<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 31, 1997
FPA MEDICAL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-24276 33-0604264
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3636 Nobel Drive
Suite 200
San Diego, California 92122
(Address of principal executive offices) (Zip Code)
(619)453-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
In connection with the business combination between FPA Medical
Management, Inc. (the "Registrant") and AHI Healthcare Systems, Inc., which was
accounted for as a pooling of interests, the Registrant has restated its
financial statements to include the accounts of AHI for all periods presented.
Information concerning the Registrant's Common Stock and per share data has
been restated on an equivalent share basis.
The following information (which is included in the Registrant's
Registration Statement on Form S-3 (Registration No. 333-31351)) is
included as exhibits to this Form 8-K:
(i) Management's Discussion and Analysis of Financial Condition and
Results of Operations;
(ii) FPA Medical Management, Inc. and Subsidiaries Consolidated Balance
Sheets as of December 31, 1995 and 1996 and as of March 31, 1997
(unaudited);
(iii) FPA Medical Management, Inc. and Subsidiaries Consolidated
Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and for the three months ended March 31, 1996 and 1997 (unaudited);
(iv) FPA Medical Management, Inc. and Subsidiaries Consolidated
Statements of Stockholders' Equity (deficit) for the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31,
1997 (unaudited);
(v) FPA Medical Management, Inc. and Subsidiaries Consolidated
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and for the three months ended March 31, 1996 and 1997 (unaudited);
and
(vi) FPA Medical Management, Inc. and Subsidiaries Notes to Consolidated
Financial Statements for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997 (unaudited).
1
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
FPA Medical Management, Inc., its subsidiaries and the Professional
Corporations derive substantially all of their operating revenue from (i) the
payments made by Payors to the Professional Corporations for managed care
medical services and (ii) fee-for-service revenues for medical centers in the
managed care business and (iii) fee-for-service revenues from emergency
department medical services. On March 17, 1997, the Company completed its merger
with AHI in which AHI stockholders were issued 5,678,509 shares of FPA Common
Stock in a transaction accounted for as a pooling of interests. Accordingly, the
following financial information includes the accounts of AHI for all periods
presented.
MANAGED CARE BUSINESS
The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
outpatient services or professional medical services ("outpatient capitation"
contracts). Under global capitation contracts, the Company receives a fixed
monthly amount per enrollee for which the Company is financially responsible to
provide the enrollees with all necessary inpatient and outpatient care. Under
outpatient capitation contracts, the Company receives a fixed monthly amount per
enrollee for which the Company is financially responsible to provide the
enrollees with all necessary outpatient care. Additionally, under these
outpatient capitation contracts, the Company is a party to shared risk
arrangements with Payors which generally reward the Company for the efficient
utilization of hospital inpatient services. Under these shared risk
arrangements, the Company shares any surplus or, in some cases, deficit, of
amounts pre-established by the Payor in relation to inpatient expense. Revenue
under global capitation contracts represented 6.6% and 26.1% for 1995 and 1996,
respectively, of managed care business operating revenue. FPA received no global
capitation revenue in 1994. Revenue under outpatient capitation contracts
represented 97.1%, 88.9% and 64.7% for 1994, 1995 and 1996, respectively, of
managed care business operating revenue.
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations and its subsidiaries.
These revenues are presented net of contractual deductions and represented 2.9%,
4.5% and 9.2% for 1994, 1995 and 1996, respectively, of managed care business
operating revenue.
Through the Professional Corporations and its subsidiaries, the Company
contracts with various healthcare providers to provide primary care and
specialty medical services to covered enrollees. Primary care physicians are
compensated on either a salary or capitation basis. Specialty care physician
services are paid for on either a discounted fee-for-service or capitation
basis. Managed care business medical services expense paid for on a capitation
basis (for certain primary care and specialty care services) or fixed salary
basis (for primary care only) totaled 64.8%, 63.4% and 46.5% for 1994, 1995 and
1996 respectively, of managed care business operating revenues, with the
remainder of medical services expense (for primary care, specialty care,
ancillary services, inpatient and outpatient services, lab charges, etc.) paid
for on a discounted fee-for-service or per diem basis.
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of
December 31, 1996 the Company provided physician practice management services on
a contract basis to 101 emergency departments, one anesthesia department, four
correctional health care facilities and two rural health urgent care clinic
located in 20 states. The Company contracts with approximately 1,000 affiliated
physicians who provide certain medical services to approximately 1.4 million
patients annually.
The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by the Company's contracted health care professionals.
Fee-for-service contracts may, depending on the hospital's patient volume and
Payor mix, involve the payment of a subsidy to the Company by the hospital. In
1994, 1995 and 1996, respectively, 94.0%, 84.4% and 84.6% of the Company's
emergency department operating revenue was earned on a fee-for-service basis,
and the Company emphasized fee-for-service contracts in its marketing
activities.
2
<PAGE> 4
Medical services expense for the emergency department business consists
primarily of payments made to independent contractor and employee physicians
("Physician Costs") and, to a lesser extent the costs of medical supplies and
malpractice insurance and laboratory fees. In 1994, 1995 and 1996, Physician
Costs accounted for 95.1%, 91.8% and 92.1%, respectively, of emergency
department medical services expense.
OPERATIONAL DEVELOPMENT
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations have
contracts and whose members are patients of physicians in the FPA network or
(iii) agreements with Payors, physicians and hospitals in other geographic
markets. The process of identifying and consummating suitable acquisitions of,
or affiliations with, physician groups can be lengthy and complex. The
marketplace for such acquisitions and affiliations is subject to increasing
competitive pressures. There can be no assurance that FPA will be successful in
identifying, acquiring or affiliating with additional physician groups or
hospitals or that the Professional Corporations 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 companies could 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.
In March 1997, the Company completed its merger with AHI which provides
services to approximately 200,000 enrollees and has approximately 9,000
affiliated physicians (including both primary care and specialist physicians).
In June 1997, the Company completed its merger with HealthCap which provides
services to approximately 50,000 HMO enrollees and has approximately 2,110
affiliated physicians (including ob-gyn physicians). In January 1996, the
Company acquired three independent practice associations in the Los Angeles,
Ventura and Sacramento regions of California, which service approximately 44,000
enrollees as of June 30, 1997 and include 570 primary care physicians. In June
1996, FPA acquired Physicians First, Inc., operating 40 medical clinics in
Florida, through which 110 primary care physicians provided services to
approximately 80,000 enrollees. In July 1996, the Company acquired two
independent practice associations, one in Arizona and Florida, providing
services to approximately 14,000 and 4,000 enrollees, respectively. In October
1996, FPA and Sterling completed a merger. Effective in December 1996, the
Company and certain Professional Corporations acquired two medical groups, one
each in California and Arizona, providing services to approximately 63,000 and
157,000 enrollees, respectively.
Listed below is a breakdown of enrollees, Payors, primary care physicians,
specialty care physicians, and emergency department business contracts
(including anesthesiology, urgent care and correctional facility business
contracts) by region at December 31, 1996. (All data also includes the
information for AHI.)
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF NUMBER OF EMERGENCY
PAYOR PRIMARY CARE SPECIALTY CARE DEPARTMENT
ENROLLEES CONTRACTS PHYSICIANS PHYSICIANS CONTRACTS
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
California 329,590 23 1,581 5,223 --
Arizona 186,102 4 570 984 --
New Jersey 29,029 4 926 447 --
Delaware 7,782 1 74 74 --
South Carolina 12,473 3 176 51 2
North Carolina 11,074 1 52 24 11
Texas 118,755 8 1,053 2,490 15
Florida 95,520 3 228 777 9
Michigan 27,334 2 406 1,028 11
Louisiana 7,023 2 43 156 10
Georgia 253 1 187 692 4
Others -- -- 351 -- 46
-------------- ------ ----------- ----------- ---------
Total 824,935 52 5,647 11,946 108
============== ====== =========== =========== =========
</TABLE>
3
<PAGE> 5
RESULTS OF OPERATIONS
The following table sets forth for 1994, 1995 and 1996 selected financial
data and selected financial data expressed as a percentage of operating revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1994 1995
--------- -----------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 79,181,877 $ 39,255,573 $ 118,437,450 $ 166,975,955 $ 115,659,527 $ 282,635,482
Medical services
expense 57,092,430 27,723,675 84,816,105 126,754,244 75,985,634 202,739,878
General and
administrative
expenses (1) 19,666,842 9,183,231 28,850,073 42,907,386 33,172,287 76,079,673
------------- ------------- ------------- ------------- ------------- -------------
Income (loss)
from operations 2,422,605 2,348,667 4,771,272 (2,685,675) 6,501,606 3,815,931
Other (income)
expense (316,892) 80,301 (236,591) (179,725) 1,758,371 1,578,646
------------- ------------- ------------- ------------- ------------- -------------
Income (loss)
before tax 2,739,497 2,268,366 5,007,863 (2,505,950) 4,743,235 2,237,285
Income tax expense
(benefit) 800,184 866,841 1,667,025 (407,412) 1,911,732 1,504,320
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) $ 1,939,313 $ 1,401,525 $ 3,340,838 $ (2,098,538) $ 2,831,503 $ 732,965
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
-------- ---------- -----
<S> <C> <C> <C>
Operating revenue $ 422,343,843 $ 136,760,770 $ 559,104,613
Medical services
expense 337,367,632 94,249,976 431,617,608
General and
administrative
expenses (1) 143,553,451 48,664,736 192,218,187
------------- ------------- -------------
Income (loss)
from operations (58,577,240) (6,153,942) (64,731,182)
Other (income)
expense 3,319,613 853,631 4,173,244
------------- ------------- -------------
Income (loss)
before tax (61,896,853) (7,007,573) (68,904,426)
Income tax expense
(benefit) 1,080,000 -- 1,080,000
------------- ------------- -------------
Net income (loss) $ (62,976,853) $ (7,007,573) $ (69,984,426)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995
---------- ----------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
-------- --------- ----- --------- --------- ------
<S> <C> C> <C> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Medical services
expense 72.1% 70.6% 71.6% 75.9% 65.7% 71.7%
General and
administrative
expenses (1) 24.8% 23.4% 24.4% 25.7% 28.7% 26.9%
------ ----- ----- ----- ----- -----
Income (loss) from
operations 3.1% 6.0% 4.0% (1.6)% 5.6% 1.4%
Other (Income)
expense (0.4)% 0.2% (0.2)% (0.1)% 1.5% 0.6%
------ ----- ----- ----- ----- -----
Income (loss)
before tax 3.5% 5.8% 4.2% (1.5)% 4.1% 0.8%
Income tax expense
(benefit) 1.0% 2.2% 1.4% (0.2)% 1.7% 0.5%
----- ----- ----- ----- ----- -----
Net income (loss) 2.5% 3.6% 2.8% (1.3)% 2.4% 0.3%
===== ===== ===== ===== ===== =====
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
-------- -------- -----
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Medical services
expense 79.9% 68.9% 77.2%
General and
administrative
expenses (1) 34.0% 35.6% 34.4%
------ ------ -----
Income (loss)
from operations (13.9)% (4.5)% (11.6)%
Other (Income)
expense 0.8% 0.6% 0.7%
------ ------ -----
Income (loss)
before tax (14.7)% (5.1)% (12.3)%
Income tax expense
(benefit) 0.3% 0.0% 0.2%
------ ------ -----
Net income (Loss) (15.0)% (5.1)% (12.5)%
====== ====== =====
</TABLE>
- -------------------
(1) Includes nonrecurring charges of $52.6 million in 1996. Excluding these
nonrecurring charges, general and administrative expense was 25.0% of
operating revenue and loss from operations was (2.2)% of operating revenue
in 1996.
MANAGED CARE BUSINESS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Operating Revenue -- The Company's managed care business operating revenue
increased to $422.3 million in 1996 from $167.0 million in 1995 and $79.2
million in 1994. The revenue increase resulted primarily from a substantial
increase in average enrollment from year to year. The year to year increases
resulted primarily from the addition of enrollees as a result of acquisitions
and secondarily from internal growth. In 1996, the Company generated net
fee-for-service revenue of $38.9 million compared to 1995 net fee-for-service
revenue of $7.6 million and $2.3 million fee-for-service revenue in 1994. The
growth in net fee-for-service revenue is attributable to the increasing number
of medical facilities managed by FPA.
Medical Services Expense -- Medical services expense for 1996 was $337.4
million or 79.9% of managed care business operating revenue as compared to
$126.8 million or 75.9% of such operating revenue in 1995 and $57.1 million or
72.1% of such operating revenue in 1994. The increase in medical services
expense as a percent of such operating revenue from 1995 to 1996 resulted from
(i) the reduction in revenue relating to certain of AHI's risk sharing
arrangements as well as increases in AHI medical costs due to a revision of
AHI's claims reserves, (ii) significantly increased membership in the
Mid-Atlantic and Florida regions under global capitation contracts which
initially experience a higher medical loss ratio than outpatient only capitation
contracts and (iii) increases in medical costs generally in the managed care
environment. The increase in medical services expense as a percentage of such
operating revenue from 1994 to 1995 resulted directly from AHI's increase in
medical costs associated with their increased membership; offset in part by
higher revenue base per member per month as a result of increased shared risk
earnings and increased capitation of specialists which limited costs for the
specialty services provided.
General and Administrative Expense -- General and administrative expense
including nonrecurring charges for 1996 was $143.6 million or 34.0% of managed
care business operating revenue as compared to $42.9 million or 25.7% of such
operating revenue in 1995 and $19.7 million or 24.8% of such operating revenue
in 1994. Excluding the effect of nonrecurring charges recognized in 1996,
general and administrative expense as a percentage of such operating revenue
would have remained approximately constant for 1996 and 1995. In 1995, the
Company hired additional staff and other personnel in new regions prior to the
addition of a significant number of enrollees and incurred the costs of
acquiring physician practices and building the infrastructure to service its
enhanced operations. The Company has also made significant investments in
information systems, and has deployed this technology to the majority of its
regions.
Merger, Restructuring and Other Unusual Charges -- Included in the
discussion of General and Administrative Expense above, during 1996, the managed
care business of the Company incurred approximately $34.9 million in
nonrecurring charges. Approximately $21.2 million resulted from write-offs of
goodwill and other assets related to unprofitable operations. The goodwill
write-offs were comprised of (1) $4.1 million associated with an Arizona
acquisition which has continued to recognize losses since its acquisition in
June 1995 and (2) $14.6 million related to certain acquisitions made in 1994 and
1995 (of the former AHI entity) which recognized significant losses in 1996
which gave rise to the determination that the goodwill balances were impaired.
Approximately $13.7 million related to costs of legal fees, accounting fees,
investment bankers' fees and other merger related.
5
<PAGE> 7
Income (Loss) from Operations -- In 1996, the managed care business of the
Company generated a loss from operations of $58.6 million including the
nonrecurring charges. Excluding such nonrecurring charges, 1996 loss from
operations was $23.7 million as compared to loss from operations of $2.7 million
in 1995, and income from operations of $2.4 million in 1994. The significant
increase in loss from operations from 1995 to 1996 was attributable primarily to
historical losses of acquired companies and recent losses of the AHI business as
described above.
EMERGENCY DEPARTMENT BUSINESS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The 1994 consolidated financial statements include the activities of the
emergency department business from June 1, 1994 (date of inception) to December
31, 1994.
Operating Revenue -- Emergency department business operating revenue
consists of gross patient revenue, net of contractual deductions and estimated
uncollectible accounts, plus other revenue, which consists principally of
hospital subsidy payments, flat-rate hospital contract revenue and non-patient
generated revenues. Operating revenue increased to $136.8 million in 1996 from
$115.7 million in 1995 and $39.3 million in 1994. On a percentage basis, the
emergency department business' operating revenue grew 195% in 1995 and 18.2% in
1996. The increases were primarily attributable to the increases in the number
of the Company's emergency department contracts from 61 in 1994 and 89 in 1995
to 104 in 1996.
Medical Services Expense -- Medical services expense increased to $94.2
million for 1996 from $76.0 million in 1995 and $27.7 million in 1994 due
primarily to the increase in the number of healthcare professionals under
contract, resulting from the increase in the number of the Company's emergency
department contracts, as well as negotiated increases in fees paid to certain
healthcare professionals. Medical services expense as a percentage of operating
revenue was 68.9% in 1996, 65.7% in 1995 and 70.6% in 1994.
General and Administrative Expense -- General and administrative expense
including nonrecurring charges was $48.7 million in 1996, $33.2 million in 1995
and $9.2 million in 1994. Excluding the effect of nonrecurring charges in 1996,
general and administrative expense would have been $31.0 million. During 1995,
the emergency department business increased the number of its regional offices
as well as the number of administrative employees to accommodate the increase in
emergency department contracts. In 1996, the Company, through cost cutting
measures, including the closing of one of its regional offices as well as the
down-sizing of another, reduced this expense. As a percentage of revenue,
general and administrative expense was 35.6% in 1996 including non-recurring
charges or 22.6% excluding non-recurring charges, 28.7% in 1995 and 23.4% in
1994.
Merger, Restructuring and Other Unusual Charges -- Included in the
discussion of General and Administrative Expense above, during 1996, the Company
incurred approximately $17.7 million in non-recurring adjustments and
restructuring charges. Approximately $12.3 million resulted from write-offs of
the value assigned to certain emergency room contracts acquired in connection
with acquisitions as those emergency room contracts were terminated subsequent
to their acquisition. Approximately $5.4 million related to costs of legal fees,
accounting fees, investment bankers' fees and other costs associated with the
Sterling merger.
Net Income (loss) from Operations -- In 1996, the emergency department
business of the Company generated a loss from operations of $6.2 million,
including nonrecurring charges. Excluding such charges, income from operations
would have been $11.5 million as compared to $6.5 million in 1995 and $2.3
million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish an infrastructure in new regions.
Capitation arrangements positively impact cash flow because FPA generally
receives capitation revenue prior to paying costs associated with services
provided under those agreements. However, shared risk arrangements negatively
impact cash flow because settlements in connection with these arrangements are
typically not collected until significantly after the end of the period in which
they were accrued. Fee-for-service revenues also negatively impact cash flow
because payment for services rendered generally lags by 90 to 120 days.
6
<PAGE> 8
At December 31, 1996, the Company had cash, cash equivalents and
marketable securities of $55.5 million and a working capital deficit (current
liabilities in excess of current assets) of $38.1 million compared to cash, cash
equivalents and marketable securities of $43.0 million and working capital of
$42.5 million at December 31, 1995. The increase in cash, cash equivalents and
marketable securities of $12.5 million resulted primarily from (i) $55.0 million
borrowed under arrangements with financial institutions, (ii) net proceeds of
$73.0 million from the Company's issuance of convertible subordinated notes, and
(iii) $10.6 million received from the exercise of stock options and warrants,
partially offset by (a) approximately $11.0 million of cash payments in
connection with acquisitions, (b) approximately $13.2 million for the
acquisition of property and equipment, (c) approximately $13.3 million used to
purchase intangible assets, (d) approximately $3.0 million invested in Great
Lakes Health Plan, Inc., and (e) approximately $70.0 million in payments on
long-term debt. At December 31, 1996 approximately 38.9% of the Company's
current liabilities consist of amounts accrued as payable to specialty care
physicians, ancillary providers, hospital and other providers of medical
services. These accrued liabilities include claims received by the Company which
have not yet been paid as well as an estimate of costs for covered medical
benefits incurred by enrollees but not yet reported by providers. These amounts
are not due and payable until after the provider has presented a claim and are
typically paid within 45 business days of receipt of such claims. The increase
in claims payable, including incurred but not reported claims, from
approximately $25.7 million at December 1995 to $97.7 million at December 31,
1996 resulted primarily from significantly increased membership and the fact
that much of the new membership is under global capitation contracts (which
includes hospital services), which resulted in more claims payable per enrollee.
During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement (the "Banque Paribas Credit Agreement") with four
financial institutions. Permitted Borrowings, as defined in the Credit
Agreement, generally include acquisitions and capital expenditures. Borrowings
under this agreement bear interest at either LIBOR plus 2-1/2%, 2-3/4% or 3%, or
prime rate plus 1%, 1-1/4% or 1-1/2%, as defined in the agreement. At December
31, 1996, the Company had borrowed the maximum of $55.0 million under the Banque
Paribas Credit Agreement.
The Company entered into a Credit Agreement with Lehman Commercial Paper
Inc. and the several lenders from time to time parties thereto (the "Lenders")
dated as of June 30, 1997 (the "Credit Agreement"). The obligations of the
Company under the Credit Agreement are secured by all the assets of the Company
and all the capital stock of its subsidiaries. The Credit Agreement contains
customary terms, events of default and covenants (including financial covenants)
which, among other things, limit payment of cash dividends, the consummation of
certain acquisitions and the incurrence of additional debt. Borrowings under
this agreement bear interest at either Citibank, N.A.'s prime rate (the "Base
Rate"), plus the applicable margin or LIBOR plus the applicable margin, as
defined in the agreement. As of June 30, 1997, the Company had drawn $187.8
million under the Credit Agreement, some of which was used to repay the
borrowings outstanding under the Banque Paribas Credit Agreement and the debt
incurred in the acquisition of the Foundation Companies.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures, which resulted in net proceeds to the Company of
approximately $73.0 million. The notes bear interest at 6-1/2%, payable
semiannually, and are convertible into shares of the Company's stock at $25.95
per share. The debentures are redeemable by the Company after December 20, 1999.
Upon the occurrence of a Repurchase Event, as defined in the debentures, each
holder has the right to require repayment of the debentures at 100% of the
principal amount plus accrued interest.
The increase in long-term debt from $31.0 million at December 31, 1995 to
$256.4 million at December 31, 1996 resulted primarily from approximately $55.0
million in borrowings under arrangements with financial institutions and the
issuance of notes payable and assumption of long-term debt in connection with
acquisitions of physician practice assets of approximately $275.8 million net of
repayments of acquisition debt of approximately $70.0 million. At December 31,
1996, long-term debt exceeded stockholders' equity.
The Company believes that its cash on hand and anticipated cash flows from
its operations, including borrowings available under the Credit Agreement will
be sufficient to meet the Company's operating capital needs through 1997.
The strategy to expand the FPA network involves the acquisition of
individual and group physician practice assets and related businesses. Such
acquisitions may be consummated using cash, stock, notes or any combination
thereof. Management does not believe that inflation will have a material effect
on the operations of the Company.
7
<PAGE> 9
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 34,780,225 $ 15,471,770 $ 20,135,507
Marketable securities 8,228,788 40,000,000 15,060,856
Accounts receivable -- net of allowance
for uncollectible accounts of $48,299,677
and $63,500,488 at December 31, 1995 and
December 31, 1996, respectively 52,868,995 106,298,672 133,567,261
Accounts receivable -- other 4,636,973 25,095,247 25,215,528
Notes receivable from affiliate 477,086 512,822 --
Income tax receivable 1,227,949 -- --
Prepaid expenses 1,536,003 6,498,174 6,740,990
Capitation deposit -- 15,409,771 20,947,369
Deferred income tax asset 4,769,898 3,478,751 12,043,116
------------- ------------- -------------
Total current assets 108,525,917 212,765,207 233,710,627
Property and equipment - net 13,085,799 46,495,863 41,714,485
Restricted cash and deposits 3,285,000 488,535 500,000
Goodwill -- net of accumulated amortization
of $3,089,048 and $7,805,903 at
December 31, 1995 and December 31,
1996, respectively 94,626,404 295,594,009 301,358,247
Intangible assets -- net of accumulated
amortization of $249,682 and $3,123,381
at December 31, 1995 and December 31,
1996, respectively 5,988,579 6,667,269 5,456,098
Investment in GLHP 1,994,900 4,994,900 4,994,900
Deferred income tax asset -- 3,189,665 2,736,327
Other assets 1,155,937 9,468,006 8,452,417
------------- ------------- -------------
Total $ 228,662,536 $ 579,663,454 $ 598,923,101
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,377,559 $ 62,003,039 $ 78,191,686
Claims payable, including incurred
but not reported claims 25,689,476 97,688,268 127,286,239
Accrued payroll and related
liabilities 1,363,304 3,880,272 12,099,013
Income tax payable 436,775 2,294,159 --
Other liabilities -- 13,218,704 13,099,616
Borrowings on line of credit 788,325 -- --
Current portion of accrued liability
for professional liability claims 610,000 1,297,790 1,147,878
Long-term debt, current portion 10,739,635 70,474,667 74,731,037
------------- ------------- -------------
Total current liabilities 66,005,074 250,856,899 306,555,469
Long-term debt, net of current portion 10,215,552 185,889,219 171,775,894
Bank line of credit 10,000,000 -- --
Accrued liability for professional
liability claims, net of current portion 2,440,000 4,217,000 3,597,000
Deferred income tax liability 1,989,770 -- --
Other long-term liabilities 397,175 4,325,862 350,793
------------- ------------- -------------
Total liabilities 91,047,571 445,288,980 482,279,156
Stockholders' equity:
Preferred stock, $.001 par value per
share, 2,000,000 shares authorized,
no shares outstanding -- -- --
Common stock, $.002 par value, 98,000,000
shares authorized, 24,232,500,
30,596,218 and 30,856,155 shares
issued and outstanding at December 31,
1995, December 31, 1996 and March 31,
1997, respectively 48,465 61,192 61,712
Additional paid-in capital 135,538,791 201,282,914 202,477,595
Stock payable 567,000 534,600 534,600
Accumulated earnings (deficit) 2,254,975 (67,103,232) (86,028,962)
Less: Deferred compensation -- stock options (344,266) -- --
Due to stockholder (450,000) (401,000) (401,000)
------------- ------------- -------------
Total stockholders' equity 137,614,965 134,374,474 116,643,945
------------- ------------- -------------
Total $ 228,662,536 $ 579,663,454 $ 598,923,101
============= ============= =============
</TABLE>
See notes to financial statements.
8
<PAGE> 10
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Managed care revenue $ 78,939,286 $ 164,164,875 $ 386,427,917 $ 66,455,352 $ 157,314,519
Fee-for-service revenue, net of
contractual deductions 39,498,164 118,470,607 172,676,696 37,497,463 65,525,095
------------- ------------- ------------- ------------- -------------
Operating revenue 118,437,450 282,635,482 559,104,613 103,952,815 222,839,614
Expenses:
Medical services expense 84,816,105 202,739,878 431,617,608 74,725,588 158,105,080
------------- ------------- ------------- ------------- -------------
33,621,345 79,895,604 127,487,005 29,227,227 64,734,534
General and administrative
expense 28,850,073 74,489,765 139,646,319 26,477,739 51,705,602
Merger, restructuring and other
unusual charges (Note 9) -- 1,589,908 52,571,868 -- 36,833,586
------------- ------------- ------------- ------------- -------------
Income (loss) from operations 4,771,272 3,815,931 (64,731,182) 2,749,488 (23,804,654)
Other income (expense):
Interest and other income 301,955 1,129,297 1,991,288 510,858 934,664
Interest expense (397,364) (2,707,943) (6,164,532) (684,331) (4,166,767)
Other expense 332,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total other income (expense) 236,591 (1,578,646) (4,173,244) (173,473) (3,232,103)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes 5,007,863 2,237,285 (68,904,426) 2,576,015 (27,036,757)
Income tax (expense) benefit (1,667,025) (1,504,320) (1,080,000) (1,159,683) 8,111,027
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 3,340,838 $ 732,965 $ (69,984,426) $ 1,416,332 $ (18,925,730)
============= ============= ============= ============= =============
Net income (loss) per share $ (2.56) $ .05 $ (0.59)
============= ============= =============
Pro forma (Note 1):
Adjustment to income tax
expense $ (110,235) $ (262,000)
============= =============
Net income $ 3,230,603 $ 470,965
============= =============
Net income per she $ .29 $ .03
============= =============
Weighted average shares
outstanding 11,271,046 18,306,992 27,381,279 25,814,913 32,288,183
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
(STOCK
SUBSCRIPTION DUE
ADDITIONAL RECEIVABLE)/ FROM ACCUMULATED DEFERRED
COMMON PREFERRED PAID-IN STOCK STOCK EARNINGS/ COMPENSATION
STOCK STOCK CAPITAL PAYABLE HOLDER (DEFICIT) STOCK OPTIONS TOTAL
------- ----- --------- -------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 2,188 $ -- $ 9,812 $ -- $ -- $ 244,172 $ -- $ 256,172
Pooling of interests
combination with
Sterling Healthcare
Group, Inc. effective
October 31, 1996 16,195 -- 8,552,074 -- -- -- (369,000) 8,199,269
Pooling of interests
combination with AHI
Healthcare Systems,
Inc. effective March
17, 1997 10,382 -- 874,618 -- -- -- (140,000) 745,000
Common stock issued
through private place-
ment for cash, net of
costs 1,294 -- 4,571,625 -- -- -- -- 4,572,919
Preferred stock issued
and redeemed -- -- (3,750,000) -- -- -- (3,750,000)
Repurchase and cancel-
lation of common stock (2,015) -- 2,015 -- -- (1,483,000) -- (1,483,000)
Issuance of common
stock for stockholders'
notes 2,015 -- 2,997,985 -- (3,000,000) -- -- --
Exchange of common
stock for Series T
preferred stock (2,015) 26,000 (23,985) -- -- -- -- --
Redemption of Series T
preferred stock -- (26,000) (2,974,000) -- 3,000,000 -- -- --
Common stock issued
through initial public
offering for cash,
net of costs 2,795 -- 11,574,068 -- -- -- -- 11,576,863
Common stock issued in
connection with
acquisition 463 -- 3,935,100 -- -- -- -- 3,935,563
Net income for the year -- -- -- -- -- 3,340,838 -- 3,340,838
Dividends paid -- -- -- -- -- (522,000) -- (522,000)
Other 36 -- 317,329 (14,227) -- -- 61,658 364,796
One-for-one stock
dividend, effective
March 1, 1995 6,626 -- (6,626) -- -- -- --
------ ------- ----------- ------- ------- ---------- -------- ----------
Balances, December 31,
1994 37,964 -- 26,080,015 (14,227) -- 1,580,010 (447,342) 27,236,420
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
(STOCK
SUBSCRIPTION DUE
ADDITIONAL RECEIVABLE)/ FROM ACCUMULATED
COMMON PREFERRED PAID-IN STOCK STOCK EARNINGS/
STOCK STOCK CAPITAL PAYABLE HOLDER (DEFICIT)
------------ --------- ------------ ------------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued
through public offering
for cash, net of costs 11,316 -- 94,929,092 -- -- --
Common stock issued in
connection with
acquisitions 450 -- 13,889,419 -- -- --
Common stock payable
issued in connection
with acquisitions -- -- -- 567,000 -- --
Undistributed
S-Corporation earnings
reclassified to
additional paid in capital -- -- 58,000 -- -- (58,000)
Issuance of common
stock to a related party -- -- 450,000 -- (450,000) --
Net income for the year -- -- -- -- 732,965
Other (1,265) -- 132,265 14,227 -- --
------------- ------------ ------------- ------------- ------------- -------------
Balances, December 31, 1995 48,465 -- 135,538,791 567,000 (450,000) 2,254,975
Stock options and
warrants exercised 515 -- 10,305,788 -- -- --
Common stock issued in
connection with
acquisitions 3,407 -- 52,200,372 41,500 -- --
Common stock issued in
connection with conver-
sion of debt 1,086 -- 3,498,914 -- -- --
Net loss for the year -- -- -- -- -- (69,984,426)
Other 7,719 -- (260,951) (73,900) 49,000 626,219
------------- ------------ ------------- ------------- ------------- -------------
Balances, December 31, 1996 61,192 -- 201,282,914 534,600 (401,000) (67,103,232)
Stock options and
warrants exercised
(unaudited) 520 -- 1,194,681 -- -- --
Net loss for the quarter
(unaudited) -- -- -- -- -- (18,925,730)
------------- ------------ ------------- ------------- ------------- -------------
Balances, March 31, 1997
(unaudited) $ 61,712 $ -- $ 202,477,595 $ 534,600 $ (401,000) $ (86,028,962)
============= ============ ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
STOCK OPTIONS TOTAL
------------- ------------
<S> <C> <C>
Common stock issued
through public offering
for cash, net of costs -- 94,940,408
Common stock issued in
connection with
acquisitions -- 13,889,869
Common stock payable
issued in connection
with acquisitions -- 567,000
Undistributed
S-Corporation earnings
reclassified to
additional paid in capital -- --
Issuance of common
stock to a related party -- --
Net income for the year -- 732,965
Other 103,076 248,303
------------- -------------
Balances, December 31, 1995 (344,266) 137,614,965
Stock options and
warrants exercised -- 10,306,303
Common stock issued in
connection with
acquisitions -- 52,245,279
Common stock issued in
connection with conver-
sion of debt -- 3,500,000
Net loss for the year -- (69,984,426)
Other 344,266 692,353
------------- -------------
Balances, December 31, 1996 -- 134,374,474
Stock options and
warrants exercised
(unaudited) -- 1,195,201
Net loss for the quarter
(unaudited) -- (18,925,730)
------------- -------------
Balances, March 31, 1997
(unaudited) $ -- $ 116,643,945
============= =============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ 3,340,838 $ 732,965 $(69,984,426) $ 1,416,332 $(18,925,730)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 1,330,733 5,586,060 13,464,151 2,375,785 5,865,269
Imputed interest on notes payable -- 132,489 98,023 22,475
Loss on disposal of business -- 772,875 -- -- --
Deferred compensation stock options 45,658 78,076 61,000 -- --
Severance settlement financed through
issuance of debt 1,200,000 -- -- -- --
Minority interest in income of consolidated
subsidiary (332,000) -- -- -- --
Impairment of goodwill -- 434,602 33,501,000 -- --
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable (6,791,976) (22,118,548) (66,390,200) (12,351,446) (27,388,870)
Income tax receivable/payable 580,440 (1,874,389) 3,397,211 1,009,570 --
Capitation deposit -- -- (15,409,771) -- (5,537,598)
Deferred income taxes (604,580) (814,455) (3,394,617) (25,110) (10,405,186)
Accounts payable and accrued expenses 1,877,558 4,254,485 17,074,166 (1,209,942) 16,188,647
Claims payable, including incurred but
not reported claims (548,194) 2,900,274 60,057,285 8,590,460 23,737,238
Accrued liability for professional
liability claims (124,216) (738,500) 2,464,790 -- (769,912)
Accrued payroll and related liabilities (7,157) 336,625 2,451,391 71,188 8,218,741
Prepaid expenses and other assets (294,057) (1,242,908) 440,093 (1,585,631) (1,974,057)
------------ ------------ ------------ ------------ ------------
Total adjustments (3,667,791) (12,293,314) 47,814,522 (3,102,651) 7,934,272
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities (326,953) (11,560,349) (22,169,904) (1,686,319) (10,991,458)
Cash flows from investing activities:
Purchase of property and equipment (2,568,053) (6,948,619) (13,206,829) (2,207,334) (3,263,073)
Payments for intangible assets (270,621) (1,703,570) (13,341,849) (1,007,580) --
Net payments (to) from affiliate 44,372 (214,546) (350,867) (306,535) --
Investment in GLHP -- (1,994,900) (3,000,000) -- --
Net sale (purchase) of marketable securities (10,079,811) 1,851,023 (31,771,212) 5,149,845 24,939,144
Acquisitions, net of cash acquired (4,951,133) (41,010,816) (10,994,630) (11,270,677) --
Payments escrowed for acquisitions -- (3,285,000) 2,796,465 -- --
Proceeds from sale of business -- 1,600,000 -- -- --
Other -- (46,212) 8,893 -- --
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities (17,825,246) (51,752,640) (69,860,029) (9,642,281) 21,676,071
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from merger, net 5,699,870 -- (169,334) 1,945 --
Net proceeds from issuance of common
stock 11,461,604 94,940,408 -- -- --
Net proceeds from private placement of
stock 4,812,919 -- -- -- --
Redemption of preferred stock (3,750,000) -- -- -- --
Issuance of convertible subordinate notes
payable 1,000,000 -- 73,125,000 -- --
Increase in bank overdrafts -- -- -- 214,395 --
</TABLE>
12
<PAGE> 14
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds from exercise of stock options and
warrants 43,365 156,000 10,575,526 738,794 1,195,201
Issuance of notes payable 222,000 12,065,000 59,178,334 8,400,000 8,176,152
Net borrowings/(payments) under bank line of
credit
207,242 7,814,781 -- (788,325) --
Receipt of payment for stock subscriptions 35,773 14,227 -- -- --
Payments on long-term debt (1,159,779) (19,689,072) (70,037,048) (3,560,516) (15,392,229)
Proceeds from payments of notes receivable
from stockholder -- -- 49,000 -- --
Dividends paid (522,000) -- -- -- --
Purchase of treasury shares (1,253,000) -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by financing
activities 16,797,994 95,301,344 72,721,478 5,006,293 (6,020,876)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents (1,354,205) 31,988,355 (19,308,455) (6,322,307) 4,663,737
Cash and cash equivalents, beginning
of year 4,146,075 2,791,870 34,780,225 34,780,225 15,471,770
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of year $ 2,791,870 $ 34,780,225 $ 15,471,770 $ 28,457,918 $ 20,135,507
============= ============= ============= ============= =============
Supplemental cash flow information:
Cash paid for interest $ 117,400 $ 1,957,194 $ 4,026,106 $ 413,695 $ 2,431,388
Cash paid for income taxes $ 2,203,296 $ 6,034,045 $ 970,382 $ 44,740 --
Issuance of promissory note for severance
settlement $ 1,200,000 -- -- -- --
Equipment acquired under capital leases $ 155,361 $ 438,643 $ 2,009,655 $ 247,901 --
Common stock issued in connection with
acquisitions $ 4,741,976 $ 13,889,870 $ 52,245,279 $ 420,000 --
Common stock issued for stockholders' notes $ 3,000,000 -- -- -- --
Exchange of common stock for Series T
preferred stock $ (3,000,000) -- -- -- --
Issuance of common stock for Series T
preferred stock $ 3,000,000 -- -- -- --
Redemption of Series T preferred stock $ (3,000,000) -- -- -- --
Issuance of promissory note for repurchase
and cancellation of common stock $ 230,000 -- -- -- --
Effects of acquisitions:
Fair value of assets acquired $ 16,961,926 $ 97,195,644 $ 275,783,635 $ 24,310,738 $ 8,778,943
Liabilities assumed $ 10,048,793 $ 56,184,828 $ 264,789,005 $ 13,040,061 $ 8,778,943
Common stock issued $ 1,962,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash paid for acquisitions $ 4,951,133 $ 41,010,816 $ 10,994,630 $ 11,270,677 $ --
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
13
<PAGE> 15
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994,1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- FPA Medical Management, Inc. ("FPA"), a Delaware corporation
incorporated in 1994, is a national physician practice management company,
which, through its network of primary care physicians, affiliated professional
corporations ("Professional Corporations") and subsidiaries, contracts with
health maintenance organizations ("HMOs") and other prepaid health insurance
plans (collectively, "Payors") to provide and manage physician and related
healthcare services to enrollees who select FPA network primary care physicians
("managed care business"). FPA also provides contract management services to
hospital emergency and anesthesia departments in twenty states ("emergency
department business").
Basis of Presentation -- The merger of FPA and AHI Healthcare Systems,
Inc. ("AHI") has been accounted for as a pooling of interests and, accordingly,
the accompanying supplemental consolidated financial statements have been
prepared on a basis that includes the accounts of FPA and AHI for all periods
presented. Information concerning common stock and per share data has been
restated on an equivalent share basis. There were no material adjustments to the
accounts of AHI as a result of adopting the same accounting principles as FPA.
The accompanying consolidated financial statements present the financial
position and results of operations of FPA and the predecessor entities,
including the accounts of FPA subsidiaries and certain Professional Corporations
(collectively, the "Company").
Business Combinations -- On October 31, 1996, FPA and Sterling Healthcare
Group, Inc. ("Sterling") consummated a business combination (the "Sterling
Merger"). Sterling is a physician practice management company engaged in the
business of providing contract management and support services primarily to
hospital-based emergency departments. As a result of the Sterling Merger, each
outstanding share of Sterling common stock was converted into 0.951 shares of
FPA common stock ("FPA Common Stock"). Sterling's stockholders were issued
8,097,781 shares of FPA Common Stock representing approximately 37% of the total
issued and outstanding shares of FPA Common Stock after the Sterling Merger. The
shares of FPA Common Stock issued to the Sterling stockholders have been
registered on a Registration Statement on Form S-4 filed under the Securities
Act of 1933, as amended. The Sterling Merger has been treated as a tax-free
reorganization and accounted for as a pooling of interests and, accordingly, the
accompanying consolidated financial statements have been prepared on a basis
that includes the accounts of Sterling since June 1, 1994, Sterling's date of
inception. Information concerning FPA Common Stock and per share data has been
restated on an equivalent share basis.
On March 17, 1997, FPA and AHI consummated a business combination (the
"AHI Merger"). As a result of the AHI Merger, each outstanding share of AHI
common stock was converted into 0.391 shares of FPA Common Stock. AHI
stockholders were issued 5,678,509 shares of FPA Common Stock representing
approximately 18% of the then total issued and outstanding shares of FPA Common
Stock after the AHI Merger. The shares of FPA Common Stock issued to the AHI
stockholders have been registered on a Registration Statement on Form S-4 filed
under the Securities Act of 1933, as amended. The AHI Merger has been treated as
a tax-free reorganization and accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements have been
prepared on a basis that includes the accounts of AHI for all periods presented.
Information concerning FPA Common Stock and per share data has been restated on
an equivalent share basis.
14
<PAGE> 16
Presented below is the effect of the Sterling Merger and AHI Merger on
previously reported results of operations for the year ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
Operating revenue:
FPA $ 18,435,877 $ 52,691,955 $ 440,318,613
Sterling 39,255,573 115,659,527 --
AHI 60,746,000 114,284,000 118,786,000
------------- ------------- -------------
$ 118,437,450 $ 282,635,482 $ 559,104,613
------------- ============= =============
Net income (loss):
FPA $ 388,313 $ 1,002,462 $ (15,716,426)
Sterling 1,401,525 2,831,503 --
AHI 1,551,000 (3,101,000) (54,268,000)
------------- ------------- -------------
$ 3,340,838 $ 732,965 $ (69,984,426)
============= ============= =============
</TABLE>
Managed Care Business -- The Company currently manages the provision of
prepaid managed healthcare services for networks of primary care physicians in
numerous states. The "FPA Network" consists of FPA, its subsidiaries, the
Professional Corporations and various independent practitioners.
The Professional Corporations and certain subsidiaries contract with
Payors to provide for the delivery of healthcare services on a capitation basis
(i.e., a fixed payment per enrollee per month). Through administrative services
agreements, the Professional Corporations assign payments from Payors to the
Company in return for management services, specialty medical care claims
administration and payment, and other services.
FPA has direct or indirect unilateral and perpetual control over the
assets and operations of the Professional Corporations for all periods
presented, other than by means of owning the majority of the voting stock of the
Professional Corporations. FPA and its subsidiaries are unable to own a majority
interest in the Professional Corporations formed in states which prohibit the
corporate practice of medicine. The Professional Corporations have as
shareholders and directors certain physicians who are employees of FPA or one of
its subsidiaries. Each shareholder/director has entered into a succession
agreement which requires such shareholder/director to sell to a designee of FPA
such shareholder/director's shares of stock for a nominal amount if such
shareholder/director is terminated from employment with FPA. This ensures
unilateral and perpetual control over the Professional Corporations by FPA. Due
to a parent-subsidiary relationship under generally accepted accounting
principles, FPA has consolidated the financial statements of the Professional
Corporations. FPA believes that consolidation of the financial statements of
these Professional Corporations is necessary to present fairly the financial
position and results of operations of the Company. All significant inter-entity
transactions have been eliminated in consolidation. The consolidated financial
statements include the operations of FPA, all of FPA's subsidiaries and
Professional Corporations since they were acquired, were incorporated, or
entered into an administrative services agreement with FPA or one of its
subsidiaries.
Managed care capitation payments from Payors are paid monthly and are
recognized as revenue during the period in which enrollees are entitled to
receive services. Contracts with Payors generally provide for terms of one to 30
years, with automatic renewal periods, terminable on prior notice (generally
between 30 and 180 days).
The Company has two types of managed care Payor contracts: contracts for
both inpatient and outpatient services ("global capitation" contracts) and those
limited to outpatient services ("outpatient capitation" contracts). Under global
capitation contracts, which accounted for approximately 6.6% and 26.1% of
managed care business operating revenue in 1995 and 1996, respectively, the
Company receives a fixed monthly amount per enrollee for which the Company is
financially responsible to provide the enrollees with all necessary inpatient
and outpatient care. In 1994, the Company had no global capitation contracts.
Under outpatient capitation contracts, the Company receives a fixed monthly
amount per enrollee for which the Company is financially responsible to provide
the enrollees with all necessary outpatient care. Additionally, under these
outpatient capitation contracts, the Company is a party to shared risk
arrangements with Payors which generally reward the Company for the efficient
utilization of inpatient services. Under these shared risk arrangements, the
Company shares any surplus or, in some cases, deficit of inpatient cost in
relation to amounts pre-established by the Payor. Estimates of shared risk funds
to be received or paid by the Company are recorded based on estimates of
hospital utilization costs. Differences between actual settlements and amounts
estimated as receivable (or payable) relating to the shared risk arrangements
are recorded at the time of settlement, generally in the second or third quarter
of the following year. The Company does not believe that the final settlements
of these shared risk arrangements will differ materially from the estimated
15
<PAGE> 17
amounts recorded in the financial statements. Revenue under outpatient
capitation contracts represented 97.1%, 88.9% and 64.7% of managed care
business operating revenue in 1994, 1995 and 1996, respectively.
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations. These revenues are
presented net of contractual deductions and represented 2.9%, 4.5% and 9.2% for
1994, 1995 and 1996, respectively, of managed care business operating revenue.
Emergency Department Business -- The Company provides physician contract
management for hospital emergency and anesthesia departments in twenty states at
December 31, 1996. Contractual arrangements with hospitals are primarily
fee-for-service whereby hospitals agree to authorize the Company and its
contracted healthcare professionals to bill and collect for the professional
component of the charges for medical services rendered by the Company's
contracted healthcare professionals. Through the emergency department business,
the Company generated fee-for-service revenues, presented net of contractual
deductions, representing 94.0%, 84.4% and 84.6% of the emergency department
business operating revenues in 1994, 1995 and 1996, respectively. The Company
has arrangements with certain hospitals for monthly subsidy amounts which either
compensate for patient revenues not achieving specified levels or to fund
front-end staffing and insurance costs. The Company also has a physician
recruiting and medical management consulting division.
Revenue Recognition and Accounts Receivable -- Fee-for-service revenue is
reported on the accrual basis, net of estimated third-party contractual
deductions. Further adjustments are recorded to reflect amounts estimated to be
uncollectible based upon individual contract experience. The allowance
considered necessary to cover contractual deductions and uncollectible accounts
is based on an analysis of current and past due accounts, collection experience
in relation to amounts billed and other relevant information. Accounts
receivable represents amounts due from third-party payors including Medicare and
Medicaid, patients and others for services rendered.
For emergency department receivables, the concentration of credit risk
relating to accounts and subsidy receivables is limited by the number and
geographic dispersion of hospital emergency departments managed by the Company,
as well as by the large number of patients and payors, including various
governmental agencies in the states in which the Company operates.
In 1994, 1995 and 1996, revenues from governmental agencies made up
approximately 29%, 25% and 34%, respectively, of operating revenue for both
divisions of the Company.
Medical Services Expense -- Through the Professional Corporations and its
subsidiaries, the Company contracts with various healthcare providers to provide
medical services to covered enrollees. Primary care physicians are compensated
by the Company under compensation arrangements with the Professional
Corporations on either a salary or capitation basis. The costs of referrals to
specialty care physicians are paid on either a fee-for-service or capitation
basis. Under global capitation contracts, the Company contracts for inpatient
services which are paid on a fee-for-service or per diem basis. Medical services
expense paid through capitation (for certain primary care and specialty care
services), fixed salary (for primary care only) or for contracted hours of
emergency department coverage at fixed hourly rates totaled 65.6%, 62.1% and
50.6% of managed care operating revenue in 1994, 1995 and 1996, respectively,
with the remainder of medical services expense (for primary care, specialty
care, ancillary services, inpatient and outpatient services, lab charges, etc.)
paid on a fee-for-service or per diem basis. The costs of healthcare services
paid on a fee-for-service or per diem basis are recorded by the Company in the
period for which services are provided based in part on estimates, including an
accrual for medical services provided but not yet billed to the Company
("incurred but not reported") and are included in claims payable in the
accompanying consolidated balance sheets.
The Company has negotiated "attachment points" for stoploss insurance
independent of Payor contracts which represent the contractual limits, generally
$25,000 per year per enrollee for outpatient services and $100,000 per year per
enrollee for inpatient services. In 1997, the Company increased its outpatient
services attachment point to $50,000 in most cases.
Cash and Cash Equivalents -- Cash and cash equivalents are defined as
highly liquid financial instruments with original maturities of three months or
less. A substantial portion of the Company's cash is deposited in three
financial institutions. The Company monitors financial conditions of each
financial institution and does not believe that the deposits are subject to a
significant degree of risk.
16
<PAGE> 18
Marketable Securities -- Marketable securities consist of corporate debt
securities and certificates of deposit. Such securities have been classified by
management of the Company as available for sale in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The estimated fair value
of the Company's marketable securities is based on quoted market prices, which
approximate cost, and therefore no unrealized gains or losses have been recorded
in the accompanying supplemental consolidated financial statements. Marketable
securities at December 31, 1995 consist of corporate debt securities and at
December 31, 1996 consist of Eurodollar certificates of deposit.
Capitation Deposits -- Capitation deposits represent funds on deposit from
a major Payor in Florida. In accordance with the Payor contract, 60% of the
capitation revenue earned each month is retained by the Payor for payment of
claims. An accrual has been included in claims payable, including incurred but
not reported claims in the accompanying balance sheet for the estimated amount
of claims payable related to this Payor contract. The Company is entitled to all
of the interest earned on this account which is recognized as interest income as
earned. The contract requires a minimum balance in this account.
Property and Equipment -- Property and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements are amortized
over the lesser of the estimated useful life or the remaining life of the
related lease.
Restricted Cash and Deposits -- The Company records as restricted cash
funds escrowed for payment of claims, for future acquisitions, and other funds
contractually required to be segregated from the Company's operating cash.
Goodwill -- The Company has classified as goodwill the excess of the
purchase price over the fair value of the net assets of entities acquired.
Goodwill is being amortized on a straight-line basis over the estimated periods
of future benefit of 15 to 30 years. At each balance sheet date following the
acquisition of a business, the Company reviews the carrying value of the
goodwill to determine if facts and circumstances suggest that it may be impaired
or that the amortization period may need to be changed. The Company considers
external factors relating to each acquired business, including hospital and
physician contract changes, local market developments, changes in third-party
payments, national health care trends, and other available information. If these
external factors indicate that the goodwill will not be recoverable, as
determined based upon undiscounted cash flows before interest charges of the
business acquired over the remaining amortization period, the carrying value of
the goodwill will be reduced. Goodwill totaling $28,667,000 arose as the result
of several AHI acquisitions in 1996, 1995 and 1994. Because substantially all of
the acquisitions by AHI have not included acquisition of other long-lived
assets, any adjustment will be equal to the difference between the carrying
value of the goodwill balance and the undiscounted cash flows. Based upon a
review of the carrying value of goodwill and AHI's significant operating loss in
1996, AHI recorded a $14,601,000 charge to write off goodwill balances
associated with these acquisitions, except for goodwill associated with The
Healthcare Partnership ("THP") acquisition in Houston, Texas. Although THP had a
deficiency in its assets at February 1995 (acquisition date), AHI has made
modifications to the payor and physician contracts, and increased administrative
efficiencies to address the operating deficiencies at THP. As a result of these
changes, AHI estimates that it will be able to recover the goodwill acquired in
the THP transaction. In December 1995, the Company sold and closed a total of
eight primary care clinics. In connection with the sale and closing, FPA
recorded a charge for impairment of goodwill in the amount of $434,000. In 1996,
the Company recorded charges for impairment of goodwill of $4.1 million as a
result of a 1995 acquisition in Arizona and $14.8 million related to terminated
emergency department contracts. The Company does not believe there currently are
any indicators that would require an additional adjustment to the carrying value
of the goodwill or its remaining useful life.
Accounting for the Impairment of Long-Lived Assets -- In March 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" which was effective for the
Company beginning January 1, 1996. SFAS No. 121 requires that long-lived assets
and certain intangible assets associated with those assets be reviewed for
impairment. The adoption of SFAS No. 121 at January 1, 1996 had no significant
impact on the Company's financial statements when adopted.
Deferred Compensation Expense -- Upon the consummation of employment
agreements with certain physician employees, AHI sold such employees shares of
AHI common stock at a price below fair value. Differences between the purchase
price of shares sold and the fair value of AHI shares at the date of sale were
recorded as deferred compensation expense. The deferred compensation expense is
amortized on the straight-line method over the related employment periods.
Network Development and Geographic Expansion Costs -- Network development
and geographic expansion costs are expensed as incurred.
17
<PAGE> 19
Intangible Assets -- Intangible assets consist primarily of capitalized
costs of non-compete agreements associated with acquisitions. Intangible assets
are being amortized on a straight-line basis over the expected period of future
benefit, ranging from 5 to 15 years.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes," which requires the use of the liability method for deferred income taxes
(see Note 8).
Professional Liability Coverage -- The Company maintains professional
liability coverage for the Company and its employee and independent contractor
physicians on a claims made basis. The Company records an estimate of its
liabilities for medical malpractice claims incurred but not reported. Such
liabilities are not discounted.
Pro Forma Information -- The pro forma net income and net income per share
information in the 1994 and 1995 consolidated statement of operations reflect
the effect on historical results as if the Company had been a C Corporation
rather than an S Corporation for income tax purposes, and no tax benefit arose
as a result of the change in tax status.
Net Income (Loss) per Common Share -- Net income (loss) per Common Share
is computed based on the weighted average number of shares and share equivalents
(options and warrants) outstanding, giving retroactive effect to all stock
splits and dividends.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
New Accounting Standards -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue to
apply Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company has continued to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and has disclosed the required pro forma effect
on net income (loss) and net income (loss) per share (See Note 7).
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share". This Statement specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock. SFAS No. 128 is not in effect for the Company
for 1996, but will be in effect for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company does not
expect the adoption of SFAS No. 128 to have a material effect on its net income
per share.
Reclassifications -- Certain reclassifications have been made to prior
years' financial statements to conform to current year classifications.
Unaudited Financial Information -- The financial information for the three
months ended March 31, 1997 and 1996, included in the consolidated financial
statements and notes thereto is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such information. Information for
the three months ended March 31, 1997 is not necessarily indicative of the
results to be expected for the entire year.
2. RELATED PARTY TRANSACTIONS
In Texas, the Company leases its main facility, certain leasehold
improvements, and certain medical and office equipment from a former officer of
a Texas subsidiary pursuant to a noncancelable operating lease agreement
expiring November 8, 2005. The agreement provides for monthly payments of
$58,654, subject to certain increases based on the consumer price index. The
lease also contains certain provisions that may, at the option of the former
officer, require the Company to acquire the facility at its fair market value.
18
<PAGE> 20
Effective October 1, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Family Practice Associates of San
Diego, an Osteopathic Corporation ("FPASD"), owned by certain officers of the
Company. The purchase price was supported by an independent valuation and
approved by a committee of the independent Directors of the Company. During
1995, the Company entered into a loan agreement with FPASD under which FPASD was
permitted to borrow a maximum of $650,000 for working capital purposes. This
loan replaces a previous loan with a maximum balance of $155,000. At December
31, 1995 and 1996, the balance of the loan was $300,086 and $0, respectively.
As a result of an acquisition, the Company leases certain property from a
shareholder. Annual rental payments totaled approximately $-0-, $75,000 and
$94,000 in 1994, 1995 and 1996, respectively. The lease expires in April 2001,
unless renewed by the Company for up to an additional ten years.
Through December 31, 1993, three stockholders of AHI collectively
advanced $475,000 to a Physician Network for operations. Of these advances,
$125,000 was repaid in 1994 and the remaining $350,000 was paid in 1995.
Interest expense on these advances totaled $41,000 in 1994 and $16,000 in 1995.
The Company has capitated and fee-for-service provider contracts with
physician professional corporations owned by physician stockholders of the
Company. Medical costs incurred totaled approximately $391,000, $760,000 and
$989,000 for 1994, 1995, and 1996, respectively.
In August 1994, AHI issued shares of common stock to two of its directors,
one of which is an officer, in exchange for promissory notes, each in the amount
of $1,500,000. The promissory notes were secured by other shares of AHI held by
these directors. The common stock was exchanged by AHI for an equal number of
shares of Series T preferred stock issued by AHI in November 1994. These shares
of preferred stock were redeemed by the Company on December 31, 1994, in
exchange for cancellation by AHI of the outstanding obligations under the
promissory notes.
Effective January 1, 1994, AHI entered into a consulting agreement with
one of its directors to assist AHI in analyzing claims and related procedures.
This agreement was terminated in March 1997. In exchange for services provided,
AHI paid $90,000 per year in 1994, 1995 and 1996.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land and buildings $ 164,825 $ 523,758
Computer hardware and software 1,730,733 12,526,830
Furniture, fixtures and equipment, including medical equipment 13,257,444 35,373,769
Leasehold improvements 2,647,653 8,160,846
Vehicles -- 311,972
------------ ------------
Total 17,800,655 56,897,175
Less accumulated depreciation and amortization (5,988,385) (11,094,498)
------------ ------------
Subtotal 11,812,270 45,802,677
Capitalized software development costs 1,273,529 693,186
------------ ------------
Property and equipment -- net $ 13,085,799 $ 46,495,863
============ ============
</TABLE>
4. DEBT
Convertible Subordinated Notes Payable -- On October 5, 1994, the Company
sold $1.0 million of convertible subordinated notes to representatives of the
underwriters of FPA's initial public offering. The notes bore interest at 6%,
payable semiannually, with principal due October 1999. During 1996, the notes
were converted into 200,000 shares of FPA Common Stock.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures due December 2001, which resulted in net proceeds to the
Company of approximately $73.0 million. The notes bear interest at 6-1/2%, with
interest payable semiannually, and are convertible into FPA Common Stock at
$25.95 per share. The debentures are redeemable by the Company after December
20, 1999. Upon the occurrence of a Repurchase Event, as defined in the
debenture, each holder has the right to require repayment of the
19
<PAGE> 21
debentures at 100% of the principal amount plus accrued interest. In January
1997, upon exercise of the overallotment option granted to the Initial
Purchasers, the Company issued additional convertible subordinated debentures
with the same terms for net proceeds of $5.4 million.
Convertible Promissory Note -- In connection with the acquisition of a
Texas subsidiary on November 1, 1995, FPA issued a 36-month, $2.5 million 9%
convertible promissory note with payments of interest only due for the first 24
months and principal and interest monthly thereafter. During 1996, the note was
converted into 243,191 shares of FPA Common Stock.
Notes Payable -- In connection with certain acquisitions, the Company has
issued various other notes payable. Following is a summary of all long-term
debt.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------------ -------------
<S> <C> <C>
Notes payable, interest ranging from 7% to 10.25% and principal due
through December 2000 $ 5,270,421 $ 3,484,627
Note payable, interest at 9% and principal due November 1997 2,500,000 --
Convertible note payable, interest at 9% and principal due November 1998 2,500,000 --
Convertible debentures payable, interest at 6.5% payable semiannually,
principal due December 2001 -- 75,000,000
Notes payable to former shareholders of Sterling, interest at rates
ranging from 5% to 5.54%, payable in 60 monthly installments
through January 1998 1,372,895 759,420
Notes payable, interest at prime (8.25% at December 31, 1996), payable in two
equal installments in December 1996 and 1997 1,200,000 600,000
6% convertible subordinated notes, interest payable semiannually through
1999, principal due October 1999 1,000,000 --
Notes payable to financial institutions, interest at 5.5%, due in full
in October 1997 714,858 55,000,000
Note payable, interest at LIBOR (5.75% at December 31, 1996), 59 payments of
principal and interest due commencing February 1999, through December 2003 -- 97,759,224
Note payable for the acquisition medical group, interest at
the applicable Federal short-term rate (6.08% at December 31, 1995),
payable quarterly with principal due in two
installments in February 1996 and July 1997,
collateralized by a letter
of credit 2,890,000 --
Note payable to certain physicians in connection with acquisition
payable quarterly through March 2005 1,349,000 1,240,000
Note payable to former stockholder, interest at 4.51%, with principal due
in January 1996 230,000 --
Notes payable, interest at 6.02% and principal due January 2006 -- 20,174,914
Other 1,928,013 2,345,701
------------ ------------
Total 20,955,187 256,363,886
Less current portion 10,739,635 70,474,667
------------ ------------
Long term debt, net of current portion $ 10,215,552 $185,889,219
============ ============
</TABLE>
20
<PAGE> 22
At December 31, 1996 future payments on long-term debt are as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE CAPITAL
AND OTHER LEASES TOTAL
---------------- ------------- -------------
<S> <C> <C> <C>
1997 $69,344,423 $1,130,244 $70,474,667
1998 2,030,088 585,239 2,615,327
1999 8,194,345 226,843 8,421,188
2000 8,893,154 67,338 8,960,492
2001 83,925,319 -- 83,925,319
Thereafter 82,288,439 -- 82,288,439
---------------- ------------- -------------
2,009,664 256,685,432
Less amount representing interest on capital leases (321,546) (321,546)
------------- -------------
Total $254,675,768 $1,688,118 $256,363,886
================ ============= =============
</TABLE>
The fair market value of the Company's debt approximates its carrying
value.
Credit Agreement -- On January 29, 1996, the Company entered into a
credit, security, guarantee and pledge agreement ("Credit Agreement") with
certain financial institutions. Permitted Borrowings, as defined in the Credit
Agreement, generally include those for acquisitions and capital expenditures.
The Company and the financial institutions amended the Credit Agreement during
1996. Fees of $1,250,000 were paid in connection with the Credit Agreement
during 1996. Borrowings bear interest at rates ranging from either LIBOR plus 2
1/2%, 2 3/4% or 3%, or prime rate plus 1%, 1 1/4%, or 1 1/2% as defined in the
Credit Agreement. The balance outstanding is due on October 31, 1997. Periodic
payments of accrued interest are due during the term of the Credit Agreement.
Additionally, the financial institutions were granted a security interest in
substantially all of the assets of the Company (excluding those of FPA Medical
Management of Michigan, Inc. d/b/a QualNet, Inc., and the stock of certain
subsidiaries of FPA) and Professional Corporations. The debt is also guaranteed
by certain Professional Corporations. In connection with the Credit Agreement,
the Company must maintain certain debt and equity ratios and profitability
thresholds. The Company issued to the financial institutions a warrant to
purchase 50,000 shares of Common Stock at $9.125 per share exercisable prior to
February 2, 2001, subject to certain anti-dilution provisions. At December 31,
1996, the Company had borrowed the maximum of $55.0 million under the Credit
Agreement.
5. MAJOR CUSTOMERS
In 1994, one Payor accounted for 11.3% of the Company's operating revenue.
In 1995, one Payor accounted for 26.2% of the Company's operating revenue. In
1996, two Payors accounted for 16.1% and 11.3%, respectively, of the Company's
operating revenue.
6. COMMITMENTS AND CONTINGENCIES
Legal -- The Company is party to certain legal actions arising in the
ordinary course of business. In the opinion of the Company's management,
liability, if any, under these claims is adequately covered by insurance and
will not have a material effect on the Company's financial position or results
of operations. The Company maintains professional liability insurance.
The Company is a defendant in a purported 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 against AHI, certain of its officers and
directors, and its Underwriters on December 20, 1995. The suit asserts that AHI,
among other things, artificially inflated the price of its stock by misleading
securities analysts and by failing to disclose in its initial public offering
prospectus alleged difficulties with the acquisition of the Lakewood Health
Plan. The plaintiffs seek unspecified damages on behalf of the stockholders who
purchased AHI common stock between September 28, 1995 and December 19, 1995. The
Company intends to vigorously defend this lawsuit. The Company does not expect
that the outcome of the lawsuit will have a material adverse effect on the
financial condition or results of operations of the Company.
Operating Leases -- The Company is a party to certain facilities and
equipment leases which terminate at various dates through November 8, 2005.
Lease terms generally range from three to 10 years with renewal options. Many of
the leases provide that the Company pay taxes, maintenance, insurance and other
expenses, and contain rent escalation clauses.
21
<PAGE> 23
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 25,579,887
1998 22,725,444
1999 19,267,150
2000 16,588,255
2001 3,245,625
Thereafter 3,978,572
------------
Total $ 91,384,933
============
</TABLE>
For 1994, 1995 and 1996, total expense under these non-cancelable
operating leases was $1,754,094, $5,343,964, and $10,640,028, respectively.
7. STOCKHOLDERS' EQUITY
Stock Splits and Dividends -- The accompanying consolidated financial
statements and notes retroactively reflect all stock splits and stock dividends.
All share, per share and stock option data have been restated to reflect the
stock splits and stock dividends.
In 1995, a Director of the Company purchased 32,000 shares of the
Company's common stock for $450,000 by delivery of a note which is receivable in
monthly installments commencing January 1996 through May 2002. The note is
secured by the purchased shares and is included in Due From Stockholder. In
addition, the Company granted this Director 42,675 stock options exercisable in
installments over a seven-year period at $14.06 per share.
In 1994, the Company issued shares of its common stock to two of its
stockholders in exchange for promissory notes totaling $3,000,000. The shares
were exchanged for the Company's Series T Preferred Stock which was subsequently
redeemed in exchange for cancellation of the promissory notes.
In 1994, the Company entered into a stock repurchase and mutual release
agreement with a former director and stockholder. Pursuant to this agreement,
such stockholder's entire equity interest was repurchased by the Company for
$153,000 in cash and a note payable of $230,000 which was paid in 1996.
In 1994, the Company entered into a stock repurchase and mutual release
agreement (the "Agreement") with a former officer of AHI. Under the terms of the
Agreement, the Company agreed to purchase the former officer's entire equity
interest representing approximately 19% of AHI's outstanding stock at the time
of repurchase for $1.1 million and to settle all outstanding employment-related
disputes for $1.3 million. The settlement payments were made in cash ($1.2
million) and a note payable ($1.2 million), which was paid in full in 1995. The
Company incurred $69,000 and $59,000 in interest expense in 1994 and 1995,
respectively. In connection with the Agreement, this former officer also
received an additional $300,000 upon the completion of AHI's initial public
offering in 1995
Preferred Stock -- During 1994, FPA issued a stock dividend consisting of
one share of Series A Redeemable Preferred Stock (the "Preferred Stock") for
each 437,600 shares of FPA's Common Stock. Accordingly, five shares of Preferred
Stock were issued through the stock dividend, one to each of the Company's five
founding directors. The Preferred Stock was subsequently redeemed by FPA at the
redemption price of $750,000 per share of Preferred Stock (aggregate $3,750,000)
in connection with the 1994 private placement of Common Stock.
22
<PAGE> 24
Omnibus Stock Option Plan -- During 1994, FPA adopted the Omnibus Stock
Option Plan under which an aggregate of 1,000,000 shares of Common Stock of FPA
may be issued through incentive stock options or nonqualified stock options. On
July 13, 1995, October 31, 1996 and March 17, 1997, the stockholders of the
Company authorized an increase in the total number of shares which may be
granted under the plan to 1,500,000, 5,000,000 and 6,500,000, respectively. The
option price per share may not be less than 100% of the fair market value of the
Common Stock on the date of grant, as defined in the stock option plan document.
Options granted under the plan generally vest over three to five years.
1994 Physician Stock Option Plan -- During 1994, FPA adopted the 1994
Physician Stock Option Plan under which an aggregate of 1,000,000 shares of
Common Stock of FPA may be issued through nonqualified stock options. The option
price per share may not be less than 100% of the fair market value of the Common
Stock on the date of grant, as defined in the stock option plan document.
Options granted under the plan generally vest over two to five years.
1995 Non-Employee Directors Non-Qualified Stock Option Plan -- On July 13,
1995, the stockholders of the Company approved the 1995 Non-Employee Directors
Non-Qualified Stock Option Plan under which options to purchase up to 200,000
shares of Common Stock may be granted to non-employee directors. Options granted
under the plan generally vest over one year.
1994 and 1995 AHI Long-Term Incentive Plans (the "LT Plans") -- Under the
LT Plans, awards of options of AHI common stock were granted to employees and
consultants as determined by the Compensation Committee. The LT Plans also
contained provisions permitting awards of restricted stock. The terms of any
awards of options and restricted stock were specified in each agreement as
determined by the Compensation Committee, including, but not limited to, the
purchase price, term, exercise, vesting, restrictions and employment
termination. These options were exercisable ratably over periods up to five
years. The LT Plans and any awards thereunder terminated no later than ten years
from date of grant. A total of 3,028,222 options were reserved for issuance
under the LT Plans. The LT Plans were dissolved in connection with the AHI
Merger.
1995 Non-Employee Directors Stock Option Program -- On August 1, 1995 AHI
adopted the 1995 Non-Employee Directors Stock Option Program (the "Directors'
Plan"). A total of 39,222 shares of common stock were reserved for issuance
under the Directors' Plan. The Directors' Plan authorized the initial grant of
options to purchase up to 7,500 shares of common stock to each Non-Employee
Director and authorized an additional 1,000 option grant annually. The option
exercise price was determined by the average of the fair market value of common
stock for the fifth through ninth Nasdaq National Market trading days following
the grant. The term of each option was ten years from the date of grant and
vests over a four year period. The Directors Plan was dissolved in connection
with the AHI Merger.
Stock option transactions and prices are summarized as follows:
<TABLE>
<CAPTION>
1995
NON-EMPLOYEE
OMNIBUS 1994 DIRECTORS LONG-TERM
STOCK PHYSICIAN STOCK NON-QUALIFIED INCENTIVE
OPTION PLAN OPTION PLAN STOCK OPTION PLAN PLANS
-------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
Shares under option:
Outstanding at January 1, 1994 -- -- -- 1,075,404
Granted 858,254 -- -- 1,013,526
Exercised -- -- -- --
Canceled (3,000) -- -- --
-------------- -------------- ---------------- ------------
Outstanding at December 31,
1994 855,254 -- -- 2,088,930
Granted 709,072 477,460 32,500 707,615
Exercised -- -- -- --
Canceled (13,692) (25) -- (74,757)
-------------- -------------- ---------------- -------
Outstanding at December 31,
1995 1,550,634 477,435 32,500 2,721,788
Granted in connection with
Sterling merger 1,313,583 -- -- 194,000
Otherwise granted 3,077,801 184,292 14,500 --
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
1995
NON-EMPLOYEE
DIRECTORS
OMNIBUS 1994 NON-QUALIFIED LONG-TERM
STOCK PHYSICIAN STOCK STOCK OPTION PLAN INCENTIVE
OPTION PLAN OPTION PLAN PLANS
----------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Exercised (181,421) (14,200) (5,000) --
Canceled (35,477) (10,100) -- (221,389)
----------- --------- ------- ---------------
Outstanding at December 31,
1996 5,725,120 637,427 42,000 2,694,399
=========== =======-= ======= ==============
</TABLE>
Common Stock -- All stock options are granted at fair market value of the
Common Stock at the grant date. The weighted average fair value of the stock
options granted during 1996 was $8.49. The fair value of each stock option grant
is estimated on the date of grant using the Black Scholes option pricing model
with the following weighted average assumptions used for grants in 1996:
risk-free interest rate of 5.7%; expected divided yield of 0%; expected life of
1.7-3 years; and expected volatility of 48%. Stock options generally expire ten
years from the grant date. Stock options generally vest over a three to five
year period, with one-third of the shares becoming exercisable on each of the
first three anniversaries of the grant date. The outstanding stock options at
December 31, 1996 have weighted average remaining contractual life of 5.97
years. The number of stock option shares exercisable at December 31, 1996 was
3,363,575. These stock options have a weighted average exercise price of $10.84
per share.
The Company accounts for its options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net loss and net loss per
share for 1995 would have been $(1,349,874) and $(.07), respectively, and the
Company's pro forma net loss and net loss per share for 1996 would have been
$(76,466,211) and $(2.79), respectively. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
PRICES AT DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31, 1996 EXERCISE PRICE
- ------------------ -------------------- ------------------- ----------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$5.0000- $8.6250 2,968,742 4.84 $6.5899 1,498,470 $ 6.5665
$8.8750-$13.7500 1,664,773 8.17 11.5848 663,630 12.0322
$13.8125-$18.8438 2,524,767 3.48 14.9427 970,057 14.1507
$19.0625-$28.3750 1,940,664 9.04 19.5457 231,418 21.2540
----------- ---- -------- ---------- --------
$5.0000-$28.3750 9,098,946 5.97 $12.5848 3,363,575 $10.8427
=========== ==== ========= ========== ========
</TABLE>
Warrants -- In connection with the revolving line of credit agreement (see
Note 4), AHI granted a warrant to the bank to purchase 53,343 shares of its
common stock at $14.06 per share which expires on May 18, 2000. The warrant may
be converted to shares of common stock equal to the aggregate fair value of
shares less the total exercise price divided by the fair value per share on the
conversion date. Pursuant to AHI's merger with FPA on March 17, 1997, the
warrant was converted into an FPA warrant.
8. INCOME TAXES
Upon the inception of the Company, the Company elected S Corporation
status under the Internal Revenue Code which provides that taxable income or
loss is attributable to the stockholders. The Company subsequently revoked its
election to be treated as an S Corporation and became subject to income taxes.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company recognized a deferred tax benefit on
the date it became a taxable enterprise.
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<PAGE> 26
The components of income tax expense for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------------ ------------------
<S> <C> <C> <C>
Federal expense:
Current $ 1,896,870 $ 2,190,978 $ 5,273,179
Deferred (539,312) (755,192) (4,622,179)
State expense:
Current 391,936 368,882 1,628,982
Deferred (82,469) (300,348) (1,199,982)
------------- ----------------- ------------------
Total $ 1,667,025 $ 1,504,320 $ 1,080,000
============= ================= ==================
</TABLE>
The Company's income tax expense differs from the amount that would have
resulted from applying the Federal statutory rate to pretax income because of
the effect of the following items:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate 34.0% 34.0% (34.2%)
Revocation of FPA S Corporation status (5.1%) -- --
State taxes, net of Federal income tax benefit 4.2% (0.7%) (0.8%)
Nondeductible goodwill amortization 1.1% 27.2% 10.1%
Nondeductible acquisition costs -- -- 4.9%
Loss (with)/without carryforward benefit (1.1%) -- 20.6%
Other 0.2% 6.7% 1.0%
------- --------- -------
33.3% 67.2% 1.6%
======= ========= =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for reporting and the
amounts used for income tax purposes. The tax effects of items comprising the
Company's net deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------------- ------------------
<S> <C> <C>
Deferred tax assets:
Goodwill -- $ 4,087,001
Allowance for uncollectible accounts $ 2,307,580 2,700,811
Accrued liability for professional liability claims 321,256 595,000
Accrued expenses 434,000 1,267,000
Depreciation and amortization 22,000 76,000
Net operating losses 1,191,511 14,028,058
Other 50,392 720,821
---------------- ------------------
Total deferred tax assets 4,326,739 23,474,691
Valuation allowance (493,000) (15,304,000)
---------------- ------------------
Total deferred tax assets $ 3,833,739 $ 8,170,691
================ ==================
Deferred tax liabilities:
Geographic expansion costs $ (179,893) $ (392,305)
Start-up costs (231,498) --
State income tax -- (290,987)
Deferred compensation (57,565) (19,069)
Depreciation and amortization (1,008,458) (799,914)
---------------- ------------------
Total deferred tax liabilities $ (1,477,414) $ (1,502,275)
---------------- ------------------
Net deferred tax assets $ 2,356,325 $ 6,668,416
================ ==================
</TABLE>
Effective January 1, 1995, all but two of the Physician Networks, and
effective January 1, 1996, all but one of the Physician Networks, revoked their
S-Corporation status. As a result, approximately $750,000 of net operating
losses are not available to offset future California income otherwise taxable at
1.5%.
The Company has net operating loss carryforwards of approximately
$48,400,000 which may be utilized in future years before expiring between 2007
and 2011. Of this amount, approximately $1,200,000 arose from pre-acquisition
losses of an acquired Physician Network, the use of which is limited to future
taxable income of this Physician Network.
A valuation allowance has been provided to offset the deferred tax asset
of AHI based, in part, on the losses incurred by AHI for the year ended December
31, 1996. Under the separate return limitation year rules, the net operating
losses of AHI can only be utilized by income generated by the former AHI
entities. No valuation allowance has been provided for the remainder of the net
deferred tax assets based on managements estimate of future taxable income.
25
<PAGE> 27
9. MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES
In 1995, the Company recorded nonrecurring expenses of $1.6 million. This
amount includes a $434,000 charge for impairment of goodwill, a $773,000 charge
for the loss on disposition of businesses and $375,000 relating to the
bankruptcy of one of its hospital clients. In 1995, the Company sold six and
closed two primary care clinics (seven in Florida and one in Texas). The
goodwill impairment and loss on sale are directly related to the sale and
closure of the primary care clinics. These clinics accounted for approximately
$2.1 million in revenue and generated an operating loss (including the unusual
items) of $3.7 million during 1995.
In 1996, the Company recorded nonrecurring expenses of $52.6 million. This
amount is comprised of (i) costs related to the Sterling Merger in the amount of
$16.8 million comprised of investment bankers' fees, attorneys' fees,
accountants' fees, legal fees, and severance and compensation required to be
paid as part of the Sterling Merger, (ii) write-offs of goodwill and other
assets in the amount of $33.5 million related to terminated emergency room
contracts and unprofitable acquisitions, and (iii) restructuring charges in the
amount of $2.3 million primarily related to severance for terminated employees.
In the three months ended March 31, 1997, the Company recorded
nonrecurring expenses of $36.8 million comprised of costs related to the AHI
Merger consisting of investment bankers fees, attorney's fees, accountants fees,
legal fees, wind-down costs, and severance and compensation required to be paid
as part of the AHI Merger.
10. SEGMENT INFORMATION
Sterling is a physician practice management company engaged in the
business of providing contract management and support services primarily to
hospital-based emergency departments ("Emergency Department"). FPA manages the
provision of prepaid managed healthcare services for networks of primary care
physicians ("Managed Care"). The activities related to the Managed Care segment
and the Emergency Department segment are as follows:
<TABLE>
<CAPTION>
EMERGENCY MANAGED
DEPARTMENT CARE CONSOLIDATED
---------- ------------ ------------
<S> <C> <C> <C>
Year Ended: (THOUSANDS OF DOLLARS)
DECEMBER 31, 1996
Operating revenues $ 136,761 $ 422,344 $ 559,105
Income (loss) from operations (6,154) (58,577) (64,731)
Assets employed at year-end 77,900 501,763 579,663
Depreciation and amortization 3,204 10,260 13,464
Capital expenditures 650 12,557 13,207
DECEMBER 31, 1995
Operating revenues $ 115,660 $ 166,975 $ 282,635
Income (loss) from operations 6,502 (2,686) 3,816
Assets employed at year-end 78,608 150,055 228,663
Depreciation and amortization 2,260 3,326 5,586
Capital expenditures 1,634 5,315 6,949
DECEMBER 31, 1994
Operating revenues $ 39,256 $ 79,181 $ 118,437
Income (loss) from operations 2,349 2,422 4,771
Assets employed at year-end 26,742 39,014 65,756
Depreciation and amortization 438 893 1,331
Capital expenditures 499 2,069 2,568
</TABLE>
11. ACQUISITIONS
Following is a summary of material acquisitions consummated during 1996 by
the Company, one of its subsidiaries, or one of the Professional Corporations.
Such acquisitions were accounted for using the purchase method of accounting.
Goodwill totaling approximately $244 million was recorded, which is being
amortized over periods ranging from 25 to 30 years. In connection with these
acquisitions, the Company issued (i) FPA Common Stock valued at $51.6 million,
(ii) notes payable of $163.8 million, and (iii) cash of $19.4 million.
26
<PAGE> 28
<TABLE>
<S> <C> <C>
VIP, IPA, A Professional Corporation January 1996
Foundation Health IPA January 1996
Century Family Medical Group, IPA January 1996
Century Family Medical Group, Inc. January 1996
Chabot Medical Group IPA January 1996
Private Physicians Group of Stanford February 1996
Physicians First, Inc. June 1996
Family First Pharmacy, Inc. June 1996
FPA Family Pharmacy, Inc. June 1996
Physicians Medical Group of Florida, Inc. June 1996
FHC IPA, Inc. July 1996
Intergroup IPA, P.C. July 1996
Foundation Health Medical Services(1) December 1996
Foundation Health Medical Group, Inc.(1) December 1996
FHMG/TDMC Medical Group, A Professional Corporation(1) December 1996
Thomas Davis Medical Centers, P.C.(1) December 1996
</TABLE>
(1) The Company is in the process of determining the appropriate values to be
assigned to the assets acquired and liabilities assumed in connection
with these acquisitions. Accordingly, the Company's estimate of these
values are subject to revision upon completion of an independent
valuation which may result in an adjustment to goodwill.
The following unaudited pro forma financial information presents the
consolidated results of operations as if all significant acquisitions had
occurred as of the beginning of the periods presented, after including the
impact of certain adjustments, such as amortization of intangibles and goodwill,
executive compensation per employment agreements, and the related income tax
effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996
----------------------------------------
<S> <C> <C>
Revenues $ 485,494,000 $ 718,713,000
Net loss (47,541,000) (131,698,857)
Net loss per share (2.60) (4.81)
</TABLE>
The Company believes that this unaudited pro forma information is not
indicative of future results of operations, nor of historical operations, if the
acquisitions had occurred as of the beginning of the periods presented.
12. LICENSURE
The application of Family and Senior Care, Inc., a wholly-owned subsidiary
of FPA, for a restricted healthcare service plan license was approved by the
California Department of Corporations ("DOC") on December 5, 1996. Following
that date, all of the Company's managed care activity in the State of California
occurred in this subsidiary. On February 24, 1997 FPA submitted a Notice of
Material Modification to request incorporation of the California activity of AHI
under FPA's restricted DOC license.
27
<PAGE> 29
13. SUBSEQUENT EVENTS (UNAUDITED)
The following significant events have occurred subsequent to the balance
sheet date:
HealthCap Merger. On June 30, 1997, FPA acquired HealthCap in a stock-for-stock
merger accounted for as a pooling of interests in which 2,300,000 shares of FPA
common stock were issued in exchange for all of the outstanding shares of
HealthCap common and preferred stock (including shares covered by HealthCap
vested options and outstanding warrants as of the effective date) and FPA
assumed certain HealthCap options. HealthCap is a physician practice management
company that provides management services for capitated physician networks,
including IPAs and single taxpayer model medical groups. HealthCap is focused on
the development and operation of primary care based multi-specialty and women's
health delivery systems in primary and secondary markets where HMO market share
has been historically low but is increasing. HealthCap operates in California,
Florida, Georgia, Missouri and Nevada. As of March 31, 1997, HealthCap had a
network of 1,540 primary care physicians which provided healthcare services to
approximately 50,000 enrollees under 12 Payor contracts.
Health Partners Merger. On July 1, 1997, FPA entered into an Agreement and Plan
of Merger with Health Partners, Inc. (the "Health Partners Merger Agreement")
which provides for the acquisition of Health Partners, Inc. by FPA in a
stock-for-stock merger anticipated to be accounted for as a pooling of
interests. The consummation of the proposed merger is subject to approval by the
stockholders of Health Partners, Inc., receipt of all necessary regulatory
approvals and other customary conditions. The Health Partners Merger Agreement
may be terminated by either of the parties if the merger is not consummated by
October 28, 1997, and under certain other circumstances. Health Partners, Inc.
currently has a network of 418 primary care physicians which provides healthcare
services to over 138,000 HMO enrollees under 8 Payor contracts. Health Partners
is the largest physician practice management organization in New York with over
103,000 HMO members and also has operations in Ohio, Kentucky, Washington D.C.,
New Jersey, Texas and Virginia.
Credit Agreement. On June 30, 1997, the Company entered into a commercial paper
credit agreement for a $225 million three-year revolving line of credit ("Line
of Credit") and a $50 million four and one-quarter year term loan ("Term Loan").
A maximum of $155 million and $30 million of the proceeds of the Line of Credit
can be used to refinance debt and to secure the Company's capitation deposits,
respectively. The remaining proceeds of the Line of credit can be used for
working capital. The proceeds of the Term Loan may be used to refinance debt.
The borrowings bear interest based on the prime rate plus 50-75 basis points or
the Interbank Eurodollar rate plus 150-175 basis points, as defined in the
agreement. In connection with the credit agreement the Company agreed to
maintain certain debt and equity ratios and profitability thresholds. This
facility is secured by the assets of the Company.
28
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Stockholders of FPA Medical Management, Inc.:
We have audited the consolidated balance sheet of FPA Medical Management, Inc.
and subsidiaries as of December 31, 1996 and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FPA Medical Management, Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of FPA
Medical Management, Inc. and subsidiaries as of December 31, 1995 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 1995, prior to their restatement for the poolings of interests with Sterling
Healthcare Group, Inc. and AHI Healthcare Systems, Inc., as described in note 1
to the consolidated financial statements. We did not audit the consolidated
balance sheet of Sterling Healthcare Group, Inc. as of December 31, 1995, or the
related consolidated statements of operations, changes in stockholders' equity
and cash flows of Sterling Healthcare Group, Inc. for the period June 1, 1994
(date of inception) to December 31, 1994 and the year ended December 31 1995,
which statements reflect total assets of $78,608,252 as of December 31, 1995,
and total revenues of $39,255,573 and $115,659,527 for the period June 1, 1994
(date of inception) to December 31, 1994 and the year ended December 31, 1995,
respectively. We also did not audit the consolidated balance sheet of AHI
Healthcare Systems, Inc. as of December 31, 1995, or the related consolidated
statements of operations, changes in stockholders' equity and cash flows of AHI
Healthcare Systems, Inc. for each of the two years in the period ended December
31, 1995, which statements reflect total assets of $76,256,000 as of December
31, 1995, and total revenues of $60,746,000 and $114,284,000 for the years ended
December 31, 1994 and 1995, respectively. Such financial statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for Sterling Healthcare Group,
Inc. and AHI Healthcare Systems, Inc. for 1994 and 1995, is based solely on the
reports of such other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1995 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the two years in the period ended December 31, 1995,
after restatement for the poolings of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
note 1 to the consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
May 2, 1997
29
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
AHI HealthCare Systems, Inc.
We have audited the accompanying consolidated balance sheet of AHI Healthcare
Systems, Inc., as of December 31, 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statments. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AHI
Healthcare Systems, Inc., at December 31, 1995, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 22, 1996
30
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sterling Healthcare Group, Inc.
Coral Gables, Florida
We have audited the consolidated balance sheets of Sterling Healthcare Group,
Inc. as of December 31, 1995, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for year ended
December 31, 1995 and the seven month period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling Healthcare
Group, Inc. as of December 31, 1995, and the results of their operations and
their cash flows for the year ended December 31, 1995 and the seven month
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND LLP
Miami, Florida
March 15, 1996
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this current report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
By: /S/ Steven Lash
---------------------
Date: July 31, 1997 Title: Executive Vice President and
Chief Financial Officer
32
