<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 333-20007
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8049 33-0604264
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
3636 NOBEL DRIVE, SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. LEBOVITZ
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
FPA MEDICAL MANAGEMENT, INC.
3636 NOBEL DRIVE, SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JUSTIN P. KLEIN, ESQ.
BALLARD SPAHR ANDREWS & INGERSOLL
1735 MARKET STREET, 51ST FLOOR
PHILADELPHIA, PENNSYLVANIA 19103
(215) 665-8500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
6 1/2% Convertible Debentures due
2001............................... $80,650,000 -- $80,650,000(1) $24,439.39(2)
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Common Stock ($.002 par value)....... 3,107,900(3) -- -- --
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Common Stock ($.002 par value)....... 5,253,471(4) $24.07(5) $126,451,047 $38,318.50
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(i).
(2) The registration fee in the amount of $24,439.39 was previously paid in
connection with the initial filing of this Registration Statement.
(3) Such number represents the number of shares of Common Stock initially
issuable upon conversion of the Debentures registered hereby and, pursuant
to Rule 416 under the Securities Act of 1933, as amended, such indeterminate
number of shares of Common Stock as may be issued from time to time upon
conversion of the Debentures by reason of adjustment of the conversion price
under certain circumstances outlined in the Prospectus.
(4) Such number represents the number of shares of Common Stock being registered
for resale by selling stockholders.
(5) Estimated solely for the purposes of calculation the registration fee
pursuant to Rule 457(c).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1997
, 1997
$80,650,000 6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
[LOGO] 8,361,371 SHARES OF COMMON STOCK
FPA MEDICAL MANAGEMENT, INC.
------------------------
This Prospectus relates to the offering by the selling security holders
named herein (the "Selling Securityholders") of 6 1/2% Convertible Subordinated
Debentures due 2001 of FPA Medical Management, Inc. (the "Company" or "FPA") in
the aggregate principal amount of up to $80,650,000 (the "Debentures"). In
addition, this Prospectus relates to the offering by the Selling Securityholders
of up to 3,107,900 shares (subject to adjustment under certain circumstances) of
the Company's common stock, par value $.002 per share (the "Common Stock" and,
together with the Debentures, the "Securities"), issued or issuable upon
conversion of the Debentures. This Prospectus also relates to the offering by
certain selling stockholders named herein (the "Selling Stockholders") of up to
5,253,471 shares of the Company's common stock, par value $.002 per share (the
"Individual Shares").
The Debentures were issued and sold in December 1996 and January 1997 in
transactions exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), to persons reasonably believed by the
initial purchasers who sold the Debentures (the "Initial Purchasers") to be (i)
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act), (ii) institutional accredited investors or (iii) non-U.S. persons in
offshore transactions in reliance upon Regulation S under the Securities Act.
The Debentures are convertible into shares of Common Stock at the option of
the holder at any time after February 16, 1997, the 60th day following the date
of original issuance of the Debentures and at or before maturity, unless
previously redeemed, at $25.95 per share, subject to adjustment upon the
occurrence of certain events. See "Description of Debentures -- Conversion
Rights." The Debentures, prior to their resale pursuant to this Prospectus, were
eligible for trading on the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") Market. The Debentures resold pursuant to this
Prospectus will no longer be eligible for trading on the PORTAL Market.
Interest on the Debentures is payable on June 15 and December 15 of each
year, commencing on June 15, 1997. Principal and interest payments will be made
without any deduction for U.S. withholding taxes. The Debentures are redeemable
in whole or in part, at the option of the Company, at the redemption prices
described herein, together with accrued interest, except that no redemption may
be made prior to December 20, 1999. See "Description of Debentures -- Optional
Redemption." At the option of the Holder (as defined herein) of the Debentures,
such Holder may require the Company to repurchase such Holder's Debentures upon
the occurrence of a Repurchase Event (as described herein), at 100% of the
Debenture's principal amount, plus accrued interest. A Repurchase Event is
limited to transactions involving a Change in Control (as defined herein) or a
Termination of Trading (as defined herein). See "Description of
Debentures -- Certain Rights to Require Repurchase of Debentures." The
Debentures are not entitled to any sinking fund. The Debentures mature on
December 15, 2001.
The Debentures are general unsecured obligations of the Company which are
subordinate to all present and future secured indebtedness of the Company and
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of the Company. See "Description of Debentures -- Subordination."
Neither the Indenture (as defined herein) nor the Debentures limit the
incurrence of additional indebtedness or other additional liabilities by the
Company or its subsidiaries.
The Company will not receive any of the proceeds from the sale of the
Securities or the Individual Shares offered hereby. The Selling Securityholders
and the Selling Stockholders directly, through agents designated from time to
time, or through brokers, dealers or underwriters to be designated, may sell the
Securities or the Individual Shares from time to time on terms to be determined
at the time of sale. To the extent required, the specific amount of Securities
or Individual Shares to be sold, the respective purchase price and public
offering price, the names of any such agent broker, dealer or underwriter, and
any applicable commission or discount with respect to the particular offer will
be set forth in a Prospectus Supplement. The Company has agreed to bear
substantially all expenses of registration of the Securities under federal and
state securities laws, other than commissions, fees and discounts of
underwriters, brokers, dealers and agents, and to indemnify the Selling
Securityholders against certain liabilities under the Securities Act. See "Plan
of Distribution."
The Selling Securityholders, the Selling Stockholders and any
broker-dealer, agents or underwriters that participate with the Selling
Securityholders and the Selling Stockholders in the distribution of the
Securities or the Individual Shares may be deemed to be "underwriters" within
the meaning of the Securities Act, and any commissions received by them and any
profits on the resale of the Securities or the Individual Shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. The Selling Securityholders have agreed to indemnify the Company
against certain liabilities. See "Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
"FPAM." On February 11, 1997, the last reported sale price of the Common Stock
was $25.63 per share.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act with respect to the
Securities and the Individual Shares offered hereby. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto
on file with the Commission pursuant to the Securities Act and the rules and the
regulations of the Commission thereunder. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, information statements and other
information with the Commission. Such reports, proxy and information statements
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60611. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or from the
Commission's Internet Web site at http://www.sec.gov. In addition, such
materials also may be inspected and copied at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents of the Company filed with the Commission (File No.
0-24276) are incorporated herein by reference:
1. FPA's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed with the Commission on March 28, 1996, as amended by Form 10-K/A
filed with the Commission on March 29, 1996, and as amended by Form 10-K/A filed
with the Commission on October 3, 1996.
2. FPA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
filed with the Commission on May 15, 1996, as amended by Form 10-Q/A filed with
the Commission on July 24, 1996.
3. FPA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
filed with the Commission on August 14, 1996.
4. FPA's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 filed with the Commission on November 13, 1996, as amended by Form 10-Q/A
filed with the Commission on November 13, 1996.
5. FPA's Current Report on Form 8-K dated February 1, 1996 filed with the
Commission on February 15, 1996, as amended by Form 8-K/A dated February 1, 1996
filed with the Commission on April 12, 1996.
6. FPA's Current Report on Form 8-K dated May 19, 1996 filed with the
Commission on May 20, 1996.
7. FPA's Current Report on Form 8-K dated June 21, 1996 filed with the
Commission on July 5, 1996.
8. FPA's Current Report on Form 8-K dated October 31, 1996 filed with the
Commission on November 12, 1996.
9. FPA's Current Report on Form 8-K dated November 8, 1996 filed with the
Commission on November 13, 1996.
10. FPA's Current Report on Form 8-K dated November 26, 1996 filed with the
Commission on December 12, 1996.
<PAGE> 4
11. FPA's Current Report on Form 8-K dated December 10, 1996 filed with the
Commission on January 10, 1997.
12. FPA's Current Report on Form 8-K dated December 13, 1996 filed with the
Commission on January 2, 1997.
13. FPA's Current Report on Form 8-K dated December 18, 1996 filed with the
Commission on January 2, 1997.
14. The description of the FPA Common Stock contained in FPA's Registration
Statement on Form 8-A dated October 20, 1994.
In addition, all reports and other documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act,
prior to the termination of the offering made hereby, shall be deemed to be
incorporated by reference into this Prospectus. Any statement included in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
ANY OR ALL OF THE DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE DOCUMENTS SO INCORPORATED.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO THE COMPANY AT 3636 NOBEL DRIVE,
SUITE 200, SAN DIEGO, CALIFORNIA 92122, ATTENTION: JAMES A. LEBOVITZ (TELEPHONE
NUMBER (619) 453-1000).
------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. When used
in this Prospectus, the words "estimate," "project," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see "RISK FACTORS." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. FPA does not undertake any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
------------------------
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and the documents
incorporated herein by reference. See "Risk Factors" for information that should
be carefully considered by prospective investors.
THE COMPANY
FPA is a national physician practice management company ("PPM") which
acquires, organizes and manages primary care physician practice networks and
provides contract management services to hospital-based emergency departments.
The Company provides primary and specialty care services to prepaid managed care
enrollees and fee-for-service patients through a network of independent practice
association ("IPA") physicians and owned primary care physician groups. Assuming
the consummation of the AHI Merger (as defined below), the Company will be
affiliated with approximately 6,480 primary care physicians and 10,800 specialty
care physicians, and will provide services to approximately 800,000 enrollees of
35 health maintenance organizations ("HMOs") or other prepaid health insurance
plans (collectively, "Payors") in ten states. Through its recent acquisition of
Sterling, FPA manages the emergency departments of 104 hospitals in 20 states.
FPA's objective is to provide cost-effective, high quality health care
services for an increasing number of Payor enrollees served by physicians in the
FPA Network (as defined below). The Company's strategy is to increase enrollment
by adding new Payor relationships and new providers to the existing FPA Network.
The Company believes new Payor and provider relationships are possible because
of its ability to manage the cost of health care without sacrificing quality.
The acquisition of Sterling enables FPA to further control costs by providing it
with the ability to control both points of entry into the managed health care
delivery system: the primary care physician's office and the emergency room.
FPA's relationships with its affiliated professional corporations (the
"Professional Corporations"), other providers of medical services and Payors
(collectively, the "FPA Network") offer physicians the opportunity to
participate more effectively in managed care programs by organizing physician
groups within geographic areas to contract with Payors. FPA enhances physician
practice operations by assuming administrative functions necessary in a managed
care environment. These functions include claims adjudication, utilization
management of medical services, Payor contract negotiations, credentialing,
financial reporting and the operation of management information systems. Under
these arrangements, FPA, on behalf of the Professional Corporations, is
responsible for the payment of the cost of medical services, including
professional, ancillary and medical management services, and is entitled to
amounts received from Payors in excess of such costs. The Company believes that
its management model is appealing to physicians because it allows the physicians
to retain control of their own practices while gaining access to more patients
through participation in a managed care program.
Agreements with Payors and providers are entered into with, and approved
by, either a subsidiary of FPA or one of the Professional Corporations,
depending on applicable state law. Pursuant to administrative services
agreements with the Professional Corporations, payments received from Payors are
assigned to FPA.
The FPA Network manages all covered primary and specialty medical care for
each enrollee in exchange for fixed monthly capitation payments pursuant to
Payor contracts. Specialty care physician services, inpatient hospitalization
and certain other services managed by primary care physicians are subject to
pre-authorization guidelines and are provided through contracts negotiated by
FPA for the Professional Corporations based on discounted fee-for-service, per
diem or capitation rates. Contracts with Payors and primary care physicians
generally include shared risk arrangements and other incentives designed to
encourage the provision of high-quality, cost effective health care. Because FPA
is obligated to provide medical services, the costs of some of which are
variable, for fixed capitation fees, its profitability may vary based on the
ability of FPA and its affiliated providers to control such health care costs.
Additionally, state laws in California, operations in which represented
approximately 22% of FPA's operating revenues for the nine months ended
September 30, 1996, require entities such as FPA to be licensed as "health care
service plans." FPA's application for a restricted license was approved by the
California Department of Corporations in December 1996. The loss or revocation
of such license would have a material adverse effect on FPA. In addition, there
can be no assurance that
3
<PAGE> 6
regulatory authorities in the other states in which FPA or its affiliates
operate will not impose similar requirements.
With the addition of Sterling, FPA also provides contract management and
support services to hospital-based emergency departments. Sterling recruits
physicians and contracts for their services to provide staffing of emergency
departments. Sterling also assists its hospital clients in such areas as
physician scheduling, operations support, quality assurance and departmental
accreditation as well as billing and record keeping. In addition, Sterling has
expanded its hospital-based services to include the management of anesthesiology
departments, correctional institutional health facilities and rural health care
clinics. FPA acquired Sterling, a publicly traded company based in Florida, on
October 31, 1996 in a stock-for-stock merger accounted for as a pooling of
interests in which FPA issued 8,097,781 shares of FPA Common Stock to Sterling
shareholders.
On November 8, 1996, the Company entered into an agreement to merge with
AHI Healthcare Systems, Inc. ("AHI"), a publicly traded physician practice
management company, in a stock-for-stock merger to be accounted for as a pooling
of interests (the "AHI Merger"). AHI develops local managed health care delivery
networks and provides managed care infrastructure services. AHI provides
services to approximately 200,000 enrollees through contracts with 11 Payors in
four states. AHI is affiliated with approximately 2,400 primary care physicians
and 5,800 specialty care physicians. The AHI Merger is expected to be completed
no later than April 30, 1997 for a purchase price of approximately $130 million,
consisting of approximately 5,000,000 shares of FPA Common Stock based on a
closing price of $25.63 on February 11, 1997.
Effective November 29, 1996, FPA acquired from Foundation Health
Corporation ("Foundation"), a publicly traded company, all the outstanding stock
of Foundation Health Medical Services ("FHMS") and FHMG/TDMC Medical Group, a
professional corporation (the "Holding Company"). FHMS provides facilities
management and professional services to the Holding Company and its
subsidiaries, Foundation Health Medical Group, Inc. and Thomas-Davis Medical
Centers, P.C. (together with FHMS, the "Combined Foundation Companies"). The
Combined Foundation Companies provide services to approximately 242,000
enrollees in California and Arizona through approximately 188 primary care
physicians and 2,300 specialty care physicians. The purchase price for this
acquisition (the "Foundation Transaction") was approximately $197 million,
comprised of $2 million in cash, 4,076,087 shares of FPA Common Stock and
approximately $120 million in notes. The Combined Foundation Companies have a
history of losses. In their fiscal year ended June 30, 1996, the Combined
Foundation Companies experienced a net loss of $32,256,000. While FPA intends to
institute certain measures to reduce these losses and operate the Combined
Foundation Companies profitably, there can be no assurance that it will be able
to do so.
Effective July 1, 1996, FPA acquired from Foundation an IPA located in
Arizona for approximately $4 million in cash and notes. This IPA serves
approximately 19,850 enrollees. Also effective July 1, 1996, FPA acquired from
Foundation an IPA located in Florida for approximately $16 million in cash and
notes. The Florida IPA serves approximately 3,600 enrollees, and together these
two IPAs consist of 93 primary care physicians.
Other recent acquisitions include the June 1996 acquisition of Physicians
First, Inc. ("PFI"), a wholly owned subsidiary of Physician Corporation of
America, a publicly traded company ("PCA"). PFI operates through its
subsidiaries 40 primary care clinics in Florida. The clinics have approximately
70 primary care physicians who provide services to approximately 90,000
enrollees in PCA's health plans in Florida. PFI was acquired for approximately
$21.6 million in cash, notes, shares of FPA Common Stock and warrants to
purchase shares of FPA Common Stock.
The Company is regularly in discussions with additional acquisition
candidates and may from time to time enter into letters of intent or definitive
agreements with respect to the acquisition of such businesses. There can be no
assurance that the Company will acquire any additional businesses.
The Company's executive offices are located at 3636 Nobel Drive, Suite 200,
San Diego, California 92122 and its telephone number is (619) 453-1000.
4
<PAGE> 7
THE OFFERING
This Prospectus relates to the Offering by the Selling Securityholders of
both the Debentures and, to the extent the Debentures have been, or are,
converted, the Common Stock. The following summary of certain terms of the
Debentures is not complete and is qualified by all of the terms and conditions
contained in the Debentures and in the Indenture. For a more detailed
description of the terms of the Debentures, see "Description of Debentures."
This Prospectus also relates to the Offering by the Selling Stockholders of the
Individual Shares. See "Description of Capital Stock."
THE COMMON STOCK AND INDIVIDUAL SHARES
<TABLE>
<S> <C>
Common Stock issuable upon conversion of the Debentures(1)(2)........... 3,107,900
Individual Shares offered by the Selling Stockholders................... 5,253,471
Total FPA common stock outstanding as of February 7, 1997............... 24,824,224
Total FPA common stock to be outstanding assuming conversion of the
Debentures............................................................ 27,932,124
Nasdaq National Market symbol........................................... FPAM
</TABLE>
- ---------------
(1) Excludes approximately 6,200,000 shares of Common Stock issuable upon
exercise of stock options and other warrants outstanding as of February 11,
1997.
(2) Assumes no adjustment to the conversion price of the Debentures.
THE OFFERED DEBENTURES
Securities Offered......... $80,650,000 principal amount of 6 1/2% Convertible
Subordinated Debentures due December 15, 2001.
Payment of Interest........ June 15 and December 15, commencing June 15, 1997.
Conversion................. Convertible into Common Stock of the Company at the
option of the holder at any time after February 17,
1997, the 60th day following the
date of original issuance of the Debentures and at
or before maturity, unless previously redeemed, at
$25.95 per share, subject to adjustment upon the
occurrence of certain events.
Subordination.............. Subordinated to all present and future Senior
Indebtedness (as defined herein) of the Company and
effectively subordinated to all indebtedness and
other liabilities of subsidiaries of the Company.
Senior Indebtedness of the Company and indebtedness
and other liabilities of its subsidiaries
aggregated approximately $143.0 million at October
31, 1996 ($327.1 million as of September 30, 1996
assuming consummation of the Foundation Transaction
and the AHI Merger). The Indenture contains no
limitation on the incurrence of additional
indebtedness (including Senior Indebtedness) or
other additional liabilities by the Company and its
subsidiaries.
Redemption................. The Debentures are redeemable in whole or in part,
at the option of the Company, at the redemption
prices set forth herein, together with accrued
interest, except that no redemption may be made
prior to December 20, 1999.
Option..................... In the event that there shall occur a Repurchase
Event (as defined herein), each holder of the
Debentures shall have the right, at the
5
<PAGE> 8
holder's option, to require the Company to
repurchase such holder's Debentures at 100% of
their principal amount, plus accrued interest. The
term Repurchase Event is limited to transactions
involving a Change in Control (as defined) or a
Termination of Trading (as defined), and does not
include other events that might adversely affect
the financial condition of the Company or result in
a downgrade in the credit rating (if any) of the
Debentures. The Company's ability to repurchase the
Debentures following a Repurchase Event is
dependent upon the Company's having sufficient
funds and may be limited by the terms of the
Company's Senior Indebtedness or the subordination
provisions of the Indenture. There is no assurance
that the Company will be able to repurchase the
Debentures upon the occurrence of a Repurchase
Event.
Trading.................... Prior to their resale pursuant to this Prospectus,
the Debentures were eligible for trading on the
PORTAL Market. The Debentures sold pursuant to this
Prospectus will no longer be eligible for trading
on the PORTAL Market.
6
<PAGE> 9
RISK FACTORS
In addition to other information contained or incorporated by reference in
this Prospectus, prospective investors should consider carefully the factors
listed below in evaluating an investment in the Securities or Individual Shares
offered hereby.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS; EXPANDED SERVICE
OFFERING
Over the last two years, the Company has pursued an aggressive growth
strategy. The Company's growth has been achieved primarily through acquisitions,
several of which have been completed or become subject to a binding agreement
during the last six months. See "Recent Developments." The recent acquisitions
of Sterling, PFI and the Combined Foundation Companies and the proposed AHI
Merger are large transactions which involve significant risks and uncertainties
for FPA. The Company intends to continue to pursue growth through acquisitions.
The success of past and future acquisitions is largely dependent on the ability
of FPA to integrate the operations of the acquired companies into FPA's
operations in an efficient and effective manner. The process of integrating
management services, which include management information systems, claims
administration and billing services, utilization management of medical services,
care coordination and case management, quality and cost monitoring and physician
recruitment, as well as administrative functions, facilities and other aspects
of operations, while managing a larger and geographically expanded entity,
presents a significant challenge to FPA's management. In addition, integration
must be carried out so that FPA is able to control medical and administrative
costs. The ability to control such costs is key to the successful future
operations of FPA. There can be no assurance that the Company's acquisitions
will be successfully integrated on a timely basis or that the anticipated
benefits of these acquisitions 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.
The Company is regularly in discussions with additional acquisition
candidates and may from time to time enter into letters of intent or definitive
agreements with respect to the acquisition of such businesses. There can be no
assurance that the Company will acquire any additional businesses.
The integration of acquired entities also requires the dedication of
management resources, which may distract the attention of management from the
day-to-day business of the combined companies. Furthermore, new acquisitions may
expose the FPA Network to new Payors and providers with which it has had no
previous business experience. FPA cannot predict whether it will be able to
enroll into the FPA Network all members currently served by physicians
affiliated with newly acquired entities. Also, there can be no assurance that
there will not be substantial unanticipated costs or other material adverse
effects associated with acquisition and integration activities, any of which
could result in significant one-time charges to earnings or otherwise adversely
affect the Company's operating results.
In addition, as a result of the acquisition of Sterling, FPA offers new
services, specifically the management and support of hospital-based emergency
departments. The addition of these new services presents certain risks and
uncertainties due to FPA's relative unfamiliarity with these types of services
and the market for such services. There can be no assurance that FPA will be
successful in developing and integrating Sterling's operations and services.
RISKS OF FINANCIAL LEVERAGE
FPA's indebtedness is significant in relation to its stockholders' equity.
On a pro forma basis giving effect to the Foundation Transaction and the
issuance of the Debentures, such debt accounts for approximately 50% of FPA's
total capitalization as of September 30, 1996. From its inception until the
completion of the Foundation Transaction and the issuance of the Debentures, FPA
had not incurred significant indebtedness as a percentage of FPA's total
capitalization. While FPA believes it will be able to service its debt, there
can be no assurance to that effect. The degree to which FPA is leveraged could
affect its ability to service its indebtedness, make capital expenditures,
respond to market conditions and extraordinary capital needs, take advantage of
certain business opportunities or obtain additional financing. Unexpected
declines in FPA's future business, or the inability to obtain additional
financing on terms acceptable to FPA, if required, could
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impair FPA's ability to meet its debt service obligations or fund acquisitions
and, therefore, could materially adversely affect FPA's business and future
prospects.
RISKS RELATING TO THE FOUNDATION TRANSACTION
History of Foundation Losses; Impact on FPA's Financial Statements. The
Combined Foundation Companies have experienced net losses of $11,195,000,
$45,341,000, and $32,256,000 for the years ended June 30, 1994, 1995 and 1996,
respectively. The losses of the Combined Foundation Companies are primarily
attributable to the addition of salaried providers within their respective
networks and less than anticipated patient volume. The Company believes that
such insufficient patient volume is due in part to the Combined Foundation
Companies' inability to receive significant contracts from multiple payors,
including competitors of Foundation and their subsidiaries, because of their
relationship with Foundation. While FPA intends to institute certain measures to
reduce these losses and operate the Combined Foundation Companies profitably,
there can be no assurance that such operations will be profitable in the future.
Assumption of Debt; Need for Additional Capital. Previous to the effective
date of the Foundation Transaction, the Combined Foundation Companies operated
at a loss, which loss was funded by Foundation. As part of the Foundation
Transaction, a subsidiary of FPA and an entity affiliated with FPA incurred
indebtedness in the approximate amount of $120 million, of which approximately
$30 million has been paid down as of the date of this Prospectus. FPA believes
that with the provider arrangements it has negotiated between Foundation and the
FHMG/TDMC Medical Group, its ability to manage physician groups and the cost
reduction plan currently being implemented for the FHMG/TDMC Medical Group, it
will be able to operate the FHMG/TDMC Medical Group profitably. However, there
can be no assurance that FPA will operate these entities profitably and pay off
its indebtedness to Foundation. In addition, FPA's growth has resulted in a
significant increase in FPA's indebtedness. While FPA believes it will be able
to service its debt, including the Foundation obligations, there can be no
assurance to that effect. If there are continuing operating losses at the
Combined Foundation Companies, FPA may need additional capital to fund its
business, and there can be no assurance that such additional capital can be
obtained or, if obtained, it will be on terms acceptable to FPA.
Reliance on Foundation Payor Relationships. Giving effect to the
consummation of the Foundation Transaction, Payor agreements with Foundation
account for approximately 41% of FPA's membership. The term of the professional
group provider agreements with Foundation is thirty years with automatic
five-year renewal periods. The agreements may be terminated in a number of
circumstances, including the event of a material breach or a violation of
applicable laws, rules or regulations. The termination of such agreements would
have a material adverse affect on FPA's results of operations.
RISKS RELATING TO THE AHI MERGER
Uncertainties Regarding Consummation of the AHI Merger. FPA anticipates
that the AHI Merger will be completed before April 30, 1997. The Agreement and
Plan of Merger dated November 8, 1996 (the "AHI Merger Agreement") contains
customary conditions to closing. However, the AHI Merger Agreement may be
terminated by either party if the AHI Merger is not consummated by April 30,
1997, certain other conditions are not met or certain events occur. There can be
no assurance that the AHI Merger will be completed.
Impact on FPA's Financial Statements. The AHI Merger will result in a pro
forma operating loss of $66,328,827 and a pro forma net loss of $50,447,112 for
FPA for the nine months ended September 30, 1996. The Foundation Transaction and
the AHI Merger account for approximately $65,075,000 and $16,904,000 of such pro
forma operating loss, respectively.
Risk of Capitated Fee Revenue Reductions and Management of Medical
Costs. For each of the nine months ended September 30, 1996 and fiscal year
1995, approximately 97% of AHI's total operating revenue related to contracts
under which AHI's physician networks received a prepaid monthly fee for each
covered life and certain utilization-based incentive payments in exchange for
assuming the responsibility for the provision of specified medical services to
assigned enrollees. Payors are increasingly overseeing the provision of and the
prices charged for medical services with the goal of reducing costs and lowering
reimbursement.
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FPA's success with AHI therefore will depend in large part on the effective
management of health care costs, including controlling utilization of specialty
care physicians and other ancillary providers and purchasing services from
third-party providers at competitive prices. Any adjustment downward in
capitation payments caused by the increasing efforts by payors to reduce costs
could have a material adverse effect on AHI and on FPA following the AHI Merger.
Fluctuations in Quarterly Operating Results; Recent Operating
Losses. AHI's operating results have been subject to quarter-to-quarter
fluctuations. AHI's quarterly results have been affected by development and
acquisition costs, adverse trends in risk share settlements and the cost of
medical services, and other operational or external factors. AHI and the managed
care industry in general have recently experienced an increase in medical costs.
For the above reasons, AHI reported a net loss for the third quarter of 1996 of
$7.6 million and as of September 30, 1996, AHI reported a working capital
deficit of approximately $2.0 million. Quarterly results may also be affected by
significant differences between actual and estimated amounts receivable or
payable relating to payor shared risk arrangements and provider "incurred but
not reported" claims ("IBNR"), which are adjusted periodically as settlements
are made in the case of shared risk arrangements or as actual claims adjustments
occur in the case of IBNR. In addition, movements of enrollees from one payor to
another, particularly during periods of open enrollment for HMOs, could impact
quarterly results. In order for the AHI Merger to be beneficial to FPA
securityholders, the Company will need to reverse these trends. There can be no
assurance that the Company will be able to achieve this objective.
Dependence on Certain Payors. AHI derives revenue from contracts between
its physician networks and payors, which contracts generally are for one to
three year terms, may be terminated earlier upon notice and, upon renewal, are
subject to annual negotiation of capitation rates, covered benefits and other
terms and conditions. Certain payors represent a substantial percentage of these
contracts, although such payors generally enter into separate contracts (with
various termination dates) with each physician network. For the years ended
December 31, 1996, 1995 and 1994, FHP, Inc. accounted for approximately 17%, 22%
and 35%, respectively, of AHI's total operating revenue, and CareAmerica
Southern California, Inc. accounted for approximately 6%, 11% and 22%,
respectively, of AHI's total operating revenue. Upon completion of the
acquisition of The Healthcare Partnership in February 1995, AHI's revenue from
PacifiCare Health Systems, Inc. represented approximately 33% and 28%,
respectively, of AHI's total operating revenue for the years ended December 31,
1996 and 1995. On a pro forma basis for fiscal years 1996 and 1995, after giving
effect to the potential merger between FHP, Inc. and PacifiCare Health Systems,
Inc., approximately 50% of AHI's total operating revenue would have been
attributable to payor agreements with the merged FHP/PacifiCare entity.
Legal Proceedings. AHI is a defendant in a class action securities lawsuit
entitled In re AHI Healthcare Systems, Inc. Securities Litigation filed in the
United States District Court for the Central District of California, Western
Division. The suit was initially filed on December 20, 1995 against AHI, certain
of its officers and directors and all of the underwriters of AHI's common stock
in AHI's initial public offering. The suit asserts that AHI artificially
inflated the price of its stock by, among other things, misleading securities
analysts and by failing to disclose in the related prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997, the district court (a)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (b) denied summary judgment on the claims relating to the proposed
acquisition of Lakewood Health Plan, Inc. As a result, only those claims
relating to Lakewood Health Plan and AHI's alleged liability for the public
statements of securities analysts following AHI remain in the suit. Since the
court's ruling on AHI's motion for partial summary judgment, the plaintiffs have
asked the court for leave to amend their complaint to add an additional claim
alleging problems with AHI's medical group operations in Downey, California. AHI
and its directors are also named as defendants in a purported class action
lawsuit filed by Joshua Chopp, a stockholder of AHI, in the Delaware Court of
Chancery on November 12, 1996 (the "Chopp Lawsuit"). The Chopp Lawsuit asserts,
among other things, that the "intrinsic value" of AHI's stock is higher than
that which AHI's
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stockholders will receive in the AHI Merger and that the directors of AHI
breached their fiduciary duties by approving the AHI Merger Agreement without
undertaking steps to accurately ascertain AHI's market value. The plaintiff
seeks, on behalf of all AHI common stockholders, to enjoin the AHI Merger as
well as rescissory and compensatory damages. FPA is also named as a defendant in
the Chopp Lawsuit. AHI has informed the Company that it presently is and intends
to continue to vigorously defend both of these lawsuits. Assuming completion of
the AHI Merger, the Company intends to continue such defense. The Company, after
considering applicable insurance coverage, does not expect the outcome of these
lawsuits to have a material adverse effect on FPA. If the plaintiff is
successful in the Chopp Lawsuit, the AHI Merger may not be consummated. In
addition, if the AHI Merger is consummated, FPA will be obligated to defend and
pay any judgment or settlement related to these suits.
GROWTH STRATEGY; DIFFICULTY IN MAINTAINING GROWTH
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA Network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA Network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations have
contracts and whose members are patients of physicians in the FPA Network or
(iii) agreements with Payors, physicians and hospitals in other geographic
markets. The process of identifying and consummating suitable acquisitions of,
or affiliations with, physician groups can be lengthy and complex. The
marketplace for such acquisitions and affiliations is subject to increasing
competitive pressures. There can be no assurance that FPA will be successful in
identifying, acquiring or affiliating with additional physician groups or
hospitals or that the Professional Corporations will be able to contract with
new Payors. FPA's ability to expand is also dependent upon its ability to comply
with legal and regulatory requirements in the jurisdictions in which it operates
or will operate and to obtain necessary regulatory approvals, certificates and
licenses.
RISKS RELATED TO INTANGIBLE ASSETS
As a result of FPA's various acquisition transactions, intangible assets of
approximately $377 million have been recorded as of September 30, 1996 (on a pro
forma basis, giving effect to probable or completed acquisitions since such
date) on FPA's balance sheet. Such intangible assets totaled approximately 160%
of FPA's stockholders' equity as of September 30, 1996 (on a pro forma basis,
giving effect to probable or completed acquisitions since such date). Using
amortization periods ranging from four to 30 years (with an average amortization
period of approximately 29 years), amortization expense relating to such
intangible assets will be approximately $13 million per year. Further
acquisitions that result in the recognition of additional intangible assets
would cause amortization expense to further increase. A portion of the
amortization generated by these intangible assets is not deductible for tax
purposes.
At the time of, or following each acquisition, FPA evaluates each
acquisition and establishes an appropriate amortization period based on the
underlying facts and circumstances. Subsequent to such initial evaluation, FPA
periodically reevaluates such facts and circumstances to determine if the
related intangible asset continues to be realizable and if the amortization
period continues to be appropriate. As the underlying facts and circumstances
subsequent to the date of acquisition can change, there can be no assurance that
the recorded value of such intangible assets will be realized by FPA. Although
at September 30, 1996, the net unamortized balance of intangible assets acquired
was not considered to be impaired, any future determination that a significant
impairment has occurred would require the write-off of the impaired portion of
unamortized intangible assets, which could have a material adverse effect on the
Company's results of operations. See Note 1 of Notes to Supplemental
Consolidated Financial Statements of the Company included herein.
DIFFICULTY IN CONTROLLING HEALTH CARE COSTS; CAPITATED NATURE OF REVENUE
Agreements with Payors typically provide for the Professional Corporations
to receive prepaid monthly fees per enrollee known as "capitation" payments.
FPA's profitability primarily depends upon its ability to control costs and the
ability of the Professional Corporations to incur less in medical, hospital and
administrative costs than the capitation revenue received from Payors. Such
profitability is achieved through
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effective management of the provision of medical services by physicians in the
FPA Network, including controlling utilization of specialty care physicians and
other ancillary providers, purchasing services from physicians outside the FPA
Network at competitive prices and negotiating favorable rates with hospitals.
Agreements with Payors may also contain shared risk arrangements under which
additional compensation can be earned based on the provision of high-quality,
cost-effective health care to enrollees but which may require that a portion of
any loss in connection with such shared risk arrangements be assumed by FPA,
which would reduce FPA's net income. The amount of non-capitated medical and
hospital costs in any period could be affected by factors beyond the control of
the FPA Network, such as changes in treatment protocols, epidemics, disasters,
new technologies and inflation. To the extent that specialty care physicians'
fees or hospital costs have not been capitated and enrollees (i) require more
specialty care than anticipated or (ii) have higher than anticipated hospital
utilization rates, revenue paid to the FPA Network by Payors may not be
sufficient to cover the costs the FPA Network is obligated to pay. FPA purchases
stoploss insurance protection which provides thresholds or "attachment points,"
generally $100,000 for inpatient services and $25,000 for outpatient services
per year, at which substantially all financial exposure for an enrollee beyond
such thresholds is contractually shifted to the insurer up to a specified level
(generally $5 million for outpatient and $1 million for inpatient), at which
point the risk for loss returns to the Company. The failure of FPA to negotiate
favorable attachment points in the future could have a material adverse effect
on FPA's financial condition, results of operations and/or liquidity. There can
be no assurance that FPA will be able to negotiate favorable attachment points
in the future.
On December 5, 1996, the TDMC physicians located in Tucson, Arizona voted
to be represented by the Federation of Physicians and Dentists. On February 13,
1997, the TDMC employees located in Tucson are scheduled to vote on whether to
be represented by the Union of Health and Hospital Care Employees. Although FPA
does not expect union affiliations of its Arizona employees to have a material
adverse effect on its results of operations or financial condition, there can be
no assurance that future affiliations and/or collective bargaining arrangements
will not have a material adverse effect on FPA's results of operations and
financial condition.
FULL RISK CAPITATION
Under capitation contracts generally, professional corporations accept
capitation payments and, as a result, accept the financial risk for the
provision of health care services, including those not normally performed and
provided by professional corporations comprised of primary care physicians under
payor contracts (e.g., specialty care physician services). Under substantially
all Payor contracts, the Professional Corporations accept the financial risk for
the provision of outpatient medical services ("fully delegated" contracts).
Under certain Payor contracts, a Professional Corporation also accepts the
financial risk for hospital services. Approximately 19% of FPA's total operating
revenue for the nine months ended September 30, 1996 was generated from
contracts in which the Professional Corporations accepted the financial risk for
outpatient medical and hospital services. In the event that (i) FPA is unable to
negotiate favorable prices or rates in contracts with providers of these
services on behalf of the Professional Corporations, (ii) a significant number
of enrollees require services up to the stoploss insurance "attachment points"
or (iii) the Professional Corporations are unable to control effectively the
utilization of these services, FPA could experience material adverse effects on
its results of operations.
FEE-FOR-SERVICE CONTRACTS
FPA's subsidiary, Sterling, provides physician practice management services
to hospitals under two types of contractual arrangements: fee-for-service
contracts and flat-rate contracts. In general, under fee-for-service contracts,
Sterling's revenue is derived from amounts billed to patients and collected for
the account of Sterling. In contrast, under flat-rate contracts Sterling's
revenue is derived from payments of negotiated amounts paid by the hospital.
Under fee-for-service contracts, Sterling accepts responsibility for billing and
collection, and consequently assumes the financial risks related to changes in
patient volume, payor mix and third party reimbursement rates. Any change in
reimbursement policies and practices, payor mix, patient volume or covered
services could materially adversely affect the operations of FPA, particularly
under fee-for-service contracts. Sterling's fee-for-service contractual
arrangements also involve a credit risk related to uncollectibility of accounts.
In addition, fee-for-service contracts have less favorable cash flow
characteristics
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than flat-rate contracts due to longer collection periods. Failure to manage
adequately the collection risks and working capital demands associated with
fee-for-service contracts could have a material adverse effect on FPA.
DEPENDENCE ON GOVERNMENTAL AND OTHER THIRD PARTY PAYORS
With the acquisition of Sterling, a significant portion of FPA's operating
revenue will be derived from payments made by government-sponsored health care
programs as well as from other third party payors. For the nine months ended
September 30, 1996, approximately 35% of the revenues of the combined FPA/
Sterling/AHI entity would have been derived from government payors.
Approximately 30% of Sterling's 1995 hospital-based operating revenue was
derived from payments made by government health care programs, primarily the
Medicare and Medicaid programs. The Medicare and Medicaid programs are subject
to substantial regulation by the federal and state governments, which are
continually revising and reviewing the programs and their regulations. In
addition, funds received under these programs are subject to audit with respect
to the proper billing for physician services and, accordingly, retroactive
adjustments of revenue from these programs may occur. While FPA seeks to comply
with applicable Medicare and Medicaid reimbursement regulations, there can be no
assurance that FPA would be found to be in compliance with such regulations
should it be subject to audit. Continuing budgetary constraints at both the
federal and state level and the rapidly escalating costs of health care and
reimbursement programs have led, and may continue to lead, to significant
reductions in government and other third party reimbursements for certain
medical charges and to the negotiation of reduced contract rates or capitated or
other financial risk-shifting payment systems by third party payors with service
providers. Both the federal government and various states are considering
imposing limitations on the amount of funding available for various health care
services. In recent years, the U.S. Congress has considered various budget
proposals intended to reduce the rate of increase in Medicare and Medicaid
expenditures through cost savings and other measures. Congress passed a fiscal
year 1996 budget reconciliation bill, which, although ultimately vetoed by the
President, called for reductions in the rate of spending increases in the
Medicare and Medicaid programs over the next seven years. FPA cannot predict the
effect current and future proposals regarding government funded programs would
have on its operations. Additionally, Resource Based Relative Value Scale
("RBRVS"), a system of reimbursement intended to reallocate medical
reimbursement among medical specialties, took effect on January 1, 1992 and was
phased in over a four year period. Under the regulations relating to the RBRVS
fee structure, the aggregate fee payments from Medicare for certain emergency
department procedures may be reduced in some circumstances. There can be no
assurance that the payments under governmental and private third party payor
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. Furthermore, changes in reimbursement regulations,
policies, practices, interpretations or statutes that place material limitations
on reimbursement amounts or practices could adversely affect the operations of
FPA.
RELIANCE ON CERTAIN PAYORS
In 1993, contracts with four Payors accounted for approximately 71% of
FPA's operating revenue. In 1994, contracts with three Payors accounted for
approximately 57% of FPA's operating revenue. In 1994, PacifiCare Health
Systems, Inc. and Prudential Healthcare Plan of California, Inc. represented 33%
and 10%, respectively, of FPA's operating revenue. In 1995, PacifiCare of
California, Inc. (including the senior programs) and Medigroup, Inc. each
represented in excess of 10% of FPA's operating revenue and collectively
accounted for approximately 41% of FPA's operating revenue. On a pro forma basis
for fiscal 1995, giving effect to the Foundation Transaction, approximately 39%
of FPA's operating revenue will be attributable to Payor agreements with
Foundation. The foregoing percentages exclude the effects of the Sterling
Merger. The loss of any of the foregoing significant Payors could have a
material adverse effect on FPA's results of operations.
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SHORT-TERM NATURE AND EARLY TERMINABILITY OF PAYOR CONTRACTS
Contracts with Payors generally provide for terms of one to three years,
may be terminated earlier without cause, upon notice and upon renewal and are
subject to negotiation of capitation rates, covered benefits and other terms and
conditions. At times, Payor contracts may be continued on a month-to-month basis
while the parties renegotiate the terms of the contracts. Agreements with
hospitals to provide contract management services generally have terms of one or
two years and are renewable automatically unless either party gives written
notice of its intent not to renew at least 90 days prior to the end of the term.
Many of these agreements provide for termination by the hospital without cause
on relatively short notice. There can be no assurance that any of such contracts
will not be terminated early, will be renewed or that they will contain
favorable terms. Since January 1994, 28 of Sterling's hospital services
agreements have been terminated as a result of non-renewal, termination by the
hospital, termination by Sterling or hospital closure. Future consolidation in
the health care industry may result in future hospital services agreements being
terminated. The loss of any Payor or hospital contract and the failure to regain
or retain such Payor's members or the related revenues without entering into new
Payor relationships or hospital contracts could have a material adverse effect
on FPA.
After giving effect to the acquisition of the Combined Foundation
Companies, effective November 29, 1996, approximately 41% of FPA's membership is
pursuant to Payor agreements with Foundation. The term of the professional group
provider agreements with Foundation is thirty years with automatic five-year
renewal periods. These agreements commit FHMS and the Holding Company to, among
other things, contract with Foundation for all benefit programs and to maintain
sufficient medical personnel to provide reasonable and adequate access to
professional services for all benefit programs offered by Foundation, to keep
care centers open given specified levels of patients and to agree to certain
pricing and contracting parameters with Foundation. In consideration of such
services, Foundation has agreed to pay in the aggregate $55.0 million to FHMS
and Holding Company. The agreements may be terminated in a number of
circumstances, including in the event of a material breach or a violation of
applicable laws, rules or regulations. The termination of such agreements would
have a material adverse effect on FPA's results of operations.
DEPENDENCE ON PRIMARY CARE PHYSICIANS AND EMERGENCY MEDICINE PHYSICIANS
Primary care physicians are an integral part of the FPA Network, as they
provide and manage medical services offered to enrollees. FPA's growth depends,
in part, on its ability to retain existing and attract additional primary care
physicians to the FPA Network. There can be no assurance that physicians
presently in the FPA Network will not leave the FPA Network, that FPA will be
able to attract additional primary care physicians into the FPA Network or that
the amount of capitation or fee-for-service payments to physicians will not have
to be increased. To the extent that primary care physicians leave the FPA
Network or capitation or fee-for-service payments to physicians are increased,
FPA's results of operations may be materially adversely affected. In order to
provide management services to hospital emergency departments, FPA must recruit
and retain sufficient numbers of qualified physicians. There is a substantial
shortage of board certified emergency medicine physicians, and FPA competes with
many types of health care providers, as well as teaching, research and
governmental institutions, for the services of such physicians. An inability to
recruit and retain emergency medicine physicians could adversely affect FPA's
adding new and retaining existing hospital clients.
RISKS RELATED TO CLASSIFICATION OF PHYSICIANS AS INDEPENDENT CONTRACTORS
FPA's subsidiary, Sterling, generally contracts with emergency room
physicians as independent contractors to provide services to its hospital
clients. These independent contractor physicians are paid on an hourly basis.
Pursuant to such compensation arrangements, independent contractor physicians do
not share in the profit derived by FPA from FPA's operations. Because FPA
regards its contracted physicians as independent contractors and not as
employees, FPA does not withhold federal or state income taxes, make federal or
state unemployment tax payments or provide workers' compensation insurance for
such physicians. There can be no assurance that federal or state taxing
authorities or other parties will not challenge the classification of such
independent contractor physicians and determine that such physicians should be
classified as employees. In
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the event that the physicians under contract with FPA are determined to be
employees, FPA will be materially and adversely affected and may be subject to
retroactive taxes and penalties.
STATE LAWS REGARDING PROHIBITION OF CORPORATE PRACTICE OF MEDICINE
In certain states in which FPA conducts or may conduct business, general
business corporations are not permitted to practice medicine, exercise control
over physicians who practice medicine or engage in certain practices such as
fee-splitting with physicians. The corporate practice of medicine refers to the
rendering directly, or through employment, of medical services by a general
business corporation. As stated in the Notes to its Consolidated Financial
Statements incorporated by reference herein, FPA believes that it has perpetual
and unilateral control over the assets and operations of the various affiliated
Professional Corporations. There can be no assurance that regulatory authorities
will not take the position that such control conflicts with state laws regarding
the corporate practice of medicine or other federal or state restrictions.
Although FPA believes its operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that the
existing organization of FPA and its contractual arrangements with affiliated
physicians will not be successfully challenged in states in which it operates as
constituting the unlicensed practice of medicine or that the enforceability of
the provisions of such arrangements, including non-competition agreements, will
not be limited. In the event of action by any regulatory authority limiting or
prohibiting FPA from carrying on its business or from expanding the operations
of FPA to certain jurisdictions, structural and organization modifications may
be required, which could have an adverse effect on FPA.
Because certain state laws prohibit general business corporations from
controlling professional corporations contractually or otherwise, FPA has
structured its contracts with the Professional Corporations so that such
corporations retain the right to enter into contracts for the provision of
medical services or make other financial commitments. Such contracts allow the
Professional Corporations to make commitments which could be on terms which may
not be advantageous to FPA. For example, a Professional Corporation could
decline to enter into Payor contracts which are negotiated for it by FPA or,
alternatively, could decide to enter into Payor contracts which FPA does not
believe are financially advantageous. Physicians who contract with these
corporations may also have the legal right to decline to use other physicians in
the FPA Network or specialists having a pre-existing, subcapitated or fixed fee
relationship with the FPA Network. These decisions, if made by a Professional
Corporation or a physician, could have a material adverse effect on FPA's
business and financial condition.
POSSIBLE NEGATIVE EFFECTS OF PROSPECTIVE HEALTH CARE REFORM
Various plans have been proposed and are being considered on federal, state
and local levels to reduce costs in health care spending. Although FPA believes
its management model responds to the concerns addressed by such plans, it is not
possible to assess the likelihood any of these proposals will be enacted or to
assess the impact any of these proposals may have on reimbursement to health
care providers. Any plan to control health care costs, however, could result in
lower rates of reimbursement. Lower rates of reimbursement may reduce the amount
ultimately received by FPA and, accordingly, may have a material adverse effect
on FPA's business and results of operations.
In recent years, legislation has been proposed in Congress to implement an
"any willing provider" law on a national level. These laws, which are in effect
in some states, require managed care organizations, such as HMOs, to contract
with any physician who is appropriately licensed and who meets any applicable
membership criteria. Such laws could limit the flexibility of manage care
organizations to achieve efficiency by controlling the size of their primary
care provider networks and the number of specialty care providers to whom
enrollees are referred. At present, no state in which FPA Network physicians
practice has such a law although "any willing provider" laws have been proposed
in states in which FPA operates. FPA cannot predict what effect such laws would
have on its operations.
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<PAGE> 17
POSSIBLE NEGATIVE EFFECTS OF GOVERNMENTAL REGULATIONS
The health care industry is subject to extensive federal and state
regulation. Changes in the regulations or reinterpretations of existing
regulations may significantly affect the FPA Network. FPA and the Professional
Corporations are subject to federal legislation that prohibits activities and
arrangements that provide kickbacks or other economic inducements for the
referral of business under the Medicare and Medicaid programs. Noncompliance
with the federal anti-kickback legislation can result in exclusion from the
Medicare and Medicaid programs and civil and criminal penalties. The federal
government has promulgated "safe harbor" regulations that identify certain
business and payment practices which are deemed not to violate the federal
anti-kickback statute. In addition, federal legislation currently restricts the
ability of physicians to refer Medicare or Medicaid patients to certain entities
in which they have an ownership interest or compensation arrangement for health
care services, including clinical laboratory services. With respect to the
self-referral prohibitions, the entity and the referring physician are
prohibited from receiving Medicare or Medicaid reimbursement for services
rendered and civil penalties may be assessed. Many states, including states in
which FPA does business, have similar anti-kickback and anti-referral laws.
Penalties similar to those imposed by federal law are provided for violation of
state anti-kickback and anti-referral laws. FPA believes that its operations
comply with all applicable anti-kickback and anti-referral laws. In addition,
health care reforms may expand existing anti-kickback and anti-referral laws to
apply to all health care payors, not just Medicare and Medicaid. It is unclear
how any reform legislation would affect health care provider networks or other
types of managed care arrangements. There can be no assurance that FPA will be
able to comply with any new laws.
Further, a number of states prohibit sharing professional fees (or fee
splitting) with anyone other than a member of the same profession. There can be
no assurance that such laws will ultimately be interpreted in a manner
consistent with the practices of FPA.
Federal and state laws regulate insurance companies, HMOs and other managed
care organizations. Many states also regulate the establishment and operation of
networks of health care providers. Generally, these laws do not apply to the
hiring and contracting of physicians by other health care providers. There can
be no assurance that regulators of the states in which FPA operates would not
apply these laws to require licensure of FPA's operations as an HMO, an insurer
or a provider network. FPA believes that it is in compliance with these laws in
the states in which it does business, but there can be no assurance that
interpretations of these laws by the regulatory authorities in these states or
in the states in which FPA may expand will not require licensure or a
restructuring of some or all of FPA's operations. In the event that FPA is
required to become licensed under these laws, the licensure process can be
lengthy and time consuming and, unless the regulatory authority permits FPA to
continue to operate while the licensure process is progressing, FPA could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which FPA may not be able to meet. Further,
once licensed, FPA would be subject to continuing oversight by and reporting to
the respective regulatory agency.
Although under the laws of most states the business of insurance generally
is defined to include acceptance of financial risk and has not extended to
physician networks, the Knox-Keene Health Care Plan Act (the "Knox-Keene Act"),
a California statute that applies to managed care health service plans, requires
all health care service plans to be licensed by the California Department of
Corporations (the "Department"). The Department has taken the position that
entities such as FPA, which contract to provide health care services to
enrollees for prepaid or periodic charges, fall under the definition of a health
care service plan. In February 1996, following a dialogue with the Department
regarding whether FPA's operations classify it as a health care service plan
(i.e., an HMO) within the meaning of California law, FPA, on behalf of one of
its subsidiaries, filed a restricted license application with the Department.
The application was approved by the Department in December 1996. FPA's
operations continued without restriction during the period of review by the
Department. The loss or revocation of such license would have a material adverse
effect on FPA.
In addition, there can be no assurance that regulatory authorities in the
other states in which FPA or its affiliates operate will not impose similar
requirements or that future interpretations of insurance laws and
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<PAGE> 18
health care network laws by the regulatory authorities in these states or other
states will not require licensure or a restructuring of some or all of the
operations of FPA.
The National Association of Insurance Commissioners ("NAIC") recently
adopted the Managed Care Plan Network Adequacy Model Act (the "Model Act") which
is intended to establish standards for the creation and maintenance of networks
by health carriers and establish requirements for written agreements between
health carriers offering managed care plans, participating providers and
intermediaries, like the Company, which negotiate provider contracts, regarding
the standards, terms and provisions under which a participating provider will
provide services to covered persons. The Model Act does not carry the force of
law unless it is adopted by state legislatures. The Company does not know which
states, if any, will adopt the Model Act. There can be no assurance that the
Company will be able to comply with the Model Act or any other act adopted by
NAIC if it is adopted in any state in which the Company does business.
ANTITRUST REGULATION
Because the affiliated provider entities within the Company remain separate
legal entities, they may be deemed competitors subject to a range of antitrust
laws that prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal and division of market. If Company provider entities are deemed
by regulatory authorities or courts to be part of a single entity or system,
they may be subject to antitrust laws that prohibit anti-competitive
combinations or activities in excess of an immaterial size. The Company believes
that it is in compliance with the antitrust laws, but there can be no assurance
that the Company's interpretation is consistent with that of federal or state
authorities or courts or that such circumstances will remain as the Company
grows and matures and as further regulation and interpretations are promulgated.
COMPETITIVE MARKET FORCES
The managed care industry is highly competitive and is subject to
continuing changes in how services are provided and how providers are selected
and paid. Increased enrollment in prepaid health care plans because of health
care reform or for other reasons, increased participation by physicians in group
practices and other factors may attract entrants into the physician practice
management services segment of the managed care industry and result in increased
competition for FPA. In addition, local physician groups and hospitals are also
trying to combine their services into integrated delivery networks. Certain of
FPA's competitors are significantly larger and better capitalized, provide a
wider variety of services, may have greater experience in providing physician
practice management services and may have longer established relationships with
Payors. Accordingly, FPA may not be able to continue to increase the number of
providers in the FPA Network, negotiate contracts with new Payors on behalf of
the Professional Corporations or renegotiate favorable contracts with current
Payors. The inability of FPA to increase the number of providers in the FPA
Network and negotiate favorable contracts with Payors could have a material
adverse effect on FPA.
In addition, as a result of consolidations among Payors, certain Payors are
able to negotiate or are in the process of negotiating significant reductions in
the capitation payments to providers. Further, certain Payors have deleted
shared risk arrangements from their contracts with providers thereby decreasing
the amount of compensation such Payors are paying providers. To date, none of
the Payors has deleted shared risk arrangements from its contract with any
Professional Corporation. If Payors negotiate cost reductions with the
Professional Corporations or eliminate shared risk arrangements in which the
Professional Corporations are currently participating, such actions could have a
material adverse effect on the results of operations of FPA.
POTENTIAL LIABILITIES
In recent years, physicians, hospitals and other participants in the
managed health care industry have become subject to an increasing number of
lawsuits alleging medical malpractice as well as claims based on the withholding
of approval for or reimbursement of necessary medical services. Many of these
lawsuits involve large claims and substantial defense costs. The Company is
named in such suits and claims and will likely be named as a party in similar
suits and claims in the future. FPA maintains an errors and omissions policy
relating to its utilization review activities and is included as a named or
additional insured on the
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<PAGE> 19
policies of the Professional Corporations. Insurance coverage for lawsuits
brought or which may be brought against FPA may not be sufficient to cover FPA's
expenses or losses. There can be no assurance that insurance coverage will be
sufficient, and, if insufficient, that such suits or claims will not have a
material adverse effect on the Company. Further, FPA could be held liable for
the negligence of a contracted health care professional if such health care
professional were regarded as an employee or agent of FPA in the practice of
medicine. In addition to any potential tort liability of FPA, FPA's emergency
department contracts with hospitals generally contain provisions under which FPA
agrees to indemnify the hospital for losses resulting from the malpractice of
contracted physicians.
An increasing number of health care providers and other entities are being
faced with lawsuits alleging fraudulent billing practices under the federal
Civil False Claims Act. The Civil False Claims Act permits a person (generally
employees or former employees of the health care provider or other entity) to
assert the rights of the government by initiating a qui tam action against a
health care provider or other entity if such person has or purports to have
information that the health care provider or other entity falsely and
fraudulently submitted a claim to the government for payment. Upon filing, the
government has the opportunity to intervene and assume control of the case.
Penalties of up to $10,000 for each false or fraudulent claim presented to the
government for payment may be awarded as well as treble damages. Defendants also
may be excluded permanently or for a period of time from participation in the
Medicare and Medicaid programs. Because of penalties and treble damages, many of
these lawsuits involve large monetary claims and substantial defense costs. If a
qui tam action is successfully prosecuted, no assurance can be given that such
action would not have a material adverse effect on FPA and its operations.
FLUCTUATIONS IN QUARTERLY RESULTS
FPA's financial statements (including interim financial statements) contain
accruals which are calculated quarterly for estimates of amounts assigned by the
Professional Corporations to FPA and paid by Payors based upon hospital
utilization ("shared risk revenues"). Quarterly results have in the past and may
in the future be affected by adjustments to such estimates for actual costs
incurred. Historically, the Professional Corporations and Payors generally
reconcile differences between actual and estimated amounts receivable or payable
relating to Payor shared risk arrangements in the second or third quarter of
each year. In the event that the Professional Corporations and Payors are unable
to reconcile such differences, extensive negotiation, arbitration or litigation
relating to the final settlement of these amounts may occur. To the extent that
the FPA Network expands to include additional Payors, the timing of these
adjustments may vary; this variation in timing may cause FPA's quarterly results
not to be directly comparable to corresponding quarters in other years. FPA's
financial statements also include estimates of costs for covered medical
benefits incurred by enrollees, which costs have not yet been reported by the
providers. While these estimates are based on information available to FPA at
the time of calculation, actual costs may differ from FPA's estimates of such
amounts. If the actual costs differ significantly from the amounts estimated by
FPA, adjustments will be required and quarterly results may be affected.
Quarterly results may also be affected by movements of Payor members from one
Payor to another, particularly during periods of open enrollment for HMOs.
Fluctuations in the Company's quarterly operating results could result in
significant volatility in, and otherwise adversely affect, the market price for
the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
Recently, there has been significant volatility in the market prices of
securities of companies in the health care industry, including the price of FPA
common stock. Many factors, including announcements of new legislative proposals
or laws relating to health care reform, the performance of, and investor
expectations for, FPA, analysts' comments, the trading volume in FPA common
stock and general economic and market conditions, may influence the trading
price of FPA common stock. Accordingly, there can be no assurance as to the
price at which FPA common stock will trade in the future.
DEPENDENCE UPON KEY PERSONNEL; EMPLOYMENT CONTRACTS
FPA is dependent upon the active participation of its executive officers
and directors, particularly Dr. Sol Lizerbram, Chairman of the Board, Dr. Seth
Flam, President and Chief Executive Officer and Dr. Stephen
17
<PAGE> 20
Dresnick, President of Sterling. The loss to FPA of the services of Drs.
Lizerbram, Flam or Dresnick could have a material adverse effect upon FPA's
future operations. FPA has an employment contract with each of Drs. Lizerbram,
Flam and Dresnick. FPA has not purchased key-man life insurance on any of its
key personnel.
SUBORDINATION OF DEBENTURES
The Debentures are subordinate in right of payment to all current and
future Senior Indebtedness of the Company. "Senior Indebtedness" includes all
secured indebtedness of the Company, whether existing on or created or incurred
after the date of the issuance of the Debentures, that is not made subordinate
to or pari passu with the Debentures by the instrument creating the
indebtedness. As of October 31, 1996, the Company has approximately $143 million
in indebtedness outstanding which constitutes Senior Indebtedness or to which
the Debentures are effectively subordinated. Giving effect to the completion of
the Foundation Transaction and assuming completion of the AHI Merger, the
Company's pro forma indebtedness as of September 30, 1996 will include an
additional $175 million of Foundation indebtedness outstanding and an additional
$37 million of AHI indebtedness outstanding, which will also constitute Senior
Indebtedness or to which the Debentures will also be effectively subordinated.
The Indenture does not limit the amount of additional indebtedness, including
Senior Indebtedness, which the Company can create, incur, assume or guarantee.
By reason of such subordination of the Debentures, in the event of insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up of the
business of the Company or upon default in payment with respect to any Senior
Indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Debentures only after all Senior
Indebtedness of the Company has been paid in full. In addition, holders of the
Debentures are effectively subordinated to the claims of creditors of the
Company's subsidiaries to the extent of the assets of such subsidiaries. In the
event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of any subsidiary of the Company, creditors of such
subsidiary generally will have the right to be paid in full before any
distribution is made to the Company or the holders of the Debentures. See
"Description of Debentures."
LIMITATIONS ON REPURCHASE UPON A REPURCHASE EVENT
In the event of a Repurchase Event, which includes a Change in Control and
a Termination of Trading (each as defined herein), each holder of the Debentures
will have the right, at such holder's option, to require the Company to
repurchase all or a portion of such holder's Debentures at a purchase price
equal to 100% of the principal amount thereof plus accrued interest to the
repurchase date. The Company's ability to repurchase the Debentures upon a
Repurchase Event may be limited by the terms of the Company's Senior
Indebtedness and the subordination provisions of the Indenture. Further, the
ability of the Company to repurchase Debentures upon a Repurchase Event will be
dependent on the availability of sufficient funds and compliance with applicable
securities laws. Accordingly, there can be no assurance that the Company will be
able to repurchase the Debentures upon a Repurchase Event. The term "Repurchase
Event" is limited to certain specified transactions and may not include other
events that might adversely affect the financial condition of the Company or
result in a downgrade of the credit rating (if any) of the Debentures, nor would
the requirement that the Company offer to repurchase the Debentures upon a
Repurchase Event necessarily afford holders of the Debentures protection in the
event of a highly leveraged reorganization, merger or similar transaction
involving the Company. See "Description of Debentures."
ABSENCE OF EXISTING MARKET FOR DEBENTURES
Prior to their resale pursuant to this Prospectus, the Debentures were
eligible for trading on the PORTAL Market. The Debentures sold pursuant to this
Prospectus will no longer be eligible for trading on the PORTAL Market. There
can be no assurance that an active trading market for the Debentures will
develop or, if such market develops, as to the liquidity or sustainability of
such market. Various factors and events such as increased competition,
quarter-to-quarter variations in financial results, changes in prevailing
interest rates, changes in perceptions of the Company's creditworthiness, or a
decline in the market price of the Common Stock could cause the market price of
the Debentures to fluctuate significantly.
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<PAGE> 21
DILUTION; ADDITIONAL CAPITAL NEEDS
Assuming the maximum number of shares of FPA common stock are issued in
connection with the AHI Merger, and after giving effect to the Foundation
Transaction and the issuance of Common Stock upon conversion of the Debentures,
the current FPA stockholders' ownership of FPA will be reduced to 73%.
FPA's expansion strategy includes acquisitions of, and affiliations with,
individual and group physician practices as well as organizations that provide
management services to such practices. Such acquisitions or affiliations may be
consummated using newly issued shares of FPA common stock, or securities
convertible or exercisable into FPA common stock, as consideration. The issuance
of additional shares of FPA common stock may have a dilutive effect on the net
tangible book value or earnings per share following such issuance.
FPA's expansion strategy also requires substantial capital investments.
Capital is needed not only for the acquisition of the assets of physician
practices, but also for their effective integration, operation and expansion and
for the addition of medical equipment and technology. In the event that FPA
common stock does not maintain sufficient valuation, or potential acquisition
candidates are unwilling to accept FPA common stock as part of the consideration
for the sale of the assets of their businesses, FPA may be required to utilize
more of its cash resources. There can be no assurance that FPA will have
sufficient cash resources or will be able to obtain additional financing or
that, if available, such financing will be on terms acceptable to FPA. Further,
an inability to obtain additional capital through subsequent debt or equity
financings may negatively affect FPA's existing operations and its future
growth.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
conversion of the Debentures offered hereby, or otherwise, or the perception
that such sales could occur, may adversely affect prevailing market prices of
FPA common stock. As of February 7, 1997, approximately 24,800,000 shares of FPA
common stock are issued and outstanding. In addition, the Company has granted
options or warrants to purchase, or securities (excluding the Debentures)
convertible into approximately 6,200,000 shares of FPA common stock. In addition
to registration rights to be granted to certain stockholders of AHI in
connection with the AHI Merger, approximately 100,000 shares of outstanding FPA
common stock are subject to registration rights agreements which permit such
shares to be included in future registration statements of common stock or
securities of FPA. In connection with acquisition transactions with Foundation,
FPA issued to Foundation $75 million in FPA common stock and granted to
Foundation warrants to purchase up to 250,000 shares of FPA common stock.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
FPA's Certificate of Incorporation, as amended, and By-laws contain certain
provisions that could have the effect of making it more difficult for a person
to acquire, or of discouraging a third party from attempting to acquire, control
of FPA. FPA's Certificate of Incorporation authorizes the Board of Directors
without the approval of the stockholders to issue Preferred Stock. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of discouraging a person from acquiring a majority of the
outstanding Common Stock. There are no shares of Preferred Stock presently
outstanding and FPA has no present plans to issue any shares of Preferred Stock.
Under the Company's credit facility, a merger, consolidation or Acquisition
(as defined therein) by the Company constitutes an event of default under the
credit facility. In the event of a "Change in Control" (as defined in the
Indenture), each holder of the Debentures will have the right, at the holder's
option, to require the Company to repurchase all or a portion of such holder's
Debentures at a purchase price equal to 100% of the principal amount thereof
plus accrued interest to the repurchase date. These provisions of the Company's
credit facility and the Debentures could serve to impede or prevent a change of
control or have a depressive effect on the price of the Common Stock. See
"Description of Debentures" and "Description of Capital Stock."
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<PAGE> 22
RECENT DEVELOPMENTS
AHI Merger. On November 8, 1996, FPA entered into the AHI Merger Agreement
which provides for the acquisition of AHI by FPA in a stock-for-stock merger to
be accounted for as a pooling of interests. The consummation of the proposed
merger is subject to approval by both companies' stockholders, receipt of all
necessary regulatory approvals and other customary conditions. The AHI Merger
Agreement may be terminated by either of the parties if the merger is not
consummated by April 30, 1997, and under certain other circumstances.
AHI develops integrated health care delivery networks and provides managed
care infrastructure services primarily in California, Florida and Texas. As of
December 31, 1996, AHI had approximately 9,000 affiliated physicians in 51
operational and 40 developing networks, which served a total of approximately
200,000 enrollees under approximately 250 payor contracts. FPA believes that the
AHI Merger will enable FPA to expand its operations in existing markets and
penetrate new markets.
Foundation Transaction. Effective November 29, 1996, FPA and certain of
its subsidiaries and affiliates acquired from Foundation all of the outstanding
stock of FHMS and Holding Company. FHMS provides facilities management,
non-physician health care professionals and other administrative and management
services to Holding Company and its subsidiaries. Holding Company holds all of
the outstanding stock of the Combined Foundation Companies. FPA believes that
the Foundation Transaction will enable FPA to expand significantly the FPA
Network in geographic areas in which FPA currently operates. The Combined
Foundation Companies have extensive operations in California, particularly in
the Sacramento region, and in Tucson and Phoenix, Arizona. In addition, the
Foundation Transaction is expected to increase substantially FPA's size in terms
of revenues, physicians and locations, thus enhancing FPA's national recognition
and making it easier for FPA to attract and retain new physicians and obtain
additional Payor contracts. Further, the Foundation Transaction is expected to
enable FPA to contract more effectively with specialists and hospitals and to
consolidate expenses.
Sterling Merger. On October 31, 1996, FPA acquired Sterling in a
stock-for-stock merger accounted for as a pooling of interests in which
8,097,781 shares of FPA common stock were issued in exchange for all of the
outstanding shares of Sterling (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. Sterling recruits physicians and contracts
for their services to provide staffing of emergency departments. In addition,
Sterling assists its hospital clients in such areas as physician scheduling,
operational support, quality assurance and departmental accreditation and
provides such administrative services as billing and record keeping with regard
to reimbursement. As of October 31, 1996, Sterling provided physician practice
management services on a contract basis to 104 hospital-based emergency
departments, one anesthesiology department and four correctional institutional
health facilities in 20 states. Sterling currently contracts with approximately
1,000 affiliated physicians who provide medical care to approximately 1.4
million patients annually. In addition, Sterling manages six primary care
physician practices and two physical therapy practices.
FPA believes that the Sterling Merger furthers FPA's long-term strategy and
enhances its existing operations. The Sterling Merger enables FPA to take
advantage of Sterling's existing relationships with hospitals and community
physicians in order to expand the FPA Network, and is expected to result in
significant financial and operational synergies. In addition, the Sterling
Merger will permit FPA to incorporate emergency department physicians into the
FPA Network, thus enabling it to cover the two major points of entry into the
managed health care system.
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<PAGE> 23
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ----- -------------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges(1)................ 59.3x 15.6x 4.0x 5.8x
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings before income taxes plus fixed charges. Fixed charges include
interest (expensed or capitalized), amortization of debt issuance cost and
the estimated interest component of rent expense.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sales of the
Securities or the Individual Shares offered hereby.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. Any
payment of future dividends will be at the discretion of the Board of Directors
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other relevant factors.
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<PAGE> 24
DESCRIPTION OF DEBENTURES
The Debentures were issued under an indenture dated as of December 18, 1996
(the "Indenture") between the Company and First Union National Bank, as trustee
(the "Trustee"). The terms of the Debentures include those stated in the
Indenture and those made a part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"), as in effect on the date of the
Indenture. The following summaries of certain provisions of the Debentures and
the Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to the provisions of the Indenture,
including the definition therein of certain terms, a copy of which is filed as
an exhibit to the Company's Current Report on Form 8-K dated December 18, 1996
and incorporated by reference herein.
GENERAL
In December 1996 and January 1997 the Company issued an aggregate principal
amount of $80,650,000 of its 6 1/2% Convertible Subordinated Debentures due 2001
pursuant to exemptions from the Securities Act.
The Debentures are general unsecured obligations of the Company which are
subordinate to all present and future secured indebtedness of the Company and
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of the Company. The Debentures mature on December 15, 2001. The
Debentures bear interest from December 18, 1996 at the rate per annum of 6 1/2%,
payable semi-annually on June 15 and December 15 of each year, commencing June
15, 1997, to the Person in whose name the Debenture (or any predecessor
Debenture) is registered at the close of business on the preceding June 1 or
December 1, as the case may be (whether or not a Business Day). Interest on the
Debentures will be paid on the basis of a 360-day year of twelve 30-day months.
Principal of and premium if any, and interest on, the Debentures will be
payable (i) in respect of Debentures held of record by The Depositary Trust
Company ("DTC") or its nominee, in same day funds on or prior to the respective
payment dates and (ii) in respect of Debentures held of record by holders other
than DTC or its nominee, in same day funds, at the office of the Trustee in New
York, New York, and the Debentures may be surrendered for transfer, exchange or
conversion at the office of the Trustee in New York, New York. In addition, with
respect to Debentures held of record by holders other than DTC or its nominee,
payment of interest may be made at the option of the Company by check mailed to
the address of the persons entitled thereto as it appears in the Register for
the Debentures on the Regular Record Date for such interest.
The Debentures will be issued only in registered form, without coupons and
in denominations of $1,000 or any integral multiple thereof. No service charge
will be made for any transfer or exchange of the Debentures, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge and any other expenses (including the fees and expenses of the Trustee)
payable in connection therewith. The Company is not required (i) to issue,
register the transfer of or exchange of any Debentures during a period beginning
at the opening of business 15 days before the day of the mailing of a notice of
redemption and ending at the close of business on the day of such mailing, (ii)
to register the transfer of or exchange of any Debenture selected for redemption
in whole or in part, except the unredeemed portion of Debentures being redeemed
in part or (iii) to register the transfer or exchange of any Debentures
surrendered for conversion or repurchase upon the occurrence of a Repurchase
Event.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Debenture which remains
unclaimed for two years after such principal, premium or interest become due and
payable may be repaid to the Company. Thereafter, the Holder of such Debenture
may, as an unsecured general creditor, look only to the Company for payment
thereof.
The Indenture does not contain any provisions that would provide protection
to Holders of the Debentures against a sudden and dramatic decline in credit
quality of the Company resulting from any takeover, recapitalization or similar
restructuring, except as described below under "Certain Rights to Require
Repurchase of Debentures."
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<PAGE> 25
CONVERSION RIGHTS
The Debentures are convertible into Common Stock at any time after February
16, 1997, the 60th day following the date of original issuance of the
Debentures, and prior to redemption or final maturity, initially at the
conversion price of $25.95 per share. The right to convert Debentures which have
been called for redemption will terminate at the close of business on the second
business day preceding the Redemption Date, unless the Company defaults on a
redemption payment. See "Optional Redemption" below.
The conversion price is subject to adjustment upon the occurrence of any of
the following events: (i) the subdivision, combination or reclassification of
outstanding shares of Common Stock; (ii) the payment in shares of Common Stock
exclusively of a dividend or distribution on Common Stock or the payment in
shares of Common Stock of a dividend or distribution on any class of capital
stock of the Company; (iii) the issuance of rights or warrants to all holders of
Common Stock entitling them to acquire shares of Common Stock at a price per
share less than the Current Market Price; (iv) the distribution to holders of
Common Stock of shares of capital stock other than Common Stock, evidences of
indebtedness, cash or assets (including securities, but excluding dividends or
distributions paid exclusively in cash and dividends, distributions, rights and
warrants referred to above); (v) a distribution consisting exclusively of cash
(excluding any cash distributions referred to in (iv) above) to all holders of
Common Stock in an aggregate amount that, together with (A) all other cash
distributions (excluding any cash distributions referred to in (iv) above) made
within the 12 months preceding the date fixed for determining the stockholders
entitled to such distribution and (B) any cash and the fair market value of
other consideration payable in respect of any tender offer by the Company or a
subsidiary of the Company for the Common Stock consummated within the 12 months
preceding such date of determination, exceeds the greater of (I) 12.5% of the
Company's market capitalization (being the product of the Current Market Price
times the number of shares of Common Stock then outstanding) on such date of
determination entitled to such distribution or (II) the Company's retained
earnings on such date of determination; and (vi) the consummation of a tender
offer made by the Company or any subsidiary of the Company for all or any
portion of the Common Stock which involves an aggregate consideration that,
together with (X) any cash and other consideration payable in respect of any
tender offer by the Company or a subsidiary of the Company for the Common Stock
consummated within the 12 months preceding the consummation of such tender offer
and (Y) the aggregate amount of all cash distributions (excluding any cash
distributions referred to in (iv) above) to all holders of the Common Stock
within the 12 months preceding the consummation of such tender offer, exceeds
the greater of (I) 12.5% of the product of the Current Market Price immediately
prior to the date of consummation of such tender offer times the number of
shares of Common Stock outstanding at the date of consummation of such tender
offer or (II) the Company's retained earnings at the date of consummation of
such tender offer. No adjustment of the conversion price will be required to be
made until cumulative adjustments amount to at least one percent of the
conversion price, as last adjusted. Any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
In addition to the foregoing adjustments, the Company is permitted to
reduce the conversion price as it considers to be advisable in order that any
event treated for federal income tax purposes as a dividend of stock or stock
rights will not be taxable to the holders of the Common Stock or if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event. In the case of any consolidation or merger of the Company with any
other corporation (other than one in which no change is made in the Common
Stock), or any sale or transfer of all or substantially all of the assets of the
Company, the Holder of any Debenture then outstanding will, with certain
exceptions, have the right thereafter to convert such Debenture only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Debenture might have been converted immediately
prior to such consolidation, merger, sale or transfer; and adjustments will be
provided for events subsequent thereto that are as nearly equivalent as
practical to the conversion price adjustments described above.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price at the close of business on the day of conversion (or, if such day
is not a Trading Day, on the Trading Day immediately preceding such day). If any
Debentures
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<PAGE> 26
are surrendered for conversion during the period from the opening of business on
any Regular Record Date through and including the next succeeding Interest
Payment Date (except any such Debentures called for redemption), such Debentures
when surrendered for conversion must be accompanied by payment of an amount
equal to the interest thereon which the registered Holder on such Regular Date
is to receive. Except as described in the preceding sentence, no interest will
be payable by the Company on converted Debentures with respect to any Interest
Payment Date subsequent to the date of conversion. No other payment or
adjustment for interest or dividends is to be made upon conversion.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Debentures is, to the extent set forth in the Indenture, subordinated in right
of payment to the prior payment in full of all Senior Indebtedness. If there is
a payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of all Senior Indebtedness are entitled
to receive payment in full of all amounts due or to become due thereon or
provision for such payment in money or money's worth before the Holders of the
Debentures will be entitled to receive any payment in respect of the principal
of or premium, if any, or interest on the Debentures. In the event of the
acceleration of the Maturity of the Debentures, the holders of all Senior
Indebtedness are first entitled to receive payment in full in cash of all
amounts due thereon or provision for such payment in money or money's worth
before the Holders of the Debentures will be entitled to receive any payment for
the principal of or premium, if any, or interest on the Debentures. No payments
on account of principal of or premium, if any, or interest on the Debentures or
on account of the purchase or acquisition of Debentures may be made if there has
occurred and is continuing a default in any payment with respect to Senior
Indebtedness, any acceleration of the maturity or any Senior Indebtedness or if
any judicial proceeding is pending with respect to any such default.
Senior Indebtedness is defined in the Indenture as (a) all secured
indebtedness of the Company for money borrowed under the Company's primary
credit facility and any predecessor or successor credit facilities thereto,
whether outstanding on the date of execution of the Indenture (such as the
Company's credit facility of $55 million, any increase in the maximum principal
amount thereof and any predecessor or successor facilities thereto) or
thereafter created, incurred or assumed, (b) all secured indebtedness of the
Company for money borrowed, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred or assumed, except any such other
indebtedness that by the terms of the instrument or instruments by which such
indebtedness was created or incurred expressly provides that it (i) is junior in
right of payment to the Debentures or (ii) ranks pari passu in right of payment
with the Debentures, and (c) any amendments, renewals, extensions,
modifications, refinancings and refundings of any of the foregoing. The term
"indebtedness for money borrowed" when used with respect to the Company is
defined to mean (i) any obligation of, or any obligation guaranteed by, the
Company for the repayment of borrowed money (including without limitation fees,
penalties and other obligations in respect thereof), whether or not evidenced by
bonds, debentures, notes or other written instruments, (ii) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument and (iii) any obligation of, or any such obligation guaranteed by,
the Company for the payment of rent or other amounts under a lease of property
or assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.
The Debentures are obligations exclusively of the Company. The operations
of the Company are currently conducted principally through subsidiaries, which
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Debentures or to make any
funds available therefor, whether by dividends, loans or other payments. In
addition, the payment of dividends and certain loans and advances to the Company
by such subsidiaries may be subject to certain statutory or contractual
restrictions, are contingent upon the earnings of such subsidiaries and are
subject to various business considerations.
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<PAGE> 27
The Debentures are effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's subsidiaries to the extent of the assets of such subsidiaries. Any
right of the Company to receive assets of any such subsidiary upon the
liquidation or reorganization of any such subsidiary (and the consequent right
of the Holders of the Debentures to participate in those assets) is effectively
subordinated to the claims of that subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subordinate to any security in the
assets of such subsidiary and any indebtedness of such subsidiary senior to that
held by the Company.
The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness. As of October 31, 1996, the Company has approximately $143 million
in indebtedness outstanding which constitutes Senior Indebtedness or to which
the Debentures are effectively subordinated. Giving effect to the completion of
the Foundation Transaction and assuming completion of the AHI Merger, the
Company's pro forma indebtedness as of September 30, 1996 includes an additional
$175 million of Foundation Indebtedness outstanding and an additional $37
million of AHI Indebtedness outstanding, which will also constitute Senior
Indebtedness or to which the Debentures will also be effectively subordinated.
The Company also expects to incur Senior Indebtedness from time to time in the
future.
OPTIONAL REDEMPTION
The Debentures are redeemable, at the Company's option, in whole or from
time to time in part, at any time on or after December 20, 1999, upon not less
than 15 nor more than 60 days' notice mailed to each Holder of Debentures to be
redeemed at its address appearing in the Security Register and prior to Maturity
at the following Redemption Prices (expressed as percentages of the principal
amount) plus accrued interest to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record Date to receive interest due on
an Interest Payment Date that is on or prior to the Redemption Date).
If redeemed during the 12-month period beginning December 15, in the year
indicated (December 20 in the case of 1999), the redemption price shall be:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999............................................................ 102.6%
2000............................................................ 101.3
</TABLE>
No sinking fund is provided for the Debentures.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Company will not permit any Person to consolidate with or
merge into the Company unless (a) if applicable, the Person formed by such
consolidation or into which the Company is merged or the Person or corporation
which acquires the properties and assets of the Company substantially as an
entirety is a corporation, partnership or trust organized and validly existing
under the laws of the United States or any state thereof or the District of
Columbia and expressly assumes payment of the principal of and premium, if any,
and interest on the Debentures and performance and observance of each obligation
of the Company under the Indenture, (b) after consummating such consolidation,
merger, transfer or lease, no Default or Event of Default will occur and be
continuing, (c) such consolidation, merger, conveyance, transfer or lease does
not adversely affect the validity or enforceability of the Debentures and (d)
the Company has delivered to the Trustee an Officer's Certificate and an Opinion
of Counsel, each stating that such consolidation, merger, conveyance, transfer
or lease complies with the provisions of the Indenture.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF DEBENTURES
In the event of any Repurchase Event (as defined below) occurring after the
date of issuance of the Debentures and on or prior to Maturity, each Holder of
Debentures has the right, at the Holder's option, to
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<PAGE> 28
require the Company to repurchase all or any part of the Holder's Debentures on
the date (the "Repurchase Date") that is 30 days after the date the Company
gives notice of the Repurchase Event as described below at a price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest to the Repurchase Date. On or prior to the
Repurchase Date, the Company shall deposit with the Trustee or a Paying Agent an
amount of money in same day funds sufficient to pay the Repurchase Price of the
Debentures which are to be repaid on or promptly following the Repurchase Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Debentures when required under the
preceding paragraph will result in an Event of Default under the Indenture
whether or not such repurchase is permitted by the subordination provisions of
the Indenture.
On or before the 15th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Debentures a notice of the
occurrence of such Repurchase Event and identifying the Repurchase Event, the
Repurchase Date, the date by which the repurchase right must be exercised, the
Repurchase Price for Debentures and the procedures which the Holder must follow
to exercise this right. To exercise the repurchase right, the Holder of a
Debenture must deliver, on or before the close of business on the Repurchase
Date, written notice to the Company (or an agent designated by the Company for
such purpose) and to the Trustee of the Holder's exercise of such right,
together with the certificates evidencing the Debentures with respect to which
the right is being exercised, duly endorsed for transfer.
A "Repurchase Event" shall have occurred upon the occurrence of a Change in
Control (as defined below) or a Termination of Trading (as defined below).
A "Change in Control" shall occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of the Company in which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
total voting power of all classes of capital stock entitled to vote generally in
the election of directors of the continuing or surviving corporation immediately
after such consolidation or merger in substantially the same proportion as their
ownership of Common Stock immediately before such transaction; (iii) any person,
or any persons acting together which would constitute a "group" for purposes of
Section 13(d) of the Exchange Act, together with any affiliates thereof, shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50%
of the total voting power of all classes of capital stock of the Company
entitled to vote generally in the election of directors of the Company; (iv) at
any time during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the stockholders of the Company was approved by
a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or (v) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
A "Termination of Trading" shall occur if the Common Stock (or other common
stock into which the Debentures are then convertible) is neither listed for
trading on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
The right to require the Company to repurchase Debentures as a result of
the occurrence of a Repurchase Event could create an event of default under
Senior Indebtedness of the Company, as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provisions of the Debentures.
See "Subordination." The Company's ability to pay cash to the Holders of
Debentures upon a repurchase may be limited by certain financial covenants
contained in the Company's Senior Indebtedness.
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<PAGE> 29
In the event a Repurchase Event occurs and the Holders exercise their
rights to require the Company to repurchase Debentures, the Company intends to
comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase.
The foregoing provisions would not necessarily afford Holders of the
Debentures protection in the event of highly leveraged or other transactions
involving the Company that may adversely affect Holders. In addition, the
foregoing provisions may discourage open market purchases of the Common Stock or
a non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a stockholder's ability to realize a premium over the market price of the
Common Stock in connection with any such transaction.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
Debentures: (a) default in the payment of the principal of or the premium, if
any, on any Debenture when due (even if such payment is prohibited by the
subordination provisions of the Indenture); (b) default in the payment of any
interest on any Debenture when due, which default continues for 30 days (even if
such payment is prohibited by the subordination provisions of the Indenture);
(c) failure to provide timely notice of a Repurchase Event as required by the
Indenture; (d) default in the payment of the Repurchase Price in respect of any
Debenture on the Repurchase Date therefor (even if such payment is prohibited by
the subordination provisions of the Indenture); (e) default in the performance,
or breach, of any other covenant or warranty of the Company in the Indenture
which continues for 60 days after written notice as provided in the Indenture;
(f) default under one or more bonds, debentures, notes or other evidences of
indebtedness for money borrowed by the Company or any subsidiary of the Company
or under one or more mortgages, indentures or instruments under which there may
be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the Company or any subsidiary of the Company, whether such
indebtedness now exists or shall hereafter be created, which default
individually or in the aggregate shall constitute a failure to pay the principal
of indebtedness in excess of $15,000,000 when due and payable after the
expiration of any applicable grace period with respect thereto or shall have
resulted in indebtedness in excess of $15,000,000 becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without such indebtedness having been discharged, or such acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the Outstanding
Debentures a written notice specifying such default and requiring the Company to
cause such indebtedness to be discharged or cause such acceleration to be
rescinded or annulled; and (g) certain events in bankruptcy, insolvency or
reorganization of the Company or any subsidiary of the Company.
If an Event of Default with respect to the Debentures (other than as
specified in clause (g) in the immediately preceding paragraph) shall occur and
be continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Debentures then outstanding may declare the
principal of and premium, if any, on all such Debentures to be due and payable
immediately, but if the Company cures all Events of Default and has paid or
deposited with the Trustee a sum sufficient to pay all interest on, premium, if
any, and principal of Debentures then due and certain other conditions are met,
such declaration may be canceled and past defaults may be waived by the holders
of a majority in principal amount of Outstanding Debentures. If an Event of
Default shall occur as a result of an event of bankruptcy, insolvency or
reorganization of the Company or any subsidiary of the Company, the aggregate
principal amount of the Debentures shall automatically become due and payable.
The Company is required to furnish to the Trustee annually a statement as to the
performance by the Company of certain of its obligations under the Indenture and
as to any default in such performance. The Indenture provides that the Trustee
may withhold notice to the Holders of the Debentures of any continuing default
(except in the payment of the principal of or premium, if any, or interest on
any Debentures) if the Trustee considers it in the interest of Holders of the
Debentures to do so.
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<PAGE> 30
MODIFICATION, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of the Holders to: (a) cause the Indenture
to be qualified under the Trust Indenture Act; (b) evidence the succession of
another Person to the Company and the assumption by any such successor of the
covenants of the Company herein and in the Debentures; (c) add to the covenants
of the Company for the benefit of the Holders or an additional Event of Default,
or surrender any right or power conferred upon the Company; (d) secure the
Debentures; (e) make provision with respect to the conversion rights of Holders
in the event of a consolidation, merger or sale of assets involving the Company,
as required by the Indenture; (f) evidence and provide for the acceptance of
appointment by a successor Trustee with respect to the Debentures; or (g) cure
any ambiguity, correct or supplement any provision which may be defective or
inconsistent with any other provision, or make any other provisions with respect
to matters or questions arising under the Indenture which shall not be
inconsistent with the provisions of the Indenture, provided, however, that no
such modifications or amendment may adversely affect the interest of Holders in
any material respect.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while
Debentures remain Outstanding if (a) all Outstanding Debentures have become due
and payable or will become due and payable at their scheduled maturity within
one year or (b) all Outstanding Debentures are scheduled for redemption within
one year or are delivered to the Trustee for conversion in accordance with the
Indenture, and in either case the Company has irrevocably deposited with the
Trustee an amount sufficient to pay and discharge all Outstanding Debentures on
the date of their scheduled maturity or the scheduled date of redemption.
FORM, DENOMINATION AND REGISTRATION
Debentures currently held by "qualified institutional buyers" as defined in
Rule 144A under the Securities Act or by persons who are not U.S. persons who
acquired such Debentures in "offshore transactions" in reliance on Regulation S
under the Securities Act ("Non-U.S. Persons") are currently evidenced by
restricted global debentures (the "Restricted Global Debentures") which were
deposited with, or on behalf of, DTC and registered in the name of Cede and Co.
("Cede"), as DTC's nominee.
Any purchaser (a "Public Holder") of Debentures pursuant to this Prospectus
will receive a beneficial interest in an unrestricted global debenture (the
"Public Global Debenture") which will be deposited with, or on behalf of, DTC
and registered in the name of Cede, as DTC's nominee. Except as set forth below,
the record ownership of the Public Global Debenture may be transferred in whole
or in part, only to another nominee of DTC or to a successor of DTC or its
nominee.
A Public Holder may hold its interest in the Public Global Debenture
directly through DTC if such Public Holder is a participant in DTC, or
indirectly through organizations which are participant in DTC ("Participant" or
"Participants"). Transfers between Participants are effected in the ordinary way
in accordance with DTC rules and will be settled in same day funds.
Public Holders who are not Participants may beneficially own interests in
the Public Global Debenture held by DTC only through Participants or certain
banks, brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC, is
the registered owner of the Public Global Debenture, Cede for all purposes is
considered the sole holder of the Public Global Debenture.
Payment of interest on and the redemption price (upon redemption at the
option of the Company or at the option of the Holder upon a Change of Control)
of the Public Global Debenture will be made to Cede, the nominee for DTC, as the
registered owner of the Public Global Debenture, by wire transfer of immediately
available funds. Neither the Company, the Trustee nor any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Public Global
Debenture or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
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<PAGE> 31
With respect to any payment of interest on and the redemption price (upon
redemption at the option of the Company or at the option of the Holder upon a
Change of Control) of the Public Global Debenture, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests represented by the Public
Global Debenture as shown on the records of DTC, unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participants to owners of beneficial interests represented by the Public Global
Debenture held through such Participants will be the responsibility of such
Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest represented by the Public Global Debenture to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interest, may be affected
by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the Company
will cause Debentures to be issued in definitive form in exchange for the Public
Global Debenture.
PAYMENTS OF PRINCIPAL AND INTEREST
The Indenture requires that payments in respect of the Debentures
(including principal, premium, if any, and interest) held of record by DTC
(including Debentures evidenced by the Public Global Debenture) be made in same
day funds. Payments in respect of the Debentures held of record by holders other
than DTC may, at the option of the Company, be made by check and mailed to such
holders of record as shown on the register for the Debentures.
GOVERNING LAW
The Indenture and, except as may otherwise be required by mandatory
provisions of law, the Debentures are governed by and construed in accordance
with the laws of the State of New York, without giving effect to such state's
conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
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<PAGE> 32
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 98,000,000 shares of
common stock, $.002 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share. As of February 7, 1997, there were 24,824,224
shares of common stock and no shares of Preferred Stock issued and outstanding.
COMMON STOCK
Holders of the common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock do not
have cumulative voting rights and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the common stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any agreement governing the
Company's indebtedness. The Company does not anticipate paying cash dividends in
the foreseeable future. See "Dividend Policy." In the event of the liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of the common stock have no preemptive, conversion or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of common stock are validly issued, fully paid and
nonassessable.
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors has the authority, without any vote or action by the
stockholders, to issue Preferred Stock in one or more series and to fix the
designations, preferences, rights, qualifications, limitations and restrictions
thereof, including the voting rights, dividend rights, dividend rate, conversion
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series. In addition, the issuance of Preferred Stock by the Board of
Directors could be utilized, under certain circumstances, as a method of
preventing a takeover of the Company at a premium above the then-prevailing
market price. See "Risk Factors -- Anti-Takeover Effect of Certain Charter
Provisions."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an interested stockholder (defined generally as a person owning 15% or
more of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware Corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder the board of directors of the
corporation approved the transaction or the business combination in which the
interested stockholder became an interested stockholder; (ii) upon consummation
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares owned by persons who are both officers and directors
of the corporation, and held by certain employee stock ownership plans); or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock of
the corporation not owned by the interested stockholder.
The Company's Bylaws provide that the exact number of directors shall be
fixed from time to time by the Board of Directors. At each annual meeting of
stockholders, directors will be elected to succeed those directors whose terms
have expired, and each newly elected director will serve for a three-year term.
Directors
30
<PAGE> 33
may be removed, with or without cause, by the holders of a majority of shares
entitled to vote at an election of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware General Corporation Law, a director of the Company
shall not be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a Director. Under current Delaware Law, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provision of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Company's Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware General Corporation Law.
In addition, the Company has entered into agreements (the "Indemnification
Agreements") with certain of the directors and officers of the Company pursuant
to which the Company agrees to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer and arising out of his capacity
as a director, officer, employee and/or agent of the corporation of which he is
a director or officer to the maximum extent provided by applicable law. In
addition, such director or officer shall be entitled to an advance of expenses
to the maximum extent authorized or permitted by law to meet the obligations
indemnified against. The Indemnification Agreements also obligate the Company to
cover each director and officer in the event the Company purchases and maintains
insurance for the benefit and on behalf of its directors and officers insuring
against all liabilities that may be incurred by each director or officer in or
arising out of his capacity as a director, officer, employee and/or agent of the
Company.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company to
indemnify directors and officers, such repeal or limitation may not be effective
as to directors and officers who are currently parties to the Indemnification
Agreements because their rights to full protection are contractually assured by
the Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and officers of the
Company.
REGISTRATION RIGHTS
The Company has granted registration rights with respect to approximately
100,000 shares of FPA common stock related to various acquisitions.
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<PAGE> 34
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal
income tax considerations to holders of the Debentures. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to holders of the Debentures or shares of
Common Stock and does not deal with tax consequences arising under the laws of
any foreign, state or local jurisdiction. This discussion is for general
information only, and does not purport to address all tax consequences that may
be important to particular purchasers in light of their personal circumstances,
or to certain types of purchasers (such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities or persons who
hold the Debentures or Common Stock in connection with a straddle) that may be
subject to special rules. This discussion assumes that each holder holds the
Debentures and the shares of Common Stock received upon conversion thereof as
capital assets.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any
holder who is not a United States person. The term "United States person" or
"U.S. Holder" means a citizen or resident of the United States, a corporation or
partnership created or organized in the United States or any state thereof, or
an estate or (for taxable years beginning before 1997) a trust the income of
which is subject to United States federal income taxation regardless of its
source, and (for taxable years beginning after 1996) a trust if (i) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (ii) one or more United States fiduciaries have
the authority to control all substantial decisions of the trust.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR
PARTICIPATION IN THIS OFFERING, OWNERSHIP AND DISPOSITION OF THE DEBENTURES,
INCLUDING CONVERSION OF THE DEBENTURES, AND THE EFFECT THAT THEIR PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
OWNERSHIP OF THE DEBENTURES
Interest on Debentures. Interest paid on Debentures will be taxable to a
holder as ordinary interest income in accordance with the holder's methods of
tax accounting at the time that such interest is accrued or (actually or
constructively) received. The Company expects that the Debentures will not be
issued with original issue discount ("OID") within the meaning of the Code.
Constructive Dividend. Certain corporate transactions, such as
distributions of assets to holders of Common Stock, may cause a deemed
distribution to the holders of the Debentures if the conversion price or
conversion ratio of the Debentures is adjusted to reflect such corporation
transaction. Such deemed distributions will be taxable as a dividend, return of
capital, or capital gain in accordance with the earnings and profits rules
discussed under "-- Dividends on Shares of Common Stock."
Sale or Exchange of Debentures or Shares of Common Stock. In general, a
holder of Debentures will recognize gain or loss upon the sale, redemption,
retirement or other disposition of the Debentures measured by the difference
between the amount of cash and the fair market value of any property received
(except to the extent attributable to the payment of accrued interest) and the
holder's adjusted tax basis in the Debentures. A holder's tax basis in
Debentures generally will equal the cost of the Debentures to the holder
increased by the amount of market discount, if any, previously taken into income
by the holder or decreased by any bond premium theretofore amortized by the
holder with respect to the Debentures. (For the basis and holding period of
shares of Common Stock, see "-- Conversion of Debentures.") In general, each
holder of Common Stock into which the Debentures have been converted will
recognize gain or loss upon the sale, exchange, redemption, or other disposition
of the Common Stock under rules similar to those applicable to the Debentures.
Special rules may apply to redemptions of the Common Stock which may result in
the amount paid being treated as a dividend. Subject to the market discount
rules discussed below, the gain or loss on the disposition of the Debentures or
shares of Common Stock will be capital gain or loss and will be long-term gain
or loss if the Debentures or shares of Common Stock have been held for more than
one year at the time of such disposition.
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<PAGE> 35
Conversion of Debentures. A holder of Debentures will not recognize gain
or loss on the conversion of the Debentures into shares of Common Stock. The
holder's tax basis in the shares of Common Stock received upon conversion of the
Debentures will be equal to the holder's aggregate basis in the Debentures
exchanged therefor (less any portion thereof allocable to cash received in lieu
of a fractional share). The holding period of the shares of Common Stock
received by the holder upon conversion of Debentures will generally include the
period during which the holder held the Debentures prior to the conversion.
Cash received in lieu of a fractional share of Common Stock should be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of such
fractional shares generally will equal the difference between the amount of cash
received and the amount of tax basis allocable to the fractional shares.
Market Discount. The resale of Debentures may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Debenture will generally be equal to the amount, if any, by which the stated
redemption price at maturity of the Debenture immediately after its acquisition
exceeds the holder's tax basis in the debenture. Subject to a de minimis
exception, these provisions generally require a holder of a Debenture acquired
at a market discount to treat as ordinary income any gain recognized on the
disposition of such Debenture to the extent of the "accrued market discount" on
such Debenture at the time of disposition. In general, market discount on a
Debenture will be treated as accruing on a straight-line basis over the term of
such Debenture, or, at the election of the holder, under a constant yield
method. A holder of a Debenture acquired at a market discount may be required to
defer the deduction of a portion of the interest on any indebtedness incurred or
maintained to purchase or carry the Debenture until the Debenture is disposed of
in a taxable transaction, unless the holder elects to include accrued market
discount in income currently.
Dividends on Shares of Common Stock. Distributions on shares of Common
Stock will constitute dividends for United States federal income tax purposes to
the extent of current or accumulated earnings and profits of the Company as
determined under United States federal income tax principles. Dividends paid to
holders that are United States corporations may qualify for the
dividends-received deduction.
To the extent, if any, that a holder receives distributions on shares of
Common Stock that would otherwise constitute dividends for United States federal
income tax purposes but that exceeds current and accumulated earnings and
profits of the Company, such distribution will be treated first as a non-taxable
return of capital reducing the holder's basis in the shares of Common Stock. Any
such distribution in excess of the holder's basis in the shares of Common Stock
will be treated as capital gain.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS
Interest on Debentures. Generally, interest paid on the Debentures to a
Non U.S.-Holder will not be subject to United States federal income tax if: (I)
such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder; (II) the Non-U.S.
Holder does not actually or constructively own 10% or more of the total voting
power of all classes of stock of the Company entitled to vote and is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the Code; and (III) the beneficial owner, under
penalty of perjury, certifies that the owner is not a United States person and
provides the owner's name and address. If certain requirements are satisfied,
the certification described in paragraph (III) above may be provided by a
securities clearing organization, a bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business. For
this purpose, the holder of Debentures would be deemed to own constructively the
Common Stock into which it could be converted. A holder that is not exempt from
tax under these rules will be subject to United States federal income tax
withholding at a rate of 30% unless the interest is effectively connected with
the conduct of a United States trade or business, in which case the interest
will be subject to the United States federal income tax on net income that
applies to United States persons generally. Non-U.S. Holders should consult
applicable income tax treaties, which may provide different rules.
Sales or Exchange of Debentures or Shares of Common Stock. A Non-U.S.
Holder generally will not be subject to United States federal income tax on gain
recognized upon the sale or other disposition of the Debentures or shares of
Common Stock unless (i) the gain is effectively connected with the conduct of a
trade
33
<PAGE> 36
or business within the United States by the Non-U.S. Holder, or (ii) in the case
of a Non-U.S. Holder who is a nonresident alien individual and holds the Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other circumstances are present. If
the Company is a "United States real property holding corporation," a Non-U.S.
Holder may be subject to federal income tax with respect to gain realized on the
disposition of such Debentures or shares of Common Stock as if it were
effectively connected with a United States trade or business and the amount
realized will be subject to withholding at the rate of 10%. The amount withheld
pursuant to these rules will be creditable against such Non-U.S. Holder's United
States federal income tax liability and may entitle such Non-U.S. Holder to a
refund upon furnishing the required information to the Internal Revenue Service.
Non-U.S. Holders should consult applicable income tax treaties, which may
provide different rules.
Conversion of Debentures. A Non-U.S. Holder generally will not be subject
to United States federal income tax on the conversion of a Debenture into shares
of Common Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share on conversion, such cash may give rise to gain that would be
subject to the rules described above with respect to the sale or exchange of a
Debenture or Common Stock.
Dividends on Share of Common Stock. Generally, any distribution on shares
of Common Stock to a Non-U.S. Holder will be subject to United States federal
income tax withholding at a rate of 30% unless the dividend is effectively
connected with the conduct of trade or business within the United States by the
Non-U.S. Holders, in which case the dividend will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax). Non-U.S. Holders should consult any
applicable income tax treaties, which may provide for a lower rate of
withholding or other rules different from those described above. A Non-U.S.
Holder may be required to satisfy certain certification requirements in order to
claim a reduction of or exemption from withholding under the foregoing rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders. Information reporting and backup withholding may apply to
payments of interest or dividends on or the proceeds of the sale or other
disposition of the Debentures or shares of Common Stock made by the Company with
respect to certain noncorporate U.S. Holders. Such U.S. Holders generally will
be subject to backup withholding at a rate of 31% unless the recipient of such
payment supplies a taxpayer identification number, certified under penalties of
perjury, as well as certain other information, or otherwise establishes, in the
manner prescribed by law, an exemption from backup withholding. Any amount
withheld under backup withholding is allowable as a credit against the U.S.
Holder's federal income tax, upon furnishing the required information.
Non-U.S. Holders. Generally, information reporting and backup withholding
of United States federal income tax at a rate of 31% may apply to payments of
principal, interest and premium (if any) to Non-U.S. Holders if the payee fails
to certify that the holder is a Non-U.S. person or if the Company or its paying
agent has actual knowledge that the payee is a United States person. The 31%
backup withholding tax generally will not apply to dividends paid to foreign
holders outside the United States that are subject to 30% withholding discussed
above or that are subject to a tax treaty that reduces such withholding.
The payment of the proceeds on the disposition of Debenture or shares of
Common Stock to or through the United States office of a United States or
foreign broker will be subject to information reporting and backup withholding
unless the owner provides the certification described above or otherwise
establishes an exemption. The proceeds of the disposition by a Non-U.S. Holder
of Debentures or share of Common Stock to or through a foreign office of a
broker will not be subject to backup withholding. However, if such broker is a
U.S. person, a controlled foreign corporation for United States tax purposes, or
a foreign person 50% or more of whose gross income from all sources for certain
periods is from activities that are effectively connected with a United States
trade or business, information reporting will apply unless such broker has
documentary evidence in its files of the owner's foreign status and has no
actual knowledge to the contrary or unless the owner otherwise establishes an
exemption. Both backup withholding and information reporting will apply to the
proceeds from such dispositions if the broker has actual knowledge that the
payee is a U.S. Holder.
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<PAGE> 37
SELLING SECURITYHOLDERS AND SELLING STOCKHOLDERS
The Debentures were originally issued by the Company in transactions exempt
from the registration requirements of the Securities Act to persons believed by
the Initial Purchasers to be "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) or to persons in off-shore transactions in
reliance upon Regulation S under the Securities Act. The Selling Securityholders
(which term includes their transferees, pledgees, donees and their successors)
may from time to time offer and sell pursuant to this Prospectus any or all of
the Debentures and the shares of Common Stock initially issued or issuable upon
conversion of the Debentures.
The following table sets forth information, with respect to the Selling
Securityholders and the respective principal amount of Debentures beneficially
owned by each such Selling Securityholder, the amount which may be sold, and the
number of shares of Common Stock that may be sold, by the Selling
Securityholders pursuant to this Prospectus. None of the Selling Securityholders
has, or within the past three years has had, any position, office or other
material relationship with the Company or any of its predecessors or affiliates.
Because the Selling Securityholders may offer all or a portion of the Debentures
and the Common Stock pursuant to this Prospectus, no estimate can be given as to
the amount of Debenture or the Common Stock that will be held by the Selling
Securityholders upon termination of any such sale. The following table is based
upon information furnished to the Company by The Depository Trust Company, New
York, New York and the Selling Securityholders.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF NUMBER OF
DEBENTURES SHARES OF
BENEFICIALLY PERCENT OF COMMON
OWNED AND THAT OUTSTANDING STOCK THAT
NAME(1) MAY BE SOLD DEBENTURES MAY BE SOLD(2)
- -------------------------------------------------- -------------- ----------- --------------
<S> <C> <C> <C>
AIM Charter Fund.................................. 9,800,000 12.2 377,649
AIM V.I. Growth and Income Fund................... 700,000 * 26,975
Bank of America Convertible Securities Fund....... 225,000 * 8,671
Bear Stearns Securities Corp(3)................... 500,000 * 19,268
Commonwealth Life Insurance -- (Teamster/Camden
Non-Enhanced)................................... 3,500,000 4.3 134,875
Commonwealth Life Insurance -- Stock TRAC
(Teamsters I)................................... 2,750,000 3.4 105,973
Dean Witter Convertible Securities Trust.......... 2,000,000 2.5 77,071
Employee Benefit Convertible Securities Fund...... 125,000 * 4,817
Froley, Revy Investment Co., Inc.(4).............. 6,600,000 8.2 254,335
Hallmark Master Trust............................. 500,000 * 19,268
Lehman Brothers(5)................................ 4,350,000 5.4 167,630
Lehman Brothers Special Financing Inc.(5)......... 8,700,000 10.8 335,260
Lincoln National Convertible Securities Fund...... 2,400,000 3.0 92,486
Lincoln National Life Insurance................... 5,395,000 6.7 207,900
MFS Convertible Securities Fund................... 5,000 * 193
Pacific Horizon Capital Income Fund............... 3,650,000 4.5 140,655
Pacific Mutual Life Insurance Company............. 1,000,000 1.2 38,536
The SMM Company B.V............................... 2,200,000 2.7 84,778
United National Life Insurance.................... 95,000 * 3,661
Weirton Trust..................................... 610,000 * 23,507
All other Holders................................. 25,545,000 31.7 984,393
</TABLE>
- ---------------
* Less than 1%.
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<PAGE> 38
(1) The information set forth herein is as of January 27, 1997 and will be
updated as required. Certain of the holders share investment power with
their respective investment advisors.
(2) Assumes conversion of the full amount of Debentures held by such holder at
the initial rate of $25.95 in principal amount of Debentures per share of
Common Stock.
(3) Within the last three years, Bear Stearns & Co. Inc. or one of its
affiliates was the co-manager of a public offering of securities of FPA, was
an Initial Purchaser in the private placement of the Debentures and/or
performed other banking services for FPA for which it received a fee from
FPA.
(4) Froley, Revy Investment Co., Inc. owns the Securities on behalf of accounts
maintained by it and for which it has investment power.
(5) Lehman Brothers Inc. was an Initial Purchaser in the private placement of
the Debentures.
Information concerning the Selling Securityholders may change from time to
time and will be set forth in supplements to this Prospectus. In addition, the
per share conversion price, and therefore the number of shares of Common Stock,
are subject to adjustment under certain circumstances. Accordingly, the number
of shares of Common Stock offered hereby may increase or decrease. As of the
date of this Prospectus, the aggregate principal amount of Debentures is
$80,650,000 and the number of shares of Common Stock into which the Debentures
may be converted is 3,107,900 shares.
It is not possible to predict the principal amount of Debentures or the
number of shares of Common Stock that will be sold hereby. Consequently, it is
not possible to predict the amount of Debentures or the number of shares of
Common Stock that will be owned by the Selling Securityholders following
completion of this offering.
The following table sets forth information with respect to the Selling
Stockholders, the number of Individual Shares offered hereby and the number of
shares to be owned by each Selling Stockholder if all Individual Shares offered
hereby are sold.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES TO BE
OWNED BEFORE BENEFICIALLY
OFFERING OWNED AFTER OFFERING
----------------- SHARES ---------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Banque Paribas................................ 50,000 * 50,000 -- *
Alan L. Barnett, D.O.......................... 11,940 * 11,940 -- *
Marilyn Barnett............................... 11,940 * 11,940 -- *
Stanley Combs, M.D.(1)........................ 36,667 * 36,667 -- *
Pushpa K. Desai, M.D.......................... 743 * 743 -- *
Jeffrey Fisher, M.D.(1)....................... 36,667 * 36,667 -- *
Foundation Health Corporation(2).............. 4,076,087 16.4 4,076,087 -- *
Bradley Gordon, M.D........................... 53,061 * 53,061 -- *
Peter Hein, M.D............................... 27,420 * 27,420 -- *
Daniel Hiser, M.D............................. 7,692 * 7,692 -- *
Steven Katzman................................ 6,500 * 6,500 -- *
Peter Minkoff, M.D............................ 27,420 * 27,420 -- *
Mary O'Dwyer, M.D............................. 27,420 * 27,420 -- *
PCA Property & Casualty Insurance
Company(3).................................. 525,000 2.1 525,000 -- *
Physician Corporation of America(4)........... 250,000 1.0 250,000 -- *
Allen Schwartz, M.D........................... 3,105 * 3,105 -- *
Samuel Stierman, M.D.(1)...................... 36,667 * 36,667 -- *
Neil Tarzy, M.D............................... 27,420 * 27,420 -- *
Paul Toma, M.D................................ 1,055 * 1,055 -- *
Debora Villa, M.D.(1)......................... 36,667 * 36,667 -- *
</TABLE>
36
<PAGE> 39
- ---------------
* Less than 1%.
(1) Each of these Selling Stockholders has agreed to a lock-up of the shares
offered hereby until the later of (i) 90 days following the effective date
of the registration statement of which this Prospectus is a part or (ii) the
day following the date when financial results covering at least 30 days of
post-merger combined operations of FPA and Consultants in Internal Medicine,
Ltd., have been published.
(2) Foundation Health Corporation received 4,076,087 shares of FPA common stock
in connection with the acquisition by FPA of FHMS and Holding Company. See
"Recent Developments." Foundation Health Corporation and FPA agreed pursuant
to a Registration Rights Agreement dated as of November 29, 1996, that
Foundation Health Corporation is entitled to a demand registration of such
shares commencing on March 31, 1997. In consideration for the inclusion of
its FPA common stock in the Registration Statement of which this Prospectus
is a part, Foundation Health Corporation has agreed to a lock-up of the
4,076,087 shares offered hereby until April 9, 1997.
(3) PCA Property & Casualty Insurance Company is affiliated with Physician
Corporation of America. PCA Property & Casualty Insurance Company has agreed
to a lock-up of its shares offered hereby until 90 days after the effective
date of the registration statement of which this Prospectus is a part.
(4) 250,000 shares represent shares of FPA common stock issuable upon exercise
of warrants held by Physician Corporation of America.
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<PAGE> 40
PLAN OF DISTRIBUTION
The following Plan of Distribution applies to offerings of both the
Securities and the Individual Shares. For the purposes of this Plan of
Distribution, a reference to "Securities" shall mean the Debentures, the Common
Stock and the Individual Shares, and a reference to "Selling Securityholder"
shall mean both the Selling Securityholders and the Selling Stockholders.
The Company will not receive any of the proceeds of the sale of the
Securities offered hereby. The Securities may be sold from time to time to
purchasers directly by the Selling Securityholders. Alternatively, the Selling
Securityholders may from time to time offer the Securities through underwriters,
brokers, dealers or agents who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Securities for whom they may act as
agent. The Selling Securityholders and any such underwriters, brokers, dealers
or agents who participate in the distribution of the Securities may be deemed to
be "underwriters", and any profits on the sale of the Securities by them and any
discounts, commissions or concessions received by any such underwriters,
brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. To the extent the Selling Securityholders
may be deemed to be underwriters, the Selling Securityholders may be subject to
certain statutory liabilities of the Securities Act, including, but not limited
to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the
Exchange Act.
The Securities offered hereby may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
Securities may be sold by one or more of the following methods, without
limitation: (i) a block trade in which the broker or dealer so engaged will
attempt to sell the Securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (ii) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (iv) an exchange
distribution in accordance with the rules of such exchange; (v) face-to-face
transactions between sellers and purchasers without a broker-dealer; (vi)
through the writing of options; (vii) to underwriters who will acquire the
Securities for their own account and resell them in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale (any public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may change from
time to time); and (viii) other. At any time a particular offer of the
Securities is made, a revised Prospectus or Prospectus Supplement, if required,
will be distributed which will set forth the aggregate amount and type of
Securities being offered and the terms of the offering, including the name or
names of any underwriters, brokers, dealers or agents, any discounts,
commissions and other items constituting compensation from the Selling
Securityholders, the purchase price paid by any underwriter for Securities
purchased from the Selling Securityholders, any discounts, commissions or other
items constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Such revised Prospectus or Prospectus Supplement and, if necessary, a
post-effective amendment to the registration statement of which this Prospectus
is a part, will be filed with the Commission to reflect the disclosure of
additional information with respect to the distribution of the Securities. In
addition, the Securities covered by this Prospectus may be sold in private
transactions or under Rule 144 rather than pursuant to this Prospectus.
There is no assurance that any Selling Securityholder will sell any or all
of the Securities offered by it hereunder or that any such Selling
Securityholder will not transfer, devise or gift such Securities by other means
not described herein. Underwriters participating in any offering made pursuant
to this Prospectus (as amended or supplemented from time to time) may receive
underwriting discounts and commissions, and discounts or concessions may be
allowed or reallowed or paid to dealers, and brokers or agents participating in
such transaction may receive brokerage or agent's commissions or fees.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rules 10b-6
and 10b-7, which may limit the timing of purchases and sales of any of the
Securities by the Selling Securityholders and any other such person.
Furthermore, under Rule 10b-6 under the Exchange Act, any person engaged in the
distribution of the Securities may not simultaneously engage in market-making
activities with respect to the particular Securities being distributed for a
period of nine business days prior to
38
<PAGE> 41
the commencement of such distribution. Regulation M, which replaces Rules 10b-6
and 10b-7 effective as of March 4, 1997, contains similar limitations on the
distribution and sale of the Securities hereunder. All of the foregoing may
affect the marketability of the Securities and the ability of any person or
entity to engage in market-making activities with respect to the Securities.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers.
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Securities to the public other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
Pursuant to the Registration Rights Agreement entered into in connection
with the offer and sale of the Debentures by the Company, each of the Company
and the Selling Securityholders will be indemnified by the other against certain
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith. Pursuant to agreements between
the Company and certain of the Selling Stockholders, the Company and certain of
the Selling Stockholders have agreed to indemnify each other against certain
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Ballard Spahr Andrews & Ingersoll, Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of FPA as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in the Form 10-K, as amended by Form 10-K/A, and the Supplemental
Consolidated Financial Statements of FPA appearing herein as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing therein, and have been incorporated herein by
reference in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
The consolidated balance sheets as of December 31, 1995 and 1994 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1995 and the period June 1, 1994 to December 31,
1994 of Sterling, have been audited by Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The combined financial statements of Foundation Health Medical Services (a
wholly-owned subsidiary of Foundation Health Corporation) and affiliates as of
June 30, 1995 and 1996 and for each of the three years in the period ended June
30, 1996, incorporated herein by reference have been audited by Deloitte &
Touche LLP (except for the December 31, 1993 financial statements of
Thomas-Davis Medical Centers, P.C.) as stated in their report incorporated
herein by reference (such report expresses an unqualified opinion and includes
an explanatory paragraph referring to significant related party transactions).
The financial statements of Thomas-Davis Medical Centers, P.C. for the year
ended December 31, 1993 (which are combined with those of Foundation Health
Medical Services (a wholly-owned subsidiary of Foundation Health Corporation)
and affiliates) have been audited by Stevenson, Jones, Imig, Holmaas &
Kleinhans, P.C., as stated in their report incorporated herein by reference.
Such financial statements of Foundation Health Medical Services (a wholly-owned
subsidiary of Foundation Health Corporation) and affiliates are incorporated
herein by reference in reliance upon the respective reports of such firms given
upon their authority as experts in accounting and auditing. All of the foregoing
firms are independent auditors.
The financial statements of Foundation Health IPA as of December 31, 1995
and 1994 and for the year ended December 31, 1995 and for the period from June
7, 1994 (date of inception) to December 31, 1994, incorporated herein by
reference have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report incorporated herein by reference (such report expresses
an unqualified opinion and includes an explanatory paragraph referring to
significant related party transactions), and has been so incorporated herein by
reference in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
39
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Stockholders of FPA Medical Management, Inc.:
We have audited the supplemental consolidated balance sheets of FPA Medical
Management, Inc. and subsidiaries as of December 31, 1994 and 1995 and the
related supplemental consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1995. These supplemental 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 audits. The supplemental consolidated financial statements give retroactive
effect to the merger with Sterling Healthcare Group, Inc., which has been
accounted for as a pooling of interests as described in Note 1 to the
supplemental consolidated financial statements. We did not audit the
consolidated balance sheets of Sterling Healthcare Group, Inc. as of December
31, 1994 and 1995 or the related consolidated statements of operations, changes
in stockholders' equity and cash flows of Sterling Healthcare Group, Inc. for
each of the two years in the period ended December 31, 1995, which statements
reflect total assets of $26,742,105 and $78,608,252 as of December 31, 1994 and
December 31, 1995, respectively, and total revenues of $39,255,573 and
$115,659,527 for the seven-month period ended December 31, 1994 and the year
ended December 31, 1995, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Sterling Healthcare Group, Inc. for 1994 and
1995 is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such supplemental consolidated financial statements present fairly, in all
material respects, the financial position of FPA Medical Management, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 8, 1996 (Except for the pooling of
interests with Sterling Healthcare Group, Inc.
as described in notes 1 and 22, for which
the date is October 31, 1996)
San Diego, California
F-1
<PAGE> 43
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 1994, 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, 1994 and 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.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 15, 1996
F-2
<PAGE> 44
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 AND SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 2,136,870 $ 2,071,173 $ 2,526,679
Marketable securities.............................................. 10,079,811 9,329,840 1,555,463
Accounts receivable -- net......................................... 16,890,026 40,229,995 76,292,294
Accounts receivable -- other....................................... 2,199,046 4,636,973 14,241,511
Current portion of note receivable from FPASD...................... 18,601 300,086 650,953
Prepaid expenses................................................... 371,977 656,003 6,894,980
Income tax receivable.............................................. 163,560 1,227,949 970,300
Deferred income tax asset.......................................... 1,370,885 2,861,898 4,108,336
----------- ------------ ------------
Total current assets......................................... 33,230,776 61,313,917 107,240,316
PROPERTY AND EQUIPMENT -- net........................................ 3,141,343 9,591,799 19,850,200
RESTRICTED CASH AND DEPOSITS......................................... 3,285,000 7,804,728
GOODWILL -- net of accumulated amortization of $112,818 and
$1,724,606 in 1994 and 1995, respectively.......................... 7,672,401 69,498,404 127,029,623
INTANGIBLE ASSETS -- net of accumulated amortization of $11,976 and
$249,682 in 1994 and 1995, respectively............................ 282,840 5,988,579 6,620,909
NOTE RECEIVABLE FROM FPASD -- net of current portion................. 66,939
INVESTMENT IN GLHP................................................... 1,994,900 4,994,900
OTHER ASSETS......................................................... 657,207 733,937 2,378,677
----------- ------------ ------------
Total assets................................................. $45,051,506 $152,406,536 $275,919,553
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................. $ 6,894,855 $14,851,559 $ 19,091,901
Claims payable, including incurred but not reported claims......... 1,284,806 10,247,476 47,474,955
Accrued payroll and related liabilities............................ 207,686 1,363,304 3,202,891
Borrowings on line of credit....................................... 788,325
Current portion of accrued liability for professional liability
claims........................................................... 475,100 610,000 650,000
Current portion of long-term debt.................................. 976,258 7,042,635 52,273,026
Income taxes payable............................................... 1,228,488 436,775 2,273,591
----------- ------------ ------------
Total current liabilities.................................... 11,067,193 35,340,074 124,966,364
BANK LINE OF CREDIT.................................................. 2,662,242 10,000,000 10,000,000
LONG-TERM DEBT -- net of current portion............................. 2,987,348 9,012,552 13,563,331
ACCRUED LIABILITY FOR PROFESSIONAL LIABILITY CLAIM, net of current
portion............................................................ 2,013,400 2,440,000 2,475,000
DEFERRED INCOME TAX LIABILITY........................................ 1,894,903 1,989,770 1,746,461
OTHER LONG TERM PAYABLES............................................. 100,000 392,275 2,476,015
MINORITY INTEREST.................................................... 4,900
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value per share, 2,000,000 shares
authorized, no shares outstanding................................
Common stock, $.002 par value, 18,000,000 shares authorized,
14,723,351 and 19,198,825 shares issued and outstanding at
December 31, 1994 and 1995, respectively......................... 29,447 38,398 41,280
Additional paid-in capital......................................... 23,237,532 87,650,858 107,378,995
Stock subscriptions receivable..................................... (14,227)
Stock payable...................................................... 567,000 493,100
Accumulated earnings............................................... 1,420,010 5,253,975 13,023,437
Less: Deferred Compensation -- stock options....................... (346,342) (283,266) (244,430)
----------- ------------ ------------
Total stockholders' equity................................... 24,326,420 93,226,965 120,692,382
----------- ------------ ------------
Total........................................................ $45,051,506 $152,406,536 $275,919,553
=========== ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 45
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 31,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Managed care revenue.................. $13,987,914 $18,193,286 $ 49,880,875 $ 28,878,594 $171,500,742
Fee-for-service revenue, net of
contractual allowances.............. 39,498,164 118,470,607 82,712,463 117,770,282
----------- ----------- ------------ ------------ ------------
Operating revenue..................... 13,987,914 57,691,450 168,351,482 111,591,057 289,271,024
Medical services -- Professional
Corporations........................ 3,748,153 4,173,204 7,234,374 4,120,715 15,971,210
Medical services -- others............ 6,599,651 35,808,319 100,257,463 66,770,586 188,825,812
----------- ----------- ------------ ------------ ------------
3,640,110 17,709,927 60,859,645 40,699,756 84,474,002
General and administrative expense.... 3,471,056 14,977,655 52,733,714 34,111,833 68,769,573
----------- ----------- ------------ ------------ ------------
Income from operations................ 169,054 2,732,272 8,125,931 6,587,923 15,704,429
OTHER INCOME (EXPENSE):
Interest and other income........... 12,325 186,955 609,297 389,490 443,071
Interest expense.................... (3,058) (187,364) (2,177,943) (1,650,854) (2,781,465)
----------- ----------- ------------ ------------ ------------
Total other income
(expense)................. 9,267 (409) (1,568,646) (1,261,364) (2,338,394)
----------- ----------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES............ 178,321 2,731,863 6,557,285 5,326,559 13,366,035
PROVISION FOR INCOME TAXES............ 942,025 2,723,320 2,169,433 5,596,573
----------- ----------- ------------ ------------ ------------
NET INCOME............................ $ 178,321 $ 1,789,838 $ 3,833,965 3,157,126 7,769,462
=========== =========== ============ ============ ============
NET INCOME PER SHARE.................. $.24 $.21 $.38
============ ============ ============
PRO FORMA (Note 1):
Adjustment for employment
agreements....................... $ 1,228,004
Adjustment to income tax expense.... (562,530) $ (110,235)
----------- -----------
Net income.......................... 843,795 1,679,603
=========== ===========
Net income per common share......... $.27 $.19
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 46
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
STOCK DEFERRED
ADDITIONAL SUBSCRIPTIONS ACCUMULATED COMPENSATION
COMMON PAID-IN (RECEIVABLE) EARNINGS STOCK
STOCK CAPITAL PAYABLE (DEFICIT) OPTIONS TOTAL
------- ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1993..................... $2,188 $ 9,812 $ (10,000) $ (548,149) $ (546,149)
Receipt of payment for stock subscription... 10,000 10,000
Net income for the year ended December 31,
1993...................................... 178,321 178,321
------- ----------- ------------- ----------- ------------
BALANCES, DECEMBER 31, 1993................... 2,188 9,812 (369,828) (357,828)
Pooling of interests combination with
Sterling Healthcare Group, Inc. effective
October 31, 1996.......................... 16,195 8,552,074 $ (369,000) 8,199,269
Common stock issued through private
placement for cash, net of costs.......... 1,294 4,571,625 4,572,919
Preferred stock issued and redeemed......... (3,750,000) (3,750,000)
Common stock issued to former director for
services rendered......................... 30 239,970 240,000
Common stock subscribed..................... 6 49,994 (50,000)
Receipt of payment for stock
subscriptions............................. 35,773 35,773
Common stock issued through initial public
offering for cash, net of costs (including
tax benefit of $160,924).................. 2,795 11,574,068 11,576,863
Common stock issued in connection with
PrimeCare, Inc. acquisition............... 313 1,953,250 1,953,563
Stock warrants issued for cash.............. 43,365 43,365
Amortization of deferred compensation....... 22,658 22,658
Net income for the year ended December 31,
1994...................................... 1,789,838 1,789,838
One-for-one stock dividend, effective March
1, 1995................................... 6,626 (6,626)
------- ----------- ------------- ----------- ------------ ------------
BALANCES, DECEMBER 31, 1994................... 29,447 23,237,532 (14,227) 1,420,010 (346,342) 24,326,420
Common stock issued through public offering
for cash, net of costs.................... 8,501 50,392,907 50,401,408
Common stock issued in connection with
acquisitions.............................. 450 13,889,419 13,889,869
Stock options and warrants exercised........ 156,000 156,000
Receipt of payments for stock
subscriptions............................. 14,227 14,227
Common stock payable........................ 567,000 567,000
Amortization and termination of deferred
compensation options...................... (25,000) 63,076 38,676
Net income for the year ended December 31,
1995...................................... 3,833,965 3,883,965
------- ----------- ------------- ----------- ------------ ------------
BALANCES, DECEMBER 31, 1995................... $38,398 $87,650,858 $ 567,000 $5,253,975 $ (283,266) $ 93,226,965
Stock options and warrants exercised
(unaudited)............................... 515 9,059,920 9,060,435
Shares issued in connection with
acquisitions (unaudited).................. 231 657,023 657,254
Shares issued in connection with the
conversion of debt (unaudited)............ 1,086 3,498,914 3,500,000
Shares issued in connection with PFI
acquisition (unaudited)................... 1,050 6,524,280 6,525,330
Termination of deferred compensation options
(unaudited)............................... (12,000) (12,000)
Amortization of deferred compensation
(unaudited)............................... 38,836 38,836
Issuance of shares for stock payable
(unaudited)............................... (73,900) (73,900)
Net income for the nine month period ended
September 30, 1996 (unaudited)............ -- -- -- 7,769,462 -- 7,769,462
------- ----------- ------------- ----------- ------------ ------------
BALANCES, SEPTEMBER 30, 1996 (unaudited)...... 41,280 107,378,995 493,100 13,023,437 (244,430) 120,692,382
======== ========== ============ =========== ============ ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 47
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------------------
1993 1994 1995 1995 1996
--------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 178,321 $ 1,789,838 $ 3,833,965 $ 3,157,126 $ 7,769,462
---------- ------------ ------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by (used by) operating activities:
Depreciation and amortization.................... 50,943 570,733 3,419,060 2,102,874 6,240,009
Imputed interest on notes payable................ 132,489 98,023
Loss on disposal of business..................... 772,875
Deferred compensation stock options.............. 22,658 38,076 29,132 26,835
Impairment of goodwill........................... 434,602
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable............................ (259,784) (4,448,976) (17,983,548) (11,085,533) (43,535,978)
Income tax receivable.......................... (163,560) (1,064,389) (1,087,850) 3,525,022
Deferred income taxes.......................... 40,000 (205,580) 591,545 (234,875) 633,085
Accounts payable and accrued expenses.......... 42,653 850,558 469,485 (825,630) (1,639,891)
Claims payable, including IBNR................. 153,522 (315,194) 5,348,274 3,499,051 37,227,479
Accrued liability for professional claims
liabilities.................................. (124,216) (738,500) (188,500) (375,000)
Accrued payroll and related liabilities........ 196,638 (7,157) 336,625 109,901 1,839,587
Prepaid expenses and other assets.............. (27,453) (129,057) (507,908) (360,858) (6,278,445)
---------- ------------ ------------ ------------ ------------
Total adjustments............................ 196,519 (3,949,791) (8,751,314) (8,042,288) (2,239,274)
---------- ------------ ------------ ------------ ------------
Net cash provided (used) by operating
activities................................. 374,840 (2,159,953) (4,917,349) (4,855,162) 5,530,188
---------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (40,011) (971,053) (4,808,619) (2,035,181) (3,894,872)
Payments for intangible assets..................... (270,621) (1,703,570) (858,930) (2,323,849)
Net payment (to) from FPASD........................ (129,912) 44,372 (214,546) 12,257 (350,867)
Investment in GLHP................................. (1,994,900) (1,994,900) (3,000,000)
Net sale (purchase) of marketable securities....... (10,079,811) 749,971 7,209,053 7,774,377
Acquisitions, net of cash acquired................. (3,713,133) (38,529,816) (22,713,070) (13,276,035)
Payments escrowed for acquisition.................. (3,285,000) 1,143,526 (4,519,728)
Proceeds from sale of businesses................... 1,600,000
Other.............................................. (46,212)
---------- ------------ ------------ ------------ ------------
Net cash used by investing activities........ (169,923) (14,990,246) (48,232,692) (21,524,297) (19,590,975)
---------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from merger, net.......................... 109,117 5,699,870
Net proceeds from issuance of common stock......... 11,441,604 50,401,408
Net proceeds from private placement of stock....... 4,812,919
Redemption of preferred stock...................... (3,750,000)
Issuance of convertible subordinated notes
payable.......................................... 1,000,000
Proceeds from issuance of stock warrants........... 43,365
Proceeds from exercise of stock options and
warrants......................................... 156,000 156,000 8,057,854
Issuance of notes payable.......................... 47,802,427
Net borrowings under bank line of credit........... 207,242 7,814,781 29,644,059 469,116
Receipt of payment for stock subscriptions......... 10,000 35,773 14,227 12,782
Payments on long-term debt......................... (2,724) (922,779) (5,302,072) (4,192,641) (41,813,105)
Deferred public offering costs..................... (25,665) (420,454)
---------- ------------ ------------ ------------ ------------
Net cash provided by financing activities.... 90,728 18,567,994 53,084,344 25,199,746 14,516,292
---------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH...................... 295,645 1,417,795 (65,697) (1,209,713) 455,505
CASH, AND CASH EQUIVALENTS BEGINNING OF PERIOD....... 423,430 719,075 2,136,870 2,136,870 2,071,174
---------- ------------ ------------ ------------ ------------
CASH, END OF PERIOD.................................. $ 719,075 $ 2,136,870 $ 2,071,173 $ 927,157 $ 2,526,679
========== ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 48
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------------------
1993 1994 1995 1995 1996
--------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest............................. $ 3,502 $ 117,400 $ 1,957,194 $ 47,090 $ 1,819,130
Cash paid for income taxes......................... $ 800 $ 1,840,296 $ 4,781,045 $ 9,350 $ 870,382
Equipment acquired under capital leases............ $ 27,702 $ 155,361 $ 438,643 $ 270,776 $ 1,137,712
Common stock issued in connection with
acquisitions..................................... $ -- $ 4,741,976 $ 13,889,870 $ 8,535,359 $ 8,941,657
Common stock to former director for services
rendered......................................... $ -- $ 240,000 $ -- $ -- $ --
</TABLE>
See notes to financial statements.
F-7
<PAGE> 49
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The merger of FPA Medical Management, Inc. and
Subsidiaries ("FPA") and Sterling Healthcare Group, Inc. ("Sterling") 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 Sterling (Sterling amounts are included
from June 1, 1994, the date of inception). 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 Sterling as a result of adopting the
same Accounting Principles of the Company.
GENERAL -- FPA Medical Management, Inc., a Delaware corporation
incorporated in 1994, is a national health care management service organization
which, through its network of primary care physicians and affiliated
professional corporations ("Professional Corporations"), contracts with health
maintenance organizations ("HMOs") and other prepaid health insurance plans
(collectively, "Payors") to provide and manage physician and related health care
services to their enrollees who select FPA network primary care physicians. In
March 1994, two predecessor entities of FPA, Family Practice Medical Management
Corp., a California corporation incorporated in 1986, and FPA Medical
Management, Inc., a California corporation incorporated in 1992, were merged
into FPA. The accompanying supplemental financial statements present the
financial position and results of operations of FPA and the predecessor
entities, including the accounts of the FPA subsidiaries, certain Professional
Corporations, and Sterling (collectively, the "Company").
FPA and its subsidiaries currently manage the provision of prepaid health
care services for networks of primary care physicians in California, Arizona,
Texas, Florida, Delaware, Michigan, and New Jersey. The "FPA Network" consists
of Professional Corporations and various independent practitioners.
The Professional Corporations contract with Payors to provide for the
delivery of health care services on a capitation basis (i.e., a fixed payment
per enrollee per month). Through administrative services agreements (see Note
2), 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.
The Company through Sterling provides physician contract management for
hospital emergency and anesthesia departments in 20 states at December 31, 1995.
The Company also operates six primary care medical facilities at December 31,
1995 in three states. The Company also has a physician recruiting and medical
management consulting division and publishes a monthly magazine. Contractual
arrangements with hospitals are primarily fee-for-service whereby hospitals
agree to authorize the Company and its contracted health care professionals to
contract directly with the patients. Therefore, the Company bills and collects
directly from the patient or third party payor for the professional component of
the charges for medical services rendered by the Company's contracted health
care professionals. The Company contracts, on an independent contractor basis,
directly with the physicians who provide such medical services. The physicians
are compensated based on an hourly rate in accordance with independent
contractor agreements.
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
Corporation. 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.
However, due to a parent-subsidiary relationship
F-8
<PAGE> 50
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
under generally accepted accounting principles as described above, FPA has
consolidated the financial statements of the following 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 all of the following subsidiaries and
Professional Corporations since they were acquired, were incorporated, or
entered into an administrative services agreement with FPA or one of its
subsidiaries.
- Arizona Managed Care Services, Inc.
- Arizona Managed Care Physicians, IPA, Inc.
- Family and Senior Care, Inc.
- FPA Medical Management of Michigan, Inc.
- FPA Medical Management of South Carolina, Inc.
- FPA Gonzaba Management Services Organization, Inc.
- OPSU, Inc.
- PrimeCare, Inc.
- Family Practice Associates of San Diego, Inc., an Osteopathic corporation
- FPA Medical Group of California, an Osteopathic corporation
- FPA Medical Group of New Jersey, a professional corporation
- FPA Medical Group of Pennsylvania, a medical corporation
- Arizona Managed Care Providers Ltd.
- William Gonzaba, M.D., a professional, d/b/a Gonzaba Medical Group
- FPA Independent Practice Association, an Osteopathic corporation
- FPA Medical Group of South Carolina, P.C.
- VIP IPA
- Foundation Health IPA
- Century Family Medical Group, Inc.
- Physicians First, Inc.
- Family First Medical Centers, Inc.
- Physicians Medical Group of Florida, Inc.
- FPA Family Pharmacy, Inc.
- FPA Acquisition Corporation
- FPA Medical Management of California, Inc.
- FPA Medical Group of Delaware, P.A.
- Family Practice Associates of Southern California, an Osteopathic Medical
Corporation
F-9
<PAGE> 51
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
- FPA Medical Group of Texas, a Texas Professional Association
- FHC IPA, Inc.
- Sterling Healthcare Group, Inc.
- Sterling Mednet Administrative Services, Inc.
- Sterling Sub Texas, Inc.
- Sterling Medical Group, Inc.
- Sterling Physicians Services of America, Inc.
- Sterling Miami, Inc.
- Sterling Anesthesia, Inc.
- Sterling Regional Emergency Services, Inc.
- Sterling Mednet Emergency Services, Inc.
- Sterling Billing Services Corp.
- Sterling Physicians Group of Texas, Inc.
- Sterling Medical Group of Michigan, Inc.
- Sterling Real Property Melbourne, Inc.
- Sterling Medical Group of Florida, Inc.
- Sterling Professional Emergency Physicians, LLC
- Sterling Healthcare of Texas, a Texas professional association
- FPA Acquisition Corp.
REVENUES AND ACCOUNTS RECEIVABLE -- 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 three years, with automatic renewal periods, terminable on prior
notice (generally between 30 and 180 days).
The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
outpatient services ("outpatient capitation" contracts). Additionally, under
global capitation contracts, the Company receives a fixed monthly amount per
enrollee after 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
after 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 amounts pre-established by the Payor in excess of
inpatient cost.
As a result of physician acquisitions, FPA has historically also generated
fee-for-service revenues through the Professional Corporations. These revenues
are presented net of contractual deductions.
F-10
<PAGE> 52
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
Fee for service revenue from patient services, primarily Sterling's, is
reported on the accrual basis, net of Estimated third-party contractual
adjustments. Further adjustments are recorded to reflect amounts estimated to be
uncollectible based upon individual contract experience. The allowance
considered necessary to cover contractual adjustments and uncollectibles 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. The Company has arrangements to
supplement patient revenues not achieving specified levels or to cover front-end
staffing and insurance costs.
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. The Company does not require collateral relating to
accounts or subsidy receivables. Sterling's revenues received directly from
governmental agencies made up approximately 26.8% and 30.2% of net operating
revenue for the years ended December 31, 1994 and 1995.
MEDICAL SERVICES EXPENSE -- Through the Professional Corporations, 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 discounted fee-for-service or capitation basis. The
majority of 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), respectively, 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.
FPA purchases stoploss insurance protection which provides thresholds or
"attachment points," generally $100,000 for inpatient services and $25,000 for
outpatient services, both policies on a per member per year basis, at which
point substantially all financial exposure for an enrollee beyond such
thresholds is contractually shifted to the insurer up to a specified level, at
which point the risk for loss returns to the Company.
CASH AND CASH EQUIVALENTS -- Cash equivalents are defined as highly liquid
financial instruments with maturities of 90 days or less from the date of
purchase and so near maturity that there is insignificant risk of changes in
value because of interest changes. The Company maintains its cash and cash
equivalents with high quality financial institutions. At times, such balances
may be in excess of the federally insured limit of $100,000. A substantial
portion of FPA's cash is deposited in four 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.
MARKETABLE SECURITIES -- Marketable securities represent the invested
proceeds of the FPA's public offerings of Common Stock and consist of U.S.
Treasury and government agency obligations, corporate debt securities, and money
market funds. Such securities have been classified by management of FPA 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 reported.
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 estimated useful lives of the assets,
generally three to thirty years. Equipment under capital leases is amortized
using the straight-line method over the shorter period of the lease term or the
estimated useful life of the equipment. Maintenance and repairs are charged to
expense as incurred. Significant renewals or betterments are
F-11
<PAGE> 53
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
capitalized. When property and equipment are retired, or otherwise disposed of,
the cost and related accumulated depreciation are removed from their respective
accounts and any relating gain or loss is reflected in earnings.
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. At
December 31, 1995, $3,000,000 of this balance relates to a pending acquisition
(see Note 20).
GOODWILL -- The Company has classified as goodwill the excess of the
purchase price over the fair value of the assets of entities acquired. Goodwill
is being amortized on a straight-line basis over the estimated periods of future
benefit of 15 to 40 years. At each balance sheet date, the Company evaluates the
recoverability of goodwill and based upon such evaluation, management believes
that no material impairment of goodwill has occurred. In December 1995, the
Company sold and closed a total of eight primary care clinics. In connection
with the sale and closing, the Company recorded a charge for impairment of
goodwill in the amount of $434,000. 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 at December 31, 1995.
INTANGIBLE ASSETS -- Intangible assets consist primarily of capitalized
costs of geographic expansion related to the Company's operations in new regions
and 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 five to fifteen years. Intangible assets also consist of
unamortized loan costs, which are comprised of costs incurred on obtaining
financing, and are amortized over the term of the related debt.
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 11).
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, based on an
actuarial valuation, of its liabilities for 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 accompanying consolidated statements of operations reflect
the effects on historical results as if (i) compensation to certain of FPA's
officers had been consistent with the employment agreements entered into as of
January 1, 1994 and (ii) FPA had been a C Corporation rather than an S
Corporation for income tax purposes, and no tax benefit arose as a result of the
change in tax status.
NET INCOME PER COMMON SHARE -- Net income per common share is computed
based on the weighted average number of shares outstanding, giving retroactive
effect to all stock splits, including a one-for-one stock dividend effective
March 1, 1995. Common equivalent shares consist of the dilutive effect of
outstanding options and warrants calculated using the treasury stock method.
STOCK OPTIONS -- The Company follows the practice of recording amounts
received upon the exercise of options by crediting common stock and additional
paid-in capital. To the extent that the Company realizes an income tax benefit
from the exercise or early disposition of certain stock options, this benefit
results in a decrease in current income taxes payable and an increase in
additional paid-in capital.
NEW ACCOUNTING STANDARDS -- In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which was effective for the Company beginning
F-12
<PAGE> 54
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
January 1, 1996. SFAS No. 121 requires that long-lived and certain intangible
assets held and used by the Company be reviewed for impairment. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which
will be 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 will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior
years' financial statements to conform to current year classifications.
ACCOUNTING ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
UNAUDITED FINANCIAL INFORMATION -- The consolidated financial information
for the nine months ended September 30, 1996 and 1995 included in the
supplemental consolidated financial statements and notes thereto are unaudited.
In the opinion of management, such information contains all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of such information. Information for the nine months ended September 30, 1996 is
not necessarily indicative of the results to be expected for the entire year.
2. ADMINISTRATIVE SERVICES AGREEMENTS
Under administrative services agreements with the Professional
Corporations, FPA and its subsidiaries provide administrative and operational
services such as contract management, marketing, financial reporting,
utilization review, case management, claims processing and payment, and quality
assurance. Pursuant to the agreements, the Professional Corporations assign to
FPA and its subsidiaries as agent all capitation revenues and substantially all
shared risk pool revenues they are entitled to receive under contracts with
Payors for prepaid medical services. In their capacities as agents for the
Professional Corporations, FPA and its subsidiaries remit a portion of the
capitation payments to the primary care physicians in the FPA Network based on
the number of enrollees each physician covers and disburses funds required to
discharge obligations arising from the Payor agreements. As compensation for
services rendered under the agreement, FPA and its subsidiaries generally retain
all revenue in excess of its costs, as defined in the agreement.
The administrative services agreements, except for the agreement with
FPASD, also provide for the assignment of all fee-for-service revenues in
exchange for expanded management services, including the provision of
facilities, non-medical staff and medical supplies for the Professional
Corporation's medical offices, billing for services performed on a
fee-for-service basis, and other services. Because the administrative services
agreement with FPASD does not assign all of its revenues to FPA and does not
obligate FPA to provide FPASD the expanded management services described above,
unilateral and perpetual control does not exist. The operations of FPASD have
not been consolidated into these financial statements.
For the years ended December 31, 1993, 1994 and 1995, total revenues
assigned to FPA and its subsidiaries under these agreements were $13,987,914,
$18,435,877 and $52,691,955, respectively, and
F-13
<PAGE> 55
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
medical services expenses to the Professional Corporations totaled $3,748,153,
$4,173,204, and $7,234,374, respectively. Additionally, prior to January 1,
1994, FPA paid FPASD fixed monthly fees for certain other medical services
provided for the Company.
The administrative services agreements between FPA or its subsidiaries and
the Professional Corporations generally expire in 2003, 2004 or 2005, subject to
renewal for an additional ten years at the option of FPA or its subsidiaries.
Thereafter, the agreements renew for successive ten-year periods unless notice
of intent to let the agreements expire is given by either party.
3. MARKETABLE SECURITIES
Marketable securities at December 31 include the following (at cost which
approximates fair value):
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
U.S. Treasury and government agency obligations.... $ 4,989,820
Corporate debt securities.......................... 4,694,270 $8,228,788
Money market funds................................. 395,721 1,101,052
----------- ----------
Total.................................... $10,079,811 $9,329,840
=========== ==========
</TABLE>
The marketable securities held by the Company at December 31, 1995 have
contractual maturities through March 1998.
4. RELATED PARTY TRANSACTIONS
During 1995, FPA 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, 1994 and 1995, the balance was $85,540 and $300,086, respectively. The
entire outstanding balance, including accrued interest at 7%, is due on demand.
In connection with a note between FPASD and a hospital ("Hospital"), FPA
agreed that it will delay receipt of its shared risk pool revenue payments
related to two Payor agreements until FPASD pays off the note, which is due
September 30, 1996. FPA will earn interest at prime plus 1% on the earned shared
risk pool revenue until it is received. Further, until the note payment is made,
the Company has agreed not to enter into capitated agreements with other
hospitals in San Diego, unless Hospital first elects not to participate in any
such agreement. FPA and FPASD have agreed that FPA will receive certain
additional shared risk pool funds until the note is paid in full.
GMSO leases from an officer of GMSO its main facility, certain leasehold
improvements, and certain medical and office equipment 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 officer, require FPA to acquire the facility at its fair
market value.
F-14
<PAGE> 56
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land........................................................ $ 25,000 $ 25,000
Building.................................................... 139,825 139,825
Computer hardware and software.............................. 317,885 1,730,733
Furniture, fixtures and equipment, including medical
equipment................................................. 3,760,154 7,519,444
Leasehold improvements...................................... 101,457 1,479,653
---------- ----------
4,344,321 10,894,655
Accumulated depreciation and amortization................... (1,231,698) (2,576,385)
---------- ----------
3,112,623 8,318,270
Capitalized software development costs...................... 28,720 1,273,529
---------- ----------
Property and equipment, net................................. $3,141,343 $9,591,799
========== ==========
</TABLE>
6. DEBT
CONVERTIBLE SUBORDINATED NOTES PAYABLE -- On October 5, 1994, FPA sold
$1,000,000 of convertible subordinated notes to representatives of the
underwriters of FPA's initial public offering. The notes bear interest at 6%,
payable semiannually, with principal due October 1999. The notes are convertible
into Common Stock of FPA at the option of the holders at any time prior to
maturity at a conversion price of $5.00 per share, subject to certain
antidilution provisions. These notes were converted during 1996.
CONVERTIBLE PROMISSORY NOTE -- In connection with the acquisition of GMSO
on November 1, 1995 FPA issued a 36-month, $2,500,000 9% convertible promissory
note with payments of interest only due for the first 24 months and principal
and interest monthly thereafter. These notes were paid off during 1996.
LINES OF CREDIT -- At December 31, 1995, GMSO maintained agreements with a
financial institution providing lines of credit totaling $1,400,000. Interest
and amounts borrowed under these lines are payable monthly at the prime rate
(8.5% at December 31, 1995). Borrowings under the lines of credit at December
31, 1995 were $788,325. In January 1996, the balance was repaid in full.
On December 31, 1994, Sterling had a $25,000,000 revolving credit facility
with an outstanding balance of $2,662,242 which was replaced on August 31, 1995
with a $50,000,000 revolving credit facility. At December 31, 1995, borrowings
under the line of credit were $10,000,000. On October 31, 1996, this facility
was repaid and terminated.
Sterling total outstanding borrowings on October 1, 1997 will convert to a
term loan payable in 20 equal quarterly installments of principal plus accrued
interest. The extent of the credit facility is available at the Sterling's
option, provided that total outstanding borrowings under the facility plus other
permitted senior indebtedness shall not exceed a multiple of 3 times (2.75 times
as of July 31, 1996 and 2.5 times as of July 31, 1997) the Company's
consolidated annual cashflow, as defined. At December 1, 1995, $17,000,000 in
additional borrowings was available under the revolving credit facility. The
line is collateralized by (i) the capital stock of all existing and future
subsidiaries, (ii) intercompany notes executed by all subsidiaries, and (iii)
all personal property of Sterling. The revolving credit facility contains
covenants that among other things, require Sterling to maintain certain
financial ratios and impose certain limitations with respect to additional
indebtedness, mergers and acquisitions, liens and encumbrances, disposition of
assets, transactions with related parties, investments and the payment of
dividends. Sterling was in compliance with the terms of the revolving credit
facility at December 31, 1995.
F-15
<PAGE> 57
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
The interest rate is determined based on Sterling's ratio of senior debt to
annualized cash flow, as defined, and accrues at the bank's prime rate plus .25%
to .75%, payable quarterly, or the LIBOR rate plus 1.50% to 2.25%, payable at
the end of each interest period, at Sterling's option. As of December 31, 1994
and 1995, the interest rate was 8.75% and 8.125%, respectively. The weighted
average interest rate on short term borrowings was 6.8% and 8.4% for the years
ended December 31, 1994 and 1995, respectively.
Based upon the amount outstanding at December 31, 1995 under the revolving
credit facility, maturities for each of the next five years and thereafter would
be as follows, assuming conversion to a note payable on October 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------
<S> <C>
1997............................................................ $ 500,000
1998............................................................ 2,000,000
1999............................................................ 2,000,000
2000............................................................ 2,000,000
Thereafter...................................................... 3,500,000
-----------
$10,000,000
===========
</TABLE>
CAPITAL LEASES -- The Company leases equipment under capital leases which
expire at various dates through the year 2000.
NOTES PAYABLE -- In connection with certain acquisitions, the Company has
entered into various additional notes payable.
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Notes payable, interest ranging from 7% to 8.5% and principal due
through January 1, 2002........................................... $ 259,565 $5,270,421
Note payable, interest at 9% and principal due November 9, 1997..... 2,500,000
Convertible note payable, interest at 9% and principal due
November 9, 1998.................................................. 2,500,000
Notes payable to former shareholders of Sterling Health Care, Inc.
interest at rates ranging from 5% to 5.54%, payable in 60 monthly
installments to maturity, January 1998............................ 2,056,464 1,372,895
Notes payable to former shareholder of Emergency Physicians Group,
interest at prime, payable in two equal installments in December
1996 and 1997..................................................... 1,200,000
6% convertible subordinated notes, interest payable April 5th and
October 5th through 1999, principal due October 5, 1999........... 1,000,000 1,000,000
Notes payable to a financial institution, interest ranging from 7%
to 8.5%, paid in full in January 1996............................. 714,858
Notes payable to former shareholder of MedNet, payable in January
1996.............................................................. 266,761
Other............................................................... 647,577 1,230,252
---------- ----------
Total..................................................... 3,963,606 16,055,187
Less current portion................................................ 976,258 7,042,635
---------- ----------
Long-term debt, net of current portion.............................. $2,987,348 $9,012,552
========== ==========
</TABLE>
F-16
<PAGE> 58
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
At December 31, 1995, future payments on long-term debt are as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE CAPITAL
AND OTHER LEASES
------------- -----------
<S> <C> <C>
1996...................................................... $ 6,638,759 $ 500,895
1997...................................................... 4,298,023 328,896
1998...................................................... 2,900,966 139,596
1999...................................................... 1,130,518 29,241
2000...................................................... 134,027 3,458
Thereafter................................................ 111,419
----------- -----------
$ 15,213,712 1,002,086
===========
Less amount representing minimum interest due on capital
leases.................................................. (160,611)
-----------
Present value of net minimum capital lease payments....... 841,475
Notes payable and other................................... 15,213,712
-----------
Total long-term debt...................................... $16,055,187
===========
</TABLE>
The fair market value of the Company's debt approximates its reported
carrying value.
7. MAJOR CUSTOMERS
In 1993, FPA had four Payors which accounted for 38%, 12%, 11% and 10%,
respectively, of FPA's operating revenue, assigned from Professional
Corporations. In 1994, FPA had two Payors which accounted for 33% and 10%,
respectively, of FPA's operating revenue, assigned from Professional
Corporations. In 1995, FPA had two Payors which accounted for 26% and 15%,
respectively, of FPA's operating revenue, assigned from Professional
Corporations. The foregoing percentages exclude the effects of the Sterling
Merger.
8. 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.
On September 21, 1991, FPASD and five founding directors of FPA were named
as defendants in a civil suit in the United States District Court of California
brought under the provisions of the Federal Civil False Claims Act. The
complaint sets forth numerous allegations of improper conduct by the defendants
concerning unsubstantiated billing, improper record keeping and other related
infractions. The Department of Justice conducted an investigation and, at
present, has declined to intervene in the case. FPASD and the five founding
directors of the Company believe the case to be without merit and intend to
defend the action vigorously. In December 1995, FPA was named as an additional
defendant in the suit and in February 1996 was dismissed from the suit.
F-17
<PAGE> 59
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
The Company is a party to certain facilities leases which terminate at
various dates through October 2009. Future minimum lease payments required under
all operating leases are as follows:
<TABLE>
<CAPTION>
RENTS
RECEIVABLE
OPERATING UNDER
LEASES SUBLEASES
----------- ----------
<S> <C> <C>
1996....................................................... $ 4,572,567 $ 283,776
1997....................................................... 4,206,795 264,288
1998....................................................... 3,825,767 254,400
1999....................................................... 3,117,026 254,400
2000....................................................... 2,434,131 256,944
Thereafter................................................. 8,562,389 674,150
----------- ----------
Total............................................ $26,718,675 $1,987,958
=========== ==========
</TABLE>
For 1993, 1994 and 1995, total expense under these non-cancelable operating
leases was $504,503, $844,094 and $2,966,964, respectively.
9. STOCKHOLDERS' EQUITY
STOCK SPLITS AND DIVIDENDS -- The accompanying consolidated financial
statements and notes retroactively reflect all stock splits, and a one-for-one
Common Stock dividend distributed April 3, 1995 to stockholders of record on
March 1, 1995. All share, per share and stock option data have been restated to
reflect the stock splits and dividend.
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.
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, the stockholders authorized an increase in the total number of
shares which may be granted under the plan to 1,500,000. 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 approved the 1995 Non-Employee 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.
F-18
<PAGE> 60
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
Stock option transactions and prices are summarized as follows:
<TABLE>
<CAPTION>
1995
NON-EMPLOYEE
1994 DIRECTORS'
PHYSICIAN NON-QUALIFIED
OMNIBUS STOCK STOCK OPTION STOCK OPTION
OPTION PLAN PLAN PLAN
------------- ------------ ------------
<S> <C> <C> <C>
Shares under option:
Outstanding at January 1, 1994
Granted................................... 858,254
Exercised.................................
Canceled.................................. (3,000)
---------
Outstanding at December 31, 1994............ 855,254
Granted................................... 709,072 477,460 17,500
Exercised.................................
Canceled.................................. (13,692) (25)
--------- ------- ------
Outstanding at December 31, 1995............ 1,550,634 477,435 17,500
========= ======= ======
Average option price per share:
At December 31, 1994...................... $ 5.11 N/A N/A
At December 31, 1995...................... $ 7.72 $ 7.05 $ 8.40
Options exercisable:
At December 31, 1994...................... 100,000
At December 31, 1995...................... 213,832 31,500
</TABLE>
WARRANTS -- In connection with FPA's initial public offering, FPA sold for
$43,290 to the representatives of the underwriters warrants to purchase up to
260,000 shares of Common Stock. The warrants are exercisable through October 20,
1999 at $6.00 per share, subject to certain anti-dilution provisions.
Additionally, FPA granted to one of the representatives of the underwriters
warrants to purchase an additional 15,000 shares of FPA's Common Stock in
exchange for certain advisory services and $75. The warrants are exercisable
through November 22, 1999 at $6.00 per share, subject to certain anti-dilution
provisions.
10. COMPENSATION AGREEMENTS
The Company has employment agreements with its executive officers, which
expire at various dates through 2001. Such agreements, which have been revised
from time to time, provide for minimum salary levels, adjusted annually for
cost-of-living changes and merit increases, as well as for incentive bonuses
which are payable if specified management goals are attained. The aggregate
commitment for future salaries at December 31, 1995, excluding bonuses, exceeds
$10,000,000.
11. INCOME TAXES
Upon the inception of FPA in October 1992, FPA elected S Corporation status
under the Internal Revenue Code which provides that taxable income or loss is
attributable to the stockholders. Effective January 1, 1994, FPA 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 at
the date it became a taxable enterprise.
F-19
<PAGE> 61
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
The components of the income tax expense as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ----------
<S> <C> <C>
Federal expense:
Current................................................... $ 974,870 $2,190,978
Deferred.................................................. (181,312) 204,808
--------- ----------
State expense:
Current................................................... 171,936 348,882
Deferred.................................................. (23,469) (21,348)
--------- ----------
$ 942,025 $2,723,320
========= ==========
</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 the
effect of the following items:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Tax expense at U.S. statutory rate..................................... 34% 34%
Revocation of FPA S Corporation status................................. (4.9)
State taxes, net of Federal income tax benefit......................... 3.2 3.7
Goodwill amortization.................................................. 1.7
Other.................................................................. 2.2 2.1
------ ----
-
Total income tax expense..................................... 34.5% 41.5%
====== ======
</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 liability at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts............................. $1,123,154 $ 2,307,580
Accrued liability for professional liability claims.............. 362,308 321,256
Net operating losses............................................. 173,667 296,511
Other............................................................ 28,534 50,392
---------- -----------
Total deferred tax assets................................ 1,687,663 2,975,739
Deferred tax liabilities:
Geographic expansion costs....................................... (101,068) (179,893)
Acquisition costs currently deductible........................... (231,498)
Fixed assets..................................................... (351,833)
Deferred compensation............................................ (57,565)
Depreciation and amortization.................................... (106,458) (656,625)
---------- -----------
Total deferred tax liabilities........................... (207,526) (1,477,414)
Net deferred tax assets (liability)................................ $1,480,137 $ 1,498,325
========== ===========
</TABLE>
No valuation allowance was deemed necessary as a result of management's
evaluation of the likelihood that all of the deferred tax assets will be
realized.
F-20
<PAGE> 62
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value:
- The carrying amount of cash and cash equivalents approximates fair value
because of the short maturities of those instruments.
- The carrying amount of debt outstanding under the revolving credit
facility approximates fair market value because the interest rate is
variable, based upon prime or LIBOR.
- The carrying amount of notes payable in the aggregate at December 31,
1995 approximates fair value.
13. NEW JERSEY ACQUISITION
On November 7, 1994, the Company acquired substantially all of the
outstanding capital stock of PrimeCare, Inc. ("PrimeCare"), an independent
practice association of physicians operating in southern New Jersey, for 312,570
shares of FPA's Common Stock, valued at $1,953,563. Additionally, the Company
capitalized $307,133 in costs related to the acquisition. The acquisition was
accounted for under the purchase method. Goodwill recorded as a result of the
acquisition of PrimeCare is being amortized over 15 years on a straight-line
basis.
Under the terms of the PrimeCare acquisition, each former PrimeCare
shareholder has agreed, for a period of 18 months following the PrimeCare
closing (if PrimeCare has not entered into contracts with Payors in the southern
New Jersey region for the provision of all outpatient medical services covering
at least 25,000 members (the "Enrollment Date") during the 18 months following
the PrimeCare closing) or four years following the PrimeCare closing (if
Enrollment Date has occurred during the 18 months following the PrimeCare
closing), not to join or affiliate with, or offer any medical services through
any management services organization or similar organization that contracts with
Payors with which the Company or its affiliated entities currently contract.
Additionally, if the Company contracts with Payors whose members are then being
serviced by physicians who are former PrimeCare shareholders, such physicians
will use their best efforts to convert such members to the Company's network.
Each such physician has also granted to the Company, for an identical period of
time, a right of first refusal to purchase such physician's interest in his or
her practice.
14. MICHIGAN SUBSIDIARY
On April 10, 1995, the Company signed an exclusive agreement to provide
management services through a majority-owned subsidiary, QualNet, with Great
Lakes Health Plan, Inc. ("GLHP") headquartered in Southfield, Michigan. GLHP was
licensed as a health maintenance organization from the Michigan Department of
Insurance in 1996. GLHP expects to service Medicaid enrollees in four counties
which currently have over 50,000 eligible Medicaid recipients. GLHP also expects
to market to commercial members following the initial Medicaid enrollment. In
connection with this transaction, the Company invested $2,000,000 in GLHP and
QualNet. QualNet began limited start-up operations on April 10, 1995. Included
in intangible assets at December 31, 1995 are $266,034 in start-up costs related
to activity in Michigan. These costs are being amortized over five years,
beginning when operations commence in Michigan.
15. ARIZONA ACQUISITIONS
Effective July 1, 1995, the Company acquired all of the outstanding shares
of AMCS and WMPS. The purchase price (including direct costs) was $1,911,511
consisting of $1,250,000 in cash, $350,000 in Common
F-21
<PAGE> 63
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
Stock (50,378 shares), a $250,000 three-year note payable, and $61,511 in direct
costs. In connection with this acquisition, $3,100,330 was recorded as goodwill,
which is being amortized over 25 years, and $300,000 was recorded as the value
of a covenant not to compete, which is being amortized over the 11 year
contractual obligation of the physician not to compete. The acquisition was
recorded under the purchase method of accounting. AMCS, WMPS and AMCP serve
approximately 13,000 managed care enrollees in the Phoenix metropolitan area.
During 1995, the Company acquired the assets and certain liabilities of two
physician practices. The aggregate purchase price of these practices was
$2,492,500 of which $1,817,731 was classified as goodwill which is being
amortized over 25 years, and $295,000 was recorded as the value of covenants not
to compete, which is being amortized over the contractual obligation of the
physicians not to compete, ranging from 10 to 13 years. These acquisitions were
accounted for under the purchase method of accounting.
16. TEXAS ACQUISITIONS
Effective November 1, 1995, the Company acquired all of the outstanding
stock of GMSO and OPSU in San Antonio, Texas. The purchase price was
$21,512,824, consisting of $14,710,404 in cash, $1,571,496 in Common Stock
(175,097 shares), $5,000,000 in notes payable, and $230,924 in direct costs.
The Company also loaned to two key employees of GMG and GMSO a total of $660,000
to be repaid over three years. In connection with this acquisition, $19,983,491
was recorded as goodwill, which is being amortized over 25 years, and $1,900,000
was recorded as the value of a covenant not to compete, which is being amortized
over the 15 year contractual obligation of the physician not to compete. The
acquisition was recorded under the purchase method of accounting. GMSO, OPSU,
and GMG serve approximately 38,000 managed care enrollees in the San Antonio
area.
17. CALIFORNIA ACQUISITIONS
During 1995, the Company acquired the assets and certain liabilities of 14
physician practices, and a Professional Corporation concurrently employed 22
additional physicians. The aggregate purchase price (including direct costs) of
these practices was $8,434,701 of which $6,121,916 was classified as goodwill,
which is being amortized over 25 years, and $1,743,000 was recorded as the value
of covenants not to compete, which is being amortized over the contractual
obligation of the physicians not to compete, ranging from five to 11 years.
These acquisitions were accounted for under the purchase method of accounting.
18. STERLING HEALTHCARE GROUP, INC. ("STERLING") ACQUISITIONS
Sterling consummated the following acquisitions in 1994 and 1995 which have
been accounted for using the purchase method of accounting for financial
reporting purposes. Accordingly, the assets and liabilities of the acquired
entities are recorded at their estimated fair values at the date of the
acquisitions. In addition, the results of operations of the companies acquired
have been included in the results of operations of Sterling from the date of
acquisition.
In January 1995, the Sterling acquired the assets of the Skylark Outpatient
Clinic from Patient Services of America, Inc. ("Skylark"). In addition to the
acquisition, Sterling entered into a consulting agreement with one of Skylark's
shareholders. In consideration for the acquisition and consulting agreement,
Sterling issued an aggregate of 154,305 shares of Sterling's Common Stock,
valued at $1.5 million and $1.5 million in cash. Skylark, headquartered in
Ocala, Florida operates a primary care medical facility at that location. The
excess purchase price over the estimated fair value of the net assets acquired
was recorded as goodwill in the amount of $3.0 million and is being amortized on
a straight-line basis over 17 years.
F-22
<PAGE> 64
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
In January 1995, Sterling consummated the acquisition of Medical Networks,
Inc. ("MedNet"). The purchase price consisted of Sterling issuing an aggregate
of 692,114 shares of Sterling's Common Stock valued at $6.7 million, $12 million
in cash, and the issuance of $3.4 million of notes payable. Sterling also
granted a former MedNet shareholder options to purchase 75,000 shares of common
stock at $12.00 per share vesting over a three year period. The excess purchase
price over the estimated fair value of the net assets acquired was recorded as
goodwill in the amount of $20.1 million and is being amortized on a
straight-line basis over 40 years. MedNet, headquartered in Houston, Texas, is a
medical management company contracting with 15 hospitals to provide emergency
department services. MedNet also owns and operates three primary care facilities
under the trade name MedStop.
In September 1995, Sterling consummated the acquisition of Professional
Emergency Physicians, P.A. ("PEP"). PEP, located in Baltimore, Maryland is a
medical management company contracting with 5 hospitals to provide emergency
department services. The purchase price consisted of Sterling Common Stock
valued at $3,100,000 and $3,100,000 in cash. Additional consideration will be
issued or paid in fiscal 1996 in consideration for the adjusted equity of PEP as
defined, on the acquisition date. The agreement also allows for contingent
consideration on the two year anniversary date as defined in the agreement.
Sterling also granted to certain PEP shareholders options to purchase Sterling
Common Stock. The excess purchase price over the estimated fair value of the net
assets acquired was recorded as goodwill in the amount of $6,600,000 and is
being amortized on a straight-line basis over 25 years.
In July 1994, Sterling acquired Regional Emergency Services, Inc.
("Regional"), a Birmingham, Alabama based company engaged in providing physician
contract management services to 14 hospital emergency departments located in
Alabama, Mississippi, and Tennessee. The purchase price consisted of Sterling
Common Stock valued at $1,400,000 and $400,000 in cash. The excess purchase
price over the estimated fair values of the net assets acquired was recorded as
goodwill in the amount of $1,900,000 and is being amortized on a straight-line
basis over 25 years.
In November 1994, Sterling consummated the acquisition of Physician
Services, Inc. dba Physician Services of America and Brightstar Communications,
Inc. (collectively "PSA"). The purchase price consisted Sterling Common Stock
valued at $1,400,000 and $1,600,000 in cash. The excess purchase price over the
estimated fair value of the net assets acquired was recorded as goodwill in the
amount of $2,600,000 and is being amortized on a straight-line basis over 40
years. Sterling also granted to certain PSA shareholders options to purchase
shares of Sterling's Common Stock vesting over a period of two years. PSA,
headquartered in Louisville, Kentucky, provides physician recruitment and
medical management consulting to hospitals, group practices, HMO's, integrated
delivery systems and insurance companies. PSA has also developed a recruiting
service bureau used by hospitals to develop recruiting programs. In addition,
PSA publishes Life in Medicine magazine which focuses on career opportunities
for physicians.
19. LICENSURE
In February 1995, following a dialogue with the California Department of
Corporations (the "Department") regarding whether the Company's operations
classified it as a health care service plan within the meaning of California
law, the Company, on behalf of one of its wholly-owned subsidiaries, FSC, filed
a restricted license application with the Department. Upon licensure, all of the
Company's managed care activity in the State of California is expected to occur
through this subsidiary. Based on discussion with the Department and the advice
of its California regulatory counsel, the Company believes that it will be able
to meet the requirements for licensure. Notwithstanding the foregoing, there can
be no assurance that the Company's license application will be approved by the
Department. The failure to receive such licensure
F-23
<PAGE> 65
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
would cause the Company to alter the way the Company conducts business in the
State of California and could have a material adverse effect on the future
operations of the Company in the State of California.
20. UNUSUAL ITEMS
In the fourth quarter of 1995, Sterling recorded unusual charges of $1.6
million. This amount includes a $43,000 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 the fourth quarter of 1995,
Sterling 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 $3.7 million in revenue and generated an operating loss (including
the unusual items) of $2.1 million for the year.
21. SEGMENT INFORMATION
FPA merged with Sterling, a publicly traded company based in Florida, on
October 31, 1996 (See Note 22). 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 Room").
The activities related to the Primary Care Segment and the Emergency Room
Segment are as follows:
<TABLE>
<CAPTION>
EMERGENCY ROOM PRIMARY CARE CONSOLIDATED
-------------- -------------- --------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
September 30, 1996
Net revenues............................ $100,749 $188,522 $289,271
Operating income........................ 6,309 9,395 15,704
Assets employed at year-end............. 90,659 185,261 275,920
Depreciation and amortization........... 2,342 3,898 6,240
Capital expenditures.................... 412 3,483 3,895
December 31, 1995
Net revenues............................ $115,660 $ 52,691 $168,351
Operating income........................ 6,502 1,624 8,126
Assets employed at year-end............. 78,608 73,799 152,407
Depreciation and amortization........... 2,260 1,159 3,419
Capital expenditures.................... 1,634 3,175 4,809
December 31, 1994
Net revenues............................ $ 39,256 $ 18,435 $ 57,691
Operating income........................ 2,349 383 2,732
Assets employed at year-end............. 26,742 18,310 45,052
Depreciation and amortization........... 438 133 571
Capital expenditures.................... 499 472 971
December 31, 1993
Net revenues............................ $ 13,988 $ 13,988
Operating income........................ 169 169
Assets employed at year-end............. 1,632 1,632
Depreciation and amortization........... 51 51
Capital expenditures.................... 40 40
</TABLE>
F-24
<PAGE> 66
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
22. SUBSEQUENT EVENTS
The following significant events have occurred subsequent to the December
31, 1995 balance sheet date:
CREDIT AGREEMENT -- On January 29, 1996, the Company entered into a
$15,000,000 credit, security, guarantee and pledge agreement ("Credit
Agreement") with two financial institutions. Permitted Borrowings, as defined in
the Credit Agreement, generally include acquisitions and capital expenditures.
Fees of $150,000 were paid in connection with the Credit Agreement. On August
31, 1996, the Amended and Restated Credit, Security, Guarantee and Pledge
Agreement (the "Amended Credit Agreement") was executed, pursuant to which fees
of $900,000 were paid. The Amended Credit Agreement allows for borrowings up to
$45,000,000. Borrowings bear interest at rates ranging from either LIBOR plus
2 1/2%, 2 3/8% or 3%, or prime rate plus 1%, 1 1/4%, or 1 1/2%, as defined by
the Amended Credit Agreement. The balance outstanding is due on the earlier of
December 31, 1996 or the consummation of the acquisition of FHMS and Holding
Company, as hereinafter defined. Periodic payments of accrued interest are due
during the term of the Amended Credit Agreement. Additionally, the financial
institutions were granted a security interest in substantially all of the assets
of the Company (excluding those of Gonzaba Management Services Organization,
Inc., FPA Medical Management of Michigan, Inc. d/b/a QualNet, Inc., and OPSU,
Inc., d/b/a Gonzaba Surgery Center), and the stock of certain subsidiaries of
FPA and Professional Corporations was pledged. The debt is also guaranteed by
the Professional Corporations. In connection with the Amended 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 September 30,
1996, the Company had borrowed $18,421,756 under the Amended Credit Agreement.
On June 28, 1996, FPA borrowed $8,507,760 from a third financial
institution pursuant to a promissory note due on December 31, 1996 and bearing
interest per annum at the higher of the interbank Federal funds rate as
announced by such institution and the base rate of interest announced from time
to time by such institution. Payments under such promissory note were guaranteed
by Foundation Health Corporation.
CALIFORNIA ACQUISITIONS -- Effective January 31, 1996, a Professional
Corporation acquired the stock of three independent practice associations in new
regions in California. All three were stock acquisitions and were financed
through notes payable issued by the Company. In connection with these
transactions, the Company obtained funding from the Credit Agreement for a
cumulative amount of $6,400,000. The purchase price of the first acquisition,
Century IPA, was $7,177,331 ($3,900,000 in cash and the remainder through a
ten-year note payable) and provides the FPA Network access to the Los Angeles,
California, market. The second acquisition, VIP IPA, was made for $6,159,015
($500,000 in cash and the remainder through a ten-year note payable) and
provides the FPA Network access to the Ventura County, California market. The
purchase price of the third acquisition, FHIPA, was $10,063,654 ($7,000,000 in
cash and the remainder through a ten-year note payable) and provides the FPA
Network access to the Sacramento, California, market.
In connection with these acquisitions, the Company opened new
administrative offices in the Los Angeles and Sacramento areas in January, 1996.
These acquisitions will be accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of tangible
assets acquired will be treated as goodwill and amortized over the expected
periods of future benefit to the Company.
Effective November 29, 1996, FPA acquired all of the outstanding stock of
Foundation Health Medical Services, a California corporation ( "FHMS") and
FHMG/TDMC Medical Group, a California Professional Corporation ("Holding
Company") from Foundation Health Corporation and certain of its affiliates
(collectively, "Foundation"). FHMS provides facilities management, non-physician
health care professionals
F-25
<PAGE> 67
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
and other administrative and management services to Holding Company and its
subsidiaries. Holding Company holds the stock of Foundation Health Medical
Group, Inc., a California Professional Corporation and Thomas-Davis Medical
Centers, P.C., an Arizona Professional Corporation. As consideration for the
acquisitions, FPA paid approximately $200 million, comprised of $5 million in
cash, $75 million in FPA Common Stock and $120 million in notes. The acquisition
has accounted for using the purchase method of accounting.
Effective July 1, 1996, the Company acquired an IPA with approximately
14,000 enrollees in Arizona for $4.0 million ($600,000 in cash and the remainder
through a twelve-month note payable). The transaction has been accounted for
using the purchase method of accounting.
Effective October 1, 1996, a Professional Corporation assumed substantially
all of the assets and liabilities of FPASD, owned by officers of the Company,
for approximately $4.1 million. No cash was exchanged pursuant to this
acquisition. The purchase price was supported by an independent valuation.
FLORIDA ACQUISITIONS -- Effective June 1, 1996, FPA acquired all of the
outstanding stock of Physicians First, Inc., a wholly owned subsidiary of
Physician Corporation of America, operating 40 primary care clinics in Florida.
The clinics have approximately 125 primary care physicians which provide
services to approximately 80,000 enrollees. As consideration for the acquisition
and a related agreement not to compete, FPA paid approximately $21,600,000,
comprised of a $15,000,000 note payable by FPA, 525,000 shares of common stock
and warrants to purchase up to 250,000 shares of FPA Common Stock. The
acquisition has been accounted for using the purchase method of accounting.
The following unaudited pro forma financial information presents the
consolidated results of operations if the acquisition of Physicians First, Inc.
had occurred as of the beginning of the periods presented after including the
impact of certain adjustments, such as amortization of intangibles.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues.......................................................... $210,012,819 $308,317,575
Net income........................................................ 2,614,989 7,474,696
Net income per share.............................................. .16 .36
</TABLE>
Effective July 1, 1996, the Company acquired an IPA with approximately
6,000 enrollees for $16.0 million ($2.4 million in cash and the remainder
through a twelve-month note payable). The transaction has been accounted for
using the purchase method of accounting.
GLHP -- On March 7, 1996, FPA made an additional capital contribution of
$3,000,000 to GLHP in connection with the acquisition by GLHP of a clinic health
plan and a number of clinics in Michigan. The acquired plan currently services
approximately 17,000 Medicaid enrollees.
BUSINESS COMBINATION -- On October 31, 1996, FPA and Sterling consummated a
business combination ("the Combination"). As a result of the Combination, each
outstanding share of Sterling $.0001 par value common shares was converted to
.951 shares of FPA, $.002 par value common stock. Sterling's shareholders were
issued approximately 8,097,781 shares of FPA, representing approximately 37% of
the total issued and outstanding shares of FPA after the Combination. The
Combination 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 Sterling since June 1, 1994.
Information concerning common stock and per share data has been restated on an
equivalent share basis. Presented below is the effect of the pooling of
interests on previously reported results of operations for the years ended
December 31.
F-26
<PAGE> 68
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Revenues:
FPA............................................................ $18,435,877 $ 52,691,955
Sterling....................................................... 39,255,573 115,659,527
----------- -----------
$57,691,450 $168,351,482
=========== ===========
Net income:
FPA............................................................ $ 388,313 $ 1,002,462
Sterling....................................................... 1,401,525 2,831,503
----------- -----------
$ 1,789,838 $ 3,833,965
=========== ===========
</TABLE>
F-27
<PAGE> 69
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY SELLING SECURITYHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Recent Developments................... 20
Ratio of Earnings to Fixed Charges.... 21
Use of Proceeds....................... 21
Dividend Policy....................... 21
Description of Debentures............. 22
Description of Capital Stock.......... 30
Certain United States Federal Income
Tax Consequences.................... 32
Selling Securityholders and Selling
Stockholders........................ 35
Plan of Distribution.................. 38
Legal Matters......................... 39
Experts............................... 39
Supplemental Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
FPA MEDICAL
[LOGO] MANAGEMENT, INC.
$80,650,000
6 1/2% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2001
8,361,371 SHARES
OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the amounts of expenses in connection with
the issuance of the Securities offered pursuant to this Registration Statement
which shall be borne by the Company. All of the expenses listed below, except
the Securities and Exchange Commission Registration Fee, represent estimates
only.
<TABLE>
<CAPTION>
ESTIMATED
-----------
<S> <C>
Securities and Exchange Commission Registration Fee..................... $ 62,757.89
Printing and Engraving Expenses......................................... 20,000
Accounting Fees and Expenses............................................ 30,000
Legal Fees and Expenses................................................. 50,000
Miscellaneous Fees and Expenses......................................... 7,000
Total......................................................... $169,757.89
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify its officers, directors, employees and
agents (or persons who have served, at the corporation's request, as officers,
directors, employees or agents of another corporation) against expenses,
including attorneys' fees, actually and reasonably incurred by any such person
in connection with the defense of any action or suit by reason of being or
having been an officer, director, employee or agent, if such person shall have
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful, except that if such action shall be by or in the right of
the corporation, no such indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery of the
State of Delaware, or the court in which the action or suit was brought, shall
determine upon application that, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
FPA's Certificate of Incorporation, as amended, has the following
indemnification provisions:
"SEVENTH"
A. Each person who was or is a party or is threatened to be made a party to
or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) actually and reasonably incurred or suffered by such person in
connection therewith, and such indemnification shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Paragraph B hereof, the
II-1
<PAGE> 71
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article SEVENTH
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article SEVENTH or otherwise. The Corporation may, by action of its Board
of Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
B. If a claim under Paragraph A of this Article SEVENTH is not paid in full
by the Corporation within thirty days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law for the Corporation to indemnify the claimant for the
amount claimed, but the burden of providing such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
C. The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article SEVENTH shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, employee or agent of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.
FPA's By-laws similarly provide that FPA shall indemnify its officers and
directors to the fullest extent permitted by the General Corporation Law of
Delaware.
In addition, FPA has entered into individual indemnification agreements
(the "Indemnification Agreements") with each of its directors. The general
effect on directors' liabilities is set forth in the provisions of the
Indemnification Agreements summarized below:
Proceedings Other Than Proceedings by or in the Right of FPA. A director
shall be entitled to the rights of indemnification if, by reason of his position
with FPA, he is, or is threatened to be made, a party to any threatened,
pending, or completed proceeding, other than a proceeding by or in the right of
FPA. In such case, such director shall be indemnified against all expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such proceeding
or any claim, issue or matter therein, if he acted in good faith and in a manner
he reasonably believed to be in or not
II-2
<PAGE> 72
opposed to the best interests of FPA and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful.
Proceedings by or in the Right of Company. Generally, a director shall be
entitled to the rights of indemnification if, by reason of his position with
FPA, he is, or is threatened to be made, a party to any threatened, pending or
completed proceeding brought by or in the right of FPA to procure a judgment in
its favor. In such case, the director shall be indemnified against all expenses
actually and reasonably incurred by him or on his behalf in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of FPA; provided, however, that if
applicable law so provides, no indemnification against such expenses shall be
made in respect of any claim, issue or matter in such proceeding as to which the
director shall have been adjudged to be liable to FPA unless and to the extent
that the Court of Chancery of the State of Delaware, or the court in which such
proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of the Indemnification
Agreements, to the extent that the director is, by reason of his position with
FPA, a party to and is successful, on the merits or otherwise, in any
proceeding, he shall be indemnified against all expenses actually and reasonably
incurred by him or on his behalf in connection therewith. If the director is not
wholly successful in such proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
proceeding, FPA shall indemnify the director against all expenses actually and
reasonably incurred by him or on his behalf in connection with each successfully
resolved claim, issue or matter.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
4.1 Indenture dated as of December 18, 1996 relating to the Company's 6 1/2% Convertible
Subordinated Debentures due 2001*
4.2 Registration Rights Agreement dated December 13, 1996 by and among the Company and
Smith Barney Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Oppenheimer &
Co., Inc. and Needham & Company, Inc.*
4.3 Form of Debenture
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
12.1 Statements re: computation of ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans P.C.
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
25.1 Form T-1, Statement of Eligibility and Qualification of First Union National Bank,
as Trustee*
</TABLE>
- ---------------
* Previously filed with the Commission
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to Delaware law, the Registrant's
Bylaws or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is,
II-3
<PAGE> 73
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which any offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
PROVIDED, HOWEVER, that paragraphs a(1)(i) and a(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California, on
February 13, 1997.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
------------------------------------
Name: James A. Lebovitz
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
* President, Chief Executive
- --------------------------------------------- Officer and Director
Seth Flam (Principal Executive
Officer)
* Executive Vice President,
- --------------------------------------------- Chief Financial Officer
Steven M. Lash and Treasurer (Principal
Financial Officer)
* Vice President - Finance and
- --------------------------------------------- Chief Accounting Officer
Cheryl A. Moore (Principal Accounting
Officer)
* Chairman of the Board of
- --------------------------------------------- Directors
Sol Lizerbram
* Director
- ---------------------------------------------
Sheldon Derezin
* Director
- ---------------------------------------------
Steven J. Dresnick
* Director
- ---------------------------------------------
Kevin Ellis
Director
- ---------------------------------------------
Michael Feinstein
* Director
- ---------------------------------------------
Howard Hassman
Director
- ---------------------------------------------
Herbert A. Wertheim
Director
- ---------------------------------------------
Harvey Wilson
*By: /s/ JAMES A. LEBOVITZ February 13, 1997
- ---------------------------------------------
James A. Lebovitz
pursuant to a power of attorney
previously filed.
</TABLE>
II-5
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
4.1 Indenture dated as of December 18, 1996 relating to the Company's 6 1/2% Convertible
Subordinated Debentures due 2001*
4.2 Registration Rights Agreement dated December 13, 1996 by and among the Company and
Smith Barney Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Oppenheimer & Co.,
Inc. and Needham & Company, Inc.*
4.3 Form of Debenture
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
12.1 Statements re: computation of ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans P.C.
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
25.1 Form T-1, Statement of Eligibility and Qualification of First Union National Bank, as
Trustee*
</TABLE>
- ---------------
* Previously filed with the Commission
<PAGE> 1
EXHIBIT 4.3
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE
DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH
SUCCESSOR DEPOSITARY. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW
YORK) ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE
& CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
(AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
FPA MEDICAL MANAGEMENT, INC.
6 1/2% Convertible Subordinated Debentures due 2001
No. P-1 $80,650,000
CUSIP 302543AD5
FPA Medical Management, Inc., a corporation duly organized and
existing under the laws of the State of Delaware (herein called the "Company",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to Cede & Co., or its
registered assigns, the principal sum (not to exceed Eighty Million Six Hundred
Fifty Thousand Dollars) shown by the latest entry made in the fourth column of
the Schedule of Exchanges of Securities on the reverse side hereof on December
15, 2001 upon surrender hereof to the Paying Agent, and to pay interest thereon
from the date of original issuance of Securities pursuant to the Indenture or
from and including the most recent Interest Payment Date to which interest has
been paid or duly provided for, semi-annually on June 15 and December 15 in
each year, commencing June 15, 1997, at the rate of 6 1/2% per annum, until the
principal hereof is paid or made available for payment and promises to pay any
liquidated damages which may be payable pursuant to Section 4 of the
Registration Rights Agreement on the Interest Payment Dates. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest, which shall be the June
1 or December 1 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed and upon such notice as may be required by such
exchange, all as more fully provided in said Indenture. Notice of a Special
Record Date shall be given to Holders of Securities not less than 10 days prior
to such Special Record Date. Payment of the principal of and premium, if any,
and interest on this Security will be made (i) in respect of Securities held of
record by the Depositary or its nominee in same day funds on or prior to the
respective payment dates and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee in same day funds at the
office or agency of the Company maintained for that purpose pursuant to Section
1002 of the Indenture, in each case in such coin or currency of the United
States of America as of the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest in respect of Securities held of record by Holders other
than the Depositary or its nominee may be made by check mailed to the address
of the Person entitled thereto as such address shall appear in the Security
Register.
<PAGE> 2
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual signature,
this Security shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
[signatures on following page]
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.
Dated: _________________ FPA MEDICAL MANAGEMENT, INC.
By _________________________
Attest:
________________________
Trustee's Certificate of Authentication.
This is one of the Securities referred to in the
within-mentioned Indenture.
FIRST UNION NATIONAL BANK,
as Trustee
By ____________________________
Authorized Signatory
3
<PAGE> 4
REVERSE OF SECURITY
This Security is one of a duly authorized issue of Securities
of the Company designated as its 6 1/2% Convertible Subordinated Debentures due
2001 (herein called the "Securities"), limited in aggregate principal amount to
$86,250,000 (including Securities issuable pursuant to the Initial Purchasers'
over-allotment option, as provided for in the Purchase Agreement dated December
13, 1996 between the Company and the Initial Purchasers), issued and to be
issued under an Indenture, dated as of December 18, 1996 (herein called the
"Indenture"), between the Company and First Union National Bank, as Trustee
(herein called the "Trustee", which term includes any successor trustee under
the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee, the
holders of Senior Indebtedness and the Holders of the Securities and of the
terms upon which the Securities are, and are to be, authenticated and
delivered.
Subject to and upon compliance with the provisions of the
Indenture, the Holder of this Security is entitled, at his option, at any time
after the 60th day following the date of original issuance of Securities
pursuant to the Indenture and on or before the close of business on December
15, 2001, or in case this Security or a portion hereof is called for
redemption, then in respect of this Security or such portion hereof until and
including, but (unless the Company defaults in making the payment due upon
redemption) not after, the close of business on the second business day
preceding the Redemption Date, to convert this Security (or any portion of the
principal amount hereof which is $1,000 or an integral multiple thereof), at
the principal amount hereof, or of such portion, into fully paid and
non-assessable shares (calculated as to each conversion to the nearest 1/100th
of a share) of Common Stock at a conversion price equal to $25.95 principal
amount for each share of Common Stock (or at the current adjusted conversion
price if an adjustment has been made as provided in the Indenture) by surrender
of this Security, duly endorsed or assigned to the Company or in blank, to the
Company at its office or agency maintained for that purpose pursuant to Section
1002 of the Indenture, accompanied by written notice to the Company in the form
provided in this Security (or such other notice as is acceptable to the
Company) that the Holder hereof elects to convert this Security, or if less
than the entire principal amount hereof is to be converted, the portion hereof
to be converted, and, in case such surrender shall be made during the period
from the opening of business on any Regular Record Date next preceding any
Interest Payment Date to the close of business on such Interest Payment Date
(unless this Security or the portion thereof being converted has been called
for redemption), also accompanied by payment in funds acceptable to the Company
of an amount equal to the interest payable on such Interest Payment Date on the
principal amount of this Security then being converted. Subject to the
aforesaid requirement for payment and, in the case of a conversion after the
Regular Record Date next preceding any Interest Payment Date and on or before
such Interest Payment Date, to the right of the Holder of this Security (or any
Predecessor Security) of record at such Regular Record Date to receive an
instalment of interest (with certain exceptions provided in the Indenture), no
payment or adjustment is to be made upon conversion on account of any interest
accrued hereon or on account of any dividends on the Common Stock issued upon
conversion. No fractional shares or scrip representing fractions of shares
will be issued on conversion, but instead of any fractional share the Company
shall pay a cash adjustment as provided in the Indenture. The conversion price
is subject to adjustment as provided in the Indenture. In addition, the
Indenture provides that in case of certain consolidations or mergers to which
the Company is a party or the sale or transfer of all or substantially all of
the assets of the Company, the Indenture shall be amended, without the consent
of any Holders of Securities, so that this Security, if then outstanding, will
be convertible thereafter, during the period this Security shall be convertible
as specified above, only into the kind and amount of securities, cash and other
property receivable upon the consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock into which this Security might
have been converted immediately prior to such consolidation, merger, sale or
transfer (assuming such holder of Common Stock failed to exercise any rights of
election and received per share the kind and amount received per share by a
plurality of non-electing shares).
4
<PAGE> 5
The Securities are subject to redemption upon not less than 15
and not more than 60 days' notice by mail, at any time on or after December 20,
1999, as a whole or in part, at the election of the Company, at the Redemption
Prices set forth below (expressed as percentages of the principal amount), plus
accrued interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date).
If redeemed during the 12-month period beginning December 15,
in the year indicated (December 20, in the case of 1999), the redemption price
shall be:
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
YEAR PRICE YEAR PRICE
---- ----------- ---- -----------
<S> <C> <C> <C>
1999. . . 102.6% 2000 . . . . . 101.3%
</TABLE>
In certain circumstances involving the occurrence of a
Repurchase Event (as defined in the Indenture), the Holder hereof shall have
the right to require the Company to repurchase this Security at 100% of the
principal amount hereof, together with accrued interest to the Repurchase Date,
but interest installments whose Stated Maturity is on or prior to such
Repurchase Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of business on the relevant
Record Dates referred to on the face hereof, all as provided in the Indenture.
In the event of redemption or conversion of this Security in
part only, a new Security or Securities for the unredeemed or unconverted
portion hereof will be issued in the name of the Holder hereof upon the
cancellation hereof.
The indebtedness evidenced by this Security is, in all
respects, subordinate and subject in right of payment to the prior payment in
full of all Senior Indebtedness, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this
Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided, and (c) appoints the Trustee his attorney-in-fact for any and all
such purposes.
If an Event of Default shall occur and be continuing, the
principal of all the Securities may be declared due and payable in the manner
and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities
under the Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding, and, under certain limited circumstances,
by the Company and the Trustee without the consent of the Holders. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Securities at the time
Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
premium, if any, and interest on this Security at the times, place and rate,
and in the coin or currency, herein prescribed or to convert this Security as
provided in the Indenture.
5
<PAGE> 6
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the office or agency of the Company in any place where the
principal of and any premium and interest on this Security are payable, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Securities are issuable only in fully registered form
without coupons in denominations of $1,000 and any integral multiple thereof.
As provided in the Indenture and subject to certain limitations therein set
forth, Securities are exchangeable for a like aggregate principal amount of
Securities of a different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange except as provided in the Indenture, and the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, except as provided in this Security, whether or not
this Security be overdue, and neither the Company, the Trustee nor any such
agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture. The
Company will furnish to any Holder upon written request and without charge a
copy of the Indenture and/or the Registration Rights Agreement.
6
<PAGE> 7
CONVERSION NOTICE
TO FPA MEDICAL MANAGEMENT, INC.
The undersigned registered owner of this Security hereby
irrevocably exercises the option to convert this Security, or the portion
hereof (which is $1,000 or a multiple thereof) designated below, into shares of
Common Stock in accordance with the terms of the Indenture referred to in this
Security, and directs that the shares issuable and deliverable upon the
conversion, together with any check in payment for a fractional share and any
Security representing any unconverted principal amount hereof, be issued and
delivered to the registered owner hereof unless a different name has been
provided below. If this Notice is being delivered on a date after the close of
business on a Regular Record Date and prior to the close of business on the
related Interest Payment Date, this Notice is accompanied by payment in funds
acceptable to the Company, of an amount equal to the interest payable on such
Interest Payment Date on the principal of this Security to be converted (unless
this Security has been called for redemption). If shares or any portion of
this Security not converted are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. Any amount required to be paid by the undersigned on account
of interest accompanies this Security.
Dated:
_________________________
_________________________
_________________________
Signature(s)
Signature(s) must be guaranteed by
an eligible guarantor institution
(banks, stockbrokers, savings and loan
associations and credit unions with
membership in an approved signature
guarantee medallion program) pursuant
to S.E.C. Rule 17Ad-15, if shares of
Common Stock are to be delivered, or
Securities to be issued, other than
to and in the name of the registered
owner.
______________________________
Signature Guarantee
Fill in for registration of shares of Common Stock if they are
to be delivered, or Securities if they are to be issued, other
than to and in the name of the registered owner:
______________________________
(Name)
______________________________
(Street Address)
______________________________
(City, State and zip code)
(Please print name and address)
Register: _____ Common Stock
_____ Securities
(Check appropriate line(s)).
Principal amount to be converted (if less
than all):
$__________,000
___________________________________
Social Security or other Taxpayer
Identification Number of owner
7
<PAGE> 8
ASSIGNMENT FORM
If you the holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to
________________________________________________________________________________
(Insert assignee's social security or tax ID
number)_________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
________________________________________________________________________________
Date: Your signature:
------------------------ ----------------------------------
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee:
____________________________________________________________
The signature to this assignment should be guaranteed by an
eligible guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with membership in
an approved signature guarantee medallion program) pursuant
to S.E.C. Rule 17Ad-15.
8
<PAGE> 9
CERTIFICATE FOR EXCHANGE OR TRANSFER
Re: 6 1/2% Convertible Subordinated Debentures due 2001
This Certificate relates to $_________ principal amount of
Securities held in *____________ book-entry or *____________ definitive form by
_________ (the "Transferor").
The Transferor*:
[ ] has requested the Trustee by written order to deliver
in exchange for its beneficial interest in a Global Security held by the
Depositary a Security or Securities in definitive, registered form of
authorized denominations and an aggregate principal amount equal to its
beneficial interest in such Global Security (or the portion thereof indicated
above); or
[ ] has requested the Trustee by written order to deliver
in exchange for its Security or Securities a beneficial interest in a Global
Security held by the Depositary in a principal amount equal to the aggregate
principal amount of such Security or Securities; or
[ ] has requested the Trustee by written order to
exchange or register the transfer of a Security or Securities.
In connection with such request and in respect of
each such security, the Transferor does hereby certify to the Company and the
Trustee that Transferor is familiar with the Indenture relating to the above
captioned Debentures and, as provided in Section 305 of such Indenture, the
transfer of this Security does not require registration under the Securities
Act (as defined below) because*:
[ ] Such Security is being acquired for the Transferor's
own account, without transfer (in satisfaction of Section 305(b)(ii)(A) or
Section 305(f)(i)(A) of the Indenture).
[ ] Such Security is being transferred to a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act of 1933,
as amended (the "Securities Act")) in reliance on Rule 144A or pursuant to an
exemption from registration in accordance with Regulation S under the
Securities Act (in satisfaction of Section 305(b)(ii)(B), Section 305(c)(i),
Section 305(d)(i), Section 305(f)(i)(B), Section 305(g)(iii) or Section
305(h)(iii) of the Indenture). An opinion of counsel to the effect that such
transfer does not require registration under the Securities Act accompanies
this Certificate (in satisfaction of Section 305(b)(ii)(B), Section 305(c)(i),
Section 305(d)(i), Section 305(f)(i)(B), Section 305(g)(iii) or Section
305(h)(iii) of the Indenture).
[ ] Such Security is being transferred in accordance with
Rule 144 under the Securities Act, or pursuant to an effective registration
statement under the Securities Act (in satisfaction of Section 305(b)(ii)(B),
Section 305(f)(i)(B) or Section 305(k)(ii) of the Indenture). If such Security
is being transferred in accordance with Rule 144 under the Securities Act, an
opinion of counsel to the effect that such transfer does not require
registration under the Securities Act accompanies this Certificate (in
satisfaction of Section 305(b)(ii)(B), Section 305(f)(i)(B) or Section
305(k)(ii) of the Indenture).
[ ] Such Security is being transferred in reliance on and
in compliance with an exemption from the registration requirements of the
Securities Act, other than Rule 144A, 144 or Regulation S under the Securities
Act. An opinion of counsel to the effect that such transfer does not require
registration under the Securities Act accompanies this Certificate (in
satisfaction of Section 305(b)(ii)(C) or Section 305(f)(i)(C) of the
Indenture).
___________________________
* (Check applicable box).
9
<PAGE> 10
You are entitled to rely upon this certificate and you are
irrevocably authorized to produce this certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
-----------------------------------
[INSERT NAME OF TRANSFEROR]
By:
--------------------------------
Date:
------------------------
10
<PAGE> 11
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company
pursuant to Section 1401 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Security (which is
$1,000 or an integral multiple thereof) purchased by the Company pursuant to
Section 1401 of the Indenture, state the amount you wish to have purchased:
$____________________
Date: ______________ Your Signature(s): ______________________
Tax Identification No.: ______________________
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee:__________________________________________________
The signature to this option of holder to elect
purchase should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan
associations and credit unions with membership in an
approved signature guarantee medallion program) pursuant
to S.E.C. Rule 17Ad-15.
11
<PAGE> 12
SCHEDULE OF EXCHANGES OF SECURITIES
The following exchanges of a part of this Global Security have
been made:
<TABLE>
<CAPTION>
Signature of
Principal Amount of authorized
Amount of decrease Amount of increase this Global signatory of
in Principal Amount in Principal Amount Security following Trustee or
Date of of this Global of this Global such decrease (or Securities
Exchange Security Security increase) Custodian
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
1.
2.
3.
4.
5.
</TABLE>
12
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL]
February 13, 1997
FPA Medical Management, Inc.
3636 Nobel Drive
Suite 200
San Diego, CA 92122
Re: Registration Statement on Form S-3 for
FPA Medical Management, Inc. (the "Company")
Ladies and Gentlemen:
We have acted as your counsel and are rendering this opinion
in connection with the filing of a Registration Statement on Form S-3 (the
"Registration Statement") by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
registration by the Company of (i) $80,650,000 principal amount of its 6 1/2%
Convertible Subordinated Debentures Due 2001 (the "Debentures"), (ii) 3,107,900
shares of the Company's common stock, par value $.002 share (the "Common
Stock"), issuable upon conversion of the Debentures (the "Conversion Shares"),
and (iii) 5,253,471 shares of Common Stock being sold by Individual Selling
Stockholders (the "Individual Shares"). The Debentures were originally issued
under an Indenture dated as of December 18, 1996 (the "Indenture") by and
between the Company and First Union National Bank, as Trustee (the "Trustee").
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of (i) the Registration Statement, as amended by
Amendment No. 1, and all exhibits thereto, (ii) the Indenture and (iii) the
Debentures. We have also examined such corporate records and other agreements,
documents and instruments, and such certificates or comparable documents of
public officials and officers and representatives of the Company, and have made
such inquiries of such officers and representatives and have considered such
matters of law as we have deemed appropriate as the basis for the opinions
hereinafter set forth, including the Company's certificate of incorporation and
bylaws, certain resolutions adopted by the Board of Directors of the Company
relating to the issuance of the Debentures and the Conversion Shares and
statements from certain officers of the Company. In delivering this opinion, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified,
photostatic or conformed copies, the authenticity of originals of all such
latter documents, and the accuracy and completeness of all records, information
and statements submitted to us by officers and representatives of the Company.
<PAGE> 2
FPA Medical Management, Inc.
February 13, 1997
Page 2
Based upon and subject to the limitations, qualifications,
exceptions and assumptions set forth herein, we are of the opinion that:
1. The Debentures have been duly and validly authorized
by the Company and, assuming due authentication by the Trustee, constitute
valid and binding obligations of the Company, enforceable against the Company
in accordance with their terms and are entitled to the benefits (and are
subject to all of the limitations) of the Indenture, except that enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer, fraudulent conveyance or other similar laws affecting or
relating to enforcement of creditors' rights generally, (ii) general principles
of equity, including without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether such
enforcement may be sought in a proceeding in equity or at law) and (iii) the
invalidity or unenforceability under certain circumstances, under state or
federal law or court decisions, of provisions indemnifying a party against
liability for its own wrongful or negligent acts or when such indemnification
is against public policy.
2. The Conversion Shares have been duly authorized by
the Company and, when issued and delivered in accordance with the terms of the
Indenture, will be validly issued, fully paid and nonassessable.
3. The Individual Shares, at the time they were issued
to the Selling Stockholders, were legally issued, fully paid and
non-assessable.
We express no opinion as to the law of any jurisdiction other
than the federal law of the United States, the law of the State of New York and
the General Corporation Law of the State of Delaware.
We hereby consent to the sole use of this opinion as an
exhibit to the Registration Statement and to the use of our name under the
heading "Legal Matters" in the Prospectus included therein. This opinion is
not to be used, circulated, quoted, referred to or relied upon by any other
person or for any other purpose without our prior written consent.
Very truly yours,
/s/ BALLARD SPAHR ANDREWS & INGERSOLL
<PAGE> 1
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------- NINE MONTHS ENDED
1993 1994 1995 SEPTEMBER 30, 1996
-------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Pretax income from continuing
operations.............................. $178,321 $2,731,863 $6,557,285 $ 13,366,035
Add: Fixed charges........................ 3,058 187,364 2,177,943 2,781,465
-------- ---------- ---------- ------------------
Adjusted earnings......................... 181,379 2,919,227 8,735,228 16,147,500
Fixed charges:
Interest expense.......................... 3,058 187,364 2,177,943 2,781,465
-------- ---------- ---------- ------------------
Total fixed charges....................... $ 3,068 $ 187,364 $2,177,943 $ 2,781,465
Ratio of earnings to fixed charges........ 59.3 15.6 4.0 5.8
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-20007 of FPA Medical Management, Inc. on Form S-3
of our report dated March 8, 1996, appearing in the Annual Report on Form 10-K,
as amended by Form 10-K/A, of FPA Medical Management, Inc. for the year ended
December 31, 1995 and to the use of our report dated March 8, 1996 (except for
the pooling of interests with Sterling Healthcare Group, Inc. as described in
Notes 1 and 22, for which the date is October 31, 1996) relating to the
supplemental consolidated financial statements of FPA Medical Management, Inc.
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 10, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of FPA Medical
Management, Inc. on Form S-3 (File No. 333-20007) ("Registration Statement") of
our report dated March 15, 1996, on our audits of the consolidated financial
statements of Sterling Healthcare Group, Inc. as of December 31, 1994 and 1995,
and for the year ended December 31, 1995, and for the period from June 1, 1994
to December 31, 1994, which report is included in this Registration Statement.
We also consent to the reference to our Firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Miami, Florida
February 10, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-20007 of FPA Medical Management, Inc. on Form S-3
of our report dated September 30, 1996 on the combined financial statements of
Foundation Health Medical Services (a wholly-owned subsidiary of Foundation
Health Corporation) and Affiliates as of June 30, 1995 and 1996 and for each of
the three years in the period ended June 30, 1996, and our report dated February
23, 1996 on the financial statements of Foundation Health IPA as of December 31,
1995 and 1994 and for the year ended December 31, 1995 and for the period from
June 7, 1994 (date of inception) to December 31, 1994 (such reports express
unqualified opinions and include explanatory paragraphs referring to significant
related party transactions), appearing in Registration Statement No. 33-13535 of
FPA Medical Management, Inc. on Form S-4.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is a part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Sacramento, California
February 10, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-20007 of FPA Medical Management, Inc. on Form S-3
of the report of Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C. dated April
27, 1994 on the financial statements of Thomas-Davis Medical Centers, P.C. as of
December 31, 1993 and for the year then ended, appearing in Registration
Statement No. 33-13535 of FPA Medical Management, Inc. on Form S-4.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is a part of this Registration Statement.
/s/ STEVENSON, JONES & HOLMAAS, P.C.
STEVENSON, JONES & HOLMAAS, P.C.
Tucson, Arizona
February 10, 1997
<PAGE> 1
EXHIBIT 23.5
[Letterhead of KPMG Peat Marwick LLP]
We consent to the incorporation by reference in the Registration Statement on
Amendment No. 1 to Form S-3 dated February 13, 1997 of FPA Medical Management,
Inc. of our report dated March 29, 1996, with respect to the consolidated
balance sheets of Physicians First, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1995, which report appeared in the registration
statement on Form S-4 of FPA Medical Management, Inc. dated October 4, 1996.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Miami, Florida
February 13, 1997
