<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 10, 1996
FPA MEDICAL MANAGEMENT, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-24276 33-0604264
- -------------------------------------------------------------------------------
(State or other juris- (Commission File (IRS Employer
diction of incorporation) Number) Identification No.)
3636 Nobel Drive, Suite 200, San Diego, California 92122
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (619) 453-1000
Not Applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 10, 1996, the Registrant and certain of its affiliates
acquired from Foundation Health Corporation ("Foundation"), a Delaware
corporation, and certain of its affiliates, all of the outstanding stock of
Foundation Health Medical Services, a California corporation, and FHMG/TDMC
Medical Group, a California professional corporation, pursuant to a Stock and
Note Purchase Agreement dated as of June 28, 1996 (the "Stock Purchase
Agreement"). The acquisition was effective as of November 29, 1996. Pursuant to
the Stock Purchase Agreement, the consideration for the acquisition 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 total number of
shares of FPA common stock included as consideration was determined pursuant to
a formula in the Stock Purchase Agreement based on a cash sum as divided by the
per share closing price of FPA common stock on a certain determination date. The
Registrant utilized its working capital to fund the cash portion of the
consideration. The shares of FPA common stock received by Foundation are not
registered and absent registration can be sold only in transactions exempt from
registration.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
(Incorporated herein by reference to Registrant's
Registration Statement on Form S-4 filed on October
4, 1996.)
Foundation Health Medical Services and Affiliates
Combined Financial Statements as of September 30,
1995 and 1996 (unaudited)
(b) Pro forma financial information
Pro Forma Condensed Consolidated Financial Statements
for the period ended December 31, 1995 and the nine
months ended September 30, 1996
(c) Exhibits
10.1 Stock and Note Purchase Agreement among,
inter alia, the Registrant and Foundation
dated as of June 28, 1996 (incorporated
herein by reference to Registrant's Current
Report on Form 8-K dated June 21, 1996)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Stevenson, Jones, Imig, Holmaas &
Kleinhans, P.C.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
(Registrant)
Dated: January 8, 1997 By: /s/ JAMES A. LEBOVITZ
------------------------------------
James A. Lebovitz
Senior Vice President, General
Counsel and Secretary
<PAGE> 4
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1995 1996
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,617,000 $ --
Patient receivables, net of allowance for uncollectible accounts . . . . . . . . . . . . 7,688,000 4,665,000
Accounts receivable from related parties . . . . . . . . . . . . . . . . . . . . . . . . 2,346,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,518,000 5,105,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,169,000 9,770,000
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,382,000 91,055,000
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 13,532,000 12,115,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,836,000 5,408,000
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,919,000 $118,348,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Reserves for claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,002,000 $ 12,990,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 22,638,000 19,570,000
Accounts payable to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,371,000
Intercompany payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,958,000 7,925,000
Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,319,000 156,818,000
Current portion of other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,422,000 1,497,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,710,000 198,800,000
Noncurrent portion of other notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 238,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,882,000 18,220,000
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,830,000 217,020,000
------------ ------------
Shareholder's deficit:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 20,000
Contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,722,000 4,722,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,653,000) (103,414,000)
------------ ------------
Total shareholder's deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (65,911,000) (98,672,000)
------------ ------------
Total liabilities and shareholder's deficit . . . . . . . . . . . . . . . . . . . $126,919,000 $118,348,000
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 5
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
UNAUDITED
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue:
Capitation revenue -- related party . . . . . . . . . . . . . . . . . . . . . . . . . . $19,618,000 $32,919,000
Patient service revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,858,000 4,175,000
Patient service revenue, net -- related party . . . . . . . . . . . . . . . . . . . . . 1,156,000 1,422,000
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,186,000 745,000
------------ ------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,818,000 39,261,000
------------ ------------
Expenses:
Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,716,000 24,281,000
Health care services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,671,000 17,150,000
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . 9,009,000 8,500,000
General and administrative -- related party . . . . . . . . . . . . . . . . . . . . . . 944,000 675,000
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,219,000 2,429,000
Interest expense -- intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,067,000 2,647,000
------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,626,000 55,682,000
------------ ------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,808,000) (16,421,000)
Benefit (provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 235,000 (656,000)
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,573,000) $(17,077,000)
============ ============
</TABLE>
<PAGE> 6
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, 1996
UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 . . . . . . . . . . . 10,200 $20,000 $4,722,000 $(86,337,000) $(81,595,000)
Net loss . . . . . . . . . . . . . . . . . . (17,077,000) (17,077,000)
------------- ------------ ------------- ------------- -------------
Balance at September 30, 1996 . . . . . . . . 10,200 $20,000 $4,722,000 $(103,414,000) $(98,672,000)
------------- ------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 7
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,573,000) $(17,077,000)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,219,000 2,461,000
Changes in assets and liabilities:
Patient receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (910,000) 163,000
Account receivable from related parties . . . . . . . . . . . . . . . . . . . . . 523,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (539,000) (3,400,000)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . 3,614,000 4,817,000
Accounts payable to related party . . . . . . . . . . . . . . . . . . . . . . . . 387,000
Reserve for claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (699,000) (2,910,000)
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,274,000) (17,251,000)
------------ ------------
Net cash used for operating activities . . . . . . . . . . . . . . . . . . . . . . . . (13,639,000) (32,810,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . (9,657,000) 491,000
Proceeds from transfer of property and equipment to related party . . . . . . . . . . . 8,123,000
Increase in intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,574,000)
Proceeds from sale of specialty practices . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (26,000) 129,000
------------ ------------
Net cash provided by (used for) investing activities . . . . . . . . . . . . . . . . . (3,134,000) 620,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydown of other notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,385,000)
Proceeds from other notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,408,000
Proceeds from intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . 30,209,000 23,782,000
------------ ------------
Net cash flows provided by financing activities . . . . . . . . . . . . . . . . . . . . 24,824,000 32,190,000
------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . 8,051,000 0
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,566,000 0
------------ ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,617,000 0
============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,326,000 $2,303,000
============ ============
Noncash investing and financing transactions:
Assumption of liabilities in conjunction with acquisition of physician
practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,045,000 $ ---
============ ============
Transfer of property and equipment to related party for reduction of
intercompany debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,140,000 $ ---
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 8
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
The combined balance sheets at September 30, 1995 and 1996 and the combined
statements of operations and cash flows for the three months ended September 30,
1995 and 1996, and the statement of shareholder's deficit for the three months
ended September 30, 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited combined
financial statements, and include all adjustments (all of which consist solely
of normal, recurring adjustments) necessary for a fair statement of the results
for the interim periods presented. See Note 3 concerning the termination of the
tax sharing agreement with Foundation Health Corporation. Operating results for
the interim periods presented are not necessarily indicative of the results that
may be expected for any other interim period or for the year as a whole.
NOTE 2 -- TRANSFER OF INTERESTS
FHMG/TDMC Medical Group (the "Holding Company") is a professional corporation
which owns Foundation Health Medical Group, Inc. (FHMG) and Thomas-Davis
Medical Centers, P.C. ("TDMC"). On June 28, 1996 the shareholder of the Holding
Company entered into an agreement to sell all of the outstanding stock of the
Holding Company to an independent practice association. Effective November 29,
1996 the transaction was consummated.
NOTE 3 -- INCOME TAXES
In December 1995 FHMG and TDMC entered into a tax sharing agreement with FHC.
Contingent upon the sale of the stock of the Holding Company (Note 2), such
agreement was terminated effective July 1, 1996. Accordingly, the tax provision
for the three months ended September 30, 1996 does not include the tax benefit
of the net operating losses of TDMC or FHMG for such period.
NOTE 4 -- RELATED PARTY TRANSACTIONS
It is suggested that these interim financial statements be read in conjunction
with the annual financial statements of Foundation Health Medical Services and
affiliates included in FPA's Form S-4 incorporated herein by reference. As
disclosed in such financial statements, Foundation Health Medical Services and
affiliates have material related party transactions.
<PAGE> 9
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES AND ACQUIRED BUSINESSES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO THE MERGER OF STERLING HEALTHCARE GROUP AND THE
ACQUISITION OF FOUNDATION HEALTH MEDICAL SERVICES
(UNAUDITED)
September 30, 1996
<TABLE>
<CAPTION>
FPA Medical
ASSETS Management, Inc
Sterling and Acquisition
FPA Medical Healthcare Pro Forma Pro forma
Management, Inc Group, Inc. Adjustments Consolidated
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $2,526,679 $2,526,679
Marketable securities 1,555,463 1,555,463
Accounts receivable - net 49,734,560 $40,799,245 90,533,805
Current portion of notes receivable 650,953 650,953
Prepaid expenses and other assets 2,732,051 5,133,229 7,865,280
Deferred income tax asset 1,011,018 3,097,318 4,108,336
-----------------------------------------------------------------
Total current assets 58,210,724 49,029,792 - 107,240,516
-----------------------------------------------------------------
Property and equipment - net 17,004,108 2,846,092 19,850,200
Restricted cash and deposits 7,804,728 7,804,728
Goodwill and intangibles- net 95,428,971 38,221,561 133,650,532
Investments in GLHP 4,994,900 4,994,900
Deposits and other assets 1,816,136 562,541 2,378,677
-----------------------------------------------------------------
Total $185,259,567 $90,659,986 $- $275,919,553
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts Payable and accrued expenses $12,010,855 $10,283,937 $13,000,000 [D] $35,294,792
Claims payable, including incurred but not reported claims 47,474,955 47,474,955
Income tax payable 2,273,591 2,273,591
Long-term debt - current portion 48,439,279 3,833,747 52,273,026
Other liabilities 650,000 650,000
-----------------------------------------------------------------
Total current liabilities 110,198,680 14,767,684 13,000,000 137,966,364
=================================================================
Long-term debt - net of current portion 12,761,989 10,801,342 23,563,331
Deferred income tax liability 1,746,461 498,521 2,244,982
Other long term liabilities 1,001,784 3,450,710 4,452,494
Minority interest
Stockholders' equity (deficit):
Common stock 25,084 852 15,344 [C] 41,280
Additional paid in capital 53,683,603 53,710,737 (15,344)[C] 107,378,996
Stock payable 493,100 493,100
Accumulated earnings (deficit) 5,348,866 7,674,570 (13,000,000)[D] 23,436
Less: deferred compensation - stock options (244,430) (244,430)
Less: Due from stockholder
-----------------------------------------------------------------
Total stockholders' equity (deficit) 59,550,653 61,141,729 (13,000,000) 107,692,382
-----------------------------------------------------------------
Total $185,259,567 $90,659,986 $- $275,919,553
=================================================================
</TABLE>
<TABLE>
<CAPTION>
FPA Medical
ASSETS Foundation Health Management, Inc.
Medical Services, Inc. Pro forma Pro forma
and Affiliates Adjustments Consolidated
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ($2,000,000)[A] $526,679
Marketable securities 1,555,463
Accounts receivable - net $4,665,000 95,198,805
Current portion of notes receivable 650,953
Prepaid expenses and other assets 5,105,000 12,970,280
Deferred income tax asset 4,108,336
------------------------------------------------------------
Total current assets 9,770,000 (2,000,000) 115,010,516
------------------------------------------------------------
Property and equipment - net 91,055,000 (72,182,000)[L] 38,723,200
Restricted cash and deposits 7,804,728
Goodwill and intangibles- net 12,115,000 209,672,000 [B] 351,212,532
(4,225,000)[L]
Investments in GLHP 4,994,900
Deposits and other assets 5,408,000 (1,687,000)[L] 6,099,677
------------------------------------------------------------
Total $118,348,000 $129,578,000 $523,845,553
============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts Payable and accrued expenses $19,570,000 ($2,903,000)[L] $51,961,792
Claims payable, including incurred but not reported claims 12,990,000 60,464,955
Income tax payable 2,273,591
Long-term debt - current portion 156,818,000 (75,191,000)[L] 62,273,026
(71,627,000)[M]
Other liabilities 9,422,000 10,072,000
------------------------------------------------------------
Total current liabilities 198,800,000 (149,721,000) 187,045,364
------------------------------------------------------------
Long-term debt - net of current portion 34,000,000 [A] 129,190,331
71,627,000 [M]
Deferred income tax liability 2,244,982
Other long term liabilities 18,220,000 22,672,494
Minority interest
Stockholders' equity (deficit):
Common stock 20,000 (20,000) 49,432
8,152 [A]
Additional paid in capital 4,722,000 (4,722,000) 182,370,844
74,991,848 [A]
Stock payable 493,100
Accumulated earnings (deficit) (103,414,000) 103,414,000 23,436
Less: deferred compensation - stock options (244,430)
Less: Due from stockholder
------------------------------------------------------------
Total stockholders' equity (deficit) (98,672,000) 173,672,000 182,692,382
------------------------------------------------------------
Total $118,348,000 $129,578,000 $523,845,553
============================================================
</TABLE>
<PAGE> 10
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Sterling
FPA Medical Physicians Healthcare Pro forma
Management, Inc. First, Inc. [E] Group, Inc. adjustments
<S> <C> <C> <C> <C>
Managed care revenues $171,500,742 $14,870,833
Fee-for-service revenue 17,020,463 4,176,018 $100,749,819
--------------------------------------------------------------------
Total operating revenue 188,521,205 19,046,851 100,749,819 -
--------------------------------------------------------------------
Expenses:
Medical services 140,110,800 16,128,269 64,686,222
General and administrative 39,015,517 2,811,904 29,754,056 $160,134 [F]
--------------------------------------------------------------------
Total expenses 179,126,317 18,940,173 94,440,278 160,134
--------------------------------------------------------------------
Income (loss) from operations 9,394,888 106,678 6,309,541 (160,134)
Other income (expense)
Interest and other income 343,881 83,940 99,190
Interest expense (2,032,358) (15,382) (749,107) (500,000)[G]
Other expense
--------------------------------------------------------------------
Total other income (expense) (1,688,477) 68,558 (649,917) (500,000)
--------------------------------------------------------------------
Income (loss) before income taxes 7,706,411 175,236 5,659,624 (660,134)
Income tax (expense) benefit (3,378,492) (73,922) (2,218,081) 264,054 [I]
--------------------------------------------------------------------
Net income (loss) $4,327,919 $101,314 $3,441,543 ($396,080)
====================================================================
Pro forma net income per share $0.34
Weighted Average Shares Outstanding [O] 12,613,385
</TABLE>
<TABLE>
<CAPTION>
FPA Medical
Management, Inc. FPA Medical
and Acquisitions Foundation Health Management, Inc.
Pro forma Medical Services, Inc. Pro forma Pro forma
Consolidated and Affiliates adjustments Consolidated
<S> <C> <C> <C> <C>
Managed care revenues $186,371,575 $99,056,000 $285,427,575
Fee-for-service revenue 121,946,300 15,732,000 137,678,300
---------------------------------------------------------------------------
Total operating revenue 308,317,875 114,788,000 - 423,105,875
---------------------------------------------------------------------------
Expenses:
Medical services 220,925,291 137,663,000 358,588,291
General and administrative 71,741,611 36,474,000 $5,726,800 [F] 113,942,411
---------------------------------------------------------------------------
Total expenses 292,666,902 174,137,000 5,726,800 472,530,702
---------------------------------------------------------------------------
Income (loss) from operations 15,650,973 (59,349,000) (5,726,800) (49,424,827)
Other income (expense)
Interest and other income 527,011 5,672,000 6,199,011
Interest expense (3,296,847) (6,855,000) (1,562,214)[G] (11,714,061)
Other expense (2,757,000) (2,757,000)
---------------------------------------------------------------------------
Total other income (expense) (2,769,836) (3,940,000) (1,562,214) (8,272,050)
---------------------------------------------------------------------------
Income (loss) before income taxes 12,881,137 (63,289,000) (7,289,014) (57,696,877)
Income tax (expense) benefit (5,406,441) 16,800,000 11,431,206 [I] 22,824,765
---------------------------------------------------------------------------
Net income (loss) $7,474,696 ($46,489,000) $4,142,192 ($34,872,112)
===========================================================================
Pro forma net income per share $0.36 ($1.39)
Weighted Average Shares Outstanding [O] 21,017,416 25,093,503
</TABLE>
<PAGE> 11
FPA MEDICAL MANAGEMENT INC. AND SUBSIDIARIES AND ACQUIRED BUSINESSES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Sterling
FPA Medical 1995 FPA Foundation Physicians Healthcare
Management, Inc. Acquisitions Health IPA First, Inc. Group, Inc.
<S> <C> <C> <C> <C> <C>
Managed care revenues $49,880,875 $25,090,938 $9,275,866 $34,313,695
Fee-for-service revenue 2,811,080 1,289,937 18,789 7,347,642 $115,659,527
---------------------------------------------------------------------------
Total operating revenue 52,691,955 26,380,875 9,294,655 41,661,337 115,659,527
---------------------------------------------------------------------------
Expenses:
Medical services 37,757,244 20,826,529 10,831,198 37,252,931 69,734,593
General and administrative 13,310,386 6,581,161 871,015 3,873,015 39,423,328
---------------------------------------------------------------------------
Total expenses 51,067,630 27,407,690 11,702,213 41,125,946 109,157,921
---------------------------------------------------------------------------
Income (loss) from operations 1,624,325 (1,026,815) (2,407,558) 535,391 6,501,606
Other income (expense)
Interest and other income 543,973 41,125 28,893 119,166 65,324
Interest expense (354,248) (414,655) (21,649) (1,823,695)
---------------------------------------------------------------------------
Total other income (expense) 189,725 (373,530) 28,893 97,517 (1,758,371)
---------------------------------------------------------------------------
Income (loss) before income taxes 1,814,050 (1,400,345) (2,378,665) 632,908 4,743,235
Income tax (expense) benefit (811,588) (62,503) 927,680 (267,562) (1,911,732)
---------------------------------------------------------------------------
Net income (loss) 1,002,462 (1,462,848) (1,450,985) 365,346 2,831,503
============================================================================
Pro forma net income per share $0.13
Weighted Average Shares Outstanding [O] 7,676,402
</TABLE>
<TABLE>
<CAPTION>
FPA Medical
Management, Inc FPA Medical
and Acquisitions Foundation Health Management, Inc.
1995 Sterling Pro Forma Pro forma Medical Services, Pro forma Pro forma
Acquisitions Adjustments Consolidated and Affiliates [N] adjustments Consolidated
<S> <C> <C> <C> <C> <C> <C>
Managed care revenues $627,179 [H] $119,188,553 $105,174,000 $224,362,553
Fee-for-service revenue $9,629,087 136,756,062 41,374,000 178,130,062
--------------------------------------------------------------------------------------------------
Total operating revenue 9,629,087 627,179 255,944,615 146,548,000 0 402,492,615
--------------------------------------------------------------------------------------------------
Expenses:
Medical services 7,296,001 183,698,496 104,723,000 288,421,496
General and administrative 2,589,077 (641,004)[K] 67,001,723 101,907,000 7,635,733 [F] 176,544,456
994,745 [F]
--------------------------------------------------------------------------------------------------
Total expenses 9,885,078 353,741 250,700,219 206,630,000 7,635,733 464,965,952
--------------------------------------------------------------------------------------------------
Income (loss) from operations (255,991) 273,438 5,244,396 (60,082,000) (7,635,733) (62,473,337)
Other income (expense)
Interest and other income 13,980 812,461 812,461
Interest expense (245,416)[K] (4,584,057) (11,210,000) (2,110,873)[G] (17,904,930)
(1,724,394)[G]
--------------------------------------------------------------------------------------------------
Total other income
(expense) 13,980 (1,969,810) (3,771,596) (11,210,000) (2,110,873) (17,092,469)
--------------------------------------------------------------------------------------------------
Income (loss) before income taxes (242,011) (1,696,372) 1,472,800 (71,292,000) (9,746,606) (79,565,806)
Income tax (expense) benefit 775,353 [I] (1,350,352) 31,368,000 3,898,642 [I] 33,916,291
--------------------------------------------------------------------------------------------------
Net income (loss) (242,011) (921,019) 122,448 (39,924,000) (5,847,964) (45,649,515)
==================================================================================================
Pro forma net income per share $0.01 $(2.22)
Weighted Average Shares
Outstanding [O] 16,470,286 20,546,373
</TABLE>
<PAGE> 12
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FPA Medical Management, Inc. and Subsidiaries ("FPA") has consummated
the following transactions; purchased the business of Grossmont Medical Clinic
("Grossmont") effective May 18, 1995 for $2,385,000 in cash and debt; purchased
Arizona Managed Care Services and Affiliates ("AMCS") effective July 1, 1995
for $1,850,000 in cash, FPA common stock and debt; purchased Gonzaba Management
Services Organization ("Gonzaba") effective November 1, 1995 for $21,512,824
in cash, FPA common stock, and debt; purchased Foundation Health IPA effective
January 31, 1996 for $10,063,654 in cash and debt; purchased Physicians First,
Inc. effective June 1, 1996 for $21,591,541 in cash, FPA common stock, warrants
for shares of FPA Common Stock and debt; merged with Sterling Healthcare Group,
Inc. ("Sterling") in exchange for 8,097,781 shares of FPA common stock
effective October 31, 1996 accounted for as pooling of interest; purchased
Foundation Health Medical Services and Affiliates ("FHMS") for $111,000,00 in
cash, FPA common stock and debt (Grossmont, AMCS and Gonzaba are collectively
referred to as the "1995 FPA Acquisitions"). Also, during 1995, Sterling
acquired Medical Networks, Inc. and Professional Emergency Physicians, P.A.
(collectively, the "1995 Sterling Acquisitions"). These completed acquisitions
by FPA and Sterling were accounted for under the purchase method. The
following adjustments are necessary to reflect the pro forma effects of the
executed and proposed transactions.
Certain of the entities included in the pro forma financial statements
are professional corporations of which FPA is unable to own a majority interest
in states which prohibit the corporate practice of medicine. Such entities are
included in the pro forma financial statements due to the fact FPA
consolidates, or will consolidate upon acquisition, these professional
corporations in the consolidated financial statements of FPA. These
professional corporations are, or will be, consolidated by FPA because FPA has
direct or indirect unilateral and perpetual control over the assets and
operations of the professional corporations, other than by means of owning the
majority of the voting stock of the professional corporations. Also, FPA
believes it has unilateral and perpetual control over the FHMS entities. The
shareholders/directors of these professional corporations have entered into a
succession agreement which requires such shareholders/directors to sell to a
designee of FPA such shareholders/directors' shares of stock if such
shareholders/directors are terminated from FPA. This ensures unilateral and
perpetual control over these professional corporations by FPA. As such, due to
the parent-subsidiary relationship under generally accepted accounting
principles, FPA will consolidate the financial statements of these professional
corporations. FPA believes that consolidation of the financial statements of
the professional corporations is necessary to present fairly the financial
position and results of operations of the Company.
[A] Reflects the $111,000,000 in FPA common stock, debt and cash issued by
FPA in connection with the acquisition of FHMS.
[B] Under purchase accounting, the assets and liabilities of the acquired
entity are required to be adjusted to their estimated fair values.
For the purposes of determining the pro forma effects of the FHMS
acquisition on the balance sheet of FPA, the estimated fair values of
the assets and liabilities of this acquisition have been preliminarily
determined by the management of FPA to be equal to the historically
recorded amounts. A valuation analysis will be performed by
independent consultants and consequently, such estimates are subject
to revision. However, the management of FPA does not expect the final
classification and amortization to materially differ from these
estimates. Accordingly, the estimated excess purchase price paid by
FPA over the net assets of FHMS acquired in the amount of $209,672,000
has been reflected as a pro forma adjustment to goodwill and
intangibles. The management of FPA has preliminarily determined that
substantially all of the excess purchase price in this transaction
will be allocated to the value of the managed care contract acquired
which has a term of 30 years.
<PAGE> 13
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
[C] Reflects the exchange of each share of Sterling common stock for .951
shares of FPA common stock based on FPA's average closing price of
$24.1958 during the measurement period as defined in the Merger
Agreement. Based on Sterling's 8,515,017 shares outstanding at
October 31, 1996 (the effective date of the Sterling Merger), the
total FPA common stock issued was 8,097,781 shares.
[D] Nonrecurring costs estimated to be $ 13,000,000 will be recorded in
connection with the Sterling Merger. These costs consist primarily of
professional fees and certain employee termination costs. Because
such costs are nonrecurring, they have not been recorded in the
accompanying unaudited pro forma condensed consolidated statements of
operations. However, such costs will be charged to income in the
first period following the consummation of the related merger.
[E] As a result of FPA's acquisition, PFI receives fully delegated
capitation revenue from Physicians Corporation of America, the seller,
based on the acquisition agreement with FPA, rather than primary care
capitation only as is reflected in the historical income statements of
PFI. The incremental revenue which PFI would have received under this
fully delegated contract was approximately $31 million for the five
months ended May 31, 1996 (date of acquisition) and approximately $67
million for the year ended December 31, 1995. Additionally, there
would have been a corresponding increase in medical services expense
and general and administrative expense for the provision of hospital
and specialty care services under this fully delegated contract.
[F] For the purpose of determining the pro forma effects of the
acquisitions of the 1995 FPA Acquisitions, FHIPA, PFI and FHMS on
FPA's statement of operations, the following adjustments to
increase(decrease) income have been made.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
1995 FPA
ACQUISITIONS FHIPA PFI FHMS TOTAL
------------ ----- --- ---- -----
<S> <C> <C> <C> <C> <C>
Amoritization over 4-15 years of
intangible assets (1)(2)......................... $(120,555) $(241,005) $ (820,000) $(1,181,560)
Amortization over 25-30 years of
cost in excess of net assets acquired
(goodwill) (2)(3)................................ (728,123) $(402,546) (427,097) (6,815,733) (8,373,499)
Depreciation of additional purchase cost
assigned to property and equipment............... (127,530) 283,780 156,250
Compensation under employment
agreements....................................... 768,331 768,331
-------------------------------------------------------------------
$(207,877) $(402,546) $(384,322) $(7,635,733) $(8,630,478)
===================================================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------
PFI FHMS TOTAL
--- ---- -----
<S> <C> <C> <C>
Amortization over 30 years of costs in excess of net assets
acquired (goodwill) (2) (3) $(177,957) $(5,111,800) $(5,289,757)
Amortization over 4-10 years of intangible assets (1) (2) (100,419) (615,000) (715,419)
Depreciation of purchase cost assigned to property and
equipment 118,242 118,242
---------------------------------------
$(160,134) $(5,726,800) $(5,886,934)
=======================================
</TABLE>
_______________
(1) The amortization period of the identifiable intangible assets is based
on the period of estimated future economic benefit as determined by
FPA in conjunction with independent valuation analysis.
<PAGE> 14
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) The total balance of the goodwill and intangibles would have been
approximately $250,432,371 and $8,364,019, respectively, related to
the 1995 FPA Acquisitions, FHIPA, PFI and FHMS at January 1, 1995.
The total balance of the goodwill and intangibles would have been
approximately $242,058,872 and $7,182,459, respectively, related to PFI
and FHMS at January 1, 1996.
(3) It is expected that substantially all of the excess purchase price
over the net assets acquired in connection with the acquisition of the
FHMS entities will be allocated to the managed care contract which has
a life of 30 years. As the value of the managed care contract will be
amortized over 30 years, the same amortization period as goodwill, and
there would be no difference in the amortization expense, no amount
has been allocated between the goodwill and the managed care contract
for the purposes of the pro forma financial statements.
[G] Reflects the increase in interest expense as a result of the notes issued
in connection with the FPA acquisitions. The debt in the amount of
approximately $116,000,000 that would have been issued or assumed in
connection with the FHMS acquisition bears interest at LIBOR plus .45%. A
one-eighth percent change in the interest rate would have an impact to
interest expense of approximately $109,000 and $145,000 for the nine months
ended September 30 ,1996 and the year ended December 31, 1995,
respectively.
[H] Reflects the increase in revenues for FHIPA as a result of the new provider
agreement with Foundation, the seller, based on the acquisition agreement.
[I] Reflects the estimated income tax effects of the pro forma adjustments.
Additionally, for the year ended December 31, 1995, reflects income taxes
as if the 1995 FPA Acquisitions and the 1995 Sterling Acquisitions were C
Corporations and had accounted for taxes in accordance with the provisions
of SFAS No. 109. No valuation allowance has been recognized related to the
pro forma tax benefits based on FPA Management's belief that it is more
likely than not, based on the assessment of future taxable income and
available tax planning strategies, that such benefit would be realized in
future periods. If FPA had incurred losses before income taxes of
$57,696,877 and $79,565,806 for the nine months ended September 30, 1996
and the year ended December 31, 1995, respectively, included in the pro
forma income statements, FPA would need to generate a comparable amount of
future taxable income over the next 15 years (net operating loss
carryforward period) in order to fully realize the benefit of these net
operating losses.
[J] Not used.
[K] Reflects the reduction in shareholder compensations, bonuses and other
benefits that will not be paid in the future as a result of the 1995
Sterling Acquisitions and the employment contracts that Sterling entered
into, in conjunction with the 1995 Sterling Acquisitions. Additionally,
reflects the amortization of the excess of cost over net assets of
businesses acquired of $216,723, and the incremental interest of $245,416
in conjunction with the 1995 Sterling Acquisitions. Interest is calculated
based on Sterling's 1995 effective borrowing rate of 8.0%. The excess of
the purchase price over the cost of the net assets of the 1995 Sterling
Acquisitions is being amortized on a straight-line basis over periods
ranging from 25 to 40 years. The 1995 Sterling Acquisitions resulted in
additional borrowings on Sterling's bank line of credit in the amount of
$15,100,000 during 1995.
[L] Reflects an adjustment for certain assets and liabilities, as defined in
the Stock and Note Purchase Agreement between Foundation and FPA (the
"Stock Purchase Agreement"), which would have been distributed from FHMS to
Foundation, the seller, prior to the acquisition of FHMS by FPA. Such
assets consist primarily of property and equipment which FPA is not
acquiring in the transaction and is being transferred to Foundation with a
corresponding decrease in the debt due to Foundation.
<PAGE> 15
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
[M] Reflects the reclassification of debt owed to Foundation to long-term as
defined in the Stock Purchase Agreement. The debt due to Foundation in
connection with this acquisition would have consisted of a note for
approximately $94,000,000 bearing interest at LIBOR plus .45%, as may be
adjusted from time to time pursuant to the note, with interest payable
monthly commencing on January 1, 1997 and principal payable in 59 monthly
installments commencing on February 1, 1999 and a final installment of the
remaining principal on December 31, 2003. Such principal payments are based
on a 13 year amortization schedule with a balloon payment at the end of
seven years. In the event FPA issues any debt or equity securities after
December 31, 1998, FPA must prepay the outstanding principal of such note
from the proceeds of such issuance in an amount equal to the lesser of (i)
25% of the amount of the net proceeds of such issuance and (ii) the
principal amount then outstanding under the note. In addition, there was a
$22 million note issued due to Foundation bearing interest at LIBOR plus
.45% for approximately the first seven months and LIBOR plus 3.45%
thereafter maturing 25 months from the closing date, which was paid down
with the proceeds from the issuance of the convertible subordinated
debentures sold in a private placement dated December 18, 1996.
[N] The FHMS amounts included in the pro forma condensed consolidated statement
of operations for the year ended December 31, 1995 represent the unaudited
results of operations of FHMS for the year ended March 31, 1996.
Accordingly, the FHMS income statement amounts for the three months ended
March 31, 1996 are included in the pro forma condensed consolidated income
statements for the year ended December 31, 1995 and the nine months ended
September 30, 1996.
[O] The weighted average shares outstanding was calculated based on the
historical weighted average shares outstanding of FPA giving effect to the
shares of FPA Common Stock issued in connection with the Sterling Merger
(at an exchange ratio of .951). In addition, for the nine months ended
September 30, 1996 and the year ended December 31, 1995, the weighted
average shares outstanding give effect to the 4,076,087 shares of FPA
Common Stock issued in connection with the FHMS acquisition, 525,000 shares
of FPA Common Stock issued in connection with the PFI Acquisition, and
225,475 shares of FPA Common Stock issued in connection with the 1995 FPA
Acquisitions.
<PAGE> 16
EXHIBIT INDEX
Exhibit Exhibit
10.1 Stock and Note Purchase Agreement among, inter alia, the
Registrant and Foundation dated as of June 28, 1996
(incorporated herein by reference to Registrant's Current
Report on Form 8-K dated June 21, 1996)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Current Report on Form 8-K
under the Securities Exchange Act of 1934 of FPA Medical Management, Inc. of our
report dated September 30, 1996 related to the combined financial statements of
Foundation Health Medical Services and Affiliates for the Years Ended June 30,
1994, 1995 and 1996 (which report expresses an unqualified opinion and includes
an explanatory paragraph relating to related party transactions) and contained
in Registration Statement No. 33-13535 of FPA Medical Management, Inc. on Form
S-4 under the Securities Act of 1933.
DELOITTE & TOUCHE LLP
Sacramento, CA.
January 8, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Form 8-K under the Securities
Exchange Act of 1934 of FPA Medical Management, Inc. 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 contained in Registration Statement No. 33-13535 of FPA
Medical Management, Inc. on Form S-4 under the Securities Act of 1933.
STEVENSON, JONES & HOLMAAS, P.C.
Tucson, Arizona
January 8, 1997
