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This filing is made pursuant
to Rule 424(b)(3) under the
Securities Act of 1933 in connection
with Registration No. 333-31351.
PROSPECTUS, DATED October 10, 1997
1,940,960 SHARES OF COMMON STOCK
[LOGO]
FPA MEDICAL MANAGEMENT, INC.
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This Prospectus relates to the offering by certain of the selling
stockholders named herein (the "Selling Stockholders") of up to 1,940,960 shares
(the "Individual Shares") of FPA Medical Management, Inc. (the "Company" or
"FPA") common stock, par value $.002 per share (the "Common Stock").
The Company will not receive any of the proceeds from the sale of the
Individual Shares offered hereby. The Selling Stockholders directly, through
agents designated from time to time, or through brokers, dealers or underwriters
to be designated, may sell the Individual Shares from time to time on terms to
be determined at the time of sale. To the extent required, the specific number
of Individual Shares to be sold, the respective purchase price and public
offering price, the names of any such agent, broker, dealer or underwriter, and
any applicable commission or discount with respect to the particular offer will
be set forth in a prospectus supplement. The Company has agreed to bear
substantially all expenses of registration of the Individual Shares under
federal and state securities laws, other than commissions, fees and discounts of
underwriters, brokers, dealers and agents, and to indemnify the Selling
Stockholders against certain liabilities under the Securities Act. See "Plan of
Distribution."
The Selling Stockholders and any broker, dealer, agents or underwriters
that participate with the Selling Stockholders in the distribution of the
Individual Shares may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by them and any profits on the
resale of the Individual Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The Selling
Stockholders have agreed to indemnify the Company against certain liabilities.
See "Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
"FPAM." On October 10, 1997, the last reported sale price of the Common Stock
was $35.4375 per share.
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SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
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THESE SECURITIES 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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act with respect to the
Individual Shares offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and the regulations of
the Commission thereunder. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, and each such
statement is qualified in all respects by such reference. The Company is subject
to the informational requirements of the Securities Exchange Act of 1934 (the
"Exchange Act"), and, in accordance therewith, files reports, proxy statements,
information statements and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: Seven World Trade Center,
Suite 1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material can be obtained from the Public
Reference Section of the Commission at 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. In addition, such materials also may be inspected and copied
at the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington,
D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents of the Company filed with the Commission (File No.
0-24276) are incorporated herein by reference:
1. FPA's Annual Report on Form 10-K for the fiscal 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, amended by Form 8-K/A filed with the Commission
on October 10, 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 audited combined balance sheets of Foundation Health Medical
Services (a wholly-owned subsidiary of Foundation Health Corporation) 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.
7. The Pro Forma Condensed Consolidated Financial Statements (Unaudited)
of FPA as of June 30, 1997 contained in FPA's Registration Statement on Form
S-4 dated October 10, 1997.
In addition, all reports and other documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act,
prior to the termination of the offering made hereby, shall be deemed to be
incorporated by reference into this Prospectus. Any statement included in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
ANY OR ALL OF THE DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE DOCUMENTS SO INCORPORATED.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO THE COMPANY AT 3636 NOBEL DRIVE,
SUITE 200, SAN DIEGO, CALIFORNIA 92122, ATTENTION: JAMES A. LEBOVITZ (TELEPHONE
NUMBER (619) 453-1000).
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. When used
in this Prospectus, the words "estimate," "project," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see "RISK FACTORS." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. FPA does not undertake any obligation to
publicly release any revisions to
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these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and the documents
incorporated herein by reference. See "Risk Factors" for information that should
be carefully considered by prospective investors. The financial and share data
and enrollment and physician data of FPA includes AHI for all periods presented
as a result of the pooling of interests transaction effective March 1997.
THE COMPANY
FPA is a national physician practice management company ("PPM") which
acquires, organizes and manages primary care physician practice networks and
provides contract management services to hospital-based emergency departments.
The Company provides primary and specialty care services to prepaid managed care
enrollees and fee-for-service patients through a network of independent practice
association ("IPA") physicians and owned primary care physician groups. FPA
manages all covered primary and specialty medical care for each enrollee in
exchange for monthly risk-sharing fixed capitation payments pursuant to Payor
contracts. Including the effects of the merger with Health Partners, Inc.
("Health Partners") (See "Recent Developments"), effective October 13, 1997, 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.
The Company 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 the Company a platform for coordinating all
aspects of patient care under global capitation Payor contracts. The Company is
also pursuing state and national Payor contracts, which facilitate more rapid
development of provider networks in new markets thus adding 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 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. The Company
believes that its management model is appealing to physicians because it allows
the 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 fixed 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.
The Company recruits physicians and contracts for their services to
provide staffing of emergency departments. The Company also assists its hospital
clients in such areas as physician scheduling, operations
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support, quality assurance and departmental accreditation as well as billing and
record keeping. In addition, the Company 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 affiliates 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 the Company'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.
The Company 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 the Company will acquire any additional businesses.
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.
The Company's executive offices are located at 3636 Nobel Drive, Suite
200, San Diego, California 92122 and its telephone number is (619) 453-1000.
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
$18,000,000, subject to adjustment based on certain performance criteria. The
acquisition will be accounted for as a purchase. EMC is a 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
departments and one radiology department in 2 states. EMC currently contracts
with approximately 125 affiliated physicians who provide medical care to
approximately 250,000 patients annually.
On October 13, 1997, FPA completed its acquisition of Health Partners in a
stock-for-stock merger accounted for as a pooling of interests in which
5,227,273 shares of FPA Common Stock were issued in exchange for all outstanding
shares and options of Health Partners. Health Partners is 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. Health
Partners' affiliated medical groups and IPAs currently serve approximately
138,000 patients under capitated or global fee arrangements. Health Partners
believes it is the New York City metropolitan area's largest PPM with 1,331
affiliated physicians and approximately 104,000 patients under capitated or
global fee arrangements.
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THE OFFERING
This Prospectus relates to the offering by the Selling Stockholders of the
Individual Shares. See "Description of Capital Stock."
THE COMMON STOCK AND INDIVIDUAL SHARES
<TABLE>
<S> <C>
Individual Shares offered by the Selling Stockholders................... 1,940,960
Total FPA Common Stock outstanding as of September 19, 1997(1).......... 33,789,827
Nasdaq National Market symbol........................................... FPAM
</TABLE>
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(1) Excludes approximately 7,881,838 shares of Common Stock issuable upon
exercise of stock options and other warrants outstanding as of
September 24, 1997 and 3,107,900 shares issuable upon conversion of the
Company's 6 1/2% Convertible Subordinated Debentures due 2001 (the
"Debentures").
RISK FACTORS
In addition to other information contained or incorporated by reference in
this Prospectus, prospective investors should consider carefully the factors
listed below in evaluating an investment in the Individual Shares offered
hereby.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS; EXPANDED SERVICE
OFFERING
Over the last two and one-half years, the Company has pursued an
aggressive growth strategy. The Company's growth has been achieved primarily
through acquisitions, several of which have been completed or become subject to
a binding agreement during the last six months. See "Recent Developments."
Several of these acquisitions are large transactions which involve significant
risks and uncertainties for FPA. The Company 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 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, 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
the Company'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 fluctuation 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.
The Company 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 the Company's ability to compete successfully at favorable prices
for available acquisition candidates or to complete future acquisitions, or as
to the financial effect on the Company of any acquired business. Future
acquisitions by the Company 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
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may result in increased indebtedness and interest and amortization expenses or
decreased operating income, which could have an adverse impact on the Company'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 Company. 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 the
Company'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 services presents certain risks and uncertainties due to FPA's relative
unfamiliarity with these types of services and the market for such services.
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 under 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 the Debentures in December 1996, such debt accounts for
approximately 240% of FPA's total capitalization 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 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 affiliates 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 the Company'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.
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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. 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 recorded 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 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 the Company's business and
results of operations.
DIFFICULTY IN CONTROLLING HEALTH CARE COSTS; CAPITATED NATURE OF REVENUE
Agreements with Payors typically provide for the Professional Corporations
or certain subsidiaries of FPA to receive prepaid monthly fees per enrollee
known as "capitation" payments. FPA's profitability primarily depends upon its
ability to control costs and the ability of the Professional Corporations to
incur less in medical, hospital and administrative costs than the capitation
revenue received from Payors. Such profitability is achieved through effective
management of the provision of medical services by physicians in the FPA
Network, including controlling utilization of specialty care physicians and
other ancillary providers, purchasing services from physicians outside the FPA
Network at competitive prices and negotiating favorable rates with hospitals.
Agreements with Payors may also contain shared risk arrangements under which
additional compensation can be earned based on the provision of high-quality,
cost-effective 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,
which would reduce FPA's net income. The amount of non-capitated medical and
hospital costs in any period could be affected by factors beyond the control of
the FPA Network, such as changes in treatment protocols, epidemics, disasters,
new technologies and inflation. To the extent that specialty care physicians'
fees or hospital costs have not been capitated and enrollees 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, 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 the Company. 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 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 Corporations 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 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 two types of contractual arrangements: 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
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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.
DEPENDENCE ON GOVERNMENTAL AND OTHER THIRD PARTY PAYORS
As a result of the Sterling acquisition, a significant portion of FPA's
operating revenue is 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 revenues were 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 providers 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
intended to reallocate medical reimbursement among medical specialties, took
effect on January 1, 1992 and was 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 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 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
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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 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 non-renewal, 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.
As of June 30, 1997, approximately 39% of FPA's membership is 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
FPA subsidiaries and 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, to keep care centers open given
specified levels of patients and to agree to certain pricing and contracting
parameters with Foundation. The agreements may be terminated in a number of
circumstances, including in 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 (the "petitioners") voted to be
represented by the Federation of Physicians and Dentists (the "Union"). On
February 13, 1997, the TDMC employees located in Tucson voted to be represented
by the Union of Health and Hospital Care Employees. On September 24, 1997, a
District Court Judge for the United States District Court for the District of
Arizona granted a temporary injunction and ordered, among other things, FPA and
TDMC to recognize the Union as the exclusive bargaining agent for the
petitioners and from making unilateral changes in the terms and conditions of
employment, and upon request of the Union, to recognize and bargain in good
faith with the Union as the exclusive collective bargaining agent of the
petitioners concerning wages, hours and other terms and conditions of
employment. TDMC and the Union commenced bargaining on October 1, 1997. 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 and financial condition.
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 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
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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 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 by reference herein, 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 states in which it operates 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 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 financial condition.
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 any 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 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
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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 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 the Company 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.
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 the Company, which negotiate provider contracts, regarding
the standards, terms and provisions under which a participating provider will
provide services to covered persons. The Model Act does not carry the force of
law unless it is adopted by state legislatures. The Company does not know which
states, if any, will adopt the Model Act. There can be no assurance that the
Company will be able to comply with the Model Act or any other act adopted by
NAIC if it is adopted in any state in which the Company does business or the
effect 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 that
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 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. The Company believes
that it is in compliance with the antitrust laws, but there can be no assurance
that the Company's interpretation is consistent with that of federal or state
authorities or courts or that such circumstances will remain as the Company
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,
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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 consolidation 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 Corporation. 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 the results of operations of FPA.
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. The Company has
been named as a party in such suits 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 the Company's financial condition and results of
operations. Further, 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.
An increasing number of health care providers and other entities are being
faced with lawsuits alleging fraudulent billing practices under the federal
Civil False Claims Act. The Civil False Claims Act permits a person (generally
employees or former employees of the 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 given that such
action 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 (a)
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 (b) 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.
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
subsidiaries and 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
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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 the Company's quarterly
operating results could result in significant volatility in, and otherwise
adversely affect, the market price for the 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, 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 trading
price of FPA common stock. Accordingly, there can be no assurance as to the
price at which FPA common stock will trade in the future.
DEPENDENCE UPON KEY PERSONNEL; EMPLOYMENT CONTRACTS
FPA is dependent upon 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 to FPA 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.
RISKS OF DILUTION; 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. Further,
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 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 FPA common stock.
As of September 19, 1997, 33,789,827 shares of FPA common stock are issued and
outstanding. In addition, as of September 24, 1997 the Company had granted
options or warrants to purchase, or securities (excluding the Debentures)
convertible into 7,881,838 shares of FPA common stock and 3,107,900 shares of
FPA common stock are issuable upon conversion of the Debentures. Approximately
5,142,000 shares of outstanding FPA common stock are subject to registration
rights agreements which permit such shares to be included in future registration
statements of common stock or other securities of FPA. In addition, the Company
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. The Company does not believe a
registration statement regarding such shares will need to be filed.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
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FPA's Certificate of Incorporation, as amended, and By-laws contain
certain provisions that could have the effect of making it more difficult for a
person to acquire, or of discouraging a third party from attempting to acquire,
control of FPA. FPA's Certificate of Incorporation authorizes the Board of
Directors without the approval of the stockholders to issue Preferred Stock. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging a person from acquiring a
majority of the outstanding common stock. There are no shares of Preferred Stock
presently outstanding and FPA has no present plans to issue any shares of
Preferred Stock.
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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sales of the
Individual Shares offered hereby.
DIVIDEND POLICY
The Company declared no cash dividends on the Common Stock during 1995,
1996 and 1997 to date. The Company currently intends to retain earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends (including
under the Credit Agreement and the Debentures) and other relevant factors.
18
<PAGE> 16
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 98,000,000 shares of
Common Stock, $.002 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share. As of September 24, 1997, there were
33,789,827 shares of common stock and no shares of Preferred Stock issued and
outstanding.
COMMON STOCK
Holders of the common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock do not
have cumulative voting rights and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the common stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any agreement governing the
Company's indebtedness. The Company does not anticipate paying cash dividends in
the foreseeable future. See "Dividend Policy." In the event of the liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of the common stock have no preemptive, conversion or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of common stock are validly issued, fully paid and
nonassessable.
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors has the authority, without any vote or action by
the stockholders, to issue Preferred Stock in one or more series and to fix the
designations, preferences, rights, qualifications, limitations and restrictions
thereof, including the voting rights, dividend rights, dividend rate, conversion
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series. In addition, the issuance of Preferred Stock by the Board of
Directors could be utilized, under certain circumstances, as a method of
preventing a takeover of the Company at a premium above the then-prevailing
market price. See "Risk Factors -- Anti-Takeover Effect of Certain Provisions."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an interested stockholder (defined generally as a person owning 15% or
more of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware Corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder the board of directors of the
corporation approved the transaction or the business combination in which the
interested stockholder became an interested stockholder; (ii) upon consummation
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares owned by persons who are both officers and directors
of the corporation, and held by certain employee stock ownership plans); or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock of
the corporation not owned by the interested stockholder.
The Company's Bylaws provide that the exact number of directors shall be
fixed from time to time by the Board of Directors. At each annual meeting of
stockholders, directors will be elected to succeed those directors whose terms
have expired, and each newly elected director will serve for a three-year term.
Directors may be removed, with or without cause, by the holders of a majority of
shares entitled to vote at an election of directors.
19
<PAGE> 17
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware General Corporation Law, a director of the Company
shall not be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a Director. Under current Delaware Law, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provision of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Company's Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware General Corporation Law.
In addition, the Company has entered into agreements (the "Indemnification
Agreements") with certain of the directors and officers of the Company pursuant
to which the Company agrees to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer and arising out of his capacity
as a director, officer, employee and/or agent of the corporation of which he is
a director or officer to the maximum extent provided by applicable law. In
addition, such director or officer shall be entitled to an advance of expenses
to the maximum extent authorized or permitted by law to meet the obligations
indemnified against. The Indemnification Agreements also obligate the Company to
cover each director and officer in the event the Company purchases and maintains
insurance for the benefit and on behalf of its directors and officers insuring
against all liabilities that may be incurred by each director or officer in or
arising out of his capacity as a director, officer, employee and/or agent of the
Company.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company to
indemnify directors and officers, such repeal or limitation may not be effective
as to directors and officers who are currently parties to the Indemnification
Agreements because their rights to full protection are contractually assured by
the Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and officers of the
Company.
REGISTRATION RIGHTS
The Company has granted registration rights with respect to approximately
5,142,000 shares of FPA Common Stock related to various acquisitions. Such
agreements permit such shares to be included in future registration statements
of common stock or other securities of FPA. In addition the Company 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. The Company does not believe a registration
statement regarding such shares will need to be filed.
20
<PAGE> 18
SELLING STOCKHOLDERS
The following table sets forth information with respect to the Selling
Stockholders, the number of Individual Shares offered hereby and the number of
shares to be owned by each Selling Stockholder if all Individual Shares offered
hereby are sold. Substantially all of these Selling Stockholders have agreed to
a lock-up of the shares offered hereby until the day following the date when
financial results covering at least 30 days of post-merger combined operations
of FPA and HealthCap have been published.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES TO BE
OWNED BEFORE BENEFICIALLY
OFFERING SHARES OWNED AFTER OFFERING
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Allstate Insurance Company 173,032 * 173,032 -- --
Allstate Life Insurance Company 105,573 * 105,573 -- --
Agents Pension Plan 15,308 * 15,307 -- --
Allstate Retirement Plan 12,246 * 12,245 -- --
Charles H. Blanchard 20,726 * 20,726 -- --
Edward Buckner 712 * 712 -- --
Theresa Buscemi 250 * 250 -- --
Terri Doe-Roberts 932 * 932 -- --
Vanessa Emerick 233 * 232 -- --
Patricia Hedrick 250 * 250 -- --
Doris Johnson 2,072 * 2,072 -- --
Donald J. Jones 7,254 * 7,254 -- --
KADDAK Limited Partnership 24,871 * 24,871 -- --
Robert B. McCray 123,529 * 123,529 -- --
Nader Naini 4,974 * 4,974 -- --
Donna J. Rockenbach 7,254 * 7,254 -- --
Dana Simpson 207 * 207 -- --
Scott T. Smith 7,461 * 7,461 -- --
Steven C. Thomas 149,230 * 149,230 -- --
Michael C. Wright 468,418 1.4% 468,418 -- --
Randall M. Baum and Besty S. Baum, 1,415 * 1,415 -- --
Trustees of the Baum Family Revocab1e
Trust, UTA dated February 21, 1997
Charles Blanchard 1,415 * 1,415 -- --
Arthur Blank 14,154 * 14,154 -- --
Ronald M. and Lisa S. Brill 2,123 * 2,123 -- --
Brian P. Burns 7,077 * 7,077 -- --
Arthur B. Calcagnini 8,493 * 8,493 -- --
Patricia Chirls 1,415 * 1,415 -- --
Martin D. Cohn and Gerald L. Cohn, 2,123 * 2,123 -- --
Trustees for Gerald L. Cohn
Gerald Cohn 1,982 * 1,982 -- --
Archibald Cox 7,077 * 7,077 -- --
WSGR Profit Sharing Plan, D.M. Laurice 354 * 354 -- --
& M.M. Rosati, Trustees, fbo Frances
Currie
Peter W. Eising 1,415 * 1,415 -- --
Frazier Management, L.L.C. 2,123 * 2,123 -- --
Frazier & Company L.P. 269 * 269 -- --
Frazier Portfolio Fund 8,224 * 8,224 -- --
Alan D. Frazier 1,415 * 1,415 -- --
Gerson Bakar 1984 Trust 7,077 * 7,077 -- --
Steven Gillis 1,415 * 1,415 -- --
Peter and Gloria Gold Revocable 3,539 * 3,539 -- --
Intervivos Trust
Greentree Shore Limited Partnership 3,539 * 3,539 -- --
David E. Harvey 1,062 * 1,062 -- --
A. Grant Heidrich, TTEEAGH Separate 708 * 708 -- --
Property Trust UDT 5/31/83
Helios Partners 7,077 * 7,077 -- --
George P. Hutchinson 1,415 * 1,415 -- --
Peter Barton Hutt 1,982 * 1,982 -- --
Inverned Associates, Inc. 9,200 * 9,200 -- --
Carlisle Jones 708 * 708 -- --
Fred Joseph BS Master Defined 1,062 * 1,062 -- --
Contribution Profit Sharing Plan,
Bear Stearns, Custodian
Saul Kurlat and Gitta Kurlat as 3,539 * 3,539 -- --
Joint Tenants with Rights of
Survivorship
Stephen A. Levin 7,077 * 7,077 -- --
Libby D. Group 2,123 * 2,123 -- --
Limit & Co. 28,309 * 28,309 -- --
M & G Equities 7,077 * 7,077 -- --
Mallard Investments L.P. 14,154 * 14,154 -- --
David Maryatt 1,415 * 1,415 -- --
Ronald Matricaria 1,415 * 1,415 -- --
MF Partners 9,200 * 9,200 -- --
Ali Naini 354 * 354 -- --
Robert Nanovic 4,246 * 4,246 -- --
Harry Palmer 1,415 * 1,415 -- --
Donald C. Pelo 1,415 * 1,415 -- --
Quogue Investment Partnership 7,077 * 7,077 -- --
R.A. Investment Group 28,309 * 28,309 -- --
R.D. Merrill Company 5,662 * 5,662 -- --
Blair and Sarah Rasmussen 3,539 * 3,539 -- --
Ralph H. Rinne, M.D. 2,123 * 2,123 -- --
Rousso Family Trust 2,831 * 2,831 -- --
SASCO Marketing, Inc. 2,831 * 2,831 -- --
Norman C. Selby 1,415 * 1,415 -- --
Stanley Sirote 1,415 * 1,415 -- --
G.W. Skinner Children's Trust 7,077 * 7,077 -- --
Solar Group S.A. 7,077 * 7,077 -- --
Springbrook G.P. 212,316 * 212,316 -- --
Stanton Family Trust 1,769 * 1,769 -- --
John Stanton & Theresa Gillespie 1,769 * 1,769 -- --
Eugene L. Step 14,154 * 14,154 -- --
Surprise, Inc. 2,123 * 2,123 -- --
Andrew & Susan Taussig 708 * 708 -- --
Thomas Teague 1,415 * 1,415 -- --
George Thompson 1,062 * 1,062 -- --
Peter Van Oppen, IRA 354 * 354 -- --
Peter Viachos 1,062 * 1,062 -- --
Walter Bros. 2,832 * 2,832 -- --
Gary L. Waterman 4,955 * 4,955 -- --
Frank Wilkens 3,540 * 3,540 -- --
WNC Corporation 2,123 * 2,123 -- --
The Patricia W. Wuliger Trust, Jeffrey 7,077 * 7,077 -- --
and Gregory Wuliger, Trustees
Frank G. Myers, Jr. 120 * 120 -- --
Frank G. Myers, Jr. & Susan F. Myers 9,394 * 9,394 -- --
Trust
B.S.& A. Myers Partners 1,680 * 1,680 -- --
Nancy S. Mueller Revocable Trust
Nancy S. Mueller Revocable Trust 2,138 * 2,138 -- --
</TABLE>
21
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
G&C Mueller Partners 534 * 534 -- --
A. Grant Heidrich III 120 * 120 -- --
A. Grant Heidrich III & Jeannette Y. 8,838 * 8,838 -- --
Heidrich Trust
BLH Trust 1,121 * 1,121 -- --
AGH, IV Trust 1,121 * 1,121 -- --
Michael J. Levinthal 120 * 120 -- --
Michael J. Levinthal Trust 6,932 * 6,932 -- --
William D. Unger 120 * 120 -- --
Unger-Luchsinger Family Trust 6,509 * 6,509 -- --
ANDMAX Partners 423 * 423 -- --
Wendell G. Van Auken 120 * 120 -- --
Wendell G. Van Auken & Ethal S. Van 6,932 * 6,932 -- --
Auken Trust
Kevin A. Fong 120 * 120 -- --
Devin A. Fong & Salley J. Fong Trust 6,932 * 6,932 -- --
Yogen K. Dalal 120 * 120 -- --
Dalal Revocable Trust 5,873 * 5,873 -- --
Nina M. Dalal 1993 Trust, RK Dalal, ttee 529 * 529 -- --
Alex R. Dalal 1993 Trust, RK Lalal, ttee 529 * 529 -- --
Andrew K. Klatt 167 * 167 -- --
Abbott:
California State Teachers' 14,105 * 14,105 -- --
Retirement System
Army & Air Force Exhchange Service 705 * 705 -- --
Trust
Illinois Municipal Retirement Fund 2,115 * 2,115 -- --
Andrew W. Mellon Foundation 4,233 * 4,233 -- --
Bolsa Company 1,411 * 1,411 -- --
Commonwealth Fund 2,821 * 2,821 -- --
Computrol, Ltd. 4,233 * 4,233 -- --
Trustees of Dartmouth College 2,821 * 2,821 -- --
Duke University 4,233 * 4,233 -- --
Endowment Venture Partners 9,875 * 9,875 -- --
Ford, Thomas 1,411 * 1,411 -- --
Greenhouse Associates 2,115 * 2,115 -- --
L SCOTT FRANTZ 282 * 282 -- --
WILLIAM T. FRANTZ 282 * 282 -- --
Harvard Managment:
Phemus Corporation 7,053 * 7,053 -- --
Harvard Master Trust 705 * 705 -- --
Harvard - Yenching Institute 352 * 352 -- --
McKinney Avenue (Estate of Jane 3,527 * 3,527 -- --
Walcott Heldt)
Hewlett Packard Master Trust 7,053 * 7,053 -- --
Horsley Bridge Fund II, L.P. 28,214 * 28,214 -- --
Leeway & Company 11,286 * 11,286 -- --
Metcalf, John R. 352 * 352 -- --
Metcalf, Susan S. Revocable Trust 352 * 352 -- --
Massachusetts Institute of Technology 14,107 * 14,107 -- --
Massachusetts Institute of Technology 5,642 * 5,642 -- --
Retirement Plan
Notre Dame de Lac 4,233 * 4,233 -- --
NYNEX Master Pension Trust 7,053 * 7,053 -- --
Owens-Illinois Master Retirement 2,821 * 2,821 -- --
Pebble II 2,821 * 2,821 -- --
Phelps Dodge Master Retirement Trust 1,411 * 1,411 -- --
Trustees of Phillips Academy 2,821 * 2,821 -- --
Nassau Capital Funds, L.P. 11,287 * 11,287 -- --
Rensselaer Polytechnic Institute 1,411 * 1,411 -- --
Rockefeller Brothers Fund 4,233 * 4,233 -- --
Scintet Development & Holdings 563 * 563 -- --
Sherman Fairchild Foundation 1,411 * 1,411 -- --
Shing Kwan Investment Co. 1,411 * 1,411 -- --
Robert R. Sprague, 705 * 705 -- --
Leland Stanford Junior University 9,875 * 9,875 -- --
Marion R. Stone 352 * 352 -- --
Robert G. Stone Jr. 705 * 705 -- --
Superior Partners Ltd. 2,115 * 2,115 -- --
University of California 21,160 * 21,160 -- --
University of Michigan, Regents 1,411 * 1,411 -- --
Wellesley College 2,115 * 2,115 -- --
Yale University 21,161 * 21,161 -- --
Basket-Bell Family Trust 308 * 308 -- --
Randall S. Battat 67 * 67 -- --
Eric Benhamou 167 * 167 -- --
Stephen M. Berkley 307 * 307 -- --
Diosado P. Banatao 307 * 307 -- --
David A. Brown Family Trust 213 * 213 -- --
Carreker Family Trust 167 * 167 -- --
Vinton G. Cerf 33 * 33 -- --
Al Chin 83 * 83 -- --
Kenneth Clark (WSGR Profit Shring Plan) 25 * 25 -- --
Robert T. Clarkson 25 * 25 -- --
Caretha Coleman 83 * 83 -- --
John C. Colligan 42 * 42 -- --
Richard G. Couch 179 * 179 -- --
Francis S. Currie (WSGR Profit Sharing 25 * 25 -- --
Plan)
PSERD Trust, Philip S. & Elayne R.
Dauber, ttees 307 * 307 -- --
Dobkin Family Trust (Dobkin, R.) 307 * 307 -- --
Investment Group of Santa Barbara Money 307 * 307 -- --
Purchase Plan
Eaton - Yara 1991 Family Trust 167 * 167 -- --
F. Terry Eger 83 * 83 -- --
Fallen Oak Partners (Pavlov, George) 196 * 196 -- --
Thomas W. Ford 307 * 307 -- --
Martin S. Gerstel 167 * 167 -- --
James F. Gibbons 126 * 126 -- --
David V. Goeddel 213 * 213 -- --
James M. Gower 83 * 83 -- --
Robert V. Gunderson Jr. 83 * 83 -- --
Timothy M. Haley 42 * 42 -- --
Cecelia A. Hayes 20 * 20 -- --
1993 Hennessey Revocable Trust 260 * 260 -- --
Russell C. Hirsch 834 * 834 -- --
Bruce Holland 308 * 308 -- --
Holman Group Inc. Money Purchase 83 * 83 -- --
Pension Trust
Huang Revocable Living Trust 308 * 308 -- --
Peter B. Hutt 67 * 67 -- --
Wende S. Hutton 832 * 832 -- --
Craig W. Johson 33 * 33 -- --
Jennifer V. Jones 42 * 42 -- --
David M. Kelley 42 * 42 -- --
Andy Klatt 1,166 * 1,166 -- --
Raju Kucheriapati 126 * 126 -- --
Randy Komisar 42 * 42 -- --
Sandra L. Kutrzig Trust 260 * 260 -- --
Mark Levin 83 * 83 -- --
Alan Levy 308 * 308 -- --
Keith R. Lobo 83 * 83 -- --
Audrey & Clair, Michael MacLean Trust 167 * 167 -- --
Joseph Mandato 308 * 308 -- --
Massey Family Trust 25 * 25 -- --
Mario Mazzola 308 * 308 -- --
Edward R. McCracken 308 * 308 -- --
J. Casey McGlynn (WSGR Profit Sharing Plan 52 * 52 -- --
Roger McNamee 83 * 83 -- --
Meresman Family Trust 307 * 307 -- --
Frederic H. Moll 260 * 260 -- --
Allen L. Morgan 25 * 25 -- --
A. Richard Newton 333 * 333 -- --
Patterson Family Trust 167 * 167 -- --
Mark W. Perry 100 * 100 -- --
John A. Powell Irrevocable Trust 83 * 83 -- --
Quattrone Family Trust 213 * 213 -- --
William R. Rauth III, Cal. Central 307 * 307 -- --
Trust Bank, ttee
Mario M. Rosati (WSGR Profit Sharing 91 * 91 -- --
Plan)
Saper Family Trust 25 * 25 -- --
Jon S. & Marshall, Mayrna G. Saxe 307 * 307 -- --
Schroeder Family Trust 250 * 250 -- --
Larray H. Sonsini 91 * 91 -- --
Isaac Stein 307 * 307 -- --
Swanson Family Fund, Ltd., Robert 307 * 307 -- --
A. Swanson, GP
Robert H. Swanson, Jr. & Sheila L. 83 * 83 -- --
Swanson Trust
VLG Investments 1994 134 * 134 -- --
Frank T. Watkins III 167 * 167 -- --
Kurt Wheeler 83 * 83 -- --
Will Family Trust, Allan R. & Heidi 100 * 100 -- --
E. Will, ttees
WS Investment Company 93E 832 * 832 -- --
Frank G. Myers, Jr. & Susan F. Myers 21 * 21 -- --
Trust
Nancy S. Mueller Revocable Trust 21 * 21 -- --
A. Grant Heidrich III & Jeannette Y. 21 * 21 -- --
Heidrich Community Property
Michael J. Levinthal Trust 21 * 21 -- --
Unger-Luchsinger Family Trust 21 * 21 -- --
Wendel G. & Ehtel S. Van Auken Trust 21 * 21 -- --
Kevin A. Fong & Sally J. Fong Trust 21 * 21 -- --
Dalal Revocable Trust, Yogen K. & 21 * 21 -- --
Margaret J. Dalal, ttees
</TABLE>
- -------------------
* Less than 1%.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the
Individual Shares offered hereby. The Individual Shares may be sold from time to
time to purchasers directly by the Selling Stockholders. Alternatively, the
Selling Stockholders may from time to time offer the Individual Shares through
underwriters, brokers, dealers or agents who may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of the Individual Shares for whom they may
act as agent. The Selling Stockholders and any such underwriters, brokers,
dealers or agents who participate in the distribution of the Individual Shares
may be deemed to be "underwriters", and any profits on the sale of the
Individual Shares by them and any discounts, commissions or concessions received
by any such underwriters, brokers, dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act. To the extent
the Selling Stockholders may be deemed to be underwriters, the Selling
Stockholders may be subject to certain statutory liabilities of the Securities
Act, including, but not limited to, Sections 11, 12 and 17 of the Securities Act
and Rule 10b-5 under the Exchange Act.
The Individual Shares offered hereby may be sold from time to time in one
or more transactions at fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The Individual Shares may be sold by one or more of the following methods,
without limitation: (i) a block trade in which the broker or dealer so engaged
will attempt to sell the Individual Shares as agent but may position and resell
a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; (iv) an
exchange distribution in accordance with the rules of such exchange; (v)
face-to-face transactions between sellers and purchasers without a
broker-dealer; (vi) through the writing of options; (vii) to underwriters who
will acquire the Individual Shares for their own account and resell them
22
<PAGE> 20
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale (any
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may change from time to time); and (viii) other. At any time a
particular offer of the Individual Shares is made, a revised Prospectus or
Prospectus Supplement, if required, will be distributed which will set forth the
aggregate amount and type of Individual Shares being offered and the terms of
the offering, including the name or names of any underwriters, brokers, dealers
or agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders, the purchase price paid by any underwriter for
Individual Shares purchased from the Selling Stockholders, any discounts,
commissions or other items constituting compensation from the Selling
Stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to dealers. Such revised Prospectus or Prospectus Supplement and, if
necessary, a post-effective amendment to the registration statement of which
this Prospectus is a part, will be filed with the Commission to reflect the
disclosure of additional information with respect to the distribution of the
Individual Shares. In addition, the Individual Shares covered by this Prospectus
may be sold in private transactions or under Rule 144 rather than pursuant to
this Prospectus.
There is no assurance that any Selling Stockholder will sell any or all of
the Individual Shares offered by it hereunder or that any such Selling
Stockholder will not transfer, devise or gift such Individual Shares by other
means not described herein. Underwriters participating in any offering made
pursuant to this Prospectus (as amended or supplemented from time to time) may
receive underwriting discounts and commissions, and discounts or concessions may
be allowed or reallowed or paid to dealers, and brokers or agents participating
in such transaction may receive brokerage or agent's commissions or fees.
The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rules 10b-6
and 10b-7, which may limit the timing of purchases and sales of any of the
Individual Shares by the Selling Stockholders and any other such person.
Furthermore, under Rule 10b-6 under the Exchange Act, any person engaged in the
distribution of the Individual Shares may not simultaneously engage in
market-making activities with respect to the particular Securities being
distributed for a period of nine business days prior to the commencement of such
distribution. Regulation M, which replaces Rules 10b-6 and 10b-7 effective as of
March 4, 1997, contains similar limitations on the distribution and sale of the
Individual Shares hereunder. All of the foregoing may affect the marketability
of the Individual Shares and the ability of any person or entity to engage in
market-making activities with respect to the Individual Shares.
In order to comply with the securities laws of certain states, if
applicable, the Individual Shares will be sold in such jurisdictions, if
required, only through registered or licensed brokers or dealers.
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Individual Shares to the public
other than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
Pursuant to agreements between the Company and certain of the Selling
Stockholders, the Company and certain of the Selling Stockholders have agreed to
indemnify each other against certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Individual Shares offered hereby will be passed upon
for the Company by James A. Lebovitz, Esq., Senior vice President, General
Counsel and Secretary of FPA, San Diego, California.
EXPERTS
The consolidated financial statements of FPA incorporated in this
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 Consolidated Financial Statements of FPA incorporated in this
Prospectus by reference from FPA's Current Report on Form 8-K dated July 31,
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, 1996 and the year then ended incorporated in this 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 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, incorporated in this 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 have been audited by Stevenson, Jones, Imig,
Holmaas & Kleinhans, P.C., as stated in their report incorporated herein by
reference.
23
<PAGE> 21
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary.....................................................
Risk Factors...........................................................
Recent Developments....................................................
Ratio of Earnings to Fixed Charges.....................................
Use of Proceeds........................................................
Dividend Policy........................................................
Description of Common Stock............................................
Selling Stockholders...................................................
Plan of Distribution...................................................
Legal Matters..........................................................
Experts................................................................
</TABLE>
================================================================================
LOGO
FPA MEDICAL
MANAGEMENT, INC.
1,940,960 SHARES
OF COMMON STOCK
---------------
PROSPECTUS
---------------
October 10, 1997
================================================================================
24
