthodontic Centers of
America, Inc.; Pedatrix Medical, Group Inc.; Physician Reliance Network, Inc.;
Physicians Resource Group, Inc.; and Specialty Care Network, Inc. (collectively,
the "Selected Companies"). With respect to the Selected Companies analyzed,
Smith Barney focused primarily on the Multi-Specialty/Primary Care PPM
Companies, the operations of which Smith Barney considered to be the most
comparable to HPI. Smith Barney compared market values as a multiple of, among
other things, estimated calendar 1997 and 1998 net income, and adjusted market
values (market equity value, plus debt, less cash) as a multiple of, among other
things, latest 12 months earnings before interest, taxes, depreciation and
amortization ("EBITDA"). All multiples were based on closing stock prices as of
June 25, 1997. Net income estimates for FPA and the Selected Companies were
based on estimates of selected investment banking firms and net income estimates
for HPI were based on internal estimates of the management of HPI (excluding
growth estimates for potential acquisitions). Applying a range of multiples
(excluding outliers) for the Multi-Specialty/Primary Care PPM Companies of
estimated calendar 1997 and 1998 net income of 18.8x to 26.1x (with a mean of
22.3x) and 13.3x to 19.3x (with a mean of 16.4x), respectively, and latest 12
months EBITDA of 12.6x to 19.8x (with a mean of 14.6x) to HPI estimated calendar
1997 and 1998 net income and estimated calendar 1997 EBITDA, respectively,
resulted in an equity reference range for HPI of approximately $74.4 million to
$110.1 million, as compared to the equity value implied by the Merger
Consideration of approximately $119.0 million based on a closing stock price of
FPA Common Stock on June 25, 1997.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction value multiples paid in selected transactions in the PPM industry,
consisting of (acquiror/target): MedPartners, Inc./InPhyNet Medical Management;
Physicians Resource Group, Inc./American Ophthalmic Inc.; FPA/AHI Healthcare
Systems, Inc.; FPA/Sterling Healthcare Group Inc.; Physicians Resource Group,
Inc./EyeCorp, Inc.; MedPartners, Inc./Pacific Physician Services Inc.;
MedPartners, Inc./Mullikin Medical Enterprises, L.P.; Coastal Healthcare Group,
Inc./Health Enterprises, Inc.; Caremark International Inc./Friendly Hills
Healthcare Network; and Foundation Health Corporation/Thomas-Davis Medical
Centers, P.C. (collectively, the "Selected Transactions"). Smith Barney
compared, among other things, the purchase prices in the Selected Transactions
as a multiple of latest 12 months net income, and transaction values as
multiples of latest 12 months earnings before interest and taxes ("EBIT") and
EBITDA. All multiples for the Selected Transactions were based on information
available at the time of announcement of the transaction. Applying a range of
multiples (excluding outliers) for the Selected Transactions of latest 12 months
net income, EBIT and EBITDA of 18.7x to 39.1x (with a mean of 28.8x and a median
of 22.3x), 13.5x to 22.9x (with a mean of 18.6x and a median of 17.2x) and 8.8x
to 17.3x (with a mean of 12.9x and a median of 12.0x), respectively, to
corresponding financial data for HPI resulted in an equity reference range for
HPI of approximately $56.9 million to $105.9 million, as compared to the equity
value implied by the Merger Consideration of approximately $119.0 million based
on a closing stock price of FPA Common Stock on June 25, 1997.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to HPI, FPA or the Merger. Accordingly, an analysis of the results of
the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the Selected Companies, Selected Transactions or the
business segment, company or transaction to which they are being compared.
Contribution Analysis. Smith Barney analyzed the respective contributions
of HPI and FPA to the estimated revenue, EBITDA, EBIT and net income of the
combined company for fiscal years 1997 through 2000, based on internal estimates
of the managements of FPA and HPI (excluding, in the case of HPI, growth
estimates for potential acquisitions), without giving effect to certain costs
savings and other potential synergies
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and transaction costs anticipated by the managements of HPI and FPA to result
from the Merger. This analysis indicated that HPI would contribute approximately
15.8% of revenue, 8.3% of EBITDA, 5.9% of EBIT and 7.7% of net income of the
combined company in fiscal year 1997, approximately 17.5% of revenue, 12.7% of
EBITDA, 11.5% of EBIT and 12.9% of net income of the combined company in fiscal
year 1998, approximately 17.8% of revenue, 12.6% of EBITDA, 11.4% of EBIT and
12.2% of net income of the combined company in fiscal year 1999, and
approximately 18.3% of revenue, 12.6% of EBITDA, 10.7% of EBIT and 11.1% of net
income of the combined company in fiscal year 2000. Based on the Exchange Ratio,
current stockholders of HPI would own approximately 14.2% of the equity value of
the combined company, on a fully diluted basis, upon consummation of the Merger,
and HPI would constitute approximately 11.5% of the enterprise value of the
combined company.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of HPI for fiscal years 1997
through 2000, based on internal estimates of the management of HPI (excluding
growth estimates for potential acquisitions) for fiscal 1997 and fiscal 1998 and
extrapolated for fiscal years 1999 through 2000 assuming annual revenue growth
rates in such years of 15% and 20%. The stand-alone discounted cash flows
analysis of HPI was determined by (i) adding (x) the present value of projected
free cash flows over the three and one-half year period from 1997 to 2000 and
(y) the present value of HPI's estimated terminal value in year 2000 and (ii)
subtracting the current net debt of HPI. The range of estimated terminal values
for HPI at the end of the three and one-half year period was calculated by
applying terminal multiples of 9.0x to 11.0x to HPI's projected 2000 EBITDA,
representing HPI estimated value beyond the year 2000. The cash flows and
terminal values of HPI were discounted to present value using discount rates
ranging from 15% to 20%. Utilizing such discount rates and terminal values, this
analysis resulted in an equity reference range for HPI of approximately $110.3
million to $150.6 million (assuming a 15% annual revenue growth rate in fiscal
years 1999 through 2000) and approximately $119.4 million to $163.3 million
(assuming a 20% annual revenue growth rate in fiscal years 1999 through 2000),
as compared to the equity value implied by the Exchange Ratio of approximately
$119.0 million based on a closing stock price of FPA Common Stock on June 25,
1997.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected earnings per share ("EPS") of FPA for the fiscal years
ended 1997 through 2000, based on internal estimates of the managements of FPA
and HPI (excluding, in the case of HPI, growth estimates for potential
acquisitions). The results of the pro forma merger analysis suggested that the
Merger could be dilutive to FPA's EPS in fiscal year 1997 and accretive to FPA's
EPS in fiscal years 1998 through 2000, assuming certain cost savings and other
potential synergies anticipated by the management of HPI to result from the
Merger were achieved. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) indications of interest
received from third parties other than FPA; (ii) FPA's and HPI's historical and
projected financial results; (iii) the history of trading prices and volume for
FPA Common Stock and the relationship between movements in FPA Common Stock,
movements in the common stock of comparable companies and movements in the S&P
500 Index; and (iv) selected published analysts' reports on FPA, including
analysts' estimates as to the earnings growth potential of FPA.
Pursuant to the terms of Smith Barney's engagement, HPI has agreed to pay
Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to 1.25% of the total consideration (including
certain liabilities assumed) payable in connection with the Merger. HPI has also
agreed to reimburse Smith Barney for reasonable travel and other out-of-pocket
expenses incurred by Smith Barney in performing its services, including the
reasonable fees and expenses of its legal counsel, and to indemnify Smith Barney
and related persons against certain liabilities, including liabilities under
federal securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised HPI that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of FPA
for their own account or for the account of customers and,
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accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided investment banking services to FPA
unrelated to the proposed Merger, for which services Smith Barney has received
compensation. In addition, Smith Barney and its affiliates (including Travelers
Group, Inc. and its affiliates) may maintain relationships with HPI and FPA.
Smith Barney is an internationally recognized investment banking firm and
was selected by HPI based on Smith Barney's experience and expertise. Smith
Barney regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
EFFECTIVE TIME OF THE MERGER
Upon the terms and conditions of the Merger Agreement, Merger Sub will be
merged with and into HPI at the Effective Time. The Merger will become effective
when the Certificate of Merger is filed with the Secretary of State of Delaware
or at such time thereafter as is provided in the Certificate of Merger. The
filing of the Certificate of Merger will be made as soon as practicable on or
after the Closing.
The Closing shall take place on the Closing Date, at the offices of
Pillsbury Madison & Sutro LLP, 101 West Broadway, Suite 1800, San Diego,
California, unless another date or place is agreed to by the parties. See "THE
MERGER AGREEMENT -- Conditions to Consummation of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain officers and all of the directors of HPI have certain interests in
the Merger that are in addition to their interests as stockholders of HPI
generally. The HPI Board was aware of these interests and considered them, among
other matters, in approving the Merger Agreement and in formulating its
recommendation to the stockholders of HPI that they approve the Merger Agreement
and the transactions contemplated therein. These interests arise from, among
other things, certain employment agreements, management retention programs,
indemnification arrangements, registration rights and other matters which FPA
will assume or has agreed to provide after the Merger.
Berg Employment Agreements. Mr. Berg is subject to an existing employment
agreement dated September 1, 1993 with HPI (the "HPI Employment Agreement").
Under the HPI Employment Agreement, Mr. Berg is entitled to receive certain
payments and benefits (the "Payments") following the termination of such
agreement, if the termination resulted from a material alteration in Mr. Berg's
duties. The HPI Board has determined that the Merger will cause such a material
alteration. Therefore, at the Effective Time, the HPI Employment Agreement will
be terminated and Mr. Berg will be entitled to receive the Payments, subject to
stockholder approval of the same. As a result of such termination, pursuant to
the terms of the HPI Employment Agreement, Mr. Berg will be entitled to receive
from HPI a cash payment equal to $350,000 (consisting of severance and related
benefits of $250,000 and $100,000 in accrued bonus) and all of his outstanding
unvested HPI Options will vest. See "THE PAYMENTS." The aggregate number of
shares of HPI Common Stock underlying the unvested portion of Mr. Berg's HPI
Options is 239,150, of which 69,300 are scheduled to vest in 1998, 69,300 in
1999, 69,300 in 2000 and 31,250 in 2001. The exercise prices for such options
range from $.001 per share to $4.25 per share.
Upon consummation of the Merger, Mr. Berg will enter into a new employment
agreement with FPA (the "FPA Employment Agreement"). The FPA Employment
Agreement will have a term of three years and provide a base salary of $240,000
per year (which may be increased but not decreased at annual reviews) and an
annual performance bonus opportunity of up to 50% of his then current base
salary. In addition, Mr. Berg will receive a payment at the Effective Time of
$300,000 (in consideration for entering into the FPA Employment Agreement). Mr.
Berg is entitled to a payment of $365,000 as consideration for a covenant not to
compete contained in the FPA Employment Agreement. Such amount will be paid upon
expiration or termination of the FPA Employment Agreement and the commencement
of the non-compete period. Mr. Berg will be granted a nonqualified option to
purchase 75,000 shares of FPA Common Stock with a per share exercise price equal
to the fair market value of a share of FPA Common Stock on the date of grant.
The
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term of the option will be ten years from the date of grant unless terminated
earlier pursuant to the terms of the stock option agreement. Subject to certain
terms and conditions, options to purchase up to 30,000 shares of FPA Common
Stock are scheduled to vest on each of the first two anniversaries of the date
of grant (5,000 will vest automatically each year and up to 25,000 may vest each
year if certain performance criteria are satisfied) and options to purchase
5,000 shares of FPA Common Stock are scheduled to vest (automatically) on each
of the next three anniversaries of such date. Pursuant to the FPA Employment
Agreement, following a termination of Mr. Berg's employment for "Cause" (as
defined in the FPA Employment Agreement) or if Mr. Berg terminates his
employment unrelated to a "Good Reason Event" (as defined in the FPA Employment
Agreement), Mr. Berg is entitled to his then effective base salary and benefits
through such termination date. If Mr. Berg is terminated without Cause or if he
terminates his employment in conjunction with a Good Reason Event, then (i) Mr.
Berg will be entitled to his then effective base salary and benefits through the
date of termination and for a period of eighteen months thereafter and (ii) all
of Mr. Berg's outstanding options will vest and remain outstanding until the
expiration of their original terms.
Other Employment Agreements. Pursuant to the Merger Agreement and except as
described with respect to Mr. Berg, all of the existing HPI employment
agreements shall remain in full force and effect following the Effective Time.
Messrs. Charles D. Phillips and Paul Conlin have existing employment agreements
which, unless renewed, are scheduled to expire on December 31, 1998 and May 31,
1999, respectively. The employment agreements provide for base salaries for
Messrs. Phillips and Conlin of $165,000 and $156,000 respectively and an annual
bonus opportunity of up to fifty percent of their then current base salary. The
agreements contain severance provisions which provide for payments of base
salary and benefits for a period of twelve months and nine months, respectively,
following a termination without Cause (as defined in the agreements). In
addition, HPI has committed to pay to each of Messrs. Phillips and Conlin
amounts equal to $50,000 and $25,000, respectively, as of the Effective Time.
Treatment of Stock Options. HPI has granted HPI Options to officers and
employers of HPI and certain HPI Subsidiaries. Pursuant to the Merger Agreement,
the HPI Options, including HPI Options granted to Messrs. Berg, Phillips and
Conlin, whether or not vested, will be canceled at the Effective Time in
exchange for a number of shares of fully paid FPA Common Stock, decreased to the
nearest whole share, equal to the quotient which results when the "Fair Market
Value" of such HPI Options at the Effective Time is divided by the FPA Value.
The Fair Market Value of the HPI Options will be determined by an investment
banking firm, selected by HPI and acceptable to FPA, by applying a variation of
the Black-Scholes option pricing model. See "THE MERGER AGREEMENT -- Treatment
of Stock Options." The HPI Options held by executive officers of HPI which will
be converted into FPA Common Stock are shown in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF ESTIMATED
HPI COMMON STOCK HPI COMMON STOCK NUMBER OF SHARES OF
EXERCISE UNDERLYING UNVESTED UNDERLYING VESTED FPA COMMON STOCK
EXECUTIVE DATE OF GRANT PRICE PORTION OF OPTION(1) PORTION OF OPTION(2) TO BE ISSUED(3)
- -------------------- ------------------- -------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
Charles G. Berg(4) May 16, 1995 $ .001 -- 34,000
January 29, 1996 $ 3.25 -- 125,000
January 6, 1997 $ 4.25 -- 125,000
Charles D.
Phillips(5) September 26, 1995 $ 4.75 11,337 2,884
January 29, 1996 $ 3.25 37,500 12,500
January 6, 1997 $ 4.25 40,000 --
Paul Conlin January 29, 1996 $ 3.25 25,000 25,000
January 6, 1997 $ 4.25 30,000 --
</TABLE>
- ---------------
(1) These numbers of shares were determined as of August 30, 1997, except as
described in footnote 4.
(2) These numbers of shares were determined as of August 30, 1997, except as
described in footnote 4.
(3) The estimated number of shares of FPA Common Stock to be issued is based on
an estimate of the Fair Market Value of the HPI Options and an FPA Value of
$ . A description of how the Fair Market Value of the HPI Options is
calculated is described above. The actual Fair Market Value of the HPI
Options will most likely differ from the estimate based on these
calculations, and the number of shares of FPA Common Stock issuable in
exchange for such options will depend on the actual FPA Value.
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(4) Mr. Berg's HPI Options are considered vested for purposes of this table
because such options will accelerate and become fully exercisable at the
Effective Time, subject to stockholder approval, as a result of the
termination of the HPI Employment Agreement.
(5) The September 26, 1995 option grant to Mr. Phillips was made by an HPI
Subsidiary to purchase shares in such subsidiary. These options are subject
to the Roll-up Transactions. The table reflects the number of substitute HPI
Options to be issued to Mr. Phillips in connection with the completion of
the Roll-up Transactions.
Management Retention Program. Pursuant to an agreement reached between HPI
and FPA, FPA will cause the Surviving Corporation to make payments to certain
key employees of the Surviving Corporation based on their continued employment
and performance during the period from the Effective Time through the first
anniversary of the Effective Time. In order to be entitled to the payment, the
employee must be employed by the Surviving Corporation, a subsidiary thereof or
FPA at the time of the first anniversary of the Effective Time, unless such
employment is earlier terminated at the request of the Surviving Corporation, a
subsidiary thereof or FPA. Also, HPI and FPA have agreed that if any of the
aforementioned key employees who do not have employment contracts are terminated
without cause at any time prior to the first anniversary of the Effective Time,
such employee will be entitled to receive six months severance and be provided
with thirty days notice of termination. Under this program, Messrs. Phillips and
Conlin are entitled to receive payments on the first anniversary of the
Effective Time in amounts equal to $90,000 and $80,000, respectively. No payment
will be made to Mr. Berg under this program.
Equity Incentive Plan. FPA has agreed to make available a pool of options
to purchase FPA Common Stock to key employees of HPI. Option grants will be
determined after the Closing and will be consistent in amount to those received
by other FPA employees with similar responsibilities. Mr. Berg will recommend
allocations of the pool among HPI key employees which will be approved in the
same manner as other FPA option grants.
Registration Rights Agreement. In the Merger Agreement, FPA has agreed to
enter into a registration rights agreement (the "Registration Rights Agreement")
with Oxford, WellPoint and Messrs. Berg, Phillips and Conlin and Stephen F.
Wiggins (collectively, the "Selling Stockholders"), pursuant to which FPA will
file a registration statement with the Commission as soon as practicable after
the Closing Date covering the shares of FPA Common Stock received in the Merger
by the Selling Stockholders (and no other shares of FPA Common Stock) and will
use its reasonable efforts to cause such registration statement to be declared
effective on or prior to 90 days after the Closing Date (but no earlier than 60
days following the Closing Date). FPA has agreed to use its reasonable efforts
to keep the registration statement effective for the period ending two years
after the Closing Date or such shorter period as necessary. See "THE MERGER
AGREEMENT -- Certain Additional Agreements -- Registration Rights Agreement."
Indemnification of Directors and Officers. FPA has agreed to indemnify,
defend and hold harmless, for a period of six years commencing at the Effective
Time, all current and former directors and officers of HPI and its subsidiaries
against all losses, claims, damages and liabilities, costs or expenses,
judgments, fines, penalties and amounts paid in settlement arising out of any
acts or omissions or alleged acts or omissions by them in their capacities as
such. Also, the Merger Agreement requires FPA to purchase, immediately following
the Effective Time, and maintain or cause the Surviving Corporation to maintain
for a period of six years thereafter directors' and officers' liability
insurance covering each person who was a director or officer of HPI at any time
prior to the Effective Time. See "THE MERGER AGREEMENT -- Certain Additional
Agreements."
Master Strategic Arrangement for Private Practice Partnerships. Certain
health plan subsidiaries of Oxford ("Oxford health plans") and certain HPI
Subsidiaries, affiliated professional corporations and an IPA ("HPI MSOs") are
parties to partnership agreements which govern the relationship between the
Oxford health plans and the providers, including provisions regarding the
compensation payable to providers for the provision of comprehensive medical
care to Oxford health plan enrollees. In connection with the Merger, Oxford and
HPI have agreed to establish certain strategic principles under which they will
enter into partnership agreements in the future in existing and new markets (the
"Strategic Agreement"). The terms of
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the Strategic Agreement include, among others, (i) the partnership agreements in
existence between Oxford health plans and HPI MSOs shall remain in effect in
accordance with their terms; (ii) if Oxford and HPI agree that an HPI MSO should
become a provider for an Oxford health plan, that provider and Oxford health
plan will enter into partnership agreements containing mutually satisfactory
provisions and will become subject to the Strategic Agreement; (iii) under
certain delineated circumstances, the Oxford health plan may advise the HPI MSO
of its intention to change the compensation level payable to providers servicing
health plan enrollees; the parties have agreed to negotiate in good faith the
intended compensation changes with specified remedies if agreement is not
reached; (iv) HPI MSOs must meet certain specified conditions in order to add
physicians to provider groups which are parties to existing partnership
agreements; and (v) if HPI develops physician networks in markets where Oxford
health plans operate, the parties agree to negotiate in good faith to enter into
partnership agreements in such areas, which agreements will be in accordance
with the terms of the Strategic Agreement. The Strategic Agreement has a term of
ten years with additional five year terms upon mutual agreement of the parties
and includes specified events of termination.
WellPoint Parent Memorandum of Understanding. WellPoint Parent and FPA have
agreed to develop a strategic relationship to further the delivery of quality,
cost-effective health care to enrollees of WellPoint Parent's subsidiary health
plans. The strategic relationship will focus on markets served by WellPoint
Parent's subsidiary health plans and will include possible expansion of current
contractual relationships between WellPoint Parent's health plans and FPA and
entering into new contractual relationships. The memorandum of understanding
contemplates various activities that WellPoint Parent and FPA may jointly pursue
in meeting the objectives of the relationship. The memorandum does not obligate
either party to alter any existing contractual relationship or to enter into any
definitive agreement regarding the terms of the memorandum.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the material federal income tax
consequences of the Merger. The summary is based upon the Code, applicable
Treasury Regulations thereunder and administrative rulings and judicial
authority as of the date hereof. All of the foregoing are subject to change,
possibly with retroactive effect, and any such change could affect the
continuing validity of the discussion. The discussion assumes that holders of
shares of HPI Common Stock hold such shares as a capital asset. Further, the
discussion does not address the tax consequences that may be relevant to a
particular stockholder subject to special treatment under certain federal income
tax laws, such as dealers in securities, banks, insurance companies, tax-exempt
organizations, non-United States persons, stockholders who acquired shares of
HPI Common Stock through the exercise of options or otherwise as compensation or
through a tax-qualified retirement plan, and holders of options granted under
HPI's benefit plans. This discussion does not address any consequences arising
under the laws of any state, locality or foreign jurisdiction or the tax
consequences of transactions effected prior to or after the Merger (whether or
not such transactions are in connection with the Merger).
Neither HPI nor FPA has requested a ruling from the Internal Revenue
Service ("IRS") with regard to any of the federal income tax consequences of the
Merger and the opinions of counsel as to such federal income tax consequences
set forth below will not be binding on the IRS.
General. As of the date hereof, it is intended that the Merger will
constitute a reorganization pursuant to Section 368(a) of the Code and that for
federal income tax purposes no gain or loss will be recognized by FPA, HPI or
Merger Sub. The respective obligations of the parties to consummate the Merger
are conditioned on (i) the receipt by FPA of an opinion of Pillsbury Madison &
Sutro LLP confirming that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code and that each of FPA, HPI and Merger Sub
will be a party to the reorganization within the meaning of Section 368(b) of
the Code and (ii) the receipt by HPI of an opinion of Gibson, Dunn & Crutcher
LLP confirming that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code and that each of FPA, HPI and Merger Sub
will be a party to the reorganization within the meaning of Section 368(b) of
the Code. Such opinions will be based upon, among other things, (i)
representations of HPI, FPA and certain stockholders of HPI customarily given in
transactions of this type and (ii) the assumption that the Merger will be
consummated in accordance with the terms of the Merger Agreement. If HPI waives
the conditions of receipt
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of such tax opinion, FPA and HPI will amend this Proxy Statement/Prospectus and
HPI will resolicit stockholder votes as required by law.
The opinions of Pillsbury Madison & Sutro LLP and Gibson, Dunn & Crutcher
LLP set forth below summarize the material federal income tax consequences of
the Merger and assume that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code.
Consequences to HPI Stockholders. Under the reorganization provisions of
the Code, no gain or loss will be recognized by holders of HPI Common Stock with
respect thereto as a result of the surrender of their shares of HPI Common Stock
in exchange for shares of FPA Common Stock pursuant to the Merger (except as
discussed below with respect to cash received in lieu of fractional shares). The
aggregate tax basis of the shares of FPA Common Stock received in the Merger
(including any fractional shares of FPA Common Stock deemed received) will be
the same as the aggregate tax basis of the shares of HPI Common Stock
surrendered in exchange therefor in the Merger. The holding period of the shares
of FPA Common Stock received (including the holding period of fractional shares
of FPA Common Stock deemed received) will include the holding period of shares
of HPI Common Stock surrendered in exchange therefor.
Fractional Shares. If a holder of shares of HPI Common Stock receives cash
in lieu of a fractional share interest in FPA Common Stock in the Merger, such
fractional share interest will be treated as having been distributed to the
holder, and such cash amount will be treated as received in redemption of the
fractional share interest. Under Section 302 of the Code, if such redemption is
"not essentially equivalent to a dividend" after giving effect to the
constructive ownership rules of the Code, the holder will generally recognize
capital gain or loss equal to the cash amount received for the fractional share
of FPA Common Stock reduced by the portion of the holder's tax basis in shares
of HPI Common Stock surrendered that is allocable to the fractional share
interest in FPA Common Stock. Under these rules, a stockholder of HPI should
recognize capital gain or loss on the receipt of cash in lieu of a fractional
share interest in FPA Common Stock. For non-corporate holders of HPI Voting
Securities, such capital gain will be taxed at ordinary income tax rates if the
holder's holding period in the fractional share interest is 12 months or less,
at a maximum federal income tax rate of 28% if the holder's holding period in
the fractional share interest is more than 12 months and not more than 18
months, and at a maximum federal income tax rate of 20% if the holder's holding
period in such fractional share interest is more than 18 months.
Consequences to HPI, FPA and Merger Sub. None of HPI, FPA or Merger Sub
will recognize gain or loss as a result of the Merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HPI
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX
LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for using the "pooling of interests" method of
accounting pursuant to Accounting Principles Board Opinion No. 16, as amended
("APB No. 16"). The "pooling of interests" method of accounting assumes that the
combining companies have been merged from inception, and the historical
financial statements for periods prior to consummation of the Merger are
restated as though the companies had been combined from inception. The restated
financial statements are adjusted to conform the accounting policies of the
separate companies. See "SELECTED HISTORICAL AND PRO FORMA INFORMATION -- PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF FPA MEDICAL
MANAGEMENT, INC. AND SUBSIDIARIES." It is a condition to the Merger that each of
FPA and HPI receive letters from their respective independent auditors stating
that the Merger will qualify as a "pooling of interests" for accounting and
financial reporting purposes.
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RESALE OF FPA COMMON STOCK BY AFFILIATES
The FPA Common Stock to be issued to stockholders of HPI in connection with
the Merger has been registered under the Securities Act pursuant to the
Registration Statement of which this Proxy Statement/Prospectus forms a part.
The FPA Common Stock received by the stockholders of HPI upon consummation of
the Merger will be freely transferable under the Securities Act, except for
shares issued to any person who may be deemed an "Affiliate" (as defined below)
of HPI or FPA within the meaning of Rule 145 promulgated under the Securities
Act ("Rule 145"). Affiliates are generally defined as persons who control, are
controlled by, or are under common control with HPI or FPA at the time of the
HPI Special Meeting (generally, directors, certain executive officers and major
stockholders). Affiliates of HPI or FPA may not sell their shares of FPA Common
Stock acquired in connection with the Merger, except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. In general, under Rule 145, for one year
following the Effective Time, an Affiliate (together with certain related
persons) would be entitled to sell shares of FPA Common Stock acquired in
connection with the Merger only through unsolicited "broker transactions" or in
transactions directly with a "market maker," as such terms are defined in Rule
144 promulgated under the Securities Act ("Rule 144"). Additionally, the number
of shares to be sold by an Affiliate (together with certain related persons and
certain persons acting in concert) during such one-year period within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding shares of FPA Common Stock or the average weekly trading volume
of such stock during the four calendar weeks preceding such sale. Rule 145 would
remain available to Affiliates only if FPA remained current with its information
filings with the Commission under the Exchange Act. One year after the Effective
Time, an Affiliate would be able to sell such FPA Common Stock without such
manner of sale or volume limitations, provided that FPA was current with its
Exchange Act information filings and such Affiliate was not then an Affiliate of
FPA. Two years after the Effective Time, an Affiliate would be able to sell such
shares of FPA Common Stock without any restrictions, provided that such
Affiliate has not been an Affiliate of FPA for at least three months prior
thereto. In addition, under rules relating to "pooling of interests" accounting,
shares of FPA Common Stock issued to affiliates of HPI may not be resold by them
until combined results of operations of FPA and HPI covering at least thirty
days of operations are published. In connection with the Merger, FPA has agreed
to enter into a Registration Rights Agreement with certain stockholders of HPI.
See "THE MERGER -- Interests of Certain Persons in the Merger -- Registration
Rights Agreement."
CERTAIN REGULATORY MATTERS
FPA and HPI intend to resist vigorously any assertion that the Merger
violates the federal antitrust laws. Any such resistance could delay
consummation of the Merger, perhaps for a considerable period of time. FPA and
HPI made their respective filings with the FTC and the DOJ with respect to the
Merger on July 29, 1997 and the waiting period of their respective HSR filings
has expired. Notwithstanding the expiration of the waiting period of the HSR
filings, the FTC, DOJ or others could take action under the antitrust laws,
before or after the Effective Time, seeking the divestiture by FPA of all or any
part of the assets of HPI acquired in the Merger. There can be no assurance that
a challenge to the Merger on antitrust grounds will not be made or, if such a
challenge is made, that it would not be successful.
Certain persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the federal antitrust laws and seek
to enjoin the consummation of the Merger and, in the case of private persons,
also seek to obtain treble damages. There can be no assurance that a challenge
to the Merger on antitrust grounds will not be made or, if such a challenge is
made, that it will not be successful. HPI does not intend to seek any further
stockholder approval or authorization of the Merger Agreement as a result of any
action that it may take to resist or resolve any FTC, DOJ or other objections,
unless required to do so by applicable law.
RIGHTS OF DISSENTING STOCKHOLDERS
Holders of HPI Voting Securities as of the Record Date (the "Record
Holders") are entitled to appraisal rights under Section 262 of the Delaware Act
("Section 262") for such securities. The following discussion
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represents a summary of the material provisions of Section 262. For additional
information, reference is made to the full text of Section 262, which is
reprinted in its entirety as Appendix C to this Proxy Statement/Prospectus. A
person having a beneficial interest in HPI Voting Securities as of the Record
Date held of record in the name of another person, such as a nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect the appraisal rights provided under
Section 262.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the HPI Special Meeting, not less
than 20 days prior to the meeting, a constituent corporation must notify each of
the holders of its stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of Section
262. THIS PROXY STATEMENT/PROSPECTUS SHALL CONSTITUTE SUCH NOTICE TO THE RECORD
HOLDERS OF HPI COMMON STOCK AND HPI PREFERRED STOCK. ANY SUCH STOCKHOLDER WHO
WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING DISCUSSION
AND APPENDIX C CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE
PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER THE
DELAWARE ACT.
Under the Delaware Act, a Record Holder of HPI Voting Securities who makes
the demand described below with respect to such shares, who continuously is the
record holder of such shares through the Effective Time, who otherwise complies
with the statutory requirements set forth in Section 262 and who neither votes
in favor of approval of the Merger Agreement and the Merger nor consents thereto
in writing will be entitled to have his or her HPI Voting Securities appraised
by the Delaware Court of Chancery and to receive payment of the "fair value" of
such shares as described below. Such holders are, in such circumstances,
entitled to appraisal rights because they hold shares of a constituent
corporation to the Merger and may be required by the Merger Agreement to accept
the Merger Consideration.
A Record Holder of HPI Voting Securities wishing to exercise his or her
appraisal rights must deliver to the Secretary of HPI, before the vote on the
Merger Agreement at the HPI Special Meeting, a written demand for appraisal of
his or her HPI Voting Securities. Merely voting or delivering a proxy directing
a vote against approval of the Merger Agreement and the Merger will not
constitute a demand for appraisal. A written demand is essential. Such written
demand must reasonably inform HPI of the identity of the Record Holder and that
such holder intends thereby to demand appraisal of the holder's shares. All
written demands for appraisal of HPI Voting Securities should be sent or
delivered to HPI at 800 Connecticut Avenue, Norwalk, Connecticut 06854,
Attention: Corporate Secretary. In addition, a Record Holder of HPI Voting
Securities wishing to exercise his or her appraisal rights must hold such shares
of record on the date the written demand for appraisal is made and must hold
such shares continuously through the Effective Time. Stockholders who hold their
HPI Voting Securities in nominee form and who wish to exercise appraisal rights
must take all necessary steps in order that a demand for appraisal is made by
the record holder of such shares and are urged to consult with their nominee to
determine the appropriate procedures for the making of a demand for appraisal by
the record holder.
Within ten days after the Effective Time of the Merger, HPI, as the
surviving corporation in the Merger, must send a notice as to the effectiveness
of the Merger to each person who has satisfied the appropriate provisions of
Section 262 and who is entitled to appraisal rights under Section 262. Within
120 days after the Effective Time, any Record Holder of HPI Voting Securities
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth (i) the aggregate number of shares of HPI Common Stock
and HPI Preferred Stock not voted in favor of the Merger Agreement and with
respect to which demands for appraisal have been received and (ii) the aggregate
number of holders of such shares. Any such statement must be mailed within ten
days after a written request therefor has been received by the Surviving
Corporation.
Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any Record Holder of HPI Voting Securities who has complied with
the foregoing procedures and who is entitled to appraisal rights under Section
262 may file a petition in the Delaware Court of Chancery demanding a
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determination of the "fair value" of such shares. The Surviving Corporation is
not under any obligation to file a petition with respect to the appraisal of the
"fair value" of the HPI Voting Securities and neither FPA nor HPI presently
intends that the Surviving Corporation file such a petition. Accordingly, it is
the obligation of the stockholders to initiate all necessary action to perfect
their appraisal rights within the time prescribed in Section 262. A Record
Holder of HPI Voting Securities will fail to perfect, or effectively lose, his
or her right to appraisal if no petition for appraisal of shares of HPI Voting
Securities is filed within 120 days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of HPI
Voting Securities entitled to appraisal rights and will appraise the "fair
value" of the HPI Voting Securities, exclusive of any element of value arising
from the accomplishment or expectation of the Merger. Stockholders considering
seeking appraisal should be aware that the "fair value" of their HPI Voting
Securities as determined under Section 262 could be more than, the same as, or
less than the value of the Merger Consideration they would have received if they
did not seek appraisal. The Delaware Supreme Court has stated that "proof of
value by any techniques or methods which are generally considered acceptable in
the financial community and otherwise admissible in court" should be considered
in the appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy.
The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose HPI Voting
Securities have been appraised. The costs of the action may be determined by
such court and taxed upon the parties as the court deems equitable. The Delaware
Court of Chancery may also order that all or a portion of the expenses incurred
by any holder of HPI Voting Securities in connection with an appraisal,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all of the HPI Voting Securities entitled to appraisal.
If any Record Holder of HPI Voting Securities who demands appraisal of his
or her shares under Section 262 fails to perfect, or effectively withdraws or
loses, his or her right to appraisal, as provided in the Delaware Act, the HPI
Voting Securities of such stockholder will be deemed to receive Merger
Consideration in accordance with the Merger Agreement. A holder may withdraw his
or her demand for appraisal by delivering to the Surviving Corporation a written
withdrawal of his or her demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 days after the
Effective Time will require the written approval of the Surviving Corporation.
Failure to follow the steps required by Section 262 of the Delaware Act for
perfecting appraisal rights may result in the loss of such rights.
Any Record Holder of HPI Voting Securities who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote the HPI Voting Securities subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares (except dividends or other distributions payable to holders of
record of shares of HPI Voting Securities as of a date prior to the Effective
Time).
THE PAYMENTS
The following is a summary of certain payments and benefits (the
"Payments") that will be paid to and received by Charles G. Berg, President and
Chief Executive Officer of HPI, in connection with the termination at the
Effective Time of the HPI Employment Agreement.
Under the HPI Employment Agreement, Mr. Berg is entitled to receive the
following Payments upon the termination of such agreement, if such termination
results from a material alteration of Mr. Berg's duties, which the HPI Board has
determined will occur as a result of the Merger: (a) a lump-sum cash payment of
$350,000 and (b) the acceleration of the vesting of his unvested HPI Options to
purchase 239,150 shares of HPI Common Stock. The value of such vesting
acceleration is estimated to be approximately $460,000. See "THE
MERGER -- Interests of Certain Persons in the Merger." By voting FOR approval of
the Payments, HPI stockholders will be approving the payment of all of the
Payments to Mr. Berg.
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Section 280G of the Code and the proposed regulations promulgated
thereunder ("Section 280G") will disallow the deduction by HPI of any portion of
the Payments characterized as an "excess parachute payment" as described below.
Also, Section 4999 of the Code will impose a 20% nondeductible excise tax on Mr.
Berg with respect to any portion of the Payments characterized as an "excess
parachute payment." To be considered parachute payments, the Payments must (i)
be in the nature of compensation, (ii) be contingent on a change in ownership of
HPI and (iii) have a present value, when combined with all other such payments
(the "Total Payments"), that equals or exceeds three times the average annual
compensation paid to Mr. Berg by HPI over the term of his employment with HPI
(the "Employment Period"). The Total Payments may include all or a portion of
the $300,000 payment to Mr. Berg to be made by FPA pursuant to the FPA
Employment Agreement. See "THE MERGER -- Interests of Certain Persons in the
Merger."
If the Total Payments are considered parachute payments, they will be
treated as "excess parachute payments" to the extent the present value of such
payments exceeds the average annual compensation paid to Mr. Berg over the
Employment Period.
The Payments appear to be in the nature of compensation to Mr. Berg. A
change in ownership of HPI will occur as a result of the Merger, a necessary
precondition to Mr. Berg's right to receive the Payments, and the present value
of the Payments, when combined with all other such payments to Mr. Berg, will
exceed three times the average annual compensation paid to Mr. Berg over the
Employment Period. Accordingly, a portion of the Payments may constitute excess
parachute payments unless exempted in the manner described below.
The adverse federal income tax consequences to HPI and to Mr. Berg under
Sections 280G and 4999 of the Code may be avoided if the Payments are approved
by a separate vote of disinterested stockholders owning in excess of 75% of the
HPI Voting Securities, voting together, not held, directly or indirectly, by Mr.
Berg or certain members of his family, after adequate disclosure to all such
stockholders of all material facts concerning the Payments. If approved, the
Payments are no longer includable in the calculation of the Total Payments and,
as a result, the maximum Total Payments will be reduced to a level below the
threshold such that none of the Total Payments could be considered a parachute
payment. The disclosure set forth in this Proxy Statement/Prospectus is intended
as adequate disclosure to all HPI stockholders of all material facts concerning
the Payments.
For purposes of the stockholder vote discussed above, any stockholder of
HPI who is not an individual may exercise its vote through any person authorized
by the entity to vote such shares. However, if a substantial portion of the
assets of such entity consists of HPI Common Stock or HPI Preferred Stock, in
general, approval of the Payments must be made by a separate vote of the persons
who hold, immediately before consummation of the Merger, in excess of 75% of the
voting power of such entity. If the Payments are not approved by the HPI
stockholders, such Payments will be forfeited.
THE BOARD OF HPI HAS APPROVED THE PAYMENTS TO MR. BERG (WITH MR. BERG
ABSTAINING), SUBJECT TO STOCKHOLDER APPROVAL, AND RECOMMENDS A VOTE "FOR" THE
PROPOSAL TO PAY THE PAYMENTS TO MR. BERG.
BOARD OF DIRECTORS AND MANAGEMENT OF
FPA FOLLOWING THE MERGER
BOARD OF DIRECTORS OF FPA FOLLOWING THE MERGER
Upon consummation of the Merger, Seth Flam, Sol Lizerbram, Sheldon Derezin,
Stephen J. Dresnick, Kevin Ellis, Howard Hassman and Herbert A. Wertheim, each
of whom is currently a director of FPA, will continue to serve as directors of
FPA.
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EXECUTIVE OFFICERS OF FPA FOLLOWING THE MERGER
The following table sets forth certain information, including age and
positions, of each person who will serve as an executive officer of FPA upon
consummation of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ------------------------------------------------------
<S> <C> <C>
Dr. Sol Lizerbram 49 Chairman of the Board of Directors
Dr. Seth Flam 39 President, Chief Executive Officer and Director
Dr. Stephen J. Dresnick 46 Vice Chairman of the Board of Directors and President,
Sterling Healthcare Group, Inc.
Steven M. Lash 43 Executive Vice President, Chief Financial Officer and
Treasurer
James A. Lebovitz 39 Senior Vice President, General Counsel and Secretary
</TABLE>
COMPARISON OF RIGHTS OF HOLDERS OF HPI
AND FPA COMMON STOCK
Both FPA and HPI are Delaware corporations and the rights of their
respective stockholders are governed by the Delaware Act and their Certificates
of Incorporation and Bylaws. In addition, the rights of the HPI stockholders are
affected by the 1994 Securities Purchase Agreement. If the Merger is
consummated, HPI stockholders will become stockholders of FPA, and their rights
will be governed by the Certificate of Incorporation and Bylaws of FPA. The
following is a brief summary of certain differences between the rights of HPI
stockholders and FPA stockholders and is qualified in its entirety by reference
to the relevant provisions of the Delaware Act, FPA's Certificate of
Incorporation and Bylaws, HPI's Certificate of Incorporation and Bylaws and the
1994 Securities Purchase Agreement.
PREFERRED STOCK
The Boards of Directors of FPA and HPI are authorized to provide for the
issuance of shares of preferred stock, in one or more series, and to fix for
each such series such voting powers, designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions, as are stated in the resolution adopted by the
Board of Directors providing for the issuance of such series and as permitted by
the Delaware Act. FPA currently has authorized 2,000,000 shares of preferred
stock, $.001 par value; HPI currently has authorized 50,000 shares of preferred
stock, $.001 par value. FPA has not authorized or issued any shares of preferred
stock. HPI has issued and outstanding 25,000 shares of Series A Convertible
Preferred Stock and 25,000 shares of Series B Convertible Preferred Stock. A
condition to the consummation of the Merger is the conversion, prior to the
Effective Time, of the issued and outstanding shares of HPI Preferred Stock into
HPI Common Stock, which HPI Common Stock will subsequently be converted into FPA
Common Stock. Each of WellPoint and Oxford has agreed to convert its outstanding
shares of HPI Preferred Stock to HPI Common Stock prior to the Effective Time.
As a result of these transactions, the current holders of HPI Preferred Stock
will no longer enjoy the special dividend, voting and liquidation preferences
and rights set forth in the HPI Certificate of Incorporation. Also, upon
conversion, the cumulative unpaid dividends on the HPI Preferred Stock will be
canceled with no additional shares of HPI Common Stock issued as consideration
for the cancellation.
BOARD OF DIRECTORS
FPA's Certificate of Incorporation provides that the FPA Board shall have
not less than three nor more than twelve members, as determined from time to
time by resolution of the board. Currently, the FPA Board consists of seven
members. HPI's Certificate of Incorporation provides that the number of
directors on the HPI Board shall be specified in HPI's Bylaws. The HPI Bylaws
provide that the Board shall have one or more members as determined by a
majority of the Board. Currently, the HPI Board consists of five members. The
1994 Securities Purchase Agreement provides that so long as each of Oxford and
WellPoint beneficially owns at least 20% of the outstanding shares of HPI Common
Stock (assuming conversion of the outstanding shares of HPI Preferred Stock
beneficially owned by such stockholder), each of Oxford and WellPoint will be
entitled to nominate two directors to the HPI Board. In addition, for so long as
certain individual investors
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collectively own at least 10% of the outstanding shares of HPI Common Stock, the
representative of a majority in interest of the individual investors (the
"Representative") shall be entitled to nominate one director to the HPI Board.
Currently, each of Oxford and WellPoint beneficially owns in excess of 20%, and
the individual investors collectively own in excess of 10%, of the HPI Common
Stock, so that these provisions are in effect.
FPA's and HPI's Bylaws provide that any or all directors may be removed
with or without cause by the holders of a majority of shares then entitled to
vote at an election of directors. HPI's Bylaws also provide that a director may
be removed for cause by vote of a majority of the HPI Board. The 1994 Securities
Purchase Agreement provides that if any of Oxford, WellPoint or the
Representative notifies the HPI stockholders that (i) such person or
Representative wishes to remove a director nominated by it or (ii) if any of
such stockholders no longer owns the requisite percentage of shares required to
maintain such nomination rights, all such stockholders shall vote their shares
in favor of such removal if a vote is otherwise required.
HPI's Bylaws provide that a vacancy on the HPI Board may be filled by a
majority vote of the directors then in office, even if less than a quorum, or by
a sole remaining director. HPI's Bylaws also provide that a vacancy created by
the removal of a director may be filled by a vote of the holders of a majority
of the outstanding shares of capital stock of HPI entitled to vote thereon.
FPA's Certificate of Incorporation provides that a vacancy on the FPA Board
shall be filled solely by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum, or by a sole remaining
director.
HPI's Bylaws provide that directors shall be elected by a plurality of
votes cast at annual meetings of stockholders (and holders of HPI's Preferred
Stock shall have the same right to vote as holders of HPI's Common Stock on an
as-converted basis) with each director serving until the next annual meeting of
stockholders and until his successor is duly elected and qualified or until his
earlier death, resignation or removal or as described above pursuant to the 1994
Securities Purchase Agreement. FPA's Bylaws provide for a staggered Board of
Directors, with the directors of FPA divided into three classes, as nearly equal
in number as possible. Each director on the FPA Board is elected to serve a term
of three years and until his successor is duly elected and qualified.
BYLAWS
FPA's Certificate of Incorporation grants the FPA Board the power to
repeal, alter, amend or rescind FPA's Bylaws. FPA's Bylaws permit FPA's
stockholders to alter, amend, repeal or adopt the same. HPI's Certificate of
Incorporation provides that the HPI Board may adopt, repeal, alter, amend or
rescind HPI's Bylaws, subject to the right of the holders of a majority of the
outstanding stock of HPI, by vote at an annual or special meeting, to amend,
alter or repeal any Bylaw made by the Board.
STOCKHOLDER MEETINGS
HPI's Bylaws provide that special meetings of stockholders may be called by
the HPI Board. FPA's Bylaws provide that special meetings of stockholders may be
called by the President. Furthermore, FPA's Bylaws provide that such special
meeting shall be called by the President or Secretary at the request in writing
of a majority of the FPA Board or stockholders owning a majority in amount of
the entire capital stock of FPA issued and outstanding and entitled to vote.
The 1994 Securities Purchase Agreement further provides that if any party
to the 1994 Securities Purchase Agreement fails to vote its shares for directors
as required therein, each other stockholder to such Agreement shall have an
irrevocable, perpetual proxy, exercisable by any of them individually, to vote
such shares of HPI securities in accordance with the 1994 Securities Purchase
Agreement.
INDEMNIFICATION
Under the Delaware Act, a corporation may generally indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement of any proceedings (other than
derivative actions), if they acted in good faith and in a manner they reasonably
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believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard is applicable in
derivative actions, except that indemnification may be made only for (i)
expenses (including attorneys' fees) and certain amounts paid in settlement and
(ii) in the event the person seeking indemnification has been adjudicated
liable, amounts deemed proper, fair and reasonable by the appropriate court upon
application thereto. The Delaware Act provides that to the extent that such
persons have been successful in defense of any proceeding, they must be
indemnified by the corporation against expenses actually and reasonably incurred
in connection therewith.
FPA's Certificate of Incorporation and HPI's Bylaws require indemnification
for directors and officers, their legal representatives, and persons serving at
the request of FPA as a director, officer, employee or agent of another
corporation, partnership or other entity ("Indemnitees") for actions undertaken
in an official capacity or any other capacity.
FPA's Certificate of Incorporation and HPI's Bylaws provide for the
continuation of indemnification for Indemnitees no longer employed by the
respective company (where the conduct at issue occurred while the Indemnitee was
employed by such company). FPA's Certificate of Incorporation and HPI's Bylaws
also provide for the benefits of indemnification to inure to the heirs,
executors and administrators of the Indemnitee. Furthermore, FPA's Certificate
of Incorporation and HPI's Bylaws require, as a prerequisite to indemnification
in connection with a suit initiated by the Indemnitee, that the Indemnitee
receive authorization from the Board prior to initiating the suit.
FPA's Certificate of Incorporation and HPI's Bylaws grant Indemnitees the
right to receive an advance of funds from their respective company to pay for
anticipated legal costs in defending a lawsuit for which indemnification is
sought. However, to the extent required by the Delaware Act, an Indemnitee may
be required to deliver an undertaking to his respective company to the effect
that the Indemnitee will repay all amounts advanced should the Indemnitee
ultimately be determined not to be entitled to indemnification.
FPA's Certificate of Incorporation provides that if an Indemnitee is not
advanced funds for anticipated costs in defending a lawsuit within thirty days
of FPA receiving a written request for such funds, the Indemnitee may sue FPA
for the unpaid amount. If the Indemnitee has delivered to FPA an undertaking to
repay such advance, FPA may not offer as a defense to such claim for indemnity
that the claimant has not met the standard of conduct for indemnification under
the Delaware Act. However, if no such undertaking has been delivered to FPA, FPA
may offer such failure to meet the standard of conduct for indemnification as a
defense. FPA may not offer as a defense to the advancement of funds that it has
not yet determined whether the Indemnitee has met the appropriate standard of
conduct. Neither HPI's Bylaws nor its Certificate of Incorporation contains
comparable provisions.
STOCKHOLDER VOTING REQUIREMENTS
Under the Delaware Act, unless otherwise provided for by the Delaware Act
or a Delaware corporation's certificate of incorporation or bylaws, if a quorum
exists, action on a matter is approved by the affirmative vote of a majority of
the shares represented at a meeting and entitled to vote on the matter.
Neither FPA's Certificate of Incorporation nor its Bylaws contains a
provision requiring a greater vote on any matter than required by the Delaware
Act.
HPI's Certificate of Incorporation contains provisions requiring the
affirmative vote of the holders of at least 80% or more of HPI Voting Securities
to amend, alter or repeal or adopt any provision inconsistent with the current
provision of the Bylaws providing that HPI's directors shall not be liable to
HPI or its stockholders for monetary damages for breach of fiduciary duty as a
director. In addition, until there are less than 5,000 shares of HPI Preferred
Stock outstanding, the approval of at least 60% of the issued and outstanding
shares of HPI Common Stock and HPI Preferred Stock, voting as a class, is
required to sell, abandon, transfer, lease or otherwise dispose of all or
substantially all of its properties or assets, merge or consolidate with or into
another corporation, voluntarily dissolve, liquidate or wind-up, authorize,
create, issue or sell any class of capital stock of HPI ranking prior to or on a
parity with the HPI Preferred Stock, alter or change the
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designations, rights and preferences of the HPI Preferred Stock in any manner or
authorize any employee stock option plan or program except plans relating to not
in excess of 1,450,000 shares of HPI Common Stock.
ACTION BY CONSENT
The Delaware Act provides that, unless otherwise provided in the
Certificate of Incorporation, any action required or permitted to be taken at
any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, by written consent of the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting. Both FPA's and HPI's
Bylaws permit action by such written consent.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement not summarized elsewhere in this Proxy Statement/Prospectus. A copy of
the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement.
THE MERGER
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by the stockholders of HPI and the satisfaction or waiver
of other conditions to the Merger, Merger Sub will be merged with and into HPI
in accordance with the Delaware Act, whereupon the separate existence of Merger
Sub will cease and HPI will be the Surviving Corporation and a wholly owned
subsidiary of FPA.
At the Effective Time:
(i) Each issued and outstanding share of HPI Common Stock, except as
provided for below, will be exchanged for the right to receive a number of
shares of FPA Common Stock equal to the Exchange Ratio. For a discussion of
the Exchange Ratio, see "THE MERGER -- Merger Consideration."
(ii) Each share of HPI Common Stock and HPI Preferred Stock held in
HPI's treasury will be canceled and extinguished and will cease to exist
and no consideration will be delivered with respect thereto.
(iii) If applicable, each outstanding share of HPI Common Stock and
HPI Preferred Stock, the holder of which (a) has not voted in favor of the
Merger, (b) has perfected such holder's dissenters' rights to appraisal in
accordance with the pertinent provisions of the Delaware Act and (c) has
not effectively withdrawn or lost such rights to appraisal, will not be
converted into a right to receive shares of FPA Common Stock, but such
holder shall be entitled only to such rights as are granted under the
applicable provisions of the Delaware Act. See "THE MERGER -- Rights of
Dissenting Stockholders."
(iv) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time will be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation.
Immediately prior to the Effective Time, HPI shall use its reasonable best
efforts to cause each issued and outstanding share of HPI Preferred Stock to be
converted into shares of HPI Common Stock in accordance with the provisions of
the relevant Certificate of Designations for such HPI Preferred Stock, and such
shares of HPI Common Stock will be converted into the right to receive shares of
FPA Common Stock as described above in subparagraph (i) of this section. The
holders of HPI Preferred Stock have agreed to convert their shares of HPI
Preferred Stock to HPI Common Stock prior to the Effective Time. Upon conversion
of the HPI Preferred Stock into HPI Common Stock, cumulative unpaid dividends
will be canceled with no additional shares of HPI Common Stock issued as
consideration for the cancellation.
At the Effective Time, present holders of HPI Common Stock and HPI
Preferred Stock will cease to have any rights as holders of such shares, other
than, if applicable, dissenters' rights to appraisal, but will have the right to
receive shares of FPA Common Stock and cash in lieu of any fractional shares of
FPA Common Stock.
The Certificate of Incorporation and Bylaws of Merger Sub will be the
Certificate of Incorporation and Bylaws of the Surviving Corporation. The
directors of Merger Sub serving immediately prior to the Effective Time will be
the initial directors of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified.
EFFECTIVE TIME
The Merger will become effective on such date as the duly prepared and
executed Certificate of Merger is filed with the Secretary of State of Delaware
in accordance with the Delaware Act. The filing of the
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Certificate of Merger will be made simultaneously with or as soon as practicable
after the second business day immediately following the date on which all
conditions contemplated by the Merger Agreement have been fulfilled or waived or
such other time as agreed between the parties.
FRACTIONAL SHARES
No certificates or scrip for fractional shares of FPA Common Stock will be
issued in connection with the Merger. In lieu of any such fractional share, each
holder of HPI Common Stock who would otherwise have been entitled to a fraction
of a share of FPA Common Stock upon surrender of certificates for exchange will
be entitled to receive from the Exchange Agent a cash payment equal to such
fraction multiplied by the FPA Value.
SURRENDER AND PAYMENT
From and after the Effective Time, as required by the Merger Agreement, FPA
will make available to the Exchange Agent certificates representing the
appropriate number of shares of FPA Common Stock and cash to be paid in lieu of
fractional shares of FPA Common Stock issuable in connection with the Merger.
Promptly after the Effective Time, the Exchange Agent shall mail to each holder
of a certificate or certificates that immediately prior to the Effective Time
represented HPI Common Stock ("HPI Certificates") a letter of transmittal and
instructions for surrendering the HPI Certificates, and each holder thereof will
be entitled to receive, upon surrender to the Exchange Agent of one or more HPI
Certificates, certificates representing the number of whole shares of FPA Common
Stock into which such shares are converted in the Merger and cash in
consideration of fractional shares of FPA Common Stock, as described above.
TREATMENT OF STOCK OPTIONS
As of September , 1997, there were outstanding options to purchase
1,183,000 shares of HPI Common Stock. HPI expects to issue options to purchase
approximately 170,287 shares of HPI Common Stock in the Roll-up Transactions. At
the Effective Time, each of the outstanding options to purchase shares of HPI
Common Stock ("HPI Options") granted under the HPI 1994 Stock Option Plan (the
"HPI Option Plan"), whether or not vested, including the substitute HPI Options
issuable to holders of Minority Options in connection with the completion of the
Roll-up Transactions, will be canceled in exchange for a number of Shares of
fully paid FPA Common Stock (the "FPA Option Shares"), decreased to the nearest
whole share, equal to the quotient which results when the "Fair Market Value" of
such option at the Effective Time is divided by the FPA Value (the "Option
Exchange"). The Fair Market Value of the HPI Options will be determined by an
investment banking firm, selected by HPI and acceptable to FPA, by applying a
variation of the Black-Scholes option pricing model. HPI estimates that an
aggregate of FPA Option Shares will be issued in the Merger.
HPI and FPA believe that HPI has the right under the HPI Option Plan to
undertake the Option Exchange without seeking the consent of the holders of HPI
Options. However, HPI has agreed to use its reasonable best efforts to cause the
holders of HPI Options to execute prior to the Closing Date a form of
acknowledgement reasonably acceptable to FPA regarding their acceptance of the
treatment of HPI Options set forth in the Merger Agreement and described above
(the "Stock Option Acknowledgements"). FPA can terminate the Merger Agreement if
HPI does not enter into Stock Option Acknowledgment Agreements with holders of
HPI Options representing at least 80% of the total number of HPI Options.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of each of FPA, Merger Sub and HPI (which are subject, in certain
cases, to specified exceptions, and all of which terminate at the Effective
Time) relating to, among other things, the following: (i) organization and
qualification to do business; (ii) capitalization; (iii) the authorization,
execution, delivery and enforceability of the Merger Agreement and the
transactions contemplated thereunder; (iv) the absence of any conflict, breach
or default of any corporate charter documents or applicable law in connection
with entering into the Merger Agreement; (v) the absence of any governmental or
regulatory consent or approval required to enter into the Merger Agreement and
to consummate the transactions contemplated thereby; (vi) the accuracy of
certain
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documents and reports filed by FPA with the Commission and the accuracy of the
financial information contained therein; (vii) the absence of certain changes or
events; (viii) the absence of undisclosed liabilities; (ix) the absence of
pending or threatened legal proceedings; (x) the accuracy of the information
each party has supplied with respect to the filings required with the Commission
in order to consummate the Merger and the transactions contemplated by the
Merger Agreement; (xi) certain tax matters; (xii) matters concerning employee
benefit plans and ERISA; (xiii) HPI's stockholders' vote to approve the Merger;
(xiv) accounting matters relating to "pooling of interests;" (xv) title to
assets; and (xvi) permits.
CONDUCT OF BUSINESS PENDING THE MERGER
At all times from and after the date of the Merger Agreement until the
Effective Time, HPI covenants and agrees as to itself and its subsidiaries
(unless expressly provided for in the Merger Agreement or to the extent that the
other party shall otherwise consent in writing) to: (i) conduct its business
only in the ordinary course consistent with past practice; (ii) use its
reasonable best efforts to keep available the services of its key officers and
employees; (iii) maintain insurance on its tangible assets and businesses in
such amounts and against such risks and losses consistent with past practice;
and (iv) preserve its relationships with customers and others having business
dealings with them.
At all times from and after the date of the Merger Agreement until the
Effective Time, each of FPA, Merger Sub and HPI has agreed that it will not
permit any of its respective subsidiaries (unless expressly provided for in the
Merger Agreement, or to the extent that the other party shall otherwise consent
in writing) to: (i) amend or propose to amend its certificate or articles of
incorporation or bylaws; (ii) declare, set aside or pay any dividends on or make
other distributions in respect of any of its capital stock; (iii) split,
combine, reclassify or take similar action with respect to any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; (iv)
adopt a plan of complete or partial liquidation or resolutions providing for or
authorizing such liquidation or a dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization, except in the case of
FPA with respect to certain potential acquisitions as disclosed to HPI; (v)
directly or indirectly redeem, repurchase or otherwise acquire any shares of its
capital stock or any options with respect thereto; (vi) issue, deliver, sell or
exchange, or authorize or propose the issuance, delivery, sale or exchange of,
any shares of its capital stock or any options with respect thereto, other than
(A) HPI may grant options to the extent required to be granted automatically
under the HPI Option Plans or pursuant to written employment agreements, may
issue shares of HPI Common Stock upon conversion of HPI Preferred Stock and may
issue shares of HPI Common Stock and HPI Options to effect the Roll-up
Transactions and (B) FPA may issue shares upon exercise of options or upon
conversion of the FPA Debentures and in connection with potential acquisitions
as disclosed to HPI; (vii) (A) permit any material change in (y) any pricing,
marketing, purchasing, investment, accounting, financial reporting, inventory,
credit, allowance or tax practice or policy or (z) any method of calculating any
bad debt, contingency or other reserve for accounting, financial reporting or
tax purposes or (B) make any material tax election or settle or compromise any
material income tax liability with any governmental or regulatory authority;
(viii) incur (which shall not be deemed to include entering into credit
agreement, lines of credit or similar arrangements until borrowings are made
under such arrangements) any indebtedness for borrowed money or guarantee any
such indebtedness other than in the ordinary course of its business consistent
with past practice in an aggregate principal amount exceeding $5,000,000 with
respect to HPI and its subsidiaries and $300,000,000 with respect to FPA and its
subsidiaries (in each case net of any amounts of any such indebtedness
discharged during such period); (ix) voluntarily purchase, cancel, prepay or
otherwise provide for a complete or partial discharge in advance of a scheduled
repayment date with respect to, or waive any right under, any indebtedness for
borrowed money other than in the ordinary course of its business consistent with
past practice in an aggregate principal amount exceeding $5,000,000 with respect
to HPI and its subsidiaries and $300,000,000 with respect to FPA and its
subsidiaries; (x) with respect to HPI, enter into, adopt or amend (except as may
be required by applicable law) any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, health care, employment or
other employee benefit plan, agreement, trust, fund or arrangement for the
benefit or welfare of any employee or retiree or enter into or amend any
employment, severance, special pay arrangement with respect to termination of
employment or other similar arrangements or agreements with any directors,
officers or key
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employees, except in the ordinary course and consistent with past; (xi) with
respect to HPI, make any acquisitions of assets in excess of $250,000 and with
respect to FPA and its subsidiaries, make any capital expenditures or
commitments for additions to plant, property or equipment constituting capital
assets except in the ordinary course of business consistent with past practice;
(xii) knowingly take or fail to take any action which action or failure to take
action would cause HPI or its stockholders to recognize gain or loss for federal
income tax purposes as a result of the consummation of the Merger; (xiii)
knowingly take any action which would jeopardize the treatment of the Merger as
a pooling of interests; or (xiv) fail to use all commercially reasonable efforts
to preserve intact in all material respects their present business organizations
and reputation.
At all times from and after the date of the Merger Agreement until the
Effective Time, each of FPA and HPI has further agreed that prior to the
Effective Time as to itself and its subsidiaries (unless expressly provided for
in the Merger Agreement, or to the extent that the other party shall otherwise
consent in writing) each party shall confer on a regular and frequent basis with
the other with respect to its business and operations and other matters relevant
to the Merger and shall promptly give notice to the other and use their
respective best efforts to prevent or promptly remedy (i) the occurrence or
failure to occur or the impending or threatened occurrence or failure to occur,
of any event which occurrence or failure to occur would be likely to cause any
of its representations or warranties to be untrue or inaccurate in any material
respect and (ii) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it.
CERTAIN ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, FPA and HPI have made the following
additional agreements.
Access to Information. Each of FPA and HPI shall, and shall cause each of
its subsidiaries, throughout
the period commencing on the date of the Merger Agreement and ending at the
Effective Time, to: (i) provide the other party and its legal and financial
advisors, accountants and any other agents and representatives (collectively,
"Advisors") with full access, upon reasonable prior notice and during normal
business hours, to their respective assets, properties, books and records, but
only to the extent that such access does not unreasonably interfere with the
business and operations of FPA and HPI, as the case may be, and its
subsidiaries, and (ii) furnish promptly to such persons (x) a copy of each
report, statement, schedule and other document filed or received by FPA or HPI,
as the case may be, or any of its subsidiaries pursuant to the requirements of
federal or state securities laws or filed with any other governmental or
regulatory authority, and (y) all other information and data concerning the
business and operations of FPA or HPI, as the case may be, and its subsidiaries
as the other party or any of such other persons reasonably may request.
In the event that the Merger Agreement is terminated without the
transactions contemplated thereby having been consummated, upon the request of
FPA or HPI, as the case may be, the other party will, and will cause its
Advisors to, promptly redeliver or cause to be redelivered all copies of
documents and information furnished by FPA or HPI, as the case may be, or its
Advisors to such party and its Advisors in connection with the Merger Agreement
or the transactions contemplated thereby and destroy or cause to be destroyed
all notes, memoranda, summaries, analyses, compilations and other writings
related thereto or based thereon prepared by FPA or HPI, as the case may be, or
its Advisors.
Inclusion of Shares on Nasdaq. FPA agreed to use its best efforts to cause
the shares of FPA Common Stock to be issued in the Merger in accordance with the
Merger Agreement to be approved for inclusion on Nasdaq.
Regulatory and Other Approvals. Subject to the terms and conditions of the
Merger Agreement, each of HPI and FPA agreed to proceed diligently and in good
faith and to use all commercially reasonable efforts to do, or cause to be done,
all things necessary, proper or advisable to, as promptly as practicable, (i)
obtain all consents, approvals or actions of, make all filings with and give all
notices to governmental or regulatory authorities or any other public or private
third parties required of FPA, HPI or any of their subsidiaries to consummate
the Merger and the other matters contemplated hereby and (ii) provide such other
information and communications to such governmental or regulatory authorities or
other public or private third parties as the other party or such governmental or
regulatory authorities or other public or private third parties may
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reasonably request in connection therewith. In addition to and not in limitation
of the foregoing, each of the parties agreed to (x) take promptly all actions
necessary to make the filings required of FPA and HPI or their affiliates under
the HSR Act, (y) comply at the earliest practicable date with any request for
additional information received by such party or its affiliates from the FTC or
the DOJ pursuant to the HSR Act and (z) cooperate with the other party in
connection with such party's filings under the HSR Act and in connection with
resolving any investigation or other inquiry concerning the Merger or the other
matters contemplated by the Merger Agreement commenced by the FTC, the DOJ or
any state attorney general.
Employee Benefit Plans. In the Merger Agreement, FPA agreed that, for one
year after the Effective Time, FPA shall, or shall cause the Surviving
Corporation to, provide employee benefit plans and programs for the benefit of
employees and former employees of HPI ("HPI Employees"), which, in the
aggregate, are no less favorable than the HPI employee benefit plans and
programs in effect immediately prior to the Effective Time. FPA further agreed
that, for the two year period beginning on the date one year following the
Effective Time, FPA shall, or shall cause the Surviving Corporation to, provide
HPI Employees with employee benefit plans and programs that are no less
favorable in the aggregate to those provided from time to time to FPA employees
of comparable status and seniority. Except as specified in the Merger Agreement,
with respect to such benefits, past service, compensation and expense credits of
such HPI Employees shall be recognized, whenever reasonably possible, consistent
with the terms of such plans and programs, for all purposes under such plans and
each employee or fringe benefit plan or program available to HPI Employees as
contemplated hereby shall be applied to such HPI Employees.
FPA agreed to honor, and agreed to cause the Surviving Corporation to
honor, without modification, all existing employment, severance, consulting and
salary continuation agreements between HPI and any current or former officer,
director, employee or consultant to HPI.
Directors' and Officers' Indemnification and Insurance. FPA agreed to
purchase and maintain, for a period of six years following the Effective Time,
policies of directors' and officers' liability insurance covering current and
former directors, officers and employers of HPI with respect to claims arising
from facts or events that occurred on or prior to the Effective Time, providing
at least the same coverage and amounts and containing terms that are no less
advantageous to the insured parties as those in effect immediately prior to the
Effective Time for officers and directors of FPA. FPA agreed to indemnify all
past or present directors, officers, employees, trustees and agents of HPI
against any liability or losses (including attorney's fees for counsel who are
reasonably acceptable to FPA) any of them may incur because of any claim brought
against them prior to or within six years from the Effective Time as officers,
directors, employees, trustees or agents of HPI, and in connection therewith,
agreed to advance attorney's fees to them to defend any such claim; provided
that FPA shall be entitled to direct the defense of any such matter; and
provided, further, that FPA shall not be obligated pursuant to the Merger
Agreement to pay the fees and disbursements of more than one counsel for all
Indemnified Parties in any single action, except to the extent that, in the
opinion of counsel for the Indemnified Parties, two or more of such Indemnified
Parties have conflicting interests in the outcome of such action. FPA may obtain
directors' and officers' liability insurance to cover these obligations.
Expenses. Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such cost or expense.
Pooling of Interests. FPA and HPI agreed that from and after the date of
the Merger Agreement and until the Effective Time, neither FPA nor HPI nor any
of their respective subsidiaries or other affiliates shall knowingly take any
action, or knowingly fail to take any action, that would jeopardize the
treatment of FPA's acquisition of HPI as a "pooling of interests" for financial
and accounting purposes. Following the Effective Time, FPA shall use its best
efforts to conduct the business of the Surviving Corporation, and shall cause
the Surviving Corporation to use its best efforts to conduct its business, in a
manner that would not jeopardize the characterization of the Merger as a
"pooling of interests" for accounting purposes.
Brokers or Finders. Each of FPA and HPI represented that no broker, finder
or investment banker is entitled to any broker's, finder's or other fee or
commission in connection with any of the transactions
71
<PAGE> 76
contemplated by the Merger Agreement, except Smith Barney, whose fees and
expenses will be paid by HPI in accordance with HPI's agreement with such firm.
Fulfillment of Conditions. Subject to the terms and conditions of the
Merger Agreement, each of FPA and HPI agreed to take or cause to be taken all
steps necessary or desirable and proceed diligently and in good faith to satisfy
each condition to the other's obligations contained in the Merger Agreement and
to consummate and make effective the transactions contemplated by the Merger
Agreement, and further agreed that neither FPA nor HPI will, nor will it permit
any of its subsidiaries to, take or fail to take any action that could be
reasonably expected to result in the nonfulfillment of any such condition.
No Solicitations. Prior to the Effective Time, HPI agreed that (a) neither
it nor any of its subsidiaries shall, and it shall use its best efforts to cause
its respective Representatives not to, initiate, solicit or encourage, directly
or indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, consolidation or other business combination including
HPI or any of its subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any portion of the assets of HPI and its subsidiaries
taken as a whole, (ii) any of the outstanding shares of HPI Common Stock or
Preferred Stock or (iii) any of the outstanding shares of the capital stock of
any subsidiary of HPI (any such proposal or offer being hereinafter referred to
as an "Alternative Proposal"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person or group relating to an Alternative Proposal (excluding the
transactions contemplated by the Merger Agreement), or otherwise facilitate any
effort or attempt to make or implement an Alternative Proposal and (b) it will
notify FPA immediately if any such inquiries, proposals or offers are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it or any such person
or group except for the Roll-up Transactions.
HPI Stockholder Agreements. FPA, HPI, Oxford and WellPoint are parties to a
Stockholder Agreement whereby Oxford and WellPoint have delivered irrevocable
proxies to FPA to vote all of their HPI Voting Securities for the approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
FPA and HPI Affiliates. Each of FPA and HPI has delivered a letter to the
other identifying all persons who may be deemed to be affiliates for purposes of
Accounting Series Release 135 ("ASR 135"). On or prior to a date that is five
days prior to the Closing Date, (i) HPI will deliver a letter to FPA identifying
all persons who may be deemed affiliates of HPI under Rule 145, including,
without limitation, all directors and executive officers of HPI, and (ii) it
shall advise the persons identified in such letter of the resale restrictions
imposed by applicable securities laws. Each of FPA and HPI has obtained from its
respective affiliates an agreement that such persons will comply with the
provisions of ASR 135 and will not sell shares of FPA Common Stock or HPI Common
Stock and Preferred Stock in an amount which would contravene the provisions of
ASR 135 until combined results of operations of FPA and HPI covering at least 30
days of combined operations are made public. FPA has agreed to keep current its
filings under the Exchange Act for purposes of reliance upon the resale
provisions of Rule 145.
Registration Rights Agreement. In the Merger Agreement, FPA agreed to enter
into the Registration Rights Agreement with Oxford, WellPoint, and Messrs. Berg,
Phillips, Conlin and Wiggins (the "Selling Stockholders") pursuant to which FPA
will file a registration statement with the Commission as soon as practicable
after the Closing Date covering the shares received in the Merger by the Selling
Stockholders (and no other shares of FPA Common Stock) and use its reasonable
efforts to cause such registration statement to be declared effective on or
prior to 90 days after the Closing Date (but no earlier than 60 days following
the Closing Date). FPA has agreed to use its reasonable efforts to keep the
registration statement effective for the period ending two years after the
Closing Date or such shorter period as may be necessary in order for the Selling
Stockholders to freely sell the registered shares. In no event shall FPA be
obligated to file more than one registration statement pursuant to the terms of
the Registration Rights Agreement.
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<PAGE> 77
ROLL-UP TRANSACTIONS
HPI has affiliated with group practices and IPAs through subsidiaries (the
"HPI Subsidiaries"). The physician-owners of the group practices and IPAs own
shares in HPI Subsidiaries with which they contract to provide health care
services. In each case, the physician-owners own less than a 30% interest in
such Minority Shares. Each of the HPI Subsidiaries has also granted Minority
Options to certain of its employees." Shareholder agreements with the
physician-owners and the stock option plans for each HPI Subsidiary grant HPI
the right to exchange the Minority Shares and Minority Options for HPI Common
Stock and HPI Options, respectively, of equal value (the "Roll-up
Transactions").
In the Merger Agreement, HPI agreed to exercise its right and deliver
roll-up notices to each of the Minority Holders, which notices serve to inform
the Minority Holders of HPI's intention to undertake the Roll-up Transactions.
The Roll-up Transactions contemplate the exchange, immediately prior to the
Effective Time, of the Minority Shares and Minority Options with respect to each
HPI Subsidiary for HPI Common Stock and substitute HPI Options based on the fair
value of such stock and options (the "Subsidiary Value"). HPI has delivered such
notices and has reached agreement with the Minority Holders of each HPI
Subsidiary with regard to the Subsidiary Value of each such HPI Subsidiary. As a
result of such valuations, HPI will issue in connection with the Roll-up
Transactions, immediately prior to the Effective Time, 871,697 shares of HPI
Common Stock and substitute HPI Options to purchase 170,287 shares of HPI Common
Stock. The acquisition of the Minority Shares shall be treated under the
purchase method of accounting with the difference between the fair value of the
HPI Common Stock issued and the fair value of the assets and liabilities
recorded as goodwill.
At the Effective Time, holders of such newly issued shares of HPI Common
Stock and substitute HPI Options will have the right to receive shares of FPA
Common Stock on the same terms and conditions as other holders of HPI Common
Stock and HPI Options at the Effective Time. See "THE MERGER -- Merger
Consideration" and "THE MERGER AGREEMENT -- Treatment of Stock Options."
CONDITIONS TO CONSUMMATION OF THE MERGER
In addition to the approval and adoption of the Merger Agreement by the
stockholders of HPI, the obligation of each party to effect the Merger is
subject to the fulfillment, at or prior to the Closing, or where legally
permissible, the waiver, of various conditions, including: (i) the effectiveness
of the Registration Statement and the absence of any stop order suspending such
effectiveness or any proceedings for that purpose being pending or threatened;
(ii) the receipt of all state securities or "Blue Sky" permits and other
authorizations necessary to issue the FPA Common Stock; (iii) the shares of FPA
Common Stock issuable to HPI's stockholders in the Merger shall have been
approved for inclusion on Nasdaq; (iv) the expiration or termination of any
waiting period (and any extension thereof) under the HSR Act; (v) no preliminary
or permanent injunction or other order or decree by any federal or state court
which prevents the consummation of the Merger shall have been issued and remain
in effect (each party agreeing to use its reasonable efforts to have any such
injunction, order or decree lifted); (vi) the receipt of letters from Deloitte &
Touche LLP and KPMG Peat Marwick LLP, each dated not more than two business days
prior to the Effective Time and addressed to FPA and HPI, respectively, stating
that the Merger will qualify as a "pooling of interests" transaction under APB
No. 16; (vii) the delivery by HPI to FPA on or prior to the date which is five
days prior to the Closing Date of a letter identifying all persons who may be
deemed affiliates of HPI under Rule 145, including, without limitation, all
directors and executive officers of HPI; (viii) the delivery by HPI to each of
the persons identified in the letter referred to in subsection (vii) above, a
notice of the resale restrictions imposed by applicable securities laws; and
(ix) the receipt of all consents, approvals and notices from governmental or
regulatory authorities or any other public or private third parties required to
consummate the Merger.
The obligation of FPA and Merger Sub to effect the Merger is further
subject to the fulfillment, at or prior to the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by FPA or
Merger Sub in their sole discretion): (i) HPI shall have performed in all
material respects each agreement, covenant and obligation required by the Merger
Agreement to be performed or complied with by it
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<PAGE> 78
on or prior to the Closing Date and the representations and warranties of HPI in
the Merger Agreement shall be true and correct in all material respects (except
for such representations and warranties that are qualified by their terms by a
referral to materiality, which representations and warranties as so qualified
shall be true in all respects) on and as of the date made and as of the Closing
Date as though made on and as of the Closing and HPI shall have delivered to FPA
a certificate, dated the Closing Date and executed on behalf of HPI by its
President and Chief Executive Officer or a Vice President, to such effect; (ii)
HPI and its subsidiaries shall have received all consents (or, in lieu thereof,
waivers) from parties to each contract disclosed in the HPI Disclosure Letter;
(iii) FPA shall have received the opinion of counsel to HPI dated the Closing
Date; (iv) FPA shall have received an opinion from Pillsbury Madison & Sutro LLP
stating that the Merger will be treated for federal income tax purposes as a
tax-free reorganization; (v) FPA shall have received the resignations of the
members of the board of directors of HPI; (vi) FPA and Oxford shall have
executed the Master Strategic Agreement; (vii) FPA and WellPoint shall have
executed the Memorandum of Understanding; (viii) there shall be no HPI Preferred
Stock outstanding; (ix) Stock Option Acknowledgments shall have been executed
and delivered by the holders of no less than 80% of the HPI Options; (x) each
Roll-up Transaction shall either be complete by the Effective Time or escrow
agreements shall have been executed; and (xi) FPA shall have received the
Denominator Certificate from HPI.
The obligation of HPI to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by HPI in its sole
discretion): (i) FPA and Merger Sub shall have performed in all material
respects each agreement, covenant and obligation required by the Merger
Agreement to be performed or complied with by them on or prior to the Closing
Date and the representations and warranties of FPA and Merger Sub in the Merger
Agreement shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a referral
to materiality, which representations and warranties as so qualified shall be
true in all respects) on and as of the date made and on and as of the Closing
Date as though made on and as of the Closing and each of FPA and Merger Sub
shall have delivered to HPI certificates, dated the Closing Date and executed on
behalf of FPA by its Chairman of the Board and Chief Executive Officer, the
President or a Vice President of FPA and of the President and Chief Executive
Officer or a Vice President of Merger Sub, to such effect; (ii) FPA shall have
delivered a registration rights agreement to the Selling Stockholders; (iii) HPI
shall have received an opinion from Gibson, Dunn & Crutcher LLP stating that the
Merger will be treated for federal income tax purposes as a tax-free
reorganization; (iv) the Smith Barney opinion shall not have been withdrawn; (v)
FPA shall have entered into employment agreements and have taken such other
employee related matters as agreed to by the parties to the Merger Agreement;
(vi) the FPA Value shall not be below $15.65; and (vii) HPI shall have received
the opinion of counsel to FPA dated the Closing Date.
To the extent that FPA or HPI waives compliance with any material
provisions of or conditions to the consummation of the Merger, including the
condition that the Merger be treated as a "pooling of interests" for accounting
and financial reporting purposes and that the Merger qualify as a tax-free
reorganization, FPA and HPI will amend this Proxy Statement/Prospectus, and HPI
will resolicit stockholder votes to the extent required by applicable law.
TERMINATION
The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned whether prior to or after the approval of the
stockholders of HPI: (i) by either FPA or HPI upon written notice to the
non-terminating party by the terminating party at any time after October 28,
1997, if the Merger has not been consummated on or prior to such date otherwise
than on account of delay or default on the part of the terminating party, except
that the non-terminating party may extend such date for an additional 30 days if
all required statutory approvals have not been obtained and, in the event FPA is
the non-terminating party, if the Roll-up Transactions have not been concluded;
(ii) if any condition to closing the Merger is not satisfied, other than as a
result of the conduct of the party whose obligation it was to obtain such
condition; (iii) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the non-terminating party set
forth in the Merger Agreement, which breach has not been cured within 30 days
following receipt by the non-terminating party of notice of such breach from the
terminating party; (iv) if the
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<PAGE> 79
Merger is enjoined by a final, unappealable court order not entered at the
request of or with the support of FPA or any of its 5% stockholders, in the case
of FPA, or HPI or any or its 5% stockholders, in the case of HPI; and (v) HPI
may terminate the Merger Agreement if the FPA Value is less than $15.65.
As described above, HPI may terminate the Merger Agreement if the FPA Value
is less than $15.65. The number of shares of FPA Common Stock issuable in the
Merger in exchange for each share of HPI Common Stock is determined by the
Exchange Ratio. See "THE MERGER -- Merger Consideration." In the event that the
FPA Value is below $15.65, the HPI Board, in exercise of its fiduciary duties,
would consider whether to terminate the Merger Agreement based on whether the
stockholders of HPI would receive fair consideration for their HPI Common Stock
and whether consummation of the Merger would be in the best interests of the
stockholders.
EFFECT OF TERMINATION
If the Merger Agreement is validly terminated by either HPI or FPA pursuant
to the Merger Agreement, the Merger Agreement will forthwith become void and
there will be no further obligation on the part of either HPI or FPA (or any of
their respective Representatives or affiliates), except (i) that certain
provisions of the Merger Agreement will continue to apply following any such
termination and (ii) that nothing contained therein shall relieve any party
thereto from liability for willful breach or a knowing violation by such party
of its representations, warranties, covenants or agreements contained in the
Merger Agreement.
AMENDMENT
The Merger Agreement may not be amended except by action taken by or on
behalf of the respective boards of directors of the parties thereto or duly
authorized committees thereof and then only by a written instrument duly
executed by or on behalf of each party thereto and in compliance with applicable
law.
WAIVER
At any time prior to the Effective Time, any party to the Merger Agreement,
by action taken by or on behalf of its board of directors, may to the extent
permitted by applicable law (i) extend the time for the performance of any of
the obligations or other acts of the other parties thereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties thereto
contained therein or in any document delivered pursuant thereto or (iii) waive
compliance with any of the covenants, agreements or conditions of the other
parties thereto contained therein, except that after the vote of HPI
stockholders with respect to the Merger Agreement, the formula for determining
the Exchange Ratio shall not be changed from that provided in the Merger
Agreement. No such extension or waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the party extending the time
of performance or waiving any such inaccuracy or non-compliance.
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<PAGE> 80
SELECTED HISTORICAL AND PRO FORMA INFORMATION
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
The following pro forma condensed consolidated balance sheet of FPA as of
June 30, 1997 and the pro forma condensed consolidated statements of operations
for the three fiscal years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1997 give effect, to the extent set forth below, to the
following consummated and probable transactions.
Consummated Transactions:
(1) The acquisition of Physicians First, Inc. ("PFI") (effective June 1,
1996).
(2) The acquisition of Foundation Health Medical Services and Affiliates
("FHMS") (effective November 29, 1996).
Probable Transaction:
(1) The proposed merger of FPA and HPI (the "Merger").
The Merger is reflected as of June 30, 1997 for the pro forma condensed
consolidated balance sheet. The Consummated Transactions are reflected as of
January 1, 1996 in the pro forma condensed consolidated statements of
operations. The Roll-up Transactions and the conversion of HPI Preferred Stock
into HPI Common Stock are reflected as of January 1, 1996 in the pro forma
condensed consolidated statements of operations and as of June 30, 1997 in the
pro forma condensed consolidated balance sheet. The Merger is reflected as of
January 1, 1994 in the pro forma condensed consolidated statements of
operations. The pro forma information is based on the respective historical
financial statements of the companies involved in the Consummated Transactions
and the Merger, giving effect to the Merger under the pooling of interests
method of accounting and the Consummated Transactions under the purchase method
of accounting, and the assumptions and adjustments described in the accompanying
notes to the pro forma condensed consolidated financial statements.
The pro forma condensed consolidated financial statements have been
prepared by the management of FPA based upon the unaudited financial statements
of FPA and HPI as of June 30, 1997 and for the six months then ended, the
audited financial statements of FPA and HPI as of December 31, 1996 and for each
of the three years in the period then ended, and the unaudited results of
operations for PFI and FHMS up to their respective acquisition dates.
Management of FPA does not believe that the pro forma condensed
consolidated financial statements are indicative of the results that actually
would have occurred if the combinations had been in effect on the dates
indicated or which may be obtained in the future. The pro forma condensed
consolidated financial statements should be read in conjunction with the
separate historical consolidated financial statements and accompanying notes of
FPA, HPI, PFI and FHMS.
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<PAGE> 81
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
HEALTH
PARTNERS, FPA MEDICAL
INC. HEALTH MANAGEMENT, INC.
FPA MEDICAL HEALTH PRO FORMA PARTNERS, INC. PRO FORMA PRO FORMA
MANAGEMENT, INC. PARTNERS, INC. ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
---------------- -------------- ------------ -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents..... $ 12,648,662 $ 11,165,000 $ 11,165,000 $ 23,813,662
Marketable
securities...... 24,619,747 24,619,747
Accounts
receivable -- net 186,781,243 17,388,000 17,388,000 204,169,243
Prepaid expenses
and other
assets.......... 8,610,274 1,497,000 1,497,000 10,107,274
Deferred income
tax asset....... 6,158,892 6,158,892
------------ ----------- ------------ ----------- ------------ ------------
Total
current
assets.... 238,818,818 30,050,000 30,050,000 268,868,818
Property and
equipment -- net... 39,123,772 8,384,000 8,384,000 47,507,772
Restricted cash and
deposits.......... 500,000 500,000
Goodwill and
intangibles -- net. 306,406,814 23,380,000 $ 14,254,000(I) 37,634,000 344,040,814
Investments in
GLHP.............. 4,994,900 4,994,900
Deferred income tax
asset............. 3,689,058 3,689,058
Deposits and other
assets............ 19,708,636 641,000 641,000 20,349,636
------------ ----------- ------------ ----------- ------------ ------------
Total....... $613,241,998 $ 62,455,000 $ 14,254,000 $ 76,709,000 $ $ 689,950,998
============ =========== ============ =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
and accrued
expenses........ $ 62,998,028 $ 11,506,000 $ 11,506,000 $ 15,500,000(A) $ 90,004,028
Claims payable,
including
incurred but not
reported
claims.......... 124,044,354 14,791,000 14,791,000 138,835,354
Long-term
debt -- current
portion......... 12,416,613 2,151,000 2,151,000 14,567,613
Current portion of
accrued
liability for
professional
liability
claims.......... 585,668 585,668
Other
liabilities..... 920,000 2,389,000 2,389,000 3,309,000
------------ ----------- ------------ ----------- ------------ ------------
Total
current
liabilities... 200,964,663 30,837,000 30,837,000 15,500,000 247,301,663
------------ ----------- ------------ ----------- ------------ ------------
Long-term
debt -- net of
current
portion......... 271,099,787 3,844,000 3,844,000 274,943,787
Accrued liability
for professional
liability
claims, net of
current
portion......... 3,195,912 3,195,912
Other long-term
liabilities..... 16,758,033 194,000 194,000 16,952,033
Minority
interests....... 746,000 (746,000)(I)
Stockholders'
equity:
Preferred
stock......... 50,000,000 (50,000,000)(J)
Common stock.... 65,933 2,000 23,000(I)(J) 25,000 (25,000)(F) 76,388
10,455(F)
Additional paid
in capital.... 209,292,915 64,977,000(I)(J) 64,977,000 (64,977,000)(F) 274,284,460
64,991,545(F)
Stock payable... 534,600 534,600
Accumulated
deficit....... (88,242,845) (23,168,000) (23,168,000) (15,500,000)(A) (126,910,845)
Less: Due from
stockholders... (427,000) (427,000)
------------ ----------- ------------ ----------- ------------ ------------
Total
stockholders'
equity........ 121,223,603 26,834,000 15,000,000 41,834,000 (15,500,000) 147,551,603
------------ ----------- ------------ ----------- ------------ ------------
Total....... $613,241,998 $ 62,455,000 $ 14,254,000 $ 76,709,000 $ $ 689,950,998
============ =========== ============ =========== ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
77
<PAGE> 82
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HEALTH
PARTNERS, FPA MEDICAL
INC. MANAGEMENT, INC.
FPA MEDICAL HEALTH PRO FORMA HEALTH PARTNERS, INC. PRO FORMA
MANAGEMENT, INC. PARTNERS, INC.(H) ADJUSTMENTS PRO FORMA CONSOLIDATED
---------------- ----------------- ----------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Managed care revenue........... $337,816,319 $63,936,000 $63,936,000 $401,752,319
Fee-for-service revenue........ 137,752,525 9,216,000 9,216,000 146,968,525
------------ ----------- -------- ------------ ------------
Total operating
revenue............ 475,568,844 73,152,000 73,152,000 548,720,844
------------ ----------- -------- ------------ ------------
Expenses:
Medical services............. 340,833,454 53,379,000 53,379,000 394,212,454
General and administrative... 109,904,940 20,949,000 $ 250,000(K) 21,199,000 131,103,940
Merger, restructuring and
other unusual charges..... 38,004,841 38,004,841
------------ ----------- -------- ------------ ------------
Total expenses....... 488,743,235 74,328,000 250,000 74,578,000 563,321,235
------------ ----------- -------- ------------ ------------
Loss from operations........... (13,174,391) (1,176,000) (250,000) (1,426,000) (14,600,391)
Other income (expense):
Interest and other income.... 4,778,925 425,000 425,000 5,203,925
Interest expense............. (8,865,929) (266,000) (266,000) (9,131,929)
Minority interests' share in
net losses................ 169,000 (169,000)(L)
------------ ----------- -------- ------------ ------------
Total other income
(expense).......... (4,087,004) 328,000 (169,000) 159,000 (3,928,004)
------------ ----------- -------- ------------ ------------
Loss before income taxes....... (17,261,395) (848,000) (419,000) (1,267,000) (18,528,395)
Income tax expense (benefit)... (3,351,782) 14,000 14,000 (3,337,782)
------------ ----------- -------- ------------ ------------
Net loss....................... $(13,909,613) $ (862,000) $(419,000) $(1,281,000) $(15,190,613)
============ =========== ======== ============ ============
Pro forma net loss per share... $ (0.40) $ (0.38)
Weighted average shares
outstanding(G)............... 34,510,257 39,737,530
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
78
<PAGE> 83
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOUNDATION FPA MEDICAL
HEALTH MANAGEMENT,
MEDICAL INC. AND
SERVICES, CONSUMMATED
FPA MEDICAL PHYSICIANS INC. TRANSACTIONS
MANAGEMENT, FIRST, AND PRO FORMA PRO FORMA HEALTH
INC. INC.(B) AFFILIATES ADJUSTMENTS CONSOLIDATED PARTNERS, INC.(H)
------------ ----------- ------------ ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Managed care revenue.... $386,427,917 $ 14,870,833 $121,214,187 $ 522,512,937 $ 57,798,000
Fee-for-service
revenue............... 172,676,696 4,176,018 19,251,147 196,103,861 16,769,000
------------ ----------- ------------ ----------- ------------- ------------
Total operating
revenue....... 559,104,613 19,046,851 140,465,334 718,616,798 74,567,000
------------ ----------- ------------ ----------- ------------- ------------
Expenses:
Medical services...... 431,617,608 16,128,269 166,950,333 614,696,210 50,328,000
General and
administrative...... 139,646,319 2,811,904 44,210,000 $6,510,814 (C) 193,179,037 34,529,000
Merger, restructuring
and other unusual
charges............. 52,571,868 52,571,868
------------ ----------- ------------ ----------- ------------- ------------
Total
expenses...... 623,835,795 18,940,173 211,160,333 6,510,814 860,447,115 84,857,000
------------ ----------- ------------ ----------- ------------- ------------
Income (loss) from
operations............ (64,731,182) 106,678 (70,694,999) (6,510,814) (141,830,317) (10,290,000)
Other income (expense):
Interest and other
income.............. 1,991,288 83,940 6,168,667 8,243,895 677,000
Interest expense...... (6,164,532) (15,382) (8,619,667) (2,406,837) (D) (17,206,418) (539,000)
Other expense......... (2,757,000) (2,757,000)
Minority interests'
share in net
losses.............. 866,000
------------ ----------- ------------ ----------- ------------- ------------
Total other
income
(expense)..... (4,173,244) 68,558 (5,208,000) (2,406,837) (11,719,523) 1,004,000
------------ ----------- ------------ ----------- ------------- ------------
Income (loss) before
income taxes.......... (68,904,426) 175,236 (75,902,999) (8,917,651) (153,549,840) (9,286,000)
Income tax (expense)
benefit............... (1,080,000) (73,922) 16,362,667 17,565,593 (E) 32,774,338 (185,000)
------------ ----------- ------------ ----------- ------------- ------------
Net income (loss)....... $(69,984,426) $ 101,314 $(59,540,332) $8,647,942 $(120,775,502) $ (9,471,000)
============ =========== ============ =========== ============= ============
Pro forma net loss per
share................. $ (2.56) $ (3.84)
Weighted average shares
outstanding(G)........ 27,381,279 31,423,942
<CAPTION>
FPA
MEDICAL
HEALTH MANAGEMENT
PARTNERS, INC. INC.
PRO FORMA HEALTH PARTNERS, INC. PRO FORMA
ADJUSTMENTS PRO FORMA CONSOLIDATED
-------------- --------------------- -------------
<S> <C> <C> <C>
Managed care revenue.... $ 57,798,000 $ 580,310,937
Fee-for-service
revenue............... 16,769,000 212,872,861
----------- ------------ -------------
Total operating
revenue....... 74,567,000 793,183,798
----------- ------------ -------------
Expenses:
Medical services...... 50,328,000 665,024,210
General and
administrative...... $ 450,000(K) 34,979,000 228,158,037
Merger, restructuring
and other unusual
charges............. 52,571,868
----------- ------------ -------------
Total
expenses...... 450,000 85,307,000 945,754,115
----------- ------------ -------------
Income (loss) from
operations............ (450,000) (10,740,000) (152,570,317)
Other income (expense):
Interest and other
income.............. 677,000 8,920,895
Interest expense...... (539,000) (17,745,418)
Other expense......... (2,757,000)
Minority interests'
share in net
losses.............. (866,000)(L)
----------- ------------ -------------
Total other
income
(expense)..... (866,000) 138,000 (11,581,523)
----------- ------------ -------------
Income (loss) before
income taxes.......... (1,316,000) (10,602,000) (164,151,840)
Income tax (expense)
benefit............... (185,000) 32,589,338
----------- ------------ -------------
Net income (loss)....... $ (1,316,000) $ (10,787,000) $(131,562,502)
=========== ============ =============
Pro forma net loss per
share................. $ (3.61)
Weighted average shares
outstanding(G)........ 36,440,693
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
79
<PAGE> 84
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FPA MEDICAL
FPA MEDICAL MANAGEMENT, INC.
MANAGEMENT, HEALTH PRO FORMA PRO FORMA
INC. PARTNERS, INC.(H) ADJUSTMENTS CONSOLIDATED
------------ ------------------ ----------- ----------------
<S> <C> <C> <C> <C>
Managed care revenue............. $164,164,875 $ 25,668,000 $189,832,875
Fee-for-service revenue.......... 118,470,607 6,308,000 124,778,607
------------ ----------- ----------- ------------
Total operating
revenue.............. 282,635,482 31,976,000 314,611,482
------------ ----------- ----------- ------------
Expenses:
Medical services............... 202,739,878 14,719,000 217,458,878
General and administrative..... 74,489,765 25,207,000 99,696,765
Merger, restructuring and other
unusual charges............. 1,589,908 1,589,908
------------ ----------- ----------- ------------
Total expenses......... 278,819,551 39,926,000 318,745,551
------------ ----------- ----------- ------------
Income (loss) from operations.... 3,815,931 (7,950,000) (4,134,069)
Other income (expense):
Interest and other income...... 1,129,297 387,000 1,516,297
Interest expense............... (2,707,943) (116,000) (2,823,943)
Minority interests' share in
net losses.................. 683,000 683,000
------------ ----------- ----------- ------------
Total other income
(expense)............ (1,578,646) 954,000 (624,646)
------------ ----------- ----------- ------------
Income (loss) before income
taxes.......................... 2,237,285 (6,996,000) (4,758,715)
Income tax expense............... (1,504,320) (175,000) (1,679,320)
------------ ----------- ----------- ------------
Net income (loss)................ $ 732,965 $ (7,171,000) $ $ (6,438,035)
============ =========== =========== ============
Pro forma
Adjustment to income tax
expense(M).................. (262,000)
------------ ----------- ----------- ------------
Net income (loss)................ $ 470,965 $ (7,171,000) $ $ 6,700,035
============ =========== =========== ============
Pro forma net income (loss) per
share.......................... $ 0.03 $ (0.31)
Weighted average shares
outstanding(G)................. 18,306,992 21,277,698
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
80
<PAGE> 85
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
FPA MEDICAL
MANAGEMENT, INC.
FPA MEDICAL HEALTH PRO FORMA PRO FORMA
MANAGEMENT, INC. PARTNERS, INC. (H) ADJUSTMENTS CONSOLIDATED
---------------- ------------------ ----------- ----------------
<S> <C> <C> <C> <C>
Managed care revenue............ $ 78,939,286 $ 9,765,000 $ 88,704,286
Fee-for-service revenue......... 39,498,164 1,200,000 40,698,164
------------ ----------- -------- ------------
Total operating
revenue............. 118,437,450 10,965,000 129,402,450
------------ ----------- -------- ------------
Expenses:
Medical services.............. 84,816,105 2,584,000 87,400,105
General and administrative.... 28,850,073 13,289,000 42,139,073
------------ ----------- -------- ------------
Total expenses........ 113,666,178 15,873,000 129,539,178
------------ ----------- -------- ------------
Income (loss) from operations... 4,771,272 (4,908,000) (136,728)
Other income (expense):
Interest and other income..... 633,955 446,000 1,079,955
Interest expense.............. (397,364) (254,000) (651,364)
Minority interests' share in
net losses................. 367,000 367,000
------------ ----------- -------- ------------
Total other income.... 236,591 559,000 795,591
------------ ----------- -------- ------------
Income (loss) before income
taxes......................... 5,007,863 (4,349,000) 658,863
Income tax expense.............. (1,667,025) (40,000) (1,707,025)
------------ ----------- -------- ------------
Net income (loss)............... $ 3,340,838 $ (4,389,000) $ $ (1,048,162)
============ =========== ======== ============
Pro forma
Adjustment to income tax
expense(M)................. (110,235)
------------ ----------- -------- ------------
Net income (loss)............... $ 3,230,603 $ (4,389,000) $ $ (1,158,397)
============ =========== ======== ============
Pro forma net income (loss) per
share......................... $ 0.29 $ (0.09)
Weighted average shares
outstanding(G)................ 11,271,046 13,343,522
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
81
<PAGE> 86
FPA NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
FPA consummated the purchase of PFI effective June 1, 1996 for $21,591,541
consisting of cash, FPA Common Stock and debt and FHMS effective November 29,
1996 for $111,000,000 consisting of cash, FPA Common Stock and debt. These
completed acquisitions by FPA were accounted for under the purchase method. The
merger of Sterling with FPA was consummated in October 1996 and the merger of
AHI with FPA was consummated in March 1997. Both of these mergers were accounted
for as a pooling of interests and FPA's financial statements have been restated
to take into account financial information and data of Sterling and AHI for all
periods presented. Additionally, FPA proposes to merge with HPI by issuing FPA
common stock in exchange for all of the outstanding common stock of HPI. It is
contemplated that the Merger will be accounted for as a pooling of interests.
The following adjustments are necessary to reflect the pro forma effects of the
FPA consummated and probable transactions.
Certain of the entities included in the pro forma condensed consolidated
financial statements are professional corporations in which FPA is unable to own
a majority interest due to certain state laws which prohibit the corporate
practice of medicine. Such entities are included in the pro forma condensed
consolidated financial statements due to the fact FPA consolidates these
professional corporations in the consolidated financial statements of FPA. These
professional corporations are consolidated by FPA because FPA has direct or
indirect unilateral and perpetual control over the assets and operations of the
professional corporations, other than by means of owning the majority of the
voting stock of the professional corporations. The shareholder/director of each
of these professional corporations which are affiliated with FPA has entered
into a succession agreement which requires such shareholder/director to sell to
a designee of FPA such shareholder/director's shares of stock if such
shareholder/director is terminated from FPA. This ensures unilateral and
perpetual control over these professional corporations by FPA. As such, due to
the parent-subsidiary relationship under generally accepted accounting
principles, FPA consolidates the financial statements of these professional
corporations. FPA believes that consolidation of the financial statements of
these professional corporations is necessary to present fairly the financial
position and results of operations of FPA.
(A) Nonrecurring costs estimated to be $15,500,000 will be recorded in
connection with the Merger. These costs consist primarily of certain
employee termination costs, financial advisory fees, professional fees
and restructuring costs. Because such costs are nonrecurring, they
have not been recorded in the accompanying unaudited pro forma
condensed consolidated statements of operations. However, such costs
will be expensed in the period the Merger is consummated.
(B) As a result of FPA's acquisition, PFI receives fully delegated
capitation revenue from Physicians Corporation of America, the seller,
based on the acquisition agreement with FPA, rather than only primary
care capitation as is reflected in this historical statement of
operations of PFI. The incremental revenue which PFI would have
received under this fully delegated contract, which is not included in
the pro forma condensed consolidated statement of operations, was
approximately $31,000,000 for the five months ended May 31, 1996 (date
of acquisition). Additionally, there would have been a corresponding
increase in medical services expense and general and administrative
expense for the provision of hospital and specialty care services
under this fully delegated contract, which is not included in the pro
forma condensed consolidated statement of operations.
82
<PAGE> 87
(C) For the purpose of determining the pro forma effects of the
acquisitions of PFI and FHMS on FPA's statement of operations, the
following adjustments to increase (decrease) income have been made:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
PFI FHMS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Amortization over 4-15 years of
intangible assets(1)(2)............ $(100,419) $ (751,667) $ (852,086)
Amortization over 30 years of cost in
excess of net assets acquired
(goodwill)(2)(3)................... (177,957) (5,599,013) (5,776,970)
Depreciation of additional purchase
cost assigned to property and
equipment.......................... 118,242 118,242
--------- ----------- ---------
$(160,134) $(6,350,680) $(6,510,814)
========= =========== =========
</TABLE>
-----------------------
(1) The amortization period of the identifiable intangible assets is
based on the period of estimated future economic benefit as
determined by FPA in conjunction with independent valuation
analyses.
(2) The total balance of the goodwill and intangibles at January 1, 1996
would have been approximately $196,053,338 and $6,164,019,
respectively, related to PFI and FHMS.
(3) It is expected that substantially all of the excess purchase price
over the net assets acquired in connection with the acquisition of
the FHMS entities will be allocated to the Foundation Payor
agreements which have terms of 30 years. As the value of the Payor
agreements will be amortized over 30 years, the same amortization
period as goodwill, and there would be no difference in the
amortization expense, no amount has been allocated between the
goodwill and the Payor agreements for the purposes of the pro forma
condensed consolidated financial statements.
(D) Reflects the increase in interest expense as a result of the notes
issued in connection with the acquisitions of PFI and FHMS. The debt
in the amount of approximately $116,000,000 that was issued or assumed
in connection with the FHMS acquisition bears interest at LIBOR plus
.45%. A one-eighth percent change in the interest rate would have had
an impact to interest expense of approximately $145,000 for the year
ended December 31, 1996.
(E) Reflects the estimated income tax effects of the pro forma
adjustments. No valuation allowance has been recognized related to the
pro forma tax benefits based on FPA management's belief that it is
more likely than not, based on the assessment of future taxable income
and available tax planning strategies, that such benefit would be
realized in future periods. If FPA had incurred the losses before
income taxes of $153,549,840 for the year ended December 31, 1996
included in the pro forma condensed consolidated statement of
operations, FPA would need to generate a comparable amount of future
taxable income over the next 15 years (the net operating loss
carryforward period) in order to fully realize the benefit of these
net operating losses.
(F) Reflects the effects of the assumed issuance of 5,227,272 shares of
FPA Common Stock in exchange for 100% of the shares of outstanding HPI
Voting Securities and HPI Options based on an assumed Adjusted FPA
Value of $22 per share.
(G) The weighted average shares outstanding was calculated based on the
historical weighted average shares outstanding of FPA giving effect to
the assumed 5,227,272 shares of FPA Common Stock to be issued in
connection with the Merger. In addition, for the year ended December
31, 1996 the weighted average shares outstanding give effect to the
4,076,087 shares of FPA Common Stock issued in connection with the
FHMS acquisition and the 525,000 shares of FPA Common Stock issued in
connection with the PFI acquisition.
83
<PAGE> 88
(H) The HPI consolidated financial statements have been adjusted to
conform with FPA's consolidation policies. Accordingly, only the
amounts associated with the consolidated affiliated medical
corporations and IPA's of HPI have been presented in the pro forma
condensed consolidated statements of operations. In order to present
pro forma medical service expense in accordance with FPA's
classification of medical service expense, a portion of HPI's clinic
salaries, medical malpractice and medical supplies have been
classified as medical service expense in the pro forma condensed
consolidated statement of operations. The following amounts included
in the HPI financial statements have been classified as medical
service expense in the pro forma condensed consolidated statement of
operations, with the remainder being classified as general and
administrative expense.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------ SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------- ------ ------ ----------------
<S> <C> <C> <C> <C>
Clinic salaries, wages and benefits............. 1,022 2,253 2,152 1,289
Network operating expenses...................... 1,091 1,959 2,797 1,834
</TABLE>
(I) Reflects the effect of the issuance of HPI Common Stock valued at an
aggregate of approximately $8,739,000 in connection with the Roll-up
Transactions.
(J) Reflects the conversion of the HPI Preferred Stock into 8,000,025
shares of HPI Common Stock.
(K) The acquisition of minority interests shall be treated under the
purchase method of accounting with the difference between the fair
value of the HPI Common Stock issued and the fair value of the assets
and liabilities recorded as goodwill. This adjustment reflects the
amortization of goodwill incurred as a result of the Roll-up
Transactions.
(L) Reflects the elimination of the minority interests share in net losses
as a result of the Roll-up Transactions.
(M) The pro forma net income (loss) and net income (loss) per share
information in the 1994 and 1995 pro forma condensed consolidated
statement of operations reflect the effect on historical results as if
FPA had been a C Corporation rather than an S Corporation for income
tax purposes, and no tax benefit arose as a result of the change in
tax status.
84
<PAGE> 89
SELECTED HISTORICAL FINANCIAL DATA -- FPA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of FPA set forth below for the years
ended December 31, 1994, 1995 and 1996 which give effect to the merger with AHI,
accounted for as a pooling of interests, have been derived from FPA's audited
supplemental consolidated financial statements incorporated herein by reference.
The Selected Historical Financial Data for the years ended December 31, 1993 and
1992 and the six months ended June 30, 1997 and 1996 are unaudited. In the
opinion of FPA's management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of FPA's financial position and
results of operations for such unaudited periods, have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for any other interim period or for the year.
The data set forth below should be read in conjunction with FPA's consolidated
financial statements and the notes thereto incoporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF
OPERATIONS:
Operating revenue............. $39,959 $58,853 $ 118,437 $ 282,636 $ 559,105 $ 237,201 $ 475,569
Medical services expense...... 28,477 41,346 84,816 202,740 431,618 177,675 340,833
------- ------- -------- -------- -------- -------- --------
11,482 17,507 33,621 79,896 127,487 59,526 134,736
General and administrative
expense..................... 12,382 14,406 28,850 74,490 139,646 59,293 109,905
Merger, restructuring and
other unusual charges....... 1,590 52,572 38,005
------- ------- -------- -------- -------- -------- --------
Income (loss) from
operations.................. (900) 3,101 4,771 3,816 (64,731) 233 (13,174)
Other income (expense), net... 197 135 237 (1,579) (4,173) (667) (4,087)
------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes....................... (703) 3,236 5,008 2,237 (68,904) (434) (17,261)
Income tax (expense)
benefit..................... (10) (84) (1,667) (1,504) (1,080) (3,175) 3,351
------- ------- -------- -------- -------- -------- --------
Net income (loss)............. $ (713) $ 3,152 $ 3,341 $ 733 $ (69,984) $ (3,609) $ (13,910)
------- ------- -------- -------- -------- -------- --------
PRO FORMA PER SHARE DATA:
Net income (loss) per share... $ 0.37 $ 0.29 $ 0.03 $ (2.56) $ (0.13) $ (0.40)
Weighted average shares
outstanding................. 8,602,201 11,271,046 18,306,992 27,381,279 27,660,452 34,510,257
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash and marketable securities........ $3,542 $ 4,037 $12,872 $ 43,009 $ 55,472 $ 37,268
Working capital surplus (deficit)..... (973) (81) 17,289 42,521 (38,092) 37,854
Total assets.......................... 7,710 11,543 65,756 228,663 579,664 613,242
Long-term liabilities................. 112 371 12,270 24,043 194,432 291,054
Stockholders' equity (deficit)........ 125 (1,001) 27,236 137,615 134,374 121,224
</TABLE>
85
<PAGE> 90
SELECTED CONSOLIDATED FINANCIAL DATA -- HPI
(IN THOUSANDS)
The selected consolidated financial data set forth below for the period
September 15, 1993 (date of inception of operations) to December 31, 1993 and
for the years ended December 31, 1994, 1995 and 1996 have been derived from
HPI's consolidated financial statements which have been audited by KPMG Peat
Marwick LLP, independent auditors. The selected consolidated financial data as
of and for the six months ended June 30, 1996 and 1997 have been derived from
unaudited financial statements of HPI. In the opinion of HPI's management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of HPI's financial position and results of operations for such
unaudited periods, have been included. Operating results for the six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or for the fiscal year. The data set forth
below are qualified in their entirety by, and should be read in conjunction
with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-HPI," HPI's consolidated financial statements and the notes
thereto and the other financial and statistical information included elsewhere
in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------
1993(1) 1994 1995 1996 1996 1997
------- ------- ------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Revenue:
Net revenue of consolidated and
unconsolidated affiliated medical
corporations and IPAs................... $ 866 $20,172 $87,277 $139,874 $65,635 $ 104,389
Less -- amounts retained by unconsolidated
affiliated medical corporations......... (425) (17,675) (36,910) (53,677) (25,200) (21,906)
Less -- amounts retained by unconsolidated
IPAs.................................... -- -- (34,027) (40,456) (20,310) (21,680)
Management services revenue............... -- 8,468 15,636 28,826 12,524 12,349
Other revenue............................. 10 36 165 255 101 247
------- ------- ------- -------- ------- -------
Net revenue........................ 451 11,001 32,141 74,822 32,750 73,399
------- ------- ------- -------- ------- -------
Operating Expenses:
Cost of affiliated physician services of
consolidated and unconsolidated
affiliated medical corporations......... 317 4,579 12,327 16,419 7,876 10,747
Less -- cost of affiliated physician
services of unconsolidated medical
corporations............................ (317) (4,579) (12,327) (16,419) (7,876) (10,747)
Clinic salaries, wages and benefits....... 445 5,743 11,457 13,995 6,229 9,362
Medical claims of consolidated and
unconsolidated affiliated medical
corporations and IPAs................... 108 5,099 53,481 94,267 46,243 70,746
Less -- medical claims of unconsolidated
affiliated medical corporations......... (108) (4,628) (9,829) (10,389) (5,709) --
Less medical claims of unconsolidated
IPAs.................................... -- -- (33,145) (38,499) (19,401) (20,490)
Network operating expenses................ -- 897 2,889 4,676 2,010 2,503
Other clinic expenses..................... 862 4,745 9,797 13,371 6,092 7,598
General corporate expenses................ 329 2,152 3,904 4,974 2,314 2,896
Depreciation and amortization............. 20 1,865 1,372 2,462 1,132 1,713
Net interest expense (income)............. (10) (156) (106) 117 68 88
------- ------- ------- -------- ------- -------
Total operating expenses........... 1,646 15,717 39,820 84,974 38,978 74,416
Loss before minority interests and
provision for income taxes.............. (1,195) (4,716) (7,679) (10,152) (6,228) (1,017)
Minority interests........................ -- 367 683 866 352 169
Provision for income taxes................ -- (40) (175) (185) (56) (14)
------- ------- ------- -------- ------- -------
Net loss.................................. $(1,195) $(4,389) $(7,171) $ (9,471) $(5,932) $ (862)
======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1993 1994 1995 1996 1996 1997
------- ------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash...................................... $ 3,543 $ 4,672 $ 5,634 $ 9,335 $ 4,674 $ 11,165
Working capital (deficit)................. 3,125 4,200 (170) (1,837) (3,228) (787)
Total assets.............................. 6,308 21,836 39,310 56,719 41,398 62,455
Long-term debt............................ 0 719 696 670 683 657
Stockholders' equity...................... 3,810 12,335 17,164 25,193 16,232 26,834
</TABLE>
- ---------------
(1) For the period September 15, 1993 (date of inception of operations) through
December 31, 1993.
86
<PAGE> 91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- HPI
The discussion and analysis set forth below is qualified in its entirety,
and should be read in conjunction with, HPI's Consolidated Financial Statements
and notes thereto and the other financial and business information related to
HPI included elsewhere in this Proxy Statement/Prospectus.
OVERVIEW
HPI was incorporated and commenced operations in September 1993 and
completed its first affiliation with a physician group practice in November
1993. Through June 30, 1997, HPI has entered into administrative services
agreements with a total of eight physician group practices representing 150
physicians and six IPAs representing 1,572 physicians. As a result of HPI's
limited period of affiliation with the group practices and IPAs, as well as the
significant number of acquisitions made by HPI, HPI does not believe that the
period to period comparisons and percentage relationships within periods set
forth below are meaningful. The following table sets forth information regarding
HPI's physician group practice and IPA affiliations and capitated patients under
risk contracts as of April 1, 1997:
<TABLE>
<CAPTION>
DATE OF NUMBER OF NUMBER OF PRIMARY NUMBER OF NUMBER OF
AFFILIATED PRACTICE/IPA AFFILIATION PHYSICIANS CARE PHYSICIANS SPECIALISTS CAPITATED PATIENTS
- ----------------------------- -------------- --------- ----------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
PHYSICIAN GROUPS
Mednet Healthcare Group November 1993 13 10 3 6,700
Brooklyn, New York
Virginia Medical Associates August 1994 42 27 15 16,500
Northern Virginia
Manhattan Primary Care October 1994 7 7 0 6,700
Manhattan, New York
Patient First Physicians July 1995 28 22 6 8,000
Group
Northern Kentucky
Vento Medical Services June 1996 13 7 6 2,000
Brooklyn, New York
Clarkstown Pediatric July 1996 21 21 0 6,500
Associates
Rockland County, New York
Primary Care Associates October 1996 14 14 0 4,000
Northern Kentucky
Gerald Family Care November 1996 12 12 0 14,000
Washington, DC
IPAS
Mednet Healthcare Group November 1993 248 42 206 1,900
Brooklyn, New York
Medica August 1994 285 91 194 10,900
Brooklyn, New York
Manhattan Primary Care October 1994 156 48 108 16,300
Manhattan, New York
Brooklyn Physician Associates January 1995 253 71 182 24,500
Brooklyn, New York
Health One Associates August 1995 252 77 175 28,000
Brooklyn, New York
San Antonio Network of June 1996 295 85 210 6,000
Physicians
San Antonio, Texas
Vento Medical Group June 1996 83 4 79 0
Brooklyn, New York
</TABLE>
HPI has affiliated with physician group practices and IPAs through
Subsidiaries. Each HPI Subsidiary acquires the property, medical and office
equipment of a group practice and simultaneously enters into an exclusive
administrative services agreement with a newly formed professional corporation.
The administrative
87
<PAGE> 92
services agreement requires the HPI Subsidiary to provide the professional
corporation with management systems and services, non-physician health care
personnel and equipment. While HPI does not directly engage in the practice of
medicine, the HPI Subsidiary may also contract with Payors and enter into a
provider services agreement with the professional corporation. The newly formed
professional corporation contracts with physician, other professional medical
corporations and/or contracts with Payors. Certain HPI Subsidiaries provide
similar services to IPAs, except such subsidiaries do not provide non-physician
health care personnel and equipment to the IPAs; however, they do provide
certain medical management service to the IPAs. The HPI Subsidiaries do not
purchase the property, medical and office equipment of the IPAs, but may
purchase contractual relationships with Payors and other providers. See
"BUSINESS OF HPI -- Administrative Services Agreements." In connection with
affiliations with medical groups and IPAs, HPI has issued the physician-owners
of the group practice or IPA shares of the relevant HPI Subsidiary, which
represents a minority interest in that HPI Subsidiary. In connection with the
minority interests, HPI has entered into shareholders agreements with all
minority shareholders which require that, at the closing of the Merger, the
holders of the minority interests exchange their stock and options in HPI
subsidiaries for HPI Common Stock with an equal value. These exchanges are
referred to in this Proxy Statement/Prospectus as the "Roll-up Transactions."
HPI and the shareholder representative for each HPI Subsidiary have reached
agreement on valuation. See "THE MERGER AGREEMENT -- Roll-up Transactions."
HPI's net revenue of consolidated and unconsolidated medical corporations
and IPAs is derived from affiliated group practices which earn revenue from
providing medical services to enrollees of HMOs and Payors, on both a capitated
and fee-for-service basis, and from affiliations with IPAs, which earn revenue
by providing medical services to enrollees of HMOs and Payors on a capitated
basis. While HPI does not directly engage in the practice of medicine, certain
HPI Subsidiaries, affiliated group practices and affiliated IPAs contract
directly with HMOs and managed care Payors for the provision of specified
medical services and to coordinate all inpatient and outpatient care for the
assigned enrollees. Generally, HPI or an affiliated group practice or IPA
receives a capitation payment from the Payor for members of the Payor who select
one of the affiliated group practice's or IPA's primary care physicians as the
member's primary care provider. The capitation payment may be either a fixed
amount or a percentage of the premium related to the enrollee. The determination
of whether the capitation payment is based on a percentage of premium or a fixed
amount depends upon the Payor's policies relating to the establishment of
capitation rates and the current market trends in reimbursement methodology. The
percentage of premium or the fixed amount is negotiated based on the medical
loss ratio of the Payor, historical medical loss ratios of the group practice or
IPA and the covered benefits under the risk contract. In addition, such
contracts provide for the establishment of shared risk pools, which represent an
annual hospital budget fund against which all payments for hospital services are
credited. Under the Payor contracts, the networks are entitled to receive a
portion of any surplus remaining in the hospital funds at the end of specified
periods. Some of the Payor contracts obligate the networks to bear a portion of
any deficits in the hospital funds. The percentage sharing in the surplus or
deficits of hospital funds will depend on the contractual terms of the Payor
contract. If an HPI Subsidiary contracts with an HMO in a shared risk
arrangement, the HPI Subsidiary bears the ultimate financial risk under the
shared risk contract. Typically, the HPI Subsidiary has shared its risk with the
contracting physicians and would be required to pay to or collect from the
physicians any applicable surplus or deficits. If an Affiliated Practice or IPA
contracts with an HMO in a shared risk arrangement and the HPI Subsidiary has
entered into an agreement to share certain surpluses and deficits as part of its
administrative services agreement, the HPI Subsidiary would either be entitled
to or be obligated for its portion of the surplus or deficit. For those
affiliated medical corporations and IPAs where HPI does not exercise control but
has a net profits interest, HPI includes the net revenue of such entities in net
revenue of consolidated and unconsolidated medical corporations and IPAs.
Amounts retained by the managed affiliated medical corporations and IPAs are
deducted from net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs.
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The following table sets forth the percentage of net revenue of
consolidated and unconsolidated medical groups and IPAs derived from capitation
and fee-for-service billings for the three years ended December 31, 1996 and the
six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capitation............................ 71% 79% 76% 78% 79%
Fee-for-service....................... 29% 21% 24% 22% 21%
</TABLE>
The cost of medical services provided by the affiliated group practices,
IPAs and independent contracting physicians, includes payments to affiliated
primary care, specialty care and ancillary providers. Compensation for such
health care providers varies typically according to the type of provider.
Primary care physicians are compensated on a capitated basis, in which they
receive a fixed monthly fee for each enrollee selecting such physician, or on a
fee-for-service basis. Specialist and ancillary providers are typically
compensated on a fee-for-service basis. Hospitals are typically compensated on a
per diem basis.
The nature of affiliated group practices affects the cost of affiliated
physician services of consolidated and unconsolidated affiliated medical
corporations, clinic salaries, wages and benefits, medical claims of
consolidated and unconsolidated medical groups and IPAs (if the affiliated group
practice has capitation arrangements), other clinic expenses and depreciation
and amortization. These expenses as a percentage of net revenues of consolidated
and unconsolidated medical groups and IPAs will vary based upon the mix of
primary care and specialist providers, the percentage of net revenue of
consolidated and unconsolidated medical groups and IPAs received on a capitated
basis and the scope of the risk of providing health care services undertaken in
a particular capitation agreement.
The nature of the IPAs affects the costs of medical claims of consolidated
and unconsolidated affiliated medical corporations and IPAs, network operating
expenses and depreciation and amortization. These expenses as a percentage of
net revenues of consolidated and unconsolidated medical groups and IPAs will
vary based upon the scope of risk of providing medical care undertaken in a
specific capitation agreement and the underlying variations in margin for
commercial, Medicaid and Medicare contracts and the growth in enrollment for
these product lines.
Net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs also includes fee-for-service revenue generated by
physicians employed by the affiliated group practices. Fee-for-service revenue
is reduced by provisions for contractual adjustments which arise under the terms
of certain reimbursement arrangements and managed care contracts, and represent
the difference between charges at the established rates and estimated
reimbursable amounts. Contractual adjustments are recognized in the period
services are rendered.
Amounts retained by consolidated and unconsolidated affiliated medical
corporations and IPAs and amounts retained by unconsolidated IPAs are deducted
from net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs. Management services revenue is equivalent to the net
profits interest and is calculated as fee-for-service revenue of affiliated
medical corporations less physican compensation plus medical corporations and
IPAs sharing in surpluses or deficits under risk contracts.
Cost of affiliated physician services of consolidated and unconsolidated
affiliated medical corporations includes amounts paid to physicians employed by
the affiliated group practices under various compensation plans at each
professional corporation. The physician compensation plans are intended to
encourage clinical efficiency and productivity and are based on factors such as
the amount of prepaid revenue, the mix between primary care and specialty
physicians in the group and community standards for physician compensation.
Clinic salaries, wages and benefits includes all amounts paid to
non-provider personnel employed at the affiliated group practices. The personnel
includes clinical, administrative and management personnel.
Medical claims of consolidated and unconsolidated affiliated medical
corporations and IPAs includes the cost of services rendered by network
providers as well as by non-network providers for which the affiliated group
practices and IPAs are financially responsible under capitated agreements. These
amounts are paid by either a subsidiary of HPI, the affiliated group practices,
IPAs or the Payor depending on the terms of the
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Payor contract. In certain contracts, funds are advanced to an affiliated group
practice or IPA which is responsible for the payment of the claims. Under other
contracts, the Payor pays the claims and performs periodic settlements pursuant
to which surpluses are paid to the affiliated group practice or IPA or deficits
are offset against future payments.
Network operating expenses includes all the administrative costs, including
salaries, wages and benefits associated with subsidiaries who provide service to
IPAs.
Other clinic expenses include all other operating expenses attributable to
affiliated group practices except for costs of affiliated physician services,
clinic salaries, wages and benefits, medical claims (if applicable), and
depreciation and amortization, interest income and expense and provision for
income taxes. These costs typically include occupancy costs, professional
liability insurance and medical and pharmaceutical supplies, among others.
Minority interests represent the proportionate share of the net income or
loss of each subsidiary attributable to the minority shareholders of such
subsidiaries. If the equity in net losses exceeded the minority interests' share
in the equity, HPI recognized all losses in the consolidated statements of
operations.
HPI's profitability depends upon effectively managing the cost and quality
of providing care in a prepaid environment, and enhancing the efficiency of
group practice and IPA operations.
HPI's quarterly operating results are subject to fluctuations resulting
from the timing and amount of costs associated with HPI's development and
acquisition of group practices and IPAs, by trends in medical costs and by other
operational or external factors. Additionally, quarterly results may be affected
by significant differences between the actual and estimated amounts receivable
from or payable to Payors relating to capitation arrangements and incurred but
not reported medical claims. Such payables and receivables are settled
periodically, and the timing of the settlements vary by Payor and are governed
by the terms of the capitation agreement. In addition, changes in enrollment
from one Payor to another, particularly during the periods of open enrollment
for employer groups, could impact quarterly results.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
For the six months ended June 30, 1997, net revenue of consolidated and
unconsolidated affiliated medical corporations and IPAs increased $38.9 million
or 59% to $104.4 million from $65.5 million in 1996. This increase is
attributable to three new affiliations with group practices which contributed
revenues of $7.1 million. The affiliations with group practices occurred in
July, October and November 1996. Full period results of the operations of an
affiliated group practice acquired in 1996 contributed revenues of $4.3 million.
Finally, due to a change in the risk sharing percentages of certain contracts
with Oxford, the affiliated group practices and IPAs recorded an additional
$25.0 million of net revenue. These increases are offset by the cancellation of
a risk contract with Oxford which decreased net revenue of consolidated and
unconsolidated affiliated medical corporations and IPAs by $4.0 million.
Amounts retained by unconsolidated affiliated medical corporations
decreased $3.3 million or 13% to $21.9 million from $25.2 million in 1996. This
decrease is attributable to certain risk contracts which were transferred to
HPIs subsidiaries and consolidated into HPI's net revenue.
Costs of affiliated physician services of consolidated and unconsolidated
affiliated medical corporations increased $2.8 million or 37% to $10.7 million
from $7.9 million in 1996. This increase is attributable to three new
affiliations with group practices which contributed $2.3 million.
Clinic salaries, wages and benefits increased $3.2 million or 52% to $9.4
million from $6.2 million in 1996. due to the three new affiliations with group
practices and contributed $3.0 million.
Medical claims of consolidated and unconsolidated affiliated medical
corporations and IPAs increased $24.5 million or 53% to $70.7 million from $46.2
million in 1996. Due to a change in risk sharing percentages of certain
contracts with Oxford, the affiliated group practices and IPAs recorded an
additional $25.0 million in medical claims expense. This increase is offset by
the cancellation of a risk contract with Oxford which had previously contributed
$4.0 million.
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Medical claims of unconsolidated affiliated medical corporations decreased
$5.7 million in 1995 which resulted from the transfer of risk sharing contracts
held by affiliated group practices to HPI Subsidiaries.
General corporate expenses increased in gross dollars as HPI has continued
to expand its management team, corporate office and install and operate its
information systems. General corporate expenses as a percentage of net revenue
has decreased while it has increased in gross dollars. HPI expects to continue
this trend as it grows and affiliates with additional group practices and IPAs.
FISCAL 1996 COMPARED TO FISCAL 1995.
For the year ended December 31, 1996, net revenue of consolidated and
unconsolidated affiliated medical corporations and IPAs increased $52.6 million
or 60% to $139.9 million from $87.3 million in 1995. The increase resulted from
four new affiliations with group practices which contributed revenues of $5.9
million and an affiliation with an additional IPA which contributed revenues of
$.9 million. Affiliations with the group practices occurred in June, July,
October and November 1996 and affiliation with the IPA occurred in June 1996.
Full year results of the operations of an affiliated group practice acquired in
1995 contributed an additional $6.8 million in revenue and an affiliation with
an additional IPA contributed an additional $15.3 million. The remaining
increase in net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs is attributable to increases in enrollment of capitated
membership, an increase in the number of primary care physicians in the managed
care network and an increase in fee-for-service revenue.
Amounts retained by consolidated and unconsolidated affiliated medical
corporations increased $16.8 million or 45% to $53.7 million from $36.9 million
in 1995. The increase resulted from full year results of the operations of an
affiliated group practice acquired in 1995 which contributed an additional $7.7
million. Also, four new affiliations with group practices contributed an
additional $4.7 million. Finally, affiliated group practices portion of
surpluses from risk sharing settlements increased by $1.7 million.
Amounts retained by unconsolidated IPAs increased $6.4 million or 19% to
$40.4 million from $34.0 million in 1995. The increase resulted from growth in
providers and corresponding enrollees for three IPAs which contributed an
additional $10.6 million. Also, two new affiliations with IPAs contributed an
additional $.9 million. These increases are offset by a $6.0 million decrease
which resulted from the transfer of a risk contract held by an IPA to an HPI
Subsidiary.
Management services revenue increased $13.2 million or 84% to $28.8 million
from $15.6 million in 1995. This increase is attributable to an increase in
fee-for-service revenue of affiliated medical groups of $14.6 million offset by
an increase in physician compensation of affiliated medical groups of $4.1
million. The remaining increase is attributable to increases in medical group
and IPA surpluses of $1.7 million.
Cost of affiliated physician services of consolidated and unconsolidated
affiliated medical corporations increased $4.1 million or 33% to $16.4 million
from $12.3 million in 1995. The increase resulted from four new affiliations
with group practices which contribute $2.0 million and full year results of the
affiliated group practice acquired in 1995 contributed an additional $2.1
million in 1996. This increase was offset by a $.4 million decrease attributable
to a reduction in the number of employed physicians at a group practice. The
growth in cost of affiliated physician services of consolidated and
unconsolidated affiliated medical corporations has not increased in proportion
to net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs since HPI has experienced a higher level of revenue growth
in capitation revenue for IPAs.
Clinic salaries, wages and benefits increased to $14.0 million or 22% from
$11.5 million in 1995. The increase is primarily attributable to the four new
affiliations with group practices which contributed $1.5 million.
Medical claims of consolidated and unconsolidated affiliated medical
corporations and IPAs increased $40.8 million or 76% to $94.3 million for 1996
from $53.5 million in 1995. The increase is attributable to the full year
results of an IPA which affiliated with HPI in August 1995 which contributed
$17.0 million. The remaining increase is primarily attributable to an increase
in enrollment of capitated members in New York. Medical claims increased from
61% to 67% of net revenue due to the increase in HPI's IPA business.
Medical claims of unconsolidated IPAs increased $5.4 million or 16% to
$38.5 million from $33.5 million in 1995. This increase is attributable to
growth in new providers and corresponding enrollees for three IPAs
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which contributed an additional $10.6 million. Also, two new affiliations with
IPAs contributed an additional $.9 million. These increases are offset by a $6.0
million decrease which resulted from the transfer of a risk sharing contract
held by an affiliated IPA to an HPI Subsidiary.
Other clinic expenses increased $3.6 million or 36% to $13.4 million from
$9.8 million in 1995. The increase is attributable to the new group practice
affiliations which contributed $1.3 million in 1996. Full year results for the
group practice acquired in 1995 contributed $2.1 million.
For the year ended December 31, 1996, general corporate expenses were $5.0
million, an increase of $1.1 million or 27% from $3.9 million in 1995. HPI
continued to expand its management team and infrastructure to manage its
acquisitions and growth strategy. HPI expects general corporate expenses to
increase in gross dollars but not in proportion to growth in revenue and other
expenses.
FISCAL 1995 COMPARED TO FISCAL 1994.
For the year ended December 31, 1995, net revenue of consolidated and
unconsolidated affiliated medical corporations and IPAs increased $67.1 million
or 334% to $87.3 million from $20.2 million for 1994. The increase resulted from
HPI's affiliation with an additional affiliated group practice in July 1995 and
two additional IPAs in January and August 1995, respectively, which produced
approximately $32.7 million of revenue. The full year results of the operations
of the affiliated physician group practices with which HPI affiliated in 1994
which produced approximately $23.4 million of revenue, and increases in existing
businesses. The increases in revenue of HPI's affiliated group practices and
IPAs resulted from increases in enrollment of capitated membership and an
increase in fee-for-service revenue. The increase in fee-for-service revenue
resulted from affiliation with an additional affiliated group practice and an
increase in the revenue generated by physicians already employed by affiliated
group practices.
Amounts retained by consolidated and unconsolidated affiliated medical
corporations increased $19.2 million or 115% to $36.9 million from $17.7 million
in 1994. This increase is attributable to full year results of the operations of
affiliated medical groups acquired in 1994 which contributed an additional $11.2
million. Also, an increase resulted from a new affiliation with a medical group
which contributed $5.5 million.
Amounts retained by unconsolidated IPAs was $34.0 million for 1995. During
1995, HPI affiliated with two new IPAs which had existing membership in January
and August 1995 and previously affiliated IPAs experienced their first
enrollment during 1995.
Management services revenue increased $7.2 million or 35% to $15.6 million
from $8.5 million in 1994. This increase is attributable to an increase in
fee-for-service revenue of $12.9 million offset by an increase in physician
compensation of $7.8 million. The remaining increase is attributable to group
surplus in risk share settlements which did not occur in 1994.
Cost of affiliated physician services of consolidated and unconsolidated
affiliated medical corporations and IPAs increased to $12.3 million for the year
ended December 31, 1995 from $4.6 million for 1994. This increase is
attributable to affiliation with additional affiliated group practices in 1995,
which cost approximately $2.1 million and the full year results of affiliation
with additional affiliated group practices in 1994, which cost approximately
$5.1 million. Costs of physician services has decreased from 23% to 14% of net
revenues due to the increase in HPI's network business.
Clinic salaries, wages and benefits increased $5.8 million or 100% to $11.5
million for the year ended December 31, 1995 from $5.7 million for 1994. The
increase is attributable to new affiliations with additional group practices and
the full year results for affiliation with additional group practices in 1994.
Clinic salaries, wages and benefits decreased as a percentage of revenue due to
the addition of IPAs, which do not require clinical staffing.
Medical claims of consolidated and unconsolidated affiliated medical
corporations and IPAs increased to $53.5 million from $5.1 million for 1994. The
increase in medical claims is due primarily to HPI's affiliation with additional
IPAs in January and August 1995. The increase is also attributable to growth
after HPI's affiliation with these additional IPAs as physicians were added and
covered lives increased for existing physicians.
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Medical claims of unconsolidated IPAs were $33.1 million for 1995, when HPI
affiliated with two new IPAs which had existing membership in January and August
1995. Also, previously affiliated IPAs experienced their first enrollment during
1995.
General corporate expenses increased in gross dollars as HPI has continued
to expand its management team, corporate office and install and operate its
information systems. HPI expects general corporate expenses to increase in the
future in gross dollars. However, the expense should decline as a percentage of
revenue.
LIQUIDITY AND CAPITAL RESOURCES
HPI requires capital primarily to acquire the assets of group practices,
develop managed care networks around its affiliated group practices, develop
affiliations with new IPAs and expand the managed care contracting network of
its affiliated IPAs. The aggregate purchase price of HPI's previous transactions
have ranged from $75,000 to $5.25 million. To fund this development and growth,
HPI has sold HPI Preferred Stock to Oxford and WellPoint pursuant to the 1994
Securities' Purchase Agreement. As of February, 1997, Oxford and WellPoint had
purchased an aggregate of $50 million of HPI Preferred Stock.
Cash was $11.2 million as of June 30, 1997, compared to $9.3 million as of
December 31, 1996. At June 30, 1997, HPI had a working capital deficit of $.8
million, compared to a deficit of $1.8 million as of December 31, 1996. Cash
provided (or used in) operating activities was $1.2 million, ($.8) million,
($4.9) million, and ($4.5) million for the six months ended June 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively. The operating
deficits are attributable to general corporate expenses required to generate
growth for HPI into additional markets and to fund operating resources required
to increase the operational effectiveness of the managed care networks. HPI has
no planned material capital expenditures or capital commitments.
As a result of HPI's capital requirements to fund its projected
acquisition, growth and development plans and normal capital expenditures for
existing group practices, HPI expects that its existing cash resources and
anticipated cash flow from operations will not be sufficient to meet capital
requirements for the next 12 months. If HPI is unable to consummate the Merger
and is unable to significantly increase its cash flow from operations, HPI will
be required to explore other financing alternatives. These alternatives will
include a potential initial public offering of HPI Common Stock, the issuance of
long-term or short-term indebtedness or the issuance of its securities in a
private transaction. No assurances can be made that such financings will be
available to HPI on satisfactory terms and conditions.
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BUSINESS OF HPI
HPI is a PPM which invests in and manages multi-specialty physician medical
groups and IPAs. While HPI does not engage in the practice of medicine, certain
HPI Subsidiaries, affiliated medical groups or IPAs contract with HMOs and other
Payors on a capitated or global fee basis in selected metropolitan markets to
provide services to assigned enrollees. HPI's strategy is to affiliate with
physicians who are seeking a partner to assist the medical group or network in
transitioning from a fee-for-service oriented health care system to a managed
care system. Each HPI Subsidiary acquires the property, medical and office
equipment of a group practice and simultaneously enters into an exclusive
administrative services agreement with a newly formed professional corporation.
The administrative services agreement requires the applicable HPI Subsidiary to
provide the newly formed professional corporation with management systems and
services, non-physician health care personnel and equipment. The HPI Subsidiary
may also contract with Payors and enter into a provider services agreement with
the newly formed professional corporation. The newly formed professional
corporation contracts with physicians, other professional medical corporations,
and/or contracts with Payors. Certain HPI Subsidiaries provide similar services
to IPAs, except such subsidiaries do not provide non-physician health care
personnel and equipment to the IPAs; however, they do provide certain medical
management services to the IPAs. The HPI Subsidiaries do not purchase the
property, medical and office equipment of the practice, but may purchase certain
contractual relationships with Payors and/or other providers.
In each market, HPI seeks to affiliate with a locally prominent medical
group or IPA and assist the medical group or IPA in building a managed care
infrastructure and developing a high quality, geographically strong network of
physicians. The network is designed to increase the number of available primary
care physicians, which provides an opportunity for HPI to increase the number of
patients served under a capitated or global fee contract. HPI believes this
approach enables physicians to provide high quality, cost-effective health care,
is highly desirable to both Payors and patients and is more likely to assist
physicians in successfully adapting to a managed care environment. HPI has
targeted major metropolitan markets with lower HMO penetration. HPI should
benefit as managed health care grows in these geographic markets by an increase
in new Payor and physician relationships.
The key elements of HPI's strategy are as follows:
Focus on High Quality Physician Group Practices. HPI develops managed
care networks in local communities by affiliating with high quality and
locally prominent physician groups. These physicians are often community
leaders, are sought after by both Payors and patients, and are likely to
better lead and adapt to a managed care system that requires significantly
more efficient delivery of health care resources. In such affiliations, HPI
purchases substantially all of the practices' operating assets and enters
into long-term administrative services agreements, which align the
incentives of HPI and the physicians to provide high quality efficient
care. HPI's affiliation with these physician group practices and IPAs
serves as the hub for the development of managed care networks.
Develop Primary Care-Oriented Networks. HPI develops primary
care-oriented multispecialty physician networks which deliver high quality,
low cost health care to patients and HMOs. Primary care physicians, as the
"gatekeepers" of the managed care system, control patient access to
specialist, hospital and other services. By controlling patient access,
primary care physicians can exert significant control over the quality and
price of specialist and hospital services, which control often exceeds that
of Payors. Furthermore, this control is enhanced through the addition of
primary care physicians, which has the capability of increasing the number
of covered members in the managed care network.
Manage the Delivery of Quality Medical Care. HPI seeks to enhance the
ability of its affiliated physicians to provide efficient, high quality
care to their patients. HPI empowers its affiliated physicians to develop
and lead the implementation of quality and utilization management programs.
By placing physicians in the decision making and oversight roles, HPI
believes it can generate greater physician enthusiasm and patient
satisfaction in the managed care environment and achieve superior quality
and cost of care results.
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Develop Sophisticated Information Systems. Sophisticated information
technology is critical for HPI and its affiliated physicians to manage the
financial and clinical risk of its capitation arrangements. HPI's
information system is a comprehensive system which administers patient
eligibility and benefits, claims payment, physician referrals, case
management and data management. The system enables HPI to administer
physician-designed quality and utilization management programs, pay for
specialist services at rates below HMO fees and analyze financial and
clinical data.
Negotiate Capitated Arrangements with Payors. HPI has negotiated
multiple shared and full risk contracts with Payors for certain HPI
Subsidiaries or for its affiliated group practices or IPAs. The contracting
party is determined based on the provisions of the respective
administrative services agreement with the group practice or IPA and will
vary by contract. These arrangements provide incentives to HPI's affiliated
physicians to deliver high quality, cost effective services to their
patients. HPI believes that the marketplace for such services is
increasing.
Target Local Communities in Major Metropolitan Areas. HPI has targeted
local communities in major metropolitan areas for its development areas.
Large markets offer significant growth opportunities that can leverage
existing management and physician infrastructure. A concentrated community
presence increases both the attractiveness of HPI's managed care networks
and its ability to negotiate favorable rates and contract terms with Payors
and other providers. In addition, many metropolitan markets have a
substantial oversupply of specialist physicians and hospital beds, which
provides HPI the opportunity to obtain significant contractual discounts on
specialist and hospital services.
ADMINISTRATIVE SERVICES AGREEMENTS
Each HPI Subsidiary enters into an administrative services agreement which
provides for the HPI Subsidiary to assume the administrative responsibilities of
the group practice or the IPA. These responsibilities include the provision of
management systems and services, non-physician health care and management
personnel, facilities, medical and office equipment. The agreements typically
provide for (i) initial terms of five years with either two, six or nine renewal
periods of five years each or (ii) ten year terms with a minimum of six renewal
periods of five years each or (iii) perpetual or forty year terms. Renewals
under these arrangements are at the sole discretion of the HPI Subsidiary.
However, two HPI Subsidiaries have entered into administrative services
agreements with initial terms of five years with renewal terms not at the sole
discretion of HPI. One agreement provides for an automatic renewal for an
additional five year term unless either party provides notice twelve months
prior to renewal notifying the other party of termination of the administrative
services agreement. The second agreement provides for an automatic renewal for
successive two year terms unless either party provides notice within 180 days
prior to renewal notifying the other party of termination of the administrative
services agreement.
Pursuant to the administrative services agreement, the professional
corporation has assigned to the HPI Subsidiary the revenue of the professional
corporation and has granted a security interest in the professional
corporation's or IPA's accounts receivable. The assignment of revenue does not
include any revenue which cannot be assigned to the HPI Subsidiary by operation
of law. Pursuant to the administrative services agreement, the HPI Subsidiary
receives a management fee in consideration for its services, which varies by
agreement. The management fee is calculated either (i) as a contracted sharing
of revenue and profits or (ii) the HPI Subsidiary's costs plus a percentage of
revenue or a fixed dollar amount. The management fee is intended to yield the
net profits interests in the affiliated medical group or IPA.
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SECURITY OWNERSHIP OF CERTAIN HPI BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of HPI's securities as of June 30, 1997 by: (i) each of HPI's
directors (other than David B. Snow Jr., Thomas Geiser and Max Brown, who do not
own any securities of HPI) and executive officers, (ii) all directors and named
executive officers of HPI as a group and (iii) each person known to HPI to be a
beneficial owner of 5% or more of any class of HPI's voting securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF HPI COMMON STOCK PERCENT OF
NAME AND ADDRESS OF PERSONS CLASS OF SECURITIES BENEFICIALLY HPI
HOLDING SECURITIES CURRENTLY OWNED OWNED(1) COMMON STOCK
- ----------------------------------------------- ------------------- ------------------- ------------
<S> <C> <C> <C>
Directors and Executive Officers:
Charles G. Berg(2) Common 834,000 8.38%
800 Connecticut Ave.
Norwalk, CT 06854
Charles D. Phillips(3) Common 12,500 *
800 Connecticut Ave.
Norwalk, CT 06854
Paul Conlin(4) Common 25,000 *
800 Connecticut Ave.
Norwalk, CT 06854
Stephen F. Wiggins(5) Common 475,000 4.91%
800 Connecticut Ave.
Norwalk, CT 06854
All Directors and Named Executive Officers Common 1,346,500 13.47%
as a Group (4 persons)(6)
5% Stockholders:
Oxford Health Plans, Inc.(7) Series B Preferred 4,700,043 48.59%
800 Connecticut Ave. Stock
Norwalk, CT 06854
WellPoint Development Company, Inc.(8) Series A Preferred 3,299,982 34.11%
21555 Oxnard Street Stock
Woodland Hills, CA 91367
</TABLE>
- ---------------
(1) Includes shares of HPI Common Stock subject to options which may be
exercised within 60 days of June 30, 1997. Such shares are deemed to be
outstanding for the purposes of computing the percentage ownership of the
individual holding such shares, but are not deemed outstanding for purposes
of computing the percentage of any other person shown in this table.
(2) The number of shares of HPI Common Stock for Mr. Berg includes vested HPI
Options to purchase 44,850 shares of HPI Common Stock and unvested HPI
Options to purchase 239,150 shares of HPI Common Stock which will vest at
the Effective Time pursuant to the termination of the HPI Employment
Agreement.
(3) The number of shares of HPI Common Stock for Mr. Phillips represents vested
HPI Options to purchase 12,500 shares of HPI Common Stock.
(4) The number of shares of HPI Common Stock for Mr. Conlin represents vested
HPI Options to purchase 25,000 shares of HPI Common Stock.
(5) Mr. Wiggins serves as Chairman of Oxford. Mr. Wiggins disclaims beneficial
ownership of the shares of HPI Preferred Stock owned by Oxford.
(6) Includes HPI Options to purchase 321,500 shares of HPI Common Stock.
(7) Oxford owns all 25,000 shares of the HPI Series B Convertible Preferred
Stock, which is convertible into 4,700,043 shares of HPI Common Stock.
Pursuant to a Stockholder Agreement dated July 1, 1997, Oxford agreed to
convert its shares of HPI Series B Convertible Preferred Stock into HPI
Common Stock prior to the Closing of the Merger. Therefore, for purposes of
this table, such shares are being treated as if converted.
96
<PAGE> 101
(8) WellPoint owns all 25,000 shares of the HPI Series A Convertible Preferred
Stock, which is convertible into 3,299,982 shares of HPI Common Stock.
Pursuant to a Shareholder Agreement, dated July 1, 1997, WellPoint agreed to
convert its shares of HPI Series A Convertible Preferred Stock into shares
of HPI Common Stock prior to the Closing of the Merger. Therefore, for
purposes of this table, such shares are being treated as if converted.
* Less than one percent.
EXECUTIVE OFFICERS OF HPI
Charles G. Berg, 40, has served as the President and Chief Executive
Officer of HPI since September 1993 and is a founder of HPI. From 1987 to 1992,
Mr. Berg was a Senior Vice President and Managing Director of WSGP Partners,
L.P., a Los Angeles, California-based investment firm. Mr. Berg specialized in
corporate investments and served as a director of various portfolio companies.
From 1982 to 1987, Mr. Berg was an attorney with Gibson, Dunn & Crutcher LLP in
Los Angeles, California and London, England specializing in corporate
acquisitions and financings.
Charles D. Phillips, 42, has served as Chief Operating Officer of HPI since
May 1996 and has been Chief Operating Officer of Cincinnati Health Partners,
Inc., an HPI Subsidiary, since September 1995. Prior to joining HPI, Mr.
Phillips was employed by Community Mutual Insurance Company of Columbus, Ohio
from 1991 to 1995 as Vice President/General Manager for the national account
strategic business unit and as Vice President/Chief Financial Officer for
Community Mutual's life insurance affiliates. From 1989 to 1990, he served as
Executive Vice President/Chief Financial and Operating Officer for Credit Life
Companies, Inc. where he directed the finance, treasury, claims, information
systems and legal functions at this financial services company. From 1981 to
1989, Mr. Phillips was employed by Ernst & Young LLP. As a Senior Manager, Mr.
Phillips was responsible for various client audit matters and strategic and
financial planning engagements. His specialties included insurance, health care
and SEC reporting. Mr. Phillips is a Certified Public Accountant.
Paul Conlin, 39, has served as Executive Vice President, New York Region of
HPI since May 1996 and has served as Chief Operating Officer of Brooklyn Health
Partners, Inc., an HPI Subsidiary, since March 1995. Mr. Conlin has eleven years
of managed care experience with the Prudential Health Care Plans. From 1992 to
1995, he served as Vice President of Managed Care Operations where he was
responsible for the northeastern regional managed medical, managed dental and
customer service operations. From 1988 to 1992, he was the Executive Director of
Prudential's St. Louis, Missouri managed care operations where he oversaw an
80,000 member plan. From 1987 to 1988, Mr. Conlin was the Regional Director in
Houston, Texas where he oversaw an eight city network expansion for a 250,000
member point-of-service account (Southwestern Bell) and established new networks
in Little Rock, Arkansas and Corpus Christi and El Paso, Texas. From 1985 to
1986, he was responsible for establishing Prudential's managed care operations
in the Dallas/Ft Worth, Texas area. From 1984 to 1985, he served as a Manager in
PruCare's Group Model operations in Memphis, Tennessee responsible for health
center development and claim operations.
97
<PAGE> 102
HPI EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
EXECUTIVE OFFICER COMPENSATION
HPI believes that it employs only three people who will be employed by HPI
or FPA as executive officers after the Merger. The following sets table sets
forth information for the fiscal year ended December 31, 1996 for such persons:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------
NAME AND PRINCIPAL -------------------------------------------------- SECURITIES
POSITION WITH OTHER ANNUAL UNDERLYING
HPI YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS
- ------------------------------ ---- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles G. Berg............... 1996 $250,000 -- -- 125,000(2)
Chief Executive Officer
Charles D. Phillips........... 1996 160,000 $103,750 $52,687 50,000(2)
Chief Operating Officer
Paul Conlin................... 1996 156,000 66,300 -- 50,000(3)
Executive Vice President,
New York Region
</TABLE>
- ---------------
(1) Includes benefits paid by HPI, such as auto allowance, long-term disability
and life insurance premiums and relocation expenses, which amounts exceeded
the lesser of $50,000 or 10% of annual salary and bonus for each of the
named executive officers.
(2) HPI options become exercisable in four equal annual installments commencing
on the first anniversary of the date of grant.
(3) One-fourth of Mr. Conlin's options became exercisable on the date of grant,
and three-fourths will become exercisable in three equal annual installments
commencing on the first anniversary of the date of grant.
The following table presents information with respect to grants of stock
options pursuant to the HPI 1994 Stock Option Plan, during the year ended
December 31, 1996, to the named executive officers reflected in the Summary
Compensation Table:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------------- AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES OPTION TERM(1)
OPTION/SARS IN FISCAL EXERCISE PRICE ---------------------
NAME GRANTED YEAR PER SHARE EXPIRATION DATE 5% 10%
- --------------------- ----------- ------------- -------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Berg...... 125,000(2) 25.20 $ 3.25 1/29/06 $255,488 $647,458
Charles D.
Phillips........... 50,000(2) 10.08 3.25 1/29/06 102,195 258,983
Paul Conlin.......... 50,000(3) 10.08 3.25 1/29/06 102,195 258,983
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual rates of appreciation were set by the
Commission and are not intended to forecast future appreciation, if any, of
the stock underlying such options.
(2) Messrs. Berg and Phillips' options become exercisable in four equal annual
installments commencing on the first anniversary of the date of grant.
(3) One-fourth of Mr. Conlin's options became exercisable on the date of grant,
and three-fourths will become exercisable in three equal annual installments
commencing on the first anniversary of the date of grant.
98
<PAGE> 103
No HPI options were exercised by any of the named executive officers during
the fiscal year ended December 31, 1996.
The following table presents information concerning the HPI option values
as of December 31, 1996 for unexercised HPI options held by each of the named
executive officers:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS/SARS
NUMBER UNDERLYING UNEXERCISED
OF SHARES OPTIONS/SARS AT YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Berg.............. -- -- 44,850 114,150 $89,036 $ 180,430
Charles D. Phillips(2)....... -- -- 12,500 37,500 12,500 37,500
Paul Conlin.................. -- -- 25,000 25,000 25,000 25,000
</TABLE>
- ---------------
(1) Represents the number of unexercised shares multiplied by the difference
between (i) the per share fair market value of HPI Common Stock at December
31, 1996 and (ii) the exercise price per share.
(2) In addition to the options listed in the table, Mr. Phillips has been issued
options to purchase 75,000 shares in an HPI Subsidiary which employed Mr.
Phillips prior to HPI. To date, Mr. Phillips' options to purchase 15,000 of
such shares, representing an estimated $13,500 in value, have vested; Mr.
Phillips' options to purchase 60,000 of such shares, representing an
estimated $59,250 in value, are unvested. Upon consummation of the Merger,
all vested and unvested options in such HPI Subsidiary will be cancelled and
substitute HPI Options to purchase 14,221 shares of HPI Common Stock will be
granted. See "THE MERGER AGREEMENT -- Roll-up Transactions."
DIRECTOR COMPENSATION
Directors of HPI do not receive any compensation for servicing as a
director of HPI, other than reimbursement for travel costs and other
out-of-pocket expenses incurred in attending each director's meeting and
committee meeting.
LEGAL MATTERS
The validity of the FPA Common Stock offered hereby and certain federal
income tax consequences of the Merger will be passed upon for FPA by Pillsbury
Madison & Sutro LLP, San Diego, California. Certain federal income tax
consequences of the Merger and certain legal matters in connection with the
Merger will be passed upon for HPI by Gibson, Dunn & Crutcher LLP, Los Angeles,
California.
ADDITIONAL INFORMATION
The HPI Board is not aware of any additional business to be acted upon at
the HPI Special Meeting other than as described herein. If, however, other
matters are properly brought before the Special Meeting, or any adjournment or
postponement thereof, the persons appointed as proxies will have discretion to
vote or act thereon according to their best judgment and applicable rules of the
Commission.
99
<PAGE> 104
EXPERTS
The consolidated financial statements of FPA incorporated in this Proxy
Statement/Prospectus by reference from FPA's Annual Report on Form 10-K, as
amended by Form 10-K/A, for the year ended December 31, 1996 have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report which
is incorporated herein by reference, and have been incorporated herein by
reference in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated balance sheet as of December 31, 1995 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1995 and the period June 1, 1994 to December 31, 1994 of Sterling,
incorporated herein by reference, have been audited by Coopers & Lybrand LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The Supplemental Consolidated Financial Statements of FPA incorporated in
this Proxy Statement/Prospectus by reference from FPA's Current Report on Form
8-K dated July 31, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference,
and have been incorporated herein by reference in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The Consolidated Financial Statements of AHI as of December 31, 1996 and
the year then ended incorporated in this Proxy Statement/Prospectus by reference
from FPA's Current Report on Form 8-K dated March 17, 1997 , as amended by Form
8-K/A, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report which is incorporated herein by reference, and have been
incorporated herein by reference in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The Consolidated Financial Statements of AHI Healthcare Systems, Inc. as of
December 31, 1995 and for each of the two years in the period ended December 31,
1995, included in the consolidated financial statements of FPA for such periods,
which statements appear in the Current Reports on Form 8-K filed on July 31,
1997 and May 30, 1997, and incorporated herein by reference, have been audited
by Ernst & Young LLP, independent auditors, as stated in their reports therein
and incorporated herein by reference, and have been incorporated herein by
reference in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of HPI and subsidiaries as of
December 31, 1994, 1995 and 1996, and for each of the years in the three-year
period ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The combined financial statements of Foundation Health Medical Services (a
wholly-owned subsidiary of Foundation) and affiliates as of June 30, 1995 and
1996 and for each of the three years in the period ended June 30, 1996,
incorporated in this Proxy Statement/Prospectus by reference from FPA's
Registration Statement on Form S-4 filed on February 13, 1997 have been audited
by Deloitte & Touche LLP (except for the December 31, 1993 financial statements
of Thomas-Davis Medical Centers, P.C.) as stated in their report which is
incorporated herein by reference (such report expresses an unqualified opinion
and includes an explanatory paragraph referring to significant related party
transactions), and have been incorporated herein by reference in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing. The financial statements of Thomas-Davis Medical Centers, P.C. for the
year ended December 31, 1993 (combined with those of Foundation Health Medical
Services (a wholly-owned subsidiary of Foundation) and affiliates) have been
audited by Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C., as stated in their
report incorporated herein by reference.
100
<PAGE> 105
HEALTH PARTNERS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements -- Years Ended December 31, 1996, 1995 and 1994
Independent Auditors' Report....................................................... F-2
Consolidated Statements of Financial Position...................................... F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Cash Flows.............................................. F-5
Consolidated Statements of Changes in Stockholders' Equity......................... F-6
Notes to Consolidated Financial Statements......................................... F-7
Consolidated Financial Statements (Unaudited) -- Quarters Ended June 30, 1997 and
1996
Consolidated Statements of Financial Position (Unaudited).......................... F-20
Consolidated Statements of Operations (Unaudited).................................. F-21
Consolidated Statements of Cash Flows (Unaudited).................................. F-22
Notes to Consolidated Financial Statements (Unaudited)............................. F-23
</TABLE>
F-1
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Health Partners, Inc.:
We have audited the accompanying consolidated statements of financial
position of Health Partners, Inc. and Subsidiaries as of December 31, 1994, 1995
and 1996 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Partners, Inc. and Subsidiaries as of December 31, 1994, 1995 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
White Plains, New York
February 28, 1997
F-2
<PAGE> 107
HEALTH PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 4,672 $ 5,634 $ 9,335
Accounts receivable, net of allowance for bad debts of $365
in 1994, $699 in 1995 and $1,750 in 1996................ 4,000 10,231 13,503
Prepaid expenses and other current assets.................. 419 1,510 1,385
------- -------- --------
Total current assets............................... 9,091 17,375 24,223
Net property, equipment and leasehold improvements........... 3,646 7,354 8,662
Net intangible assets........................................ 8,667 14,017 23,337
Other long-term assets....................................... 432 564 497
------- -------- --------
Total assets....................................... $21,836 $ 39,310 $ 56,719
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................... $ 2,982 $ 6,180 $ 10,498
Accrued medical costs...................................... 1,447 6,308 11,527
Other current liabilities.................................. 443 2,146 2,131
Notes payable, current..................................... -- 2,887 1,877
Current portion of long-term debt.......................... 19 24 27
------- -------- --------
Total current liabilities.......................... 4,891 17,545 26,060
Other long-term liabilities.................................. 255 175 228
Long-term debt............................................... 719 696 670
Notes payable, long-term..................................... 1,750 2,437 3,653
------- -------- --------
Total liabilities.................................. 7,615 20,853 30,611
------- -------- --------
Minority Interests........................................... 1,886 1,293 915
------- -------- --------
Stockholders' Equity:
Preferred stock:
Series A convertible preferred stock.................... 9,000 15,000 22,500
Series B convertible preferred stock.................... 9,000 15,000 25,000
Common stock ($.001 par value, 15,000 shares authorized,
1,550, 1,550 and 1,624 shares issued and outstanding in
1994, 1995
and 1996)............................................... 2 2 2
Accumulated deficit........................................ (5,667) (12,838) (22,309)
------- -------- --------
Total stockholders' equity......................... 12,335 17,164 25,193
------- -------- --------
Total liabilities and stockholders' equity....... $21,836 $ 39,310 $ 56,719
======= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 108
HEALTH PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Net Revenue:
Net revenue of consolidated and unconsolidated affiliated
medical corporations and IPAs........................... $20,172 $87,277 $139,874
Less -- amounts retained by unconsolidated affiliated
medical corporations.................................... (17,675) (36,910) (53,677)
Less -- amounts retained by unconsolidated IPAs............ -- (34,027) (40,456)
Management services revenue................................ 8,468 15,636 28,826
Other revenue.............................................. 36 165 255
------- ------- --------
Net revenue........................................ 11,001 32,141 74,822
------- ------- --------
Operating Expenses:
Cost of affiliated physician services of consolidated and
unconsolidated affiliated medical corporations.......... 4,579 12,327 16,419
Less -- cost of affiliated physician services of
unconsolidated medical corporations..................... (4,579) (12,327) (16,419)
Clinic salaries, wages and benefits........................ 5,743 11,457 13,995
Medical claims of consolidated and unconsolidated
affiliated medical corporations and IPAs................ 5,099 53,481 94,267
Less -- medical claims of unconsolidated affiliated medical
corporations............................................ (4,628) (9,829) (10,389)
Less -- medical claims of unconsolidated IPAs -- (33,145) (38,499)
Network operating expenses................................. 897 2,889 4,676
Other clinic expenses...................................... 4,745 9,797 13,371
General corporate expenses................................. 2,152 3,904 4,974
Depreciation and amortization.............................. 1,865 1,372 2,462
Net interest expense (income).............................. (156) (106) 117
------- ------- --------
Total operating expenses........................... 15,717 39,820 84,974
------- ------- --------
Loss before minority interests and provision for income
taxes................................................... (4,716) (7,679) (10,152)
Minority interests' share in net loss...................... 367 683 866
Provision for income taxes................................. (40) (175) (185)
------- ------- --------
Net loss................................................... $(4,389) $(7,171) $ (9,471)
======= ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 109
HEALTH PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(4,389) $(7,171) $ (9,471)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 1,865 1,372 2,462
Provision for bad debts................................. 418 727 1,052
Minority interests' share in net loss................... (367) (683) (866)
Changes in assets and liabilities:
Increase in accounts receivable......................... (2,146) (5,812) (2,586)
(Increase) decrease in prepaid expenses and other
current assets........................................ (88) (1,016) 268
(Increase) decrease in other long-term assets........... (19) (160) 104
(Decrease) increase in accounts payable and accrued
expenses.............................................. (853) 2,159 3,000
Increase in accrued medical costs....................... 1,140 3,798 5,199
(Decrease) increase in other long-term liabilities...... (37) 1,927 38
------- ------- --------
Net cash used by operating activities.............. (4,476) (4,859) (800)
======= ======= ========
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired............ (6,764) (3,321) (7,700)
Additions to property, equipment and improvements.......... (1,149) (3,972) (2,347)
------- ------- --------
Net cash used by investing activities.............. (7,913) (7,293) (10,047)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock.................. 13,000 12,000 17,500
Proceeds from long-term debt............................... 738 -- --
Proceeds from notes payable................................ -- 1,450 800
Payments on notes payable and long-term debt............... (95) (336) (3,771)
Other...................................................... (125) -- 19
------- ------- --------
Net cash provided by financing activities.......... 13,518 13,114 14,548
------- ------- --------
Net change in cash and cash equivalents............ 1,129 962 3,701
Cash and cash equivalents at beginning of period... 3,543 4,672 5,634
------- ------- --------
Cash and cash equivalents at end of period......... $ 4,672 $ 5,634 $ 9,335
======= ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 110
HEALTH PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
OLD-SERIES A NEW-SERIES A SERIES B
CUMULATIVE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- ----------------- ---------------- -------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------- ------- ------- ------- ------ ------- ----------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993.................. 5,000 $ 5,112 0 $ 0 0 $ 0 4,875,000 $ 5 $ (1,307) $ 3,810
Net loss................ -- -- -- -- -- -- -- -- (4,389) (4,389)
Series A preferred stock
dividend
(8% per annum)........ -- 131 -- -- -- -- -- -- (131) 0
Payment of preferred
stock dividend........ -- (52) -- -- -- -- -- -- -- (52)
Elimination of preferred
stock dividend........ -- (191) -- -- -- -- -- -- 191 0
Purchase of common
stock................. -- -- -- -- -- -- (4,200,000) (4) -- (4)
Stock dividend.......... -- -- -- -- -- -- 675,000 1 (1) 0
Issuance of common
stock................. -- -- -- -- -- -- 200,000 0 -- 0
Exchange of preferred
stock................. (5,000) (5,000) -- -- 5,000 5,000 -- -- -- 0
Issuance of preferred
stock (Series A and
B).................... -- -- 9,000 9,000 4,000 4,000 -- -- -- 13,000
Costs related to
issuance of preferred
stock................. -- -- -- -- -- -- -- -- (30) (30)
----- ------ ------ ------- ------ ------- --------- --- -------- -------
BALANCE, DECEMBER 31,
1994.................. 0 0 9,000 9,000 9,000 9,000 1,550,000 2 (5,667) 12,335
Net loss................ -- -- -- -- -- -- -- -- (7,171) (7,171)
Issuance of preferred
stock (Series A and
B).................... -- -- 6,000 6,000 6,000 6,000 -- -- -- 12,000
----- ------ ------ ------- ------ ------- --------- --- -------- -------
BALANCE, DECEMBER 31,
1995.................. 0 0 15,000 15,000 15,000 15,000 1,550,000 2 (12,838) 17,164
Net loss................ -- -- -- -- -- -- -- -- (9,471) (9,471)
Issuance of common stock
pursuant to stock
options............... -- -- -- -- -- -- 73,500 0 -- 0
Issuance of preferred
stock (Series A and
B).................... -- -- 7,500 7,500 10,000 10,000 -- -- -- 17,500
----- ------ ------ ------- ------ ------- --------- --- -------- -------
BALANCE, DECEMBER 31,
1996.................. 0 $ 0 22,500 $22,500 25,000 $25,000 1,623,500 $ 2 $ (22,309) $25,193
===== ====== ====== ======= ====== ======= ========= === ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 111
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(1) ORGANIZATION AND OPERATION
Health Partners, Inc. ("HPI" or the "Company") was incorporated and
commenced operations on September 15, 1993. HPI, through its majority owned
subsidiaries, provides management systems and services, non-physician health
care personnel and equipment to affiliated medical corporations, independent
practice associations ("IPAs") and managed care contracting networks. HPI
operates primarily in the managed health care business and supports health care
networks of multi-specialty physicians, through which managed health care is
provided under contracts with prepaid health plans. Affiliated medical
corporations, IPAs and managed care contracting networks employ physicians,
contract with physicians and professional medical corporations, and/or contract
with health maintenance organizations ("HMOs"). Pursuant to the administrative
services agreements between the Company's subsidiaries and the affiliated
medical corporations and IPAs, the resulting management services revenue is
equivalent to a net profits interest in the preponderance of medical services
provided by the affiliated medical corporations and IPAs. The accompanying
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries in which the Company has more than a 50% ownership
interest and exercises direct unilateral and perpetual control. For those
affiliated medical corporations and IPAs where the Company does not exercise
control but has a net profits interest, the Company includes the net revenue of
such entities in net revenue of consolidated and unconsolidated affiliated
medical corporations and IPAs in the accompanying statements of operations.
Amounts retained by the managed affiliated medical corporations and IPAs are
deducted from net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs in the accompanying consolidated statements of operations.
Amounts retained by the managed affiliated medical corporations and/or IPAs are
also deducted from cost of affiliated physician services of consolidated and
unconsolidated affiliated medical corporations and from medical claims of
consolidated and unconsolidated affiliated medical corporations and IPAs in the
accompanying consolidated statements of operations. Management of the Company
believes that this data provides readers of the financial statements with
additional useful information about its operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries in which the Company has more
than a 50% ownership interest and exercises direct unilateral and perpetual
control. Significant intercompany accounts and transactions have been eliminated
in consolidation.
Minority Interests
Minority interests represent the minority stockholders' proportionate share
of the equity of subsidiaries. Brooklyn Health Partners, Inc. ("BHPI"), Gotham
Practice Management, Inc. ("GPMI"), Network Management Strategies Corporation
("NMS"), San Antonio Health Partners, Inc. ("SAHPI") and Comprehensive Primary
Care MSO, Inc. ("CPC") have incurred net losses which exceed the minority
interests' share of equity. To the extent the net losses exceed the equity of
the minority interests, the Company recognizes all losses in the consolidated
statements of operations. As these subsidiaries generate net income, the Company
will recognize all net income until such losses have been fully offset. At
December 31, 1994, 1995 and 1996, cumulative net losses of minority interests
recognized by the Company were approximately $491,000, $1,033,000, and
$1,551,000, respectively.
F-7
<PAGE> 112
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
Net Revenue and Cost Recognition
Net revenue in the consolidated statement of operations consists of the
total net revenue of the Company's consolidated and unconsolidated affiliated
medical corporations and IPAs and management services revenue after deducting
amounts retained by the managed affiliated medical corporations and IPAs. Net
revenue of consolidated and unconsolidated affiliated medical corporations
practices and IPAs consists of capitation revenue (including shared-risk
revenue) and fee-for-service revenue. Fee-for-service revenue is recorded by the
affiliated medical corporations at established rates reduced by provisions for
contractual allowances and doubtful accounts. Management services revenue is
equal to the difference between the amount of net revenue (including
fee-for-service, capitation and shared-risk revenue) and amounts retained by the
managed IPAs and affiliated medical corporations for risk pool payments,
compensation and other expenses. Management services revenue is based on several
different types of arrangements including percentages of net revenue, flat fees
and reimbursement of clinic expenses. The Company recognizes capitation revenue
from HMOs contracting with affiliated medical corporations and independent
practice associations for the delivery of health care services. Amounts due to
affiliated medical corporations, independent practice associations and other
health care providers for the provision of health care services in connection
with HMO contracts are accrued as incurred. The HMO contracts contain
shared-risk provisions whereby additional incentive revenue can be earned or
penalties can be incurred based upon the utilization of inpatient services by
assigned HMO enrollees. The Company records estimated shared-risk amounts
receivable from (or payable to) HMOs based upon inpatient utilization and
associated costs incurred by assigned HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable (or payable) relating to HMO shared-risk arrangements are recorded in
the year of final settlement. Management believes that accrued medical costs,
which represent the amounts payable for services incurred by patients but not
yet paid at December 31, 1994, 1995 and 1996, is adequate to cover claims that
will ultimately be paid.
Contractual Adjustments
Contractual adjustments arise due to the terms of certain reimbursement
arrangements and managed care contracts. These adjustments represent the
difference between charges at established rates and estimated reimbursable
amounts and are recognized in the period the services are rendered. Any
differences between the estimated reimbursable amounts and actual payments under
reimbursement arrangements are reported in the year the payments are received.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straightline method over the estimated useful
lives of the assets. The principal estimated useful lives are 5 years for
medical, computer and office equipment and 30 years for buildings. Leasehold
improvements are amortized over the estimated useful lives of the improvements
or the terms of the leases, whichever is shorter. The principal estimated useful
life is 10 years.
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and any resultant gains or losses are included in the
consolidated statements of operations.
Intangible Assets
Intangible assets resulting from business acquisitions principally consist
of the excess of the acquisition cost over the fair value of the net assets
acquired ("goodwill"). Goodwill is amortized on a straight-line basis over 20 to
30 years based upon its estimated useful life.
F-8
<PAGE> 113
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
Other intangible assets are amortized on a straight-line basis over their
estimated useful lives.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121").
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. If events and circumstances occur which indicate
impairment, SFAS No. 121 requires that impairment losses be recognized based on
the difference between the fair value and carrying value of the assets.
Long-lived assets to be disposed of should be reported at the lower of carrying
amount or fair value less cost to sell. SFAS No. 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. The
Company has complied with the provisions of SFAS No. 121. The adoption of SFAS
No. 121 did not have a material effect on the accompanying consolidated
financial statements.
Income Taxes
The Company follows Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires accounting for income taxes on an asset and
liability method. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and respective tax bases. Under this method, deferred tax
liabilities and assets are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Certain entities file tax returns on a stand
alone basis.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS Statement
No. 123, "Accounting for StockBased Compensation" ("SFAS No. 123") which is
effective for financial statements for fiscal years beginning after December 15,
1995. As permitted under SFAS No. 123, the Company has elected not to adopt the
fair value based method of accounting for its stock-based compensation plans,
but has complied with the disclosure requirements of SFAS No. 123 (note 10) and
will continue to account for such compensation under the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees".
Cash and Cash Equivalents
HPI considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. A substantial portion of HPI's cash
and cash equivalents is deposited in three banks. HPI monitors each bank's
financial status and does not believe the deposits are subject to a significant
degree of risk.
Disclosures about the Fair Value of Financial Instruments
The Company values its financial instruments as required by SFAS Statement
No. 107, "Disclosures about Fair Values of Financial Instruments." The carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable,
short-term debt and long-term variable-rate debt approximate fair value.
F-9
<PAGE> 114
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
(3) ACQUISITIONS
During 1994, 1995 and 1996 the Company acquired the medical organizations
described below and accounted for the transactions in accordance with the
purchase method of accounting. The results of operations of the acquired
companies are included in the Company's consolidated statements of operations
for the periods in which they were owned by the Company. The acquisitions are
generally financed through various combinations of cash payments, notes payable
and the assumption of certain liabilities. Simultaneous with its acquisitions,
the Company's majority owned subsidiaries enter into an administrative services
agreement ("ASA") with affiliated medical corporations and/or IPAs. After an
initial term, the ASAs relative to the medical organizations have automatic
long-term renewal options, except for SAHPI which has a forty year ASA and
Gateway Physician Services, L.P. ("GPS") which has an indefinite term, and can
only be terminated if the subsidiaries breach the ASA or at the option of the
subsidiary.
In August 1994, the Company acquired a majority interest in VMA, Inc. for
an aggregate purchase price of approximately $5,250,000. The stock of VMA, Inc.
was transferred by the Company to Gateway Physician Services, L.P. for an equal
ownership interest in GPS. The minority shareholders also exchanged their
ownership interests in VMA, Inc. for an equivalent ownership interest in GPS.
Simultaneous with the transaction, GPS entered into non-compete agreements with
certain physicians.
In October 1994, GPMI acquired the property, medical equipment and office
equipment of Gotham Practice Management Services, Inc. for approximately
$700,000.
In January 1995, Network Management Strategies Corporation ("NMS") was
organized to provide management services to independent practice associations.
In August 1995, NMS acquired the stock of Health One Associates, Inc. and
certain of the assets of Palm Lake Administrators, Inc. for an aggregate
purchase price of $2,000,000.
In July 1995, Cincinnati Health Partners, Inc. ("CHPI") acquired the
property, medical and office equipment of Timmerman & Saelinger, P.S.C. and
Family Physicians of Northern Kentucky, P.S.C. and entered into non-compete
agreements for an aggregate purchase price of approximately $3,700,000.
In June 1996, Paramount Medical Management, Inc. ("PMM") acquired the
property, medical and office equipment of Vento Medical Services, P.C. and
entered into non-compete agreements for an aggregate purchase price of
approximately $1,900,000.
In June 1996, San Antonio Health Partners, Inc. was organized to provide
management services to independent practice associations.
In July 1996, Hudson Valley Health Partners, Inc. ("HVHPI") acquired the
property, medical and office equipment of Clarkstown Pediatrics Associates, P.C.
and entered into non-compete agreements for an aggregate purchase price of
$2,475,000.
F-10
<PAGE> 115
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
In October 1996, CHPI acquired the property, medical and office equipment
of Primary Care Associates of Northern Kentucky, P.S.C. and entered into
non-compete agreements for an aggregate purchase price of $3,275,000.
In November 1996, CPC acquired the property, medical and office equipment
of Gerald Family Practice, P.C. and entered into non-compete agreements for an
aggregate purchase price of $2,050,000.
The following financial information sets forth the unaudited pro forma
consolidated results of operations for the years ended December 31, 1995 and
1996 as if the acquisitions had occurred effective January 1, 1995:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net revenue of consolidated and unconsolidated
affiliated medical corporations and IPAs...... $122,316,000 $152,803,000
Net loss........................................ $ (5,975,000) $ (8,902,000)
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the purchases been made on
January 1, 1995 or future results of operations of the consolidated companies.
Intangible assets resulting from business combinations at December 31,
1994, 1995 and 1996 consist of goodwill of $9,493,000, $13,493,000 and
$18,615,000, respectively, and non-compete agreements of $1,090,000, $2,859,000
and $7,713,000, respectively. Accumulated amortization of intangible assets at
December 31, 1994, 1995 and 1996 was approximately $1,916,000, $2,335,000 and
$2,991,000, respectively.
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements at December 31, 1994, 1995
and 1996 consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Building.............................................. $ 842,000 $ 842,000 $ 842,000
Medical, computer and office equipment................ 1,862,000 4,994,000 6,928,000
Leasehold improvements................................ 1,078,000 2,631,000 3,745,000
Construction in progress.............................. 176,000 73,000 --
---------- ----------- -----------
3,958,000 8,540,000 11,515,000
Less accumulated depreciation and amortization........ (312,000) (1,186,000) (2,853,000)
---------- ----------- -----------
$3,646,000 $ 7,354,000 $ 8,662,000
========== =========== ===========
</TABLE>
Depreciation and leasehold improvement amortization expense for the years
ended December 31, 1994, 1995 and 1996 was $292,000, $1,006,000 and $1,785,000.
F-11
<PAGE> 116
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(5) LEASES
The Company has operating leases covering facilities and equipment for
which rental expense for the years ended December 31, 1994, 1995 and 1996 was
$1,668,000, $2,750,000 and $4,474,000, respectively. Minimum rental commitments
under noncancelable capital and operating leases are as follows:
<TABLE>
<S> <C>
1997............................................ $ 4,190,000
1998............................................ $ 3,378,000
1999............................................ $ 2,669,000
2000............................................ $ 2,234,000
2001............................................ $ 1,765,000
Thereafter...................................... $ 5,339,000
</TABLE>
(6) CREDIT FACILITIES
In October 1994, GPS executed a credit agreement with a bank that provided
a line of credit (the "line") of $800,000 and an equipment loan with maximum
permitted borrowing of $600,000 ("equipment loan"). The agreement required GPS
to meet both financial and non-financial covenants and contained covenants
restricting the payment of dividends, incurrence of debt and sale of assets. As
of December 31, 1994, GPS had no borrowings under this agreement.
In September 1995, GPS converted outstanding borrowings under its equipment
loan into a term note. The principal balance of approximately $315,000 bears
interest at 8.9% and is payable over five years.
In October 1995, GPS amended its credit agreement with a bank to provide a
$1,500,000 line of credit and increase the equipment loan to $500,000. GPS's
requirement to meet both financial and non-financial covenants remained
unchanged.
In May 1996, GPS amended its credit agreement with a bank regarding its
existing line of credit and equipment loan. The line, which provided for
borrowing based upon 80% of eligible accounts receivable, as defined, was
terminated in August 1996. The principal balance was repaid in two installments
in July and August 1996. The equipment loan, which was based on 90% of the
purchased equipment's value and bore interest at the bank's prime rate plus a
spread based on GPS's financial ratios, was terminated in May 1996. Effective
with this amendment, GPS maintained its existing deed of trust note, term note
and the covenants contained in GPS's prior agreement with the bank.
As of December 31, 1996, GPS was in default on both financial and
non-financial covenants. GPS is in discussions with the bank regarding curing
the default.
Borrowings under the line are collateralized by the accounts receivable,
and borrowings under the equipment loan are collateralized by the underlying
equipment. Also, the bank maintains an additional security interest in all
current and future assets of GPS and is superior to all current and future
indebtedness of GPS.
F-12
<PAGE> 117
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
The following schedule summarizes the activity with respect to the credit
agreements and term note:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Line of Credit:
Borrowings.................................. $ 0 $ 1,450,000 $ 0
Interest rate............................... N/A 10.5% 10.5%
Term Note:
Borrowings.................................. $ 0 $ 300,000 $ 246,000
Interest rate............................... N/A 8.9% 8.9%
</TABLE>
In December 1996, HVHPI entered into a $250,000 line of credit agreement
with a bank. The line of credit bears interest at the bank's prime rate plus
1/2 percentage point, is collateralized by HVHPI's accounts receivable and
expires on December 10, 1997. At December 31, 1996, there were no borrowings
under this agreement.
See Note 7, Long-Term Debt and Notes Payable, for information regarding the
deed of trust note.
(7) LONG-TERM DEBT AND NOTES PAYABLE
In December 1994, GPS executed a $738,000 deed of trust note ("the note")
collateralized by GPS's building. Payment of the note is based on a 15 year
payment schedule with a five year balloon payment and bears a fixed rate of
interest at 10.35%. GPS is subject to the same financial, non-financial and
restrictive covenants as in its credit facilities (See Note 6 -- Credit
Facilities). The balance of the note was $738,000, $720,000 and $697,000 as of
December 31, 1994, 1995 and 1996, respectively.
In conjunction with the acquisition of VMA, Inc., the Company agreed to a
deferred purchase price of $1,750,000 payable over 3 years beginning in 1996. In
1996 the deferred purchase price was renegotiated to $1,450,000.
Obligations under capital leases at December 31, 1996 totaled $315,000 of
which $87,000 was current.
F-13
<PAGE> 118
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
The following is a summary of notes payable and long-term debt at December
31, 1996:
<TABLE>
<CAPTION>
ORIGINAL INTEREST
DESCRIPTION PRINCIPAL RATE BALANCE EXPIRATION
- ----------------------------------------------- ---------- -------- ---------- --------------
<S> <C> <C> <C> <C>
Deferred Purchase Price (GPS).................. $1,750,000 (5) $ 942,000 August 1998(1)
Term Note (GPS)................................ $ 315,000 8.90% 246,000 September 2000(2)
Notes Payable (CHPI)........................... $1,303,000 8.25% 788,000 June 2000(2)
Notes Payable (CHPI)........................... $ 764,000 (5) 382,000 August 1997(1)
Notes Payable (CHPI)........................... $ 579,000 7.00% 579,000 November 2000(2)
Term Note (CHPI) (7)........................... $ 800,000 7.25% 781,000 November 2003(2)
Note Payable (PMM)............................. $ 588,000 8.00% 524,000 June 2000(3)
Note Payable (PMM)............................. $ 85,000 8.00% 85,000 October 2000(3)
Note Payable (CPC)............................. $ 400,000 7.00% 400,000 November 2000(3)
Notes Payable (HVHPI).......................... $ 536,000 8.00% 496,000 July 1999(3)
Note Payable (HVHPI)........................... $ 150,000 (5) 148,000 December 2001(2)
Term Note (HVHPI) (7).......................... $ 100,000 (4) 100,000 July 1999(2)
Other Notes Payable............................ $ 65,500 (6) 59,000 various
----------
Total Notes Payable............................ 5,530,000
Long-Term Debt (GPS)........................... 697,000
----------
Total Notes Payable and LongTerm Debt.......... $6,227,000
==========
</TABLE>
- ---------------
(1) Annual payments each August
(2) Payable monthly
(3) Payable quarterly
(4) Interest at the bank's prime rate plus 1/2 percentage point
(5) Note is non-interest bearing
(6) Interest at 8% and the prime rate
(7) Secured by accounts receivable and equipment
Aggregate maturities of long-term debt and notes payable are as follows:
<TABLE>
<S> <C>
1997............................................. $1,904,000
1998............................................. $1,568,000
1999............................................. $1,082,000
2000............................................. $1,345,000
2001............................................. $ 138,000
Thereafter....................................... $ 190,000
</TABLE>
F-14
<PAGE> 119
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(8) INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Current provision:
Federal................................... $ -- $ -- $ --
State..................................... 40,000 175,000 185,000
------- -------- -------
Total Current..................... 40,000 175,000 185,000
------- -------- -------
Deferred provision:
Federal................................... -- -- --
State..................................... -- -- --
------- -------- -------
Total Deferred.................... -- -- --
------- -------- -------
Provision for income taxes.................. $40,000 $175,000 $185,000
======= ======== =======
</TABLE>
The Company has established a valuation allowance for the net deferred tax
assets that arose during 1994, 1995 and 1996. Therefore, no tax benefit has been
reflected in the consolidated statements of operations.
The components of deferred tax assets and liabilities as of December 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards................. $ 2,406,000 $ 5,155,000 $ 7,665,000
Management fee payable............................ 4,259,000 10,085,000 11,865,000
Accounts payable.................................. 1,597,000 9,465,000 3,446,000
Other............................................. 49,000 285,000 4,810,000
---------- ----------- -----------
Total deferred tax assets............... 8,311,000 24,990,000 27,786,000
---------- ----------- -----------
Deferred tax liabilities:
Accounts receivable............................... 2,200,000 9,873,000 3,789,000
Management fee receivable......................... -- 1,913,000 1,627,000
Property, equipment and leasehold improvements.... 127,000 270,000 250,000
Intangible Assets................................. -- -- 3,038,000
Prepaid expenses.................................. 20,000 72,000 33,000
Other............................................. 4,000 194,000 1,506,000
---------- ----------- -----------
Total deferred tax liabilities.................... 2,351,000 12,322,000 10,243,000
Less valuation allowance.......................... (5,960,000) (12,668,000) (17,543,000)
---------- ----------- -----------
Net deferred tax asset liability.................. $ -- $ -- $ --
========== =========== ===========
</TABLE>
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1996 will be applied to reduce future
tax provisions, except for certain tax benefits resulting from acquisitions
which may be allocated to goodwill depending on the timing and the nature of
their use.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $17,450,000 which will begin to expire in 2008.
F-15
<PAGE> 120
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(9) STOCKHOLDERS' EQUITY
In May 1994, the Company underwent a capital restructuring whereby the
Articles of Incorporation were amended to redefine the Company's Series A
preferred stock and establish a Series B preferred stock. The capital
restructuring eliminated the redemption feature of the Old-Series A preferred
stock and added a conversion feature, at the holder's option or under certain
circumstances as defined below, to the Company's common stock based upon a
predetermined conversion price.
The preferred stock is subject to a mandatory conversion if the Company
consummates a public offering of its common stock in excess of stated levels.
Also, the preferred stock has a liquidation preference equal to the original
issuance price, accrued dividends and declared but unpaid dividends. The Series
B preferred stock maintains the same provisions as the New-Series A preferred
stock except for the conversion price.
In May 1994, Oxford Health Plans, Inc. ("Oxford"), a minority shareholder,
purchased all outstanding Old-Series A preferred stock for stated value. Oxford
then exchanged the Old-Series A preferred stock for Series B preferred stock and
payment of cumulative unpaid dividends, which approximated $52,000, on Oxford's
Old-Series A preferred stock.
In conjunction with the restructuring, the Company purchased 4,200,000
shares of its common stock for $4,200 and declared and paid a stock dividend,
which amounted to 675,000 shares. Subsequent to the dividend, the Company issued
an additional 200,000 shares of common stock for $200.
The following is a summary of the shares of the Series A preferred stock
and the Series B preferred stock that the Company has sold to Foxfield Ventures,
Inc. and Oxford, respectively:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------- AGGREGATE
DATE SOLD SERIES A SERIES B PURCHASE PRICE
------------------------------------ -------- -------- --------------
<S> <C> <C> <C>
May 1994............................ 5,000 5,000 $ 10,000,000
August 1994......................... 4,000 4,000 8,000,000
May 1995............................ 6,000 6,000 12,000,000
May 1996............................ 2,500 2,500 5,000,000
July 1996........................... 5,000 5,000 10,000,000
November 1996....................... -- 2,500 2,500,000
------ ------ -----------
Total..................... 22,500 25,000 $ 47,500,000
====== ====== ===========
</TABLE>
In February 1997, the Company sold 2,500 shares of the Series A preferred
stock to Foxfield for $2,500,000.
Stockholders' equity consists of the following at December 31, 1994, 1995
and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Series A convertible preferred stock, $1,000 stated
value, 25,000 shares authorized, 9,000, 15,000 and
22,500 shares issued and outstanding in 1994, 1995
and 1996........................................... $9,000,000 $15,000,000 $22,500,000
Series B convertible preferred stock, $1,000 stated
value, 25,000 shares authorized, 9,000, 15,000 and
25,000 shares issued and outstanding in 1994, 1995
and 1996........................................... $9,000,000 $15,000,000 $25,000,000
Common Stock, $.001 par value, 15,000,000 shares
authorized in 1994, 1995 and 1996, 1,550,000 shares
issued and outstanding in 1994 and 1995, 1,624,000
shares issued and outstanding in 1996.............. $ 1,550 $ 1,550 $ 1,624
</TABLE>
F-16
<PAGE> 121
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
Both the Series A and Series B preferred stock bear a cumulative dividend
of $80 per annum per share. As of December 31, 1994, 1995 and 1996, the Company
had cumulative unpaid dividends on the Series A and Series B preferred stock of
approximately $760,000, $2,829,000 and $6,006,000, respectively. If a
stockholder exercises the preferred stock's conversion feature, the cumulative
dividend is not required to be paid in accordance with the Company's Articles of
Incorporation.
In connection with the capital restructuring, HPI entered into a securities
purchase agreement with certain corporate and management investors. This
agreement provides for additional sales of HPI's Series A and Series B
convertible preferred stock and superseded the existing securities purchase
agreement.
(10) STOCK OPTION PLAN
In 1994, the Company adopted a fixed stock option plan ("1994 Option Plan")
for key employees and consultants to acquire 450,000 shares of common stock of
the Company. In 1995, the Company allocated 1,000,000 additional shares of
common stock to the 1994 Option Plan. Options vest over four to five years,
become exercisable as specified in the individual stock option agreements and
expire ten years after the date of grant. The following schedule summarizes the
activity within the stock option plan:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Options outstanding, January 1..................... 0 381,000 491,000
Options granted.................................... 381,000 110,000 496,000
Options exercised.................................. 0 0 (73,500)
Options forfeited.................................. 0 0 (99,000)
Options expired.................................... 0 0 0
-------- -------- --------
Options outstanding, December 31................... 381,000 491,000 814,500
======== ======== ========
Options exercisable, December 31................... 23,700 100,900 146,100
Compensation expense recorded...................... $ 0 $ 0 $ 0
</TABLE>
Weighted average option exercise price information for the years ended
December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
(1) Outstanding, January 1................ N/A $.001 $.314
(2) Granted during the year............... $.001 $1.40 $3.39
(3) Grant date fair value................. $ 001 $1.40 $3.39
(4) Outstanding, December 31.............. $.001 $.314 $2.21
(5) Exercisable, December 31.............. $.001 $.001 $ .44
(6) Options forfeited during the year..... N/A N/A $.165
(7) Options exercised during the year..... N/A N/A $.001
</TABLE>
At December 31, 1996, the exercise price of options outstanding ranged from
$.001 to $5.32 per share and the weighted-average remaining contractual life of
the options outstanding was approximately 8.5 years.
The fair value of each stock option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted average
assumptions used for grants in 1996: risk-free interest rate of 7.0%; expected
dividend yield of 0%; expected life of 5 years; and expected volatility of 0%.
The following financial information sets forth the unaudited proforma
consolidated results of operations for the years ended December 31, 1994, 1995
and 1996 as if the Company had determined compensation cost based on fair value
in accordance with SFAS 123:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Proforma net loss....................... $(4,389,000) $(7,176,000) $(9,550,000)
</TABLE>
F-17
<PAGE> 122
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(11) 401(k) PLAN
Effective September 1, 1994, the Company adopted the Health Partners, Inc.
401(k) Savings Plan ("Plan"). The Plan is a Code Section 401(k) plan that
requires one-half year of service to become a participant in the Plan. Service
for a predecessor employer will be considered for participation requirements in
the Plan for all employees employed by the Company through its acquisition
activities. Eligible employees may contribute up to 17% of their compensation.
The Company matches employee contributions at 50% up to the first 4% of
compensation. Employees vest in matching contributions according to a graduated
5-year schedule. Company contributions to the plan were approximately $24,000,
$182,000 and $301,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
(12) CONCENTRATION OF CREDIT RISK
As of December 31, 1994, 1995 and 1996, various affiliated medical groups
had net receivables from Oxford of approximately $1,687,000, $3,542,000 and
$2,106,000, respectively, as a result of their capitated contracts (see Note 2 -
Revenue and Cost Recognition). Also, Oxford accounted for 62%, 69% and 70% of
HPI's net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs for the years ended December 31, 1994, 1995 and 1996,
respectively.
(13) RELATED PARTY TRANSACTIONS
The laws of various states prevent corporations, such as HPI and its
subsidiaries, from providing medical care to patients. Various agreements for
the provision of medical services have been made with affiliated medical groups
primarily owned by the presidents of HPI's subsidiaries. The agreements for the
provision of medical services, including services required under certain HMO
contracts, are held by the affiliated medical groups. HPI is dependent upon the
performance of medical services by the affiliated medical groups, insofar as
medical care delivery is concerned.
The presidents and other physicians of certain HPI subsidiaries have
entered into lease arrangements whereby medical space and/or medical equipment
is leased to certain HPI subsidiaries at fair market value and terms ranging
from one to fifteen years. The following schedule summarizes the rental expense
under these arrangements:
<TABLE>
<CAPTION>
HPI SUBSIDIARY 1994 1995 1996
------------------------------------------ ------- -------- --------
<S> <C> <C> <C>
GPS (a)................................... $45,000 $142,000 $238,000
CHPI (b).................................. -- $333,000 $821,000
PMM (c)................................... -- -- $133,000
HVHPI (d)................................. -- -- $ 83,000
------- -------- --------
</TABLE>
- ---------------
(a) Lease payments began on August 1, 1994.
(b) Lease payments began on July 11, 1995.
(c) Lease payments began on June 10, 1996.
(d) Lease payments began on July 10, 1996
The Company leases office space and utilizes certain services from Oxford.
All such arrangements are at fair market value.
F-18
<PAGE> 123
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(14) COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into Employment Agreements with certain of its
management employees, which include, among other terms, noncompete provisions
and provision for salary and benefit continuation.
Insurance
The Company, its subsidiaries and affiliated medical organizations are
insured with respect to medical malpractice and other professional liability
risks on either an occurrence or claims-made basis. Claims-made policies cover
claims reported to the insurance carrier prior to the end of the policy period.
The Company and its affiliated medical organizations intend to renew the
existing or similar claims-made policies annually and expect to be able to
reasonably obtain such coverage. Management is not aware of any claims against
it or the affiliated medical organizations that might have a material impact on
the Company's financial position.
(15) SUPPLEMENTAL CASH FLOW INFORMATION
Cash disbursements for the years ending December 31, 1994, 1995 and 1996
included interest of $120,000, $225,000 and $399,000, respectively, and income
taxes of $40,000, $151,000 and $66,000, respectively. For the years ending
December 31, 1994, 1995 and 1996, non-cash investing activities included the
deferred purchase prices relating to the acquisitions of VMA, Inc., CHPI, PMM,
HVHPI and CPC and the purchase of computer and office equipment through capital
leases totaling $201,000 in 1994, $38,000 in 1995 and $120,000 in 1996.
F-19
<PAGE> 124
HEALTH PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 4,674 $ 11,165
Accounts receivable, net of allowance for bad debts of $1,542 in
1996 and $2,681 in 1997......................................... 11,143 17,388
Prepaid expenses and other current assets.......................... 1,410 1,497
------- -------
Total current assets....................................... 17,227 30,050
Net property, equipment and leasehold improvements................... 8,170 8,384
Net intangible assets................................................ 15,444 23,380
Other long-term assets............................................... 557 641
------- -------
Total assets............................................... $ 41,398 $ 62,455
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 6,501 $ 11,506
Accrued medical costs.............................................. 9,465 14,791
Other current liabilities.......................................... 1,710 2,389
Notes payable, current............................................. 2,754 2,123
Current portion of long-term debt.................................. 25 28
------- -------
Total current liabilities.................................. 20,455 30,837
Other long-term liabilities.......................................... 214 194
Long-term debt....................................................... 683 657
Notes payable, long-term............................................. 2,873 3,187
------- -------
Total liabilities.......................................... 24,225 34,875
------- -------
Minority Interests................................................... 941 746
------- -------
Stockholders' Equity:
Preferred stock:
Series A convertible preferred stock............................ 17,500 25,000
Series B convertible preferred stock............................ 17,500 25,000
Common stock ($.001 par value, 15,000 shares authorized, 1,550
and
1,674 issued and outstanding in 1996 and 1997)................ 2 2
Accumulated deficit................................................ (18,770) (23,168)
------- -------
Total stockholders' equity................................. 16,232 26,834
------- -------
Total liabilities and stockholders' equity................. $ 41,398 $ 62,455
======= =======
</TABLE>
See accompanying note to the unaudited financial statements.
F-20
<PAGE> 125
HEALTH PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Net Revenue:
Net revenue of consolidated and unconsolidated affiliated medical
corporations and IPAs............................................. $ 65,635 $104,389
Less -- amounts retained by unconsolidated affiliated medical
corporations...................................................... (25,200) (21,906)
Less -- amounts retained by unconsolidated IPAs...................... (20,310) (21,680)
Management services revenue.......................................... 12,524 12,349
Other revenue........................................................ 101 247
-------- --------
Net revenue.................................................. 32,750 73,399
-------- --------
Operating Expenses:
Cost of affiliated physician services of consolidated and
unconsolidated affiliated medical corporations.................... 7,876 10,747
Less -- cost of affiliated physician services of unconsolidated
medical corporations.............................................. (7,876) (10,747)
Clinic salaries, wages and benefits.................................. 6,229 9,362
Medical claims of consolidated and unconsolidated affiliated medical
corporations and IPAs............................................. 46,243 70,746
Less -- medical claims of unconsolidated affiliated medical
corporations...................................................... (5,709) 0
Less -- medical claims of unconsolidated IPAs........................ (19,401) (20,490)
Network operating expenses........................................... 2,010 2,503
Other clinic expenses................................................ 6,092 7,598
General corporate expenses........................................... 2,314 2,896
Depreciation and amortization........................................ 1,132 1,713
Net interest expense................................................. 68 88
-------- --------
Total operating expenses..................................... 38,978 74,416
-------- --------
Loss before minority interests and provision for income taxes........ (6,228) (1,017)
Minority interests' share in net loss................................ 352 169
Provision for income taxes........................................... (56) (14)
-------- --------
Net loss............................................................. $ (5,932) $ (862)
======== ========
</TABLE>
See accompanying note to unaudited financial statements.
F-21
<PAGE> 126
HEALTH PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $(5,932) $ (862)
Adjustments to reconcile net loss to net cash (used) provided by
operating activities:
Depreciation and amortization....................................... 1,132 1,713
Provision for bad debts............................................. 843 915
Minority interests' share in net loss............................... (352) (169)
Changes in assets and liabilities:
Increase in accounts receivable..................................... (1,426) (4,662)
Decrease (increase) in prepaid expenses and other current assets.... 173 (112)
Decrease (increase) in other long-term assets....................... 8 (136)
Increase in accounts payable and accrued expenses................... 98 1,003
Increase in accrued medical costs................................... 3,137 3,264
(Decrease) increase in other long-term liabilities.................. (397) 224
------ -------
Net cash (used) provided by operating activities.................... (2,716) 1,178
------ -------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........................ (1,464) (490)
Additions to property, equipment and improvements...................... (1,484) (926)
------ -------
Net cash used by investing activities............................... (2,948) (1,416)
------ -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock.............................. 5,000 2,500
Payments on notes payable and long-term debt........................... (296) (432)
------ -------
Net cash provided by financing activities........................... 4,704 2,068
------ -------
Net change in cash and cash equivalents............................. (960) 1,830
Cash and cash equivalents at beginning of period.................... 5,634 9,335
------ -------
Cash and cash equivalents at end of period.......................... $ 4,674 $11,165
====== =======
</TABLE>
See accompanying note to unaudited financial statements.
F-22
<PAGE> 127
HEALTH PARTNERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) SUBSEQUENT EVENTS
The Company has entered into an Agreement and Plan of Merger dated as of
July 1, 1997 with FPA Medical Management, Inc. ("FPA") whereby the Company will
become a wholly owned subsidiary of FPA and all outstanding securities of the
Company will be exchanged for FPA common stock. The total merger consideration
to be received will be subject to adjustment depending upon the average closing
stock price of FPA as reported on the Nasdaq for the ten consecutive trading
days ending on the date that is two trading days prior to the closing of the
transaction. All outstanding options at the time of the merger will be cancelled
in exchange for a number of shares of fully paid FPA common stock. The FPA
common stock will have a market value equal to the fair value of such option by
applying a variation of the Black-Scholes option pricing model by an investment
banking firm.
In connection with the aforementioned transaction, WellPoint and Oxford
have agreed to convert the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, respectively, into 3,299,982 and 4,700,043 shares
of Company common stock, respectively and the cancellation of cumulative unpaid
dividends which was provided in the 1994 Securities Purchase Agreement.
As the result of entering into the foregoing agreement, the Company has
exercised its right to exchange the minority stockholders' shares of the equity
of the Company's subsidiaries for the Company's common stock. The Company has
reached agreement with the stockholders of all of the Company's subsidiaries
and, in connection with these transactions, will issue 871,697 shares of HPI
common stock with an aggregate value of approximately $8,739,000. Also, the
Company will cancel all existing stock options to purchase shares in the
Company's subsidiaries in exchange for the issuance of options to purchase
170,287 shares of HPI Common Stock. The acquisition of minority interests shall
be treated under the puchase method of accounting with the difference between
the fair value of the HPI Common Stock issued and the fair values of assets and
liabilities recorded as goodwill.
F-23
<PAGE> 128
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 1, 1997
BY AND AMONG
FPA MEDICAL MANAGEMENT, INC.,
FPA ACQUISITION CORP.
AND
HEALTH PARTNERS, INC.
================================================================================
<PAGE> 129
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER................................................................... A-1
Section 1.1 The Merger............................................................. A-1
Section 1.2 Effective Time of the Merger........................................... A-1
ARTICLE II THE SURVIVING CORPORATION AND PARENT........................................ A-1
Section 2.1 Certificate of Incorporation........................................... A-1
Section 2.2 Bylaws................................................................. A-1
Section 2.3 Directors and Executive Officers of the Surviving Corporation.......... A-2
Section 2.4 Effects of Merger...................................................... A-2
ARTICLE III CONVERSION OF SHARES....................................................... A-2
Section 3.1 Conversion of Shares in the Merger..................................... A-2
Section 3.2 Equitable Adjustment................................................... A-3
Section 3.3 Exchange of Certificates............................................... A-3
Section 3.4 No Fractional Securities............................................... A-4
Section 3.5 Options to Purchase Company Stock...................................... A-5
Section 3.6 Closing................................................................ A-5
Section 3.7 Closing of the Company's Transfer Books................................ A-5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
AND ACQUISITION......................................................................... A-6
Section 4.1 Organization and Qualification......................................... A-6
Section 4.2 Capitalization......................................................... A-6
Section 4.3 Authority; Non-Contravention; Approvals................................ A-7
Section 4.4 Reports and Financial Statements....................................... A-8
Section 4.5 Absence of Undisclosed Liabilities..................................... A-8
Section 4.6 Absence of Certain Changes or Events................................... A-8
Section 4.7 Litigation............................................................. A-9
Section 4.8 Registration Statement and Proxy Statement............................. A-9
Section 4.9 No Violation of Law.................................................... A-9
Section 4.10 Compliance............................................................. A-10
Section 4.11 Taxes.................................................................. A-10
Section 4.12 No Parent Stockholders' Approval Required.............................. A-10
Section 4.13 Pooling and Tax-Free Reorganization Matters............................ A-10
Section 4.14 Brokers................................................................ A-11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ A-11
Section 5.1 Organization and Qualification......................................... A-11
Section 5.2 Capitalization......................................................... A-11
Section 5.3 Subsidiaries........................................................... A-12
Section 5.4 Authority; Non-Contravention; Approvals................................ A-12
Section 5.5 Financial Statements................................................... A-13
Section 5.6 Absence of Undisclosed Liabilities..................................... A-13
Section 5.7 Absence of Certain Changes or Events................................... A-14
Section 5.8 Litigation............................................................. A-14
Section 5.9 Registration Statement and Proxy Statement............................. A-14
Section 5.10 No Violation of Law.................................................... A-14
Section 5.11 Compliance............................................................. A-15
Section 5.12 Taxes.................................................................. A-15
Section 5.13 Employee Benefit Plans; ERISA.......................................... A-15
</TABLE>
i
<PAGE> 130
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 5.14 Labor Controversies.................................................... A-16
Section 5.15 Environmental Matters.................................................. A-16
Section 5.16 Title to Assets........................................................ A-16
Section 5.17 Company Stockholders' Approval......................................... A-17
Section 5.18 Pooling and Tax-Free Reorganization Matters............................ A-17
Section 5.19 Insurance.............................................................. A-17
Section 5.20 Opinion of Company's Financial Advisor................................. A-17
Section 5.21 Brokers................................................................ A-17
Section 5.22 Contracts and Commitments.............................................. A-17
Section 5.23 Intellectual Property.................................................. A-18
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER...................................... A-18
Section 6.1 Conduct of Business by the Company Pending the Merger.................. A-18
Section 6.2 Conduct of Business by Parent and Acquisition Pending the Merger....... A-20
Section 6.3 Control of the Company's Operations.................................... A-21
Section 6.4 Control of Parent's Operations......................................... A-21
Section 6.5 Conduct of Business of Acquisition..................................... A-21
ARTICLE VII ADDITIONAL AGREEMENTS...................................................... A-21
Section 7.1 Access to Information.................................................. A-21
Section 7.2 Registration Statement and Proxy Statement............................. A-22
Section 7.3 Company Stockholders' Approval......................................... A-22
Section 7.4 Affiliates of the Company and Parent................................... A-22
Section 7.5 Exchange Listing....................................................... A-23
Section 7.6 Expenses and Fees...................................................... A-23
Section 7.7 Agreement to Cooperate................................................. A-23
Section 7.8 Public Statements...................................................... A-23
Section 7.9 Employee Matters....................................................... A-23
Section 7.10 Notification of Certain Matters........................................ A-24
Section 7.11 Corrections to the Proxy Statement/Prospectus and Registration
Statement.............................................................. A-24
Section 7.12 Insurance; Indemnity................................................... A-24
Section 7.13 No Solicitations....................................................... A-25
Section 7.14 Roll-up Transactions................................................... A-25
Section 7.15 Bank Consent........................................................... A-26
ARTICLE VIII CONDITIONS................................................................. A-26
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger............. A-26
Section 8.2 Conditions to Obligation of the Company to Effect the Merger........... A-27
Section 8.3 Conditions to Obligations of Parent and Acquisition to Effect the
Merger................................................................. A-27
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER............................................ A-28
Section 9.1 Termination............................................................ A-28
Section 9.2 Effect of Termination.................................................. A-29
Section 9.3 Amendment.............................................................. A-29
Section 9.4 Waiver................................................................. A-30
ARTICLE X GENERAL PROVISIONS............................................................ A-30
Section 10.1 Non-Survival of Representations and Warranties......................... A-30
Section 10.2 Notices................................................................ A-30
Section 10.3 Interpretation......................................................... A-31
Section 10.4 Miscellaneous.......................................................... A-31
Section 10.5 Counterparts........................................................... A-31
</TABLE>
ii
<PAGE> 131
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is made this 1st day of July, 1997
("Agreement"), by and among FPA Medical Management, Inc., a Delaware corporation
("Parent"), FPA Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Acquisition"), and Health Partners, Inc., a Delaware
corporation (the "Company").
WITNESSETH:
WHEREAS, the boards of directors of Parent, Acquisition and the Company
believe it to be advisable and in the best interests of their respective
stockholders that Acquisition merge with and into the Company on the terms set
forth in this Agreement (the "Merger");
WHEREAS, the Merger is intended for Federal income tax purposes to qualify
as a reorganization under the provisions of Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code");
WHEREAS, the Merger also is intended to qualify for treatment as a pooling
of interests under Accounting Principles Board Opinion No. 16 ("APB No. 16").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger.
Upon the terms and subject to the conditions of this Agreement, at the
Effective Time (as defined in Section 1.2 hereof), in accordance with the
Delaware General Corporation Law ("DGCL"), Acquisition shall be merged with and
into the Company and the separate existence of Acquisition shall thereupon
cease. The Company shall be the surviving corporation in the Merger and is
hereinafter sometimes referred to as the "Surviving Corporation."
SECTION 1.2 Effective Time of the Merger.
The Merger shall become effective at the date and time (the "Effective
Time") when a duly prepared and executed Certificate of Merger is filed with the
Secretary of State of the State of Delaware (the "Merger Filing") in accordance
with the DGCL. The Merger Filing shall be made simultaneously with or as soon as
practicable after the closing of the transactions contemplated by this Agreement
in accordance with Section 3.6 hereof.
ARTICLE II
THE SURVIVING CORPORATION AND PARENT
SECTION 2.1 Certificate of Incorporation.
The Certificate of Incorporation of Acquisition as in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation after the Effective Time, and thereafter may be amended in
accordance with its terms and as provided by law and this Agreement.
SECTION 2.2 Bylaws.
The bylaws of Acquisition as in effect immediately prior to the Effective
Time shall be the bylaws of the Surviving Corporation after the Effective Time,
and thereafter may be amended in accordance with their terms and as provided by
law and the Certificate of Incorporation of the Surviving Corporation.
A-1
<PAGE> 132
SECTION 2.3 Directors and Executive Officers of the Surviving Corporation.
The directors of the Surviving Corporation shall be the directors of
Acquisition serving immediately prior to the Effective Time and the executive
officers of the Surviving Corporation shall be the executive officers of the
Company in office immediately prior to the Effective Time, and such directors
and executive officers shall serve in accordance with the bylaws of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified.
SECTION 2.4 Effects of Merger.
The Merger shall have the effects set forth in Section 259 of the DGCL.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 Conversion of Shares in the Merger.
(a) Company Common Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof, each issued and
outstanding share of Company Common Stock, par value $.001 per share (the
"Company Common Stock"), other than shares to be canceled in accordance with
Section 3.1(c) hereof and other than Dissenting Shares (as defined in Section
3.1(d) hereof), shall be converted into the right to receive the number of
shares of fully paid and nonassessable common stock, par value $.002 per share,
of Parent ("Parent Common Stock") determined by dividing the "Numerator" by the
"Denominator" (the quotient herein referred to as the "Exchange Ratio"). The
Denominator shall be the maximum number of shares of Company Common Stock issued
and outstanding at the Effective Time plus shares of Company Common Stock
issuable pursuant to Section 7.14 hereof. The Numerator shall be the remainder
which results when (y) the Stock Option Shares is subtracted from (z) the
quotient which results when $115,000,000 is divided by the Effective Valuation
Amount. The Effective Valuation Amount shall be:
(i) the average of the closing prices of Parent Common Stock as
reported on the Nasdaq National Market ("NNM") for the ten (10) consecutive
trading days ending on the date that is two (2) trading days prior to the
Closing Date (as defined in Section 3.6) (the "Parent Value") if such
average is greater than or equal to $18.00 but less than or equal to
$22.00; or
(ii) $18.00, if the Parent Value is less than $18.00; or
(iii) $22.00, if the Parent Value is greater than $22.00.
The Stock Option Shares shall equal the number of shares of Parent Common Stock
issuable pursuant to Section 3.5 hereof in respect of Company Stock Options (as
defined in Section 3.5 hereof) outstanding on the Closing Date whether or not
the same are vested immediately after giving effect to the Merger.
The Company shall provide to Parent, no later than the date on which the
Parent Value is determinable pursuant to this Section 3.1, a certificate (the
"Denominator Certificate") reasonably acceptable to Parent setting forth the
Denominator and the method used in the calculation thereof. If, prior to the
Effective Time, the announcement of a transaction by the Parent requires the
amendment or re-filing of the Registration Statement (as defined in Section
4.8), and, as a result of the re-filing or amendment of the Registration
Statement, the Closing occurs more than 90 days after the date of this
Agreement, notwithstanding clause (ii) of the definition of Effective Valuation
Amount, the Effective Valuation Amount shall equal the Parent Value if the
Parent Value is less than $18.00. Except as set forth in the immediately
preceding sentence, in no event will the number of shares of Parent Common Stock
issued upon the Merger (including shares issued under Section 3.5 hereof) exceed
6,388,889 shares.
(b) Company Preferred Stock. The Company shall use its reasonable best
efforts to cause, immediately prior to the Effective Time, each issued and
outstanding share of the Company's Series A Convertible Preferred Stock, par
value $.001 per share, and Series B Convertible Preferred Stock, par value $.001
per
A-2
<PAGE> 133
share (collectively, the "Company Preferred Stock") to be converted into shares
of Company Common Stock, in accordance with the provisions of the relevant
Certificate of Designations for such Company Preferred Stock. At the Effective
Time, by virtue of the Merger and without any action on the part of the holder
thereof, such shares of Common Stock, other than shares to be canceled in
accordance with Section 3.1(c) hereof and other than Dissenting Shares, shall be
converted into the right to receive a number of shares of fully paid and
nonassessable shares of Parent Common Stock based on the Exchange Ratio.
(c) Cancellation of Company Stock. All shares of Company Common Stock and
Company Preferred Stock (collectively, "Company Stock") which, immediately prior
to the Effective Time, are held by the Company in its treasury shall be canceled
and extinguished and shall cease to exist and no consideration shall be
delivered with respect thereto.
(d) Dissenting Shares. (i) If applicable, notwithstanding any provision of
this Agreement to the contrary, each outstanding share of Company Stock, the
holder of which (x) has not voted in favor of the Merger, (y) has perfected such
holder's right to an appraisal of such holder's shares in accordance with the
applicable provisions of the DGCL and (z) has not effectively withdrawn or lost
such right to appraisal (a "Dissenting Share"), shall not be converted into or
represent a right to receive shares of Parent Common Stock pursuant to Section
3.1(a) or 3.1(b), as applicable, but the holder thereof shall be entitled only
to such rights as are granted by the applicable provisions of the DGCL;
provided, however, that any Dissenting Share held by a person at the Effective
Time who shall, after the Effective Time, withdraw the demand for appraisal or
lose the right of appraisal, in either case pursuant to the DGCL, shall be
deemed to be converted into, as of the Effective Time, the right to receive
Parent Common Stock pursuant to Section 3.1(a) or 3.1(b), as applicable.
(ii) The Company shall give Parent prompt notice of any written demands for
appraisal, withdrawals of demands for appraisal and any other instruments served
pursuant to the applicable provisions of the DGCL relating to the appraisal
process received by the Company and shall allow Parent the right to direct any
proceedings and the resolution thereof relating to such process.
(e) Acquisition Shares. Each share of capital stock of Acquisition issued
and outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation.
SECTION 3.2 Equitable Adjustment.
The calculations set forth in Section 3.1 hereof shall be subject to
equitable adjustment in the event of, or the setting of a record date prior to
the Effective Time with respect to, any stock split, stock dividend, reverse
stock split, recapitalization, reclassification or combination of Company Stock
or Parent Common Stock or dividend or distribution with respect to Parent Common
Stock or Company Stock or other change in the number of shares of Company Stock
outstanding prior to the Closing (as defined in Section 3.6 hereof) other than
issuances of shares pursuant to the exercise of outstanding stock options and
issuance of shares pursuant to the transactions contemplated by Section 7.14
hereof.
SECTION 3.3 Exchange of Certificates.
(a) From and after the Effective Time, each holder of an outstanding
certificate which immediately prior to the Effective Time represented shares of
Company Stock shall be entitled to receive in exchange therefor, upon surrender
thereof to a bank or trust company designated before the Effective Time by
Parent and reasonably acceptable to the Company (the "Exchange Agent"), a
certificate or certificates representing the number of whole shares of Parent
Common Stock to which such holder is entitled pursuant to Section 3.1 hereof.
Notwithstanding any other provision of this Agreement, (i) until holders or
transferees of certificates theretofore representing shares of Company Stock
have surrendered them for exchange as provided herein, no dividends shall be
paid with respect to any shares represented by such certificates and no payment
for fractional shares shall be made and (ii) without regard to when such
certificates representing shares of Company Stock are surrendered for exchange
as provided herein, no interest shall be paid on any dividends or
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any payment for fractional shares. Upon surrender of a certificate which
immediately prior to the Effective Time represented shares of Company Stock,
there shall be paid to the holder of such certificate the amount of any
dividends which theretofore became payable, but which were not paid by reason of
the foregoing, with respect to the number of whole shares of Parent Common Stock
represented by the certificate or certificates issued upon such surrender.
(b) If any certificate for shares of Parent Common Stock is to be issued in
a name other than that in which the certificate for shares of Company Stock
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the person requesting such exchange shall pay any applicable
transfer or other taxes required by reason of such issuance.
(c) Promptly after the Effective Time, Parent shall make available to the
Exchange Agent the certificates representing shares of Parent Common Stock
required to effect the exchanges referred to in paragraph (a) above and cash for
payment of any fractional shares referred to in Section 3.4 hereof.
(d) Promptly after the Effective Time, the Exchange Agent shall mail to
each holder of record of a certificate or certificates that immediately prior to
the Effective Time represented outstanding shares of Company Stock (the "Company
Certificates") (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Company Certificates shall
pass, only upon actual delivery of the Company Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the Company
Certificates in exchange for certificates representing shares of Parent Common
Stock. Upon surrender of Company Certificates for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such other
documents as the Exchange Agent shall reasonably require, the holder of such
Company Certificates shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Parent Common Stock into
which the shares of Company Stock theretofore represented by the Company
Certificates so surrendered shall have been converted pursuant to the provisions
of Section 3.1 hereof, and the Company Certificates so surrendered shall be
canceled.
(e) Promptly following the date which is nine (9) months after the
Effective Time, the Exchange Agent shall deliver to Parent all cash,
certificates (including any Parent Common Stock) and other documents in its
possession relating to the transactions described in this Agreement, and the
Exchange Agent's duties shall terminate. Thereafter, each holder of a Company
Certificate may surrender such Company Certificate to the Surviving Corporation
and (subject to applicable abandoned property, escheat and similar laws) receive
in exchange therefor the Parent Common Stock, without any interest thereon. If
any certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of Company Stock entitled to payment pursuant to
Section 3.1 hereof shall not have been surrendered for such payment prior to
such date on which any payment in respect thereof would otherwise escheat to or
become property of any governmental agency or other governmental entity, such
shares of Company Stock shall, to the extent permitted by applicable law, be
deemed to be canceled and no money or other payment will be due to the holder
thereof.
(f) In the event any Company Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Company Certificate to be lost, stolen or destroyed, Parent shall issue in
exchange for such lost, stolen or destroyed Company Certificate the Parent
Common Stock deliverable in respect thereof determined in accordance with
Section 3.1 hereof. When authorizing such payment in exchange therefor, the
board of directors of Parent may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed
Company Certificate to give the Surviving Corporation such indemnity as it may
reasonably direct as protection against any claim that may be made against the
Surviving Corporation with respect to the Company Certificate alleged to have
been lost, stolen or destroyed.
SECTION 3.4 No Fractional Securities.
Notwithstanding any other provision of this Agreement, no certificates or
scrip for fractional shares of Parent Common Stock shall be issued in the Merger
and no Parent Common Stock dividend, stock split or interest shall relate to any
fractional security, and such fractional interests shall not entitle the owner
thereof to vote or to any other rights of a security holder. In lieu of any such
fractional shares, each holder of Company
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Stock who would otherwise have been entitled to receive a fraction of a share of
Parent Common Stock (in the aggregate) upon surrender of Company Certificates
for exchange pursuant to Section 3.3 hereof shall be entitled to receive from
the Exchange Agent a cash payment equal to such fraction multiplied by the
Parent Value.
SECTION 3.5 Options to Purchase Company Stock.
(a) Each option to purchase shares of Company Common Stock (a "Company
Stock Option") which is outstanding immediately prior to the Effective Time
pursuant to any stock option plan of the Company in effect on the date hereof
(the "Company Stock Plans") shall be canceled at the Effective Time and the
holder of such Company Stock Option shall be entitled to receive a number of
shares of Parent Common Stock, decreased to the nearest whole share, equal to
the quotient which results when the "Fair Market Value" of such Company Stock
Option at the Effective Time is divided by the Parent Value. The Fair Market
Value of all Company Stock Options shall be the fair value thereof determined by
an investment banking firm selected by the Company that is acceptable to the
Parent based upon the Effective Valuation Amount and the Exchange Ratio and
otherwise using valuation techniques reasonably acceptable to Parent and the
Company and consistent with the requirements of APB No. 16.
(b) Parent shall not issue fractional shares or pay cash to the holders of
Company Stock Options receiving shares of Parent Common Stock in lieu of issuing
fractional shares of Parent Common Stock. Instead, all fractional shares of
Parent Common Stock issuable under this Section 3.5 shall be decreased to the
nearest whole share.
(c) The Company shall use its reasonable best efforts to cause the holders
of Company Stock Options to execute prior to the Closing Date a form of
acknowledgement reasonably acceptable to Parent regarding their acceptance of
the treatment of Company Stock Options set forth in this Section 3.5 (each a
"Stock Option Acknowledgement").
SECTION 3.6 Closing.
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place at the offices of Pillsbury Madison & Sutro LLP, 101
West Broadway, Suite 1800, San Diego, California, or at any other location
mutually agreeable to Parent and the Company on the second business day
immediately following the date on which the last of the conditions set forth in
Article VIII is fulfilled or waived, or at such other time as Parent and the
Company shall agree (the date on which the Closing occurs is referred to in this
Agreement as the "Closing Date").
SECTION 3.7 Closing of the Company's Transfer Books.
At and after the Effective Time, holders of Company Certificates shall
cease to have any rights as stockholders of the Company, except for (a) the
right to an appraisal for Dissenting Shares pursuant to Section 3.1(d) hereof
(but solely as provided by the DGCL), (b) the right to receive shares of Parent
Common Stock pursuant to Section 3.3 hereof and (c) the right to receive cash
for payment of fractional shares pursuant to Section 3.4 hereof. At the
Effective Time, the stock transfer books of the Company shall be closed and no
transfer of shares of Company Stock which were outstanding immediately prior to
the Effective Time shall thereafter be made. If, after the Effective Time,
subject to the terms and conditions of this Agreement, Company Certificates
formerly representing Company Stock are presented to the Surviving Corporation,
they shall be canceled and exchanged for Parent Common Stock in accordance with
this Article III.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION
Parent and Acquisition each represent and warrant to the Company as
follows:
SECTION 4.1 Organization and Qualification.
Each of Parent and Acquisition is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted. Each of
Parent and Acquisition is qualified to do business and is in good standing in
each jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified and in good standing would not have
a Parent Material Adverse Effect. As used in this Agreement, a "Parent Material
Adverse Effect" shall mean any event, circumstance, development or occurrence,
individually or when taken together with all other such events, circumstances,
developments or occurrences, causing, resulting in or having, or reasonably
likely to cause, result in or have, a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of Parent and its subsidiaries (as defined in Section 4.2 hereof),
taken as a whole. True, accurate and complete copies of each of Parent's and
Acquisition's Certificates of Incorporation and bylaws, in each case as in
effect on the date hereof, including all amendments thereto, have heretofore
been delivered to the Company.
SECTION 4.2 Capitalization.
(a) The authorized capital stock of Parent consists of (i) 98,000,000
shares of Parent Common Stock, par value $.002, of which 33,234,157 shares were
outstanding as of the date of this Agreement, and (ii) 2,000,000 shares of
preferred stock, par value $.002 per share ("Parent Preferred Stock"), of which
no shares were outstanding as of the date of this Agreement. All of the issued
and outstanding shares of Parent Common Stock and Parent Preferred Stock are
validly issued and are fully paid, nonassessable and free of preemptive rights.
(b) The authorized capital stock of Acquisition consists of 100 shares of
Acquisition Common Stock, par value $.01, of which 10 shares are issued and
outstanding, which shares are owned beneficially and of record by Parent.
(c) Except as set forth on Schedule 4.2(c) attached hereto, as of the date
of this Agreement, there are no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, instrument or other agreement and also including any rights plan or
other anti-takeover agreement, obligating Parent or any subsidiary of Parent to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of Parent or obligating Parent or any subsidiary of
Parent to grant, extend or enter into any such agreement or commitment. There
are no voting trusts, proxies or other agreements or understandings to which
Parent or any subsidiary of Parent is a party or by which Parent or any
subsidiary of Parent is bound with respect to the voting of any shares of
capital stock of Parent. The shares of Parent Common Stock issued to
stockholders of the Company in the Merger will be at the Effective Time duly
authorized, validly issued, fully paid, nonassessable, and free of preemptive
rights. As used in this Agreement, "subsidiary" means, with respect to any party
hereto (a "Subject Party"), any corporation or other organization, whether
incorporated or unincorporated, (i) of which more than fifty percent (50%) of
either the equity interests in, or the voting control of, such corporation or
other organization is, directly or indirectly through subsidiaries or otherwise,
beneficially owned by such Subject Party or (ii) which is a professional
corporation as to which such Subject Party or a subsidiary thereof has executed
a succession or similar stockholder agreement.
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SECTION 4.3 Authority; Non-Contravention; Approvals.
(a) Parent and Acquisition each have full corporate power and authority to
enter into this Agreement and, subject to the Parent Required Statutory
Approvals (as defined in Section 4.3(c) hereof), to consummate the transactions
contemplated hereby. This Agreement has been approved by the boards of directors
of Parent and Acquisition and by Parent as the sole stockholder of Acquisition,
and no other corporate proceedings on the part of Parent or Acquisition are
necessary to authorize the execution and delivery of this Agreement or the
consummation by Parent and Acquisition of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by each of Parent and
Acquisition, and, assuming the due authorization, execution and delivery hereof
by the Company, constitutes a valid and legally binding agreement of each of
Parent and Acquisition enforceable against each of them in accordance with its
terms, except that such enforcement may be subject to (i) bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles, and except that the availability of equitable
remedies, including specific performance and injunctive relief, is subject to
the discretion of the court before which any proceedings may be brought.
(b) Except as set forth on Schedule 4.3(b) attached hereto, the execution
and delivery of this Agreement by each of Parent and Acquisition do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Parent or any of its subsidiaries under
any of the terms, conditions or provisions of (i) the respective charters or
bylaws of Parent or any of its subsidiaries, (ii) any statute, law, ordinance,
rule, regulation, judgment, decree, order, injunction, writ, permit or license
of any court or governmental authority applicable to Parent or any of its
subsidiaries or any of their respective properties or assets or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which Parent or any of its subsidiaries is now a party or by which
Parent or any of its subsidiaries or any of their respective properties or
assets may be bound or affected. The consummation by Parent and Acquisition of
the transactions contemplated hereby will not result in any violation, conflict,
breach, termination, acceleration or creation of liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the preceding
sentence, subject to (x) in the case of the terms, conditions or provisions
described in clause (ii) above, obtaining (prior to the Effective Time) the
Parent Required Statutory Approvals (as defined in Section 4.3(c) hereof) and
(y) in the case of the terms, conditions or provisions described in clause (iii)
above, obtaining (prior to the Effective Time) consents required from commercial
lenders, lessors or other third parties named in Schedule 4.3(b) attached
hereto. Set forth on Schedule 4.3(b) attached hereto is a list of hospital
contracts with respect to which the consent of any party other than Parent is
required in order that consummation by Parent of the transactions contemplated
hereby will not result in a breach or termination of the respective contracts.
Excluded from the foregoing sentences of this paragraph (b), insofar as they
apply to the terms, conditions or provisions described in clauses (ii) and (iii)
of the first sentence of this paragraph (b), are such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not have a Parent Material Adverse
Effect.
(c) Except for (i) the filings by Parent and the Company required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing of the Proxy Statement/Prospectus (as defined in Section
4.8 hereof) with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and
the declaration of the effectiveness thereof by the Commission and filings with
various state blue sky authorities, (iii) the making of the Merger Filing with
the Secretary of State of the State of Delaware in connection with the Merger
and (iv) any other required filings with or approvals from applicable Federal
and state governmental authorities (the filings and approvals referred to in
clauses (i) through (iv) are collectively referred to as the "Parent Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and
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delivery of this Agreement by Parent or Acquisition or the consummation by
Parent or Acquisition of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not have a
Parent Material Adverse Effect.
SECTION 4.4 Reports and Financial Statements.
Since October 20, 1994, Parent has filed with the Commission all material
forms, statements, reports and documents (including all exhibits, amendments and
supplements thereto) required to be filed by it under each of the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the respective rules and regulations thereunder, all of which, as amended if
applicable, complied in all material respects at the time of filing with all
applicable requirements of the appropriate act and the rules and regulations
thereunder. Parent has previously delivered or made available to the Company a
copy of its (a) Annual Report on Form 10-K, as amended, for the fiscal years
ended December 31, 1994, 1995 and 1996, and its report on Form 10-Q for the
quarter ended March 31, 1997, each as filed with the Commission, (b) proxy and
information statements relating to (i) all meetings of its stockholders (whether
annual or special) and (ii) actions by written consent in lieu of a
stockholders' meeting from October 20, 1994, until the date hereof, and (c) all
other reports, including quarterly and current reports, or registration
statements filed by Parent with the Commission (the documents referred to in
clauses (a), (b) and (c) are collectively referred to as the "Parent SEC
Reports"). As of their respective dates, the Parent SEC Reports complied in all
material respects with the requirements of the Exchange Act and/or the
Securities Act and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements of Parent included in such reports,
including the notes and schedules thereto (collectively, the "Parent Financial
Statements"), have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
Parent and its subsidiaries as of the dates thereof and the results of their
operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and any other adjustments described therein.
SECTION 4.5 Absence of Undisclosed Liabilities.
Except as disclosed in the Parent SEC Reports or with respect to
acquisitions or potential transactions or commitments heretofore disclosed to
the Company in writing or as set forth on Schedule 4.5 attached hereto, neither
Parent nor any of its subsidiaries had at December 31, 1996, or has incurred
since that date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except: (a) liabilities, obligations or
contingencies (i) which are accrued or reserved against in the Parent Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
December 31, 1996 and were incurred in the ordinary course of business and
consistent with past practices; and (b) liabilities and obligations which are of
a nature not required to be reflected in the consolidated financial statements
of Parent and its subsidiaries prepared in accordance with generally accepted
accounting principles consistently applied and which were incurred in the normal
course of business (provided that no liabilities, obligations or contingencies
excepted by subparagraphs (a)(ii) or (b) hereof will have, individually or in
the aggregate, a Parent Material Adverse Effect).
SECTION 4.6 Absence of Certain Changes or Events.
Except as disclosed in the Parent SEC Reports or with respect to
acquisitions or potential transactions or commitments heretofore disclosed to
the Company in writing or as set forth on Schedule 4.6 attached hereto, since
December 31, 1996, there has not been any change or event (other than changes
generally affecting the
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industry in which Parent and its subsidiaries operate or arising from general
business or economic conditions or as a result of this Agreement) that would
have a Parent Material Adverse Effect.
SECTION 4.7 Litigation.
Except as disclosed in the Parent SEC Reports, there are no claims, suits,
actions or proceedings pending or, to the knowledge of Parent, threatened
against, relating to or affecting Parent or any of its subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that seek to restrain or enjoin the consummation of
the Merger or which would have a Parent Material Adverse Effect. Except as set
forth in the Parent SEC Reports, neither Parent nor any of its subsidiaries is
subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or would have any Parent Material Adverse Effect.
SECTION 4.8 Registration Statement and Proxy Statement.
None of the information to be supplied by Parent or its subsidiaries for
inclusion in (a) the Registration Statement on Form S-4 to be filed under the
Securities Act with the Commission by Parent in connection with the Merger for
the purpose of registering the shares of Parent Common Stock to be issued in the
Merger (the "Registration Statement") or (b) the proxy statement to be
distributed in connection with the Company's meeting of its stockholders to vote
upon this Agreement and the transactions contemplated hereby (the "Proxy
Statement" and, together with the prospectus included in the Registration
Statement, the "Proxy Statement/Prospectus") will, in the case of the Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the meeting of stockholders of the Company to be held in connection
with the transactions contemplated by this Agreement, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, or, in the case of
the Registration Statement, as amended or supplemented, at the time it becomes
effective and at the time of such meeting of the stockholders of the Company,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. The Proxy Statement/Prospectus, as of its Effective
Time, will comply as to form in all material respects with all applicable laws,
including the provisions of the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder, except that no representation is
made by Parent or Acquisition with respect to information supplied by the
Company for inclusion therein.
SECTION 4.9 No Violation of Law.
Except as disclosed in the Parent SEC Reports, neither Parent nor any of
its subsidiaries is in violation of, or has been given notice or been charged
with any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law) of
any governmental or regulatory body or authority, except for violations which
would not have a Parent Material Adverse Effect. Except as disclosed in the
Parent SEC Reports, as of the date of this Agreement, to the knowledge of
Parent, no investigation or review by any governmental or regulatory body or
authority is pending or threatened, nor has any governmental or regulatory body
or authority indicated an intention to conduct the same, other than, in each
case, those the outcome of which would not have a Parent Material Adverse
Effect. Parent and its subsidiaries have all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations, consents
and approvals necessary to conduct their businesses as presently conducted
(collectively, the "Parent Permits"), except for permits, licenses, franchises,
variances, exemptions, orders, authorizations, consents and approvals the
absence of which would not have a Parent Material Adverse Effect. Parent and its
subsidiaries are not in violation of the terms of any Parent Permit, except for
delays in filing reports or violations which would not have a Parent Material
Adverse Effect.
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SECTION 4.10 Compliance.
Except as disclosed in the Parent SEC Reports or on Schedule 4.10 attached
hereto, Parent and each of its subsidiaries are not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with lapse of time or action by a third party, would
result in a default under (a) the respective charters, bylaws or other similar
organizational instruments of Parent or any of its subsidiaries or (b) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which Parent or any of its
subsidiaries is a party or by which any of them is bound or to which any of
their property is subject, which breaches, violations and defaults, in the case
of clause (b) of this Section 4.10, would have a Parent Material Adverse Effect.
SECTION 4.11 Taxes.
(a) Parent and its subsidiaries have (i) duly filed (or timely requested
and received an extension to file) with the appropriate governmental authorities
all Tax Returns (as defined in Section 4.11(c) hereof) required to be filed by
them for all periods ending on or prior to the Effective Time, other than those
Tax Returns the failure of which to file would not have a Parent Material
Adverse Effect, and such Tax Returns are true, correct and complete in all
material respects and (ii) duly paid in full or made adequate provision for the
payment of all Taxes (as defined in Section 4.11(b) hereof) for all periods
ending at or prior to the Effective Time. The liabilities and reserves for Taxes
reflected in the Parent balance sheet included in the latest Parent SEC Report
are adequate to cover all Taxes for all periods ending at or prior to the date
of such balance sheet and there are no material liens for Taxes upon any
property or assets of Parent or any subsidiary thereof, except for liens for
Taxes not yet due. There are no unresolved issues of law or fact arising out of
a notice of deficiency, proposed deficiency or assessment from the Internal
Revenue Service (the "IRS") or any other governmental taxing authority with
respect to Taxes of Parent or any of its subsidiaries which, if decided
adversely would have a Parent Material Adverse Effect. Neither Parent nor any of
its subsidiaries is a party to any agreement providing for the allocation or
sharing of Taxes with any entity that is not, directly or indirectly, a
subsidiary of Parent other than agreements the consequences of which are
adequately reserved for in the Parent Financial Statements. Neither Parent nor
any of its subsidiaries has, with regard to any assets or property held,
acquired or to be acquired by any of them, filed a consent to the application of
Section 341(f) of the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all taxes,
including, without limitation, income, gross receipts, excise, property, sales,
withholding, social security, occupation, use, service, service use, license,
payroll, franchise, transfer and recording taxes, fees and charges, windfall
profits, severance, customs, import, export, employment or similar taxes,
charges, fees, levies or other assessments imposed by the United States, or any
state, local or foreign government or subdivision or agency thereof, whether
computed on a separate, consolidated, unitary, combined or any other basis, and
such term shall include any interest, fines, penalties or additional amounts and
any interest in respect of any additions, fines or penalties attributable or
imposed or with respect to any such taxes, charges, fees, levies or other
assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes.
SECTION 4.12 No Parent Stockholders' Approval Required.
No vote of stockholders of Parent is required by Parent's Certificate of
Incorporation, bylaws, any applicable law or any national securities exchange or
The NNM for the approval of this Agreement or the consummation of the
transactions contemplated hereby (including the issuance, registration and
inclusion on the NNM of Parent Common Stock)
SECTION 4.13 Pooling and Tax-Free Reorganization Matters.
To the knowledge of Parent and based upon consultation with its independent
accountants, neither Parent nor Acquisition nor any of their affiliates has
taken or agreed to take any action that would interfere with the ability of
Parent to (a) account for the business combination to be effected by the Merger
as a pooling of
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interests under APB No. 16 for accounting and financial statement purposes or
(b) treat the Merger as a tax-free reorganization pursuant to Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code.
SECTION 4.14 Brokers.
Parent and Acquisition represent and warrant that no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or
Acquisition.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Acquisition as follows:
SECTION 5.1 Organization and Qualification.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the requisite corporate
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted. The Company is qualified to
do business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing would not have a Company Material Adverse Effect. As used
in this Agreement, a "Company Material Adverse Effect" shall mean any event,
circumstance, development or occurrence, individually or when taken together
with all other such events, circumstances, developments or occurrences, causing,
resulting in or having, or reasonably likely to cause, result in or have, a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of the Company and its
subsidiaries (as defined in Section 4.2 hereof), taken as a whole. True,
accurate and complete copies of the Company's Certificate of Incorporation and
bylaws, in each case as in effect on the date hereof, including all amendments
thereto, have heretofore been delivered to Parent.
SECTION 5.2 Capitalization.
(a) The authorized capital stock of the Company consists of 15,000,000
shares of Company Common Stock, par value $.001 per share, and 50,000 shares of
Company Preferred Stock, par value $.001 per share, of which 25,000 shares have
been designated Series A Convertible Preferred Stock and 25,000 shares have been
designated Series B Convertible Preferred Stock. As of the date of this
Agreement, 1,673,500 shares of Company Common Stock and 50,000 shares of Company
Preferred Stock were issued and outstanding (25,000 and 25,000 shares of which
are designated Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock respectively). All of such issued and outstanding shares are
validly issued and are fully paid, nonassessable and free of preemptive rights.
(b) Except as set forth on Schedule 5.2(b) attached hereto, as of the date
hereof there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, obligating the Company or any subsidiary of the Company
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of the Company or obligating the Company or any
subsidiary of the Company to grant, extend or enter into any such agreement or
commitment. Except as set forth on Schedule 5.2(b) attached hereto, there are no
voting trusts, proxies or other agreements or understandings to which the
Company or any subsidiary of the Company is a party or by which the Company or
any subsidiary of the Company is bound with respect to the voting of any shares
of capital stock of the Company.
(c) Each Stock Option Acknowledgement executed and delivered by the holder
of a Company Stock Option as contemplated by Section 3.5(a) above shall, from
and after the Effective Time, be binding upon the holder of the Company Stock
Option to which such Stock Option Acknowledgement relates on the terms and
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subject to the conditions provided in Section 3.5(a) and such Stock Option
Acknowledgement. Except as set forth on Schedule 5.2(c) attached hereto, none of
the benefits available under the Company Stock Options are subject to
acceleration as a result of the Merger or otherwise, and the Company shall take
no action to permit or foster any such acceleration.
SECTION 5.3 Subsidiaries.
Schedule 5.3 sets forth the name, state of incorporation and stockholders
of each subsidiary of the Company. Each subsidiary of the Company is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Each subsidiary of the Company is
qualified to do business, and is in good standing, in each jurisdiction in which
the properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing would not have a Company Material Adverse
Effect. All of the outstanding shares of capital stock of each corporate
subsidiary of the Company are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and are owned directly or indirectly
by the Company, free and clear of any liens, claims, encumbrances, security
interests, equities, charges and options of any nature whatsoever except as set
forth on Schedule 5.3 attached hereto. There are no subscriptions, options,
warrants, rights, calls, contracts, voting trusts, proxies or other commitments,
understandings, restrictions or arrangements relating to the issuance, sale,
voting, transfer, ownership or other rights with respect to any shares of
capital stock of any corporate subsidiary of the Company, including any right of
conversion or exchange under any outstanding security, instrument or agreement
except as disclosed on Schedule 5.3 attached hereto.
SECTION 5.4 Authority; Non-Contravention; Approvals.
(a) The Company has full corporate power and authority to enter into this
Agreement and, subject to the Company Stockholders' Approval of the Merger (as
defined in Section 7.3(a)) and the Company Required Statutory Approvals (as
defined in Section 5.4(c)), to consummate the transactions contemplated hereby.
This Agreement has been approved by the board of directors of the Company, and
no other corporate proceedings on the part of the Company are necessary to
authorize the execution and delivery of this Agreement or, except for the
Company Stockholders' Approval, the consummation by the Company of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by Parent and Acquisition, constitutes a valid and legally
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to (i) bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium or other similar
laws affecting or relating to enforcement of creditors' rights generally and
(ii) general equitable principles, and except that the availability of equitable
remedies, including specific performance and injunctive relief, is subject to
the discretion of the court before which any proceedings may be brought.
(b) Except as set forth on Schedule 5.4(b) attached hereto, the execution
and delivery of this Agreement by the Company do not violate, conflict with or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any of its subsidiaries under any of the
terms, conditions or provisions of (i) the respective charters or bylaws of the
Company or any of its subsidiaries, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to the Company or any of its
subsidiaries or any of their respective properties or assets, or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which the Company or any of its subsidiaries is now a party or by which
the Company or any of its subsidiaries or any of their respective properties or
assets may be bound or affected. The consummation by the Company of the
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transactions contemplated hereby will not result in any violation, conflict,
breach, termination, acceleration or creation of liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the preceding
sentence, subject to (x) in the case of the terms, conditions or provisions
described in clause (ii) above, obtaining (prior to the Effective Time) the
Company Required Statutory Approvals and the Company Stockholders' Approval and
(y) in the case of the terms, conditions or provisions described in clause (iii)
above, obtaining (prior to the Effective Time) consents required from commercial
lenders, lessors or other third parties. Set forth on Schedule 5.4(b) attached
hereto is a list of hospital contracts with respect to which the consent of any
party other than the Company is required in order that consummation by the
Company of the transactions contemplated hereby will not result in a breach or
termination of the respective contracts. Excluded from the foregoing sentences
of this paragraph (b), insofar as they apply to the terms, conditions or
provisions described in clauses (ii) and (iii) of the first sentence of this
paragraph (b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or encumbrances
that would not have a Company Material Adverse Effect.
(c) Except for (i) the filings by Parent and the Company required by the
HSR Act, (ii) the filing of the Proxy Statement/Prospectus with the Commission
pursuant to the Securities Act and the declaration of the effectiveness thereof
by the Commission and filings with various state blue sky authorities, (iii) the
making of the Merger Filing with the Secretary of State of the State of Delaware
in connection with the Merger and (iv) any other required filings with or
approvals from applicable Federal and state governmental authorities (the
filings and approvals referred to in clauses (i) through (iv) are collectively
referred to as the "Company Required Statutory Approvals"), no declaration,
filing or registration with, or notice to, or authorization, consent or approval
of, any governmental or regulatory body or authority is necessary for the
execution and delivery of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not have a
Company Material Adverse Effect.
SECTION 5.5 Financial Statements.
The Company has previously delivered or made available to Parent a copy of
the following financial statements (the "Company Financial Statements"), all of
which have been prepared on a consolidated basis (except as otherwise indicated)
in accordance with generally accepted accounting principles consistently applied
throughout the periods indicated (except as may be indicated in the notes
thereto):
(a) Audited Consolidated Statements of Financial Position, Operations,
Cash Flows and Changes in Stockholders' Equity of the Company and its
consolidated subsidiaries at or for the twelve (12) months ended December
31, 1994, 1995, 1996 and related Notes to the Consolidated Financial
Statements as of and for the years ended December 31, 1994, 1995, 1996; and
(b) Unaudited Consolidated Statements of Financial Position and
Operations at or for the three (3) months ended March 31, 1997.
The Company Financial Statements fairly present the financial position of the
Company and its subsidiaries as of the dates thereof and the results of their
operations and changes in financial position for the periods then ended,
although the unaudited Company Financial Statements do not contain the footnotes
required by generally accepted accounting principles and are subject to normal
year-end and audit adjustments and any other adjustments described therein.
SECTION 5.6 Absence of Undisclosed Liabilities.
Except with respect to acquisitions or potential transactions or
commitments disclosed on Schedule 5.6 attached hereto, neither the Company nor
any of its subsidiaries had at December 31, 1996, or has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature, except: (a) liabilities, obligations or contingencies
(i) which are accrued or reserved against in the Company Financial Statements or
reflected in the notes thereto or (ii) which were incurred after December 31,
1996 and were incurred in the ordinary course of business and consistent with
past practices; and (b)
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liabilities and obligations which are of a nature not required to be reflected
in the consolidated financial statements of the Company and its subsidiaries
prepared in accordance with generally accepted accounting principles
consistently applied and which were incurred in the normal course of business
(provided that no liabilities, obligations or contingencies excepted by
subparagraphs (a)(ii) or (b) hereof will have, individually or in the aggregate,
a Company Material Adverse Effect).
SECTION 5.7 Absence of Certain Changes or Events.
Except as set forth on Schedule 5.7 attached hereto, since December 31,
1996, there has not been any change or event (other than changes generally
affecting the industry in which the Company and its subsidiaries operate or
arising from general business or economic conditions or as a result of this
Agreement) that would have a Company Material Adverse Effect.
SECTION 5.8 Litigation.
Except as set forth on Schedule 5.8 attached hereto, there are no claims,
suits, actions or proceedings pending or, to the knowledge of the Company,
threatened against, relating to or affecting the Company or any of its
subsidiaries, before any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that seek to restrain the
consummation of the Merger or which would have a Company Material Adverse
Effect. Except as referred to in Schedule 5.8 attached hereto, neither the
Company nor any of its subsidiaries is subject to any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator which prohibits or
restricts the consummation of the transactions contemplated hereby or would have
any Company Material Adverse Effect.
SECTION 5.9 Registration Statement and Proxy Statement.
None of the information to be supplied by the Company or its subsidiaries
for inclusion in (a) the Registration Statement or (b) the Proxy Statement will,
in the case of the Proxy Statement or any amendments thereof or supplements
thereto, at the time of the mailing of the Proxy Statement and any amendments or
supplements thereto, and at the time of the meeting of stockholders of the
Company to be held in connection with the transactions contemplated by this
Agreement, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, or, in the case of the Registration Statement, as amended or
supplemented, at the time it becomes effective and at the time of such meeting
of the stockholders of the Company, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The Proxy
Statement/Prospectus, as of its Effective Time, will comply as to form in all
material respects with all applicable laws, including the provisions of the
Securities Act and the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with respect to
information supplied by Parent or Acquisition for inclusion therein.
SECTION 5.10 No Violation of Law.
Except as set forth on Schedule 5.10 attached hereto, neither the Company
nor any of its subsidiaries is in violation of or has been given notice or been
charged with any violation of, any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which would not have a Company Material
Adverse Effect. As of the date of this Agreement, to the knowledge of the
Company, no investigation or review by any governmental or regulatory body or
authority is pending or threatened, nor has any governmental or regulatory body
or authority indicated an intention to conduct the same, other than, in each
case, those the outcome of which would not have Company Material Adverse Effect.
The Company and its subsidiaries have all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations, consents
and approvals necessary to conduct their businesses as presently conducted
(collectively, the "Company Permits"), except for permits, licenses, franchises,
variances, exemptions, orders,
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authorizations, consents and approvals the absence of which would not have a
Company Material Adverse Effect. The Company and its subsidiaries are not in
violation of the terms of any Company Permit, except for delays in filing
reports or violations which would not have a Company Material Adverse Effect.
SECTION 5.11 Compliance.
Except as set forth on Schedule 5.11 attached hereto, the Company and each
of its subsidiaries are not in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has occurred
which, with lapse of time or action by a third party, would result in a default
under, (a) the respective charters, bylaws or similar organizational instruments
of the Company or any of its subsidiaries or (b) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease, bond, license,
approval or other instrument to which the Company or any of its subsidiaries is
a party or by which any of them is bound or to which any of their property is
subject, which breaches, violations and defaults, in the case of clause (b) of
this Section 5.11, would have a Company Material Adverse Effect.
SECTION 5.12 Taxes.
The Company and its subsidiaries have (i) duly filed (or timely requested
and received an extension to file) with the appropriate governmental authorities
all Tax Returns required to be filed by them for all periods ending on or prior
to the Effective Time, other than those Tax Returns the failure of which to file
would not have a Company Material Adverse Effect, and such Tax Returns are true,
correct and complete in all material respects, and (ii) duly paid in full or
made adequate provision for the payment of all Taxes for all periods ending at
or prior to the Effective Time. The liabilities and reserves for Taxes reflected
in the most recent audited Company balance sheet are adequate to cover all Taxes
for all periods ending at or prior to the Effective Time and there are no
material liens for Taxes upon any property or assets of the Company or any
subsidiary thereof, except for liens for Taxes not yet due. There are no
unresolved issues of law or fact arising out of a notice of deficiency, proposed
deficiency or assessment from the IRS or any other governmental taxing authority
with respect to Taxes of the Company or any of its subsidiaries which, if
decided adversely would have a Company Material Adverse Effect. Neither the
Company nor any of its subsidiaries is a party to any agreement providing for
the allocation or sharing of Taxes with any entity that is not, directly or
indirectly, a wholly-owned corporate subsidiary of Company other than agreements
the consequences of which are adequately reserved for in the Company Financial
Statements. Neither the Company nor any of its corporate subsidiaries has, with
regard to any assets or property held, acquired or to be acquired by any of
them, filed a consent to the application of Section 341(f) of the Code.
SECTION 5.13 Employee Benefit Plans; ERISA.
(a) All material employee benefit plans, programs, arrangements or
practices covering current or former employees of the Company, including
employee benefit plans within the meaning set forth in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), are
listed in Schedule 5.13(a) attached hereto (such plans, programs, arrangements
or practices of Company together with those of its subsidiaries being referred
to as the "Company Plans"). True and complete copies of each Company Plan has
been made available to the Company. To the extent applicable, each Company Plan
complies in all material respects with the requirements of its terms, ERISA and
the Code. Each Company Plan intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter from the IRS. No Company Plan
is covered by Title IV of ERISA or Section 412 of the Code. Neither the Company
nor any of its subsidiaries has incurred any liability or penalty under Section
4975 of the Code or Section 502(i) of ERISA with respect to any Company Plan. To
the knowledge of the Company, there are no pending, threatened or anticipated
claims against or otherwise involving the Company Plans, except routine claims
for benefits. All material contributions required to be made as of the date of
this Merger Agreement to the Company Plans have been made or properly accounted
for. Neither the Company nor any entity under "common control" with the Company
within the meaning of Section 4001 of ERISA has contributed to or been required
to contribute to, any "multiemployer plan" (as defined in Section 3(37) of
ERISA). No Company Plan provides for post-retirement medical benefits, other
than as required by applicable law.
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SECTION 5.14 Labor Controversies.
Except as set forth on Schedule 5.14 attached hereto, (a) there are no
significant controversies pending or, to the knowledge of the Company,
threatened between the Company or its subsidiaries and any representatives of
any of their employees, (b) to the knowledge of the Company, there are no
material organizational efforts presently being made involving any of the
presently unorganized employees of the Company or its subsidiaries, (c) the
Company and its subsidiaries have, to the knowledge of the Company, complied in
all material respects with all laws relating to the employment of labor,
including, without limitation, any provisions thereof relating to wages, hours,
collective bargaining, and the payment of social security and similar taxes, and
(d) no person has, to the knowledge of the Company, asserted that the Company or
any of its subsidiaries is liable in any amount for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing, except for
such controversies, organizational efforts, noncompliance and liabilities which
would not have a Company Material Adverse Effect.
SECTION 5.15 Environmental Matters.
Except as set forth on Schedule 5.15 attached hereto, (i) the Company and
its subsidiaries have conducted their respective businesses in compliance with
all applicable Environmental Laws, including, without limitation, having all
permits, licenses and other approvals and authorizations necessary for the
operation of their respective businesses as presently conducted, (ii) none of
the properties owned by the Company or any of its subsidiaries contain any
Hazardous Substance as a result of any activity of the Company or any of its
subsidiaries in amounts exceeding the levels permitted by applicable
Environmental Laws, (iii) neither the Company nor any of its subsidiaries has
received any notices, demand letters or requests for information from any
Federal, state, local or foreign governmental entity or third party indicating
that the Company or any of its subsidiaries may be in violation of, or liable
under, any Environmental Law in connection with the ownership or operation of
their businesses, (iv) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings pending or, to
the knowledge of the Company and its subsidiaries, threatened against the
Company or any of its subsidiaries relating to any violation, or alleged
violation, of any Environmental Law, (v) no reports have been filed, or are
required to be filed, by the Company or any of its subsidiaries concerning the
release of any Hazardous Substance or the threatened or actual violation of any
Environmental Law, (vi) no Hazardous Substance has been disposed of, released or
transported in violation of any applicable Environmental Law from any properties
owned by the Company or any of its subsidiaries as a result of any activity of
the Company or any of its subsidiaries during the time such properties were
owned, leased or operated by the Company or any of its subsidiaries, (vii) there
have been no environmental investigations, studies, audits, tests, reviews or
other analyses regarding compliance or noncompliance with any applicable
Environmental Law conducted by or which are in the possession of the Company or
its subsidiaries relating to the activities of the Company or its subsidiaries
which have not been delivered to Parent prior to the date hereof, (viii) there
are, to the knowledge of Company and its subsidiaries, no underground storage
tanks on, in or under any properties owned by the Company or any of its
subsidiaries and no underground storage tanks have been closed or removed from
any of such properties during the time such properties were owned, leased or
operated by the Company or any of its subsidiaries, (ix) there is, to the
knowledge of Company and its subsidiaries, no asbestos or asbestos containing
material present in any of the properties owned by the Company and its
subsidiaries, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by the Company or
any of its subsidiaries, and (x) neither the Company, its subsidiaries nor any
of their respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law, except for violations of the foregoing
clauses (i) through (x) that would not reasonably be expected to have a Company
Material Adverse Effect.
SECTION 5.16 Title to Assets.
Except as set forth on Schedule 5.16 attached hereto, the Company and each
of its subsidiaries has good and marketable title in fee simple to all its real
property and good title to all its leasehold interests and other
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properties, as reflected in the most recent balance sheet included in the
Company Financial Statements, except for properties and assets that have been
disposed of in the ordinary course of business since the date of such balance
sheet, free and clear of all mortgages, liens, pledges, charges or encumbrances
of any nature whatsoever, except (i) the lien for current taxes, payments of
which are not yet delinquent, (ii) such imperfections in title and easements and
encumbrances, if any, as are not substantial in character, amount or extent and
do not materially detract from the value or interfere with the present use of
the property subject thereto or affected thereby, or otherwise materially impair
the Company's business operations (in the manner presently carried on by the
Company) or (iii) as disclosed in Schedule 5.16 attached hereto, and except for
such matters which would not have a Company Material Adverse Effect. All leases
under which the Company leases any substantial amount of real or personal
property have been made available to Parent and are in good standing, valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing default or event which with notice or lapse of time
or both would become a default other than defaults under such leases which would
not have a Company Material Adverse Effect.
SECTION 5.17 Company Stockholders' Approval.
The affirmative vote of stockholders of the Company required for approval
and adoption of this Agreement and the Merger is a majority of the outstanding
shares of Company Common Stock and sixty percent (60%) of the holders of each
class of Company Preferred Stock.
SECTION 5.18 Pooling and Tax-Free Reorganization Matters.
To the knowledge of the Company and based upon consultation with its
independent accountants, neither the Company nor any of its affiliates has taken
or agreed to take any action that would interfere with the ability of Parent to
(a) account for the business combination to be effected by the Merger as a
pooling of interests or (b) treat the Merger as a tax-free reorganization
pursuant to Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
SECTION 5.19 Insurance.
Except as set forth on Schedule 5.19 attached hereto, the Company maintains
insurance with financially responsible insurance companies in amounts customary
in its industry to insure it against risks and losses associated with the
operation of its business and its properties. Copies of such policy or policies
have been made available to Parent.
SECTION 5.20 Opinion of Company's Financial Advisor.
The Board of Directors of the Company has received the opinion of Smith
Barney Inc. ("Smith Barney"), financial advisor to the Company, to the effect
that, as of the date of this Agreement, the Exchange Ratio is fair, from a
financial point of view, to the holders of Company Common Stock (the "Smith
Barney Opinion").
SECTION 5.21 Brokers.
The Company represents and warrants that no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company (except for fees,
expenses and amounts of indemnity payable to Smith Barney).
SECTION 5.22 Contracts and Commitments.
(a) There is no default or event that with notice or lapse of time, or
both, would constitute a material default by the Company or any of its
subsidiaries under any of the material contracts (a "Material Contract") to
which it is a party. Neither the Company nor any of its subsidiaries has
received written notice of an outstanding, uncured default under any Material
Contract by any other party thereto. Except as set forth in Schedule 5.22
attached hereto, neither the Company nor any of its subsidiaries has any
knowledge (i) that any
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hospital, hospital system, independent practice association ("IPA"), physician
group, physician, pharmacy, laboratory, home health care agency, nursing
facility, mental health provider, therapist or other allied health care
professional or institution (each a "Provider" and collectively "Providers")
representing individually or in the aggregate in excess of ten percent (10%) of
the enrollees of the Company or of the total number of Providers are organized
or attempting to organize any entity (whether or not incorporated) for the
purpose of bargaining or otherwise dealing with the Company on a collective
basis (except with respect to individual Providers who have formed professional
corporations or partnerships with respect to IPAs and medical groups which
already contract with the Company or its subsidiaries); (ii) that IPAs, medical
groups or individual physicians which contract with the Company or its
subsidiaries and which serve individually or in the aggregate more than ten
percent (10%) of the enrollees of the Company or its subsidiaries have provided
written notice of an intent (whether or not legally binding) to terminate or not
to renew their respective contracts with the Company or its subsidiaries; (iii)
of any circumstances likely to result in disenrollment of enrollees, the loss of
which individually and in the aggregate would have a Company Material Adverse
Effect, other than those occurring as a result of general economic or financial
conditions or other conditions or developments that are not unique to the
Company and its subsidiaries but also affect other persons who participate or
are engaged in the lines of business in which the Company and its subsidiaries
participate or are engaged; or (iv) of any Provider providing services to the
Company and its subsidiaries that does not maintain professional liability
insurance.
(b) Each of the Material Contracts is enforceable against the Company or
any of its subsidiaries, as the case may be, in accordance with its terms,
except as such enforceability may be limited by general principles of equity or
by bankruptcy, insolvency or other similar laws relating to rights of creditors.
Neither the Company nor any of its subsidiaries has received written notice that
any party to any of the Material Contracts intends to cancel or terminate any of
the Material Contracts or to exercise or not exercise any options under any of
the Material Contracts.
SECTION 5.23 Intellectual Property.
Except as set forth on Schedule 5.23 attached hereto, the Company does not
have any patents, trademarks, service marks, trade names, corporate names
(including all registrations and applications therefor) and copyright
registrations and applications that are material to the business or condition of
the Company or any of its subsidiaries.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 Conduct of Business by the Company Pending the Merger.
Except as otherwise contemplated by this Agreement, after the date hereof
and prior to the Closing Date or earlier termination of this Agreement, unless
Parent shall otherwise agree in writing, the Company shall, and shall cause its
subsidiaries, to:
(a) conduct their respective businesses in the ordinary and usual
course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters or
bylaws, (ii) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, except for the
declaration and payment of dividends by a wholly-owned subsidiary solely to
its parent corporation, (iii) split, combine, reclassify or take similar
action with respect to any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, (iv) adopt a plan of
complete or partial liquidation or resolutions providing for or authorizing
such liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization or (v) directly or indirectly
redeem, repurchase or otherwise acquire any shares of its capital stock or
any option with respect thereto;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, their capital stock of any
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class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that the Company (i) may grant options to the
extent required to be granted automatically under the Company's Plans or
pursuant to written employment agreements disclosed on a Schedule hereto,
(ii) may issue shares upon conversion of convertible securities and
exercise of options outstanding on the date hereof, or options granted
pursuant to subsection (c)(i) of this Section 6.1 and (iii) may issue
shares necessary to effect the transactions contemplated by Section 7.14;
(d) not (i) incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until borrowings
are made under such arrangements) any indebtedness for borrowed money or
guarantee any such indebtedness other than in the ordinary course of its
business consistent with past practice in an aggregate principal amount
exceeding $5,000,000 (net of any amounts of any such indebtedness
discharged during such period), or (ii) voluntarily purchase, cancel,
prepay or otherwise provide for a complete or partial discharge in advance
of a scheduled repayment date with respect to, or waive any right under,
any indebtedness for borrowed money other than in the ordinary course of
its business consistent with past practice in an aggregate principal amount
exceeding $5,000,000, (iii) redeem, purchase, acquire or offer to purchase
or acquire any shares of its capital stock or any options, warrants or
rights to acquire any of its capital stock or any security convertible into
or exchangeable for its capital stock, (iv) knowingly take any action which
would jeopardize the treatment of the Merger as a pooling of interests
under APB No. 16, (v) knowingly take or fail to take any action which
action or failure would cause the Company or its stockholders (except to
the extent that any stockholders receive cash in lieu of fractional shares)
to recognize gain or loss for Federal income tax purposes as a result of
the consummation of the Merger, (vi) make any acquisition of any assets or
businesses in an aggregate amount in excess of $250,000, (vii) sell,
pledge, dispose of or encumber any assets or businesses other than sales in
the ordinary course of business or (viii) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(e) not, except to the extent required by applicable law, (x) permit
any material change in (A) any pricing, marketing, purchasing, investment,
accounting, financial reporting, inventory, credit, allowance or tax
practice or policy or (B) any method of calculating any bad debt,
contingency or other reserve for accounting, financial reporting or tax
purposes or (y) make any material tax election or settle or compromise any
material income tax liability with any governmental or regulatory body or
authority;
(f) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement;
(g) confer on a regular and frequent basis with one or more
representatives of Parent to report operational matters of materiality and
the general status of ongoing operations;
(h) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except in the ordinary course and consistent with past practice;
(i) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as required to comply with changes in applicable law; and
(j) maintain with financially responsible insurance companies
insurance on its tangible assets and its businesses in such amounts and
against such risks and losses as are consistent with past practice.
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SECTION 6.2 Conduct of Business by Parent and Acquisition Pending the Merger.
Except as otherwise contemplated by this Agreement, after the date hereof
and prior to the Closing Date or earlier termination of this Agreement, unless
the Company shall otherwise agree in writing, Parent and Acquisition shall, and
shall cause their subsidiaries, to:
(a) not (i) amend or propose to amend their respective charters or
bylaws, (ii) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, except for the
declaration and payment of dividends by a wholly-owned subsidiary solely to
its parent corporation, (iii) split, combine, reclassify or take similar
action with respect to any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, (iv) adopt a plan of
complete or partial liquidation or resolutions providing for or authorizing
such liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization (except in connection with the
potential acquisitions described on Schedule 6.2 attached hereto or
subsequently disclosed to Company in writing) or (v) directly or indirectly
redeem, repurchase or otherwise acquire any shares of its capital stock or
any option with respect thereto;
(b) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any shares of Parent Common Stock, or any options,
warrants or rights of any kind to acquire any shares of their capital stock
of any class or any debt or equity securities convertible into or
exchangeable for such capital stock, except that Parent may issue shares
(i) upon conversion of convertible securities and exercise of options
outstanding on the date hereof or granted following the date hereof
consistent with Parent's prior practices and (ii) in connection with the
potential acquisitions described on Schedule 6.2 attached hereto or
subsequently disclosed to Company in writing;
(c) not (i) incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until borrowings
are made under such arrangements) any indebtedness for borrowed money or
guarantee any such indebtedness other than in the ordinary course of its
business consistent with past practice in an aggregate principal amount
exceeding $300,000,000 (net of any amounts of any such indebtedness
discharged during such period), (ii) voluntarily purchase, cancel, prepay
or otherwise provide for a complete or partial discharge in advance of a
scheduled repayment date with respect to, or waive any right under, any
indebtedness for borrowed money other than in the ordinary course of its
business consistent with past practice in an aggregate principal amount
exceeding $300,000,000, (iii) redeem, purchase, acquire or offer to
purchase or acquire any shares of its capital stock or any options,
warrants or rights to acquire any of its capital stock or any security
convertible into or exchangeable for its capital stock, (iv) knowingly take
any action which would jeopardize the treatment of the Merger as a pooling
of interests under APB No. 16, (v) knowingly take or fail to take any
action which action or failure to take action would cause the Company or
its stockholders (except to the extent that any stockholders receive cash
in lieu of fractional shares) to recognize gain or loss for Federal income
tax purposes as a result of the consummation of the Merger, (vi) make any
acquisition of any assets or businesses other than expenditures for fixed
or capital assets in the ordinary course of business and as described on
Schedule 6.2 attached hereto or subsequently disclosed to Company in
writing, (vii) sell, pledge, dispose of or encumber any assets or
businesses other than sales in the ordinary course of business or (viii)
enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing;
(d) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement; and
(e) be reasonably available to confer on a regular and frequent basis
with one or more representatives of the Company to report operational
matters of materiality and the general status of ongoing operations.
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SECTION 6.3 Control of the Company's Operations.
Nothing contained in this Agreement shall give to Parent, directly or
indirectly, rights to control or direct the Company's operations prior to the
Effective Time. Prior to the Effective Time, the Company shall exercise,
consistent with the terms and conditions of this Agreement, complete control and
supervision of its operations.
SECTION 6.4 Control of Parent's Operations.
Nothing contained in this Agreement shall give to the Company, directly or
indirectly, rights to control or direct Parent's or Acquisition's operations
prior to the Effective Time. Prior to the Effective Time, Parent and Acquisition
shall exercise, consistent with the terms and conditions of this Agreement,
complete control and supervision of their respective operations.
SECTION 6.5 Conduct of Business of Acquisition.
During the period from the date of this Agreement to the Effective Time,
Acquisition shall not engage in any activities of any nature except as provided
in or contemplated by this Agreement. Parent shall take all actions necessary to
cause Acquisition to perform its obligations under this Agreement and to
consummate the Merger on the terms and conditions set forth herein.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 Access to Information.
(a) The Company and its subsidiaries shall afford to Parent and Acquisition
and their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") and Parent and its subsidiaries
shall afford to the Company and its accountants, counsel, financial advisors and
other representatives (the "Company Representatives") reasonable access during
normal business hours throughout the period prior to the earlier of the
termination of this Agreement or the Effective Time to all of their respective
properties, books, contracts, commitments and records (including, but not
limited to, Tax Returns) and, during such period, shall furnish promptly to one
another (i) a copy of each report, schedule and other document filed or received
by any of them pursuant to the requirements of Federal or state securities laws
or filed by any of them with the Commission in connection with the transactions
contemplated by this Agreement or which may have a material effect on their
respective businesses, properties or personnel and (ii) such other information
concerning their respective businesses, properties and personnel as Parent,
Acquisition or the Company, as the case may be, shall reasonably request;
provided that no investigation pursuant to this Section 7.1 shall amend or
modify any representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the Merger. Parent and its
subsidiaries shall hold and shall use their reasonable best efforts to cause the
Parent Representatives to hold, and the Company and its subsidiaries shall hold
and shall use their reasonable best efforts to cause the Company Representatives
to hold, in strict confidence all such information in accordance with the terms
of the confidentiality agreement dated as of November 6, 1996 (the
"Confidentiality Agreement"), between Parent and the Company.
(b) In the event that this Agreement is terminated in accordance with its
terms, each party shall promptly return to the other all non-public written
material provided pursuant to this Section 7.1 or the Confidentiality Agreement
and shall not retain any copies, extracts or other reproductions in whole or in
part of such written material. In such event, all documents, memoranda, notes
and other writings prepared by Parent or the Company based on the information in
such material shall be destroyed (and Parent and the Company shall use their
respective reasonable best efforts to cause their advisors and representatives
to similarly destroy their documents, memoranda and notes), and such destruction
(and reasonable best efforts) shall be certified in writing by an authorized
officer supervising such destruction.
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(c) The Company shall promptly advise Parent and Parent shall promptly
advise the Company in writing of any change or the occurrence of any event after
the date of this Agreement having, or which could reasonably be expected to
have, any Company Material Adverse Effect or Parent Material Adverse Effect, as
the case may be.
SECTION 7.2 Registration Statement and Proxy Statement.
Parent shall file with the Commission as soon as is reasonably practicable
after the date hereof the Proxy Statement/Prospectus and shall use all
reasonable efforts to have the Registration Statement declared effective by the
Commission as promptly as practicable. Parent shall also take any action
required to be taken under applicable state blue sky, securities laws or rules
or regulations of any national securities exchange or the NNM in connection with
the issuance of Parent Common Stock pursuant hereto. Parent and the Company
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by any of
them in connection with the preceding two sentences.
SECTION 7.3 Company Stockholders' Approval.
The Company, Parent and Stockholders of the Company holding, in the
aggregate, a number of shares of Company Common Stock and Company Preferred
Stock sufficient to approve and adopt this Agreement are parties to a
Stockholder Agreement dated the date of this Agreement whereby such stockholders
have agreed to vote for approval and adoption of the Agreement and the
transactions contemplated hereby, among other matters (the "Stockholder
Agreement"). The Stockholder Agreement is in form attached hereto as Exhibit
7.3. The Company shall, as promptly as practicable, submit this Agreement and
the transactions contemplated hereby for the approval of its stockholders at a
meeting of stockholders and shall use its best efforts to seek to obtain
stockholder approval and adoption (the "Company Stockholders' Approval") of this
Agreement and the transactions contemplated hereby. Such meeting of stockholders
shall be held as soon as practicable following the date upon which the
Registration Statement becomes effective. Subject to the fiduciary duties of the
board of directors of the Company under applicable law, the Company shall,
through its board of directors, recommend to its stockholders approval of the
transactions contemplated by this Agreement. Subject to the foregoing, the
Company (i) acknowledges that a breach of its covenant contained in this Section
7.3(a) to convene a meeting of its stockholders and call for a vote thereat with
respect to the approval of this Agreement and the Merger will result in
irreparable harm to Parent which will not be compensable in money damages and
(ii) agrees that such covenant shall be specifically enforceable and that
specific performance and injunctive relief shall be a remedy properly available
to Parent for a breach of such covenant.
SECTION 7.4 Affiliates of the Company and Parent.
On or prior to July 15, 1997, the Company and Parent shall each deliver to
the other a letter pursuant to Staff Accounting Bulletins 65 & 76 and Accounting
Series Releases 130 & 135 (the "APB No. 16 Affiliate Letter") identifying all
persons who may be deemed affiliates of the Company or Parent, respectively, for
the purposes of the foregoing, including, without limitation, all directors and
executive officers of the Company or of the Parent as of the date of the APB No.
16 Affiliate Letter. On or prior to the date that is five (5) days prior to the
Closing Date, (i) the Company shall deliver to Parent another letter (the "Rule
145 Letter") identifying all persons who may be affiliates of the Company, as
defined under Rule 145 under the Securities Act ("Rule 145"), as of the date of
the Rule 145 Letter, and (ii) the Company shall advise the persons identified in
the Rule 145 Letter of the resale restrictions imposed by applicable securities
laws. Each of the Company and Parent shall use its reasonable best efforts to
obtain as soon as practicable from each person listed on the respective APB No.
16 Affiliate Letter and from any person who may be deemed to have become an
affiliate of the Company or Parent for the purposes of the foregoing after such
party's delivery of the APB No. 16 Affiliate Letter and in any event not later
than July 31, 1997, an agreement not to sell shares of Company Common Stock or
Parent Common Stock in excess of an amount which would, in the aggregate,
contravene the provisions of the foregoing until combined results of operations
of the Company and Parent
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covering at least thirty (30) days of combined operations are made public.
Parent will keep current its filings under the Exchange Act for purposes of
reliance by Company affiliates upon the resale provisions of Rule 145.
SECTION 7.5 Exchange Listing.
Parent shall use its reasonable best efforts to effect, at or before the
Effective Time, authorization for inclusion on the NNM, upon official notice of
issuance, of the shares of Parent Common Stock to be issued pursuant to the
Merger.
SECTION 7.6 Expenses and Fees.
All costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses.
SECTION 7.7 Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto shall use its reasonable best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using its
reasonable best efforts to obtain all necessary or appropriate waivers, consents
and approvals and Commission "no-action" letters to effect all necessary
registrations, filings and submissions and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible).
(b) Without limitation of the foregoing, each of Parent and the Company
undertakes and agrees to (i) take all actions necessary to cause the Merger to
(a) qualify as a tax-free merger under Section 368 of the Code and (b) be
treated as a pooling of interests under APB No. 16 for accounting and financial
statement purposes, and (ii) file as soon as practicable after the date hereof a
Notification and Report Form under the HSR Act with the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division"). Each of Parent and the Company shall (i) use its
reasonable efforts to comply as expeditiously as possible with all lawful
requests of the FTC or the Antitrust Division for additional information and
documents and (ii) not extend any waiting period under the HSR Act or enter into
any agreement with the FTC or the Antitrust Division not to consummate the
transactions contemplated by this Agreement, except with the prior written
consent of such parties.
SECTION 7.8 Public Statements.
The parties shall consult with each other prior to issuing any press
release or any written public statement with respect to this Agreement or the
transactions contemplated hereby and shall not issue any such press release or
written public statement prior to such consultation unless required by law, by
regulation of the NNM or upon written advice of counsel.
SECTION 7.9 Employee Matters.
(a) From and after the Effective Time, Parent and the Surviving
Corporation, and their respective affiliates will honor in accordance with their
terms all existing employment, severance, consulting and salary continuation
agreements between the Company and any current or former officer, director,
employee or consultant to the Company.
(b) Parent agrees that, for one year after the Effective Time, Parent
shall, or shall cause the Surviving Corporation to, provide employee benefit
plans and programs for the benefit of employees and former employees of the
Company ("Company Employees"), which, in the aggregate, are no less favorable
than the Company employee benefit plans and programs in effect immediately prior
to the Effective Time. Parent further agrees that, for the two year period
beginning on the date one year following the Effective Time, Parent shall
provide, or shall cause the Surviving Corporation to provide, Company Employees
with employee benefit plans and programs that are no less favorable in the
aggregate to those provided from time to time to
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employees of Parent of comparable status and seniority. Except with respect to
plans and programs set forth on Schedule 7.9 attached hereto, with respect to
such benefits, past service, compensation and expense credits of such Company
Employees shall be recognized, whenever reasonably possible consistent with the
terms of such plans and programs, for all purposes under such plans (including,
but not limited to, participation, eligibility, vesting and calculation of
benefits), and each employee or fringe benefit plan or program available to
Company Employees as contemplated hereby shall be applied to such Company
Employees.
SECTION 7.10 Notification of Certain Matters.
Each of the Company, Parent and Acquisition agrees to give prompt notice to
each other of, and to use their respective reasonable best efforts to prevent or
promptly remedy, (a) the occurrence or failure to occur or the impending or
threatened occurrence or failure to occur, of any event which occurrence or
failure to occur would be likely to cause any of its representations or
warranties in this Agreement to be untrue or inaccurate in any material respect
at any time from the date hereof to the Effective Time and (b) any material
failure on its part to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this Section 7.10 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
SECTION 7.11 Corrections to the Proxy Statement/Prospectus and Registration
Statement.
Prior to the date of the Company Stockholders' Approval of the Merger, each
of the Company, Parent and Acquisition shall correct promptly any information
provided by it to be used in the Proxy Statement/Prospectus and Registration
Statement that shall have become false or misleading in any material respect and
shall take all reasonable steps necessary to file with the Commission and have
declared effective or cleared by the Commission any amendment or supplement to
the Proxy Statement/Prospectus or the Registration Statement so as to correct
the same and to cause the Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of the Company and Parent, in each case to the
extent required by applicable law.
SECTION 7.12 Insurance; Indemnity.
For a period of six (6) years following the Effective Time, Parent shall
indemnify, defend and hold harmless to the fullest extent permitted under
applicable law each person who is now or has been an officer, director,
employee, trustee or agent of the Company (or any subsidiary or division
thereof), including, without limitation, each person controlling any of the
foregoing persons (individually, an "Indemnified Party" and collectively, the
"Indemnified Parties"), against all losses, claims, damages, liabilities, costs
or expenses (including reasonable attorneys' fees), judgments, fines, penalties
and amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to acts or omissions,
or alleged acts or omissions, by them in their capacities as such, whether
commenced, asserted or claimed before or after the Effective Time. In the event
of any such claim, action, suit, proceeding or investigation (an "Action"), (i)
Parent shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Party, which counsel shall be reasonably acceptable to Parent, in
advance of the final disposition of any such Action to the full extent and under
all circumstances permitted by Delaware law as in effect on the date hereof,
upon receipt of any undertaking required by applicable law, and (ii) Parent will
direct the defense of any such matter; provided, however, that Parent shall not
be obligated pursuant to this Section to pay the fees and disbursements of more
than one counsel for all Indemnified Parties in any single Action, except to the
extent that, in the opinion of counsel for the Indemnified Parties, two or more
of such Indemnified Parties have conflicting interests in the outcome of such
action. Immediately following the Effective Time, Parent shall purchase and
maintain or cause the Surviving Corporation to purchase and maintain, for a
period of six (6) years following the Effective Time, policies of directors' and
officers' liability insurance covering each person who was a director or officer
of the Company at any time prior to the Effective Time with respect to claims
arising from facts or events that occurred on or prior to the Effective Time and
providing at least the same coverage and amounts and containing terms that are
no less advantageous to the insured parties as those in effect immediately prior
to the Effective Time for officers and directors of Parent. The provisions of
this
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Section 7.12 are intended to be for the benefit of, and shall be enforceable by,
each Indemnified Party and each party entitled to insurance coverage under the
previous sentence hereof, respectively, and his or her heirs and legal
representatives, and shall be in addition to any other rights an Indemnified
Party may have under the certificate or articles of incorporation or bylaws of
the Surviving Company or any of its subsidiaries, under the DGCL or otherwise.
SECTION 7.13 No Solicitations.
Prior to the Effective Time, the Company agrees (a) that neither it nor any
of its subsidiaries shall, and it shall use its best efforts to cause their
respective representatives not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, consolidation or other business combination including
the Company or any of its subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any portion of the assets of the Company and its
subsidiaries taken as a whole, (ii) any of the outstanding shares of Company
Common Stock or (iii) any of the outstanding shares of the capital stock of any
subsidiary of the Company (any such proposal or offer being hereinafter referred
to as an "Alternative Proposal"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person or group relating to an Alternative Proposal (excluding the
transactions contemplated by this Agreement), or otherwise facilitate any effort
or attempt to make or implement an Alternative Proposal; and (b) that it will
notify Parent immediately if any such inquiries, proposals or offers are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it or any such person
or group. There shall be excepted from this Section 7.13 the transactions
effected pursuant to Section 7.14 hereof.
SECTION 7.14 Roll-up Transactions.
(a) Roll-up Notices. Following the execution of this Agreement, the Company
shall deliver notices to each of the holders ("Minority Holders"), excluding the
Company and its affiliates, of stock ("Minority Shares") and/or stock options
("Minority Options") in any of the Company's subsidiaries (as defined in Section
4.2(c) above), which notices shall serve to inform the Minority Holders of the
Company's intention to undertake the transactions contemplated by the
shareholder agreements ("Minority Shareholder Agreements") and stock option
plans ("Minority Option Plans") relating to such subsidiaries to eliminate the
Minority Holders' interests in each such subsidiary ("Roll-up Transactions").
The Company will use its best efforts to consummate all of the Roll-up
Transactions as of the Effective Time.
(b) Minority Shares. If the Roll-up Transactions relating to the Minority
Shares of a particular subsidiary are consummated as of the Effective Time, such
Minority Shares shall be exchanged for Company Common Stock at the Effective
Time as provided in the related Minority Shareholder Agreement and shall be
treated in the Merger as other issued and outstanding Company Common Stock is
treated pursuant to Section 3.1 of this Agreement. If the Roll-up Transactions
relating to the Minority Shares of a particular subsidiary will not be
consummated as of the Effective Time, the Company shall use its best efforts to
induce each holder of Minority Shares in such subsidiary to enter into an escrow
agreement with Parent and the Company ("Escrow Agreement") providing that such
holder shall have no actions, causes of action or claims against the Company or
Parent with respect to such holder's Minority Shares other than for a number of
shares of Parent Common Stock not to exceed those held in the escrow
specifically to complete the Roll-up Transactions for such subsidiary.
(c) Minority Options. If the Roll-up Transactions relating to the Minority
Options issued by a particular subsidiary are consummated as of the Effective
Time, such Minority Options shall be exchanged for Company Stock Options at the
Effective Time as provided in the related Minority Option Plan and shall be
treated in the Merger as other issued and outstanding Company Stock Options are
treated pursuant to Section 3.5 of this Agreement. If the Roll-up Transactions
relating to the Minority Options of a particular subsidiary will not be
consummated as of the Effective Time, the Company shall use its best efforts to
induce each holder of such Minority Options to enter into an Escrow Agreement
providing that such holder shall have
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no actions, causes of action or claims against the Company or Parent with
respect to such holder's Minority Options other than for a number of shares of
Parent Common Stock and/or Parent Stock Options held in the escrow specifically
to complete the Roll-up Transactions for such subsidiary.
(d) Escrow Provisions. Any shares of Parent Common Stock or Parent Stock
Options held in any escrow pursuant to this Section 7.14 shall constitute shares
or options which would otherwise be issuable to stockholders or optionees of the
Company in the Merger. The terms of each Escrow Agreement and any related escrow
arrangements shall be reasonably agreed upon by Parent and the Company.
(e) Adjustments Following Completion of Roll-up Transactions. If, following
the completion of a Roll-up Transaction for any subsidiary after the Effective
Time, there are shares of Parent Common Stock remaining in any escrow account
established with respect to the Minority Shares of or Minority Options issued by
such subsidiary, a number of such shares remaining in all such escrow account
shall be distributed to the former Company stockholders and option holders who
received shares of Parent Common Stock pursuant to Section 3.1 and Section 3.5,
respectively.
SECTION 7.15 Bank Consent.
Parent shall use its reasonable best efforts to obtain the consent of its
senior lender with respect to the transactions contemplated by this Agreement on
or before August 15, 1997.
ARTICLE VIII
CONDITIONS
SECTION 8.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite
vote of the stockholders of the Company under the Company's Certificate of
Incorporation and applicable law.
(b) Inclusion of Parent Common Stock. The shares of Parent Common
Stock issuable in the Merger shall have been authorized for listing on the
NNM upon official notice of issuance.
(c) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(d) Registration Statement. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act
and state blue sky laws, if applicable, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
for that purpose shall have been instituted by the Commission or any state
regulatory authorities.
(e) No Injunction. No preliminary or permanent injunction or other
order or decree by any Federal or state court which prevents the
consummation of the Merger shall have been issued and remain in effect
(each party agreeing to use its reasonable efforts to have any such
injunction, order or decree lifted).
(f) Pooling. Parent and the Company shall have received letters from
Deloitte & Touche LLP and KPMG Peat Marwick LLP, respectively, dated not
more than two business days prior to the Effective Time, to the effect that
the Merger qualifies for "pooling of interests" accounting treatment if
consummated in accordance with this Agreement and if the operations of
Parent and the Surviving Corporation are conducted in a manner that do not
violate "pooling of interests" accounting treatment.
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SECTION 8.2 Conditions to Obligation of the Company to Effect the Merger.
Unless waived by the Company, the obligation of the Company to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following additional conditions:
(a) Compliance with Covenants; Accuracy of Representations and
Warranties. Parent and Acquisition shall have performed in all material
respects their agreements, covenants and obligations contained in this
Agreement required to be performed or complied with by Parent and
Acquisition on or prior to the Closing Date and the representations and
warranties of Parent and Acquisition contained in this Agreement shall be
true and correct in all material respects (except for such representations
and warranties that are qualified by a reference to materiality, which
representations and warranties as so qualified shall be true in all
respects) on and as of the date made and on and as of the Closing Date as
if made at and as of such date, and the Company shall have received a
certificate of the Chairman of the Board and Chief Executive Officer, the
President or a Vice President of Parent and of the President and Chief
Executive Officer or a Vice President of Acquisition to that effect.
(b) Tax Opinion. The Company shall have received from Gibson, Dunn &
Crutcher LLP, counsel to the Company, on the date of the Proxy Statement
and on the Closing Date opinions, in each case dated as of such respective
dates and stating that the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code and that Parent, Acquisition and the Company will each be a party to
that reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinions, counsel for the Company shall be entitled to rely
upon representations of officers and affiliates of Parent, Acquisition and
the Company reasonably satisfactory in form and substance to such counsel
and to Parent and Acquisition.
(c) Fairness Opinion. The Smith Barney Opinion shall not have been
withdrawn.
(d) Consents; Approvals. Parent shall have obtained all of the
consents set forth on Schedule 4.3(b) attached hereto. With respect to the
Parent Required Statutory Approvals, all approvals shall have been obtained
and all filings which are required to be made prior to the Effective Time
shall have been submitted.
(e) Employee Matters. Parent shall have entered into employment
agreements and have taken such other employee related matters as are listed
on a Memorandum of even date herewith initialed among the parties.
(f) Registration Rights Agreement. Parent shall have executed and
delivered the Registration Rights Agreement in the form attached hereto as
Exhibit 8.2(f).
(g) Opinions of Counsel. The Company shall have received the opinions
of Pillsbury Madison & Sutro LLP, and James A. Lebovitz, Esq., counsel to
Parent, dated the Closing Date, in form reasonably satisfactory to the
Company.
(h) Bank Consent. Parent shall have received the consent of its senior
lender with respect to the transactions contemplated by this Agreement not
later than the date set forth in Section 7.15.
SECTION 8.3 Conditions to Obligations of Parent and Acquisition to Effect the
Merger.
Unless waived by Parent and Acquisition, the obligations of Parent and
Acquisition to effect the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the additional following conditions:
(a) Compliance with Covenants; Accuracy of Representations and
Warranties. The Company shall have performed in all material respects its
agreements, covenants and obligations contained in this Agreement required
to be performed or complied with by the Company on or prior to the Closing
Date and the representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects (except
for such representations and warranties that are qualified by their terms
by a referral to materiality, which representations and warranties as so
qualified shall be true in all respects) on and as of the date made and on
and as of the Closing Date as if made at and as of such date,
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and Parent shall have received a Certificate of the President and Chief
Executive Officer or of a Vice President of the Company to that effect.
(b) Tax Opinion. Parent shall have received from Pillsbury Madison &
Sutro LLP, counsel to Parent, on the date of the Proxy Statement and on the
Closing Date opinions, in each case dated as of such respective dates and
stating that the Merger will be treated for Federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code and that
Parent, Acquisition and the Company will each be a party to that
reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinions, counsel for Parent shall be entitled to rely upon
representations of officers and affiliates of Parent, Acquisition and the
Company reasonably satisfactory in form and substance to such counsel and
to the Company.
(c) Consents; Approvals. The Company shall have obtained all of the
consents set forth on Schedule 5.4(b) attached hereto. With respect to the
Company Required Statutory Approvals, all approvals shall have been
obtained and all filings which are required to be made prior to the
Effective Time shall have been submitted.
(d) Resignations. Parent shall have received from the Company the
resignations of all individuals serving as directors of the Company
immediately prior to the Effective Time.
(e) Master Strategic Agreement for Private Practice Partnerships. The
Company and Oxford Health Plans, Inc., a Delaware corporation ("Oxford"),
shall have executed a master strategic agreement substantially in the form
of Exhibit 8.3(e) hereof.
(f) Wellpoint Memorandum of Understanding. The Company and Wellpoint
Health Networks, Inc., a Delaware corporation ("Wellpoint"), shall have
executed a Memorandum of Understanding substantially in the form of Exhibit
8.3(f) hereof.
(g) Opinion of Counsel. Parent shall receive the opinion of Gibson,
Dunn & Crutcher LLP, counsel to the Company, dated the Closing Date, in
form reasonably satisfactory to Parent.
(h) No Preferred Stock Outstanding. The Company and the holders of
Company Preferred Stock shall have taken all necessary actions to ensure
that all of the outstanding shares of Preferred Stock will be canceled or
converted into shares of Company Common Stock no later than immediately
prior to the Effective Time.
(i) Stock Option Acknowledgements. Stock Option Acknowledgements shall
have been executed and delivered by the holders of Company Stock Options
representing no less than eighty percent (80%) of the shares of Company
Stock available under all Company Stock Options (whether such Company Stock
Options are vested or unvested) as of immediately prior to the Effective
Time.
(j) Roll Up. Each Roll-up Transaction shall either be complete as of
the Effective Time or the parties with respect thereto shall have entered
into Escrow Agreements as contemplated by Section 7.14.
(k) Denominator Certificate. Parent shall have received the
Denominator Certificate in form reasonably acceptable to Parent.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 Termination.
This Agreement may be terminated at any time prior to the Closing Date,
whether before or after approval by the stockholders of the Company, as follows:
(a) The Company shall have the right to terminate this Agreement:
(i) if the Merger is not completed by the date 120 days from the
date of this Agreement otherwise than on account of delay or default on
the part of the Company, provided that Parent may
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extend such date for an additional 30 days if all Parent Required
Statutory Approvals and all Company Required Statutory Approvals have
not then been obtained or if the transactions contemplated by Section
7.14 shall not have been concluded;
(ii) if the Merger is enjoined by a final, unappealable court order
not entered at the request or with the support of the Company or any of
its 5% stockholders or any of their affiliates or associates;
(iii) if Parent (A) fails to perform in any material respect any of
its material covenants in this Agreement and (B) does not cure such
default in all material respects within thirty (30) days after written
notice of such default is given to Parent by the Company;
(iv) if any condition set forth in Section 8.1 or Section 8.2
hereof is not satisfied, other than as a result of the conduct of the
Company;
(v) if the Parent Value is less than $15.65; or
(vi) if the Parent shall not have received the consent of its
senior lender specified in Section 8.2(h) by not later than August 15,
1997.
(b) Parent shall have the right to terminate this Agreement.
(i) if the Merger is not completed by the date 120 days from the
date of this Agreement otherwise than account of delay or default on the
part of Parent, provided that Company may extend such date for an
additional 30 days if all Parent Required Statutory Approvals and
Company Required Statutory Approvals have not then been obtained or if
the transactions contemplated by Section 7.14 shall not have been
concluded;
(ii) if the Merger is enjoined by a final, unappealable court order
not entered at the request or with the support of Parent or any of its
5% stockholders or any of their affiliates or associates;
(iii) if the Company (A) fails to perform in any material respect
any of its material covenants in this Agreement and (B) does not cure
such default in all material respects within thirty (30) days after
written notice of such default is given to the Company by Parent; or
(iv) if any condition set forth in Section 8.1 or Section 8.3
hereof is not satisfied, other than as a result of the conduct of
Parent.
(c) As used in this Agreement, (i) "affiliate" has the meaning
assigned to it in the Federal securities laws and (ii) "group" has the
meaning set forth in Section 13(d) of the Exchange Act and the rules and
regulations thereunder.
SECTION 9.2 Effect of Termination.
In the event of termination of this Agreement by either Parent or the
Company, as provided in Section 9.1 hereof, this Agreement shall forthwith
become void and there shall be no further obligation on the part of the Company,
Parent, Acquisition or their respective officers or directors with respect to
obligations existing thereunder prior to the termination (except as set forth in
this Section 9.2 and in Sections 7.1, 7.6 and 7.8 hereof and except for the
rights of any non-breaching party in respect of a willful breach or a knowing
violation by another party of a covenant, representation or warranty hereunder,
all of which shall survive the termination).
SECTION 9.3 Amendment.
This Agreement may not be amended except by action taken by the parties'
respective boards of directors or duly authorized committees thereof and then
only by an instrument in writing signed on behalf of each of the parties hereto
and in compliance with applicable law.
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SECTION 9.4 Waiver.
At any time prior to the Effective Time, the parties hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant thereto and
(c) waive compliance with any provisions of this Agreement or conditions
contained herein except that, after the vote of the Company's stockholders with
respect to this Agreement, the Exchange Ratio shall not be changed from that
provided herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 Non-Survival of Representations and Warranties.
All representations and warranties in this Agreement shall not survive the
Merger, and after effectiveness of the Merger neither the Company, Parent, the
Surviving Corporation or their respective officers or directors shall have any
further obligation with respect thereto.
SECTION 10.2 Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, mailed by nationally recognized
overnight mail service or sent via facsimile to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to Parent or Acquisition to:
FPA Medical Management, Inc.
3636 Nobel Drive, 2nd Floor
San Diego, CA 92122
Attention: Chief Financial Officer
with copies to:
James A. Lebovitz, Esq.
Senior Vice President,
General Counsel & Secretary
FPA Medical Management, Inc.
3636 Nobel Drive, 2nd Floor
San Diego, CA 92122
and
Pillsbury Madison & Sutro LLP
101 W. Broadway, Suite 1800
San Diego, CA 92101
Attention: David R. Snyder, Esq.
(b) If to the Company, to:
Health Partners, Inc.
800 Connecticut Avenue
Norwalk, CT 06854
Attention: Charles G. Berg,
Chief Executive Officer
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with a copy to:
Bruce D. Meyer, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
SECTION 10.3 Interpretation.
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
In this Agreement, unless a contrary intention appears, (i) the words "herein",
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular Article, Section or other
subdivision and (ii) reference to any Article or Section means such Article or
Section hereof. No provision of this Agreement shall be interpreted or construed
against any party hereto solely because such party or its legal representative
drafted such provision.
SECTION 10.4 Miscellaneous.
This Agreement (including the documents and instruments referred to herein)
(a) constitutes the entire agreement and supersedes all other prior agreements
and understandings, both written and oral, among the parties, or any of them,
with respect to the subject matter hereof, (b) except with respect to the
provisions of Sections 3.5 and 7.12, is not intended to confer upon any other
person any rights or remedies hereunder and shall be binding upon and inure to
the benefit solely of each party hereto, and their respective successors and
assigns, and (c) shall not be assigned by operation of law or otherwise, except
that Acquisition may assign this Agreement to any other wholly-owned subsidiary
of Parent. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY,
INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 10.5 Counterparts.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement. Each party agrees (i) to accept the facsimile signature of the
other party's representatives hereto and (ii) to be bound by its own
representative's facsimile signature hereon.
IN WITNESS WHEREOF, Parent, Acquisition and the Company have caused this
Agreement to be signed by their respective officers as of the date first written
above.
Parent
FPA MEDICAL MANAGEMENT, INC.
By: /s/ SETH M. FLAM
------------------------------------
Print Name: Seth M. Flam
Title: President & Chief Executive
Officer
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Acquisition
FPA ACQUISITION CORP.
By: /s/ SETH M. FLAM
------------------------------------
Print Name: Seth M. Flam
Title: President & Chief Executive
Officer
Company
HEALTH PARTNERS, INC.
By: /s/ CHARLES G. BERG
------------------------------------
Print Name: Charles G. Berg
Title: Chief Executive Officer
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APPENDIX B
[LETTERHEAD OF SMITH BARNEY INC.]
July 1, 1997
The Board of Directors
Health Partners, Inc.
800 Connecticut Avenue
Norwalk, Connecticut 06854
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Health Partners, Inc. ("Health
Partners") of the consideration to be received by such holders pursuant to the
terms and subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of July 1, 1997 (the "Merger Agreement"), by and among FPA
Medical Management, Inc. ("FPA"), FPA Acquisition Corp., a wholly owned
subsidiary of FPA ("Acquisition Sub"), and Health Partners. As more fully
described in the Merger Agreement, (i) Acquisition Sub will be merged with and
into Health Partners (the "Merger") and (ii) the outstanding shares of the
common stock, par value $0.001 per share, of Health Partners (the "Health
Partners Common Stock") will be converted into the right to receive that number
of shares of the common stock, par value $0.002 per share, of FPA (the "FPA
Common Stock") having an aggregate value of $115 million (the "Merger
Consideration"), subject to adjustment as more fully specified in the Merger
Agreement if the average closing prices of FPA Common Stock for the 10
consecutive trading days ending on the date that is two trading days prior to
the closing of the Merger is less than $18.00 or greater than $22.00.
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of Health Partners and certain senior officers and other
representatives of FPA concerning the businesses, operations and prospects of
Health Partners and FPA. We examined certain business and financial information
relating to Health Partners and certain publicly available business and
financial information relating to FPA as well as certain financial forecasts and
other information and data for Health Partners and FPA which were provided to or
otherwise discussed with us by the respective managements of Health Partners and
FPA, including information relating to certain strategic implications and
operational benefits anticipated to result from the Merger. We reviewed the
financial terms of the Merger as set forth in the Merger Agreement in relation
to, among other things: current and historical market prices and trading volumes
of FPA Common Stock; the historical and projected earnings and other operating
data of Health Partners and FPA; and the capitalization and financial condition
of Health Partners and FPA. We considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which we
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations we considered relevant in evaluating those
of Health Partners and FPA. We also evaluated the potential pro forma financial
impact of the Merger on FPA. In connection with our engagement, we were
requested to approach on a limited basis, and held discussions with, certain
third parties to solicit indications of interest in a possible acquisition of
Health Partners. In addition to the foregoing, we conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of Health Partners and FPA that such forecasts and
other information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Health
Partners and
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The Board of Directors
Health Partners, Inc.
July 1, 1997
Page 2
FPA as to the future financial performance of Health Partners and FPA and the
strategic implications and operational benefits anticipated to result from the
Merger. We have assumed, with your consent, that the Merger will be treated as a
pooling of interests in accordance with generally accepted accounting principles
and as a tax-free reorganization for federal income tax purposes. We also have
assumed, with your consent, and have taken into account to the extent relevant
to our analysis, that prior to the consummation of the Merger all outstanding
shares of the Series A Convertible Preferred Stock, par value $0.001 per share,
of Health Partners and Series B Convertible Preferred Stock, par value $0.001
per share, of Health Partners and all outstanding minority interests in
subsidiaries of Health Partners will be converted into shares of Health Partners
Common Stock. We are not expressing any opinion as to what the value of the FPA
Common Stock actually will be when issued to Health Partners stockholders
pursuant to the Merger or the price at which the FPA Common Stock will trade
subsequent to the Merger. We have not made or been provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Health Partners or FPA nor have we made any physical inspection of the
properties or assets of Health Partners or FPA. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Smith Barney has been engaged to render financial advisory services to Health
Partners in connection with the proposed Merger and will receive a fee for such
services, a significant portion of which is contingent upon the consummation of
the Merger. We also will receive a fee in connection with the delivery of this
opinion. In the ordinary course of our business, we and our affiliates may
actively trade or hold the securities of FPA for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. We have in the past provided investment banking
services to FPA unrelated to the proposed Merger, for which services we have
received compensation. In addition, we and our affiliates (including Travelers
Group Inc. and its affiliates) may maintain relationships with Health Partners
and FPA.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Health Partners in its evaluation of
the proposed Merger, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Merger. Our opinion may not be published or otherwise used
or referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to the holders of Health Partners Common Stock.
Very truly yours,
SMITH BARNEY INC.
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APPENDIX C
DELAWARE GENERAL CORPORATIONS
LAW SECTION 262
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
subsection (g) of sec. 251), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the
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date the notice is given; provided that, if the notice is given on or after
the effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
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<PAGE> 168
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE> 169
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify its officers, directors, employees and
agents (or persons who have served, at the corporation's request, as officers,
directors, employees or agents of another corporation) against the expenses,
including attorneys' fees, actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors, officers, employees or agents, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceedings, had no reason to believe his conduct was unlawful, except that if
such action shall be in the right of the corporation, no such indemnification
shall be provided as to any claim, issue or matter as to which such person shall
have been adjudged to have been liable to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware, or any other court
in which the suit was brought, shall determine upon application that, in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
FPA's Certificate of Incorporation, as amended, has the following
indemnification provisions:
"SEVENTH"
A. Each person who was or is a party or is threatened to be made a party to
or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall
be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgements,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) actually and reasonably incurred or suffered by such person
in connection therewith, and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in Paragraph
B hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Article SEVENTH shall be a contract
right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition; provided, however, that, if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
person while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final disposition
of a proceeding, shall be made only upon delivery to the Corporation of
an undertaking, by or on behalf of such director or officer, to repay
all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Article
SEVENTH or otherwise. The Corporation may, by action of its Board
II-1
<PAGE> 170
of Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
B. If a claim under Paragraph A of this Article SEVENTH is not paid in full
by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall
be a defense to any such action (other than a action brought to enforce
a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the
Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of providing such
defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable
standard of conduct set forth in the Delaware General Corporation Law,
nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not
met the applicable standard of conduct.
C. The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in
this Article SEVENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
FPA's By-laws similarly provide that FPA shall indemnify its officers and
directors to the fullest extent permitted by the Delaware Law.
In addition, FPA has entered into individual indemnification agreements
(the "Indemnification Agreements") with each of the directors. The general
effect on directors' liabilities is set forth in the provisions of the
Indemnification Agreements summarized below:
Proceedings Other Than Proceedings by or in the Right of FPA. A director
shall be entitled to the rights of indemnification if, by reason of his position
with FPA, he is, or is threatened to be made, a party to any threatened,
pending, or completed proceeding, other than a proceeding by or in the right of
FPA. In such case, such director shall be indemnified against all expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such proceeding
or any claim, issue or matter therein, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of FPA and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
Proceedings by or in the Right of Company. Generally, a director shall be
entitled to the rights of indemnification if, by reason of his position with
FPA, he is, or is threatened to be made, a party to any threatened, pending or
completed proceeding brought by or in the right of FPA to procure a judgment in
its favor. In such case, the director shall be indemnified against all expenses
actually and reasonably incurred by him or on his behalf in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of FPA; provided, however, that if
applicable law so provides, no indemnification against such expenses shall be
made in respect of any claim, issue or
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<PAGE> 171
matter in such proceeding as to which the director shall have been adjudged to
be liable to FPA unless and to the extent that the Court of Chancery of the
State of Delaware, or the court in which such proceeding shall have been brought
or is pending, shall determine that such indemnification may be made.
Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of the Indemnification
Agreements, to the extent that the director is, by reason of his position with
FPA, a party to and is successful, on the merits or otherwise, in any
proceeding, he shall be indemnified against all expenses actually and reasonably
incurred by him or on his behalf in connection therewith. If the director is not
wholly successful in such proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
proceeding, FPA shall indemnify the director against all expenses actually and
reasonably incurred by him or on his behalf in connection with each successfully
resolved claim, issue or matter.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibit
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C> <C>
2 -- Agreement and Plan of Merger by and among the Registrant, FPA Acquisition Corp.
and Health Partners, Inc. (included as Appendix A)
3.1 -- Certificate of Incorporation.*
3.2 -- Bylaws.*
3.3 -- Certificate of Amendment of Certificate of Incorporation filed October 20, 1994
(incorporated by reference to FPA's Annual Report on Form 10-K for the year ended
December 31, 1994 at Exhibit No. 3.3.
4.1 -- Specimen of Common Stock Certificate.*
4.2 -- Form of Warrant.*
4.3 -- Indenture dated as of December 18, 1996, by and between the Registrant and the
Trustee for the 6 1/2% Convertible Subordinated Debentures (incorporated by
reference to the Registrant's Current Report on Form 8-K dated December 18,
1996.)
4.4 -- Registration Rights Agreement dated December 13, 1996 by and among the Registrant
and the Initial Purchasers of the 6 1/2% Convertible Subordinated Debentures
(incorporated by reference to the Registrant's Current Report on Form 8-K dated
December 18, 1996.)
4.5 -- Form of Rule 144A Restricted Global Debenture (incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 18, 1996.)
4.6 -- Form of Regulation S Global Debenture (incorporated by reference to the
Registrant's Current Report on Form H-K dated December 18, 1996.)
4.7 -- Registration Rights Agreement dated June 30, 1997 by and among the Registrant,
and certain stockholders of HealthCap, Inc. (incorporated by reference to
Registration Statement No. 333-21251 at Exhibit No. 4.7)
4.8 -- Form of Registration Rights Agreement by and among the Registrant and certain
holders of Health Partners, Inc. Common Stock and Preferred Stock.
4.9 -- Registration Rights Agreement dated September 2, 1997 by and among the Registrant
and the shareholders of Emergency Medical Care Incorporated.
5 -- Opinion of Pillsbury Madison & Sutro LLP.
</TABLE>
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<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C> <C>
8.1 -- Opinion of Pillsbury Madison & Sutro LLP with respect to tax matters.
8.2 -- Opinion of Gibson, Dunn & Crutcher LLP with respect to tax matters.
10.1 -- IPA Medicare Partial Risk Services Agreement between Pacificare of California and
Family Practice Associates of San Diego, Inc. ("FPASD") dated January 1, 1993,
including an amendment thereto date effective January 1, 1994.* **
10.2 -- [Reserved]
10.3 -- Medical Services Organization Agreement dated January 21, 1995 between FPANJ and
Medigroup, Inc. (HMO Blue).* **
10.4 -- Pacificare IPA Commercial Services Agreement with FPASD dated May 1, 1995.* **
10.5 -- Amendment to IPA Medicare Partial Risk Services Agreement between Pacificare of
California and FPASD dated April 1995.* **
10.6 -- [Reserved]
10.7 -- Form of Primary Care Physician Agreement/California.* **
10.8 -- Form of Specialty Care Physician Agreement/California.* **
10.9 -- Form of Administrative Services Agreement between FPA and a Professional
Corporation.*
10.10 -- Form of Administrative Services Agreement between FPA and a Professional
Corporation.*
10.11 -- Form of Succession Agreement.*
10.12 -- Employment Agreement between FPA and Dr. Sol Lizerbram effective as of October 1,
1996.
10.13 -- Employment Agreement between FPA and Dr. Seth Flam effective as of October 1,
1996.
10.14 -- Employment Agreement between FPA and Dr. Howard Hassman effective as of October
1, 1996.
10.15 -- Employment Agreement between FPA and Dr. Kevin Ellis effective as of October 1,
1996.
10.16 -- Employment Agreement between FPA and Steven M. Lash effective as of October 1,
1996.
10.17 -- Employment Agreement between FPA and Robert J. Burg effective December 1, 1994
(incorporated by reference to FPA's Annual Report on Form 10-K for the year ended
December 31, 1994 at Exhibit No. 10.27).
10.18 -- Employment Agreement between FPA and James A. Lebovitz effective as of February
1, 1997.
10.19 -- FPA Amended Omnibus Stock Option Plan (incorporated by reference to Registration
Statement No. 333-34027 at Exhibit 99).
10.20 -- [Reserved]
10.21 -- [Reserved]
10.22 -- [Reserved]
10.23 -- [Reserved]
10.24 -- 401(k) Salary Savings Plan effective January 1, 1994 (incorporated by reference
to Registration Statement No. 33-79714 at Exhibit 10.20).
10.25 -- 1995 Directors Stock Option Plan.*
10.26 -- 1994 Physicians Stock Option Plan.*
</TABLE>
II-4
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C> <C>
10.27 -- Credit, Security, Guarantee and Pledge Agreement dated as of January 29, 1996
among FPA and its subsidiaries and certain guarantors and the lenders named
therein and Banque Paribas, as amended March 15, 1996 (incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
10.28 -- Agreement and Plan of Merger among FPA, FPA Acquisition Corporation and AHI
Healthcare Systems, Inc. made November 8, 1996, as amended by Amendment No. 1 to
Agreement and Plan of Merger, dated as of February 5, 1997 (incorporated by
reference to Registration Statement No. 333-21721 at Exhibit No. 2).
10.29 -- Form of Indemnification Agreement*
10.30 -- Stock and Note Purchase Agreement by and among, inter alia, the Registrant and
Foundation Health Corporation dated as of June 28, 1996 (incorporated by
reference to Registrant's Current Report on Form 8-K dated June 21, 1996).
10.31 -- Agreement and Plan of Merger dated June 5, 1997 by and among the Registrant, FPA
Acquisition Corp. and HealthCap, Inc. (incorporated by reference to Registration
Statement No. 333- 31351 at Exhibit No. 10.31).
10.32 -- Credit Agreement dated as of June 30, 1997 by and among the Registrant, Lehman
Commercial Paper, Inc. and the lenders parties thereto (incorporated by reference
to Registration Statement No. 333-31351 at Exhibit No. 10.32).
10.33 -- HealthCap Management Group, Inc. 1994 Stock Option Plan (incorporated by
reference to Registration Statement No. 333- 31341 at Exhibit No. 99.1).
10.34 -- HealthCap Management Group, Inc. Quality Consultant Stock Option Plan
(incorporated by reference to Registration Statement No. 333-31341 at Exhibit No.
99.2).
13 -- Annual Report on Form 10-K (incorporated by reference to Registrant's Annual
Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended December
31, 1996).
21 -- Subsidiaries of FPA.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Coopers & Lybrand LLP.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Ernst & Young LLP.
23.5 -- Consent of Deloitte & Touche LLP.
23.6 -- Consent of Pillsbury Madison & Sutro LLP (included in Exhibits 5 and 8.1).
23.7 -- Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.2)
24 -- Power of Attorney (included in Part II of Registration Statement).
99 -- Form of HPI Proxy.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential portions
have been filed separately.
II-5
<PAGE> 174
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933, as amended
(the "Securities Act"), and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
application of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set for the registration
statement. Notwithstanding the
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<PAGE> 175
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b)(sec. 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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<PAGE> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on September 17, 1997.
FPA MEDICAL MANAGEMENT INC.
By: /s/ SETH FLAM
------------------------------------
Seth Flam
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated on September 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------------
<C> <S>
/s/ SOL LIZERBRAM Director and Chairman of the Board of
- ----------------------------------------------- Directors
Sol Lizerbram
/s/ SETH FLAM President, Chief Executive Officer and
- ----------------------------------------------- Director (Principal Executive Officer)
Seth Flam
*/s/ STEPHEN J. DRESNICK Director and Vice-Chairman of the Board of
- ----------------------------------------------- Directors
Stephen J. Dresnick
/s/ STEVEN M. LASH Executive Vice President and Chief Financial
- ----------------------------------------------- Officer and Treasurer (Principal Financial
Steven M. Lash and Accounting Officer)
*/s/ HOWARD HASSMAN Director
- -----------------------------------------------
Howard Hassman
*/s/ KEVIN ELLIS Director
- -----------------------------------------------
Kevin Ellis
*/s/ SHELDON DEREZIN Director
- -----------------------------------------------
Sheldon Derezin
*/s/ HERBERT A. WERTHEIM Director
- -----------------------------------------------
Herbert A. Wertheim
* /s/ JAMES A. LEBOVITZ
- -----------------------------------------------
James A. Lebovitz,
Attorney-in-Fact
</TABLE>
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<PAGE> 177
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- --------------------------------------------------------------------------- ----------
<S> <C> <C>
2 Agreement and Plan of Merger by and among the Registrant, FPA Acquisition
Corp. and Health Partners, Inc. (included as Appendix A)...................
3.1 Certificate of Incorporation*..............................................
3.2 Bylaws*....................................................................
3.3 Certificate of Amendment of Certificate of Incorporation filed October 20,
1994 (incorporated by reference to FPA's Annual Report on Form 10-K for the
year ended December 31, 1994 at Exhibit No. 3.3)...........................
4.1 Specimen of Common Stock Certificate*......................................
4.2 Form of Warrant*...........................................................
4.3 Indenture dated as of December 18, 1996, by and between the Registrant and
the Trustee for the 6 1/2% Convertible Subordinated Debentures
(incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 18, 1996)...................................................
4.4 Registration Rights Agreement dated December 13, 1996 by and among the
Registrant and the Initial Purchasers of the 6 1/2% Convertible
Subordinated Debentures (incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 18, 1996)........................
4.5 Form of Rule 144A Restricted Global Debenture (incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 18, 1996).......
4.6 Form of Regulation S Global Debenture (incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 18, 1996)...........
4.7 Registration Rights Agreement dated June 30, 1997 by and among the
Registrant and certain stockholders of HealthCap, Inc. (incorporated by
reference to Registration Statement No. 333-31351 at Exhibit No. 4.7)......
4.8 Form of Registration Rights Agreement by and among the Registrant and
certain holders of Health Partners, Inc. Common Stock and Preferred
Stock......................................................................
4.9 Registration Rights Agreement dated September 2, 1997 by and among the
Registrant and the shareholders of Emergency Medical Care Incorporated.....
5 Opinion of Pillsbury Madison & Sutro LLP...................................
8.1 Opinion of Pillsbury Madison & Sutro LLP with respect to tax matters.......
8.2 Opinion of Gibson, Dunn & Crutcher LLP with respect to tax matters.........
10.1 IPA Medicare Partial Risk Services Agreement between Pacificare of
California and Family Practice Associates of San Diego, Inc. ("FPASD")
dated January 1, 1993, including an amendment thereto effective the date
thereof and an amendment thereto date effective January 1, 1994* **........
10.2 [Reserved].................................................................
10.3 Medical Services Organization Agreement dated January 21, 1995 between
FPANJ and Medigroup, Inc. (HMO Blue)* **...................................
10.4 Pacificare IPA Commercial Services Agreement with FPASD dated May 1, 1995*
**.........................................................................
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
Pacificare of California and FPASD dated April 1995* **....................
10.6 [Reserved].................................................................
10.7 Form of Primary Care Physician Agreement/California* **....................
</TABLE>
<PAGE> 178
<TABLE>
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SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
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<S> <C> <C>
10.8 Form of Specialty Care Physician Agreement/California* **..................
10.9 Form of Administrative Services Agreement between FPA and a Professional
Corporation.*..............................................................
10.10 Form of Administrative Services Agreement between FPA and a Professional
Corporation.*..............................................................
10.11 Form of Succession Agreement.*.............................................
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as of
October 1, 1996............................................................
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of October
1, 1996....................................................................
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as of
October 1, 1996............................................................
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
October 1, 1996............................................................
10.16 Employment Agreement between FPA and Steven M. Lash effective as of October
1, 1996....................................................................
10.17 Employment Agreement between FPA and Robert J. Burg effective December 1,
1994 (incorporated by reference to FPA's Annual Report on Form 10-K for the
year ended December 31, 1994 at Exhibit No. 10.27).........................
10.18 Employment Agreement between FPA and James A. Lebovitz effective as of
February 1, 1997...........................................................
10.19 FPA Amended Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 333-34027 at Exhibit 99)........................
10.20 [Reserved].................................................................
10.21 [Reserved].................................................................
10.22 [Reserved].................................................................
10.23 [Reserved].................................................................
10.24 401(k) Salary Savings Plan effective January 1, 1994 (incorporated by
reference to Registration Statement No. 33-79714 at Exhibit 10.20).........
10.25 1995 Directors Stock Option Plan.*.........................................
10.26 1994 Physicians Stock Option Plan.*........................................
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January 29,
1996 among FPA and its subsidiaries and certain guarantors and the lenders
named therein and Banque Paribas, as amended March 15, 1996 (incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)...................................................
10.28 Agreement and Plan of Merger among FPA, FPA Acquisition Corporation and AHI
Healthcare Systems, Inc. made November 8, 1996, as amended by Amendment No.
1 to Agreement and Plan of Merger, dated as of February 5, 1997
(incorporated by reference to Registration Statement No. 333-21721 at
Exhibit No. 2).............................................................
10.29 Form of Indemnification Agreement.*........................................
10.30 Stock and Note Purchase Agreement among, inter alia, the Registrant and
Foundation Health Corporation dated as of June 28, 1996 (incorporated by
reference to Registrant's Current Report on Form 8-K dated June 21,
1996)......................................................................
</TABLE>
<PAGE> 179
<TABLE>
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SEQUENTIAL
EXHIBIT PAGE
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<S> <C> <C>
10.31 Agreement and Plan of Merger dated June 5, 1997 by and among the
Registrant, FPA Acquisition Corp. and HealthCap, Inc. (incorporated by
reference to Registration Statement No. 333-31351 at Exhibit No. 10.31)....
10.32 Credit Agreement dated June 30, 1997 by and among the Registrant, Lehman
Commercial Paper, Inc. and the lenders parties thereto (incorporated by
reference to Registration Statement No. 333-31351 at Exhibit No. 10.32)....
10.33 HealthCap Management Group, Inc. 1994 Stock Option Plan (incorporated by
reference to Registration Statement No. 333-31341 at Exhibit No. 99.1).....
10.34 HealthCap Management Group, Inc. Quality Consultant Stock Option Plan
(incorporated by reference to Registration Statement No. 333-31341 at
Exhibit No. 99.2)..........................................................
13 Annual Report on Form 10-K (incorporated by reference to Registrant's
Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year
ended December 31, 1996)...................................................
21 Subsidiaries of FPA........................................................
23.1 Consent of Deloitte & Touche LLP...........................................
23.2 Consent of Coopers & Lybrand LLP...........................................
23.3 Consent of KPMG Peat Marwick LLP...........................................
23.4 Consent of Ernst & Young LLP...............................................
23.5 Consent of Deloitte & Touche LLP...........................................
23.6 Consent of Pillsbury Madison & Sutro LLP (included in Exhibits 5 and
8.1).......................................................................
23.7 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.2)...........
24 Power of Attorney (included in Part II of Registration Statement)..........
99 Form of HPI Proxy..........................................................
</TABLE>
- ---------------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential portions
have been filed separately.
<PAGE> 1
EXHIBIT 4.8
REGISTRATION RIGHTS AGREEMENT
Dated as of ________ __, 1997
by and among
FPA MEDICAL MANAGEMENT, INC.
as the Company,
and
Persons Listed on Schedule I hereto
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of ______
__, 1997, by and among FPA Medical Management, Inc., a Delaware corporation (the
"Company"), and the Person(s) listed on Schedule I hereto (the "Holders").
BACKGROUND
This Agreement is made pursuant to the Agreement and Plan of Merger,
dated as of July 1, 1997 (the "Merger Agreement"), by and among the Company, a
wholly owned subsidiary of the Company and Health Partners, Inc., a Delaware
corporation ("Health Partners"). The execution of this Agreement is a condition
to the closing of the transactions contemplated by the Merger Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Advice: As defined in the last paragraph of Section 3 hereof.
Affiliate: As to any specified Person shall mean any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
Agreement: This Registration Rights Agreement, as the same may be
amended, supplemented or modified from time to time in accordance with the terms
hereof.
Business Day: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or other applicable place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
Closing Date: As defined in the Merger Agreement.
Commission: The Securities and Exchange Commission.
Common Stock: Common stock, $0.02 par value per share, of the Company.
<PAGE> 3
Company: FPA Medical Management, Inc., a Delaware corporation, and any
successor corporation thereto.
Effectiveness Period: As defined in Section 2(a) hereof.
Effectiveness Target Date: The 90th day following the Closing Date.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission pursuant thereto.
Filing Date: The 60th day following the Closing Date.
Indemnified Person: As defined in Section 5(a) hereof.
Person: Any individual, partnership, joint venture, corporation, trust
or unincorporated organization.
Proceeding: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the Person subject thereto,
threatened.
Prospectus: The prospectus included in the Shelf Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated pursuant to the Securities
Act), as amended or supplemented by any prospectus supplement, with respect to
the terms of the resale of any portion of the Restricted Securities covered by
such Shelf Registration Statement, and all other amendments and supplements to
any such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
Holders: The Persons listed on Schedule I hereto.
Shelf Registration Statement: The registration statement of the Company
that covers the resale of any of the Restricted Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference, if any, in such
registration statement.
Rule 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 158: Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
2
<PAGE> 4
Rule 174: Rule 174 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 415: Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
Restricted Securities: The shares of Common Stock received by each
Holder pursuant to the terms of the Merger Agreement and any stock dividends
with respect to such shares until, in the case of any such share of Common
Stock, (i) the date on which it has been registered effectively pursuant to the
Securities Act and disposed of in accordance with the Shelf Registration
Statement relating to it, or (ii) the date on which the shares of Common Stock
are distributed to the public pursuant to Rule 144 (or any similar provisions
then in effect) or are salable pursuant to Rule 144(k) promulgated by the
Commission pursuant to the Securities Act.
2. Shelf Registration
(a) The Company agrees to file with the Commission as soon as
practicable after the Closing Date, but in no event earlier than the Filing
Date, a Shelf Registration Statement for an offering to be made on a continuous
basis pursuant to Rule 415 covering all of the Restricted Securities. The Shelf
Registration Statement shall initially be on Form S-3 under the Securities Act
or another appropriate form permitting registration of such Restricted
Securities for resale by the Holders in the manner or manners reasonably
designated by them. The Company shall not permit any securities other than the
Restricted Securities to be included in the Shelf Registration Statement. The
Company shall use its reasonable efforts, as described in Section 3, to cause
the Shelf Registration Statement to be declared effective pursuant to the
Securities Act as promptly as is practicable following the filing thereof, with
a goal of having the Shelf Registration Statement declared effective on or prior
to the Effectiveness Target Date, and (subject to Section 7 hereof) to keep the
Shelf Registration Statement continuously effective under the Securities Act
thereafter for the period ending two years after the Closing Date (except during
periods following the filing of a post effective amendment thereto and prior to
the declaration of the effectiveness of such post effective amendment; provided,
the Company shall use its reasonable efforts to cause any such post effective
amendment to be declared effective as soon as practicable) (subject to extension
pursuant to clause (b)), or such shorter period as may be specified by the
Commission in amending Rule 144 or ending when there cease to be outstanding any
Restricted Securities (the "Effectiveness Period").
3
<PAGE> 5
(b) The Company shall use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective (except during periods following
the filing of a post effective amendment thereto and prior to the declaration of
the effectiveness of such post effective amendment; provided, the Company shall
use its reasonable best efforts to cause any such post effective amendment to be
declared effective as soon as practicable) by supplementing and amending the
Shelf Registration Statement as required by the rules, regulations or
instructions applicable to the registration form used for such Shelf
Registration Statement if required by the Securities Act or reasonably requested
by the Holders.
3. Registration Procedures
In connection with the Company's registration obligations hereunder, the
Company shall effect such registration on the appropriate form available for the
sale of the Restricted Securities to permit the sale of the Restricted
Securities in accordance with the method or methods of disposition thereof
specified by the Holders, and pursuant thereto the Company shall as
expeditiously as reasonably possible:
(a) No fewer than five Business Days prior to the initial filing of the
Shelf Registration Statement or Prospectus and, if practical, no fewer than two
Business Days prior to the filing of any amendment or supplement thereto (other
than any document that would be incorporated or deemed to be incorporated
therein by reference), furnish to the Holders, copies of all such documents
proposed to be filed, which documents, if practical (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders. The Company shall not file such Shelf Registration
Statement or related Prospectus or any amendments or supplements thereto to
which the Holders covered thereby shall reasonably object on a timely basis;
(b) Prepare and file with the Commission such amendments, including
post-effective amendments, to each Shelf Registration Statement as may be
necessary to keep such Shelf Registration Statement continuously effective for
the Effectiveness Period; cause the related Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
securities covered by such Shelf Registration Statement during such period in
accordance with the intended methods of disposition by the selling Holders
thereof contemplated hereby and set forth in such Shelf Registration Statement
as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders promptly (and in the case of an event specified
by clause (i)(A) of this paragraph, if practical, in no event fewer than two
Business Days prior to such filing), and (if requested by any such Person),
confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus
Supplement or post-effective amendment is proposed to be filed, and (B) with
respect to the Shelf Registration Statement or any post-effective amendment,
when the same has become effective, (ii) of any request by the Commission or any
other federal or state governmental authority for amendments or supplements to
the Shelf Registration Statement or related Prospectus or for additional
information, (iii) of the issuance by the Commission, any state securities
commission, any other governmental agency or any court of any stop order, order
or injunction
4
<PAGE> 6
suspending or enjoining the use or the effectiveness of the Shelf Registration
Statement or the Initiation of any proceedings for that purpose, (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Restricted
Securities for sale in any jurisdiction, or the initiation or threat of any
proceeding for such purpose, and (v) of the happening of any event that makes
any statement made in such Shelf Registration Statement or related Prospectus or
any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes in
such Shelf Registration Statement, Prospectus or documents so that, in the case
of the Shelf Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, not misleading, and that
in the case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of any order enjoining or suspending the use or
effectiveness of the Shelf Registration Statement or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Restricted Securities for sale in any jurisdiction, at the earliest reasonable
practicable moment;
(e) If requested by the Holders, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment such information as Holders
indicate relates to them or otherwise reasonably request be included therein,
and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law;
(f) Furnish to each Holder without charge, at least one conformed copy
of the Shelf Registration Statement and each amendment thereto, including
financial statements (but excluding schedules, all documents incorporated or
deemed to be incorporated therein by reference);
(g) Deliver to each Holder as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons reasonably request; and the Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the Holders in connection with the offering and sale of the
Restricted Securities covered by such Prospectus and any amendment or supplement
thereto;
(h) Prior to any public offering of the Restricted Securities, use its
reasonable best efforts to register or qualify or cooperate with the Holders in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Restricted Securities for offer and sale
under the securities or "Blue Sky" laws of such jurisdictions within the United
States as any Holder reasonably requests in writing and to cause the offering of
the Restricted Securities covered by the Shelf Registration Statement to be
registered with or approved by such
5
<PAGE> 7
other governmental agencies or authorities within the United States, except as
may be required as a consequence of the selling Holder's business (in which case
the Company will cooperate in all reasonable respects with the filing of such
Shelf Registration Statement therewith and granting of approvals thereby), as
may be necessary to enable the selling Holders to consummate the disposition of
such Restricted Securities; keep each such registration or qualification (or
exemption therefrom) or approval effective during the period such Shelf
Registration Statement is required to be kept effective and do any and all other
acts necessary or advisable to enable the disposition in such jurisdictions of
the Restricted Securities covered by the Shelf Registration Statement; provided,
however, that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any tax
in any such jurisdiction where it is not then so subject;
(i) In connection with any sale or transfer of the Restricted Securities
that will result in such securities no longer being the Restricted Securities,
cooperate with the Holders to facilitate the timely preparation and delivery of
certificates representing the Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company and to enable such
Restricted Securities to be in such denominations and registered in such names
as the Holders may request at least two Business Days prior to any sale of the
Restricted Securities;
(j) Upon the occurrence of any event contemplated by Section 3(c)(v)
hereof, as promptly as practicable, prepare a supplement or amendment,
including, if appropriate, a post-effective amendment, to the Shelf Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, such Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(k) Comply with applicable rules and regulations of the Commission and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act), no later than 45
days after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) commencing on the first day of
the first fiscal quarter after the effective date of the Shelf Registration
Statement, which statement shall cover said period, consistent with the
requirements of Rule 158; and
(l) List all Common Stock covered by such Shelf Registration Statement
on the exchange or system, if any, on which the Common Stock of the Company is
then listed.
The Company may require each seller of the Restricted Securities as to
which any registration is being effected to: (i) furnish to the Company such
information regarding the distribution of such Restricted Securities as is
required by law to be disclosed in the Shelf Registration Statement and (ii)
provide to the Company a signed writing accepting and acknowledging its rights
and obligations hereunder. The Company may exclude from such
6
<PAGE> 8
registration the Restricted Securities of any holder of Restricted Securities
who unreasonably fails to furnish such information or signed writing at least 5
Business Days prior to the effective date of such Shelf Registration Statement.
Each Holder agrees by acquisition of the Restricted Securities that,
upon receipt of any notice from the Company of the happening of any event of the
kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), or 3(c)(v) hereof, such
Holder will forthwith discontinue disposition of such Restricted Securities
covered by such Shelf Registration Statement or Prospectus until such Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 3(i) hereof, or until it is advised in writing (the "Advice") by the
Company that the use of the applicable Prospectus may be resumed, and, in either
case, has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus.
The registration rights of the Holders pursuant to this Agreement and
the ability to offer and sell Restricted Securities pursuant to the Shelf
Registration Statement are subject to the conditions and limitations contained
in this paragraph and Section 7, and each Holder will be deemed to have agreed
with the Company that if the Board of Directors of the Company determines in its
good faith judgment, as evidenced by a resolution of the Board of Directors,
that the use of any Prospectus would require the disclosure of material
information that the Company has a bona fide business purpose for preserving as
confidential or the disclosure of which would impede the Company's ability to
consummate a significant transaction, and that the Company is not otherwise
required by applicable securities laws or regulations to disclose, upon written
notice of such determination by the Company, the rights of the Holders to offer,
sell or distribute any Restricted Securities pursuant to the Shelf Registration
Statement or to require the Company to take action with respect to the
registration or sale of any Restricted Securities pursuant to the Shelf
Registration Statement shall be suspended until the date upon which the Company
notifies the Holders in writing that suspension of such rights for the grounds
set forth in this paragraph is no longer necessary subject to the limits set
forth in Section 7, and the Company agrees to give such notice as promptly as
practicable following the date that such suspension of rights is no longer
necessary.
4. Registration Expenses
All fees and expenses incident to the performance of or compliance with
this Agreement by the Company shall be borne by it whether or not the Shelf
Registration Statement is filed or becomes effective and whether or not any
securities are issued or sold pursuant to the Shelf Registration Statement. The
fees and expenses referred to in the foregoing sentence shall include, without
limitation, (a) all registration and filing fees (including, without limitation,
fees and expenses in compliance with securities or "Blue Sky" laws (b) printing
expenses (including, without limitation, expenses of printing Prospectuses), (c)
messenger, telephone and delivery expenses, (d) fees and disbursements of
counsel for the Company; (e) Securities Act liability insurance, if the Company
desires such insurance, and (f) fees and expenses of all other Persons retained
by the Company. In addition, the Company shall pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, and the fees and expenses incurred in
7
<PAGE> 9
connection with the listing of the securities to be registered on any securities
exchange. Notwithstanding the foregoing or anything in this Agreement to the
contrary, each Holder shall pay all underwriting discounts and commissions of
any underwriters or broker-dealers with respect to any Restricted Securities
sold by it.
5. Indemnification
(a) The Company agrees to indemnify and hold harmless each Holder and
his representatives and agents (an "Indemnified Person"), from and against any
and all losses, claims, damages, liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in the Shelf
Registration Statement, Prospectus or form of Prospectus or in any amendment or
supplement thereto or in any preliminary Prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the case of any
Prospectus or form of Prospectus or supplement thereto, in the light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Indemnified Person furnished to the Company by or on
behalf of such Indemnified Person; provided that the foregoing indemnity with
respect to any preliminary Prospectus shall not inure to the benefit of any
Indemnified Person from whom the Person asserting such losses, claims, damages,
liabilities and judgments purchased securities if such untrue statement or
omission or alleged untrue statement or omission made in such preliminary
Prospectus is eliminated or remedied in the Prospectus and a copy of the
Prospectus shall not have been furnished to such Person in a timely manner
provided such failure is not as a result of an action or inaction on the part of
the Indemnifying Person.
(b) In case any action shall be brought against any Indemnified Person,
based upon the Shelf Registration Statement or any such Prospectus or any
amendment or supplement thereto and with respect to which indemnity may be
sought against the Company, such Indemnified Person shall promptly notify the
Company in writing and the Company shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Person and
payment of all fees and expenses. Any Indemnified Person shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person, unless (i) the employment of such counsel shall have
been specifically authorized in writing by the Company, (ii) the Company shall
have failed to assume the defense and employ counsel for the Indemnified Parties
or (iii) the named parties to any such action (including any impleaded parties)
include both such Indemnified Person and the Company and such Indemnified Person
shall have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company (in which case the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Person), provided, however,
that the Company shall not, in connection with any such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Indemnified Persons, which firm shall be designated in
writing by such Indemnified Persons; and provided, however, that all such fees
and expenses shall
8
<PAGE> 10
be reimbursed as they are incurred. The Company shall not be liable for any
settlement of any such action effected without its written consent but if
settled with the written consent of the Company, the Company agrees to indemnify
and hold harmless any Indemnified Person from and against any loss or liability
by reason of such settlement. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(c) In connection with the Shelf Registration Statement, each Holder
participating in such Shelf Registration Statement agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its officers
and any Person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Indemnified Person but only with
reference to information relating to such Indemnified Person furnished by or on
behalf of such Indemnified Person. In case any action shall be brought against
the Company, any of its directors, any such officer or any Person controlling
the Company based on such Shelf Registration Statement and in respect of which
indemnity may be sought against any Indemnified Person, the Indemnified Person
shall have the rights and duties given to the Company (except that if the
Company shall have assumed the defense thereof, such Indemnified Person shall
not be required to do so, but may employ separate counsel therein and
participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person), and the Company, its
directors, any such officers and any Person controlling the Company shall have
the rights and duties specified for Indemnified Persons in Section 5(b) hereof.
(d) If the indemnification provided for in this Section 5 is unavailable
to an indemnified party in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claim, damages,
liabilities and judgments (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and each
Indemnified Person on the other hand from the offering of the Restricted
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and each such Indemnified Person in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative fault of the Company and each such Indemnified
Person shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company or such Indemnified
Person and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation (even if the Indemnified Persons were treated as one entity for
such purpose) or by any other method of allocation which
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does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 5, no Indemnified Person shall be required to contribute any amount in
excess of the amount by which the total net proceeds received by it in
connection with the sale of the Restricted Securities pursuant to this Agreement
exceeds the amount of any damages which such Indemnified Person has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. The Indemnified Persons' obligations to contribute pursuant
to this Section 5(d) are several in proportion to the respective amount of
Restricted Securities included in any such Shelf Registration Statement by each
Indemnified Person and not joint.
6. Rule 144
The Company shall use its reasonable best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it will, upon the
request of any Holder, make available other information as required by, and so
long as necessary to permit, sales of its Restricted Securities pursuant to Rule
144.
7. Standstill Request.
In connection with any Shelf Registration Statement filed pursuant to
this Agreement, the Holders, and each of them, agree to refrain from selling
Restricted Securities pursuant to such Shelf Registration Statement during any
period in which the Company is engaged in an offering of securities or during
which the securities laws or other regulatory requirements or the reasonable
requirements of investment bankers to the Company make such action necessary or
appropriate from the standpoint of the Company; provided, however, that each
Holder's ability to sell its Restricted Securities under this Agreement shall
not be suspended for more than (A) 10 consecutive trading days in any calendar
year or 30 days in aggregate during any calendar year (pro-rated for calendar
year 1997) (in each case other than as specified in clauses (B) and (C) below),
including without limitation by reason of any suspension or stop order with
respect to the Registration Statement or the fact that an event (other than an
event described in clauses (B) or (C) below) has occurred as a result of which
the Prospectus (including any supplements thereto) included in such Registration
Statement then in effect contains any untrue statements of material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, but other than in connection with a Permitted Public
Offering (as hereinafter defined), (B) 45 consecutive days or 90 days in the
aggregate during any calendar year (pro-rated for calendar year 1997), in
connection with one or more material acquisitions by the Company, which
acquisitions require the Company to present the financial statements of the
acquired business in accordance with Rule 3-05 of Regulation S-X under the
Exchange Act, or pro forma financial information in
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accordance with Rule 11-01 of Regulation S-X under the Exchange Act, which
presentation requirement shall result in a Holder's inability to use the
Registration Statement to offer and sell Restricted Securities, or (C) 10 days
prior to, and 30 days subsequent to the pricing of each Permitted Public
Offering, but not in excess of 80 days in the aggregate in any calendar year
(pro-rated for calendar year 1997). A "Permitted Public Offering" shall mean a
bona fide public offering of shares of Common Stock which raises gross proceeds
of at least $25 million. In such event, the Company will notify Holders in
writing (a) at least 10 days before the effective date of any such offering, or
(b) promptly upon a determination by the Company as to the securities law or
regulatory or other requirement prompting the invoking of this Section 7. Should
it be necessary to terminate the effectiveness of any Shelf Registration
Statement or blue sky qualification filed hereunder for the period described in
this Section 7, as soon as practicable thereafter, the Company shall take all
appropriate steps, at its own expense, to have the Shelf Registration Statement,
or any substitute registration made necessary by the prior termination, declared
effective by the Commission and qualify all Shares under the "blue sky" or other
securities laws of all states in which the Shares were previously qualified.
8. Miscellaneous
(a) Remedies. In the event of a breach by the Company, or by a Holder of
any of their obligations under this Agreement, each Holder or the Company, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company and each Holder agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of any of the provisions of this Agreement and hereby further agrees that,
in the event of any action for specific performance in respect of such breach,
it shall waive the defense that a remedy at law would be adequate.
(b) No Piggyback on Registrations. After the date hereof, the Company
shall not grant to any of its security holders (other than the Holders) the
right to include any of its securities in the Shelf Registration Statement other
than Restricted Securities.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, without the written consent of each of the Holders.
(d) Notices. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified first
class mail, return receipt requested, telex or telecopy:
If the Company:
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Tel: (619) 453-1000
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Fax: (619) 453-1941
Attn: Chief Financial Officer
with copies to:
James A. Lebovitz, Esq.
Senior Vice President,
General Counsel and Secretary
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
and
Pillsbury Madison & Sutro LLP
101 West Broadway, Suite 1800
San Diego, California 92101
Attention: David R. Snyder, Esq.
If to any Holder:
at the address and telephone numbers set forth for such
Holder on Schedule 1 hereto
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071-3197
Tel: (213) 229-7000
Fax: (213) 229-7520
Attn: Bruce D. Meyer, Esq.
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (i) delivered by hand, if
personally delivered, (ii) one Business Day after being timely delivered to a
next-day air courier, (iii) five Business Days after being deposited in the
mail, postage prepaid, if mailed, (iv) when answered back, if telexed or (v)
when receipt is acknowledged by the recipient's telecopier machine, if
telecopied.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. Notwithstanding the foregoing, no
transferee shall have any of the rights granted under this Agreement until such
transferee shall acknowledge its rights and obligations hereunder by a signed
written statement of such transferee's acceptance of such rights and
obligations.
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<PAGE> 14
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, as applied to contracts made
and performed within the State of New York without regard to principles of
conflicts of law.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
(i) Authority. The Company hereby represents to the parties listed on
Schedule I hereto that this Agreement has been duly authorized, executed and
delivered.
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
FPA MEDICAL MANAGEMENT, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
OXFORD HEALTH PLANS, INC.
By:______________________________________
Name:_________________________________
Title:________________________________
WELLPOINT DEVELOPMENT COMPANY, INC.
By:______________________________________
Name:_________________________________
Title:________________________________
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SCHEDULE I
OXFORD HEALTH PLANS, INC.
WELLPOINT DEVELOPMENT COMPANY, INC.
CHARLES G. BERG
CHARLES D. PHILLIPS
PAUL CONLIN
STEPHEN F. WIGGINS
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EXHIBIT 4.9
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is entered into
as of September 2, 1997 by and between FPA MEDICAL MANAGEMENT, INC., a Delaware
corporation (the "Company"), and the persons and entities listed on the
signature pages hereto (individually, a "Shareholder," and collectively, the
"Shareholders"),
W I T N E S S E T H:
WHEREAS, the Company, Sterling Healthcare Group, Inc., a Florida
corporation and wholly owned subsidiary of the Company ("Sterling"), EMC
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
Sterling, Emergency Medical Care Incorporated, a Missouri corporation ("EMC"),
and one of the Shareholders of EMC have entered into that certain Agreement and
Plan of Merger dated as of August 2, 1997 (the "Merger Agreement"), in which,
in consideration for the sale of the Shareholders' outstanding shares of
capital stock of EMC to the Company, the Shareholders are to receive, among
other things, shares of Common Stock, par value $0.002 per share, of the
Company (the "Common Stock"), which shares are not registered under the
Securities Act, as defined below; and
WHEREAS, the parties hereto wish to enter into this Agreement to
provide for the registration of such shares of Common Stock;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Shareholders
hereby agree as follows:
Article 1. Registration.
1.1 Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:
(a) "Advice": See the last paragraph of Section 2.2.
(b) "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
(c) "Effectiveness Period": See Section 2.1(a).
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(e) "Holder" shall mean the Shareholders, and any transferee or
subsequent transferee of Registrable Securities originally issued to the
Shareholders (other than a transferee who purchases the
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Registrable Securities in a sale effected pursuant to any Registration
Statement).
(f) "Prospectus" shall mean the prospectus included in any
Registration Statement (including, without limitation, a prospectus that
discloses information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated under
the Securities Act), as amended or supplemented by any prospectus supplement,
including, without limitation, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement
and all other amendments and supplements to the prospectus, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such prospectus.
(g) "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(h) "Registrable Securities" shall mean shares of Common Stock issued
to the Shareholders pursuant to the Merger Agreement; provided, however, that
Registrable Securities shall not include any such shares of Common Stock which
have been sold under an effective Registration Statement by Shareholder.
(i) "Registration Expenses": See Section 2.3.
(j) "Registration Statement" shall mean any registration statement of
the Company that covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement, including post-effective
amendments, all exhibits, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
(k) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "Rule 415" shall mean Rule 415 as promulgated by the Commission
under the Securities Act, as such rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
2. Registration.
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2.1 Piggy Back Registration Rights. (a) If at any time during the
period commencing on the Effective Time (as defined in the Merger Agreement)
and ending on the earliest to occur of the following: (i) all Registrable
Securities have been sold under a Registration Statement, or (ii) Holders no
longer hold any Registrable Securities or (iii) all Registrable Securities held
by Holders may be sold in compliance with Rule 144 (the "Effectiveness
Period"), the Company proposes to register any of its securities under the
Securities Act on any form for the registration of securities under the
Securities Act, whether or not for its own account (other than by a
registration statement on Form S-4 or Form S-8 or other form which does not
include substantially the same information as would be required in a form for
the general registration of securities or would not be available for the
Registrable Securities) (a "Piggy Back Registration"), it shall as
expeditiously as possible give written notice to the Holders of its intention
to do so and of the Holders' rights under this Section 2. (Such rights are
referred to hereinafter as "Piggy Back Registration Rights.") Upon the written
request of the Holders made within five (5) business days after receipt of any
such notice (which request shall specify the Registrable Securities intended to
be disposed of by the Holders, excluding however, Registrable Securities
covered by a Registration Statement which has been declared effective under the
Securities Act), the Company shall include in the Registration Statement the
Registrable Securities which the Company has been so requested to register by
the Holders and the Company shall use reasonable efforts to prepare and file
with, and have declared effective by, the Commission a Registration Statement
with respect to all of the Registrable Securities. The Company shall use
reasonable efforts to maintain the effectiveness of any Registration Statement
covering Registrable Securities for the period necessary for the Holders to
effect the proposed sale or other disposition (but in no event for a period
greater than 90 days).
(b) If at any time after giving written notice of its intention to
register any securities in a Piggy Back Registration but prior to the effective
date of the related Registration Statement, the Company shall determine for any
reason not to register such securities, the Company shall give written notice
of such determination to the Holders and thereupon shall be relieved of its
obligation to register any Registrable Securities in connection with such Piggy
Back Registration.
(c) If a Piggy Back Registration involves an offering by or through
one or more underwriters, then the Holders, provided they have requested to
have Registrable Securities included in the Company's Registration Statement,
shall agree to sell their Registrable Securities to the underwriters selected
by the Company on the same terms and conditions as apply to other selling
shareholders and enter into an underwriting agreement with such underwriters
containing customary representations and warranties.
(d) The Registration Statement filed in accordance with this Section
may include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(e) If a Piggy Back Registration involves an offering by or through
one or more underwriters, the Company shall not be required to include
Registrable Securities therein if and to the extent the underwriter managing
the offering reasonably believes in good faith and advises the Company (which
in turn advises the Holders) that such inclusion would materially adversely
affect such offering. In the event that less than all Registrable Securities
are to be included in a Registration Statement as a result of the provisions of
this Section 2.1(e), (i) all shares of Common Stock to be offered pursuant to
such Registration Statement by stockholders not holding contractual
registration rights shall first be excluded and (ii) thereafter, to the extent
necessary, the number of shares of Common Stock, if any,
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to be offered for the accounts of Holders and other stockholders of the Company
holding contractual registration rights shall be reduced pro rata on the basis
of the relative number of shares of Common Stock held by each stockholder that
are registrable pursuant to contractual registration rights to the number
recommended by such managing underwriter.
2.2 Registration Procedures. In connection with the Company's
registration obligations under Section 2.1 hereof, the Company shall effect
such registration to permit the sale of the Registrable Securities in
accordance with the method or methods of disposition thereof intended by the
Holder, and pursuant thereto the Company shall as expeditiously as practicable
(and any obligations of the Company relating to Registrable Securities shall
extend to Registrable Securities covered by an effective Registration
Statement, all of which have not yet been sold):
(a) Before filing any Registration Statement or Prospectus or any
amendments or supplements thereto (other than documents that would be
incorporated or deemed to be incorporated therein by reference and that the
Company is required by applicable securities laws or stock exchange
requirements to file), furnish to the Holders copies of all such documents
proposed to be filed, which documents will be subject to the review of such
Holders and their counsel, if any, and the Company shall not file any such
Registration Statement or amendment thereto or any Prospectus or any supplement
thereto (other than such documents which, upon filing, would be incorporated or
deemed to be incorporated by reference therein and that the Company is required
by applicable securities laws or stock exchange requirements to file) to which
the Holders of a majority of the securities covered by such Registration
Statement shall reasonably object on a timely basis. In the event of any such
objection, the Holders shall provide the Company with any required revisions to
such prospectus or supplement within ten (10) days of such objection.
(b) Prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the applicable
period specified in Section 2.1(a); cause the related Prospectus to be amended
or supplemented by any required Prospectus amendment or supplement, and as so
amended or supplemented to be filed pursuant to Rule 424 (or any similar
provisions then in force) under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the methods of disposition intended by the Holders thereof
set forth in such Registration Statement as so amended or in such Prospectus as
so supplemented.
(c) Notify the Holders promptly, and confirm such notice in writing,
(i) when a Prospectus or any Prospectus supplement or post- effective amendment
has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective, (ii) of any
request by the Commission or any other federal or state governmental authority
during the period of effectiveness of the Registration Statement for amendments
or supplements to a Registration Statement or related Prospectus or for
additional information, (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a Registration Statement or the initiation of any proceedings
for that purpose, (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, (v) of the
existence of any fact or the happening of any event that makes any statement
made in such Registration Statement or related Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or which requires the making of any changes in such
Registration Statement, Prospectus or
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documents so that, in the case of the Registration Statement, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and that in the case of the Prospectus, it will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and (vi) of
the Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
(d) Use all reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.
(e) If reasonably requested by the Holders of a majority of the
securities being sold, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the Company or the Holders of a
majority of such securities agree should be included therein as required by
applicable law, (ii) make all required filings of such Prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such Prospectus
supplement or post-effective amendment, and (iii) supplement or make amendments
to any Registration Statement consistent with clause (i) or (ii) above;
provided, that the Company shall not be required to take any actions under this
paragraph that are not, in the opinion of outside counsel for the Company, in
compliance with applicable law.
(f) Furnish to each Holder and its counsel, if any, upon written
request and without charge, at least one conformed copy of the Registration
Statement or Statements and any post-effective amendment thereto, including
financial statements (but excluding schedules, all documents incorporated or
deemed to be incorporated therein by reference and all exhibits, unless
requested in writing by such Holder or counsel).
(g) Deliver to each Holder and its counsel, if any, without charge,
as many copies of the Prospectus or Prospectuses relating to such Registrable
Securities (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons may reasonably request in writing; and the
Company hereby consents to the use of such Prospectus or each amendment or
supplement thereto by each Holder in connection with the offering and sale of
the Registrable Securities covered by such Prospectus or any amendment or
supplement thereto.
(h) Use all reasonable efforts to register and qualify the
Registrable Securities under (or obtain exemption from) the securities or Blue
Sky laws of such jurisdictions within the United States as any Holder
reasonably requests in writing; keep each such registration or qualification
(or exemption therefrom) effective during the applicable period set forth in
Section 2.1(a) and do any and all other acts or things necessary or advisable
to enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable Registration Statement; provided, that the Company
will not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified or (ii) take any action that
would subject it to general service of process in any such jurisdiction where
it is not then so subject.
(i) Cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities within the United States, except as may be
required solely as a consequence of the nature of any Holder or Holders, in
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which case the Company will cooperate in all reasonable respects with the
filing of such Registration Statement and the granting of such approvals, as
may be necessary to enable such Holder or Holders to consummate the disposition
of such Registrable Securities.
(j) Within five (5) days following the occurrence of any event
contemplated by paragraphs 2.2(c)(v) or 2.2(c)(vi) above, prepare and file with
the Commission a supplement or post-effective amendment to each Registration
Statement or an amendment or supplement to the related Prospectus or any
document incorporated therein by reference or file any other required document
(such as a Current Report on Form 8-K) so that, as thereafter delivered to the
purchasers of the Registrable Securities being sold thereunder, such Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the five-(5) day period may be extended by
an additional 30 days if in the good faith judgment of the Board of Directors
of the Company, such amended or supplemental disclosures would be seriously
detrimental to the Company at such time and the Board of Directors concludes
that it is essential not to make such amended or supplemental disclosures and
the Company shall furnish to the Holders a certificate signed by the President
of the Company certifying thereto; provided further that the Company may not
extend such period more than once in any twelve-month period.
(k) If necessary in connection with a disposition of Registrable
Securities, make available for inspection, at the offices where normally kept
during reasonable business hours, by a representative of any Holder and any
attorney or accountant retained by such Holder, financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries as they may reasonably request, and cause the officers, directors
and employees of the Company and its subsidiaries to supply all information
reasonably requested by any such representative, attorney or accountant in
connection with such disposition; provided, that any records, information or
documents that are designated by the Company in writing as confidential at the
time of delivery of such records, information or documents shall be kept
confidential by such Persons, and such Persons shall so agree in writing,
unless (i) such records, information or documents are in the public domain or
otherwise publicly available, (ii) disclosure of such records, information or
documents is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities or (iii) disclosure of such
records, information or documents is otherwise required by law (including,
without limitation, pursuant to the requirements of the Securities Act).
(l) Comply with all applicable rules and regulations of the
Commission and make generally available to its securityholders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 45 days after the end of any 12 month period (or 90 days after
the end of any 12 month period if such period is a fiscal year) commencing on
the first day of the first fiscal quarter of the Company, after the effective
date of a Registration Statement, which statements shall cover said 12 month
periods.
(m) Enter into such agreements and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of such
Registrable Securities.
(n) Unless any Registrable Securities shall be in book-entry only
form, cooperate with the Holders and transfer agent and registrar to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and enable such
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Registrable Securities to be in such denominations and registered in such names
as a Holder may request.
(o) Cause the Common Stock to be listed on each securities exchange
or quotation system on which the Company's Common Stock is then listed no later
than the date the Registration Statement is declared effective and, in
connection therewith, to the extent applicable, to make any required filings
under the Exchange Act and to have such filings declared effective thereunder.
The Company may require a Holder, and each Holder agrees, to furnish
to the Company such information regarding the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request in writing
and the Company may exclude from such registration the Registrable Securities
of any Holder if such Holder unreasonably fails to furnish such information
within a reasonable time after receiving such request. Each Holder agrees
promptly to furnish to the Company all information required to be disclosed in
order to make the information previously furnished to the Company by such
Holder not misleading. Any sale of any Registrable Securities by any Holder
shall constitute a representation and warranty by such Holder that the
information relating to such Holder and its plan of distribution is as set
forth in the Prospectus delivered by such Holder in connection with such
disposition, that such Prospectus does not as of the time of such sale contain
any untrue statement of a material fact relating to such Holder or its plan of
distribution and that such Prospectus does not as of the time of such sale omit
to state any material fact relating to such Holder or its plan of distribution
necessary to make the statements in such Prospectus, in the light of the
circumstances under which they were made, not misleading.
Each Holder agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in paragraphs 2.2(c)(ii),
2.2(c)(iii), 2.2(c)(iv), 2.2(c)(v) or 2.2(c)(vi) hereof, such Holder will
forthwith discontinue disposition of such Registrable Securities covered by the
applicable Registration Statement or Prospectus until such Holder's receipt of
the copies of the supplemented or amended Prospectus contemplated by paragraph
2.2(j) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and has received
copies of any additional or supplemental filings that are incorporated or
deemed to be incorporated by reference in such Prospectus. The Company agrees
to give the Advice promptly after it determines that the use of the applicable
Prospectus may be resumed.
2.3 Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any of the Registration Statements become
effective and whether or not any of the Registrable Securities are transferred
pursuant to the Registration Statement. Such fees and expenses shall include,
without limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to designation of the
Registrable Securities as eligible for trading on The Nasdaq Stock Market's
National Market, and (B) of compliance with securities or Blue Sky laws), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities in a form eligible for deposit with The
Depository Trust Company and of printing Prospectuses), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and counsel for the Holders in connection with the Registration
Statement (provided that the Company shall not be liable for the reasonable
fees and expenses of more than one separate firm for all parties other than the
Company participating in any transaction hereunder), (v) reasonable fees and
disbursements of all independent certified public accountants, (vi) Securities
Act liability insurance if the Company so desires such insurance, and (vii)
fees and expenses of all other Persons retained by the Company. In addition,
the Company will, in any event, bear its own internal expenses
-7-
<PAGE> 8
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange on which similar securities
issued by the Company are then listed and the fees and expenses of any Person,
including special experts, retained by the Company. The Holders shall pay all
underwriting or brokerage commissions and discounts, if any, associated with
the Registrable Securities being sold by the Holders pursuant to the Piggy Back
Registration.
3. Indemnification.
(a) To the maximum extent permitted by law, the Company will
indemnify and hold harmless each Holder of such Registrable Securities and each
person, if any, who controls such Holder within the meaning of the Securities
Act or the Exchange Act, against any losses, claims, damages or liabilities
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law; and the Company will reimburse
each such Holder or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, expense, liability or action to the extent
that it arises out of or is based upon a Violation which arises out of or is
based upon information furnished in writing for use in connection with such
registration by any such Holder or controlling person; provided, further, that
the Company will not be liable to any Holder or controlling person with respect
to any loss, claim, damage, expense or liability arising out of or based upon
any untrue statement or alleged untrue statement or omission or alleged
omission to state a material fact in any preliminary prospectus which is
corrected in an amended, supplemented or final prospectus if the purchaser
asserting such loss, claim, damage, expense or liability purchased from such
Holder and was not sent or given a copy of such amended, supplemented or final
prospectus at or prior to the sale of Registrable Securities to such purchaser.
(b) To the maximum extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the Registrable
Securities as to which such registration, qualification or compliance is being
effected, indemnify and hold harmless the Company and each person who controls
the Company within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise
out of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation arises out of or is based upon information
furnished in writing by such Holder for use in connection with
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<PAGE> 9
such registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld. Each
Holder's liability under this paragraph shall not exceed the net proceeds
actually received by such Holder from the sale of Registrable Securities held
by such Holder included in such registration, qualification or compliance.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). Without limiting the generality of the foregoing,
the Indemnified Party may withhold its consent to any such counsel who also
acts as counsel to the Indemnifying Party (with respect to such claim or
otherwise) and the Indemnified Party reasonably believes that there exists a
conflict of interest between the Indemnified Party and the Indemnifying Party,
with respect to such claim or litigation. In such event, the Indemnifying
Party shall bear the expense of another counsel who shall represent the
Indemnified Party and any other persons or entities who have indemnification
rights from the Indemnifying Party hereunder, with respect to such claim or
litigation, and shall be selected as provided in the first sentence of this
paragraph. The Indemnified Party may participate in such defense at such
party's expense (except to the extent that the Indemnifying Party is required
to pay the expense of such counsel pursuant to this paragraph). The failure of
any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless such failure
is materially prejudicial to the Indemnifying Party in defending such claim or
litigation. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability with respect to such claim or
litigation.
(d) If the indemnification provided for in this Section is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions which resulted in such loss, liability, claim,
damage or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Each Holder's
liability under this paragraph shall not exceed the net proceeds actually
received by such Holder from the sale of Registrable Securities held by such
Holder included in the relevant registration, qualification or compliance.
-9-
<PAGE> 10
4. Information Requirements
(a) The Company shall file in a timely manner the reports required to
be filed by it under the Securities Act and the Exchange Act, and if at any
time the Company is not required to file such reports, it will, upon the
request of any Holder, make publicly available other information so long as
necessary to permit sales pursuant to Rule 144 under the Securities Act. The
Company further covenants that it will cooperate with any Holder and take such
further action as such Holder may reasonably request (including without
limitation making such representations as any such Holder may reasonably
request), all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144 under the
Securities Act. Upon the request of any Holder, the Company shall deliver to
such Holder a written statement as to whether it has complied with such filing
requirements.
(b) The Company shall file in a timely manner the reports required to
be filed by it under the Exchange Act and shall comply with all other
requirements set forth in the instructions to Form S-3 in order to allow the
Company to be eligible to file registration statements on Form S-3.
5. Miscellaneous.
5.1 No Inconsistent Agreements. The Company has not entered, as
of the date hereof, and shall not enter, on or after the date of this
Agreement, any agreement with respect to its securities which is inconsistent
with the rights granted to the Holders in this Agreement [except for that
certain Registration Rights Agreement to be entered into by and among the
Company and certain of the stockholders of Health Partners, Inc.].
5.2 Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of each
Holder.
5.3 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing and shall be deemed given (i) when
made, if made by hand delivery, (ii) upon confirmation, if made by facsimile
transmission or (iii) one business day after being deposited with a reputable
next-day courier, charges prepaid, to the parties as follows:
(a) if to a Holder, at the most current address given by
such Holder to the Company in accordance with the provisions of this
Section (or, if no such address has been furnished by such Holder, to
such Holder in care of Patrick D. Barron at 2002 Kehrsboro Drive,
Clarkson Valley, Missouri 63005); and
(b) if to the Company,
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: James A. Lebovitz, Esq.
Facsimile No.: (619) 453-1941
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<PAGE> 11
or to such other address as any party may have furnished to the other parties
in writing in accordance herewith.
5.4 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties. The Company may not assign its rights or obligations hereunder
without the prior written consent of Holders of a majority of the Registrable
Securities.
5.5 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
5.6 Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
5.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, as applied to
contracts made and performed within the State of California, without regard to
principles of conflicts of laws.
5.8 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties hereto shall
use their best efforts to find and employ an alternative means to achieve the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
5.9 Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and the registration rights
granted by the Company with respect to the Common Stock issued to Shareholder
pursuant to the Merger Agreement. Except as provided in the Merger Agreement,
there are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein, with respect to the registration rights
granted by the Company with respect to the Common Stock. This Agreement
supersedes all prior agreements and understandings among the parties with
respect to such registration rights.
5.10 Attorneys' Fees. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the prevailing party, as determined by the
court, shall be entitled to recover reasonable attorneys' fees in addition to
any other available remedy.
5.11 Further Assurances. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things reasonably necessary, proper or advisable under
applicable law, and execute and deliver such documents and other papers, as may
be required to carry out the provisions of this Agreement and the other
documents contemplated hereby and consummate and make effective the
transactions contemplated hereby.
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<PAGE> 12
5.12 Termination. This Agreement and the obligations of the
parties hereunder shall terminate at the end of the Effectiveness Period,
except for any liabilities or obligations under Sections 2.3 or 3 or the
proviso of paragraph 2.2(k) above, which shall remain in effect in accordance
with their terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FPA Medical Management, Inc.
By /s/ James A. Lebovitz
---------------------------------------
Title Senior Vice President and Secretary
------------------------------------
Shareholders:
/s/ Patrick D. Barron
-----------------------------------------
/s/ Cathryn E. Barron - Trustee
-----------------------------------------
/s/ Cathryn E. Barron - Trustee
-----------------------------------------
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<PAGE> 1
EXHIBIT 5
September 17, 1997
FPA Medical Management, Inc.
3636 Nobel Drive, Second Floor
San Diego, CA 92122
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
FPA Medical Management, Inc., a Delaware corporation (the "Company"),
has filed a Registration Statement on Form S-4 (the "Registration Statement")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to the issuance of a maximum of 6,388,889 shares of the
Company's common stock, par value $.002 per share (the "Common Stock") The
Common Stock is issuable upon the effectiveness of the merger (the "Merger") of
a wholly-owned subsidiary of the Company with and into Health Partners, Inc., a
Delaware corporation ("HPI"), pursuant to the terms of that certain Agreement
and Plan of Merger dated July 1, 1997 by and among the Company, HPI and a wholly
owned subsidiary of the Company (the "Merger Agreement").
Based upon the foregoing, it is our opinion that the shares of Common
Stock which are the subject of the Registration Statement, when issued and sold
in accordance with the terms of the Merger Agreement, will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit 5.1 to the Registration Statement.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
<PAGE> 1
EXHIBIT 8.1
September 17, 1997
FPA Medical Management, Inc.
3636 Nobel Drive, 2nd Floor
San Diego, CA 92122
Ladies and Gentlemen:
With reference to the Registration Statement on Form S-4 (the
"Registration Statement") filed by FPA Medical Management, Inc., a Delaware
corporation ("FPA"), with the Securities and Exchange Commission in connection
with the Registration under the Securities Act of 1933, as amended, of shares of
its common stock, par value $0.002 per share ("FPA Common Stock"), to be issued
in connection with the transactions contemplated by the Agreement and Plan of
Merger (the "Merger Agreement") dated as of July 1, 1997 by and among Health
Partners, Inc., a Delaware corporation ("HPI"), FPA and FPA Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of FPA, which Merger
Agreement is described therein and filed as Appendix A to the Registration
Statement, it is our opinion that the discussion set forth under the captions
"Summary - The Merger - Material Federal Income Tax Consequences" and "The
Merger - Certain Federal Income Tax Consequences" in the Registration Statement
describes the material federal income tax considerations relevant to the HPI
shareholders receiving FPA Common Stock pursuant to the Merger Agreement.
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the use of our name in the Registration Statement
and in the Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
<PAGE> 1
EXHIBIT 8.2
September 17, 1997
Health Partners, Inc.
800 Connecticut Avenue
Norwalk, Connecticut 06854
Ladies and Gentlemen:
With reference to the Registration Statement on Form S-4 (the
"Registration Statement") filed by FPA Medical Management, Inc., a Delaware
corporation ("FPA"), with the Securities and Exchange Commission in connection
with the Registration under the Securities Act of 1933, as amended, of shares of
its common stock, par value $0.002 per share ("FPA Common Stock"), to be issued
in connection with the transactions contemplated by the Agreement and Plan of
Merger (the "Merger Agreement") dated as of July 1, 1997 by and among Health
Partners, Inc., a Delaware corporation ("HPI"), FPA and FPA Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of FPA, which Merger
Agreement is described therein and filed as Appendix A to the Registration
Statement, it is our opinion that the discussion set forth under the captions
"Summary - The Merger - Material Federal Income Tax Consequences" and "The
Merger - Certain Federal Income Tax Consequences" in the Registration Statement
describes the material federal income tax considerations relevant to the HPI
shareholders receiving FPA Common Stock pursuant to the Merger Agreement.
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the use of our name in the Registration Statement
and in the Prospectus included therein.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
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This Employment Agreement (the "Agreement"), is made as of October 1,
1996, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company"), and Sol Lizerbram ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as Chairman of the Company, on the terms and subject to
the conditions set forth in the Agreement.
(b) Scope and Duties. Employee shall perform such executive
and managerial duties as normally associated with the position of chairman and
shall report solely to the Board of Directors of the Company (the "Board").
The duties of Employee shall be performed primarily in San Diego, California,
except for such travel in the ordinary course of the business of the Company as
may from time to time be reasonably required. Employee's principal place of
business shall be at the offices of the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board,
render services of a business nature to any other person or entity, if such
activities would materially interfere with the performance of Employee's duties
under the Agreement; provided, however, that none of the following activities
(collectively, "Permitted Activities") shall be deemed to be in violation of
the Agreement: (i) owning or managing real or personal property owned by the
Employee or his family members; (ii) owning any business which does not
compete, directly or indirectly, with the Company, so long as such interests
are held only for investment purposes; (iii) owning up to five percent (5%) of
any class of any corporation's outstanding securities which are listed on any
national securities exchange, registered under Section 12(g) of the
<PAGE> 2
FPA Medical Management, Inc.
Employment Agreement
Page -2-
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Securities Exchange Act of 1934, as amended, or otherwise regularly traded in
the over-the-counter market; (iv) holding directorships or similar positions in
any organization which is not competing with the Company and which is approved
by the Board, which approval shall not be unreasonably withheld but which shall
not be required with respect to charitable activities and community affairs
referred to in (v) below; and (v) engaging in charitable activities and
community affairs.
2. TERM OF EMPLOYMENT.
(a) The term of Employee's employment under the Agreement
will commence on the date of the Agreement and continue for a period of five
(5) years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On September 30,
2000, and on each subsequent anniversary thereof, the term of Employee's
employment shall be extended for a period of one (1) year unless, no later than
six (6) months prior to such September 30 or, if applicable, any extended term,
either party shall have given written notice to the other that it does not wish
to extend the term of the Agreement.
(b) Notwithstanding the preceding paragraph, the term of
employment shall not be extended beyond the seventh anniversary of the date of
the Agreement without the prior written consent of both parties hereto.
However, if the Employer does not offer to extend the term of employment beyond
the seventh anniversary of the date of the Agreement, beginning on such seventh
anniversary, the Company shall pay and otherwise make available to Employee (or
his estate) all compensation and benefits (including the Severance Benefits
defined hereinafter) referred to in Section 4(a)(ii), or, if the seventh
anniversary occurs within the period described in Section 4(a)(iii) hereof, the
Severance Package (defined hereinafter) referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
<PAGE> 3
FPA Medical Management, Inc.
Employment Agreement
Page -3-
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3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment under
the Agreement, the Company shall pay to Employee a base salary at the rate of
Four Hundred Forty-Five Thousand Dollars ($445,000) per year. Employee's base
salary shall be paid in equal, bimonthly installments. Employee's base salary
shall be increased from time to time by the Company but, once increased, shall
not thereafter be decreased.
(b) Performance Bonuses. Employee shall be entitled to an
annual bonus of up to one hundred fifty percent (150%) of base salary based on
the increase in the Company's earnings per share (excluding non-recurring
charges) ("EPS") on a year-to-year basis. For each one percent (1%) increase
in EPS, Employee shall be entitled to a bonus of fifteen percent (15%) of base
salary up to a maximum bonus of one hundred fifty percent (150%) of base
salary. Bonuses shall be paid within thirty (30) days from the completion of
the Company's audited financial statements for the applicable fiscal year.
(c) Other Benefits. During the term of Employee's employment
under the Agreement or in accordance with the terms of Sections 3(d) or 4 of
the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Compensation Committee of the Board,
at its sole discretion.
(ii) Benefit Plans, Medical Expense Reimbursement
and Other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and shall be included in any
employee benefit plans, programs, policies and arrangements of the Company, in-
<PAGE> 4
FPA Medical Management, Inc.
Employment Agreement
Page -4-
- --------------------------------------------------------------------------------
cluding, but not limited to, any group health and life insurance, 401(k),
profit sharing, SEPP, stock option or other plans now existing or hereafter
established which are generally made available to senior management-level
employees of the Company, but the execution of the Agreement shall not prevent
the Company from amending, modifying or terminating any such employee benefit
plan, program, policy or arrangement provided the benefits provided to Employee
as of the date hereof considered as a whole shall not be reduced by such
amendment, modification or termination. Employee shall also be provided with
all perquisites now existing or hereafter made available to senior
management-level employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all medical or dental expenses
incurred by Employee or his dependents that are not covered by the insurance
plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability, "own-occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of Base Salary in effect at the time of the disability commencing not
more than six (6) months after the date of Employee's disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this Section 3(c)(iii) as of the date hereof
considered as a whole shall not be reduced by such amendment, modification or
termination. Employee shall pay the premiums associated with such policies.
Such premiums shall be reimbursed by Company to Employee as additional taxable
compensation. The amount of the Company's premium reimbursement shall be
grossed up for state and federal income and employment
<PAGE> 5
FPA Medical Management, Inc.
Employment Agreement
Page -5-
- --------------------------------------------------------------------------------
taxes so that the net taxable effect to Employee is zero with respect to the
premiums and tax gross-up thereon.
(iv) Life Insurance.
(A) The Company shall maintain during the
term of Employee's employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those persons who are so designated from time to time by
Employee.
(B) Employee understands that the Company
may determine to purchase a key-man life insurance policy on the life of
Employee. Employee agrees to fully cooperate with the Company, submitting to
reasonable physical examinations if required to do so by the insurance carrier
or another entity. Employee acknowledges that (x) the Company shall be
responsible for any premiums due on any key-man life insurance policy, (y) all
incidents of ownership in any key-man life insurance policy on the life of
Employee are held by the Company, and (z) the Company is the sole beneficiary
of any such policy or shall appoint, in its sole discretion, a beneficiary.
The inability of the Company to secure any such policy shall not affect the
obligations of the Company hereunder.
(v) Professional Fees and Clubs. The Company shall
provide Employee with a maximum of Fifteen Thousand Dollars ($15,000) each year
during the term of the Agreement for personal financial, tax and legal
counseling or fitness club, social club, or similar benefits.
(vi) Vacation. Employee will be entitled to accrue
vacation at the rate of five (5) weeks per calendar year. During periods of
vacation, Employee's compensation shall be paid in full, and any vacation day
<PAGE> 6
FPA Medical Management, Inc.
Employment Agreement
Page -6-
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unused as of the end of any calendar year shall be accumulated and carried
forward, and may be used in any future years, provided that no more than ten
(10) weeks vacation may be taken by Employee in any calendar year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), (v) and (vi), from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until the date on which Employee commences to
receive benefits under the long-term disability plan provided pursuant to
Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee's annual base salary as set forth in Section 3(a) for an additional
thirty-six (36) consecutive months, regardless of the then-remaining term of
Employee's employment under the Agreement. Furthermore, in the event of such
disability:
(i) the benefits described in Sections 3(c)(ii) and
3(c)(iv) will continue as if Employee had continued to render services pursuant
to the Agreement and shall remain in effect for a minimum of thirty-six (36)
calendar months after the date of any such disability;
(ii) the benefits described in Section 3(c)(v) will
continue to the extent that any portion of the allowance for professional fees
and clubs set forth in such Section 3(c)(v) remains unused for the calendar
year in which such disability occurs and the Company shall not be entitled to
reimbursement of any such allowance paid prior to the disability.
To the extent the Company may not continue the benefits
described in this Section 3(d) after termination of employment for legal or
insurance underwriting
<PAGE> 7
FPA Medical Management, Inc.
Employment Agreement
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reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under a
Company's qualified retirement plan.
For purposes of this Section 3(d), the determination of
whether or not Employee is declared permanently and totally disabled shall be
made by Employee's physician, by written notice to the Board. If the Board
disagrees with the determination by Employee's physician, the Board will
appoint, at the Company's expense, another physician to make such
determination. If the physician so appointed by the Board disagrees with the
determination made by Employee's physician, then the two physicians shall
appoint a mutually acceptable third physician, at the Company's expense, to
make the final determination of whether Employee is permanently and totally
disabled, which determination will be binding on all parties hereto.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written notice from the Company to Employee. For purposes of the
Agreement, "Cause" means (A) Employee's conviction for the commission of a
felony other than a traffic violation; (B) any willful or grossly negligent act
by Employee having the effect of materially injuring the reputation or business
of the Company; or (C) the willful and continued failure by Employee to
substantially perform his duties hereunder (other than by reason of inca-
<PAGE> 8
FPA Medical Management, Inc.
Employment Agreement
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pacity due to physical or mental illness) after a written demand for
substantial performance is delivered by the Board, which demand specifically
identifies the manner in which the Board believes that the Employee has not
substantially performed the Employee's duties and which failure is not cured
within twenty (20) days after notice of such failure has been given to
Employee. For purposes of clauses (B) and (C) above, (x) no act, or failure to
act, on the Employee's part shall be deemed "willful" unless done, or omitted
to be done, by the Employee not in good faith and without reasonable belief
that the Employee's act, or failure to act, was in the best interest of the
Company and (y) in the event of a dispute concerning the application of this
provision, no claim by the Company that Cause exists shall be given effect
unless the Company establishes by clear and convincing evidence that Cause
exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or his
estate) the sum of (1) Employee's monthly base salary at the base salary rate
in effect immediately prior to the date of termination (without regard to any
decrease in such base salary giving rise to Employee's voluntary termination
pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of the
performance and any other bonuses paid or payable to Employee in respect of the
Company's fiscal year immediately preceding the date of termination. For
purposes of clause (2) of the preceding sentence, to the extent Employee's
bonus for such preceding year was payable in the form of a grant of options to
acquire Company stock ("Options"), such bonus shall be deemed to be equal to
one hundred twenty percent (120%) of the cash amount that would otherwise have
been payable to the Employee as a cash bonus but for the payment of such bonus
in the form of a grant of Options.
<PAGE> 9
FPA Medical Management, Inc.
Employment Agreement
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The amounts determined hereunder shall be payable on a monthly basis for a
period of thirty-six (36) months following the date of termination;
(B) the Company shall continue to pay for
and provide Employee with benefits set forth in Section 3(c) (other than
Sections 3(c)(i) and 3(c)(vi)) during the period that Employee is receiving the
amounts described in clause (A) above, provided that, the Company shall prepay
all remaining premiums on a paid-up basis under any insurance policy in effect
between the Employee and the Company insuring the life of the Employee and
shall transfer to the Employee any and all rights and incidents of ownership in
such arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee, and, further
provided that, all Employee stock options shall be immediately and fully vested
and exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan; and
(C) the Company shall pay to the Employee,
in a lump sum, a payment in settlement of all accrued but unused vacation days
as of the date of termination, plus a pro rata performance bonus for the year
in which occurs the date of termination, such bonus to be determined by
multiplying (1) the performance bonus that would have been payable under
Section 3(b) hereof in
<PAGE> 10
FPA Medical Management, Inc.
Employment Agreement
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respect of such year, assuming the Company's EPS for the portion of the year
through the end of the month preceding the month in which occurs the date of
termination were multiplied by the quotient obtained by dividing (i) the number
twelve (12) by (ii) the number of completed months in such year prior to the
date of termination (the "Elapsed Months"), by (2) a fraction the numerator of
which is the number of Elapsed Months and the denominator of which is twelve
(12).
The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement; (3) pursuant to Section 2 hereof, the Company elects not to extend
the term of Employee's employment under the Agreement and the Employee
terminates his employment pursuant to Section 4(b)(ii); or (4) the Employee
terminates his employment pursuant to Section 4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the date of termination or the year immediately preceding
the Change of Control, whichever bonus is greater;
<PAGE> 11
FPA Medical Management, Inc.
Employment Agreement
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(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, and 3(c)(v), including, but not limited to, the continuation in kind
(including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and in such manner as does not unreasonably interfere with the
continued use of such asset by the Company for corporate purposes) of all
perquisites provided to Employee immediately prior to the Change of Control, or
payment in lieu of such benefits (other than the aforementioned perquisites) in
an amount equal to the cost to Employee of replacing the benefits. In
addition, all Employee stock options shall be immediately and fully vested and
exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan;
(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of ownership in such
arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the
<PAGE> 12
FPA Medical Management, Inc.
Employment Agreement
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projected premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled
<PAGE> 13
FPA Medical Management, Inc.
Employment Agreement
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assuming he were eligible for such benefits as of the date of termination)
under the Company's post-retirement medical plan as in effect immediately prior
to the date of termination or, if more favorable to the Employee, as in effect
immediately prior to the Change of Control, such benefits to be provided
commencing on the later of the date on which such coverage would have first
become available and continuing for the remainder of Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the payments or benefits
(including timing and supplemental items such as acceleration of vesting)
received or to be received by the Employee in connection with a Change of
Control or the Employee's termination of employment (whether pursuant to the
terms of the Agreement or any other plan, arrangement or agreement with the
Company, any Person (as hereinafter defined) whose actions result in a Change
of Control or any Person affiliated with the Company or such Person) (such
payments or benefits, excluding the Gross-Up Payments (as hereinafter defined),
being hereinafter referred to as the "Total Payments") will be subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the
Employee an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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the Total Payments shall be treated as "parachute payments" (within the meaning
of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Employee and selected by the accounting
firm which was, immediately prior to the Change of Control, the Company's
independent auditor (the "Auditor"), such payments or benefits (in whole or in
part) do not constitute parachute payments, including by reason of Section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in
excess of the "Base Amount" (as defined in Section 280G(b)(3) of the Code)
allocable to such reasonable compensation, or are otherwise not subject to the
Excise Tax, and (iii) the value of any noncash benefits or any deferred payment
or benefit shall be determined by the Auditor in accordance with the principles
of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, the Employee shall be deemed to pay federal
income tax at the highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rate of taxation in the state and locality
of the Employee's residence on the date of termination (or if there is no date
of termination, then the date on which the Gross-Up Payment is calculated for
purposes of this Section), net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the
<PAGE> 15
FPA Medical Management, Inc.
Employment Agreement
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portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income and employment taxes imposed on the Gross-Up Payment
being repaid by the Employee, to the extent that such repayment results in a
reduction in the Excise Tax and a dollar-for-dollar reduction in the Employee's
taxable income and wages for purposes of federal, state and local income and
employment taxes), plus interest on the amount of such repayment at 120% of the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account hereunder in
calculating the Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest, penalties or additions payable by the Employee
with respect to such excess) within five (5) business days following the time
that the amount of such excess is finally determined. The Employee and the
Company shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.
(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
<PAGE> 16
FPA Medical Management, Inc.
Employment Agreement
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(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof) at least 60% of the combined
voting power of the securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of the Company (not
including in the securities Beneficially Owned by such person any securities
acquired directly from the Company or its affiliates) representing 25% or more
of the combined voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of
<PAGE> 17
FPA Medical Management, Inc.
Employment Agreement
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the Company or there is consummated an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets, other than a
sale or disposition by the Company of all or substantially all of the Company's
assets to an entity, at least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company in substantially
the same proportions as their ownership of the Company immediately prior to
such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company; and (2) the term "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
<PAGE> 18
FPA Medical Management, Inc.
Employment Agreement
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(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of written notice from Employee specifying in detail the
precise nature of the Company's breach; (2) any action by the Company resulting
in the diminution in Employee's title or the material diminution of Employee's
authority, duties or responsibilities (including, but not limited to, a
substantial diminution in corporate operating assets or employee after a sale
of corporate assets); (3) notification by the Company that Employee's principal
place of employment will be relocated under the Agreement; (4) nonpayment of
amounts due under the Agreement; or (5) a Change of Control.
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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With respect to a particular set of circumstances giving rise
to Good Reason other than 4(b)(i)(5), Employee shall waive his right to
terminate hereunder for Good Reason if he does not give written notice within
120 days of the time he first becomes aware of such circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided,
however, that if such election is made by the Company during the period
described in Section 4(a)(iii) hereof and Employee elects to terminate his
employment pursuant to the first sentence of this Section 4(b)(ii), in lieu of
the payments and benefits set forth herein, Employee shall be entitled to
receive the Severance Package referred to in Section 4(a)(iii) and, if
applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If Employee's employment under the
Agreement is terminated pursuant to this Section 4(c)(i), the Company shall pay
to Employee's estate the sum of (i) the Employee's month-
<PAGE> 20
FPA Medical Management, Inc.
Employment Agreement
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ly base salary at the base salary rate in effect at the date of death plus (2)
one-twelfth (1/12) of the performance and any other bonuses paid or payable to
Employee in respect of the year immediately preceding the date of death (such
bonus to be valued, if applicable, in the manner described in Section
4(a)(ii)(A)). The amounts determined hereunder shall be payable on a monthly
basis for a period of twelve (12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Section 4(b)(ii), the Company shall pay to Employee the base
salary that Employee would have been entitled to receive under Section 3(a)
through the date of termination.
(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of six (6) months following termination of Employee pursuant to Section
4(a)(i) (the "Noncompetition Period"), and except as provided in Section 1(c)
with regard to Permitted Activities, Employee shall not, directly or
indirectly, without the prior written consent of the Company, which consent
shall
<PAGE> 21
FPA Medical Management, Inc.
Employment Agreement
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not unreasonably be withheld, provide material consultative services with or
without pay, own, manage, operate, join, control, participate in, or be
connected as a stockholder, partner or otherwise with any business,
individual, partner, firm, corporation, or other entity that (1) is in
substantial competition with any business then actively being conducted by the
Company or any subsidiary or affiliate of the Company or (2) manages physician
groups as its principal business in California, Texas, Florida or any other
geographic area in which the Company is then doing business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it, any
of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its subsidiaries (the "Confidential
Information"), other than in the good faith performance of his duties hereunder
and with the consent of the Company, which consent shall not unreasonably be
withheld, in accordance with the Company's policies and regulations, as
established from time to time, for the protection of the Company's Confidential
Information. The term "Confidential Information" does not include, and there
shall be no obligation hereunder with respect to (a) information that is
obvious, or that may readily be determined by any person reasonably
knowledgeable in the industry in which the Company operates by diligent review
and examination of public sources, or that becomes generally available to the
public other than as a result of a disclosure by Employee (or any agent or
other representative thereof) in violation of the terms hereof, and (b) office
practices and procedures applicable to the Company's business. Employee shall
not have any obligation hereunder to keep confidential any Confidential
Information to the extent disclosure of any thereof is required by law, or
determined in
<PAGE> 22
FPA Medical Management, Inc.
Employment Agreement
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good faith by Employee to be necessary or appropriate to comply with any legal
or regulatory order, regulation or requirement; provided, however, that in the
event disclosure is required by law, Employee shall provide the Company with
reasonable notice of such requirement so that the Company may seek an
appropriate protective order. Upon termination of employment or the expiration
of the Agreement, all tangible evidence of such confidential or proprietary
information in the possession of Employee shall be returned to the Company, and
Employee shall not make or retain any copies or excerpts thereof, except that
Employee may retain copies of all materials that may be of a personal nature to
Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period of two (2) years after termination
of Employee's employment for any reason (the "Antisolicitation Period"),
Employee shall not influence or attempt to influence customers of the Company
or any of its present or future subsidiaries either directly or indirectly, to
divert their business from the Company to any individual, partnership, firm,
corporation, or other entity that is in substantial competition with any
business then being actively conducted by the Company or any subsidiary or
affiliate of the Company. Notwithstanding the foregoing, if Employee's
employment is terminated under the Agreement by the Company other than pursuant
to Section 4(a)(i), or by Employee pursuant to Section 4(b)(i) or Section
4(b)(ii), the term Antisolicitation Period shall mean the period during which
Employee is employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
<PAGE> 23
FPA Medical Management, Inc.
Employment Agreement
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(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be the sole owner of all domestic and foreign
rights pertaining to the Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall not apply to an invention which was
developed entirely on the Employee's own time without using the Company's
equipment, supplies, facilities or trade secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of
<PAGE> 24
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them, the Company shall be entitled, in addition to all other remedies it may
have, to injunctions or other appropriate orders to restrain any such breach by
Employee without showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to the
performance by the Employee of services for (or acting as a fiduciary of any
employee benefit plans, programs or arrangements of) the Company or any of its
subsidiaries or affiliates, including as a director, officer or employee of the
Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy covering the
Employee to the extent the Company provides such coverage for its other
executive officers. Notwithstanding any other provision of the Agreement, the
provisions of this Section 5 shall survive any termination or expiration of the
Agreement.
6. MISCELLANEOUS PROVISION.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
<PAGE> 25
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Employment Agreement
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If to Employee: Dr. Sol Lizerbram
P.O. Box 8101
17169 Circa Del Sur
Rancho Santa Fe, California 92067
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in this Section shall be
deemed given on the third business day following such mailing, and any notice
given by telegram as provided herein shall be deemed delivered on the business
day following the delivery of such notice to the telegraph company for
transmission.
(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all prior oral and written
understandings (including the Employment Agreement made as of January 1, 1994,
by and between Employee and the Company except for any provisions therein
relating to the grant of options) and there are no further or other agreements
or understandings, written or oral, in effect between the parties relating to
the subject matter hereof unless expressly referred to herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and
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be binding upon the parties hereto and their respective heirs, successors and
permitted assigns.
(d) Counterparts. The Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof may be
changed, waived, discharged or terminated orally or in writing, except that any
term of the Agreement may be amended and the observance of any such term may
be waived (either generally or in a particular instance and either
retroactively or prospectively) with (but only with) the written consent of
both parties hereto. No delay or omission to exercise any right, power or
remedy accruing to any party hereto shall be construed to be a waiver of any
such right, power or remedy, nor constitute any course of dealing or
performance hereunder.
(f) Legal Fees. The Company shall promptly pay or reimburse
the Employee for reasonable legal fees incurred by the Employee in disputing in
good faith any issue hereunder relating to the Employee's employment or the
termination thereof or in seeking in good faith to obtain or enforce any
benefit or right provided by the Agreement. Such payments shall be made within
five (5) business days after delivery of the Employee's written request for
payment accompanied with such evidence of fees and expenses incurred as the
Company reasonably may require.
(g) Construction. The captions assigned to the provisions of
the Agreement are for convenience only and shall be disregarded in construing
the Agreement. Unless the context otherwise requires, the pronouns of any
gender shall include the other gender, either the singular or plural shall
include the other, and the word "or" is not exclusive. All of the parties
hereto have participated in the drafting, preparation and review of
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the Agreement, and in any construction to be made of the Agreement, it shall
not be construed as against any party.
(h) Governing Law. The Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(j) Taxes. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law.
Except as otherwise expressly provided in the Agreement, the deductibility or
other tax consequence of any payment hereunder to the Company shall not be
taken into account in determining whether and to what extent payment is to be
made to Employee hereunder.
(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitra-
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tion Association, except that if the dispute relates to the application of
Section 4(a)(i) or Section 4(b)(i) hereof, the evidentiary standards set forth
therein shall apply. Any arbitration conducted pursuant to the provisions of
the Agreement shall be conducted by a recognized independent and impartial
arbitrator mutually agreed to by the parties or, if they cannot agree within
thirty (30) days after the initial demand for arbitration, by three
arbitrators, one chosen by the Company, one chosen by the Employee and the
third selected by the two so chosen. If the arbitrators selected by the
parties fail to agree on the third arbitrator within thirty (30) days of the
appointment of the second arbitrator, the third arbitrator shall be selected by
the American Arbitration Association in accordance with its then existing
rules. All fees and expenses relating to the arbitration shall be paid by the
Company. The judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement, effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /S/ Seth Flam
Its: President
By: /S/ Sheldon Derezin
Chairman, Compensation
Committee
EMPLOYEE
/s/ Sol Lizerbram
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
This Employment Agreement (the "Agreement"), is made as of October 1,
1996, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company"), and Seth Flam ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as President and Chief Executive Officer of the Company,
on the terms and subject to the conditions set forth in the Agreement.
(b) Scope and Duties. Employee shall perform such executive
and managerial duties as normally associated with the position of president and
chief executive officer and shall report solely to the Board. The duties of
Employee shall be performed primarily in San Diego, California, except for such
travel in the ordinary course of the business of the Company as may from time
to time be reasonably required. Employee's principal place of business shall
be at the offices of the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board of
Directors of the Company (the "Board"), render services of a business nature to
any other person or entity, if such activities would materially interfere with
the performance of Employee's duties under the Agreement; provided, however,
that none of the following activities (collectively, "Permitted Activities")
shall be deemed to be in violation of the Agreement: (i) owning or managing
real or personal property owned by the Employee or his family members; (ii)
owning any business which does not compete, directly or indirectly, with the
Company, so long as such interests are held only for investment purposes; (iii)
owning up to five percent (5%) of any class of any corporation's outstanding
securities which are listed on any national securities exchange, regis-
<PAGE> 2
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tered under Section 12(g) of the Securities Exchange Act of 1934, as amended,
or otherwise regularly traded in the over-the-counter market; (iv) holding
directorships or similar positions in any organization which is not competing
with the Company and which is approved by the Board, which approval shall not
be unreasonably withheld but which shall not be required with respect to
charitable activities and community affairs referred to in (v) below; and (v)
engaging in charitable activities and community affairs.
2. TERM OF EMPLOYMENT.
(a) The term of Employee's employment under the Agreement
will commence on the date of the Agreement and continue for a period of five
(5) years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On September 30,
2000, and on each subsequent anniversary thereof, the term of Employee's
employment shall be extended for a period of one (1) year unless, no later than
six (6) months prior to such September 30 or, if applicable, any extended term,
either party shall have given written notice to the other that it does not wish
to extend the term of the Agreement.
(b) Notwithstanding the preceding paragraph, the term of
employment shall not be extended beyond the seventh anniversary of the date of
the Agreement without the prior written consent of both parties hereto.
However, if the Employer does not offer to extend the term of employment beyond
the seventh anniversary of the date of the Agreement, beginning on such seventh
anniversary, the Company shall pay and otherwise make available to Employee (or
his estate) all compensation and benefits (including the Severance Benefits
defined hereinafter) referred to in Section 4(a)(ii), or, if the seventh
anniversary occurs within the period described in Section 4(a)(iii) hereof, the
Severance Package (defined hereinafter) referred to in Section 4(a)(iii) and,
if
<PAGE> 3
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applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment under
the Agreement, the Company shall pay to Employee a base salary at the rate of
Four Hundred Forty-Five Thousand Dollars ($445,000) per year. Employee's base
salary shall be paid in equal, bimonthly installments. Employee's base salary
shall be increased from time to time by the Company but, once increased, shall
not thereafter be decreased.
(b) Performance Bonuses. Employee shall be entitled to an
annual bonus of up to one hundred fifty percent (150%) of base salary based on
the increase in the Company's earnings per share (excluding non-recurring
charges) ("EPS") on a year-to-year basis. For each one percent (1%) increase
in EPS, Employee shall be entitled to a bonus of fifteen percent (15%) of base
salary up to a maximum bonus of one hundred fifty percent (150%) of base
salary. Bonuses shall be paid within thirty (30) days from the completion of
the Company's audited financial statements for the applicable fiscal year.
(c) Other Benefits. During the term of Employee's employment
under the Agreement or in accordance with the terms of Sections 3(d) or 4 of
the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Compensation Committee of the Board,
at its sole discretion.
(ii) Benefit Plans, Medical Expense Reimbursement
and other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and
<PAGE> 4
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shall be included in any employee benefit plans, programs, policies and
arrangements of the Company, including, but not limited to, any group health
and life insurance, 401(k), profit sharing, SEPP, stock option or other plans
now existing or hereafter established which are generally made available to
senior management-level employees of the Company, but the execution of the
Agreement shall not prevent the Company from amending, modifying or terminating
any such employee benefit plan, program, policy or arrangement provided the
benefits provided to Employee as of the date hereof considered as a whole shall
not be reduced by such amendment, modification or termination. Employee shall
also be provided with all perquisites now existing or hereafter made available
to senior management-level employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all medical or dental expenses
incurred by Employee or his dependents that are not covered by the insurance
plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability, "own-occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of Base Salary in effect at the time of the disability commencing not
more than six (6) months after the date of Employee's disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this Section 3(c)(iii) as of the date hereof
considered as a whole shall not be reduced by such amendment, modification or
termination. Employee shall pay the premiums associated with such policies.
Such premiums shall be reimbursed by Company to Employee as additional taxable
compensation.
<PAGE> 5
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The amount of the Company's premium reimbursement shall be grossed up for state
and federal income and employment taxes so that the net taxable effect to
Employee is zero with respect to the premiums and tax gross-up thereon.
(iv) Life Insurance.
(A) The Company shall maintain during the
term of Employee's employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those persons who are so designated from time to time by
Employee.
(B) Employee understands that the Company
may determine to purchase a key-man life insurance policy on the life of
Employee. Employee agrees to fully cooperate with the Company, submitting to
reasonable physical examinations if required to do so by the insurance carrier
or another entity. Employee acknowledges that (x) the Company shall be
responsible for any premiums due on any key-man life insurance policy, (y) all
incidents of ownership in any key-man life insurance policy on the life of
Employee are held by the Company, and (z) the Company is the sole beneficiary
of any such policy or shall appoint, in its sole discretion, a beneficiary.
The inability of the Company to secure any such policy shall not affect the
obligations of the Company hereunder.
(v) Professional Fees and Clubs. The Company shall
provide Employee with a maximum of Fifteen Thousand Dollars ($15,000) each year
during the term of the Agreement for personal financial, tax and legal
counseling or fitness club, social club, or similar benefits.
(vi) Vacation. Employee will be entitled to accrue
vacation at the rate of five (5) weeks per
<PAGE> 6
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calendar year. During periods of vacation, Employee's compensation shall be
paid in full, and any vacation day unused as of the end of any calendar year
shall be accumulated and carried forward, and may be used in any future years,
provided that no more than ten (10) weeks vacation may be taken by Employee in
any calendar year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), (v) and (vii), from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until the date on which Employee commences to
receive benefits under the long-term disability plan provided pursuant to
Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee s annual base salary as set forth in Section 3(a) for an additional
thirty-six (36) consecutive months, regardless of the then-remaining term of
Employee s employment under the Agreement. Furthermore, in the event of such
disability:
(i) the benefits described in Sections 3(c)(ii) and
3(c)(iv) will continue as if Employee had continued to render services pursuant
to the Agreement and shall remain in effect for a minimum of thirty-six (36)
calendar months after the date of any such disability;
(ii) the benefits described in Section 3(c)(v) will
continue to the extent that any portion of the allowance for professional fees
and clubs set forth in such Section 3(c)(v) remains unused for the calendar
year in which such disability occurs and the Company shall not be entitled to
reimbursement of any such allowance paid prior to the disability.
<PAGE> 7
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To the extent the Company may not continue the benefits
described in this Section 3(d) after termination of employment for legal or
insurance underwriting reasons, the Company shall provide comparable benefits
through the purchase of individual coverage or from its general assets. To the
extent benefits after termination of employment are limited or reduced under a
retirement plan qualified under Section 401 of the Internal Revenue Code, such
benefits shall be informally funded into a grantor trust established by the
Company with distribution and investment options comparable to those available
under a Company's qualified retirement plan.
For purposes of this Section 3(d), the determination of
whether or not Employee is declared permanently and totally disabled shall be
made by Employee's physician, by written notice to the Board. If the Board
disagrees with the determination by Employee's physician, the Board will
appoint, at the Company's expense, another physician to make such
determination. If the physician so appointed by the Board disagrees with the
determination made by Employee's physician, then the two physicians shall
appoint a mutually acceptable third physician, at the Company's expense, to
make the final determination of whether Employee is permanently and totally
disabled, which determination will be binding on all parties hereto.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written notice from the Company to Employee. For purposes of the
Agreement, "Cause" means (A) Employee's conviction for the commission of a
felony other than a traffic violation; (B) any willful or grossly negligent act
by Employee having the effect of materially injuring the
<PAGE> 8
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reputation or business of the Company; or (C) the willful and continued failure
by Employee to substantially perform his duties hereunder (other than by reason
of incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered by the Board, which demand specifically
identifies the manner in which the Board believes that the Employee has not
substantially performed the Employee's duties and which failure is not cured
within twenty (20) days after notice of such failure has been given to
Employee. For purposes of clauses (B) and (C) above, (x) no act, or failure to
act, on the Employee's part shall be deemed "willful" unless done, or omitted
to be done, by the Employee not in good faith and without reasonable belief
that the Employee's act, or failure to act, was in the best interest of the
Company and (y) in the event of a dispute concerning the application of this
provision, no claim by the Company that Cause exists shall be given effect
unless the Company establishes by clear and convincing evidence that Cause
exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or his
estate) the sum of (1) Employee's monthly base salary at the base salary rate
in effect immediately prior to the date of termination (without regard to any
decrease in such base salary giving rise to Employee's voluntary termination
pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of the
performance and any other bonuses paid or payable to Employee in respect of the
Company's fiscal year immediately preceding the date of termination. For
purposes of clause (2) of the preceding sentence, to the extent Employee's
bonus for such preceding year was payable in the form of a grant of options to
acquire Company stock ("Options"), such bonus shall be deemed to be equal to
one hundred twenty percent
<PAGE> 9
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(120%) of the cash amount that would otherwise have been payable to the
Employee as a cash bonus but for the payment of such bonus in the form of a
grant of Options. The amounts determined hereunder shall be payable on a
monthly basis for a period of thirty-six (36) months following the date of
termination;
(B) the Company shall continue to pay for
and provide Employee with benefits set forth in Section 3(c) (other than
Sections 3(c)(i) and 3(c)(vi)) during the period that Employee is receiving the
amounts described in clause (A) above, provided that, the Company shall prepay
all remaining premiums on a paid-up basis under any insurance policy in effect
between the Employee and the Company insuring the life of the Employee and
shall transfer to the Employee any and all rights and incidents of ownership in
such arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee, and, further
provided that, all Employee stock options shall be immediately and fully vested
and exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan; and
(C) the Company shall pay to the Employee,
in a lump sum, a payment in settlement of all accrued but unused vacation days
as of the date of termination, plus a pro rata performance bonus for the year
in
<PAGE> 10
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which occurs the date of termination, such bonus to be determined by
multiplying (1) the performance bonus that would have been payable under
Section 3(b) hereof in respect of such year, assuming the Company's EPS for the
portion of the year through the end of the month preceding the month in which
occurs the date of termination were multiplied by the quotient obtained by
dividing (i) the number twelve (12) by (ii) the number of completed months in
such year prior to the date of termination (the "Elapsed Months"), by (2) a
fraction the numerator of which is the number of Elapsed Months and the
denominator of which is twelve (12).
The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement; (3) pursuant to Section 2 hereof, the Company elects not to extend
the term of Employee's employment under the Agreement and the Employee
terminates his employment pursuant to Section 4(b)(ii); or (4) the Employee
terminates his employment pursuant to Section 4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the
<PAGE> 11
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date of termination or the year immediately preceding the Change of Control,
whichever bonus is greater;
(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, and 3(c)(v), including, but not limited to, the continuation in kind
(including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and in such manner as does not unreasonably interfere with the
continued use of such asset by the Company for corporate purposes) of all
perquisites provided to Employee immediately prior to the Change of Control, or
payment in lieu of such benefits (other than the aforementioned perquisites) in
an amount equal to the cost to Employee of replacing the benefits. In
addition, all Employee stock options shall be immediately and fully vested and
exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan;
(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of
<PAGE> 12
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ownership in such arrangements or at the Company's election, the Company shall
purchase an individual whole life policy for an equivalent face value, pay the
projected premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled assuming he were eligible for such benefits as of the date of
termination) under the Company's post-retirement medical plan as in effect
immediately prior to the date of termination or, if more favorable to the
Employee, as in effect immediately prior to the Change of Control, such
benefits to be provided commencing on the later of the date on which such
coverage would have first become available and continuing for the remainder of
Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the payments or benefits
(including timing and supplemental items such as acceleration of vesting)
received or to be received by the Employee in connection with a Change of
Control or the Employee's termination of employment (whether pursuant to the
terms of the Agreement or any other plan, arrangement or agreement with the
Company, any Person (as hereinafter defined) whose actions result in a Change
of Control or any Person affiliated with the Company or such Person) (such
payments or benefits, excluding the Gross-Up Payments (as hereinafter defined),
being hereinafter referred to as the "Total Payments") will be subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay
<PAGE> 13
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to the Employee an additional amount (the "Gross-Up Payment") such that the net
amount retained by the Employee, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be treated as "parachute
payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Employee
and selected by the accounting firm which was, immediately prior to the Change
of Control, the Company's independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(l) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "Base Amount" (as defined in Section 280G(b)(3) of the
Code) allocable to such reasonable compensation, or are otherwise not subject
to the Excise Tax, and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by the Auditor in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Employee shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Employee's residence on the date of termination (or if there is
no date of termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section), net
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Employee,
to the extent that such repayment results in a reduction in the Excise Tax and
a dollar-for-dollar reduction in the Employee's taxable income and wages for
purposes of federal, state and local income and employment taxes), plus
interest on the amount of such repayment at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Employee with respect to such
excess) within five (5) business days following the time that the amount of
such excess is finally determined. The Employee and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
<PAGE> 15
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Employment Agreement
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(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof) at least 60% of the combined
voting power of the securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation
<PAGE> 16
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Employment Agreement
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effected to implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
Beneficially Owned by such person any securities acquired directly from the
Company or its affiliates) representing 25% or more of the combined voting
power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition by
the Company of all or substantially all of the Company's assets to an entity,
at least 60% of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities
<PAGE> 17
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Employment Agreement
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under an employee benefit plan of the Company or any of its affiliates, (iii)
an underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company; and (2) the term "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of written notice from Employee specifying in detail the
precise nature of the Company's breach; (2) any action by the Company resulting
in the diminution in Employee's title or the material diminution of Employee's
authority,
<PAGE> 18
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Employment Agreement
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duties or responsibilities (including, but not limited to, a substantial
diminution in corporate operating assets or employees after a sale of corporate
assets); (3) notification by the Company that Employee's principal place of
employment will be relocated under the Agreement; (4) nonpayment of amounts due
under the Agreement; or (5) a Change of Control. Good Reason shall also exist
if Sol Lizerbram ceases to be Chairman of the Board, and Employee is not
appointed his immediate successor within 90 days of the effective date of Dr.
Lizerbram's termination as Chairman.
With respect to a particular set of circumstances giving rise
to Good Reason other than 4(b)(i)(5), Employee shall waive his right to
terminate hereunder for Good Reason if he does not give written notice within
120 days of the time he first becomes aware of the circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided,
however, that if such election is made by the Company during the period
described in Section 4(a)(iii) hereof and Employee elects to terminate his
employment pursuant to the first sentence of this Section 4(b)(ii), in lieu of
the payments and benefits set forth herein, Employee shall be entitled to
receive the Severance Package referred to in Section 4(a)(iii) and, if
applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If Employee's employment under the
Agreement is terminated pursuant to this Section 4(c)(i), the Company shall pay
to Employee's estate the sum of (i) the Employee's monthly base salary at the
base salary rate in effect at the date of death plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the year immediately preceding the date of death (such bonus to be valued, if
applicable, in the manner described in Section 4(a)(ii)(A)). The amounts
determined hereunder shall be payable on a monthly basis for a period of twelve
(12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Section 4(b)(ii), the Company shall pay to Employee the base
salary that Employee would have been entitled to receive under Section 3(a)
through the date of termination.
(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
<PAGE> 20
FPA Medical Management, Inc.
Employment Agreement
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set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of six (6) months following termination of Employee pursuant to Section
4(a)(i) (the "Noncompetition Period"), and except as provided in Section 1(c)
with regard to Permitted Activities, Employee shall not, directly or indirectly,
without the prior written consent of the Company, which consent shall not
unreasonably be withheld, provide material consultative services with or without
pay, own, manage, operate, join, control, participate in, or be connected as a
stockholder, partner or otherwise with any business, individual, partner, firm,
corporation, or other entity that (1) is in substantial competition with any
business then actively being conducted by the Company or any subsidiary or
affiliate of the Company or (2) manages physician groups as its principal
business in California, Texas, Florida or any other geographic area in which the
Company is then doing business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it, any
of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its subsidiaries (the "Confidential
Information"), other than in the good faith performance of his duties hereunder
and with the consent of the Company, which consent shall not unreasonably be
withheld, in accordance with the Company's policies and regulations, as
established from time to time, for the protection of the Company's Confidential
Information. The term "Confidential Information" does not include, and
<PAGE> 21
FPA Medical Management, Inc.
Employment Agreement
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there shall be no obligation hereunder with respect to (a) information that is
obvious, or that may readily be determined by any person reasonably
knowledgeable in the industry in which the Company operates by diligent review
and examination of public sources, or that becomes generally available to the
public other than as a result of a disclosure by Employee (or any agent or
other representative thereof) in violation of the terms hereof, and (b) office
practices and procedures applicable to the Company's business. Employee shall
not have any obligation hereunder to keep confidential any Confidential
Information to the extent disclosure of any thereof is required by law, or
determined in good faith by Employee to be necessary or appropriate to comply
with any legal or regulatory order, regulation or requirement; provided,
however, that in the event disclosure is required by law, Employee shall
provide the Company with reasonable notice of such requirement so that the
Company may seek an appropriate protective order. Upon termination of
employment or the expiration of the Agreement, all tangible evidence of such
confidential or proprietary information in the possession of Employee shall be
returned to the Company, and Employee shall not make or retain any copies or
excerpts thereof, except that Employee may retain copies of all materials that
may be of a personal nature to Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period of two (2) years after termination
of Employee's employment for any reason (the "Antisolicitation Period"),
Employee shall not influence or attempt to influence customers of the Company
or any of its present or future subsidiaries either directly or indirectly, to
divert their business from the Company to any individual, partnership, firm,
corporation, or other entity that is in substantial competition with any
business then being actively conducted by the Company or any subsidiary or
affiliate of the Company. Notwithstanding the foregoing, if Employee's
employment is terminated under the Agreement by the Company other than pursuant
to Section
<PAGE> 22
FPA Medical Management, Inc.
Employment Agreement
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4(a)(i), or by Employee pursuant to Section 4(b)(i) or Section 4(b)(ii), the
term Antisolicitation Period shall mean the period during which Employee is
employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be the sole owner of all domestic and foreign
rights pertaining to the Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall
<PAGE> 23
FPA Medical Management, Inc.
Employment Agreement
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not apply to an invention which was developed entirely on the Employee's own
time without using the Company's equipment, supplies, facilities or trade
secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of them, the Company shall be
entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Employee without
showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to the
performance by the Employee of services for (or acting as a fiduciary of any
employee benefit plans, programs or arrangements of) the Company or any of its
subsidiaries or affiliates, including as a director, officer or employee of the
Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy covering the
Employee to the extent the Company provides such coverage for its other
executive officers. Notwithstanding any other provision of the Agreement, the
<PAGE> 24
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Employment Agreement
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provisions of this Section 5 shall survive any termination or expiration of the
Agreement.
6. MISCELLANEOUS PROVISION.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: Dr. Seth Flam
P.O. Box 675271
17936 Circa Oriente
Rancho Santa Fe, California 92067
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in this Section shall be
deemed given on the third business day following such mailing, and any notice
given by telegram as provided herein shall be deemed delivered on the business
day following the delivery of such notice to the telegraph company for
transmission.
(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all prior oral and written
understandings (including the
<PAGE> 25
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Employment Agreement
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Employment Agreement made as of January 1, 1994, by and between Employee and
the Company except for any provisions therein relating to the grant of options)
and there are no further or other agreements or understandings, written or
oral, in effect between the parties relating to the subject matter hereof
unless expressly referred to herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns.
(d) Counterparts. The Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof may be
changed, waived, discharged or terminated orally or in writing, except that any
term of the Agreement may be amended and the observance of any such term may be
waived (either generally or in a particular instance and either retroactively
or prospectively) with (but only with) the written consent of both parties
hereto. No delay or omission to exercise any right, power or remedy accruing
to any party hereto shall be construed to be a waiver of any such right, power
or remedy, nor constitute any course of dealing or performance hereunder.
(f) Legal Fees. The Company shall promptly pay or reimburse
the Employee for reasonable legal fees incurred by the Employee in disputing in
good faith any issue hereunder relating to the Employee's employment or the
termination thereof or in seeking in good faith to obtain or enforce any
benefit or right provided by the Agreement. Such payments shall be made within
five (5) business days after delivery of the Employee's written
<PAGE> 26
FPA Medical Management, Inc.
Employment Agreement
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request for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
(g) Construction. The captions assigned to the provisions of
the Agreement are for convenience only and shall be disregarded in construing
the Agreement. Unless the context otherwise requires, the pronouns of any
gender shall include the other gender, either the singular or plural shall
include the other, and the word "or" is not exclusive. All of the parties
hereto have participated in the drafting, preparation and review of the
Agreement, and in any construction to be made of the Agreement, it shall not be
construed as against any party.
(h) Governing Law. The Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(j) Taxes. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law.
Except as otherwise expressly provided in the Agreement, the deductibility or
other tax consequence of any payment
<PAGE> 27
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hereunder to the Company shall not be taken into account in determining whether
and to what extent payment is to be made to Employee hereunder.
(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitration Association,
except that if the dispute relates to the application of Section 4(a)(i) or
Section 4(b)(i) hereof, the evidentiary standards set forth therein shall
apply. Any arbitration conducted pursuant to the provisions of the Agreement
shall be conducted by a recognized independent and impartial arbitrator
mutually agreed to by the parties or, if they cannot agree within thirty (30)
days after the initial demand for arbitration, by three arbitrators, one chosen
by the Company, one chosen by the Employee and the third selected by the two so
chosen. If the arbitrators selected by the parties fail to agree on the third
arbitrator within thirty (30) days of the appointment of the second arbitrator,
the third arbitrator shall be selected by the American Arbitration Association
in accordance with its then existing rules. All fees and expenses relating to
the arbitration shall
<PAGE> 28
FPA Medical Management, Inc.
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be paid by the Company. The judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement, effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /S/ Sol Lizerbram
Its: Chairman
By: /S/ Sheldon Derezin
Chairman, Compensation
Committee
EMPLOYEE
/S/ Seth Flam
<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
- -------------------------------------------------------------------------------
This Employment Agreement (the "Agreement"), is made as of October 1,
1996, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company") and Howard Hassman ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as Executive Vice President-Corporate Development of the
Company, on the terms and subject to the conditions set forth in the Agreement.
(b) Scope and Duties. Employee shall perform such
executive and managerial duties as normally associated with the position of
executive vice president-corporate development and shall report to the Chief
Executive Officer of the Company. The duties of Employee shall be performed
primarily in San Diego, California, except for such travel in the ordinary
course of the business of the Company as may from time to time be reasonably
required. Employee s principal place of business shall be at the offices of
the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board of
Directors of the Company (the "Board"), render services of a business nature to
any other person or entity, if such activities would materially interfere with
the performance of Employee s duties under the Agreement; provided, however,
that none of the following activities (collectively, "Permitted Activities")
shall be deemed to be in violation of the Agreement: (i) owning or managing
real or personal property owned by the Employee or his family members; (ii)
owning any business which does not compete, directly or indirectly, with the
Company, so long as such interests are held only for investment purposes; (iii)
owning up to five percent (5%) of any
<PAGE> 2
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Employment Agreement
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class of any corporation s outstanding securities which are listed on any
national securities exchange, registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, or otherwise regularly traded in the
over-the-counter market; (iv) holding directorships or similar positions in any
organization which is not competing with the Company and which is approved by
the Board, which approval shall not be unreasonably withheld but which shall
not be required with respect to charitable activities and community affairs
referred to in (v) below; and (v) engaging in charitable activities and
community affairs.
2. TERM OF EMPLOYMENT.
The term of Employee s employment under the Agreement will
commence on the date of the Agreement and continue for a period of five (5)
years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On September 30,
2000, and on each subsequent anniversary thereof, the term of Employee s
employment shall be extended for a period of one (1) year unless, no later than
six (6) months prior to such September 30, or, if applicable, any extended
term, either party shall have given written notice to the other that it does
not wish to extend the term of the Agreement.
3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment
under the Agreement, the Company shall pay to Employee a base salary at the
rate of Two Hundred Seventy Thousand Dollars ($270,000) per year. Employee s
base salary shall be paid in equal, bimonthly installments. Employee s base
salary shall be increased from time to time by the Company but shall not be
decreased.
(b) Performance Bonuses. Employee shall be entitled to a
bonus up to seventy-five percent (75%) of
<PAGE> 3
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Employment Agreement
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base salary based on the achievement of certain performance criteria as
determined annually by the Company s Chief Executive Officer. Also, Employee
shall be eligible for an additional bonus in the discretion of the Company's
Chief Executive Officer, in an amount not to exceed seventy-five percent (75%)
of base salary. Bonuses shall be paid within thirty (30) days from the
completion of the Company s audited financial statements for the applicable
fiscal year.
(c) Other Benefits. During the term of Employee s
employment under the Agreement or in accordance with the terms of Sections 3(d)
or 4 of the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Board, the Compensation Committee of
the Board or the Company s Chief Executive Officer at their sole discretion.
(ii) Benefit Plans, Medical Expense Reimbursement
and Other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and shall be included in any
employee benefit plans, programs, policies and arrangements of the Company,
including, but not limited to, any group health and life insurance, 401(k),
profit sharing, SEPP, stock option or other plans now existing or hereafter
established which are generally made available to senior management-level
employees of the Company, but the execution of the Agreement shall not prevent
the Company from amending, modifying or terminating any employee benefit plan,
program, policy or arrangement provided the benefits provided to Employee as of
the date hereof considered as a whole shall not be materially reduced by such
amendment, modification or termination. Employee shall
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FPA Medical Management, Inc.
Employment Agreement
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also be provided with all perquisites now existing or made available to senior
management-level employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all medical or dental expenses
incurred by Employee or his dependents that are not covered by the insurance
plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability "own occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of base salary in effect at the time of disability commencing not more
than six (6) months after the date of Employee s disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this Section 3(c)(iii) as of the date hereof
considered as a whole shall not be materially reduced by such amendment,
modification or termination. Employee shall pay the premiums associated with
such policies. Such premiums shall be reimbursed by Company to Employee as
additional taxable compensation. The amount of the Company's premium
reimbursement shall be grossed up for state and federal income and employment
taxes so that the net taxable effect to Employee is zero with respect to the
premiums and tax gross-up thereon.
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FPA Medical Management, Inc.
Employment Agreement
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(iv) Life Insurance.
(A) The Company shall maintain during
the term of Employee s employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($ 2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those persons who are so designated from time to time by
Employee.
(B) Employee understands that the
Company may determine to purchase a key-man life insurance policy on the life
of Employee. Employee agrees to fully cooperate with the Company, submitting
to reasonable physical examinations if required to do so by the insurance
carrier or another entity. Employee acknowledges that (x) the Company shall be
responsible for any premiums due on any key-man life insurance policy, (y) all
incidents of ownership in any key-man life insurance policy on the life of
Employee are held by the Company, and (z) the Company is the sole beneficiary
of any such policy or shall appoint, in its sole discretion, a beneficiary.
The inability of the Company to secure any such policy shall not affect the
obligations of the Company hereunder.
(v) Professional Fees and Clubs. The Company
shall provide Employee with a maximum of Fifteen Thousand Dollars ($15,000)
each year during the term of the Agreement for personal financial, tax and
legal counseling or fitness club, social club, or similar benefits.
(vi) Vacation. Employee will be entitled to five
(5) weeks vacation each calendar year. During periods of vacation, Employee's
compensation shall be paid in full, and any vacation day unused as of the end
of any calendar year shall be accumulated and carried forward, and may be used
in future years, provided that
<PAGE> 6
FPA Medical Management, Inc.
Employment Agreement
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no more than ten (10) weeks vacation may be taken by Employee in any calendar
year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), and (v) and (vi), from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until the date on which Employee commences to
receive benefits under the long-term disability plan provided pursuant to
Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee s annual base salary as set forth in Section 3(a) for an additional
thirty-six (36) consecutive months, regardless of the then-remaining term of
Employee s employment under the Agreement. Furthermore, in the event of such
disability:
(i) the benefits described in Sections 3(c)(ii)
and 3(c)(iv) will continue as if Employee had continued to render services
pursuant to the Agreement and shall remain in effect for a minimum of
thirty-six (36) calendar months after the date of any such disability; and
(ii) the benefits described in Section 3(c)(v)
will continue to the extent that any portion of the allowance for professional
fees and clubs set forth in such Section 3(c)(v) remains unused for the
calendar year in which such disability occurs and the Company shall not be
entitled to reimbursement of any such allowance paid prior to the disability.
To the extent the Company may not continue the
benefits described in this Section 3(d) after termination of employment for
legal or insurance underwriting reasons, the Company shall provide
<PAGE> 7
FPA Medical Management, Inc.
Employment Agreement
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comparable benefits through the purchase of individual coverage or from its
general assets. To the extent benefits after termination of employment are
limited or reduced under a retirement plan qualified under Section 401 of the
Internal Revenue Code, such benefits shall be informally funded into a grantor
trust established by the Company with distribution and investment options
comparable to those available under a Company's qualified retirement plan.
For purposes of this Section 3(d), the determination
of whether or not Employee is declared permanently and totally disabled shall
be made by Employee's physician, by written notice to the Board. If the Board
disagrees with the determination by Employee's physician, the Board will
appoint, at the Company's expense, another physician to make such
determination. If the physician so appointed by the Board disagrees with the
determination made by Employee's physician, then the two physicians shall
appoint a mutually acceptable third physician, at the Company's expense, to
make the final determination of whether Employee is permanently and totally
disabled, which determination will be binding on all parties hereto.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written notice from the Company to Employee. For purposes of the
Agreement, "Cause" means (A) Employee's conviction for the commission of a
felony other than a traffic violation; (B) any willful or grossly negligent act
by Employee having the effect of materially injuring the reputation or business
of the Company; or (C) the willful and continued failure by Employee to
substantially per-
<PAGE> 8
FPA Medical Management, Inc.
Employment Agreement
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form his duties hereunder (other than by reason of incapacity due to physical
or mental illness) after a written demand for substantial performance is
delivered by the Board, which demand specifically identifies the manner in
which the Board believes that the Employee has not substantially performed the
Employee's duties and which failure is not cured within twenty (20) days after
notice of such failure has been given to Employee. For purposes of clauses (B)
and (C) above, (x) no act, or failure to act, on the Employee's part shall be
deemed "willful" unless done, or omitted to be done, by the Employee not in
good faith and without reasonable belief that the Employee's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that
Cause exists shall be given effect unless the Company establishes by clear and
convincing evidence that Cause exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause;, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or
his estate) the sum of (1) Employee's monthly base salary at the base salary
rate in effect immediately prior to the date of termination (without regard to
any decrease in such base salary giving rise to Employee's voluntary
termination pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the Company's fiscal year immediately preceding the date of termination. For
purposes of clause (2) of the preceding sentence, to the extent Employee's
bonus for such preceding year was payable in the form of a grant of options to
acquire Company stock ("Options"), such bonus shall be deemed to be equal to
one hundred twenty percent (120%) of the cash amount that would otherwise have
been
<PAGE> 9
FPA Medical Management, Inc.
Employment Agreement
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payable to the Employee as a cash bonus but for the payment of such bonus in
the form of a grant of Options. The amounts determined hereunder shall be
payable on a monthly basis for a period of thirty-six (36) months following the
date of termination;
(B) the Company shall continue to pay
for and provide Employee with benefits set forth in Section 3(c) (other than
Sections 3(c)(i) and 3(c)(vi)) during the period that Employee is receiving the
amounts described in clause (A) above. In addition, all Employee stock options
shall be immediately and fully vested and exercisable and all Employee stock
awards shall be immediately and fully vested. To the extent the Company may
not continue the benefits described herein after termination of employment for
legal or insurance underwriting reasons, the Company shall provide comparable
benefits through the purchase of individual coverage or from its general
assets. To the extent benefits after termination of employment are limited or
reduced under a retirement plan qualified under Section 401 of the Internal
Revenue Code, such benefits shall be informally funded into a grantor trust
established by the Company with distribution and investment options comparable
to those available under the Company's qualified retirement plan; and
(C) the Company shall pay to the
Employee, in a lump sum, a payment in settlement of all accrued but unused
vacation days as of the date of termination, plus a pro rata performance bonus
for the year in which occurs the date of termination, such bonus to be
determined by multiplying (1) the performance bonus paid for the calendar year
preceding the date of termination, by (2) a fraction the numerator of which is
the number of months completed during the calendar year in which the
termination occurs but preceding the date of termination and the denominator of
which is twelve (12).
<PAGE> 10
FPA Medical Management, Inc.
Employment Agreement
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The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement; (3) pursuant to Section 2 hereof, the Company elects not to extend
the term of Employee's employment under the Agreement and the Employee
terminates his employment pursuant to Section 4(b)(ii); or (4) the Employee
terminates his employment pursuant to Section 4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the date of termination or the year immediately preceding
the Change of Control, whichever bonus is greater;
(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, and 3(c)(v), including, but not limited to, the continuation in kind
(including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and
<PAGE> 11
FPA Medical Management, Inc.
Employment Agreement
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in such manner as does not unreasonably interfere with the continued use of
such asset by the Company for corporate purposes) of all perquisites provided
to Employee immediately prior to the Change of Control, or payment in lieu of
such benefits (other than the aforementioned perquisites) in an amount equal to
the cost to Employee of replacing the benefits. In addition, all Employee
stock options shall be immediately and fully vested and exercisable and all
Employee stock awards shall be immediately and fully vested. To the extent the
Company may not continue the benefits described herein after termination of
employment for legal or insurance underwriting reasons, the Company shall
provide comparable benefits through the purchase of individual coverage or from
its general assets. To the extent benefits after termination of employment are
limited or reduced under a retirement plan qualified under Section 401 of the
Internal Revenue Code, such benefits shall be informally funded into a grantor
trust established by the Company with distribution and investment options
comparable to those available under the Company's qualified retirement plan;
(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of ownership in such
arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled assuming he were eligible for such benefits as of the date of
termination) under the Company's post-retirement
<PAGE> 12
FPA Medical Management, Inc.
Employment Agreement
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medical plan as in effect immediately prior to the date of termination or, if
more favorable to the Employee, as in effect immediately prior to the Change of
Control, such benefits to be provided commencing on the later of the date on
which such coverage would have first become available and continuing for the
remainder of Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the payments or benefits
(including timing and supplemental items such as acceleration of vesting)
received or to be received by the Employee in connection with a Change of
Control or the Employee's termination of employment (whether pursuant to the
terms of the Agreement or any other plan, arrangement or agreement with the
Company, any Person (as hereinafter defined) whose actions result in a Change
of Control or any Person affiliated with the Company or such Person) (such
payments or benefits, excluding the Gross-Up Payments (as hereinafter defined),
being hereinafter referred to as the "Total Payments") will be subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the
Employee an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be treated as "parachute
pay-
<PAGE> 13
FPA Medical Management, Inc.
Employment Agreement
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ments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Employee
and selected by the accounting firm which was, immediately prior to the Change
of Control, the Company's independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of Section 280G(b)(l) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "Base Amount" (as defined in Section 280G(b)(3) of the
Code) allocable to such reasonable compensation, or are otherwise not subject
to the Excise Tax, and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by the Auditor in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Employee shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Employee's residence on the date of termination (or if there is
no date of termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income and employment taxes imposed on the Gross-Up Payment
being repaid by the Employee, to the extent that such repayment results in a
reduction in the Excise Tax and a dollar-for-dollar reduction in the Employee's
taxable income and wages for purposes of federal, state and local income and
employment taxes), plus interest on the amount of such repayment at 120% of the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account hereunder in
calculating the Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest, penalties or additions payable by the Employee
with respect to such excess) within five (5) business days following the time
that the amount of such excess is finally determined. The Employee and the
Company shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.
(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
<PAGE> 15
FPA Medical Management, Inc.
Employment Agreement
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Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof) at least 60% of the combined
voting power of the securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of the Company (not
including in the securities Beneficially Owned by such person any securities
acquired directly from the Company or its affiliates) representing 25% or more
of the combined
<PAGE> 16
FPA Medical Management, Inc.
Employment Agreement
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voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition by
the Company of all or substantially all of the Company's assets to an entity,
at least 60% of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company;
<PAGE> 17
FPA Medical Management, Inc.
Employment Agreement
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and (2) the term "Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of written notice from Employee specifying in detail the
precise nature of the Company's breach; (2) any action by the Company resulting
in the diminution in Employee's title or the material diminution of Employee's
authority, duties or responsibilities (including, but not limited to, a
substantial diminution in corporate operating assets or employees after a sale
of corporate assets); (3) notification by the Company that Employee's principal
place of employment will be relocated under the
<PAGE> 18
FPA Medical Management, Inc.
Employment Agreement
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Agreement; or (4) nonpayment of amounts due under the Agreement.
With respect to a particular set of circumstances giving rise
to Good Reason, Employee shall waive his right to terminate hereunder for Good
Reason if he does not give written notice within 120 days of the time he first
becomes aware of such circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided
however, that if such election is made by the Company during the period
described in Section 4(a)(iii) hereof and Employee elects to terminate his
employment pursuant to the first sentence of this Section 4(b)(ii), in lieu of
the payments and benefits set forth herein, Employee shall be entitled to
receive the Severance Package referred to in Section 4(a)(iii) and, if
applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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Employee's employment under the Agreement is terminated pursuant to this
Section 4(c)(i), the Company shall pay to Employee's estate the sum of (i) the
Employee's monthly base salary at the base salary rate in effect at the date of
death plus (2) one-twelfth (1/12) of the performance and any other bonuses paid
or payable to Employee in respect of the year immediately preceding the date of
death (such bonus to be valued, if applicable, in the manner described in
Section 4(a)(ii)(A)). The amounts determined hereunder shall be payable on a
monthly basis for a period of twelve (12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Section 4(b)(ii), the Company shall pay to Employee the base
salary that Employee would have been entitled to receive under Section 3(a)
through the date of termination.
(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of (1) six (6) months following termination of Employee pursuant to
Section 4(a)(i) or
<PAGE> 20
FPA Medical Management, Inc.
Employment Agreement
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(2) twelve (12) months or such shorter period following termination of Employee
other than pursuant to Section 4(a)(i) and provided that Employee is receiving
Severance Benefits or the Severance Package during such twelve (12) month or
shorter period, (the "Noncompetition Period"), and except as provided in
Section 1(c) with regard to Permitted Activities, Employee shall not, directly
or indirectly, without the prior written consent of the Company, which consent
shall not unreasonably be withheld, provide material consultative services with
or without pay, own, manage, operate, join, control, participate in, or be
connected as a stockholder, partner or otherwise with any business, individual,
partner, firm, corporation, or other entity that (1) is in substantial
competition with any business then actively being conducted by the Company or
any subsidiary or affiliate of the Company or (2) manages physician groups as
its principal business in California, Texas, Florida or any other geographic
area in which the Company is then doing business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it, any
of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its subsidiaries (the "Confidential
Information"), other than in the good faith performance of his duties hereunder
and with the consent of the Company, which consent shall not unreasonably be
withheld, in accordance with the Company's policies and regulations, as
established from time to time, for the protection of the Company's Confidential
Information. The term "Confidential Information" does not include, and there
shall be no obligation hereunder with respect to (a) information that is
obvious, or that may readily be determined by any person reasonably
<PAGE> 21
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knowledgeable in the industry in which the Company operates by diligent review
and examination of public sources, or that becomes generally available to the
public other than as a result of a disclosure by Employee (or any agent or
other representative thereof) in violation of the terms hereof, and (b) office
practices and procedures applicable to the Company's business. Employee shall
not have any obligation hereunder to keep confidential any Confidential
Information to the extent disclosure of any thereof is required by law, or
determined in good faith by Employee to be necessary or appropriate to comply
with any legal or regulatory order, regulation or requirement; provided,
however, that in the event disclosure is required by law, Employee shall
provide the Company with reasonable notice of such requirement so that the
Company may seek an appropriate protective order. Upon termination of
employment or the expiration of the Agreement, all tangible evidence of such
confidential or proprietary information in the possession of Employee shall be
returned to the Company, and Employee shall not make or retain any copies or
excerpts thereof, except that Employee may retain copies of all materials that
may be of a personal nature to Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period of two (2) years after termination
of Employee's employment for any reason (the "Antisolicitation Period"),
Employee shall not influence or attempt to influence customers of the Company
or any of its present or future subsidiaries either directly or indirectly, to
divert their business from the Company to any individual, partnership, firm,
corporation, or other entity that is in substantial competition with any
business then being actively conducted by the Company or any subsidiary or
affiliate of the Company. Notwithstanding the foregoing, if Employee's
employment is terminated under the Agreement by the Company other than pursuant
to Section 4(a)(i), or by Employee pursuant to
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Section 4(b)(i) or Section 4(b)(ii), the term Antisolicitation Period shall
mean the period during which Employee is employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be the sole owner of all domestic and foreign
rights pertaining to the Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall not apply to an invention which was
developed entirely on
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the Employee's own time without using the Company's equipment, supplies,
facilities or trade secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of them, the Company shall be
entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Employee without
showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to the
performance by the Employee of services for (or acting as a fiduciary of any
employee benefit plans, programs or arrangements of) the Company or any of its
subsidiaries or affiliates, including as a director, officer or employee of the
Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy covering the
Employee to the extent the Company provides such coverage for its other
executive officers. Notwithstanding any other provision of the Agreement, the
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provisions of this Section 5 shall survive any termination or expiration of the
Agreement.
6. MISCELLANEOUS PROVISION.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: Dr. Howard Hassman
P.O. Box 675730
16326 Cazadero
Rancho Santa Fe, California 92067
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in this Section shall be
deemed given on the third business day following such mailing, and any notice
given by telegram as provided herein shall be deemed delivered on the business
day following the delivery of such notice to the telegraph company for
transmission.
(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all
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prior oral and written understandings (including the Employment Agreement made
as of January 1, 1994, by and between Employee and the Company except for any
provisions therein relating to the grant of options) and there are no further
or other agreements or understandings, written or oral, in effect between the
parties relating to the subject matter hereof unless expressly referred to
herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns.
(d) Counterparts. The Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof
may be changed, waived, discharged or terminated orally or in writing, except
that any term of the Agreement may be amended and the observance of any such
term may be waived (either generally or in a particular instance and either
retroactively or prospectively) with (but only with) the written consent of
both parties hereto. No delay or omission to exercise any right, power or
remedy accruing to any party hereto shall be construed to be a waiver of any
such right, power or remedy, nor constitute any course of dealing or
performance hereunder.
(f) Legal Fees. The Company shall promptly pay or
reimburse the Employee for reasonable legal fees incurred by the Employee in
disputing in good faith any issue hereunder relating to the Employee's
employment or the termination thereof or in seeking in good faith to obtain or
enforce any benefit or right provided by the
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Agreement. Such payments shall be made within five (5) business days after
delivery of the Employee's written request for payment accompanied with such
evidence of fees and expenses incurred as the Company reasonably may require.
(g) Construction. The captions assigned to the
provisions of the Agreement are for convenience only and shall be disregarded
in construing the Agreement. Unless the context otherwise requires, the
pronouns of any gender shall include the other gender, either the singular or
plural shall include the other, and the word "or" is not exclusive. All of the
parties hereto have participated in the drafting, preparation and review of the
Agreement, and in any construction to be made of the Agreement, it shall not be
construed as against any party.
(h) Governing Law. The Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If the covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
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(j) Taxes. Any payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law.
(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitration Association,
except that if the dispute relates to the application of Section 4(a)(i) or
Section 4(b)(i) hereof, the evidentiary standards set forth therein shall
apply. Any arbitration conducted pursuant to the provisions of the Agreement
shall be conducted by a recognized independent and impartial arbitrator
mutually agreed to by the parties or, if they cannot agree within thirty (30)
days after the initial demand for arbitration, by three arbitrators, one chosen
by the Company, one chosen by the Employee and the third selected by the two so
chosen. If the arbitrators selected by the parties fail to agree on the third
arbitrator within thirty (30) days of the appointment of the second arbitrator,
the third arbitrator shall be selected by the American Arbitration Association
in accordance with its then existing rules.
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All fees and expenses relating to the arbitration shall be paid by the Company.
The judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement,
effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ SETH FLAM
--------------------------------
Seth Flam
Its: President
By: /s/ SHELDON DEREZIN
--------------------------------
Sheldon Derezin
Chairman, Compensation Committee
EMPLOYEE
/s/ HOWARD HASSMAN
--------------------------------
Howard Hassman
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
This Employment Agreement (the "Agreement"), is made as of October 1,
1996, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company") and Kevin Ellis ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as Executive Vice President and Chief Medical Officer of
the Company, on the terms and subject to the conditions set forth in the
Agreement.
(b) Scope and Duties. Employee shall perform such
executive and managerial duties as normally associated with the position of
executive vice president and chief medical officer and shall report to the
Chief Executive Officer of the Company. The duties of Employee shall be
performed primarily in San Diego, California, except for such travel in the
ordinary course of the business of the Company as may from time to time be
reasonably required. Employee s principal place of business shall be at the
offices of the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board of
Directors of the Company (the "Board"), render services of a business nature to
any other person or entity, if such activities would materially interfere with
the performance of Employee s duties under the Agreement; provided, however,
that none of the following activities (collectively, "Permitted Activities")
shall be deemed to be in violation of the Agreement: (i) owning or managing
real or personal property owned by the Employee or his family members; (ii)
owning any business which does not compete, directly or indirectly, with the
Company, so long as such interests are held only for investment purposes; (iii)
owning up to five percent (5%) of any
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class of any corporation s outstanding securities which are listed on any
national securities exchange, registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, or otherwise regularly traded in the
over-the-counter market; (iv) holding directorships or similar positions in any
organization which is not competing with the Company and which is approved by
the Board, which approval shall not be unreasonably withheld but which shall
not be required with respect to charitable activities and community affairs
referred to in (v) below; and (v) engaging in charitable activities and
community affairs.
2. TERM OF EMPLOYMENT.
The term of Employee s employment under the Agreement will
commence on the date of the Agreement and continue for a period of five (5)
years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On September 30,
2000, and on each subsequent anniversary thereof, the term of Employee s
employment shall be extended for a period of one (1) year unless, no later than
six (6) months prior to such September 30, or, if applicable, any extended
term, either party shall have given written notice to the other that it does
not wish to extend the term of the Agreement.
3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment
under the Agreement, the Company shall pay to Employee a base salary at the
rate of Two Hundred Seventy Thousand Dollars ($270,000) per year. Employee s
base salary shall be paid in equal, bimonthly installments. Employee s base
salary shall be increased from time to time by the Company but shall not be
decreased.
(b) Performance Bonuses. Employee shall be entitled to a
bonus up to seventy-five percent (75%) of base salary based on the achievement
of certain
<PAGE> 3
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Employment Agreement
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performance criteria as determined annually by the Company s Chief Executive
Officer. Also, Employee shall be eligible for an additional bonus in the
discretion of the Company's Chief Executive Officer in an amount not to exceed
seventy-five percent (75%) of base salary. Bonuses shall be paid within thirty
(30) days from the completion of the Company s audited financial statements for
the applicable fiscal year.
(c) Other Benefits. During the term of Employee s
employment under the Agreement or in accordance with the terms of Sections 3(d)
or 4 of the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Board, the Compensation Committee of
the Board or the Company s Chief Executive Officer at their sole discretion.
(ii) Benefit Plans, Medical Expense Reimbursement
and Other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and shall be included in any
employee benefit plans, programs, policies and arrangements of the Company,
including, but not limited to, any group health and life insurance, 401(k),
profit sharing, SEPP, stock option or other plans now existing or hereafter
established which are generally made available to senior management-level
employees of the Company, but the execution of the Agreement shall not prevent
the Company from amending, modifying or terminating any employee benefit plan,
program, policy or arrangement provided the benefits provided to Employee as of
the date hereof considered as a whole shall not be materially reduced by such
amendment, modification or termination. Employee shall also be provided with
all perquisites now existing or
<PAGE> 4
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made available to senior management-level employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all medical or dental expenses
incurred by Employee or his dependents that are not covered by the insurance
plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability "own occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of base salary in effect at the time of disability commencing not more
than six (6) months after the date of Employee s disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this Section 3(c)(iii) as of the date hereof
considered as a whole shall not be materially reduced by such amendment,
modification or termination. Employee shall pay the premiums associated with
such policies. Such premiums shall be reimbursed by Company to Employee as
additional taxable compensation. The amount of the Company's premium
reimbursement shall be grossed up for state and federal income and employment
taxes so that the net taxable effect to Employee is zero with respect to the
premiums and tax gross-up thereon.
(iv) Life Insurance.
(A) The Company shall maintain during
the term of Employee s employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($ 2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those
<PAGE> 5
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Employment Agreement
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persons who are so designated from time to time by Employee.
(B) Employee understands that the
Company may determine to purchase a key-man life insurance policy on the life
of Employee. Employee agrees to fully cooperate with the Company, submitting
to reasonable physical examinations if required to do so by the insurance
carrier or another entity. Employee acknowledges that (x) the Company shall be
responsible for any premiums due on any key- man life insurance policy, (y) all
incidents of ownership in any key-man life insurance policy on the life of
Employee are held by the Company, and (z) the Company is the sole beneficiary
of any such policy or shall appoint, in its sole discretion, a beneficiary.
The inability of the Company to secure any such policy shall not affect the
obligations of the Company hereunder.
(v) Professional Fees and Clubs. The Company
shall provide Employee with a maximum of Fifteen Thousand Dollars ($15,000)
each year during the term of the Agreement for personal financial, tax and
legal counseling or fitness club, social club, or similar benefits.
(vi) Vacation. Employee will be entitled to five
(5) weeks vacation each calendar year. During periods of vacation, Employee's
compensation shall be paid in full, and any vacation day unused as of the end
of any calendar year shall be accumulated and carried forward, and may be used
in future years, provided that no more than ten (10) weeks vacation may be
taken by Employee in any calendar year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), (v) and (vi), from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until
<PAGE> 6
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the date on which Employee commences to receive benefits under the long-term
disability plan provided pursuant to Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee s annual base salary as set forth in Section 3(a) for an additional
thirty-six (36) consecutive months, regardless of the then-remaining term of
Employee s employment under the Agreement. Furthermore, in the event of such
disability:
(i) the benefits described in Sections 3(c)(ii)
and 3(c)(iv) will continue as if Employee had continued to render services
pursuant to the Agreement and shall remain in effect for a minimum of
thirty-six (36) calendar months after the date of any such disability; and
(ii) the benefits described in Section 3(c)(v)
will continue to the extent that any portion of the allowance for professional
fees and clubs set forth in such Section 3(c)(v) remains unused for the
calendar year in which such disability occurs and the Company shall not be
entitled to reimbursement of any such allowance paid prior to the disability.
To the extent the Company may not continue the
benefits described in this Section 3(d) after termination of employment for
legal or insurance underwriting reasons, the Company shall provide comparable
benefits through the purchase of individual coverage or from its general
assets. To the extent benefits after termination of employment are limited or
reduced under a retirement plan qualified under Section 401 of the Internal
Revenue Code, such benefits shall be informally funded into a grantor trust
established by the Company with distribution and investment options comparable
to those available under a Company's qualified retirement plan.
<PAGE> 7
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For purposes of this Section 3(d), the determination
of whether or not Employee is declared permanently and totally disabled shall
be made by Employee s physician, by written notice to the Board. If the Board
disagrees with the determination by Employee s physician, the Board will
appoint, at the Company s expense, another physician to make such
determination. If the physician so appointed by the Board disagrees with the
determination made by Employee s physician, then the two physicians shall
appoint a mutually acceptable third physician, at the Company s expense, to
make the final determination of whether Employee is permanently and totally
disabled, which determination will be binding on all parties hereto.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written notice from the Company to Employee. For purposes of the
Agreement, "Cause" means (A) Employee's conviction for the commission of a
felony other than a traffic violation; (B) any willful or grossly negligent act
by Employee having the effect of materially injuring the reputation or business
of the Company; or (C) the willful and continued failure by Employee to
substantially perform his duties hereunder (other than by reason of incapacity
due to physical or mental illness) after a written demand for substantial
performance is delivered by the Board, which demand specifically identifies the
manner in which the Board believes that the Employee has not substantially
performed the Employee's duties and which failure is not cured within twenty
(20) days after notice of such failure has been given to Employee. For
purposes of clauses (B) and (C) above, (x) no act, or failure to act, on the
Employee's part shall be deemed "willful" unless done, or omitted to be done,
by the Employee not
<PAGE> 8
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in good faith and without reasonable belief that the Employee's act, or failure
to act, was in the best interest of the Company and (y) in the event of a
dispute concerning the application of this provision, no claim by the Company
that Cause exists shall be given effect unless the Company establishes by clear
and convincing evidence that Cause exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or
his estate) the sum of (1) Employee's monthly base salary at the base salary
rate in effect immediately prior to the date of termination (without regard to
any decrease in such base salary giving rise to Employee's voluntary
termination pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the Company's fiscal year immediately preceding the date of termination. For
purposes of clause (2) of the preceding sentence, to the extent Employee's
bonus for such preceding year was payable in the form of a grant of options to
acquire Company stock ("Options"), such bonus shall be deemed to be equal to
one hundred twenty percent (120%) of the cash amount that would otherwise have
been payable to the Employee as a cash bonus but for the payment of such bonus
in the form of a grant of Options. The amounts determined hereunder shall be
payable on a monthly basis for a period of thirty-six (36) months following the
date of termination;
(B) the Company shall continue to pay
for and provide Employee with benefits set forth in Section 3(c) (other than
Sections 3(c)(i) and 3(c)(vi)) during the period that Employee is receiving the
amounts described in clause (A) above. In addition, all Employee stock options
shall be immediately and fully vested and
<PAGE> 9
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Employment Agreement
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exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan; and
(C) the Company shall pay to the
Employee, in a lump sum, a payment in settlement of all accrued but unused
vacation days as of the date of termination, plus a pro rata performance bonus
for the year in which occurs the date of termination, such bonus to be
determined by multiplying (1) the performance bonus paid for the calendar year
preceding the date of termination, by (2) a fraction the numerator of which is
the number of months completed during the calendar year in which the
termination occurs but preceding the date of termination and the denominator of
which is twelve (12).
The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement; (3) pursuant to Section 2 hereof, the Company elects not to extend
the term of Employee's employment under the Agreement and the Employee
terminates his employment pursuant to Section
<PAGE> 10
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Employment Agreement
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4(b)(ii); or (4) the Employee terminates employment pursuant to Section
4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the date of termination or the year immediately preceding
the Change of Control, whichever bonus is greater;
(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, and 3(c)(v), including, but not limited to, the continuation in kind
(including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and in such manner as does not unreasonably interfere with the
continued use of such asset by the Company for corporate purposes) of all
perquisites provided to Employee immediately prior to the Change of Control, or
payment in lieu of such benefits (other than the aforementioned perquisites) in
an amount equal to the cost to Employee of replacing the benefits. In
addition, all Employee stock options shall be immediately and fully vested and
exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual
<PAGE> 11
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coverage or from its general assets. To the extent benefits after termination
of employment are limited or reduced under a retirement plan qualified under
Section 401 of the Internal Revenue Code, such benefits shall be informally
funded into a grantor trust established by the Company with distribution and
investment options comparable to those available under the Company's qualified
retirement plan;
(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of ownership in such
arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled assuming he were eligible for such benefits as of the date of
termination) under the Company's post-retirement medical plan as in effect
immediately prior to the date of termination or, if more favorable to the
Employee, as in effect immediately prior to the Change of Control, such
benefits to be provided commencing on the later of the date on which such
coverage would have first become available and continuing for the remainder of
Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the
<PAGE> 12
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Employment Agreement
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payments or benefits (including timing and supplemental items such as
acceleration of vesting) received or to be received by the Employee in
connection with a Change of Control or the Employee's termination of employment
(whether pursuant to the terms of the Agreement or any other plan, arrangement
or agreement with the Company, any Person (as hereinafter defined) whose
actions result in a Change of Control or any Person affiliated with the Company
or such Person) (such payments or benefits, excluding the Gross-Up Payments (as
hereinafter defined), being hereinafter referred to as the "Total Payments")
will be subject to the excise tax (the "Excise Tax") imposed under Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), the Company
shall pay to the Employee an additional amount (the "Gross-Up Payment") such
that the net amount retained by the Employee, after deduction of any Excise Tax
on the Total Payments and any federal, state and local income and employment
taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total
Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be treated as "parachute
payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Employee
and selected by the accounting firm which was, immediately prior to the Change
of Control, the Company's independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of Section 280G(b)(l) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable com-
<PAGE> 13
FPA Medical Management, Inc.
Employment Agreement
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pensation for services actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the "Base Amount" (as defined in
Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income tax at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is
to be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Employee's residence on the date of
termination (or if there is no date of termination, then the date on which the
Gross-Up Payment is calculated for purposes of this Section), net of the
maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Employee,
to the extent that such repayment results in a reduction in the Excise Tax and
a dollar-for-dollar reduction in the Employee's taxable income and wages for
purposes of federal, state and local income and employment taxes), plus
interest on the amount of such repayment at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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interest, penalties or additions payable by the Employee with respect to such
excess) within five (5) business days following the time that the amount of
such excess is finally determined. The Employee and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
<PAGE> 15
FPA Medical Management, Inc.
Employment Agreement
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(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof) at least 60% of the combined
voting power of the securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of the Company (not
including in the securities Beneficially Owned by such person any securities
acquired directly from the Company or its affiliates) representing 25% or more
of the combined voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition by
the Company of all or substantially all of the Company's assets to an entity,
at least 60% of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series ofintegrated transactions immediately following which the record holders
of the common stock of the Company immediately prior to such transaction or
series of
<PAGE> 16
FPA Medical Management, Inc.
Employment Agreement
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transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company; and (2) the term "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by
<PAGE> 17
FPA Medical Management, Inc.
Employment Agreement
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clear and convincing evidence that such position is not correct.
For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of written notice from Employee specifying in detail the
precise nature of the Company's breach; (2) any action by the Company resulting
in the diminution in Employee's title or the material diminution of Employee's
authority, duties or responsibilities (including, but not limited to,
substantial diminution in corporate operating assets or employees after a sale
of corporate assets); (3) notification by the Company that Employee's principal
place of employment will be relocated under the Agreement; or (4) nonpayment of
amounts due under the Agreement.
With respect to a particular set of circumstances giving rise
to Good Reason, Employee shall waive his right to terminate hereunder for Good
Reason if he does not give written notice within 120 days of the time he first
becomes aware of such circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided
however, that if such election is made by the Company during the period
described
<PAGE> 18
FPA Medical Management, Inc.
Employment Agreement
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in Section 4(a)(iii) hereof and Employee elects to terminate his employment
pursuant to the first sentence of this Section 4(b)(ii), in lieu of the
payments and benefits set forth herein, Employee shall be entitled to receive
the Severance Package referred to in Section 4(a)(iii) and, if applicable, the
Gross-Up Payment referred to in Section 4(a)(iii)(E).
(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If Employee's employment under the
Agreement is terminated pursuant to this Section 4(c)(i), the Company shall pay
to Employee's estate the sum of (i) the Employee's monthly base salary at the
base salary rate in effect at the date of death plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the year immediately preceding the date of death (such bonus to be valued, if
applicable, in the manner described in Section 4(a)(ii)(A)). The amounts
determined hereunder shall be payable on a monthly basis for a period of twelve
(12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Sec-
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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tion 4(b)(ii), the Company shall pay to Employee the base salary that Employee
would have been entitled to receive under Section 3(a) through the date of
termination.
(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of (1) six (6) months following termination of Employee pursuant to
Section 4(a)(i) or (2) twelve (12) months or such shorter period following
termination of Employee other than pursuant to Section 4(a)(i) and provided
that Employee is receiving Severance Benefits or the Severance Package during
such twelve (12) month or shorter period, (the "Noncompetition Period"), and
except as provided in Section 1(c) with regard to Permitted Activities,
Employee shall not, directly or indirectly, without the prior written consent
of the Company, which consent shall not unreasonably be withheld, provide
material consultative services with or without pay, own, manage, operate, join,
control, participate in, or be connected as a stockholder, partner or otherwise
with any business, individual, partner, firm, corporation, or other entity that
(1) is in substantial competition with any business then actively being
conducted by the Company or any subsidiary or affiliate of the Company or (2)
manages physician groups as its principal business in California, Texas,
Florida or any other geographic area in which the Company is then doing
business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it,
<PAGE> 20
FPA Medical Management, Inc.
Employment Agreement
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any of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its subsidiaries (the "Confidential
Information"), other than in the good faith performance of his duties hereunder
and with the consent of the Company, which consent shall not unreasonably be
withheld, in accordance with the Company's policies and regulations, as
established from time to time, for the protection of the Company's Confidential
Information. The term "Confidential Information" does not include, and there
shall be no obligation hereunder with respect to (a) information that is
obvious, or that may readily be determined by any person reasonably
knowledgeable in the industry in which the Company operates by diligent review
and examination of public sources, or that becomes generally available to the
public other than as a result of a disclosure by Employee (or any agent or
other representative thereof) in violation of the terms hereof, and (b) office
practices and procedures applicable to the Company's business. Employee shall
not have any obligation hereunder to keep confidential any Confidential
Information to the extent disclosure of any thereof is required by law, or
determined in good faith by Employee to be necessary or appropriate to comply
with any legal or regulatory order, regulation or requirement; provided,
however, that in the event disclosure is required by law, Employee shall
provide the Company with reasonable notice of such requirement so that the
Company may seek an appropriate protective order. Upon termination of
employment or the expiration of the Agreement, all tangible evidence of such
confidential or proprietary information in the possession of Employee shall be
returned to the Company, and Employee shall not make or retain any copies or
excerpts thereof, except that Employee may retain copies of all materials that
may be of a personal nature to Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period
<PAGE> 21
FPA Medical Management, Inc.
Employment Agreement
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of two (2) years after termination of Employee's employment for any reason (the
"Antisolicitation Period"), Employee shall not influence or attempt to
influence customers of the Company or any of its present or future subsidiaries
either directly or indirectly, to divert their business from the Company to any
individual, partnership, firm, corporation, or other entity that is in
substantial competition with any business then being actively conducted by the
Company or any subsidiary or affiliate of the Company. Notwithstanding the
foregoing, if Employee's employment is terminated under the Agreement by the
Company other than pursuant to Section 4(a)(i), or by Employee pursuant to
Section 4(b)(i) or Section 4(b)(ii), the term Antisolicitation Period shall
mean the period during which Employee is employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
<PAGE> 22
FPA Medical Management, Inc.
Employment Agreement
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(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be the sole owner of all domestic and foreign
rights pertaining to the Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall not apply to an invention which was
developed entirely on the Employee's own time without using the Company's
equipment, supplies, facilities or trade secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of them, the Company shall be
entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Employee without
showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to
<PAGE> 23
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Employment Agreement
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the performance by the Employee of services for (or acting as a fiduciary of
any employee benefit plans, programs or arrangements of) the Company or any of
its subsidiaries or affiliates, including as a director, officer or employee of
the Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy covering the
Employee to the extent the Company provides such coverage for its other
executive officers. Notwithstanding any other provision of the Agreement, the
provisions of this Section 5 shall survive any termination or expiration of the
Agreement.
6. MISCELLANEOUS PROVISIONS.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: Dr. Kevin Ellis
2033 Corte Madeira
Alpine, California 91901
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in
<PAGE> 24
FPA Medical Management, Inc.
Employment Agreement
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this Section shall be deemed given on the third business day following such
mailing, and any notice given by telegram as provided herein shall be deemed
delivered on the business day following the delivery of such notice to the
telegraph company for transmission.
(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all prior oral and written
understandings (including the Employment Agreement made as of January 1, 1994,
by and between Employee and the Company except for any provisions therein
relating to the grant of options) and there are no further or other agreements
or understandings, written or oral, in effect between the parties relating to
the subject matter hereof unless expressly referred to herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns.
(d) Counterparts. The Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof
may be changed, waived, discharged or terminated orally or in writing, except
that any term of the Agreement may be amended and the observance of any such
term may be waived (either generally or in a particular instance and either
retroactively or prospectively) with (but only with) the written consent of
both parties hereto. No delay or omission to exercise any right, power or
remedy accruing to any party hereto shall be construed to be a waiver of any
such right, power or remedy, nor constitute any course of dealing or
performance hereunder.
<PAGE> 25
FPA Medical Management, Inc.
Employment Agreement
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(f) Legal Fees. The Company shall promptly pay or
reimburse the Employee for reasonable legal fees incurred by the Employee in
disputing in good faith any issue hereunder relating to the Employee's
employment or the termination thereof or in seeking in good faith to obtain or
enforce any benefit or right provided by the Agreement. Such payments shall be
made within five (5) business days after delivery of the Employee's written
request for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
(g) Construction. The captions assigned to the
provisions of the Agreement are for convenience only and shall be disregarded
in construing the Agreement. Unless the context otherwise requires, the
pronouns of any gender shall include the other gender, either the singular or
plural shall include the other, and the word "or" is not exclusive. All of the
parties hereto have participated in the drafting, preparation and review of the
Agreement, and in any construction to be made of the Agreement, it shall not be
construed as against any party.
(h) Governing Law. The Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If the covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the
<PAGE> 26
FPA Medical Management, Inc.
Employment Agreement
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scope of the covenant is reduced only to the minimum extent necessary to render
the modified covenant valid, legal and enforceable.
(j) Taxes. Any payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law.
(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitration Association,
except that if the dispute relates to the application of Section 4(a)(i) or
Section 4(b)(i) hereof, the evidentiary standards set forth therein shall
apply. Any arbitration conducted pursuant to the provisions of the Agreement
shall be conducted by a recognized independent and impartial arbitrator
mutually agreed to by the parties or, if they cannot agree within thirty (30)
days after the initial demand for arbitration, by three arbitrators, one chosen
by the Company, one chosen by the Employee and the third selected by the two so
chosen. If the arbitrators selected by the parties fail to agree on the third
arbitrator within thirty (30) days of the appointment of the second arbitrator,
the third arbitrator shall be selected by the American Arbitration Association
in accordance with its then existing rules. All fees and expenses relating to
the arbitration shall
<PAGE> 27
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be paid by the Company. The judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement,
effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ SETH FLAM
Its: President
By: /s/ SHELDON DEREZIN
Chairman, Compensation
Committee
EMPLOYEE
/s/ KEVIN ELLIS
<PAGE> 1
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
- -------------------------------------------------------------------------------
This Employment Agreement (the "Agreement"), is made as of October 1,
1996, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company"), and Steven Lash ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as Executive Vice President and Chief Financial Officer of
the Company, on the terms and subject to the conditions set forth in the
Agreement.
(b) Scope and Duties. Employee shall perform such executive
and managerial duties as normally associated with the position of executive
vice president and chief financial officer and shall report solely to the Chief
Executive Officer of the Company. The duties of Employee shall be performed
primarily in San Diego, California, except for such travel in the ordinary
course of the business of the Company as may from time to time be reasonably
required. Employee's principal place of business shall be at the offices of
the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board of
Directors of the Company (the "Board"), render services of a business nature to
any other person or entity, if such activities would materially interfere with
the performance of Employee's duties under the Agreement; provided, however,
that none of the following activities (collectively, "Permitted Activities")
shall be deemed to be in violation of the Agreement: (i) owning or managing
real or personal property owned by the Employee or his family members; (ii)
owning any business which does not compete, directly or indirectly, with the
Company, so long as such interests are held only for investment purposes; (iii)
owning up to five percent (5%) of any
<PAGE> 2
FPA Medical Management, Inc.
Employment Agreement
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class of any corporation's outstanding securities which are listed on any
national securities exchange, registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, or otherwise regularly traded in the
over-the-counter market; (iv) holding directorships or similar positions in any
organization which is not competing with the Company and which is approved by
the Board, which approval shall not be unreasonably withheld but which shall
not be required with respect to charitable activities and community affairs
referred to in (v) below; and (v) engaging in charitable activities and
community affairs.
2. TERM OF EMPLOYMENT.
(a) The term of Employee's employment under the Agreement
will commence on the date of the Agreement and continue for a period of five
(5) years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On September 30,
2000, and on each subsequent anniversary thereof, the term of Employee's
employment shall be extended for a period of one (1) year unless, no later than
six (6) months prior to such September 30 or, if applicable, any extended term,
either party shall have given written notice to the other that it does not wish
to extend the term of the Agreement.
(b) Notwithstanding the preceding paragraph, the term of
employment shall not be extended beyond the seventh anniversary of the date of
the Agreement without the prior written consent of both parties hereto.
However, if the Employer does not offer to extend the term of employment beyond
the seventh anniversary of the date of the Agreement, beginning on such seventh
anniversary, the Company shall pay and otherwise make available to Employee (or
his estate) all compensation and benefits (including the Severance Benefits
defined hereinafter) referred to in Section 4(a)(ii), or, if the seventh
anniversary occurs within the period described in Section 4(a)(iii) hereof, the
Severance Package (defined
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Employment Agreement
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hereinafter) referred to in Section 4(a)(iii) and, if applicable, the Gross-Up
payment referred to in Section 4(a)(iii)(E).
3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment under
the Agreement, the Company shall pay to Employee a base salary at the rate of
Three Hundred Forty-Five Thousand Dollars ($345,000) per year. Employee's base
salary shall be paid in equal, bimonthly installments. Employee's base salary
shall be increased from time to time by the Company but, once increased, shall
not thereafter be decreased.
(b) Performance Bonuses. Employee shall be entitled to an
annual bonus of up to seventy-five percent (75%) of base salary based on the
increase in the Company's earnings per share (excluding non-recurring charges)
("EPS") on a year-to-year basis. For each one percent (1%) increase in EPS,
Employee shall be entitled to a bonus of seven and one-half percent (7.5%) of
base salary up to a maximum bonus of seventy-five percent (75%) of base salary.
Also, Employee shall be eligible for an additional bonus in the discretion of
the Company's Chief Executive Officer, in an amount not to exceed seventy-five
percent (75%) of base salary. Bonuses shall be paid within thirty (30) days
from the completion of the Company's audited financial statements for the
applicable fiscal year.
(c) Other Benefits. During the term of Employee's employment
under the Agreement or in accordance with the terms of Sections 3(d) or 4 of
the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Compensation Committee of the Board,
at its sole discretion.
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Employment Agreement
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(ii) Benefit Plans, Medical Expense Reimbursement
and Other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and shall be included in any
employee benefit plans, programs, policies and arrangements of the Company,
including, but not limited to, any group health and life insurance, 401(k),
profit sharing, SEPP, stock option or other plans now existing or hereafter
established which are generally made available to senior management-level
employees of the Company, but the execution of the Agreement shall not prevent
the Company from amending, modifying or terminating any such employee benefit
plan, program, policy or arrangement provided the benefits provided to Employee
as of the date hereof considered as a whole shall not be reduced by such
amendment, modification or termination. Employee shall also be provided with
all perquisites now existing or hereafter made available to senior
management-level employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all medical or dental expenses
incurred by Employee or his dependents that are not covered by the insurance
plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability, "own-occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of Base Salary in effect at the time of the disability commencing not
more than six (6) months after the date of Employee's disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this
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Employment Agreement
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Section 3(c)(iii) as of the date hereof considered as a whole shall not be
reduced by such amendment, modification or termination. Employee shall pay the
premiums associated with such policies. Such premiums shall be reimbursed by
Company to Employee as additional taxable compensation. The amount of the
Company's premium reimbursement shall be grossed up for state and federal
income and employment taxes so that the net taxable effect to Employee is zero
with respect to the premiums and tax gross-up thereon.
(iv) Life Insurance.
(A) The Company shall maintain during the
term of Employee's employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those persons who are so designated from time to time by
Employee.
(B) Employee understands that the Company
may determine to purchase a key-man life insurance policy on the life of
Employee. Employee agrees to fully cooperate with the Company, submitting to
reasonable physical examinations if required to do so by the insurance carrier
or another entity. Employee acknowledges that (x) the Company shall be
responsible for any premiums due on any key-man life insurance policy, (y) all
incidents of ownership in any key-man life insurance policy on the life of
Employee are held by the Company, and (z) the Company is the sole beneficiary
of any such policy or shall appoint, in its sole discretion, a beneficiary.
The inability of the Company to secure any such policy shall not affect the
obligations of the Company hereunder.
(v) Professional Fees and Clubs. The Company shall
provide Employee with a maximum of Fifteen Thousand Dollars ($15,000) each year
during the term of
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Employment Agreement
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the Agreement for personal financial, tax and legal counseling or fitness club,
social club, or similar benefits.
(vi) Vacation. Employee will be entitled to accrue
vacation at the rate of five (5) weeks per calendar year. During periods of
vacation, Employee's compensation shall be paid in full, and any vacation day
unused as of the end of any calendar year shall be accumulated and carried
forward, and may be used in any future years, provided that no more than ten
(10) weeks vacation may be taken by Employee in any calendar year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), (v) and (vi), from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until the date on which Employee commences to
receive benefits under the long-term disability plan provided pursuant to
Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee s annual base salary as set forth in Section 3(a) for an additional
thirty-six (36) consecutive months, regardless of the then-remaining term of
Employee s employment under the Agreement. Furthermore, in the event of such
disability:
(i) the benefits described in Sections 3(c)(ii) and
3(c)(iv) will continue as if Employee had continued to render services pursuant
to the Agreement and shall remain in effect for a minimum of thirty-six (36)
calendar months after the date of any such disability;
(ii) the benefits described in Section 3(c)(v) will
continue to the extent that any portion of the allowance for professional fees
and clubs
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FPA Medical Management, Inc.
Employment Agreement
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set forth in such Section 3(c)(v) remains unused for the calendar year in which
such disability occurs and the Company shall not be entitled to reimbursement
of any such allowance paid prior to the disability.
To the extent the Company may not continue the benefits
described in this Section 3(d) after termination of employment for legal or
insurance underwriting reasons, the Company shall provide comparable benefits
through the purchase of individual coverage or from its general assets. To the
extent benefits after termination of employment are limited or reduced under a
retirement plan qualified under Section 401 of the Internal Revenue Code, such
benefits shall be informally funded into a grantor trust established by the
Company with distribution and investment options comparable to those available
under a Company's qualified retirement plan.
For purposes of this Section 3(d), the determination of
whether or not Employee is declared permanently and totally disabled shall be
made by Employee's physician, by written notice to the Board. If the Board
disagrees with the determination by Employee's physician, the Board will
appoint, at the Company's expense, another physician to make such
determination. If the physician so appointed by the Board disagrees with the
determination made by Employee's physician, then the two physicians shall
appoint a mutually acceptable third physician, at the Company's expense, to
make the final determination of whether Employee is permanently and totally
disabled, which determination will be binding on all parties hereto.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written
<PAGE> 8
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Employment Agreement
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notice from the Company to Employee. For purposes of the Agreement, "Cause"
means (A) Employee's conviction for the commission of a felony other than a
traffic violation; (B) any willful or grossly negligent act by Employee having
the effect of materially injuring the reputation or business of the Company; or
(C) the willful and continued failure by Employee to substantially perform his
duties hereunder (other than by reason of incapacity due to physical or mental
illness) after a written demand for substantial performance is delivered by the
Board, which demand specifically identifies the manner in which the Board
believes that the Employee has not substantially performed the Employee's
duties and which failure is not cured within twenty (20) days after notice of
such failure has been given to Employee. For purposes of clauses (B) and (C)
above, (x) no act, or failure to act, on the Employee's part shall be deemed
"willful" unless done, or omitted to be done, by the Employee not in good faith
and without reasonable belief that the Employee's act, or failure to act, was
in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that
Cause exists shall be given effect unless the Company establishes by clear and
convincing evidence that Cause exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or his
estate) the sum of (1) Employee's monthly base salary at the base salary rate
in effect immediately prior to the date of termination (without regard to any
decrease in such base salary giving rise to Employee's voluntary termination
pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of the
performance and any other bonuses paid or payable to Employee in respect of the
Company's fiscal year immediately preceding the date
<PAGE> 9
FPA Medical Management, Inc.
Employment Agreement
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of termination. For purposes of clause (2) of the preceding sentence, to the
extent Employee's bonus for such preceding year was payable in the form of a
grant of options to acquire Company stock ("Options"), such bonus shall be
deemed to be equal to one hundred twenty percent (120%) of the cash amount that
would otherwise have been payable to the Employee as a cash bonus but for the
payment of such bonus in the form of a grant of Options. The amounts
determined hereunder shall be payable on a monthly basis for a period of
thirty-six (36) months following the date of termination;
(B) the Company shall continue to pay for
and provide Employee with benefits set forth in Section 3(c) (other than
Sections 3(c)(i) and 3(c)(vi)) during the period that Employee is receiving the
amounts described in clause (A) above, provided that, the Company shall prepay
all remaining premiums on a paid-up basis under any insurance policy in effect
between the Employee and the Company insuring the life of the Employee and
shall transfer to the Employee any and all rights and incidents of ownership in
such arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee, and, further
provided that, all Employee stock options shall be immediately and fully vested
and exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan; and
<PAGE> 10
FPA Medical Management, Inc.
Employment Agreement
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(C) the Company shall pay to the Employee,
in a lump sum, a payment in settlement of all accrued but unused vacation days
as of the date of termination, plus a pro rata performance bonus for the year
in which occurs the date of termination, such bonus to be determined by
multiplying (1) the performance bonus that would have been payable under
Section 3(b) hereof in respect of such year, assuming the Company's EPS for the
portion of the year through the end of the month preceding the month in which
occurs the date of termination were multiplied by the quotient obtained by
dividing (i) the number twelve (12) by (ii) the number of completed months in
such year prior to the date of termination (the "Elapsed Months"), by (2) a
fraction the numerator of which is the number of Elapsed Months and the
denominator of which is twelve (12).
The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement;(3) pursuant to Section 2 hereof, the Company elects not to extend
the term of Employee's employment under the Agreement and the Employee
terminates his employment pursuant to Section 4(b)(ii); or (4) the Employee
terminates his employment pursuant to Section 4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
<PAGE> 11
FPA Medical Management, Inc.
Employment Agreement
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succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the date of termination or the year immediately preceding
the Change of Control, whichever bonus is greater;
(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, and 3(c)(v), including, but not limited to, the continuation in kind
(including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and in such manner as does not unreasonably interfere with the
continued use of such asset by the Company for corporate purposes) of all
perquisites provided to Employee immediately prior to the Change of Control, or
payment in lieu of such benefits (other than the aforementioned perquisites) in
an amount equal to the cost to Employee of replacing the benefits. In
addition, all Employee stock options shall be immediately and fully vested and
exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan;
<PAGE> 12
FPA Medical Management, Inc.
Employment Agreement
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(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of ownership in such
arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled assuming he were eligible for such benefits as of the date of
termination) under the Company's post-retirement medical plan as in effect
immediately prior to the date of termination or, if more favorable to the
Employee, as in effect immediately prior to the Change of Control, such
benefits to be provided commencing on the later of the date on which such
coverage would have first become available and continuing for the remainder of
Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the payments or benefits
(including timing and supplemental items such as acceleration of vesting)
received or to be received by the Employee in connection with a Change of
Control or the Employee's termination of employment (whether pursuant to the
terms of the Agreement or any other plan, arrangement or agreement with the
Company, any Person (as hereinafter defined) whose actions result in a Change
of Control or any Person affiliated with the Company or such Person) (such
payments or benefits,
<PAGE> 13
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Employment Agreement
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excluding the Gross-Up Payments (as hereinafter defined), being hereinafter
referred to as the "Total Payments") will be subject to the excise tax (the
"Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Company shall pay to the Employee an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Employee, after deduction of any Excise Tax on the Total Payments and any
federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be treated as "parachute
payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Employee
and selected by the accounting firm which was, immediately prior to the Change
of Control, the Company's independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(l) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "Base Amount" (as defined in Section 280G(b)(3) of the
Code) allocable to such reasonable compensation, or are otherwise not subject
to the Excise Tax, and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by the Auditor in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Employee shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Employee's residence on the date of termination (or
if there is no date of termination, then the date on which the Gross-Up Payment
is calculated for purposes of this Section), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Employee,
to the extent that such repayment results in a reduction in the Excise Tax and
a dollar-for- dollar reduction in the Employee's taxable income and wages for
purposes of federal, state and local income and employment taxes), plus
interest on the amount of such repayment at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Employee with respect to such
excess) within five (5) business days following the time that the amount of
such excess is finally determined. The Employee and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
<PAGE> 15
FPA Medical Management, Inc.
Employment Agreement
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(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof)
<PAGE> 16
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Employment Agreement
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at least 60% of the combined voting power of the securities of the Company or
such surviving entity or any parent thereof outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which
no Person is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities Beneficially Owned
by such person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition by
the Company of all or substantially all of the Company's assets to an entity,
at least 60% of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the
<PAGE> 17
FPA Medical Management, Inc.
Employment Agreement
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"Exchange Act"), as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company; and (2) the term "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of
<PAGE> 18
FPA Medical Management, Inc.
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written notice from Employee specifying in detail the precise nature of the
Company's breach; (2) any action by the Company resulting in the diminution in
Employee's title or the material diminution of Employee's authority, duties or
responsibilities (including, but not limited to, a substantial diminution in
corporate operating assets or employees after a sale of corporate assets); (3)
notification by the Company that Employee's principal place of employment will
be relocated under the Agreement; (4) nonpayment of amounts due under the
Agreement; or (5) a Change of Control.
With respect to a particular set of circumstances giving rise
to Good Reason, Employee shall waive his right to terminate hereunder for Good
Reason if he does not give written notice within 120 days of the time he first
becomes aware of the circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided,
however, that if such election is made by the Company during the period
described in Section 4(a)(iii) hereof and Employee elects to terminate his
employment pursuant to the first sentence of this Section 4(b)(ii), in lieu of
the payments and benefits set forth herein, Employee shall be entitled to
receive the Severance Package referred to in Section 4(a)(iii) and, if
applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If Employee's employment under the
Agreement is terminated pursuant to this Section 4(c)(i), the Company shall pay
to Employee's estate the sum of (i) the Employee's monthly base salary at the
base salary rate in effect at the date of death plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the year immediately preceding the date of death (such bonus to be valued, if
applicable, in the manner described in Section 4(a)(ii)(A)). The amounts
determined hereunder shall be payable on a monthly basis for a period of twelve
(12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Section 4(b)(ii), the Company shall pay to Employee the base
salary that Employee would have been entitled to receive under Section 3(a)
through the date of termination.
(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
<PAGE> 20
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set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of six (6) months following termination of Employee pursuant to Section
4(a)(i) (the "Noncompetition Period"), and except as provided in Section 1(c)
with regard to Permitted Activities, Employee shall not, directly or
indirectly, without the prior written consent of the Company, which consent
shall not unreasonably be withheld, provide material consultative services with
or without pay, own, manage, operate, join, control, participate in, or be
connected as a stockholder, partner or otherwise with any business,
individual, partner, firm, corporation, or other entity that (1) is in
substantial competition with any business then actively being conducted by the
Company or any subsidiary or affiliate of the Company or (2) manages physician
groups as its principal business in California, Texas, Florida or any other
geographic area in which the Company is then doing business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it, any
of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its subsidiaries (the "Confidential
Information"), other than in the good faith performance of his duties hereunder
and with the consent of the Company, which consent shall not unreasonably be
withheld, in accordance with the Company's policies and regulations, as
established from time to time, for the protection of the Company's Confidential
Information. The term "Confidential Information" does not include, and there
shall be no obligation here-
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under with respect to (a) information that is obvious, or that may readily be
determined by any person reasonably knowledgeable in the industry in which the
Company operates by diligent review and examination of public sources, or that
becomes generally available to the public other than as a result of a
disclosure by Employee (or any agent or other representative thereof) in
violation of the terms hereof, and (b) office practices and procedures
applicable to the Company's business. Employee shall not have any obligation
hereunder to keep confidential any Confidential Information to the extent
disclosure of any thereof is required by law, or determined in good faith by
Employee to be necessary or appropriate to comply with any legal or regulatory
order, regulation or requirement; provided, however, that in the event
disclosure is required by law, Employee shall provide the Company with
reasonable notice of such requirement so that the Company may seek an
appropriate protective order. Upon termination of employment or the expiration
of the Agreement, all tangible evidence of such confidential or proprietary
information in the possession of Employee shall be returned to the Company, and
Employee shall not make or retain any copies or excerpts thereof, except that
Employee may retain copies of all materials that may be of a personal nature to
Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period of two (2) years after termination
of Employee's employment for any reason (the "Antisolicitation Period"),
Employee shall not influence or attempt to influence customers of the Company
or any of its present or future subsidiaries either directly or indirectly, to
divert their business from the Company to any individual, partnership, firm,
corporation, or other entity that is in substantial competition with any
business then being actively conducted by the Company or any subsidiary or
affiliate of the Company. Notwithstanding the foregoing, if Employee's
employment is terminated under the Agreement by the Company other than pursuant
to Section 4(a)(i), or by Employee pursuant to Section 4(b)(i) or
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Section 4(b)(ii), the term Antisolicitation Period shall mean the period during
which Employee is employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be the sole owner of all domestic and foreign
rights pertaining to the Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall not apply to an invention which was
developed entirely on the Employee's own time without using the Company's
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equipment, supplies, facilities or trade secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of them, the Company shall be
entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Employee without
showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to the
performance by the Employee of services for (or acting as a fiduciary of any
employee benefit plans, programs or arrangements of) the Company or any of its
subsidiaries or affiliates, including as a director, officer or employee of the
Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy covering the
Employee to the extent the Company provides such coverage for its other
executive officers. Notwithstanding any other provision of the Agreement, the
provisions of this Section 5 shall survive any termination or expiration of the
Agreement.
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6. MISCELLANEOUS PROVISION.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: Steven M. Lash
P.O. Box 676176
Rancho Santa Fe, California 92067
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in this Section shall be
deemed given on the third business day following such mailing, and any notice
given by telegram as provided herein shall be deemed delivered on the business
day following the delivery of such notice to the telegraph company for
transmission.
(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all prior oral and written
understandings (including the Employment Agreement made as of September 1,
1994, by and between Employee and the Company except for any provisions
therein relating to the grant of options and the payment of a signing bonus or
stock award) and there
<PAGE> 25
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are no further or other agreements or understandings, written or oral, in
effect between the parties relating to the subject matter hereof unless
expressly referred to herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns.
(d) Counterparts. The Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof may be
changed, waived, discharged or terminated orally or in writing, except that any
term of the Agreement may be amended and the observance of any such term may be
waived (either generally or in a particular instance and either retroactively
or prospectively) with (but only with) the written consent of both parties
hereto. No delay or omission to exercise any right, power or remedy accruing
to any party hereto shall be construed to be a waiver of any such right, power
or remedy, nor constitute any course of dealing or performance hereunder.
(f) Legal Fees. The Company shall promptly pay or reimburse
the Employee for reasonable legal fees incurred by the Employee in disputing in
good faith any issue hereunder relating to the Employee's employment or the
termination thereof or in seeking in good faith to obtain or enforce any
benefit or right provided by the Agreement. Such payments shall be made within
five (5) business days after delivery of the Employee's written request for
payment accompanied with such evidence of fees and expenses incurred as the
Company reasonably may require.
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(g) Construction. The captions assigned to the provisions of
the Agreement are for convenience only and shall be disregarded in construing
the Agreement. Unless the context otherwise requires, the pronouns of any
gender shall include the other gender, either the singular or plural shall
include the other, and the word "or" is not exclusive. All of the parties
hereto have participated in the drafting, preparation and review of the
Agreement, and in any construction to be made of the Agreement, it shall not be
construed as against any party.
(h) Governing Law. The Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(j) Taxes. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law.
Except as otherwise expressly provided in the Agreement, the deductibility or
other tax consequence of any payment hereunder to the Company shall not be
taken into account in determining whether and to what extent payment is to be
made to Employee hereunder.
<PAGE> 27
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(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitration Association,
except that if the dispute relates to the application of Section 4(a)(i) or
Section 4(b)(i) hereof, the evidentiary standards set forth therein shall
apply. Any arbitration conducted pursuant to the provisions of the Agreement
shall be conducted by a recognized independent and impartial arbitrator
mutually agreed to by the parties or, if they cannot agree within thirty (30)
days after the initial demand for arbitration, by three arbitrators, one chosen
by the Company, one chosen by the Employee and the third selected by the two so
chosen. If the arbitrators selected by the parties fail to agree on the third
arbitrator within thirty (30) days of the appointment of the second arbitrator,
the third arbitrator shall be selected by the American Arbitration Association
in accordance with its then existing rules.
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All fees and expenses relating to the arbitration shall be paid by the Company.
The judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement, effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ SETH FLAM
Its: President
By: /s/SHELDON DEREZIN
Chairman, Compensation Committee
EMPLOYEE
/s/ STEVEN LASH
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
This Employment Agreement (the "Agreement"), is made as of February 1,
1997, by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company") and James Lebovitz ("Employee").
1. EMPLOYMENT DUTIES.
(a) Capacity. The Company shall employ Employee, and
Employee shall serve as Senior Vice President, General Counsel and Secretary of
the Company, on the terms and subject to the conditions set forth in the
Agreement.
(b) Scope and Duties. Employee shall be the senior and
chief legal officer of the Company, perform such executive and managerial
duties as normally associated with the position of chief legal officer, senior
vice president, general counsel and secretary and shall report to the Chief
Executive Officer of the Company. The duties of Employee shall be performed
primarily in San Diego, California, except for such travel in the ordinary
course of the business of the Company as may from time to time be reasonably
required. Employee s principal place of business shall be at the offices of
the Company in San Diego, California.
(c) Permitted Activities. Employee shall devote
substantially all of his business time to his obligations to the Company
pursuant to the Agreement, and shall not, without the approval of the Board of
Directors of the Company (the "Board"), render services of a business nature to
any other person or entity, if such activities would materially interfere with
the performance of Employee s duties under the Agreement; provided, however,
that none of the following activities (collectively, "Permitted Activities")
shall be deemed to be in violation of the Agreement: (i) owning or managing
real or personal property owned by the Employee or his family members; (ii)
owning any business which does not compete, directly or indirectly, with the
Company, so long as such interests are held only for investment purposes; (iii)
owning up to five percent (5%) of any
<PAGE> 2
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class of any corporation s outstanding securities which are listed on any
national securities exchange, registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, or otherwise regularly traded in the
over-the-counter market; (iv) holding directorships or similar positions in any
organization which is not competing with the Company and which is approved by
the Board, which approval shall not be unreasonably withheld but which shall
not be required with respect to charitable activities and community affairs
referred to in (v) below; and (v) engaging in charitable activities and
community affairs.
2. TERM OF EMPLOYMENT.
The term of Employee s employment under the Agreement will
commence on the date of the Agreement and continue for a period of five (5)
years thereafter, unless terminated sooner pursuant to Section 4 hereof or
extended pursuant to the immediately succeeding sentence. On January 31, 2001,
and on each subsequent anniversary thereof, the term of Employee s employment
shall be extended for a period of one (1) year unless, no later than six (6)
months prior to such January 31, or, if applicable, any extended term, either
party shall have given written notice to the other that it does not wish to
extend the term of the Agreement.
3. COMPENSATION AND OTHER BENEFITS.
(a) Base Salary. As compensation for his employment
under the Agreement, the Company shall pay to Employee a base salary at the
rate of Two Hundred Thirty-Nine Thousand Dollars ($239,000) per year. Employee
s base salary shall be paid in equal, bimonthly installments. Employee s base
salary shall be increased from time to time by the Company but shall not be
decreased.
(b) Performance Bonuses. Employee shall be entitled to a
bonus up to seventy-five percent (75%) of base salary based on the achievement
of certain
<PAGE> 3
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performance criteria as determined annually by the Company s Chief Executive
Officer. Bonuses shall be paid within thirty (30) days from the completion of
the Company s audited financial statements for the applicable fiscal year.
(c) Other Benefits. During the term of Employee s
employment under the Agreement or in accordance with the terms of Sections 3(d)
or 4 of the Agreement:
(i) Other Bonus. Notwithstanding Section 3(b) of
the Agreement, lump sum cash bonuses payable to Employee or stock option grants
may from time-to-time be authorized by the Board, the Compensation Committee of
the Board or the Company s Chief Executive Officer at their sole discretion.
(ii) Benefit Plans, Medical Expense Reimbursement
and Other Perquisites.
(A) Employee (and his dependents, where
applicable) shall be entitled to participate and shall be included in any
employee benefit plans, programs, policies and arrangements of the Company,
including, but not limited to, any group health and life insurance, 401(k),
profit sharing, SEPP, stock option or other plans now existing or hereafter
established which are generally made available to senior management-level
employees of the Company, but the execution of the Agreement shall not prevent
the Company from amending, modifying or terminating any employee benefit plan,
program, policy or arrangement provided the benefits provided to Employee as of
the date hereof considered as a whole shall not be materially reduced by such
amendment, modification or termination. Employee shall also be provided with
all perquisites now existing or made available to senior management-level
employees of the Company.
(B) The Company shall pay on behalf of the
Employee or reimburse Employee for any and all
<PAGE> 4
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medical or dental expenses incurred by Employee or his dependents that are not
covered by the insurance plans of the Company.
(iii) Disability Plan. The Company shall maintain
in effect for Employee a long-term disability "own occupation" portable
insurance policy with annual disability benefits of not less than sixty percent
(60%) of base salary in effect at the time of disability commencing not more
than six (6) months after the date of Employee s disability determined in
accordance with Section 3(d) of the Agreement. To the extent insurance cannot
be purchased in such amount, the Company shall self insure the difference. The
execution of the Agreement shall not prevent the Company from amending,
modifying or terminating any disability plan provided that the benefits
provided to Employee under this Section 3(c)(iii) as of the date hereof
considered as a whole shall not be materially reduced by such amendment,
modification or termination. Employee shall pay the premiums associated with
such policies. Such premiums shall be reimbursed by Company to Employee as
additional taxable compensation. The amount of the Company's premium
reimbursement shall be grossed up for state and federal income and employment
taxes so that the net taxable effect to Employee is zero with respect to the
premiums and tax gross-up thereon.
(iv) Life Insurance.
(A) The Company shall maintain during
the term of Employee s employment hereunder one or more life insurance policies
insuring the life of Employee in the aggregate principal amount of Two Million
Dollars ($ 2,000,000), with the beneficiary or beneficiaries of such policy or
policies being those persons who are so designated from time to time by
Employee.
(B) Employee understands that the
Company may determine to purchase a key-man life insurance policy on the life
of Employee. Employee
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agrees to fully cooperate with the Company, submitting to reasonable physical
examinations if required to do so by the insurance carrier or another entity.
Employee acknowledges that (x) the Company shall be responsible for any
premiums due on any key-man life insurance policy, (y) all incidents of
ownership in any key-man life insurance policy on the life of Employee are held
by the Company, and (z) the Company is the sole beneficiary of any such policy
or shall appoint, in its sole discretion, a beneficiary. The inability of the
Company to secure any such policy shall not affect the obligations of the
Company hereunder.
(v) Professional Fees and Clubs. The Company
shall provide Employee with a maximum of Five Thousand Dollars ($5,000) each
year during the term of the Agreement for personal financial, tax and legal
counseling or fitness club, social club, or similar benefits.
(vi) Vacation. Employee will be entitled to four
(4) weeks vacation each calendar year. During periods of vacation, Employee's
compensation shall be paid in full, and any vacation day unused as of the end
of any calendar year shall be accumulated and carried forward, and may be used
in future years, provided that no more than ten (10) weeks vacation may be
taken by Employee in any calendar year.
(d) Salary and Benefit Continuation. The Company shall
continue to pay to Employee all compensation and all benefits set forth in
Sections 3(a), 3(c)(i), (ii), (iv), (v), and (vi) from the date Employee is
declared permanently and totally disabled and unable to perform the duties
required under the Agreement, until the date on which Employee commences to
receive benefits under the long-term disability plan provided pursuant to
Section 3(c)(iii).
Following commencement of the payment of benefits
under Section 3(c)(iii), the Company will pay to Employee fifty percent (50%)
of Employee's annual base
<PAGE> 6
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salary as set forth in Section 3(a) for an additional thirty-six (36)
consecutive months, regardless of the then-remaining term of Employee s
employment under the Agreement. Furthermore, in the event of such disability:
(i) the benefits described in Sections 3(c)(ii)
and 3(c)(iv) will continue as if Employee had continued to render services
pursuant to the Agreement and shall remain in effect for a minimum of
thirty-six (36) calendar months after the date of any such disability; and
(ii) the benefits described in Section 3(c)(v)
will continue to the extent that any portion of the allowance for professional
fees and clubs set forth in such Section 3(c)(v) remains unused for the
calendar year in which such disability occurs and the Company shall not be
entitled to reimbursement of any such allowance paid prior to the disability.
To the extent the Company may not continue the
benefits described in this Section 3(d) after termination of employment for
legal or insurance underwriting reasons, the Company shall provide comparable
benefits through the purchase of individual coverage or from its general
assets. To the extent benefits after termination of employment are limited or
reduced under a retirement plan qualified under Section 401 of the Internal
Revenue Code, such benefits shall be informally funded into a grantor trust
established by the Company with distribution and investment options comparable
to those available under a Company's qualified retirement plan.
For purposes of this Section 3(d), the determination
of whether or not Employee is declared permanently and totally disabled shall
be made by Employee s physician, by written notice to the Board. If the Board
disagrees with
<PAGE> 7
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the determination by Employee s physician, the Board will appoint, at the
Company s expense, another physician to make such determination. If the
physician so appointed by the Board disagrees with the determination made by
Employee s physician, then the two physicians shall appoint a mutually
acceptable third physician, at the Company s expense, to make the final
determination of whether Employee is permanently and totally disabled, which
determination will be binding on all parties hereto.
(e) Professional Dues and Continuing Legal Education.
The Company shall pay the dues and other fees necessary for Employee to
maintain his active memberships in the Pennsylvania and American Bar
Associations and the National Health Lawyers Association, such other bar
associations to which Employee shall be admitted and other legal associations
which the Company and Employee agree are beneficial for Employee, including
costs of attendance at continuing legal education courses. The Company shall
also pay for Employee to attend a review course in preparation for sitting for
the California bar and shall pay for the costs related to Employee's admission
to such bar.
4. TERMINATION PROVISIONS.
(a) Termination by Company and by Employee Under Certain
Circumstances.
(i) Employee's employment under the Agreement may be
terminated by the Company for Cause (as hereinafter defined) following thirty
(30) days' written notice from the Company to Employee. For purposes of the
Agreement, "Cause" means (A) Employee's conviction for the commission of a
felony other than a traffic violation; (B) any willful or grossly negligent act
by Employee having the effect of materially injuring the reputation or business
of the Company; or (C) the willful and continued failure by Employee to
substantially perform his duties hereunder (other than by reason of incapacity
due to physical or mental illness) after a written demand for substantial
performance is delivered by the Board, which demand specifically identifies the
manner in which the Board believes that the Employee has not substantially
performed the Employee's duties and which
<PAGE> 8
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failure is not cured within twenty (20) days after notice of such failure has
been given to Employee. For purposes of clauses (B) and (C) above, (x) no act,
or failure to act, on the Employee's part shall be deemed "willful" unless
done, or omitted to be done, by the Employee not in good faith and without
reasonable belief that the Employee's act, or failure to act, was in the best
interest of the Company and (y) in the event of a dispute concerning the
application of this provision, no claim by the Company that Cause exists shall
be given effect unless the Company establishes by clear and convincing evidence
that Cause exists.
(ii) If Employee's employment under the Agreement is
terminated by the Company for other than Cause, or by the Employee pursuant to
Section 4(b)(i) of the Agreement, then unless Section 4(a)(iii) hereof shall
apply:
(A) the Company will pay to Employee (or
his estate) the sum of (1) Employee's monthly base salary at the base salary
rate in effect immediately prior to the date of termination (without regard to
any decrease in such base salary giving rise to Employee's voluntary
termination pursuant to Section 4(b)(i) hereof) plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the Company's fiscal year immediately preceding the date of termination. For
purposes of clause (2) of the preceding sentence, to the extent Employee's
bonus for such preceding year was payable in the form of a grant of options to
acquire Company stock ("Options"), such bonus shall be deemed to be equal to
one hundred twenty percent (120%) of the cash amount that would otherwise have
been payable to the Employee as a cash bonus but for the payment of such bonus
in the form of a grant of Options. The amounts determined hereunder shall be
payable on a monthly basis for a period of thirty-six (36) months following the
date of termination;
(B) the Company shall continue to pay
for and provide Employee with benefits set forth in
<PAGE> 9
FPA Medical Management, Inc.
Employment Agreement
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Sections 3(c) (other than Sections 3(c)(i) and 3(c)(vi))and 3(e) during the
period that Employee is receiving the amounts described in clause (A) above.
In addition, all Employee stock options shall be immediately and fully vested
and exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide comparable benefits through the purchase of
individual coverage or from its general assets. To the extent benefits after
termination of employment are limited or reduced under a retirement plan
qualified under Section 401 of the Internal Revenue Code, such benefits shall
be informally funded into a grantor trust established by the Company with
distribution and investment options comparable to those available under the
Company's qualified retirement plan; and
(C) the Company shall pay to the
Employee, in a lump sum, a payment in settlement of all accrued but unused
vacation days as of the date of termination, plus a pro rata performance bonus
for the year in which occurs the date of termination, such bonus to be
determined by multiplying (1) the performance bonus paid for the calendar year
preceding the date of termination, by (2) a fraction the numerator of which is
the number of months completed during the calendar year in which the
termination occurs but preceding the date of termination and the denominator of
which is twelve (12).
The amounts referred to in Sections
4(a)(ii)(A), (B) and (C) above shall collectively be referred to as the
"Severance Benefits."
(iii) If, within twenty-four (24) months after, or
six (6) months before, a Change of Control, as that event is described below in
Section 4(a)(iii)(F): (1) the Employee's employment under the Agreement is
terminated by the Company for other than Cause; (2) the Company breaches the
Agreement; (3) pursuant to Section 2 hereof, the Company elects not to extend
the term of
<PAGE> 10
FPA Medical Management, Inc.
Employment Agreement
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Employee's employment under the Agreement and the Employee terminates his
employment pursuant to Section 4(b)(ii); or (4) the Employee terminates his
employment pursuant to Section 4(b)(i):
(A) on the effective date of Employee's
termination, the Company will pay to Employee in a lump sum the aggregate
amounts determined under Section 4(a)(ii)(A) (for the entire thirty-six (36)
month period referred to therein) and Section 4(a)(ii)(C), except that for
purposes of this Section 4(a)(iii)(A), the bonus amount determined under clause
(2) of Section 4(a)(ii)(A) (taking into account the sentence immediately
succeeding said clause) shall be equal to one-twelfth (1/12) of the performance
and any other bonuses paid or payable to Employee in respect of the year
immediately preceding the date of termination or the year immediately preceding
the Change of Control, whichever bonus is greater;
(B) for a thirty-six (36) month period after
the date of termination, the Company shall continue to pay for and provide
Employee with benefits set forth in Sections 3(c)(i) through 3(c)(iii),
inclusive, 3(c)(v) and 3(e), including, but not limited to, the continuation in
kind (including, in the case of any corporate assets such as office space and
services, secretarial, computer and administrative support, transportation and
security made available for use by the Employee, continued use of such asset at
such times and in such manner as does not unreasonably interfere with the
continued use of such asset by the Company for corporate purposes) of all
perquisites provided to Employee immediately prior to the Change of Control, or
payment in lieu of such benefits (other than the aforementioned perquisites) in
an amount equal to the cost to Employee of replacing the benefits. In
addition, all Employee stock options shall be immediately and fully vested and
exercisable and all Employee stock awards shall be immediately and fully
vested. To the extent the Company may not continue the benefits described
herein after termination of employment for legal or insurance underwriting
reasons, the Company shall provide
<PAGE> 11
FPA Medical Management, Inc.
Employment Agreement
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comparable benefits through the purchase of individual coverage or from its
general assets. To the extent benefits after termination of employment are
limited or reduced under a retirement plan qualified under Section 401 of the
Internal Revenue Code, such benefits shall be informally funded into a grantor
trust established by the Company with distribution and investment options
comparable to those available under the Company's qualified retirement plan;
(C) the Company shall prepay all remaining
premiums on a paid-up basis under any insurance policy in effect between the
Employee and the Company insuring the life of the Employee and shall transfer
to the Employee any and all rights and incidents of ownership in such
arrangements or at the Company's election, the Company shall purchase an
individual whole life policy for an equivalent face value, pay the projected
premium costs in advance and transfer such policy to Employee; and
(D) the Company shall provide to Employee
(and, to the extent applicable, his dependents), the benefits to which the
Employee is entitled as of the date of termination (or would have been so
entitled assuming he were eligible for such benefits as of the date of
termination) under the Company's post-retirement medical plan as in effect
immediately prior to the date of termination or, if more favorable to the
Employee, as in effect immediately prior to the Change of Control, such
benefits to be provided commencing on the later of the date on which such
coverage would have first become available and continuing for the remainder of
Employee's life.
The amounts and benefits referred to in Sections 4(a)(iii)(A)
through 4(a)(iii)(D), inclusive, shall collectively be referred to as the
"Severance Package."
(E) (1) Whether or not the Employee becomes
entitled to the Severance Package, if any of the
<PAGE> 12
FPA Medical Management, Inc.
Employment Agreement
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payments or benefits (including timing and supplemental items such as
acceleration of vesting) received or to be received by the Employee in
connection with a Change of Control or the Employee's termination of employment
(whether pursuant to the terms of the Agreement or any other plan, arrangement
or agreement with the Company, any Person (as hereinafter defined) whose
actions result in a Change of Control or any Person affiliated with the Company
or such Person) (such payments or benefits, excluding the Gross-Up Payments (as
hereinafter defined), being hereinafter referred to as the "Total Payments")
will be subject to the excise tax (the "Excise Tax") imposed under Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), the Company
shall pay to the Employee an additional amount (the "Gross-Up Payment") such
that the net amount retained by the Employee, after deduction of any Excise Tax
on the Total Payments and any federal, state and local income and employment
taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total
Payments.
(2) For purposes of determining whether
any of the Total Payments will be subject to the Excise Tax and the amount of
such Excise Tax, (i) all of the Total Payments shall be treated as "parachute
payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the
opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Employee
and selected by the accounting firm which was, immediately prior to the Change
of Control, the Company's independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of Section 280G(b)(l) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "Base Amount" (as defined in Section 280G(b)(3) of the
Code) allocable to such reasonable compensation, or are otherwise not subject
to the Excise
<PAGE> 13
FPA Medical Management, Inc.
Employment Agreement
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Tax, and (iii) the value of any noncash benefits or any deferred payment or
benefit shall be determined by the Auditor in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, the Employee shall be deemed to pay federal
income tax at the highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rate of taxation in the state and locality
of the Employee's residence on the date of termination (or if there is no date
of termination, then the date on which the Gross-Up Payment is calculated for
purposes of this Section), net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes.
(3) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Employee shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Employee,
to the extent that such repayment results in a reduction in the Excise Tax and
a dollar-for-dollar reduction in the Employee's taxable income and wages for
purposes of federal, state and local income and employment taxes), plus
interest on the amount of such repayment at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Employee with respect to such
excess) within five (5) business
<PAGE> 14
FPA Medical Management, Inc.
Employment Agreement
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days following the time that the amount of such excess is finally determined.
The Employee and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
(F) A "Change of Control" shall be deemed to
have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(1) any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or indirectly,
of securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (3) below;
(2) the following individuals cease for any
reason to constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the Company)
whose appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended;
(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation,
<PAGE> 15
FPA Medical Management, Inc.
Employment Agreement
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other than (i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof) at least 60% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation, or (ii) a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities Beneficially Owned
by such person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition by
the Company of all or substantially all of the Company's assets to an entity,
at least 60% of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of the common stock of the Company
<PAGE> 16
FPA Medical Management, Inc.
Employment Agreement
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immediately prior to such transaction or series of transactions continue to
have substantially the same proportionate ownership in an entity which owns all
or substantially all of the assets of the Company immediately following such
transaction or series of transactions.
For purposes hereof, (1) the term "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company; and (2) the term "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
(b) Termination by Employee.
(i) Employee's employment under the Agreement may be
terminated by Employee following thirty (30) days written notice to the Company
for Good Reason (as hereinafter defined). If Employee's employment under the
Agreement is terminated by Employee pursuant to this Section 4(b)(i), the
Company shall pay and otherwise make available to Employee (or his estate) all
compensation and benefits (including the Severance Benefits) referred to in
Section 4(a)(ii), or if the breach or event (including a Change of Control)
giving rise to such termination occurs within the period described in Section
4(a)(iii) hereof, the Severance Package referred to in Section 4(a)(iii) and,
if applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E). In
the event of any dispute regarding the application of this Section 4(b)(i), the
position taken by Employee shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.
<PAGE> 17
FPA Medical Management, Inc.
Employment Agreement
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For purposes of the Agreement, Good Reason shall constitute
(1) any breach by the Company of its material obligations under the Agreement
(including, but not limited to, any breach of Section 1 or Section 3 hereof),
which breach is not cured by the Company within thirty (30) days following the
Company's receipt of written notice from Employee specifying in detail the
precise nature of the Company's breach; (2) any action by the Company resulting
in the diminution in Employee's title or the material diminution of Employee's
authority, duties or responsibilities (including, but not limited to, a
substantial diminution in corporate operating assets or employees after a sale
of corporate assets); (3) notification by the Company that Employee's principal
place of employment will be relocated under the Agreement; or (4) nonpayment of
amounts due under the Agreement.
With respect to a particular set of circumstances giving rise
to Good Reason, Employee shall waive his right to terminate hereunder for Good
Reason if he does not give written notice within 120 days of the time he first
becomes aware of such circumstances.
(ii) If the Company, pursuant to Section 2 hereof,
elects not to extend the term of Employee's employment under the Agreement,
Employee's employment under the Agreement may be terminated by Employee
following thirty (30) days written notice to the Company. In such event, the
Company shall pay or provide to Employee, for the remainder of the term of
Employee's employment under Section 2 (determined after giving effect to such
election by the Company), the amounts referred to in Section 4(a)(ii)(A) hereof
and the benefits referred to in Section 4(a)(ii)(B) hereof, and shall pay to
Employee the amounts referred to in Section 4(a)(ii)(C) hereof; provided
however, that if such election is made by the Company during the period
described in Section 4(a)(iii) hereof and Employee elects to terminate his
employment pursuant to the first sentence of this Section 4(b)(ii), in lieu of
the payments and benefits set forth herein, Employee shall be entitled to
<PAGE> 18
FPA Medical Management, Inc.
Employment Agreement
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receive the Severance Package referred to in Section 4(a)(iii) and, if
applicable, the Gross-Up Payment referred to in Section 4(a)(iii)(E).
(iii) Employee may voluntarily terminate his
employment under the Agreement (other than pursuant to Sections 4(b)(i) and
(ii) above) following thirty (30) days' prior written notice to the Company.
(c) Other Termination.
(i) Employee's employment under the Agreement shall
terminate on the death of Employee. If Employee's employment under the
Agreement is terminated pursuant to this Section 4(c)(i), the Company shall pay
to Employee's estate the sum of (i) the Employee's monthly base salary at the
base salary rate in effect at the date of death plus (2) one-twelfth (1/12) of
the performance and any other bonuses paid or payable to Employee in respect of
the year immediately preceding the date of death (such bonus to be valued, if
applicable, in the manner described in Section 4(a)(ii)(A)). The amounts
determined hereunder shall be payable on a monthly basis for a period of twelve
(12) months following the date of death.
(ii) Employee's employment under the Agreement will
terminate as of the date Employee is declared permanently and totally disabled
and unable to perform the duties required under the Agreement. If Employee's
employment under the Agreement is terminated pursuant to this Section 4(c)(ii),
the Company will pay Employee compensation in accordance with Section 3(d).
(iii) If Employee's employment under the Agreement
is terminated for Cause or voluntarily by Employee other than pursuant to
Section 4(b)(i) or Section 4(b)(ii), the Company shall pay to Employee the base
salary that Employee would have been entitled to receive under Section 3(a)
through the date of termination.
<PAGE> 19
FPA Medical Management, Inc.
Employment Agreement
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(d) No Mitigation. If Employee's employment under the
Agreement terminates for any reason, with or without Cause, Employee shall have
no obligation to seek other employment in mitigation of damages; and, except as
set forth in Section 4(e) below, no compensation received by Employee from
other employment or other sources shall be considered as a mitigation of the
amounts owing to Employee hereunder.
(e) Noncompetition. During the term of the Agreement and a
period of (1) six (6) months following termination of Employee pursuant to
Section 4(a)(i) or (2) six (6) months or such shorter period following
termination of Employee other than pursuant to Section 4(a)(i) and provided
that Employee is receiving Severance Benefits or the Severance Package during
such six (6) month or shorter period, (the "Noncompetition Period"), and except
as provided in Section 1(c) with regard to Permitted Activities, Employee shall
not, directly or indirectly, without the prior written consent of the Company,
which consent shall not unreasonably be withheld, provide material consultative
services with or without pay, own, manage, operate, join, control, participate
in, or be connected as a stockholder, partner or otherwise with any business,
individual, partner, firm, corporation, or other entity that (1) is in
substantial competition with any business then actively being conducted by the
Company or any subsidiary or affiliate of the Company or (2) manages physician
groups as its principal business in California, Texas, Florida or any other
geographic area in which the Company is then doing business.
(f) Confidential Information. During and after the term of
the Agreement, Employee shall not directly or indirectly, divulge, furnish or
make accessible to any party not authorized by the Company to receive it, any
of the proprietary or confidential information or knowledge of the Company,
including without limitation, any financial information, marketing plans,
strategies, trade secrets, data, know-how, processes, techniques and other
proprietary information of the Company or its
<PAGE> 20
FPA Medical Management, Inc.
Employment Agreement
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subsidiaries (the "Confidential Information"), other than in the good faith
performance of his duties hereunder and with the consent of the Company, which
consent shall not unreasonably be withheld, in accordance with the Company's
policies and regulations, as established from time to time, for the protection
of the Company's Confidential Information. The term "Confidential Information"
does not include, and there shall be no obligation hereunder with respect to
(a) information that is obvious, or that may readily be determined by any
person reasonably knowledgeable in the industry in which the Company operates
by diligent review and examination of public sources, or that becomes generally
available to the public other than as a result of a disclosure by Employee (or
any agent or other representative thereof) in violation of the terms hereof,
and (b) office practices and procedures applicable to the Company's business.
Employee shall not have any obligation hereunder to keep confidential any
Confidential Information to the extent disclosure of any thereof is required by
law, or determined in good faith by Employee to be necessary or appropriate to
comply with any legal or regulatory order, regulation or requirement; provided,
however, that in the event disclosure is required by law, Employee shall
provide the Company with reasonable notice of such requirement so that the
Company may seek an appropriate protective order. Upon termination of
employment or the expiration of the Agreement, all tangible evidence of such
confidential or proprietary information in the possession of Employee shall be
returned to the Company, and Employee shall not make or retain any copies or
excerpts thereof, except that Employee may retain copies of all materials that
may be of a personal nature to Employee.
(g) Antisolicitation. During the period of Employee's
employment with the Company and for a period of two (2) years after termination
of Employee's employment for any reason (the "Antisolicitation Period"),
Employee shall not influence or attempt to influence customers of the Company
or any of its present or future subsidiaries either directly or indirectly, to
divert their business from the Company to any individual, part-
<PAGE> 21
FPA Medical Management, Inc.
Employment Agreement
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nership, firm, corporation, or other entity that is in substantial competition
with any business then being actively conducted by the Company or any
subsidiary or affiliate of the Company. Notwithstanding the foregoing, if
Employee's employment is terminated under the Agreement by the Company other
than pursuant to Section 4(a)(i), or by Employee pursuant to Section 4(b)(i) or
Section 4(b)(ii), the term Antisolicitation Period shall mean the period during
which Employee is employed by the Company.
(h) Soliciting Employees. During the Antisolicitation
Period, Employee shall not directly or indirectly solicit any of the Company
employees to work for any business, individual, partnership, firm, corporation,
or other entity in substantial competition with any business then being
actively conducted by the Company or any subsidiary or affiliate of the
Company.
(i) Disclosure to Company; Intellectual Property as Sole
Property of the Company.
(i) Employee shall promptly disclose and deliver to
the Company copies of any and all literary material, discoveries, improvements,
trade secrets, techniques, processes, know-how, and any other intellectual
property rights, whether or not subject to patent, trademark, copyright, or
trade secret, and whether or not reduced to practice, which relate to or result
from actual or anticipated business, work, research or investigations of the
Company or any subsidiary or affiliate, either alone or jointly with others,
and which have been reduced to writing (the work hereinafter collectively
referred to as the "Intellectual Property").
(ii) Employee acknowledges and agrees that all
Intellectual Property shall be the sole property of the Company or other entity
designated by it, and Employee hereby assigns to the Company his entire right
and interest in and to all the Intellectual Property. The Company or any other
entity designated by it shall be
<PAGE> 22
FPA Medical Management, Inc.
Employment Agreement
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the sole owner of all domestic and foreign rights pertaining to the
Intellectual Property.
(iii) Notwithstanding any provision in the Agreement
to the contrary, this Section 4(i) shall not apply to an invention which was
developed entirely on the Employee's own time without using the Company's
equipment, supplies, facilities or trade secret information.
(j) Injunction. Employee agrees that it would be difficult
to measure damage to the Company from any breach by Employee of the promises
set forth in subsections (e) through (i) of this Section 4, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for such breach. Accordingly,
Employee agrees that if Employee shall breach any provision of the subsections
(e) through (i) of this Section 4, or any of them, the Company shall be
entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Employee without
showing or proving any actual damage sustained by the Company.
5. INDEMNIFICATION.
To the fullest extent permitted by law and the Company's
certificate of incorporation and by-laws, the Company shall promptly indemnify
the Employee for all amounts (including, without limitation, judgments, fines,
settlement payments, losses, damages, costs and expenses (including reasonable
attorneys' fees)) incurred or paid by the Employee in connection with any
action, proceeding, suit or investigation arising out of or relating to the
performance by the Employee of services for (or acting as a fiduciary of any
employee benefit plans, programs or arrangements of) the Company or any of its
subsidiaries or affiliates, including as a director, officer or employee of the
Company or any such subsidiary or affiliate. The Company also agrees to
maintain a directors' and officers' liability insurance policy
<PAGE> 23
FPA Medical Management, Inc.
Employment Agreement
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covering the Employee to the extent the Company provides such coverage for its
other executive officers. Notwithstanding any other provision of the
Agreement, the provisions of this Section 5 shall survive any termination or
expiration of the Agreement.
6. MISCELLANEOUS PROVISIONS.
(a) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered, sent by
prepaid telegram, or by first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: James A. Lebovitz
P.O. Box 8790
16625 Via Lago Azul
Rancho Santa Fe, California 92067
If to Company: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: Chief Executive Officer
With a copy to: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: General Counsel
Either party may change the address to which such
communications are to be delivered by giving written notice to the other party.
Any notice personally given shall be deemed received upon delivery to the
address designated, any notice by mail as provided in this Section shall be
deemed given on the third business day following such mailing, and any notice
given by telegram as provided herein shall be deemed delivered on the business
day following the delivery of such notice to the telegraph company for
transmission.
<PAGE> 24
FPA Medical Management, Inc.
Employment Agreement
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(b) Entire Agreement. The Agreement contains the entire
understanding of the parties, supersedes all prior oral and written
understandings (including the Employment Agreement made as of February 1, 1996,
by and between Employee and the Company except for any provisions therein
relating to the grant of options and the payment of a signing bonus or stock
award) and there are no further or other agreements or understandings, written
or oral, in effect between the parties relating to the subject matter hereof
unless expressly referred to herein.
(c) Assignment. The Agreement will not be assignable by
Employee or the Company without the prior written consent of the other.
Subject to the preceding sentence, the Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns.
(d) Counterparts. The Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Waiver. Neither the Agreement nor any term hereof
may be changed, waived, discharged or terminated orally or in writing, except
that any term of the Agreement may be amended and the observance of any such
term may be waived (either generally or in a particular instance and either
retroactively or prospectively) with (but only with) the written consent of
both parties hereto. No delay or omission to exercise any right, power or
remedy accruing to any party hereto shall be construed to be a waiver of any
such right, power or remedy, nor constitute any course of dealing or
performance hereunder.
(f) Legal Fees. The Company shall promptly pay or
reimburse the Employee for reasonable legal fees incurred by the Employee in
disputing in good faith any issue hereunder relating to the Employee's
employment or the termination thereof or in seeking in good faith to
<PAGE> 25
FPA Medical Management, Inc.
Employment Agreement
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obtain or enforce any benefit or right provided by the Agreement. Such
payments shall be made within five (5) business days after delivery of the
Employee's written request for payment accompanied with such evidence of fees
and expenses incurred as the Company reasonably may require.
(g) Construction. The captions assigned to the
provisions of the Agreement are for convenience only and shall be disregarded
in construing the Agreement. Unless the context otherwise requires, the
pronouns of any gender shall include the other gender, either the singular or
plural shall include the other, and the word "or" is not exclusive. All of the
parties hereto have participated in the drafting, preparation and review of the
Agreement, and in any construction to be made of the Agreement, it shall not be
construed as against any party.
(h) Governing Law. The Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
(i) Severability. Any provision of the Agreement that is
deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of the Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If the covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
<PAGE> 26
FPA Medical Management, Inc.
Employment Agreement
Page -26-
- --------------------------------------------------------------------------------
(j) Taxes. Any payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law.
(k) Arbitration. All differences, claims or matters in
dispute arising out of the Agreement, the breach hereof or otherwise arising
between the Company and the Employee shall, at the election of either party, by
notice to the other, be submitted to arbitration by the American Arbitration
Association or its successor, in San Diego, California. Such arbitration shall
be governed by the then existing rules of the American Arbitration Association,
except that if the dispute relates to the application of Section 4(a)(i) or
Section 4(b)(i) hereof, the evidentiary standards set forth therein shall
apply. Any arbitration conducted pursuant to the provisions of the Agreement
shall be conducted by a recognized independent and impartial arbitrator
mutually agreed to by the parties or, if they cannot agree within thirty (30)
days after the initial demand for arbitration, by three arbitrators, one chosen
by the Company, one chosen by the Employee and the third selected by the two so
chosen. If the arbitrators selected by the parties fail to agree on the third
arbitrator within thirty (30) days of the appointment of the second arbitrator,
the third arbitrator shall be selected by the American Arbitration Association
in accordance with its then existing rules. All fees and expenses relating to
the arbitration shall
<PAGE> 27
FPA Medical Management, Inc.
Employment Agreement
Page -27-
- --------------------------------------------------------------------------------
be paid by the Company. The judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement,
effective as of the date first above written.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ SETH FLAM
Its: President
By: /s/ SHELDON DEREZIN
Chairman, Compensation
Committee
EMPLOYEE
/s/ JAMES A. LEBOVITZ
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FPA MEDICAL MANAGEMENT, INC.
AHI Healthcare Systems, Inc. (DE)
Arizona Managed Care Physicians IPA, Inc. (AZ)
California Healthcare Management Billing, Inc. (CA)
FPA Acquisition Corp. (DE)
FPA Acquisition Corporation (FL)
FPA Medical Group of Florida, Inc. (FL)
FPA Medical Group of Kentucky, Inc. (KY)
FPA Medical Management of Arizona, Inc. (AZ)
FPA Medical Management of California, Inc. (DE)
FPA Medical Management of Florida, Inc. (FL)
FPA Medical Management of Georgia, Inc. (GA)
FPA Medical Management of Kentucky, Inc. (KY)
FPA Medical Management of Louisiana, Inc. (LA)
FPA Medical Management of Michigan, Inc. (MI)
FPA Medical Management of South Carolina, Inc. (DE)
FPA Medical Management of Tennessee, Inc. (TN)
FPA Medical Management of Texas, Inc. (TX)
FPA Medical Management of the Mid-Atlantic, Inc. (DE)
FPA MSO of California, Inc. (DE)
HealthCap - Atlanta, Inc. (CA)
HealthCap - Florida, Inc. (CA)
HealthCap - Missouri, Inc. (CA)
HealthCap - Nevada, Inc. (CA)
HealthCap, Inc. (CA)
OB/GYN Management, Inc. (CA)
OPSU, Inc. (TX)
PrimeCare, Inc. (NJ)
SpecialNet, Inc. (CA)
Sterling Anesthesia, Inc. (FL)
Sterling Credentials Verification Services, Inc. (FL)
Sterling Emergency Medical Incorporated (DE)
Sterling Healthcare Group, Inc. (FL)
Sterling Medical Group of Florida, Inc. (FL)
Sterling Medical Group of Michigan, Inc. (FL)
Sterling Medical Group, Inc. (FL)
Sterling Mednet Administrative Services, Inc. (TX)
Sterling Mednet Emergency Services, Inc. (TX)
Sterling Miami, Inc. (FL)
Sterling Physician Services of America, Inc. (FL)
Sterling Physicians Group of Texas, Inc. (TX)
Sterling Professional Emergency Physicians, LLC (MD)
Sterling Real Property Melbourne, Inc. (FL)
Sterling Regional Emergency Services, Inc. (FL)
Sterling Sub Texas, Inc. (TX)
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-32687 of our report dated March 21, 1997,
appearing in the Annual Report on Form 10-K/A of FPA Medical Management, Inc.
for the year ended December 31, 1996, our report dated May 2, 1997, appearing in
the Current Report on Form 8-K/A of FPA Medical Management, Inc. filed on May
30, 1997 and our report dated May 2, 1997, appearing in the Current Report on
Form 8-K of FPA Medical Management, Inc filed on July 31, 1997.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of the Registration Statement.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
September 17, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
FPA Medical Management, Inc. in this Amendment No. 1 to Registration Statement
(File No. 333-32687) of our report dated March 15, 1996, on our audits of the
consolidated financial statements of Sterling Healthcare Group, Inc. as of
December 31, 1995, and for the year ended December 31, 1995 and for the period
from June 1, 1994 to December 31, 1994, which is included in the Annual Report
on Form 10-K/A and the Current Report on Form 8-K dated July 31, 1997. We also
consent to the reference to our Firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Miami, Florida
September 17, 1997
<PAGE> 1
EXHIBIT 23.3
To the Board of Directors
Health Partners, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
(signed) KPMG PEAT MARWICK LLP
White Plains, New York
September 17, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (form S-4 No. 333-32687) of FPA Medical Management, Inc.
and in the related Prospectus and to the incorporation by reference of
our report dated February 22, 1996, with respect to the 1995 and 1994
consolidated financial statements of AHI Healthcare Systems, Inc. included in
the Current Reports on Form 8-K of FPA Medical Management, Inc. filed on July
31, 1997 and May 30, 1997, with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Los Angeles, California
September 17, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-32687 of FPA Medical Management, Inc. of our
report dated September 30, 1996, on the combined financial statements of
Foundation Health Medical Services (a wholly-owned subsidiary of Foundation
Health Corporation) and Affiliates as of June 30, 1995 and 1996 and for each of
the three years in the period ended June 30, 1996 (such report expresses an
unqualified opinion and includes an explanatory paragraph referring to
significant related party transactions), appearing in the Proxy
Statement/Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the Proxy
Statement/Prospectus, which is a part of this Registration Statement.
Deloitte & Touche LLP
Sacramento, California
September 17, 1997
<PAGE> 1
EXHIBIT 99
HEALTH PARTNERS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS TO BE HELD ON _____________, 1997
The undersigned hereby appoints _____________ and ______________, each
with the power to appoint his substitute, as Proxies to represent and vote, as
designated below, all shares of common stock, par value $.001 per share (the
"Common Stock"), of Health Partners, Inc. (the "Company") held of record by the
undersigned at the Special Meeting of Stockholders of the Company to be held on
__________, 1997 at 10:00 a.m. at the Company's corporate headquarters, 800
Connecticut Avenue, Norwalk, Connecticut (the "Special Meeting"), and at any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING
PROPOSALS:
1. Approval and adoption of the Agreement and Plan of Merger dated as
of July 1, 1997 by and among FPA Medical Management, Inc., FPA Acquisition
Corp., and the Company (the "Merger Agreement").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of certain payments and benefits (collectively, the
"Payments") to be paid to or received by Charles G. Berg, president and chief
executive officer of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are each authorized to vote upon
such other matters as may properly come before the Special Meeting and any
adjournments or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED HEREIN BY
THE UNDERSIGNED. ABSTENTIONS AND NON-VOTES WILL HAVE THE EFFECT OF A VOTE
AGAINST APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND AGAINST APPROVAL OF
THE PAYMENTS.
-----------------------------------------------------------------------------
(CONTINUED AND TO BE SIGNED AND DATED ON THE OTHER SIDE)
Do you plan to attend the meeting? [ ] YES [ ] NO
Please sign exactly as your name appears on the
stock certificate(s). When shares are held by
joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or
guardian, please give your full title as such. If
a corporation, please sign in full corporate name
by the president or other authorized officer. If a
partnership, please sign the partnership's name by
an authorized person.
DATED: _______________________, 1997
________________________________________________
Signature
________________________________________________
Signature if jointly held
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
