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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3636 NOBEL DRIVE,
(STATE OR OTHER JURISDICTION OF SUITE 200,
INCORPORATION OR ORGANIZATION) SAN DIEGO, CA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
33-0604264 92122
(I.R.S. EMPLOYER (ZIP CODE)
IDENTIFICATION NO.)
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Registrant's telephone number, including area code: (619) 453-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.002 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 21, 1997 was $604,077,078.
The number of shares outstanding of the registrant's Common Stock as of
March 21, 1997 was 30,708,632.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY
REFERENCE IN THIS FORM 10-K.
1. PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS (PART III)
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PART I
ITEM 1. BUSINESS
GENERAL
FPA Medical Management, Inc. ("FPA" or the "Company") 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 emergency departments. FPA provides primary and
specialty care services to prepaid managed care enrollees and fee-for-service
patients through a network of independent practice association ("IPA")
physicians and owned primary care physician groups. On March 17, 1997, the
Company completed its previously announced merger with AHI Healthcare Systems,
Inc. ("AHI") pursuant to which approximately 5.8 million shares of FPA Common
Stock were issued to AHI stockholders and AHI became a wholly-owned subsidiary
of the Company. Following the merger with AHI, FPA is affiliated with
approximately 5,100 primary care physicians and 13,500 specialty care
physicians, and provides services to approximately 830,000 enrollees of 35
health maintenance organizations ("HMOs") or other prepaid health insurance
plans (collectively, "Payors") in ten states. Through its merger with Sterling
Healthcare Group, Inc. ("Sterling") in October 1996, FPA is affiliated with
approximately 1,000 emergency department physicians and manages the emergency
departments of 104 hospitals in 20 states.
FPA's relationships with its subsidiaries, affiliated professional
corporations (the "Professional Corporations"), other providers of medical
services and Payors (collectively, the "FPA Network") offer physicians the
opportunity to participate more effectively in managed care programs by
organizing physician groups within geographic areas to contract with Payors. FPA
improves physician practice operations by assuming administrative functions
necessary in a managed care environment. These functions include claims
adjudication, utilization management of medical services, Payor contract
negotiations, credentialing, financial reporting and the operation of management
information systems. Under these arrangements, FPA, on behalf of the
Professional Corporations, is responsible for the payment of the cost of medical
services, including professional, ancillary and medical management services, and
is entitled to amounts received from Payors in excess of such costs. FPA
believes that its IPA management model is appealing to independent 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, one of the Professional Corporations or subsidiaries of the Company,
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
preauthorization guidelines and are provided through contracts negotiated by FPA
for the Professional Corporations or subsidiaries of the Company 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, 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 year ended December 31,
1996, require entities such as FPA to be licensed as health care service plans.
The application of a wholly-owned subsidiary of FPA 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 regulatory authorities in the other
states in which FPA or its affiliates operate will not impose similar
requirements.
As part of its management and support services to hospital 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.
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
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serving enrollees of Payors in the FPA Network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations or
subsidiaries of FPA have contracts and whose members are patients of physicians
in the FPA Network or (iii) agreements with Payors, physicians and hospitals in
other geographic markets. The process of identifying and consummating suitable
acquisitions of, or affiliations with, physician groups can be lengthy and
complex. The 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 or subsidiaries of FPA
will be able to contract with new Payors. In addition, there can be no assurance
that the Company's acquisitions will be successfully integrated on a timely
basis or that the anticipated benefits of these acquisitions will be realized;
failure to effectively accomplish the integration of acquired entities may have
a material adverse effect on FPA's results of operations and financial
condition. FPA's ability to expand is also dependent upon its ability to comply
with legal and regulatory requirements in the jurisdictions in which it operates
or will operate and to obtain necessary regulatory approvals, certificates and
licenses.
The health care industry is subject to extensive federal and state
legislation and regulation. Changes in the regulations or reinterpretations of
existing regulations could significantly affect the business of FPA.
THE MANAGED HEALTH CARE INDUSTRY
Medical services traditionally have been provided on a fee-for-service
basis with insurance companies assuming responsibility for paying all or a
portion of such fees. The increase in medical costs under traditional indemnity
health care plans has been caused by a number of factors, including, but not
limited to, the lack of incentives on the part of health care providers to
deliver cost-effective medical care and the absence of controls over the
utilization of costly specialty care physicians and hospitals.
As a result of escalating health care costs, employers, insurers and
governmental entities have all been seeking cost-effective approaches to the
delivery of and payment for quality health care services. HMOs and other managed
health care organizations have emerged as integral components in this effort.
HMOs enroll members by entering into contracts with employer groups or directly
with individuals to provide a broad range of health care services for a
capitation payment, with minimal or no deductibles or co-payments required of
the members. HMOs, in turn, contract either directly with physicians, or through
organizations like FPA, hospitals and other health care providers to administer
medical care to HMO members. These contracts provide for payment to the provider
on either a discounted fee-for-service or per diem basis, or through capitation
payments based on the number of members covered, regardless of the amount of
necessary medical care required within the covered benefits.
In response to the growth in HMO penetration, several provider group models
have evolved pursuant to which Payors generally shift certain administrative and
economic burdens to physicians. Administrative burdens include justifying
medical procedures, seeking authorization for tests and surgical procedures and
responding to additional oversight from Payors. These burdens have been
exacerbated by the proliferation of HMOs, which require physicians to comply
with multiple formats for claims processing, credentialing and other
administrative reporting requirements. As a result, physicians' operating
expenses and the number of hours devoted to non-medical activities have
increased. In addition to adding these administrative pressures, by capitating
payments to physicians, HMOs, in effect, have also begun to shift to physicians
a significant portion of the economic risk of providing health care. These
arrangements exert more pressure on the physician to reduce costs and
unnecessary medical treatments while continuing to deliver quality medical care.
To relieve these administrative and economic burdens, physicians have begun
to outsource to third parties, such as PPMs, both the management of economic
risk and the non-medical management tasks associated with the practice of
medicine. PPMs provide management and other administrative services to
physicians and, in certain circumstances, manage a portion of the economic risk
involved in providing health care. PPMs also help physician groups by
negotiating capitation rates and incentive payment arrangements with Payors.
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In addition to physician practices, hospitals have been affected by the
changing health care industry. Cost considerations are important to hospital
operations, particularly with respect to emergency room departments. FPA
believes that hospital emergency departments play a central role in determining
levels of admissions and profitability as well as in establishing a hospital's
reputation in the community. However, the ability of hospitals to provide high
quality health care services, including emergency care services, has been
adversely affected by recent trends in the U.S. health care industry. Continuing
cost-containment pressures are causing hospitals to seek new ways to provide
high quality services in a cost effective manner. In addition, hospitals face
numerous problems in managing their emergency departments, including
difficulties in recruiting, evaluating, scheduling and retaining emergency
physicians. Hospital emergency departments also continue to experience
increasing patient volumes, a shortage of board certified emergency physicians
and extensive use for routine primary care, particularly at night and on
weekends.
THE FPA NETWORK
The FPA Network currently has contracts to provide services to
approximately 830,000 enrollees of 35 Payors, which enrollees are serviced by
approximately 6,100 primary care physicians (including emergency department
physicians) and 13,500 specialty care physicians. Listed below is a breakdown as
of March 21, 1997 of enrollees, Payors, primary care physicians and specialty
care physicians by region.
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STATES ENROLLEES NUMBER OF PAYOR PRIMARY CARE SPECIALTY CARE PHYSICIANS
- ------ --------- CONTRACTS PHYSICIANS -------------------------
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Arizona 194,415 3 572 1,036
California 312,288 20 1,741 5,235
Delaware 7,978 1 75 74
Florida 114,433 2 492 2,095
Michigan 34,687 1 406 1,028
New Jersey 27,618 3 926 447
North Carolina 12,205 2 52 24
South Carolina 10,384 1 207 20
Texas 118,846 9 1,067 2,495
Pennsylvania - - 351 -
Georgia 353 1 182 863
Kentucky - - 70 197
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MANAGED CARE BUSINESS
FPA provides management services to physicians, hospitals and Payors in the
FPA Network. FPA's services include: (i) comprehensive management information
systems ("MIS") that collect and assimilate data necessary for monitoring and
managing health care costs; (ii) claims administration and billing services;
(iii) utilization management of medical services and related financial reporting
and analysis; (iv) care coordination and case management assistance for
enrollees requiring medically complex or long-term health care; (v) monitoring
of the quality and cost of hospital and ancillary care; and (vi) credentialing
and recruiting of physicians.
Management Information Systems. FPA maintains an on-line database that
provides inpatient and outpatient utilization statistics and patient encounter
reporting and tracking. FPA believes that the availability of timely information
on utilization patterns improves primary care physician productivity and
effectiveness. This data also plays an integral role in the specialty care
physician and hospital utilization control process as by enabling the medical
directors and utilization control nurses to monitor encounter data, case
management decisions and patient outcomes. In addition, Serling has developed
MIS specific to hospital and clinical management services. The MIS collects data
regarding patient flow utilization, physician efficiency and other data used by
Sterling and hospital clients. In particular, Sterling uses the data to develop
staffing patterns. Further, the MIS assist FPA in performing various
administrative functions, including insurance verification, payment of accounts
payable, financial reporting and claims payment. The MIS also include the
customer service documentation system which assists FPA in resolving concerns
enrollees may have and in evaluating patient and physician satisfaction.
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Claims Administration and Billing Services. FPA possesses complete medical
bill review and claims processing capabilities. These capabilities include
determining enrollee eligibility, identifying appropriate benefits, issuing
payments to providers, processing hospital and outpatient facility charges for
the payment of claims and providing and analyzing encounter data. As a service
to certain Professional Corporations, FPA performs fee-for-service billing and
collections. Billing staff register fee-for-service patients, send monthly
statements and pursue collection.
Utilization Management. Physicians within the FPA Network have established
a utilization management program to help ensure the delivery of high quality,
cost-effective health care. Utilization management encourages physicians in the
FPA Network to provide cost-effective, quality care by emphasizing preventive
medicine and by eliminating unnecessary tests, procedures, surgeries,
hospitalizations and referrals to specialty care physicians. Referrals to
specialty care physicians and all hospital admissions, with the exception of
emergencies, generally require prior approval by the utilization management
committees of the various Professional Corporations or subsidiaries. Each
utilization management committee has established guidelines for routine
referrals which can be authorized by the committee's staff. Following admission,
a patient's status is monitored daily by a member of the utilization management
committee, in conjunction with the admitting physician or in-house intensivist,
to assure timely and appropriate hospital discharge. A member of the utilization
management committee coordinates with hospital nurses for discharge planning and
use of sub-acute alternatives to hospitalization. FPA has developed separate
utilization management committees on a regional basis due to expansion into new
geographic markets.
Case Management. Case management is a service administered by the various
utilization management committees and is a clinical and administrative process
by which health care services are identified, coordinated, implemented and
evaluated on an ongoing basis for enrollees experiencing selected health
problems. Such selected health problems include chronic disability, complex
medical cases or problems requiring long-term care. Case management involves the
coordination of a variety of services, including home nursing, home infusion and
the provision of durable medical equipment. This approach provides a continuum
of quality care throughout the extended treatment period.
Quality Assurance. The FPA Network maintains, as a service to both its
physicians and Payors, a comprehensive quality assurance program designed to
improve patient care. The quality assurance program incorporates peer review,
patient satisfaction surveys, medical records audit, continuing medical staff
development and regular continuing medical education seminars as required by
accrediting organizations, state law and licensing requirements. Medical staff
development includes the provision of training and support programs to encourage
the team-oriented delivery of high quality, cost-effective medical care.
Physician Credentialing and Recruitment. As a service to Payors and the
Professional Corporations, FPA verifies that the credentials of physicians in
the FPA Network meet the minimum requirements specified in Payor contracts. In
addition, FPA assists the Professional Corporations in the recruitment of highly
competent physicians who share in the philosophy of prepaid managed health care.
The recruitment process includes a lengthy series of interviews and reference
checks incorporating a number of credentialing and competency assurance
protocols. All of the FPA Network's physicians are licensed to practice medicine
in the state where they provide medical services and are generally either board
certified or board eligible.
EMERGENCY DEPARTMENT BUSINESS
General. With the acquisition of Sterling, FPA provides physician practice
management services to 104 hospital emergency departments, one hospital
anesthesiology department and four correctional institutional health
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facilities in 20 states. FPA contracts with approximately 1,000 affiliated
physicians. These contracts typically provide all necessary physician coverage
for hospital emergency departments on a 24-hour, 365-day basis. The Company
identifies and recruits physicians as candidates for admission to a client's
medical staff and coordinates the on-going scheduling of staff physicians, who
provide clinical coverage in the area of emergency medicine and, in one
hospital, anesthesiology. The Company also provides an on-site medical director
for the hospital's emergency department, who works directly with the hospital
medical staff and administration in such areas as quality assurance, risk
management and departmental accreditation.
Physician Recruiting. Recruiting physicians is an essential service
provided by Sterling to its hospital clients. Sterling's physician recruitment
methods include the use if its in-house search firm and certain third party
search firms, direct contact with residency programs, mail solicitations,
medical journal advertising, telemarketing and use of personal contacts.
Sterling has developed a proprietary computer database, which is periodically
updated, to identify physicians who might be available as independent
contractors for Sterling.
Affiliating with Sterling offers physicians the opportunity to minimize
their administrative burden and concentrate on the practice of medicine. The
Company believes that many physicians enjoy the relative freedom from the
business aspects of medicine, including the development of a patient base, the
financing of a practice and the complexity associated with billing and
collection procedures, that results from affiliation with Sterling. As a
provider of contract management services across a broad geographic spectrum,
Sterling can offer a physician substantial flexibility in terms of geographic
location, type of facility and opportunities for relocation. The physician also
tends to gain greater individual control over the number and scheduling of hours
worked. Physicians under contract with Sterling also have the option of
conveniently obtaining professional liability insurance with somewhat more
favorable terms than might otherwise be available.
AGREEMENTS WITH PAYORS, PROVIDERS AND EMERGENCY DEPARTMENTS; ADMINISTRATIVE
SERVICE AGREEMENTS
Contracts with Payors. FPA arranges for contracts between Payors and the
Professional Corporations or subsidiaries. These contracts generally provide for
terms of one to thirty years, with automatic renewal periods, terminable upon
prior notice (generally between 30 and 180 days) by either party. These
contracts obligate the Professional Corporations or subsidiaries to deliver
covered medical benefits and to coordinate all inpatient and outpatient care for
enrollees. Under most of these arrangements, the Professional Corporation or
subsidiary receives a capitation payment for each Payor enrollee who selects a
primary care physician who is employed by or affiliated with such Professional
Corporation or subsidiary. These capitation payments, in turn, are assigned to
FPA pursuant to FPA's administrative services agreement with the Professional
Corporation. The Professional Corporations (and indirectly, FPA) retain a level
of risk for the provision of appropriate medical care. In addition, these
contracts typically provide for bonuses derived from shared risk arrangements
and provide other financial incentives designed to encourage efficient
utilization of hospital and other medical services provided to enrollees. To
encourage efficient utilization of hospital and related services, the Payor
contracts typically establish a yearly shared risk pool from which all payments
for hospitalization and other specified services are deducted. At the end of the
period, the Professional Corporation or subsidiary is entitled to a portion of
any excess amounts over actual expenditures deducted from the pool. Certain of
the Payor contracts which are material to FPA obligate the Professional
Corporation to bear a portion of any deficit in this fund. To date, however,
neither FPA nor any Professional Corporation has been called upon to pay any
deficit. Under most circumstances, when such deficits do occur, they are carried
forward and offset against future surpluses. Additionally, some Payor contracts
contain similar arrangements with respect to other specialty care services. FPA
purchases stoploss insurance protection which provides thresholds or "attachment
points," generally $100,000 for inpatient services (up to an aggregate of $5
million) and $25,000 for outpatient services (up to an aggregate of $1 million)
per year, at which substantially all financial exposure for an enrollee beyond
such thresholds is contractually shifted to the insurer. The failure of FPA to
negotiate favorable attachments 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.
In 1996, revenue from two Payors, Physician Corporation of America and
Foundation Health Corporation, each exceeded 10% of FPA's operating revenue, and
collectively accounted for approximately 25% of FPA's operating revenue. The
loss of either of these Payors could have a material adverse effect on FPA.
Contracts with Providers. The FPA Network, through the Professional
Corporations, subsidiaries and Payors, contracts with a variety of providers,
including primary and specialty care physicians, hospitals and other ancillary
providers. These agreements generally have terms up to three years, are
automatically renewable and are terminable by either party on the
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following December 31 upon at least 90 days' prior notice. A primary care
physician's affiliation and compensation arrangement with a Professional
Corporation or subsidiary may take one of several forms. The physician may be
(i) an individual or a member of a group practice or an IPA which (a) contracts
with FPA and a Professional Corporation for FPA's services and receives
capitation payments based on the number of enrollees and is entitled to
additional compensation based upon efficiency in utilizing the services of
specialty care providers, subject to other factors including but not limited to
compliance with contractual quality standards or (b) enters into an arrangement
with FPA and one of its Professional Corporations; or (ii) an individual or
group practice of physicians which sells to FPA and a Professional Corporation
the assets of its practice and receives as compensation for employment a base
salary and productivity bonus, or receives a percentage of net collections of
the practice determined in accordance with applicable law. The physician or
group which sells its practice still practices medicine in the same location.
While such physician or group is employed and paid by a Professional Corporation
or subsidiary, FPA provides most employees and administrative services to such
physician or group. In general, a primary care physician is entitled to earn
additional compensation if the medical practice, determined in accordance with
applicable law, meets certain performance standards.
In November 1994, the Board of Directors approved a physician stock option
program effective January 1, 1995. Under this program, physicians are eligible
to receive options to purchase FPA's Common Stock if they reach objective
quality standards set by FPA.
The compensation structures for primary care physicians are set to be
competitive within the geographic area in which each physician is employed. FPA
currently surveys physician compensation patterns and programs in HMO and other
group practice settings to ensure that FPA Network physicians' compensation and
benefits are competitive.
Specialty care providers contract with a Professional Corporation or
subsidiary to provide medical services to enrollees and are compensated on a
discounted fee-for-service or capitated basis. Hospital and affiliated medical
facilities contract with a Professional Corporation or subsidiary and Payors to
provide both inpatient and outpatient services to enrollees on a
fee-for-service, per diem or capitated basis, which are discounted from
customary charges.
Emergency Departments-Client Contracts. Sterling provides physician
practice management services to hospitals under fee-for-service contracts and
flat-rate contracts. A substantial portion of Sterling's hospital-based net
revenues are derived from payments made on a fee-for-service basis. Hospitals
entering into fee-for-service contracts agree, in exchange for Sterling's
services, to authorize Sterling and its contracted health care professionals to
bill and collect the professional component of the charges for medical services
rendered by Sterling's contracted health care professionals. Under the
fee-for-service arrangements with hospital clients, Sterling receives direct
disbursements of the amounts collected and, depending on the magnitude of
services provided to the hospital and payor mix, may also receive a subsidy from
the hospital client for Sterling's physician practice management services.
Pursuant to such arrangement, Sterling accepts responsibility for billing and
collection and assumes the risks of changes in patient volume, payor mix and
third-party reimbursement rates, delays attendant to reimbursement through
government programs and other third-party payors and uncollectibility of
accounts. All of these factors are taken into consideration by Sterling in
arriving at contractual arrangements with health care institutions and
professionals. Clients entering into flat-rate contracts pay fees to Sterling
based on the hours of physician coverage provided.
Sterling provides physician practice management services to hospitals under
contracts that generally have terms of one or two years, renewable automatically
under the same terms and conditions unless either party gives the other written
notice of its intent not to renew at least 90 days prior to the end of the then
current term. Many of these agreements provide for termination by the hospital
without cause on relatively short notice.
Emergency Departments-Physician Contracts. Sterling contracts with
physicians as independent contractors to provide services to hospital clients.
Professional fees from Sterling to the physicians are typically calculated on a
flat rate based on the number of hours of coverage provided. Some physicians may
receive, in addition to a flat hourly fee, other compensation based upon
departmental performance and their individual contribution to such performance.
Consistent with Sterling's treatment of the physicians as independent
contractors, under his or her contract, each physician is responsible for his or
her own self-employment tax, social security and workers' compensation insurance
payments, if any. Under Sterling's contracts with hospitals, a physician who
provides services at hospitals is required to obtain professional liability
insurance with coverage limits as specified in such contracts. Agreements
between Sterling and its independent contractor physicians typically can be
terminated by Sterling at any time under certain circumstances
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(including, in the case of the independent contractors retained to staff
hospital emergency rooms, termination of Sterling's contract with the hospital)
or by either party without cause, typically upon 90 to 120 days' prior notice.
Administrative Services Agreements. FPA has entered into administrative
services agreements with the Professional Corporations which delegate to FPA
certain administrative, management and support functions which are required by
physicians in the practice of medicine (the "Administrative Services
Agreements"). Pursuant to the Administrative Services Agreements, FPA generally
provides facilities, fixtures and equipment for the provision of all medical
services. The Administrative Services Agreements generally have either (i)
initial terms of 10 years and are renewable for an additional 10 year period at
FPA's election and thereafter renew automatically for a third 10-year term
unless either party elects to terminate or (ii) a term of 40 years.
Pursuant to the Administrative Services Agreements, the Professional
Corporations have assigned to FPA, as agent for the Professional Corporations
and as security for the payment to FPA of its management fee, substantially all
revenue received by the Professional Corporations, retain the rights to its
fee-for-service revenue and provide for its own operating costs. "Revenue" is
generally defined as all capitated sums which the Professional Corporations
receive or become entitled to receive for the performance of medical services by
physicians employed by or under contract with the Professional Corporations, all
fee-for-service revenue and substantially all shared risk pool revenue received.
Amounts that may not be assigned to FPA under applicable law (including
traditional fee-for-service Medicare payments) are not included in the revenue
assigned to FPA. As compensation for services rendered to the Professional
Corporations by FPA under the Administrative Services Agreements, FPA receives a
management fee, which consists of assigned revenues minus the costs associated
with the provision of medical care and general and administrative expenses. FPA
remits a portion of the capitation payments on behalf of the Professional
Corporations to the primary care physicians in the FPA Network based on the
number of enrollees each physician covers, regardless of the amount of medical
care provided. Pursuant to the Administrative Services Agreements, the
Professional Corporations appoint FPA as collection and disbursement agent to
collect receivables and disburse funds required to discharge obligations arising
form the Payor agreements.
AGREEMENTS WITH BILLING FIRMS
Sterling's fee-for-service hospital-based billing and collection services
are provided by two nonaffiliated billing firms. Sterling enters into a separate
written agreement with each billing firm for each hospital client to which
services are provided. Each billing firm reviews patient charts, prepares
invoices for the services provided and submits insurance claims, if any. Under
Sterling's arrangements with independent contractor physicians, collections are
paid directly to accounts from which Sterling has the right to withdraw its
management fees. Sterling receives monthly reports on billings invoiced and cash
collected. As of December 1996, the monthly rates paid by Sterling to the
billing firms and collection services were approximately $900,000, collectively.
Sterling's primary care billing and collection functions are serviced
internally.
COMPETITION
The health care industry is highly competitive and is subject to continuing
changes in how services are provided and how providers are selected and paid.
Generally, FPA and the Professional Corporations compete with any entity that
contracts with Payors for the provision of prepaid health care services. The FPA
Network also competes with other companies, including PPMs, which provide
management services to health care providers. FPA also competes with local
physician groups and hospitals for the provision of physician practice
management services to hospital emergency departments. FPA also competes with
other companies for acquisitions of PPMs, IPAs and physician practices. Certain
competitors are significantly larger and better capitalized than FPA, provide a
wider variety of services, have greater experience in providing physician
practice management services and have longer-established relationships with
buyers of such services than does the Company.
GOVERNMENTAL REGULATION
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which FPA operates will not change
significantly in the future. Generally, regulation of health care companies is
increasing.
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Reimbursement. Various proposals affecting federal and state regulation of
the health care industry, including limitations on Medicare and Medicaid
payments, have been introduced in the past, including provisions that would
reduce funds available for the Medicare program. Any limitation on Medicare,
Medicaid or other government sponsored payments may adversely affect FPA. For
example, Sterling derived approximately 30% of its 1996 hospital-based operating
revenue from payments made by government-sponsored health care programs,
principally Medicare and Medicaid. Furthermore, funds received under these
programs are subject to audit and retroactive review. In addition, many of
Sterling's services are reimbursed pursuant to Resource Based Relative Value
Scale ("RBRVS"). FPA believes that the impact of RBRVS on Sterling's operations
and financial condition has not been significant. However, if future changes are
adopted relating to the RBRVS fee structure, the aggregate fee payments from
Medicare for certain emergency department procedures could be affected. If the
result is a reduction in such fees, especially if followed by reductions in
reimbursement by commercial third party payors, the RBRVS system could adversely
affect Sterling's operating results or financial condition. There can be no
assurance that the payments under any governmental and private third party payor
program 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 could adversely affect the operations of
the Company.
Corporate Practice of Medicine. Federal law and the laws of the states
where FPA and the Professional Corporations currently operate generally specify
who may practice medicine and limit the scope of relationships between medical
practitioners and other parties. Under certain states' laws, FPA is prohibited
from practicing medicine or exercising control over the provisions of medical
services. In order to comply with such laws, the FPA Network is organized so
that all physician services are offered by the physicians who are employed by or
affiliated with the Professional Corporations. In order to comply with such
laws in those states, FPA does not employ practicing physicians as
practitioners, exert control over their decisions regarding medical care or
represent to the public that it offers medical services. FPA has entered into
administrative services agreements with the Professional Corporations which
delegate to FPA the performance of certain administrative, management and
support functions. FPA believes that the services it provides to the FPA Network
do not constitute the practice of medicine under applicable laws.
Licensing Requirements. Every state imposes licensing requirements on
individual physicians and on facilities and services operated by physicians. In
addition, federal and state laws regulate HMOs and other managed care
organizations with which the physician groups may have contracts. Many states
require regulatory approval, including certificates of need, before establishing
or expanding certain types of health care facilities, offering certain services
or making expenditures in excess of statutory thresholds for health care
equipment, facilities or programs. Some states also require licensing of
third-party administrators, entities performing utilization management functions
and collection agencies. Certain of FPA's subsidiaries have obtained third-party
administrator and utilization management licenses. In connection with its
existing operations and its expansion into new markets, FPA believes it is in
compliance with all such laws and regulations and current interpretations
thereof, but there can be no assurance that such laws, regulations or
interpretations will not restrict expansion or affect operations in the future
or that additional laws and regulations will not be enacted. The ability of FPA
to operate profitably will depend in part upon FPA and its affiliated physician
groups obtaining and maintaining all necessary licenses, certificates of need
and other approvals and operating in compliance with applicable health care
regulations.
Fraud and Abuse; Self-referral. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for, or in order
to induce: (i) the referral of a person for services; (ii) the furnishing or
arranging for the furnishing of items or services; or (iii) the purchase, lease
or order of arranging or recommending purchasing; leasing or ordering of any
item or service, in each case, reimbursable under Medicare or Medicaid. Pursuant
to this anti-kickback law, the federal government has announced a policy of
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
patients. The applicability of these provisions to many kinds of business
transactions in the health care industry has not yet been subject to judicial
and regulatory interpretation. In addition, federal legislation currently
restricts the ability of physicians to refer patients to entities in which they
have an ownership interest or compensation arrangement for clinical laboratory
services. Effective January 1, 1995, the federal anti-referral legislation
extended to entities that provide certain other "designated health services."
Many states, including those in which FPA presently does business, have similar
anti-kickback and anti-referral laws.
A violation of the federal anti-kickback statute generally requires several
elements: (i) the offer, payment, solicitation or receipt of remuneration; (ii)
the intent to induce referrals; and (iii) the ability of the parties to make or
influence
9
<PAGE> 10
referrals of patients for services reimbursable under Medicare or Medicaid
programs or to provide items or services reimbursable under such programs.
Noncompliance with, or violation of, the federal anti-kickback legislation can
result in exclusion for Medicare and Medicaid programs and civil and criminal
penalties. With respect to the self-referral prohibition, the entity and the
referring physician are prohibited from receiving Medicare or Medicaid
reimbursement for services rendered. Similar penalties are provided for
violation of state and anti-kickback and anti-referral laws. 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. Although FPA's business does not fall within certain of
the current or proposed safe harbors, FPA believes that its operations
materially comply with such statutes and regulations.
FPA believes that its business operations do not involve the offer,
payment, solicitation or receipt of remuneration to induce referrals of patients
because compensation arrangements with primary care physicians who make
referrals are designed to discourage referrals to the extent they are
unnecessary. These physicians are paid either on a capitation or fee-for-service
basis and do not receive any financial benefit from making referrals. FPA also
believes that its business arrangements do not involve the referral of patients
to entities with whom referring physicians have an ownership interest or
compensation arrangement within the meaning of federal and state anti-referral
laws, because most referrals are made directly to other providers rather than to
entities in which referring physicians have an ownership or compensation
arrangement. FPA further believes its compensation arrangements with physicians
fall within various exceptions to state and federal anti-referral laws,
including exceptions for ownership or compensation arrangements with certain
managed care organizations and for physician incentive plans that limit
referrals. In addition, FPA believes that the methods used to acquire existing
physician practices and to recruit new physicians do not violate anti-kickback
and anti-referral laws and regulations. Should any of FPA's business
arrangements be deemed to constitute arrangements designed to induce the
referral of Medicare or Medicaid patients or to involve referrals to entities
with whom the referring physician has an ownership interest or compensation
arrangement, then such arrangements could be viewed as possibly violating
anti-kickback or anti-referral laws and regulations. A determination of
liability under any such law could have a material adverse effect on FPA's
results of operations.
Insurance Regulation. Federal and state laws regulate insurance companies,
HMOs and other managed care organizations. Generally, these laws apply to
entities that accept financial risk. Certain of the risk arrangements entered
into by FPA could be characterized by some states as the business of insurance.
FPA, however, believes that the acceptance of capitation payments by a health
care provider does not constitute the conduct of the business of insurance. 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 in the states in which FPA operates would not apply these laws to
require licensure of FPA's operations as an insurer or 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 future interpretations of these
laws by the regulatory authorities in these states or 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 immediately be able to meet. Further, once licensed, FPA would be
subject to continuing oversight by and reporting to the respective regulatory
agency.
State laws in California, operations in which represented approximately 22%
of FPA's operating revenues for the year ended December 31, 1996, require
entities such as FPA to be licensed as health care service plans. The
application of a wholly-owned subsidiary of FPA 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 regulatory authorities in the other
states in which FPA or its affiliates operate will not impose similar
requirements.
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
10
<PAGE> 11
reimbursement may reduce the amount assigned to FPA by the Professional
Corporations and accordingly, would have a material effect of FPA's business and
results of operations.
Other. In recent years, legislation has been proposed in Congress to
implement an "any willing provider" law on a national level. These laws, which
are in effect in some states, require managed care organizations, such as HMOs,
to contract with any physician who is appropriately licensed and who meets any
applicable membership criteria. Such laws could limit the flexibility of managed
care organizations 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.
CORPORATE LIABILITY AND INSURANCE
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 and related 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 requires all physicians in the FPA Network to carry certain
minimum amounts of malpractice insurance coverage. The Professional Corporations
and certain subsidiaries maintain their own malpractice insurance. The Company
also maintains an errors and omissions insurance policy which covers utilization
review activities. Sterling currently maintains professional liability insurance
underwritten by an insurance company unaffiliated with Sterling for itself, its
hospital clients and its contracted physicians, in amounts it deems to be
appropriate, based upon historical claims and the nature and risks of its
business. The professional liability insurance coverage is on a claims-made
basis (the coverage includes claims reported during the period that the insured
was covered by the policy) and includes certain self-insurance retention. Such
insurance provides coverage, subject to policy limits, in the event that
Sterling is held liable as a co-defendant in a lawsuit against an independent
contractor physician or hospital client. In addition to any potential tort
liability of Sterling, Sterling's contracts with hospitals generally contain
provisions under which Sterling agrees to indemnify the hospital for losses
resulting from the negligence of the hospital or hospital personnel. Any claim
or claims in excess of insurance policy limits could have a material adverse
effect on FPA.
EMPLOYEES
At March 21, 1997, the Company had approximately 4,000 full time employees.
Management believes that its employee relations are good. None of the FPA
Network's employees are subject to a collective bargaining agreement, however,
certain physicians in Thomas-Davis Medical Centers, P.C., a professional
corporation affiliated with FPA, and employees in Tucson, Arizona voted in late
1996 and early 1997, respectively, to form a collective bargaining unit. Appeals
with respect to the vote are currently pending before the National Relations
Board.
11
<PAGE> 12
ITEM 2. PROPERTIES
FPA leases administrative office space in each of its regions, as follows:
<TABLE>
<CAPTION>
REGION SQUARE FEET TERMINATION DATE
------ ----------- ----------------
<S> <C> <C>
San Diego, CA................................................ 20,150 September 2001
Coral Gables, FL............................................. 38,000 April 2000
San Diego, CA................................................ 25,000 May 1999
Sacramento, CA............................................... 5,000 June 2001
Los Angeles, CA.............................................. 16,000 December 2000
Newtown Square, PA........................................... 13,000 October 2000
Phoenix, AZ.................................................. 10,000 January 2001
San Antonio, TX.............................................. 36,000 October 2005
-------
Total................................................... 163,150
=======
</TABLE>
FPA also leases certain other administrative offices and various medical
office spaces for the health centers that FPA, its subsidiaries and the
Professional Corporations operate. As FPA, its subsidiaries and the Professional
Corporations acquire additional physician practices, management expects that
FPA, its subsidiaries and the Professional Corporations will enter into
additional medical office space leases.
ITEM 3. LEGAL PROCEEDINGS
FPA is party to certain legal actions arising in the ordinary course of
business. In the opinion of FPA's management, liability, if any, under these
claims is adequately covered by insurance or will not have a material effect on
FPA's financial position or results of operations.
AHI is a defendant in a purported class action securities lawsuit entitled
In re AHI Healthcare Systems, Inc. Securities Litigation filed in the United
States District Court for the Central District of California, Western Division.
The suit was initially filed against AHI, certain of its officers and directors,
and its underwriters on December 20, 1995. The suit asserts that AHI
artificially inflated the price of its stock by, among other things, misleading
securities analysts and by failing to disclose in its initial public offering
prospectus alleged difficulties with the acquisition of Lakewood Health Plan,
Inc. and with two of AHI's payor contracts with FHP, Inc. The plaintiffs seek
unspecified damages on behalf of the stockholders who purchased AHI's common
stock between September 28, 1995 and December 19, 1995. On January 17, 1997 the
district court (a) granted AHI's motion for partial summary judgment and
dismissed the class plaintiffs' claims concerning the alleged misrepresentations
regarding AHI's intended use of initial public offering proceeds and AHI's
relationship with FHP, Inc. but (b) denied summary judgment on the claims
relating to the proposed acquisition of Lakewood Health Plan, Inc. As a result,
only those claims relating to Lakewood Health Plan and AHI's alleged liability
for the public statements of securities analysts following AHI remain in the
suit. Since the court's ruling on AHI's motion for partial summary judgment, the
plaintiffs have asked the court for leave to amend their complaint to add an
additional claim alleging problems with AHI's medical group operations in
Downey, California. Additionally, on November 12, 1996, FPA, AHI and AHI's
directors were named as defendants in a class action lawsuit filed in Delaware
Chancery Court by Joshua Chopp, a stockholder of AHI. The suit asserts, among
other things, that the "intrinsic value" of AHI's stock is higher than that
which AHI's stockholders will receive in the merger, and that the directors of
AHI breached their fiduciary duties by approving the merger without undertaking
steps to accurately ascertain AHI's market value. The stockholder further
alleges that FPA knowingly aided and abetted a breach of fiduciary duty by the
individual defendants. The stockholder is seeking equitable relief. FPA intends
to vigorously defend both of these lawsuits and does not expect that the outcome
of these lawsuits will have a material adverse effect on its financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of FPA stockholders held on October 31, 1996, two
matters were voted upon by the FPA stockholders. The FPA stockholders adopted an
agreement and plan of merger pursuant to which Sterling Healthcare Group, Inc.
became a wholly-owned subsidiary of FPA. The vote to adopt such agreement and
plan of merger was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 7,480,410
AGAINST 20,167
WITHHELD 32,784
ABSTENTIONS 26,753
BROKER NON-VOTES --
</TABLE>
The second matter voted upon was the approval of amendments to the FPA Omnibus
Stock Option Plan to increase the total number of shares of FPA Common Stock
issuable upon exercise of options granted under such plan by 2,500,000 to
5,000,000 and limit the number of shares of FPA Common Stock for which options
may be granted under such plan to any person during calendar year to 750,000.
The vote to approve such amendments was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 5,377,171
AGAINST 2,153,321
WITHHELD --
ABSTENTIONS 29,622
BROKER NON-VOTES --
</TABLE>
12
<PAGE> 13
At a special meeting of FPA stockholders held on March 17, 1997, two
matters were voted upon by the FPA stockholders. The FPA stockholders adopted an
agreement and plan of merger pursuant to which AHI Healthcare Systems, Inc.
became a wholly-owned subsidiary of FPA. The vote to adopt such agreement and
plan of merger was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 15,530,374
AGAINST 38,512
WITHHELD -
ABSTENTIONS 19,024
BROKER NON-VOTES -
</TABLE>
The second matter voted upon was the approval of amendments to the Omnibus Stock
Option Plan to increase the total number of shares of FPA Common Stock issuable
upon exercise of options granted under such plan by 1,500,000 to 6,500,000. The
vote to approve such amendment was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 13,361,987
AGAINST 2,171,741
WITHHELD -
ABSTENTIONS 54,182
BROKER NON-VOTES -
</TABLE>
Executive Officers of the Registrant
Set forth below is information about the executive officers of FPA. The
offices referred to below are offices of FPA unless otherwise indicated.
All executive officers are elected to serve at the pleasure of the Board of
Directors.
Dr. Sol Lizerbram (48), Chairman of the Board since 1986 and President from
1986 until October 31, 1996.
Dr. Seth Flam (38), Chief Executive Officer since 1986 and President since
November 1, 1996.
Dr. Stephen Dresnick (46), Vice Chairman of the Board since 1996 and
President, Sterling Healthcare Group, Inc. since 1987.
Dr. Howard Hassman (39), Executive Vice President -- Corporate Development
since September 1994; Chief Financial Officer from 1986 to September 1994.
Dr. Kevin Ellis (40), Chief Medical Officer since April 1995. Chief
Operating Officer from 1988 until April 1995.
Steven M. Lash (43), Executive Vice President and Chief Financial Officer
since September 1994. Executive Vice President for Institutional Care at Sharp
Health care, a health care system providing medical services throughout San
Diego, California, from April 1993 to September 1994; Senior Vice President of
Business Affairs and Chief Financial Officer of San Diego Hospital Association,
doing business as Sharp Healthcare, from 1981 to April 1993.
James A. Lebovitz (39), Senior Vice President, General Counsel and
Secretary since March 1996. Partner, Ballard Spahr Andrews & Ingersoll, a law
firm, from 1991 until March 1996.
Cheryl A. Moore (31), Vice President-Finance since July 1996; Controller
since January 1994; Vice President and Chief Accounting Officer since August
1994. Audit manager, Deloitte & Touche, from 1993 to January 1994; auditor,
Deloitte & Touche, from 1988 to 1993.
13
<PAGE> 14
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FPA's Common Stock is traded on The Nasdaq Stock Market under the symbol
FPAM. The table below shows the high and low bid prices for FPA's Common Stock
for each quarter during 1995 and 1996.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter............................. $11.250 $6.000
2nd Quarter............................. 12.500 7.875
3rd Quarter............................. 12.125 8.875
4th Quarter............................. 9.750 5.875
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter............................. $13.250 $8.625
2nd Quarter............................. 20.125 12.125
3rd Quarter............................. 27.125 12.500
4th Quarter............................. 29.500 16.375
</TABLE>
At March 21, 1997, there were approximately 251 holders of record of
Common Stock. FPA declared no cash dividends during 1995 or 1996 and has no
plans to declare cash dividends in the foreseeable future.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following statement of operations data and balance sheet data have been
derived from the audited consolidated financial statements of the Company.
Selected financial data below should be read in conjunction with the
consolidated financial statements and notes thereto, included elsewhere in this
document.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
COMBINED STATEMENTS OF OPERATIONS: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenue $ 8,275 $ 13,988 $ 57,691 $ 168,352 $ 440,319
Medical services expense 6,423 10,348 41,352 113,743 313,707
----------- ----------- ------------ ------------ -----------
1,852 3,640 16,339 54,609 126,612
General and administrative expenses 1,893 3,471 13,607 44,893 99,230
Merger, restructuring and other
unusual charges 1,590 37,971
----------- ----------- ------------ ------------ -----------
Income (loss) from operations (41) 169 2,732 8,126 (10,589)
Other income (expense), net 10 9 -- (1,569) (5,127)
----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes (31) 178 2,732 6,557 (15,716)
Income tax (expense) benefit -- -- (942) (2,723) --
----------- ----------- ------------ ------------ -----------
Net income (loss) $ (31) $ 178 $ 1,790 $ 3,834 $ (15,716)
=========== =========== ============ ============ ===========
PRO FORMA PER SHARE DATA:
Net income per share $ 0.27 $ 0.26 $ 0.28 $ (0.72)
Weighted average shares outstanding 3,163,000 6,579,828 13,693,192 21,702,786
COMBINED BALANCE SHEET DATA:
Cash and marketable securities $ 423 $ 610 $ 12,217 $ 11,401 $ 45,595
Working capital surplus (deficit) (634) (600) 22,164 25,974 (12,078)
Total assets 1,027 1,633 45,052 152,407 577,270
Long-term liabilities -- 21 9,650 23,839 193,318
Stockholders' equity (deficit) (546) (358) 24,326 93,227 143,518
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
FPA Medical Management, Inc., its subsidiaries and the Professional
Corporations derive substantially all of their operating revenue from (i) the
payments made by Payors to the Professional Corporations for managed care
medical services and (ii) fee-for-service revenues for medical centers in the
managed care business and (iii) fee-for-services revenues from emergency
department medical services.
MANAGED CARE BUSINESS
The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
outpatient services or professional medical services ("outpatient capitation"
contracts). Under global capitation contracts, the Company receives a fixed
monthly amount per enrollee for which the Company is financially responsible to
provide the enrollees with all necessary inpatient and outpatient care. Under
outpatient capitation contracts, the Company receives a fixed monthly amount per
enrollee for which the Company is financially responsible to provide the
enrollees with all necessary outpatient care. Additionally, under these
outpatient capitation contracts, the Company is a party to shared risk
arrangements with Payors which generally reward the Company for the efficient
utilization of hospital inpatient services. Under these shared risk
arrangements, the Company shares any surplus or, in some cases, deficit, of
amounts pre-established by the Payor in relation to inpatient expense. Revenue
under global capitation contracts represented 0%, 20.9% and 36.3% for 1994, 1995
and 1996, respectively, of managed care business operating revenue. Revenue
under outpatient capitation contracts represented 98.5%, 72.4% and 51.7% for
1994, 1995 and 1996, respectively, of managed care business operating revenue.
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations and its subsidiaries.
These revenues are presented net of contractual deductions and represented 1.5%,
6.7% and 12.0% for 1994, 1995 and 1996, respectively, of managed care business
operating revenue.
Through the Professional Corporations and its subsidiaries, the Company
contracts with various healthcare providers to provide primary care and
specialty medical services to covered enrollees. Primary care physicians are
compensated
16
<PAGE> 17
on either a salary or capitation basis. Specialty care physician services
are paid for on either a discounted fee-for-service or capitation basis. Managed
care business medical services expense paid for on a capitation basis (for
certain primary care and specialty care services) or fixed salary basis (for
primary care only) totaled 42.5%, 31.9% and 25.8% for 1994, 1995 and 1996
respectively, of managed care business operating revenues, with the remainder of
medical services expense (for primary care, specialty care, ancillary services,
inpatient and outpatient services, lab charges, etc.) paid for on a discounted
fee-for-service or per diem basis.
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of
December 31, 1996 the Company provided physician practice management services on
a contract basis to 104 emergency departments, one anesthesia department, three
correctional health care facilities and one rural health urgent care clinic
located in 20 states. The Company contracts with approximately 1,000 affiliated
physicians who provide certain medical services to approximately 1.4 million
patients annually.
The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by the Company's contracted health care professionals.
Fee-for-service contracts may, depending on the hospital's patient volume and
payor mix, involve the payment of a subsidy to the Company by the hospital. In
1994, 1995 and 1996, respectively, 94.0%, 84.4% and 84.6% of the Company's
emergency department operating revenue was earned on a fee-for-service basis,
and the Company emphasized fee-for-service contracts in its marketing
activities.
Medical services expense for the emergency department business consists
primarily of payments made to independent contractor and employee physicians
("Physician Costs") and, to a lesser extent the costs of medical supplies and
malpractice insurance and
17
<PAGE> 18
laboratory fees. In 1994, 1995 and 1996, Physician Costs accounted for 95.1%,
91.8% and 92.1%, respectively, of emergency department medical services expense.
OPERATIONAL DEVELOPMENT
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations have
contracts and whose members are patients of physicians in the FPA network or
(iii) agreements with Payors, physicians and hospitals in other geographic
markets. The process of identifying and consummating suitable acquisitions of,
or affiliations with, physician groups can be lengthy and complex. The
marketplace for such acquisitions and affiliations is subject to increasing
competitive pressures. There can be no assurance that FPA will be successful in
identifying, acquiring or affiliating with additional physician groups or
hospitals or that the Professional Corporations will be able to contract with
new Payors. In addition, there can be no assurance that the Company's
acquisitions will be successfully integrated on a timely basis or that the
anticipated benefits of these acquisitions will be realized; failure to
effectively accomplish the integration of acquired companies could have a
material adverse effect on FPA's results of operations and financial condition.
FPA's ability to expand is also dependent upon its ability to comply with legal
and regulatory requirements in the jurisdictions in which it operates or will
operate and to obtain necessary regulatory approvals, certificates and licenses.
In March 1997, the Company completed its merger with AHI Healthcare
Systems, Inc. In January 1996, the Company acquired three independent practice
associations in the Los Angeles, Ventura and Sacramento regions of California,
which now service approximately 76,000 enrollees and include 570 primary care
physicians. In June 1996, FPA acquired Physicians First, Inc., operating 40
medical clinics in Florida, through which 110 primary care physicians provided
services to approximately 80,000 enrollees. In July 1996, the Company acquired
two independent practice associations, one in Arizona and Florida, providing
services to approximately 14,000 and 4,000 enrollees, respectively. In October
1996, FPA and Sterling completed a merger. Effective in December 1996, the
Company and certain Professional Corporations acquired two medical groups, one
each in California and Arizona, providing services to approximately 63,000 and
157,000 enrollees, respectively.
Listed below is a breakdown of enrollees, Payors, primary care physicians,
specialty care physicians, and emergency department business contracts
(including anesthesiology, urgent care and correctional facility business
contracts) by region at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF NUMBER OF EMERGENCY
PAYOR PRIMARY CARE SPECIALTY CARE DEPARTMENT
ENROLLEES CONTRACTS PHYSICIANS PHYSICIANS CONTRACTS
--------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
California 207,967 21 681 3,191 --
Arizona 186,102 4 459 771 --
New Jersey 29,029 4 926 447 --
Delaware 7,782 1 74 74 --
South Carolina 12,473 3 176 51 2
North Carolina 11,074 1 52 -- 11
Texas 46,199 6 64 427 16
Florida 95,520 3 228 777 9
Michigan 27,334 2 406 1,028 10
Louisiana -- -- -- -- 10
Mississippi -- -- -- -- 8
Tennessee -- -- -- -- 7
Alabama -- -- -- -- 6
Others -- -- -- -- 30
------- --- ----- ----- ---
Total 623,480 45 3,066 6,766 109
======= === ===== ===== ===
</TABLE>
RESULTS OF OPERATIONS
18
<PAGE> 19
The following table sets forth for 1994, 1995 and 1996 selected financial
data and selected financial data expressed as a percentage of operating revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995
---- ----
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 18,435,877 $39,255,573 $57,691,450 $ 52,691,955 $115,659,527 $168,351,482
Medical services
expense 13,628,430 27,723,675 41,352,105 37,757,244 75,985,634 113,742,878
General and
administrative
expenses (1) 4,423,842 9,183,231 13,607,073 13,310,386 33,172,287 46,482,673
------------ ----------- ----------- ------------ ------------ ------------
Income (loss)
from operations 383,605 2,348,667 2,732,272 1,624,325 6,501,606 8,125,931
Other (income)
expense (79,892) 80,301 409 (189,725) 1,758,371 1,568,646
------------ ----------- ----------- ------------ ------------ ------------
Income (loss)
before tax 463,497 2,268,366 2,731,863 1,814,050 4,743,235 6,557,285
Income tax expense 75,184 866,841 942,025 811,588 1,911,732 2,723,320
------------ ----------- ----------- ------------ ------------ ------------
Net income (loss) $ 388,313 $ 1,401,525 $ 1,789,838 $ 1,002,462 $ 2,831,503 $ 3,833,965
============ =========== =========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
----
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
-------- -------- -----
<S> <C> <C> <C>
Operating revenue $ 303,557,843 $ 136,760,770 $ 440,318,613
Medical services
expense 219,456,632 94,249,976 313,706,608
General and
administrative
expenses (1) 88,536,451 48,664,736 137,201,187
------------- ------------- -------------
Income (loss)
from operations (4,435,240) (6,153,942) (10,589,182)
Other (income)
expense 4,273,613 853,631 5,127,244
------------- ------------- -------------
Income (loss)
before tax (8,708,853) (7,007,573) (15,716,426)
Income tax expense -- -- --
------------- ------------- -------------
Net income (loss) $ (8,708,853) $ (7,007,573) $ (15,716,426)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995
---- ----
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Operating revenue 100% 100% 100.0% 100.0% 100.0% 100.0%
Medical services
expense 73.9% 70.6% 71.7% 71.7% 65.7% 67.6%
General and
administrative
expenses (1) 24.0% 23.4% 23.6% 25.3% 28.7% 27.5%
----- ---- ----- ----- ----- -----
Income (loss) from
operations 2.1% 6.0% 4.7% 3.0% 5.6% 4.8%
Other (Income)
expense (0.4)% 0.2% 0.0% (0.4)% 1.5% 0.9%
----- ---- ----- ----- ----- -----
Income (loss)
before tax 2.5% 5.8% 4.7% 3.4% 4.1% 3.9%
Income tax expense 0.4% 2.2% 1.6% 1.5% 1.7% 1.6%
----- ---- ----- ----- ----- -----
Net income (loss) 2.1% 3.6% 3.1% 1.9% 2.4% 2.3%
===== ==== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
----
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
-------- -------- -----
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Medical services
expense 72.3% 68.9% 71.3%
General and
administrative
expenses (1) 29.2% 35.5% 31.2%
----- ----- -----
Income (loss)
from operations (1.5)% (4.5)% (2.4)%
Other (Income)
expense 1.4% 0.6% 1.2%
----- ----- -----
Income (loss)
before tax (2.9)% (5.1)% (3.6)%
Income tax expense 0.0% 0.0% 0.0%
----- ----- -----
Net income (Loss) (2.9)% (5.1)% (3.6)%
===== ===== =====
</TABLE>
(1) Includes nonrecurring charges of $38.0 million in 1996. Excluding
these nonrecurring charges, general and administrative expense was
22.6% of operating revenue and income from operations was 6.2% of
operating revenue in 1996.
MANAGED CARE BUSINESS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Operating Revenue -- The Company's managed care business operating revenue
increased to $303.6 million in 1996 from $52.7 million in 1995 and $18.4 million
in 1994. The revenue increase resulted primarily from the increase in average
enrollment to 327,000 in 1996, from 63,000 in 1995 and 30,000 in 1994. As
compared to 1995, the 1996 increase resulted from the addition of (i)
approximately 161,000 enrollees in California primarily as a result of
acquisitions, (ii) approximately 174,000 enrollees in Arizona primarily as a
result of a December 1996 acquisition, (iii) enrollment of 42,000, 14,000, and
15,000 enrollees, respectively, in the Mid Atlantic region, Texas and Florida as
a result of internal growth, (iv) approximately 27,000 enrollees in Michigan and
(v) approximately 80,000 enrollees in Florida, as a result of a June 1996
acquisition. In 1996, the Company generated net fee-for-
19
<PAGE> 20
service revenue of $35.9 million compared to 1995 net fee-for-service revenue of
$2.8 million and no fee-for-service revenue in 1994. The growth in
fee-for-service revenue is attributable to the increasing number of medical
facilities managed by FPA.
Medical Services Expense -- Medical services expense for 1996 was $219.5
million or 72.3% of managed care business operating revenue as compared to $37.8
million or 71.7% of such operating revenue in 1995 and $13.6 million or 73.9% of
such operating revenue in 1994. The increase in medical services expense as a
percent of such operating revenue from 1995 to 1996 resulted primarily from
significantly increased membership in the Mid-Atlantic and Florida regions under
global capitation contracts which initially experience a higher medical loss
ratio than outpatient only capitation contracts. The decrease in medical
services expense as a percentage of such operating revenue from 1994 to 1995
resulted from a higher revenue base per member per month as a result of
increased shared risk earnings and increased capitation of specialists which
limited costs for the specialty services provided.
General and Administrative Expense -- General and administrative expense
including nonrecurring charges for 1996 was $88.5 million or 29.2% of managed
care business operating revenue as compared to $13.3 million or 25.3% of such
operating revenue in 1995 and $4.4 million or 24.0% of such operating revenue in
1994. Excluding the effect of nonrecurring charges recognized in 1996, general
and administrative expense would have decreased to 22.6% of such operating
revenue as the Company achieved economies of scale in its operations. In 1995,
the Company hired additional staffing and other personnel in new regions prior
to the addition of a significant number of enrollees. The Company has also made
significant investments in information systems, and has deployed this technology
to the majority of its regions.
Merger, Restructuring and Other Unusual Charges -- During 1996, the managed
care business of the Company incurred approximately $20.3 million in
nonrecurring charges. Approximately $6.6 million resulted from write-offs of
goodwill and other assets related to unprofitable operations in Arizona and
California. Approximately $11.7 million related to costs of legal fees,
accounting fees, investment bankers' fees and other costs associated with the
Sterling merger. As the Sterling merger was accounted for as pooling of
interests, generally accepted accounting principles require that transaction
costs be expensed as incurred. Approximately $2.0 million arose from the costs
of severance payments,
20
<PAGE> 21
lease terminations and other costs associated with consolidating medical centers
and adjusting staffing in Florida, Arizona and as a result of the Sterling
merger.
Income (Loss) from Operations -- In 1996, the managed care business of the
Company generated a loss from operations of $4.4 million including the
nonrecurring charges. Excluding such nonrecurring charges, 1996 income from
operations was $15.9 million as compared to income from operations of $1.6
million in 1995, and $.4 million in 1994.
EMERGENCY DEPARTMENT BUSINESS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The 1994 consolidated financial statements include the activities of the
emergency department business from June 1, 1994 (date of inception) to December
31, 1994.
Operating Revenue -- Emergency department business operating revenue
consists of gross patient revenue, net of contractual deductions and estimated
uncollectible accounts, plus other revenue, which consists principally of
hospital subsidy payments, flat-rate hospital contract revenue and non-patient
generated revenues. Operating revenue increased to $136.8 million in 1996 from
$115.7 million in 1995 and $39.3 million in 1994. On a percentage basis, the
emergency department business' operating revenue grew 195% in 1995 and 18.2% in
1996. The increases were primarily attributable to the increases in the number
of the Company's emergency department contracts from 61 in 1994 and 89 in 1995
to 104 in 1996.
Medical Services Expense -- Medical services expense increased to $94.2
million for 1996 from $76.0 million in 1995 and $27.7 million in 1994 due
primarily to the increase in the number of healthcare professionals under
contract, resulting from the increase in the number of the Company's emergency
department contracts, as well as negotiated increases in fees paid to certain
healthcare professionals. Medical services expense as a percentage of operating
revenue was 68.9% in 1996, 65.7% in 1995 and 70.6% in 1994.
General and Administrative Expense -- General and administrative expense
including nonrecurring charges was $48.7 million in 1996, $33.2 million in 1995
and $9.2 million in 1994. Excluding the effect of nonrecurring charges in 1996,
general and administrative expense would have been $31.0 million. During 1995,
the emergency department business increased the number of its regional offices
as well as the number of administrative employees to accommodate the increase in
emergency department contracts. In
21
<PAGE> 22
1996, the Company, through cost cutting measures, including the closing of one
of its regional offices as well as the down-sizing of another, reduced this
expense. As a percentage of revenue, general and administrative expense was
35.5% in 1996 including non-recurring charges or 22.7% excluding non-recurring
charges, 28.7% in 1995 and 23.5% in 1994.
Merger, Restructuring and Other Unusual Charges -- During 1996, the Company
incurred approximately $17.7 million in non-recurring adjustments and
restructuring charges. Approximately $12.3 million resulted from write-offs of
goodwill and other assets related to terminated emergency department contracts.
Approximately $5.1 million related to costs of legal fees, accounting fees,
investment bankers' fees and other costs associated with the Sterling merger. As
the Sterling merger was accounted for as pooling of interests, generally
accepted accounting principles require that transaction costs be expensed as
incurred. Approximately $.3 million related to restructuring charges arose from
the costs of severance payments, lease terminations and other costs associated
with the Sterling merger.
Net Income (loss) from Operations -- In 1996, the emergency department
business of the Company generated a loss from operations of $6.2 million,
including nonrecurring charges. Excluding such charges, income from operations
would have been $11.5 million as compared to $6.5 million in 1995 and $2.3
million in 1994.
QUARTERLY RESULTS
The following table presents financial information for the eight quarters
ended December 31, 1996. In the opinion of management, this information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this document and all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the amounts
presented below to present fairly the quarterly results when read in conjunction
with the audited consolidated financial statements of the Company and notes
thereto. The Company's quarterly results have in the past been subject to
fluctuation and as a result, the operating results for any quarter are not
necessarily indicative of results for any future period. All numbers in the
following table are in thousands.
22
<PAGE> 23
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 29,533 $37,489 $44,569 $56,760 $73,162 $92,075 $124,034 $ 151,048
-------- ------- ------- ------- ------- ------- -------- ---------
Medical services
expense 19,804 25,255 30,035 38,648 51,550 66,120 92,126 103,911
-------- ------- ------- ------- ------- ------- -------- ---------
9,729 12,234 14,534 18,112 21,612 25,955 31,908 47,137
General and
administrative
expenses 8,467 9,883 11,559 14,984 17,108 20,286 24,592 37,244
Merger, restructuring
and other unusual
charges -- -- -- 1,590 -- -- 1,746 36,225
-------- ------- ------- ------- ------- ------- -------- ---------
Income (loss) from
operations 1,262 2,351 2,975 1,538 4,504 5,669 5,570 (26,332)
Other expense 208 410 644 307 507 838 993 2,789
-------- ------- ------- ------- ------- ------- -------- ---------
Income (loss) before
taxes 1,054 1,941 2,331 1,231 3,997 4,831 4,577 (29,121)
Income tax (benefit)
expense 434 765 970 554 1,657 2,007 1,948 (5,612)
-------- ------- ------- ------- ------- ------- -------- ---------
Net income (loss) $ 620 $ 1,176 $ 1,361 $ 677 $ 2,340 $ 2,824 $ 2,629 $ (23,509)
======== ======= ======= ======= ======= ======= ======== =========
</TABLE>
Operating and medical services expense during the first and third quarters
have been and continue to be affected by movements of members in Payor plans
from one plan to another during periods of open enrollment for Payors.
Retroactive capitation rate increases generally take effect during the second
quarter, while medical services expense increases tend to occur ratably
throughout the year. Quarterly results may be affected by final settlements of
shared risk distributions which generally occur in the second and third quarter
accrued in the previous year. From time to time, final settlements may differ
from such estimated amounts. As the Company adds new Payors into the FPA
network, the timing of these adjustments may vary and, consequently, quarterly
results may be affected in the future, especially due to the start-up of
operations in new regions where there is no operating history. Similarly, if
medical services expense varies from amounts previously accrued for claims
incurred but not reported ("IBNR"), quarterly operating results may fluctuate. A
portion of the Company's expansion strategy includes the acquisition of
individual and group physician practices by the FPA network, and any such
acquisition may materially affect quarterly operating results, causing quarterly
fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish an infrastructure in new regions.
Capitation arrangements positively impact cash flow because FPA generally
receives capitation revenue prior to paying costs associated with services
provided under those agreements. However, shared risk arrangements negatively
impact cash flow because settlements in connection with
23
<PAGE> 24
these arrangements are typically not collected until significantly after the end
of the period in which they were accrued. Fee-for-service revenues also
negatively impact cash flow because payment for services rendered generally lags
by 90 to 120 days.
At December 31, 1996, the Company had cash, cash equivalents and marketable
securities of $45.6 million and a working capital deficit (current liabilities
in excess of current assets) of $12.1 million compared to cash, cash equivalents
and marketable securities of $11.4 million and working capital of $26.0 million
at December 31, 1995. The increase in cash, cash equivalents and marketable
securities of $34.2 million resulted primarily from (i) $55.0 million borrowed
under arrangements with financial institutions, (ii) net proceeds of $73.0
million from the Company's issuance of convertible subordinated notes, and (iii)
$14.1 million received from the exercise of stock options and warrants,
partially offset by (a) approximately $10.5 million of cash payments in
connection with acquisitions, (b) approximately $9.1 million for the acquisition
of property and equipment, (c) approximately $13.3 million used to purchase
intangible assets, (d) approximately $3.0 million invested in Great Lakes
Health Plan, Inc., (e) approximately $54.3 million in payments on notes payable
related to acquisitions, and (f) approximately $10.0 in net payments under a
bank line of credit. At December 31, 1996 approximately 30% of the Company's
current liabilities consist of amounts accrued as payable to specialty care
physicians, ancillary providers, hospital and other providers of medical
services. These accrued liabilities include claims received by the Company which
have not yet been paid as well as an estimate of costs for covered medical
benefits incurred by enrollees but not yet reported by providers. These amounts
are not due and payable until after the provider has presented a claim and are
typically paid within 45 business days of receipt of such claims. The increase
in claims payable, including incurred but not reported claims, from
approximately $10.3 million at December 1995 to $65.6 million at December 31,
1996 resulted primarily from significantly increased membership and the fact
that much of the new membership is under global capitation contracts (which
includes hospital services), which resulted in more claims payable per enrollee.
During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement (the "Credit Agreement") with four financial
institutions. Permitted Borrowings, as defined in the Credit Agreement,
generally include acquisitions and capital expenditures. Borrowings under this
agreement bear interest
24
<PAGE> 25
at either LIBOR plus 2-1/2%, 2-3/4% or 3%, or prime rate plus 1%, 1-1/4% or
1-1/2%, as defined in the agreement. At December 31, 1996, the Company had
borrowed the maximum of $55.0 million under the Credit Agreement.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures, which resulted in net proceeds to the Company of
approximately $73.0 million. The notes bear interest at 6-1/2%, payable
semiannually, and are convertible into shares of the Company's stock at $25.95
per share. The debentures are redeemable by the Company after December 20, 1999.
Upon the occurrence of a Repurchase Event, as defined in the debentures, each
holder has the right to require repayment of the debentures at 100% of the
principal amount plus accrued interest.
The increase in long-term debt from $26.1 million at December 31, 1995 to
$254.8 million at December 31, 1996 resulted primarily from approximately $55.0
million in borrowings under arrangements with financial institutions and the
issuance of notes payable and assumption of long-term debt in connection with
acquisitions of physician practice assets of approximately $273.6 million net of
repayments of acquisition debt of approximately $64.2 million. At December 31,
1996, long-term debt exceeded stockholders' equity.
The Company believes that its cash on hand and anticipated cash flows from
its operations will be sufficient to meet the Company's operating capital needs
through 1997. The Company intends to obtain additional financing to support
planned expansion through an expansion of a line of credit facility to
approximately $100.0 million or through other potential financing alternatives
including private and public offerings of debt and equity-related securities.
There can be no assurance that the Company will be able to obtain such increased
credit facility or that it will be able to issue debt or equity-related
securities on terms satisfactory to it. To the extent that additional financing
is not available, the Company may delay certain potential acquisitions or
certain geographic expansion or may seek alternate sources of financing.
The strategy to expand the FPA network involves the acquisition of
individual and group physician practice assets and related businesses. Such
acquisitions may be consummated using cash, stock, notes or any combination
thereof. Management does not believe that inflation will have a material effect
on the operations of the Company.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,172,225 $ 5,594,877
Marketable securities 8,228,788 40,000,000
Accounts receivable -- net of allowance for uncollectible accounts of
$47,006,677 and $59,796,488 at December 31, 1995 and December 31, 1996,
respectively 40,229,995 95,306,672
Accounts receivable - other 4,636,973 61,168,891
Notes receivable from affiliate 300,086 --
Income tax receivable 1,227,949 --
Prepaid expenses 656,003 7,397,174
Capitation deposit -- 15,409,771
Deferred income tax asset 2,861,898 3,478,751
------------- -------------
Total current assets 61,313,917 228,356,136
Property and equipment - net 9,591,799 40,139,332
Restricted cash and deposits 3,285,000 488,535
Goodwill -- net of accumulated amortization of $1,724,606 and $5,046,296 at
December 31, 1995 and December 31, 1996, respectively 69,498,404 284,288,009
Intangible assets -- net of accumulated amortization of $249,682 and
$3,123,381 at December 31, 1995 and December 31, 1996, respectively 5,988,579 6,667,269
Investment in GLHP 1,994,900 4,994,900
Deferred income tax asset -- 3,189,665
Other assets 733,937 9,146,431
------------- -------------
Total $ 152,406,536 $ 577,270,277
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,851,559 $ 84,289,042
Claims payable, including incurred but not reported claims 10,247,476 65,618,268
Accrued payroll and related liabilities 1,363,304 3,814,695
Income tax payable 436,775 2,294,159
Other liabilities -- 13,104,704
Borrowings on line of credit 788,325 --
Current portion of accrued liability for professional liability claims 610,000 1,297,790
Long-term debt, current portion 7,042,635 70,015,734
------------- -------------
Total current liabilities 35,340,074 240,434,392
Long-term debt, net of current portion 9,012,552 184,774,984
Bank line of credit 10,000,000 --
Accrued liability for professional liability claims, net of current portion 2,440,000 4,217,000
Deferred income tax liability 1,989,770 --
Other long-term liabilities 397,175 4,325,862
------------- -------------
Total Liabilities 59,179,571 433,752,238
Stockholders' equity:
Preferred stock, $.001 par value per share, 2,000,000 shares authorized,
no shares outstanding -- --
Common stock, $.002 par value, 98,000,000 shares authorized, 18,566,326 and
24,771,149 shares issued and outstanding at December 31, 1995 and
December 31, 1996, respectively 37,133 49,542
Additional paid-in capital 87,652,123 153,396,348
Stock payable 567,000 534,600
Accumulated earnings (deficit) 5,253,975 (10,462,451)
Less: Deferred compensation - stock options (283,266) --
------------- -------------
Total stockholders' equity 93,226,965 143,518,039
------------- -------------
Total $ 152,406,536 $ 577,270,277
============= =============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Managed care revenue $ 18,193,286 $ 49,880,875 $ 267,641,917
Fee-for-service revenue, net of
contractual deductions 39,498,164 118,470,607 172,676,696
------------ ------------- -------------
Operating revenue 57,691,450 168,351,482 440,318,613
Expenses:
Medical services expense - Professional
Corporations 4,173,204 7,234,374 27,190,347
Medical services expense - others 37,178,901 106,508,504 286,516,261
------------ ------------- -------------
16,339,345 54,608,604 126,612,005
General and administrative expense 13,607,073 44,892,765 99,230,319
Merger, restructuring and other unusual
charges (Note 9) -- 1,589,908 37,970,868
------------ ------------- -------------
Income (loss) from operations 2,732,272 8,125,931 (10,589,182)
Other income (expense):
Interest and other income 186,955 609,297 852,288
Interest expense (187,364) (2,177,943) (5,979,532)
------------ ------------- -------------
Total other expense (409) (1,568,646) (5,127,244)
------------ ------------- -------------
Income (loss) before income taxes 2,731,863 6,557,285 (15,716,426)
Income tax expense 942,025 2,723,320 --
------------ ------------- -------------
Net income (loss) $ 1,789,838 $ 3,833,965 $ (15,716,426)
============ ============= =============
Net income (loss) per share $ .28 $ (.72)
============= =============
Pro forma (Note 1):
Adjustment to income tax expense $ (110,235)
------------
Net income $ 1,679,603
------------
Net income per share $ .26
============
Weighted average shares
outstanding 6,579,828 13,693,192 21,702,786
============ ============= =============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
(STOCK
SUBSCRIPTIONS
ADDITIONAL RECEIVABLE)/ ACCUMULATED DEFERRED
COMMON PAID-IN- STOCK EARNINGS/ COMPENSATION
STOCK CAPITAL PAYABLE (DEFICIT) STOCK OPTIONS TOTAL
----- ------- ------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 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 through
initial public offering for cash,
net of costs 2,795 11,574,068 -- -- -- 11,576,863
Common stock issued in connection
with acquisition 313 1,953,250 -- -- -- 1,953,563
Net income for the year -- -- -- 1,789,838 1,789,838
Other 36 333,329 (14,227) -- 22,658 341,796
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
Common stock payable issued in
connection with acquisitions -- -- 567,000 -- -- 567,000
Net income for the year -- -- -- 3,833,965 -- 3,833,965
Other (1,265) 132,265 14,227 -- 63,076 208,303
----------- ------------- --------- ------------ ------------ -------------
Balances, December 31, 1995 37,133 87,652,123 567,000 5,253,975 (283,266) 93,226,965
Stock options and warrants
exercised 515 10,305,788 -- -- -- 10,306,303
Common stock issued in connection
with acquisitions 3,407 52,200,372 41,500 -- -- 52,245,279
Common stock issued in connection
with conversion of debt 1,086 3,498,914 -- -- -- 3,500,000
Net loss for the year -- -- -- (15,716,426) -- (15,716,426)
Other 7,401 (260,849) (73,900) -- 283,266 (44,082)
----------- ------------- --------- ------------ ------------ -------------
Balances, December 31, 1996 $ 49,542 $ 153,396,348 $ 534,600 $(10,462,451) $ -- $ 143,518,039
=========== ============= ========= ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,789,838 $ 3,833,965 $ (15,716,426)
Adjustments to reconcile net income (loss)
to net cash used by
operating activities:
Depreciation and amortization 570,733 3,419,060 10,736,151
Imputed interest on notes payable -- 132,489 98,023
Loss on disposal of business -- 772,875 --
Deferred compensation stock options 22,658 38,076 --
Impairment of goodwill -- 434,602 18,900,000
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable (4,448,976) (17,983,548) (104,525,844)
Income tax receivable/payable (163,560) (1,064,389) 3,397,211
Capitation deposit -- -- (15,409,771)
Deferred income taxes (205,580) 591,545 (5,302,617)
Accounts payable and accrued expenses 850,558 469,485 51,891,810
Claims payable, including incurred but
not reported claims (315,194) 5,348,274 43,807,285
Accrued liability for professional
liability claims (124,216) (738,500) 2,464,790
Accrued payroll and related liabilities (7,157) 336,625 2,451,391
Prepaid expenses and other assets (129,057) (507,908) (1,451,907)
------------ ------------ -------------
Total adjustments (3,949,791) (8,751,314) 7,056,522
------------ ------------ -------------
Net cash used by operating activities (2,159,953) (4,917,349) (8,659,904)
Cash flows from investing activities:
Purchase of property and equipment (971,053) (4,808,619) (9,126,829)
Payments for intangible assets (270,621) (1,703,570) (13,341,849)
Net payments (to) from affiliate 44,372 (214,546) (350,867)
Investment in GLHP -- (1,994,900) (3,000,000)
Net sale (purchase) of marketable securities (10,079,811) 1,851,023 (31,771,212)
Acquisitions, net of cash acquired (3,713,133) (38,529,816) (10,491,630)
Payments escrowed for acquisitions -- (3,285,000) 2,796,465
Proceeds from sale of business -- 1,600,000 --
Other -- (46,212) --
------------ ------------ -------------
Net cash used by investing activities (14,990,246) (47,131,640) (65,285,922)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from merger, net 5,699,870 -- (169,334)
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 subordinate notes
payable 1,000,000 -- 73,125,000
</TABLE>
29
<PAGE> 30
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Proceeds from exercise of stock options and
warrants 43,365 156,000 14,075,526
Issuance of notes payable -- -- 53,628,334
Net borrowings under bank line of credit 207,242 7,814,781 --
Receipt of payment for stock subscriptions 35,773 14,227 --
Payments on long-term debt (922,779) (5,302,072) (64,291,048)
------------ ------------ -------------
Net cash provided by financing
activities 18,567,994 53,084,344 76,368,478
------------ ------------ -------------
Net increase in cash and cash equivalents 1,417,795 1,035,355 2,422,652
Cash and cash equivalents, beginning
of year 719,075 2,136,870 3,172,225
------------ ------------ -------------
Cash and cash equivalents, end of year $ 2,136,870 $ 3,172,225 $ 5,594,877
============ ============ =============
Supplemental cash flow information:
Cash paid for interest $ 117,400 $ 1,957,194 4,026,106
Cash paid for income taxes $ 1,840,296 $ 4,781,045 870,382
Equipment acquired under capital leases $ 155,361 $ 438,643 2,009,655
Common stock issued in connection with
acquisitions $ 4,741,976 $ 13,889,870 $ 52,245,279
Effects of acquisitions:
Fair value of assets acquired $ 7,371,926 $ 78,845,644 $ 273,610,635
Liabilities assumed $ 3,658,793 $ 40,315,828 $ 263,119,005
Net cash paid for acquisitions $ 3,713,133 $ 38,529,816 $ 10,491,630
============ ============ =============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- FPA Medical Management, Inc. ("FPA" or the "Company"), a
Delaware corporation incorporated in 1994, is a national physician practice
management company, which, through its network of primary care physicians,
affiliated professional corporations ("Professional Corporations") and
subsidiaries, contracts with health maintenance organizations ("HMOs") and other
prepaid health insurance plans (collectively, "Payors") to provide and manage
physician and related healthcare services to enrollees who select FPA network
primary care physicians. FPA also provides contract management services to
hospital emergency and anesthesia departments in twenty states.
On October 31, 1996, FPA and Sterling Healthcare Group, Inc. ("Sterling")
consummated a business combination (the "Merger"). As a result of the Merger,
each outstanding share of Sterling common stock $.0001 par value per share was
converted to .951 shares of FPA Common Stock, $.002 par value per share (FPA
"Common Stock"). Sterling's stockholders were issued 8,097,781 shares of FPA
Common Stock representing approximately 37% of the total issued and outstanding
shares of FPA Common Stock after the Merger. The shares of FPA Common Stock
issued to the Sterling stockholders have been registered on a Registration
Statement on Form S-4 filed under the Securities Act of 1933, as amended. The
Merger has been treated as a tax-free reorganization and accounted for as a
pooling of interests and, accordingly, the accompanying consolidated financial
statements have been prepared on a basis that includes the accounts of Sterling
since June 1, 1994, Sterling's date of inception. Information concerning 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:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Operating revenue:
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>
31
<PAGE> 32
Managed Care Business -- FPA, its subsidiaries and the Professional
Corporations currently manage the provision of prepaid managed healthcare
services for networks of primary care physicians in numerous states. The "FPA
Network" consists of FPA, its subsidiaries, the Professional Corporations and
various independent practitioners.
The Professional Corporations and certain subsidiaries contract with Payors
to provide for the delivery of healthcare services on a capitation basis (i.e.,
a fixed payment per enrollee per month). Through administrative services
agreements, the Professional Corporations assign payments from Payors to the
Company in return for management services, specialty medical care claims
administration and payment, and other services.
FPA has direct or indirect unilateral and perpetual control over the assets
and operations of the Professional Corporations for all periods presented, other
than by means of owning the majority of the voting stock of the Professional
Corporations. FPA and its subsidiaries are unable to own a majority interest in
the Professional Corporations formed in states which prohibit the corporate
practice of medicine. The Professional Corporations have as shareholders and
directors certain physicians who are employees of FPA or one of its
subsidiaries. Each shareholder/director has entered into a succession agreement
which requires such shareholder/director to sell to a designee of FPA such
shareholder/director's shares of stock for a nominal amount if such
shareholder/director is terminated from employment with FPA. This ensures
unilateral and perpetual control over the Professional Corporations by FPA. Due
to a parent-subsidiary relationship under generally accepted accounting
principles, FPA has consolidated the financial statements of the Professional
Corporations. FPA believes that consolidation of the financial statements of
these Professional Corporations is necessary to present fairly the financial
position and results of operations of the Company. All significant inter-entity
transactions have been eliminated in consolidation. The consolidated financial
statements include the operations of the Company, all of the Company's
subsidiaries and Professional Corporations since they were acquired, were
incorporated, or entered into an administrative services agreement with FPA or
one of its subsidiaries.
Managed care capitation payments from Payors are paid monthly and are
recognized as revenue during the period in which enrollees are entitled to
receive services. Contracts with Payors generally provide for terms of one to
thirty years, with automatic renewal periods, terminable on prior notice
(generally between 30 and 180 days).
32
<PAGE> 33
The Company has two types of managed care Payor contracts: contracts for
both inpatient and outpatient services ("global capitation" contracts) and those
limited to outpatient services ("outpatient capitation" contracts). Under global
capitation contracts, which accounted for approximately 20.9% and 36.3% of
managed care business operating revenue in 1995, and 1996, respectively, the
Company receives a fixed monthly amount per enrollee for which the Company is
financially responsible to provide the enrollees with all necessary inpatient
and outpatient care. In 1994, the Company had no global capitation contracts.
Under outpatient capitation contracts, the Company receives a fixed monthly
amount per enrollee for which the Company is financially responsible to provide
the enrollees with all necessary outpatient care. Additionally, under these
outpatient capitation contracts, the Company is a party to shared risk
arrangements with Payors which generally reward the Company for the efficient
utilization of inpatient services. Under these shared risk arrangements, the
Company shares any surplus or, in some cases, deficit of inpatient cost in
relation to amounts pre-established by the Payor. Estimates of shared risk funds
to be received or paid by the Company are recorded based on estimates of
hospital utilization costs. Differences between actual settlements and amounts
estimated as receivable (or payable) relating to the shared risk arrangements
are recorded at the time of settlement, generally in the second or third quarter
of the following year. The Company does not believe that the final settlements
of these shared risk arrangements will differ materially from the estimated
amounts recorded in the financial statements. Revenue under outpatient
capitation contracts represented 98.5%, 72.4% and 51.7% of managed care business
operating revenue in 1994, 1995 and 1996, respectively.
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations. These revenues are
presented net of contractual deductions and represented 1.5%, 6.7% and 12.0% for
1994, 1995 and 1996, respectively, of managed care business operating revenue.
Emergency Department Business -- The Company provides physician contract
management for hospital emergency and anesthesia departments in twenty states at
December 31, 1996. Contractual arrangements with hospitals are primarily
fee-for-service whereby hospitals agree to authorize the Company and its
contracted healthcare professionals to bill and collect for the professional
component of the charges for medical services rendered by the Company's
contracted healthcare professionals.
Through the emergency department business, the Company generates
fee-for-service revenues. These revenues are presented net of contractual
deductions, and represented 94.0%, 84.4% and 84.6% of the emergency department
business operating revenues in 1994, 1995 and 1996, respectively. The Company
has arrangements with certain hospitals for monthly subsidy amounts
33
<PAGE> 34
which either compensate for patient revenues not achieving specified levels or
to fund front-end staffing and insurance costs. The Company also has a physician
recruiting and medical management consulting division.
Revenue Recognition and Accounts Receivable -- Fee-for-service revenue is
reported on the accrual basis, net of estimated third-party contractual
deductions. Further adjustments are recorded to reflect amounts estimated to be
uncollectible based upon individual contract experience. The allowance
considered necessary to cover contractual deductions and uncollectible accounts
is based on an analysis of current and past due accounts, collection experience
in relation to amounts billed and other relevant information. Accounts
receivable represents amounts due from third-party payors including Medicare and
Medicaid, patients and others for services rendered.
For emergency department receivables, the concentration of credit risk
relating to accounts and subsidy receivables is limited by the number and
geographic dispersion of hospital emergency departments managed by the Company,
as well as by the large number of patients and payors, including various
governmental agencies in the states in which the Company operates.
In 1994, 1995 and 1996, revenues from governmental agencies made up
approximately 33%, 19% and 34%, respectively, of operating revenue for both
divisions of the Company.
Medical Services Expense -- Through the Professional Corporations and its
subsidiaries, the Company contracts with various healthcare providers to provide
medical services to covered enrollees. Primary care physicians are compensated
by the Company under compensation arrangements with the Professional
Corporations on either a salary or capitation basis and the cost is recorded as
"Medical services expense -- Professional Corporations" in the accompanying
consolidated statements of operations. The costs of referrals to specialty care
physicians are paid on either a discounted fee-for-service or capitation basis.
Under global capitation contracts, the Company contracts for inpatient services
which are paid on a fee-for-service or per diem basis. Medical services expense
paid through capitation (for certain primary care and specialty care services),
fixed salary (for primary care only) or for contracted hours of emergency
department coverage at fixed hourly rates totaled 14%, 51% and 38% of operating
revenues in 1994, 1995 and 1996, respectively, with the remainder of medical
services expense (for primary care, specialty care, ancillary services,
inpatient and outpatient services, lab charges, etc.) paid for on a discounted
fee-for-service or per diem basis. The costs of healthcare services paid for on
a fee-for-service or per diem basis are recorded by the Company in the period
for which services are provided based
34
<PAGE> 35
in part on estimates, including an accrual for medical services provided but not
yet billed to the Company ("incurred but not reported") and are included in
claims payable in the accompanying consolidated balance sheets.
The Company has negotiated "attachment points" for stoploss insurance
independent of Payor contracts which represent the contractual limits, generally
$25,000 per year per enrollee for outpatient services and $100,000 per year per
enrollee for inpatient services. In 1997, the Company increased its outpatient
services attachment point to $50,000 in most cases.
Cash and Cash Equivalents -- Cash and cash equivalents are defined as
highly liquid financial instruments with original maturities of three months or
less. A substantial portion of the Company's cash is deposited in three
financial institutions. The Company monitors financial conditions of each
financial institution and does not believe that the deposits are subject to a
significant degree of risk.
Marketable Securities -- Marketable securities consist of corporate debt
securities and certificates of deposit. 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 recorded
in the accompanying consolidated financial statements. Marketable securities at
December 31, 1995 consist of corporate debt securities and at December 31, 1996
consist of Eurodollar certificates of deposit.
Capitation Deposits -- Capitation deposits represent funds on deposit from
a major Payor in Florida. In accordance with the Payor contract, 60% of the
capitation revenue earned each month is set aside for payment of claims. The
Company is entitled to all of the interest earned on this account. The contract
requires a minimum balance in this account.
Property and Equipment -- Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the assets,
generally three to seven years. Leasehold improvements are amortized over the
lesser of the estimated useful life or the remaining life of the related lease.
Restricted Cash and Deposits -- The Company records as restricted cash
funds escrowed for payment of claims, for future acquisitions, and other funds
contractually required to be segregated from the Company's operating cash.
Goodwill -- The Company has classified as goodwill the excess of the
purchase price over the fair value of the net assets of entities acquired.
Goodwill is being amortized on a straight-line basis over the estimated periods
of future benefit of 15 to 30 years. At each balance sheet date following the
acquisition of a business, the Company reviews
35
<PAGE> 36
the carrying value of the goodwill to determine if facts and circumstances
suggest that it may be impaired or that the amortization period may need to be
changed. The Company considers external factors relating to each acquired
business, including hospital and physician contract changes, local market
developments, changes in third party payments, national health care trends, and
other publicly available information. If these external factors indicate that
the goodwill will not be recoverable, as determined based upon undiscounted cash
flows before interest charges of the business acquired over the remaining
amortization period, the carrying value of the goodwill will be reduced. 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. In 1996, the Company
recorded charges for impairment of goodwill of $4.1 million as a result of a
1995 acquisition in Arizona and $14.8 million related to terminated emergency
department contracts. The Company does not believe there currently are any
indicators that would require an additional adjustment to the carrying value of
the goodwill or its remaining useful life at December 31, 1996.
Intangible Assets -- Intangible assets consist 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 5 to 15 years.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes," which requires the use of the liability method for deferred income taxes
(see Note 8).
Professional Liability Coverage - The Company maintains professional
liability coverage for the Company and its employee and independent contractor
physicians on a claims made basis. The Company records an estimate of its
liabilities for medical malpractice claims incurred but not reported. Such
liabilities are not discounted.
36
<PAGE> 37
Pro Forma Information -- The pro forma net income and net income per share
information in the 1994 consolidated statement of operations reflect the effect
on historical results as if FPA had been a C Corporation rather than an S
Corporation for income tax purposes, and no tax benefit arose as a result of the
change in tax status.
Net Income (Loss) per Common Share -- Net income (loss) per Common Share is
computed based on the weighted average number of shares and share equivalents
(options and warrants) outstanding, giving retroactive effect to all stock
splits, including a one-for-one common stock dividend effective March 1, 1995.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
New Accounting Standards -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue to
apply Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company has continued to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and has disclosed the required pro forma effect
on net income (loss) per share (See Note 7).
Reclassifications -- Certain reclassifications have been made to prior
years' financial statements to conform to current year classifications.
37
<PAGE> 38
2. RELATED PARTY TRANSACTIONS
In Texas, the Company leases its main facility, certain leasehold
improvements, and certain medical and office equipment from an officer of a
Texas subsidiary pursuant to a noncancelable operating lease agreement expiring
November 8, 2005. The agreement provides for monthly payments of $58,654,
subject to certain increases based on the consumer price index. The lease also
contains certain provisions that may, at the option of the officer, require FPA
to acquire the facility at its fair market value.
Effective October 1, 1996, a Professional Corporation and FPA acquired
substantially all of the assets and assumed certain liabilities of Family
Practice Associates of San Diego, an Osteopathic Corporation ("FPASD"), owned by
certain officers of the Company. The purchase price was supported by an
independent valuation and approved by a committee of the Independent Directors
of the Company. During 1995, 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, 1995 and 1996, the balance was $300,086 and $0, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land and buildings $ 164,825 $ 523,758
Computer hardware and software 1,730,733 12,526,830
Furniture, fixtures and equipment, including medical equipment 7,519,444 25,677,238
Leasehold improvements 1,479,653 6,764,846
Vehicles -- 311,972
------------ ------------
Total 10,894,655 45,804,644
Less accumulated depreciation and amortization (2,576,385) (6,358,498)
------------ ------------
Subtotal 8,318,270 39,446,146
Capitalized software development costs 1,273,529 693,186
------------ ------------
Property and equipment -- net $ 9,591,799 $ 40,139,332
============ ============
</TABLE>
38
<PAGE> 39
4. DEBT
Convertible Subordinated Notes Payable -- On October 5, 1994, FPA sold
$1.0 million of convertible subordinated notes to representatives of the
underwriters of FPA's initial public offering. The notes bore interest at 6%,
payable semiannually, with principal due October 1999. During 1996, the notes
were converted into 200,000 shares of FPA Common Stock.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures due December 2001, which resulted in net proceeds to the
Company of approximately $73.0 million. The notes bear interest at 6-1/2%, with
interest payable semiannually, and are convertible into FPA Common Stock at
$25.95 per share. The debentures are redeemable by the Company after December
20, 1999. Upon the occurrence of a Repurchase Event, as defined in the
debenture, each holder has the right to require repayment of the debentures at
100% of the principal amount plus accrued interest. In January 1997, upon
exercise of the overallotment option granted to the Initial Purchasers, the
Company issued additional convertible subordinated debentures with the same
terms for net proceeds of $5.4 million.
Convertible Promissory Note -- In connection with the acquisition of a
Texas subsidiary on November 1, 1995, FPA issued a 36-month, $2.5 million 9%
convertible promissory note with payments of interest only due for the first 24
months and principal and interest monthly thereafter. During 1996, the note was
converted into 243,191 shares of FPA Common Stock.
Notes Payable -- In connection with certain acquisitions, the Company
has issued various other notes payable. Following is a summary of all long-term
debt.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- ----------
<S> <C> <C>
Notes payable, interest ranging from 7% to 10.25% and principal due
through December 2000 $ 5,270,421 $3,484,627
Note payable, interest at 9% and principal due November 1997 2,500,000 --
Convertible note payable, interest at 9% and principal due November 1998 2,500,000 --
Convertible debentures payable, interest at 6.5% and principal due
December 2001 -- 75,000,000
Notes payable to former shareholders of Sterling Healthcare, Inc., interest
at rates ranging from 5% to 5.54%, payable in 60 monthly installments
through January 1998 1,372,895 759,420
Notes payable, interest at prime, payable in two equal installments in --
December 1996 and 1997 1,200,000 600,000
6% convertible subordinated notes, interest payable each April
and October through 1999, principal due October 1999 1,000,000 --
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C>
Notes payable to financial institutions, interest at 5.5%, due in full
in October 1997 714,858 55,000,000
Note payable, interest at LIBOR, 59 payments of principal and interest
due commencing February 1999, through December 2003 -- 97,759,244
Notes payable interest at 6.02% and principal due January 2006 -- 20,174,914
Other 1,497,013 2,012,513
----------- ------------
Total 16,055,187 254,790,718
Less current portion 7,042,635 70,015,734
----------- ------------
Long term debt, net of current portion $ 9,012,552 $184,774,984
=========== ============
</TABLE>
At December 31, 1996 future payments on long-term debt are as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE CAPITAL
AND OTHER LEASES
--------- ------
<S> <C> <C>
1997 $ 68,885,510 $ 1,130,244
1998 1,859,868 585,239
1999 8,024,125 226,843
2000 8,722,934 67,358
2001 83,755,099 --
Thereafter 81,855,064 --
------------ ------------
$253,102,600 2,009,664
============
Less amount representing interest on capital leases (321,546)
------------
Present value of net minimum capital lease payments 1,688,118
Notes payable and other 253,102,600
------------
Total $254,790,718
============
</TABLE>
The fair market value of the Company's debt approximates its carrying value.
Credit Agreement -- On January 29, 1996, the Company entered into a credit,
security, guarantee and pledge agreement ("Credit Agreement") with certain
financial institutions. Permitted Borrowings, as defined in the Credit
Agreement, generally include those for acquisitions and capital expenditures.
The Company and the financial institutions amended the Credit Agreement during
1996. Fees of $1,250,000 were paid in connection with the Credit Agreement
during 1996. Borrowings bear interest at rates ranging from either LIBOR plus
2 1/2%, 2 3/4% or 3%, or prime rate plus 1%, 1 1/4%, or 1 1/2% as defined by the
Credit Agreement. The balance outstanding is due on October 31, 1997. Periodic
payments of accrued interest are due during the term of the Credit Agreement.
Additionally, the financial institutions were granted a security interest in
substantially all of the assets of the Company (excluding those of FPA Medical
Management of Michigan, Inc. d/b/a QualNet, Inc., and the stock of certain
subsidiaries of FPA) and Professional Corporations. The debt is also guaranteed
by the Professional Corporations. In connection with the Credit Agreement, the
Company must maintain certain debt and equity ratios and profitability
thresholds. The Company issued to the financial institutions a warrant to
purchase
40
<PAGE> 41
50,000 shares of Common Stock at $9.125 per share exercisable prior to February
2, 2001, subject to certain anti-dilution provisions. At December 31, 1996, the
Company had borrowed the maximum of $55.0 million under the Credit Agreement.
5. MAJOR CUSTOMERS
In 1994, two Payors accounted for 11% and 34%, respectively, of the
Company's operating revenue. In 1995, two Payors accounted for 10% and 19%
respectively, of the Company's operating revenue. In 1996, two Payors accounted
for 11% and 14%, respectively, of the Company's operating revenue.
6. COMMITMENTS AND CONTINGENCIES
Legal -- The Company is party to certain legal actions arising in the
ordinary course of business. In the opinion of the Company's management,
liability, if any, under these claims is adequately covered by insurance and
will not have a material effect on the Company's financial position or results
of operations. The Company maintains professional liability insurance.
Operating Leases -- The Company is a party to certain facilities and
equipment leases which terminate at various dates through November 8, 2005.
Future minimum lease payments required under all operating leases are as
follows:
<TABLE>
<S> <C>
1997 $21,911,887
1998 19,606,444
1999 17,329,150
2000 15,214,255
2001 2,352,625
Thereafter 1,878,572
-----------
Total $78,292,933
===========
</TABLE>
For 1994, 1995 and 1996, total expense under these non-cancelable operating
leases was $844,094, $2,966,964, and $6,909,028, respectively.
7. STOCKHOLDERS' EQUITY
41
<PAGE> 42
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, October 31, 1996 and March 17, 1997, the stockholders of the
Company authorized an increase in the total number of shares which may be
granted under the plan to 1,500,000, 5,000,000 and 6,500,000, respectively. The
option price per share may not be less than 100% of the fair market value of the
Common Stock on the date of grant, as defined in the stock option plan document.
Options granted under the plan generally vest over three to five years.
1994 Physician Stock Option Plan -- During 1994, FPA adopted the 1994
Physician Stock Option Plan under which an aggregate of 1,000,000 shares of
Common Stock of FPA may be issued through nonqualified stock options. The
option price per share may not be less than 100% of the fair market value of the
Common Stock on the date of grant, as defined in the stock option plan document.
Options granted under the plan generally vest over two to five years.
1995 Non-Employee Directors Non-Qualified Stock Option Plan -- On July 13,
1995, the stockholders of the Company approved the 1995 Non-Employee Directors
Non-Qualified Stock Option Plan under which options to purchase up to 200,000
shares of Common Stock may be granted to non-employee directors. Options granted
under the plan generally vest over one year.
Stock option transactions and prices are summarized as follows:
42
<PAGE> 43
<TABLE>
<CAPTION>
1995
OMNIBUS 1994 NON-EMPLOYEE DIRECTORS
STOCK PHYSICIAN STOCK NON-QUALIFIED
OPTION PLAN OPTION PLAN STOCK OPTION 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
Granted in connection with Sterling merger 1,313,583
Otherwise granted 3,077,801 184,292 12,500
Exercised (181,421) (14,200) (5,000)
Canceled (35,477) (10,100) --
---------- -------- ---------
Outstanding at December 31, 1996 5,725,120 637,427 25,000
========== ======== =========
Average option price per share:
At December 31, 1994 $ 5.11 N/A N/A
At December 31, 1995 $ 6.27 $ 7.02 $ 8.40
At December 31, 1996 $ 13.75 $ 9.33 $ 13.51
Options exercisable:
At December 31, 1994 100,000 -- --
At December 31, 1995 215,332 31,500 --
At December 31, 1996 1,705,560 146,689 12,500
</TABLE>
Common Stock -- All stock options are granted at fair market value of the
Common Stock at the grant date. The weighted average fair value of the stock
options granted during 1996 was $8.63. The fair value of each stock option grant
is estimated on the date of grant using the Black Scholes option pricing model
with the following weighted average assumptions used for grants in 1996:
risk-free interest rate of 5.7%; expected divided yield of 0%; expected life of
3 years; and expected volatility of 48%. Stock options generally expire ten
years from the grant date. Stock options generally vest over a three year
period, with one-third of the shares becoming exercisable on each of the first
three anniversaries of the grant date. The outstanding stock options at December
31, 1996 have weighted average remaining contractual life of 8.42 years. The
number of stock option shares exercisable at December 31, 1996 was 1,864,749.
These stock options have a weighted average exercise price of $10.94 per share.
The Company accounts for its options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost been determined
43
<PAGE> 44
consistent with SFAS No. 123, the Company's pro forma net income and earnings
per share for 1995 would have been $1,867,126 and $.14, respectively, and the
Company's pro forma net loss and net loss per share for 1996 would have been
$21,875,211 and $1.01, respectively. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
PRICES AT DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31, 1996 EXERCISE PRICE
------ -------------------- ---------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 5.0000-$ 8.6250 1,759,463 8.03 $ 6.3571 789,214 $ 6.1599
$ 8.8750-$13.7500 1,664,773 8.17 11.5848 663,630 12.0322
$13.8125-$18.8438 1,022,647 8.28 16.2501 180,487 14.5660
$19.0625-$28.3750 1,940,664 9.04 19.5457 231,418 21.2547
--------- ---- --------- --------- ---------
$ 5.0000-$28.3750 6,387,547 8.42 $ 13.3104 1,864,749 $ 10.9366
========= ==== ========= ========= =========
</TABLE>
8. 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 on
the date it became a taxable enterprise.
The components of income tax expense as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal Expense:
Current $ 974,870 $ 2,190,978 $ 5,230,179
Deferred (181,312) 204,808 (5,230,179)
State Expense:
Current 171,936 348,882 1,566,982
Deferred (23,469) (21,348) (1,566,982)
----------- ----------- -----------
Total $ 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 of
the effect of the following items:
44
<PAGE> 45
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate 34.0% 34.0% (35.0%)
Revocation of FPA S Corporation status (4.9%) -- --
State taxes, net of Federal income tax benefit 3.2% 3.7% (1.8%)
Nondeductible goodwill amortization -- 1.7% 11.0%
Nondeductible acquisition costs -- -- 21.5%
Other 2.2% 2.1% 4.3%
---- ---- -----
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 and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Goodwill -- $ 4,087,001
Allowance for uncollectible accounts $ 2,307,580 2,700,811
Accrued liability for professional liability claims 321,256 595,000
Net operating losses 296,511 67,058
Other 50,392 720,821
----------- ------------
Total deferred tax assets $ 2,975,739 $ 8,170,691
----------- ------------
Deferred tax liabilities:
Geographic expansion costs $ (179,893) $ (392,305)
Start-up costs (231,498) --
State income tax -- (290,987)
Deferred compensation (57,565) (19,069)
Depreciation and amortization (1,008,458) (799,914)
----------- ------------
Total deferred tax liabilities $(1,477,414) $ (1,502,275)
----------- ------------
Net deferred tax assets $ 1,498,325 $ 6,668,416
=========== ============
</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.
9. MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES
In 1995, the Company recorded nonrecurring expenses of $1.6 million. This
amount includes a $434,000 charge for impairment of goodwill, a $773,000 charge
for the loss on disposition of businesses and $375,000 relating to the
bankruptcy of one of its hospital clients. In 1995, the Company sold
45
<PAGE> 46
six and closed two primary care clinics (seven in Florida and one in Texas). The
goodwill impairment and loss on sale are directly related to the sale and
closure of the primary care clinics. These clinics accounted for approximately
$2.1 million in revenue and generated an operating loss (including the unusual
items) of $3.7 million during 1995.
In 1996, the Company recorded nonrecurring expenses of $38.0 million
($28.8 million after tax or $1.32 per share). This amount is comprised of (i)
costs related to the Merger in the amount of $16.8 million comprised of
investment bankers' fees, attorneys' fees, accountants' fees, legal fees, and
severance and compensation required to be paid as part of the Merger, (ii)
write-offs of goodwill and other assets in the amount of $18.9 million related
to terminated emergency room contracts and an unprofitable acquisition in
Arizona, and (iii) restructuring charges in the amount of $2.3
million primarily related to severance for terminated employees.
10. SEGMENT INFORMATION
Sterling is a physician practice management company engaged in the business
of providing contract management and support services primarily to hospital
based emergency departments ("Emergency Department"). FPA manages the provision
of prepaid managed healthcare services for networks of primary care physicians
("Managed Care"). The activities related to the Managed Care segment and the
Emergency Department segment are as follows:
<TABLE>
<CAPTION>
EMERGENCY MANAGED
DEPARTMENT CARE CONSOLIDATED
---------- ---- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
DECEMBER 31, 1996
Operating revenues $ 136,761 $ 303,558 $ 440,319
Operating loss (6,154) (4,435) (10,589)
Assets employed at year-end 77,900 499,370 577,270
Depreciation and amortization 3,204 7,532 10,736
Capital expenditures 650 8,477 9,127
DECEMBER 31,1995
Operating 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
Operating revenues $ 39,256 $ 18,435 $ 57,691
Operating income 2,349 383 2,732
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C> <C>
Assets employed at year-end 26,742 18,310 45,052
Depreciation and amortization 438 133 571
Capital expenditures 499 472 971
</TABLE>
11. ACQUISITIONS
Following is a summary of material acquisitions consummated during 1996 by
the Company, one of its subsidiaries, or one of the Professional Corporations.
Such acquisitions were accounted for using the purchase method of accounting.
Goodwill totaling approximately $242 million was recorded, which is being
amortized over periods ranging from 25 to 30 years. In connection with these
acquisitions, the Company issued (i) FPA Common Stock valued at $51.6 million,
(ii) notes payable of $163.8 million, and (iii) cash of $19.4 million.
VIP, IPA, A Professional Corporation January 1996
Foundation Health IPA January 1996
Century Family Medical Group, IPA January 1996
Century Family Medical Group, Inc. January 1996
Chabot Medical Group IPA January 1996
Physicians First, Inc. June 1996
Family First Pharmacy, Inc. June 1996
FPA Family Pharmacy, Inc. June 1996
Physicians Medical Group of Florida, Inc. June 1996
FHC IPA, Inc. July 1996
Intergroup IPA, P.C. July 1996
Foundation Health Medical Services(1) December 1996
Foundation Health Medical Group, Inc.(1) December 1996
FHMG/TDMC Medical Group, A Professional Corporation(1) December 1996
Thomas Davis Medical Centers, P.C.(1) December 1996
(1) The Company is in the process of determining the appropriate values to be
assigned to the assets acquired and liabilities assumed in connection with
these acquisitions. Accordingly, the Company's estimate of these values are
subject to revision upon completion of an independent valuation which may
result in an adjustment to goodwill.
The following unaudited pro forma financial information presents the
consolidated results of operations as if all significant acquisitions had
occurred as of the beginning of the periods presented, after including the
impact of certain adjustments, such as amortization of intangibles and goodwill,
executive compensation per employment agreements, and the related income tax
effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Revenues $ 366,483,000 $ 599,662,000
Net loss (43,914,000) (77,348,857)
Net loss per share (2.40) (3.00)
</TABLE>
47
<PAGE> 48
The Company believes that this unaudited pro forma information is not
indicative of future results of operations, nor of historical operations, if the
acquisitions had occurred as of the beginning of the periods presented.
12. MICHIGAN SUBSIDIARY
On April 10, 1995, the Company signed an exclusive agreement to provide
management services through a majority-owned subsidiary, with Great Lakes Health
Plan, Inc. ("GLHP") headquartered in Southfield, Michigan. In connection with
this transaction, the Company invested $2 million in GLHP and the subsidiary.
The subsidiary began limited start-up operations on April 10, 1995. Included in
intangible assets are $266,034 in start-up costs related to activity in
Michigan. These costs are being amortized over five years. On March 7, 1996, FPA
made an additional capital contribution of $3 million 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 27,000 Medicaid
enrollees.
13. LICENSURE
The application of Family and Senior Care, Inc., a wholly-owned subsidiary
of FPA, for a restricted healthcare service plan license was approved by the
California Department of Corporations on December 5, 1996. Following that date,
all of the Company's managed care activity in the State of California occurred
in this subsidiary.
14. SUBSEQUENT EVENTS
The following significant events have occurred subsequent to the balance
sheet date:
On March 17, 1997, FPA completed the merger (the "AHI Merger") of FPA
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of FPA,
with and into AHI Healthcare Systems, Inc., a Delaware corporation ("AHI").
Pursuant to the AHI Merger, AHI became a wholly-owned subsidiary of FPA and each
outstanding share of AHI Common Stock was exchanged for .391 shares of FPA
Common Stock. The shares of FPA Common Stock issued to the AHI stockholders were
registered on a Registration Statement on Form S-4 filed
48
<PAGE> 49
under the Securities Act of 1933, as amended. The AHI Merger will be treated as
a tax-free reorganization and accounted for as a pooling of interests.
The following pro forma unaudited consolidated information presents the
operations of FPA and AHI, as though the AHI Merger had occurred as of the
beginning of the periods presented. The 1996 information includes the twelve
months ended September 30, 1996 for AHI as information for the twelve months
ended December 31, 1996 is not yet available.
Management believes that when actual twelve month financial statements
for the year ended December 31, 1996 are available, they will result in a net
loss higher than that presented in the following table as a result of higher
medical costs experienced recently by AHI.
49
<PAGE> 50
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Revenues $ 282,635,482 $ 559,386,613
Net income (loss) 470,965 (32,061,426)
Net income (loss) per share .04 (1.19)
</TABLE>
50
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Stockholders of FPA Medical Management, Inc.:
We have audited the consolidated balance sheets of FPA Medical Management, Inc.
and subsidiaries as of December 31, 1995 and 1996 and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The 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
consolidated financial statements. We did not audit the consolidated balance
sheet of Sterling Healthcare Group, Inc. as of December 31, 1995, or the
related consolidated statements of operations, changes in stockholders' equity
and cash flows of Sterling Healthcare Group, Inc. for the period June 1, 1994
(date of inception) to December 31, 1994 and the year ended December 31, 1995,
which statements reflect total assets of $78,608,252 as of December 31, 1995,
and total revenues of $39,255,573 and $115,659,527 for the seven-month period
ended December 31, 1994 and the year ended December 31, 1995, respectively.
Such financial 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of FPA Medical Management, Inc. and subsidiaries as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 21, 1997
51
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sterling Healthcare Group, Inc.
Coral Gables, Florida
We have audited the consolidated balance sheets of Sterling Healthcare Group,
Inc. as of December 31, 1995, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for year ended
December 31, 1995 and the seven month period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling Healthcare
Group, Inc. as of December 31, 1995, and the results of their operations and
their cash flows for the year ended December 31, 1995 and the seven month
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND LLP
Miami, Florida
March 15, 1996
52
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information required under this item is incorporated
herein by reference to the information under the caption "Election of Directors"
in the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders.
(b) Executive Officers of the Registrant. The information with respect to
the executive officers required under this item is set forth in Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the information under the caption "Certain Transactions" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders.
53
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets, December 31, 1995 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the consolidated
Financial Statements or Notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- ----------- ------------------------
<S> <C>
3.1 Certificate of Incorporation.*
3.2 Bylaws.
3.3 Certificate of Amendment of Certificate of Incorporation filed
October 20, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
3.3) .
3.4 Certificate of Amendment of Certificate of Incorporation filed
August 6, 1996.
4.1 Specimen of Common Stock Certificate.*
4.2 Form of Warrant.*
10.1 IPA Medicare Partial Risk Services Agreement between PacifiCare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994.* **
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995
between FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 PacifiCare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
PacifiCare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
<S> <C>
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.13) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.12).* +
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.14) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.13).* +
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.15) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.14).* +
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.16) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.15).* +
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective September 1, 1994 (incorporated by reference to FPA's
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit No. 10.26). +
10.17 Amended and Restated Employment Contract dated as of January 1, 1995
between Sterling Healthcare Group, Inc. and Stephen J. Dresnick,
M.D. (incorporated by reference to Sterling Healthcare Group, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit 10.31). +
10.18 Employment Agreement between FPA and James A. Lebovitz effective
March 1, 1996 (incorporated by reference to FPA's Annual Report on
Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.18). +
10.19 FPA Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 33-79714 at Exhibit No. 10.19). +
10.20 Indenture dated as of December 18, 1996 by and between FPA and First
Union National Trust Bank relating to FPA's 6 1/2% Convertible
Subordinated Debentures Due 2001 (incorporated by reference to
Registration Statement No. 333-20007 at Exhibit 4.1).
10.21 Registration Rights Agreement dated December 13, 1996 by and among
FPA and the Initial Purchasers relating to FPA's 6 1/2% Convertible
Subordinated Debentures Due 2001 (incorporated by reference to
Registration Statement No. 333-20007 at Exhibit 4.2).
10.22 Form of Rule 144A Restricted Global Debenture relating to FPA's 6
1/2% Convertible Subordinated Debentures Due 2001 (incorporated by
reference to Registration Statement No. 333-20007 at Exhibit 4.4).
10.23 Form of Regulation S Global Debenture relating to FPA's 6 1/2%
Convertible Subordinated Debentures Due 2001 (incorporated by
reference to Registration Statement No. 333-20007 at Exhibit 4.5).
10.24 401(K) Salary Savings Plan effective January 1, 1994. +
10.25 1995 Directors Stock Option Plan.* +
10.26 1994 Physicians Stock Option Plan.*
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to FPA's Annual Report on Form 10-K
for the year ended December 31, 1995 at Exhibit No. 10.27).
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
<S> <C>
10.28 [Reserved]
10.29 Form of Indemnification Agreement.*
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
23.1 Consent of Coopers & Lybrand LLP.
</TABLE>
* Incorporated by reference to the exhibit to the Registrant's
Registration Statement on Form S-1, Reg. No. 33-97456, at the
exhibit number set forth opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities
and Exchange Commission for portions of this exhibit, which
confidential portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed
as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K. The Registrant filed the following current Reports
on Form 8-K during the quarter ended December 31, 1996 and through March 21,
1997:
DATE OF REPORT ITEMS REPORTED
- -------------- --------------
October 31, 1996.................................................2 and 7
November 8, 1996.................................................5 and 7
November 26, 1996................................................5 and 7
December 10, 1996................................................2 and 7
December 13, 1996................................................5 and 7
December 18, 1996................................................7 and 9
March 17, 1997...................................................2 and 7
56
<PAGE> 57
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
FPA MEDICAL MANAGEMENT, INC.
(Registrant)
By: /s/ SETH FLAM
------------------------
Seth Flam
President
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
DATE SIGNATURE CAPACITY
- ---- --------- --------
<S> <C> <C>
March 28, 1997 /s/ SETH FLAM Principal Executive Officer, President,
-------------------------------- Chief Executive Officer and Director
Seth Flam
March 28, 1997 /s/ STEVEN M. LASH Principal Financial Officer, Executive
-------------------------------- Vice President and Chief Financial
Steven M. Lash Officer
March 28, 1997 /s/ CHERYL A. MOORE Principal Accounting Officer, Vice
-------------------------------- President - Finance and Chief
Cheryl A. Moore Accounting Officer
March 28, 1997 /s/ SOL LIZERBRAM Chairman and Director
--------------------------------
Sol Lizerbram
March 28, 1997 /s/ HOWARD HASSMAN Executive Vice President - Corporate
-------------------------------- Development and Director
Howard Hassman
March 28, 1997 /s/ KEVIN ELLIS Executive Vice President - Chief Medical
-------------------------------- Officer and Director
Kevin Ellis
March 28, 1997 /s/ MICHAEL FEINSTEIN Director
--------------------------------
Michael Feinstein
March __, 1997 Vice Chairman, President of Sterling
-------------------------------- Healthcare Group, Inc. and Director
Stephen Dresnick
March 28, 1997 /s/ SHELDON DEREZIN Director
--------------------------------
Sheldon Derezin
March 28, 1997 /s/ HERBERT WERTHEIM Director
--------------------------------
Herbert Wertheim
</TABLE>
57
<PAGE> 58
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
----------- ------------------------
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation.*
3.2 Bylaws.
3.3 Certificate of Amendment of Certificate of Incorporation filed
October 20, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
3.3) .
3.4 Certificate of Amendment of Certificate of Incorporation filed
August 6, 1996.
4.1 Specimen of Common Stock Certificate.*
4.2 Form of Warrant.*
10.1 IPA Medicare Partial Risk Services Agreement between PacifiCare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994.* **
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995
between FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 PacifiCare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
PacifiCare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.13) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.12).* +
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.14) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.13).* +
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.15) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.14).* +
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.16) and amendment thereto effective
as of July 1, 1995 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.15).* +
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
<S> <C>
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective September 1, 1994 (incorporated by reference to FPA's
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit No. 10.26). +
10.17 Amended and Restated Employment Contract dated as of January 1, 1995
between Sterling Healthcare Group, Inc. and Stephen J. Dresnick,
M.D. (incorporated by reference to Sterling Healthcare Group, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit 10.31). +
10.18 Employment Agreement between FPA and James A. Lebovitz effective
March 1, 1996 (incorporated by reference to FPA's Annual Report on
Form 10-K for the year ended December 31, 1995 at Exhibit No.
10.18). +
10.19 FPA Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 33-79714 at Exhibit No. 10.19). +
10.20 Indenture dated as of December 18, 1996 by and between FPA and First
Union National Trust Bank relating to FPA's 6 1/2% Convertible
Subordinated Debentures Due 2001 (incorporated by reference to
Registration Statement No. 333-20007 at Exhibit 4.1).
10.21 Registration Rights Agreement dated December 13, 1996 by and among
FPA and the Initial Purchasers relating to FPA's 6 1/2% Convertible
Subordinated Debentures Due 2001 (incorporated by reference to
Registration Statement No. 333-20007 at Exhibit 4.2).
10.22 Form of Rule 144A Restricted Global Debenture relating to FPA's 6
1/2% Convertible Subordinated Debentures Due 2001 (incorporated by
reference to Registration Statement No. 333-20007 at Exhibit 4.4).
10.23 Form of Regulation S Global Debenture relating to FPA's 6 1/2%
Convertible Subordinated Debentures Due 2001 (incorporated by
reference to Registration Statement No. 333-20007 at Exhibit 4.5).
10.24 401(K) Salary Savings Plan effective January 1, 1994. +
10.25 1995 Directors Stock Option Plan.* +
10.26 1994 Physicians Stock Option Plan.*
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to FPA's Annual Report on Form 10-K
for the year ended December 31, 1995 at Exhibit No. 10.27).
10.28 [Reserved]
10.29 Form of Indemnification Agreement.*
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
23.1 Consent of Coopers & Lybrand LLP.
</TABLE>
* Incorporated by reference to the exhibit to the Registrant's
Registration Statement on Form S-1, Reg. No. 33-97456, at the
exhibit number set forth opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities
and Exchange Commission for portions of this exhibit, which
confidential portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed
as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
<PAGE> 1
Exhibit 3.2
[Amended as of October 31, 1996]
B Y - L A W S
OF
FPA MEDICAL MANAGEMENT, INC.
ARTICLE I
OFFICES
Section 1. The registered office in the State of Delaware
shall be as stated in the Certificate of Incorporation or at such other location
in the State of Delaware to which the registered office shall be changed by
action of the Board of Directors.
Section 2. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election
of directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a
<PAGE> 2
duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at
such date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote a Board of Directors and transact such other business as may
properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
2
<PAGE> 3
present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by
3
<PAGE> 4
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the Certificate of
Incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period.
Section 11. Unless otherwise provided in the
4
<PAGE> 5
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The business and affairs of the Corporation shall
be managed by or under the direction of its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-laws directed or required to be exercised or done by the stockholders.
Section 2. The number of directors which shall constitute the
Board of Directors shall be determined as set forth in the Certificate of
Incorporation. The directors shall be elected and shall hold office as set forth
in the Certificate
5
<PAGE> 6
of Incorporation. Directors need not be stockholders.
Section 3. Vacancies and newly created directorships resulting
from any increases in the authorized number of directors may be filled as set
forth in the Certificate of Incorporation. If there are no directors in office,
then an election of directors may be held in the manner provided by statute. If,
at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
Board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
6
<PAGE> 7
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be
held without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 7. Special meetings of the Board may be called by the
President on one day's notice to each director, either personally or by mail or
by telegram; special meetings shall be called by the President or Secretary in
like manner and on like notice on the written request of two directors unless
the Board consists of only one director, in which case special meetings
7
<PAGE> 8
shall be called by the President or Secretary in like manner and on like notice
on the written request of the sole director.
Section 8. At all meetings of the Board a majority of the
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the Certificate of
Incorporation or these By-laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 10. Unless otherwise restricted by the Certificate of
Incorporation or these By-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons
8
<PAGE> 9
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation
(except that a committee may, to the extent
9
<PAGE> 10
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-laws of the Corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provides,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
10
<PAGE> 11
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the Certificate of
Incorporation or these By-laws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the Certificate of
Incorporation or by law, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares then
entitled to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or
of the Certificate of Incorporation or of these By-laws, notice is required to
be given to any director or
11
<PAGE> 12
stockholder, it shall not be construed to mean personal notice, but such notice
may be given in writing, by mail, addressed to such director or stockholder, at
his address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Notice to directors may
also be given by telegram.
Section 2. Whenever any notice is required to be given under
the provisions of the statutes or of the Certificate of Incorporation or of
these By-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be a
Chairman, a President, a Secretary and a Treasurer or persons who shall act as
such, regardless of the name or title by which they may be designated, elected
or appointed. The Corporation may also have one or more Vice-Presidents and such
other officers and assistant officers as the Board of Directors may choose. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these By-laws otherwise provide.
Section 2. The officers and assistant officers shall be chosen
by the Board of Directors at its first meeting after
12
<PAGE> 13
each annual meeting of stockholders and shall hold office until their successors
are elected and qualified or until their earlier resignation or removal.
Section 3. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. Any officer elected or appointed by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the Corporation
shall be filled by the Board of Directors.
Section 5. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
THE CHAIRMAN
Section 6. The Chairman shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE PRESIDENT
Section 7. In the absence of the Chairman, the President shall
preside at all meetings of the stockholders and
13
<PAGE> 14
the Board of Directors.The President shall be the chief executive officer of the
Corporation and shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 8. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
THE VICE-PRESIDENTS
Section 9. In the absence of the President or in the event of
his inability or refusal to act, and if a Vice-President has been appointed by
the Board of Directors, the Vice-President (or in the event there be more than
one Vice-President, the Vice-Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice-Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
14
<PAGE> 15
THE SECRETARY AND ASSISTANT SECRETARY
Section 10. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be. He shall have
custody of the corporate seal of the Corporation and he, or an assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
Section 11. The Assistant Secretary, or if there be more than
one, the Assistant Secretaries in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the Secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the Secretary
and shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
15
<PAGE> 16
THE TREASURER AND ASSISTANT TREASURERS
Section 12. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
Section 13. He shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
Section 14. If required by the Board of Directors, he shall
give the Corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of this office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
Section 15. The Assistant Treasurer, or if there shall
16
<PAGE> 17
be more than one, the Assistant Treasurers in the order determined by the Board
of Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the Corporation shall be represented
by a certificate, provided that the Board of Directors may provide, by
resolution or resolutions, that some or all of any or all classes or series of
its stock shall be uncertificated shares. Certificates shall be signed by, or in
the name of the Corporation by, the chairman or vice-chairman of the Board of
Directors, or the President or a Vice-President, and the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation.
Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General
Corporation Law of Delaware or a statement that the Corporation will furnish
without charge to each stockholder who so requests
17
<PAGE> 18
the powers, designations, preferences and relative participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Section 2. Any of or all the signatures on a certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate
or certificates or uncertificated shares to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates or
uncertificated shares, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall
18
<PAGE> 19
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares, such uncertificated shares shall
be cancelled and issuance of new equivalent uncertificated shares or
certificated shares shall be made to the person entitled thereto and the
transaction shall be recorded upon the books of the Corporation.
19
<PAGE> 20
FIXING RECORD DATE
Section 5. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as
20
<PAGE> 21
otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
21
<PAGE> 22
ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the Corporation.
CHECKS
Section 4. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
22
<PAGE> 23
INDEMNIFICATION
Section 7. The Corporation shall indemnify its officers and
directors to the fullest extent permitted by the General Corporation Law of
Delaware.
ARTICLE VIII
AMENDMENTS
Section 1. These By-laws may be altered, amended or repealed
or new by-laws may be adopted by the stockholders or by the Board of Directors,
when such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the Board of Directors by the
Certificate of Incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
23
<PAGE> 1
EXHIBIT 3.4
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:00 AM 08/06/1996
960228503 - 2377093
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FPA MEDICAL MANAGEMENT, INC.
FPA Medical Management, Inc., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. ARTICLE FOURTH of the Certificate of Incorporation of the
Corporation, as amended, is hereby further amended to read in its entirety as
follows:
FOURTH: The aggregate number of shares which the Corporation
shall have authority to issue is 100,000,000, to be divided into (a)
98,000,000 shares of Common Stock, par value $.002 per share, and (b)
2,000,000 shares of Preferred Stock, par value $.001 per share.
The Board of Directors is hereby empowered to cause the
Preferred Stock to be issued from time to time for such consideration as
it may from time to time fix, and to cause such Preferred Stock to be
issued in series with such voting powers and such designations,
preferences and relative, participating, optional or other special
rights as designated by the Board of Directors in the resolution
providing for the issue of such series. Shares of Preferred Stock of
any one series shall be identical in all respects.
2. That the foregoing amendment was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, FPA Medical Management, Inc. has caused this
Certificate to be executed by its duly authorized officer, on this 9th day of
August, 1996.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ James A. Lebovitz
-----------------------
Name: James A. Lebovitz
Title: Senior Vice President
<PAGE> 1
Exhibit 10.24
FPA MEDICAL MANAGEMENT, INC. 401(K) SAVINGS PLAN
BACKGROUND
WHEREAS, FPA Medical Management, Inc. (the "Company") adopted
the FPA Medical Management, Inc. 401(k) Salary Savings Plan, effective January
1, 1994, for certain of its employees; and
WHEREAS, beginning in 1995 the Company has acquired and will
be acquiring in the future corporations which are maintaining section 401(k)
plans for their eligible employees; and
WHEREAS, the Company desires to consolidate its various
section 401(k) plans with the FPA Medical Management, Inc. 401(k) Salary Savings
Plan so that a single section 401(k) plan will cover its eligible employees and
certain of the eligible employees of its affiliates; and
WHEREAS, the Company desires to amend and restate the FPA
Medical Management, Inc. 401(k) Salary Savings Plan to accomplish its goal of
having a single company-wide section 401(k) plan which covers a substantial
portion of its employees and that such amended and restated plan shall be known
as the FPA Medical Management, Inc. 401(k) Savings Plan to; and
NOW, THEREFORE, effective January 1, 1997, the FPA Medical
Management, Inc. 401(k) Savings Plan is continued, amended and restated as
hereinafter set forth:
<PAGE> 2
ARTICLE I
DEFINITIONS
Except where otherwise clearly indicated by context, the
masculine shall include the feminine and the singular shall include the plural,
and vice-versa. Any term used herein without an initial capital letter that is
used in a provision of the Code with which this Plan must comply to meet the
requirements of section 401(a) of the Code shall be interpreted as having the
meaning used in such provision of the Code, if necessary for the Plan to comply
with such provision.
"Account" means the entries maintained in the records of the
Committee which represent Participant's interest in the Fund. The term "Account"
shall refer, as the context indicates, to any or all of the following:
"Matching Contribution Account" -- the Account to
which are credited Matching Contributions, if any, allocated to a Participant,
adjustments for withdrawals and distributions, and the earnings, losses and
expenses attributable thereto.
"Profit Sharing Account" -- the Account to which
are credited Profit Sharing Contributions, if any, allocated to a Participant,
adjustments for withdrawals and distributions, and the earnings, losses and
expenses attributable thereto.
"Rollover Account" -- the Account to which are
credited a Participant's Rollover Contributions, if any, that are not subject to
the joint and survivor annuity requirements of sections 401(a)(11) and 417 of
the Code, adjustments for withdrawals and distributions, and the earnings,
losses and expenses attributable thereto.
"Salary Reduction Account" -- the Account to which
are credited a Participant's Salary Reduction Contributions, adjustments for
withdrawals and distributions, and the earnings, losses and expenses
attributable thereto.
"Transfer Account" -- the Account to which are
credited a Participant's Rollover Contributions, if any, that are subject to the
joint and survivor annuity requirements of
2
<PAGE> 3
sections 401(a)(11) and 417 of the Code, adjustments for withdrawals and
distributions, and the earnings, losses and expenses attributable thereto.
"Actual Deferral Percentage" means, for any Eligible Employee
for a given Plan Year, the ratio of:
(a) the sum of:
(1) such Eligible Employee's Salary
Reduction Contributions for the Plan Year, plus
(2) in the case of any Highly Compensated
Eligible Employee, his elective deferrals for the year under any other qualified
retirement plan, other than an employee stock ownership plan as defined in
section 4975(e)(7) of the Code or a tax credit employee stock ownership plan as
defined in section 409(a) of the Code, maintained by a Participating Company or
any Affiliated Company, plus
(3) at the election of the Committee, any
portion of the Eligible Employee's Matching Contributions contributed pursuant
to Section 3.4 hereof required or permitted to be taken into account under
section 401(k) of the Code and the regulations issued thereunder, plus
(4) at the election of the Committee, any
portion of the Eligible Employee's Profit Sharing Contributions contributed
pursuant to Section 3.5 hereof required or permitted to be taken into account
under section 401(k) of the Code and the regulations issued thereunder; to
(b) the Eligible Employee's Compensation for the Plan
Year.
"Affiliated Company" means, with respect to any Participating
Company, (a) any corporation that is a member of a controlled group of
corporations, as determined under section 414(b) of the Code, which includes
such Participating Company; (b) any member of an affiliated service group, as
determined under section 414(m) of the Code, of which such Participating Company
is a member; (c) any trade or business (whether or not incorporated) that is
under common control with such Participating Company, as determined under
section 414(c) of the
3
<PAGE> 4
Code; and (d) any other organization or entity which is required to be
aggregated with the Participating Company under section 414(o) of the Code. "50%
Affiliated Company" means an Affiliated Company, but determined with "more than
50%" substituted for the phrase "at least 80%" in section 1563(a) of the Code,
when applying sections 414(b) and (c) of the Code.
"Age" means, for any individual, his age on his last birthday,
except that an individual attains Age 59-1/2 or Age 70-1/2 on the corresponding
date in the sixth calendar month following the month in which his 59th or 70th
(respectively) birthday falls (or the last day of such sixth month if there is
no such corresponding date therein).
"Alternate Payee" means any Spouse, former Spouse, child or
other dependent of a Participant who is recognized by a domestic relations order
(within the meaning of section 414(p)(1)(B) of the Code) as having a right to
receive all, or a portion of, the benefits payable under the Plan with respect
to such Participant.
"Average Actual Deferral Percentage" means, for a specified
group of Eligible Employees for a Plan Year, the average of the Actual Deferral
Percentages for such Eligible Employees for the Plan Year.
"Average Contribution Percentage" means, for a specified group
of Eligible Employees for a Plan Year, the average of the Contribution
Percentages for such Eligible Employees for the Plan Year.
"Benefit Commencement Date" means, for any Participant or
beneficiary, the date as of which the first benefit payment, including a single
sum, from the Participant's Account is due, other than pursuant to a withdrawal
under Article VIII hereof.
"Board of Directors" means, unless otherwise specified, the
board of directors of the Company or a committee of the Board of Directors to
which the Board of Directors has delegated some or all of its responsibilities
hereunder.
"Code" means the Internal Revenue Code of 1986, as it is
presently constituted, as it may be amended or any successor statute of similar
purpose and any regulations issued thereunder.
4
<PAGE> 5
"Committee" or "Savings Plan Committee" means the individuals
appointed by the Board of Directors to supervise the administration of the Plan,
as provided in Article X hereof, or, if no such Committee is appointed, it shall
mean the Company.
"Company" means FPA Medical Management, Inc. and its
successors.
"Compensation" means, for any Eligible Employee, for any Plan
Year or Limitation Year, as the case may be:
(a) For purposes of Sections 3.1, 3.4, and 3.5
hereof, subject to the limitations set forth in Subsection (e) of this
definition, an Eligible Employee's total wages as reported in the box titled
"Wages, tips, other compensation" of Form W-2 (i.e., wages as defined in section
3401(a) of the Code and all other payments of compensation for which the
Participating Company is required to furnish the employee a written statement
under sections 6041(d) and 6051(a)(3) of the Code) from a Participating Company
for such Plan Year, reduced by any reimbursements or other expense allowances,
fringe benefits (cash and noncash), moving expenses, deferred compensation, and
welfare benefits, but including Salary Reduction Contributions and elective
contributions that are not includible in gross income under section 125,
402(e)(3), 402(h) or 403(b) of the Code.
(b) For the purposes of Article XIII and Section 3.10
hereof, subject to the limitations set forth in Subsection (e) of this
definition, total wages as reported in the box titled "Wages, tips, other
compensation" of Form W-2 (i.e., wages as defined in section 3401(a) of the Code
and all other payments of compensation for which the Participating Company is
required to furnish the employee a written statement under sections 6041(d) and
6051(a)(3) of the Code).
(c) For the purposes of the definitions of "Actual
Deferral Percentage" and "Contribution Percentage" in this Article (except as
otherwise provided in such definitions), and subject to the limitations set
forth in Subsection (e) of this definition, total wages as reported in the box
titled "Wages, tips, other compensation" of Form W-2 (i.e., wages as defined in
section 3401(a) of the Code and all other payments of compensation for which the
Participating Company is required to
5
<PAGE> 6
furnish the employee a written statement under sections 6041(d) and 6051(a)(3)
of the Code).
For the purpose of this Subsection (c), the Company may elect
to consider only compensation as defined above for that portion of the Plan Year
during which the Employee was an Eligible Employee, provided that this election
is applied uniformly to all Eligible Employees for the Plan Year.
(d) For the purpose of the definition of "Highly
Compensated Employee" in this Article (except as otherwise provided in such
definition), the Employee's total wages as reported in the box titled "Wages,
tips, other compensation" of Form W-2 (i.e., wages as defined in section 3401(a)
of the Code and all other payments of compensation for which the Participating
Company is required to furnish the employee a written statement under sections
6041(d) and 6051(a)(3) of the Code), but including amounts that are excluded
from gross income under section 125 (relating to cafeteria plans), 402(e)(3)
(relating to section 401(k) cash or deferred plans), 402(h)(1)(B) (relating to
simplified employee pensions) or 403(b) (relating to tax-deferred annuities) of
the Code, or a reasonable approximation thereof.
(e) With respect to any Plan Year, only compensation
not in excess of the amount to which the $200,000 (for Plan Years beginning
before January 1, 1994) or the $150,000 (for Plan Years beginning on or after
January 1, 1994) limit of Code section 401(a)(17) has been indexed shall be
taken into account for purposes of Subsections (a), (b) and (c) of this
definition, except that this Subsection (e) shall not apply for purposes of
Sections 3.10 and 13.2(c) hereof.
"Contribution Percentage" means for any Eligible Employee for
a given Plan Year, the ratio of:
(a) the sum of
(1) such Eligible Employee's Matching
Contributions for the Plan Year (to the extent not included in such Eligible
Employee's Actual Deferral Percentage for such Plan Year), plus
6
<PAGE> 7
(2) in the case of any Highly Compensated
Eligible Employee, any employee contributions and employer matching
contributions, including any elective deferrals recharacterized as employee
contributions, under any other qualified retirement plan, other than an employee
stock ownership plan as defined in section 4975(e)(7) of the Code or a tax
credit employee stock ownership plan, as defined in section 409(a) of the Code,
maintained by a Participating Company or any Affiliated Company.
(3) at the election of the Committee, any
portion of the Eligible Employee's Salary Reduction Contributions for the Plan
Year or elective deferrals under any other qualified retirement plan maintained
by a Participating Company or any Affiliated Company that may be disregarded
without causing this Plan or such other qualified retirement plan to fail to
satisfy the requirements of section 401(k)(3) of the Code; to
(b) the Eligible Employee's Compensation for the Plan
Year.
"Covered Employee" means any Employee who (a) is employed by a
Participating Company, (b) is not covered by a collective bargaining agreement,
unless such agreement specifically provides for participation hereunder, (c) is
not a nonresident alien who receives no compensation from sources within the
United States (within the meaning of section 861(a)(3) of the Code), (d) is not
covered by another tax-qualified profit sharing plan maintained by a
Participating Company, and (e) is not an independent contractor. An Employee who
is such solely by reason of being a leased employee shall not be a Covered
Employee.
"Effective Date" means for the Plan in effect prior to this
amendment and restatement January 1, 1994, and for this amended and restated
Plan "Effective Date" means January 1, 1997.
"Eligible Employee" means an Employee who has become an
Eligible Employee as set forth in Section 2.2 hereof, and who has remained a
Covered Employee at all times thereafter.
"Employee" means an individual who is employed by a
Participating Company or an Affiliated Company, except that any individual who
is classified by a Participating Company or an
7
<PAGE> 8
Affiliated Company as an independent contractor shall not be an Employee,
regardless of whether such individual qualifies as an "employee" under
employment tax laws, common-law or any other law; provided that in the event an
individual is recharacterized as qualifying as a common-law "employee," such
individual will have no entitlement to any accrued benefits under this Plan, but
shall be eligible to be credited with a Period of Service for vesting purposes
to the extent that such individual has been employed as a common-law "employee."
An individual who is not otherwise employed by a Participating Company or
Affiliated Company shall be deemed to be employed by such company if he is a
leased employee with respect to whose services such Participating Company or
Affiliated Company is the recipient within the meaning of section 414(n) or
414(o) of the Code, but to whom section 414(n)(5) of the Code does not apply.
"Employment Commencement Date" means, for any Employee, the
date on which he is first entitled to be credited with an "Hour of Service"
described in Paragraph (a)(1) of the definition of Hour of Service in this
Article.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any regulations issued thereunder.
"FPA Common Stock" means the common stock, $.002 par value per
share, of the Company or such other stock of the Company, which is "employer
securities" as defined in section 409(l) of the Code.
"Fund" means the fund established for this Plan, administered
under the Trust Agreement, out of which benefits payable under this Plan shall
be paid.
"Highly Compensated Eligible Employee" means an Eligible
Employee who is (or is treated as) a Highly Compensated Employee.
"Highly Compensated Employee" means an Employee who:
(a) is a 5-percent owner, as defined in
section 416(i) of the Code, at any time during the current or preceding Plan
Year; or
8
<PAGE> 9
(b) received more than $80,000 (as indexed)
in Compensation from a Participating Company or an Affiliated Company during the
preceding Plan Year. If elected by the Committee, a Highly Compensated Employee,
as determined pursuant to this Subsection (b), must also be among the top 20% of
Employees of all Participating Companies and Affiliated Companies ranked by
Compensation in the preceding Plan Year (excluding Employees described in
section 414(q)(8) of the Code to the extent (1) permitted under the Code and (2)
elected by the Committee, for purposes of identifying the number of Employees in
the top 20%).
"Hour of Service" means, for any Employee, a credit awarded
with respect to:
(a) except as provided in Subsection (b) or (c),
(1) each hour for which he is directly or
indirectly paid or entitled to payment by a Participating Company or an
Affiliated Company for the performance of employment duties; or
(2) each hour for which he is entitled,
either by award or agreement, to back pay from a Participating Company or an
Affiliated Company, irrespective of mitigation of damages; or
(3) each hour for which he is directly or
indirectly paid or entitled to payment by a Participating Company or an
Affiliated Company on account of a period of time during which no duties are
performed due to vacation, holiday, illness, incapacity (including disability),
jury duty, layoff, leave of absence, or military duty.
(b) For any period that includes any hours for which
an Hour of Service would otherwise be credited to an Employee under Subsection
(a), above, the Committee may, in accordance with rules applied in a uniform and
nondiscriminatory manner, elect instead to credit Hours of Service using one or
more of the following equivalencies:
9
<PAGE> 10
<TABLE>
<CAPTION>
Basis Upon Which Records Credit Granted to Individual
Are Maintained For Period
-------------- ----------
<S> <C> <C>
shift actual hours for full shift
day 10 Hours of Service
week 45 Hours of Service
semi-monthly period 95 Hours of Service
month 190 Hours of Service
</TABLE>
(c) Anything to the contrary in Subsection (a) or (b)
notwithstanding:
(1) No Hours of Service shall be credited to
an Employee for any period merely because, during such period, payments are made
or due him under a plan maintained solely for the purpose of complying with
applicable workers' compensation, unemployment compensation, or disability
insurance laws.
(2) No more than 501 Hours of Service shall
be credited to an Employee under Paragraph (a)(3) of this definition on account
of any single continuous period during which no duties are performed by him,
except to the extent otherwise provided in the Plan.
(3) No Hours of Service shall be credited to
an Employee with respect to payments solely to reimburse for medical or
medically related expenses.
(4) No Hours of Service shall be credited
twice.
(5) Hours of Service shall be credited at
least as liberally as required by the rules set forth in U.S. Department of
Labor Reg. Section 2530.200b-2(b) and (c).
(6) In the case of an Employee who is such
solely by reason of service as a leased employee within the meaning of section
414(n) or 414(o) of the Code, Hours of Service shall be credited as if such
Employee were employed and paid with respect to such service (or with respect to
any related absences or entitlements) by the Participating Company or Affiliated
Company that is the recipient thereof.
10
<PAGE> 11
"Investment Medium" means any fund, contract, obligation, or
other mode of investment, including FPA Common Stock, to which a Participant may
direct the investment of the assets in his Account.
"Limitation Year" means the Plan Year.
"Matching Contributions" means the amounts, if any,
contributed by the Company pursuant to Section 3.4 hereof.
"Normal Retirement Age" means, for any Participant, the date
on which he attains Age 65.
"Normal Retirement Date" means, for any Participant, the first
day of the month coincident with or next following his attainment of Normal
Retirement Age.
"One-Year Period of Severance" means a 12-consecutive-month
period beginning on the date of the Employee's Separation from Service during
which the former Employee is credited with no Hours of Service.
"Participant" means an individual for whom one or more
Accounts are maintained under the Plan.
"Participating Company" means the Company and each other
organization which is authorized by the Board of Directors to adopt this Plan by
action of its board of directors or other governing body and any successor by
merger or any business organization that acquires a Participating Company's
business and adopts this Plan with the approval of the Board of Directors. Each
reference to the singular shall be deemed a reference to each such Participating
Company individually.
"Payroll Period" means a weekly, bi-weekly, semi-monthly, or
monthly pay period or such other standard pay period of the Participating
Company applicable to the class of Employees of which the Eligible Employee is a
part.
"Period of Service" means, with respect to any Employee, the
period of time commencing on the Employee's Employment Commencement Date and
ending on the date of the Employee's Separation from Service and, if applicable,
the period of time commencing on an Employee's Reemployment Commencement
11
<PAGE> 12
Date and ending on the date of the Employee's subsequent Separation from
Service.
"Period of Severance" means the period of time commencing on
the date of an Employee's Separation from Service and ending on the date on
which the Employee is again entitled to be credited with an Hour of Service.
"Plan" means the amended and restated FPA Medical Management,
Inc. 401(k) Savings Plan, a profit sharing plan with a cash or deferred
arrangement, as set forth herein and as it may be further amended from time to
time.
"Plan Year" means each 12-consecutive month period that begins
on each January 1st and ends on the next following December 31st.
"Predecessor Plan" means each of the tax-qualified defined
contribution plans identified on Appendix A, attached at the end hereof, which
have had their assets transferred to this Plan. Appendix A also contains special
provisions applicable to Participants who participated in such Predecessor
Plans.
"Profit Sharing Contributions" means the amounts, if any,
contributed by the Company pursuant to Section 3.5 hereof.
"Profit Sharing Participant" means an individual who has
become a Profit Sharing Participant as provided in Article II hereof and
remained a Covered Employee at all times thereafter.
"Qualified Domestic Relations Order" means a domestic
relations order (within the meaning of section 414(p)(1)(B) of the Code) which
creates or recognizes the existence of an Alternate Payee's rights to, or
assigns to an Alternate Payee the right to, receive all or a portion of the
benefits payable with respect to a Participant under the Plan, and is determined
by the Committee to satisfy the requirements of section 414(p) of the Code.
"Reemployment Commencement Date" means the first day following
a One-Year Period of Severance on which an Employee is entitled to be credited
with an Hour of Service described in Paragraph (a)(1) of the definition of "Hour
of Service" in this Article.
12
<PAGE> 13
"Required Beginning Date" means, for any Participant:
(a) if he is not a 5-percent owner (within the
meaning of section 416 of the Code) of a Participating Company at any time
during the five-Plan-Year period ending in the calendar year in which he
attained Age 70-1/2, or thereafter, April 1 of the calendar year following the
later of the calendar year in which he has a Separation from Service or the
calendar year in which he attained Age 70-1/2; or
(b) if he is a 5-percent owner (within the meaning of
section 416 of the Code) of a Participating Company at any time during the
five-Plan-Year period ending in the calendar year in which he attained Age
70-1/2, or thereafter, the later of (1) April 1 of the calendar year following
the calendar year in which he attained Age 70-1/2 or (2) April 1 of the calendar
year in which he becomes a 5-percent owner.
"Rollover Contributions" means, for any Participant, his
rollover contributions as provided in Section 7.1 hereof.
"Salary Reduction Contributions" means, for any Participant,
contributions on his behalf as provided in Section 3.1(a) hereof.
"Separation from Service" means, for any Employee, his death,
retirement, resignation, discharge or any absence that causes him to cease to be
an Employee.
"Severance from Service Date" means the date, as recorded on
the records of a Participating Company or an Affiliated Company, on which an
Employee of such company quits, retires, is discharged, or dies, or, if earlier,
the first anniversary of the first day of a period during which the Employee
remains absent from service with all Participating Companies and Affiliated
Companies (with or without pay) for any other reason, except:
(a) Solely for purposes of determining whether a
One-Year Period of Severance has occurred, if the Employee is absent from work
beyond the first anniversary of the first day on which he is absent by reason of
pregnancy, childbirth, or placement in connection with adoption, or for purposes
of the
13
<PAGE> 14
care of such Employee's child immediately after birth or placement in connection
with adoption, such Employee's Severance from Service Date shall be the second
anniversary of the first day of such absence; or
(b) If the Employee is absent for military service
under leave granted by the Participating Company or Affiliated Company or
required by law, the Employee shall not be considered to have a Separation from
Service, provided the absent Employee returns to service with the Participating
Company or Affiliated Company within 90 days of his release from active military
duty or any longer period during which his right to reemployment is protected by
law.
"Spouse" means the person to whom a Participant is legally
married on any date of reference.
"Total Disability" means, with respect to any Participant, a
disability with respect to which he is eligible for and receiving benefits under
a long-term disability program sponsored by a Participating Company or an
Affiliated Company. If no such program is in effect for any Participant, then as
to him "Total Disability" means a disability of a potentially permanent
character that prevents a Participant from engaging in the occupation or
fulfilling the duties which he performed at the time of the occurrence of such
disability, excluding, in either case, disability resulting from:
(a) service in the Armed Forces or Merchant Marine of
the United States or any other country;
(b) warfare;
(c) willful participation in any criminal act;
(d) intentionally self-inflicted or self-incurred
injury; or
(e) use of drugs or narcotics contrary to law.
"Trust Agreement" means any agreement and declaration of trust
executed under this Plan.
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"Trustee" means the corporate trustee or one or more
individuals collectively appointed and acting under the Trust Agreement.
"Valuation Date" means the date investments are valued and
shall occur on each business day on which the New York Stock Exchange is open
for business.
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ARTICLE II
TRANSITION AND ELIGIBILITY TO PARTICIPATE
2.1 Rights Affected and Preservation of Accrued Benefit.
Except as provided to the contrary herein, the provisions of this amended and
restated Plan shall apply only to Employees who complete an Hour of Service on
or after the Effective Date. The rights of any former Employee on the Effective
Date shall be governed by the Plan or any Predecessor Plan as in effect upon his
Severance from Service Date.
2.2 Eligibility to Participate - Salary Reduction
Contributions.
(a) Each Covered Employee as of the Effective Date
who was eligible to participate in the Plan or in one of the Predecessor Plans
immediately prior to the Effective Date shall continue to be an Eligible
Employee as of the Effective Date.
(b) Each Covered Employee who was not eligible to
participate immediately prior to the Effective Date shall become an Eligible
Employee upon the first day of the Payroll Period coincident with or next
following the date he has completed thirty (30) days of service or the date he
would have become eligible to participate in a Predecessor Plan, if earlier.
(c) If an individual is not a Covered Employee on the
date he would otherwise become an Eligible Employee pursuant to Subsection (b)
of this Section, he shall become an Eligible Employee as of the first date
thereafter on which he is a Covered Employee.
(d) An Eligible Employee who ceases to be a Covered
Employee, by Separation from Service or otherwise, and who later becomes a
Covered Employee, shall become an Eligible Employee as of the date on which he
first again completes an Hour of Service as a Covered Employee.
2.3 Election to Make Salary Reduction Contributions. Each
Eligible Employee may elect to make Salary Reduction Contributions and become an
active Participant by providing notice of such election with the Committee in
the form and manner
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which the Committee determines to be appropriate for that purpose. Such notice
shall authorize the Participating Company to reduce such Eligible Employee's
Compensation by an amount determined in accordance with Section 3.1 and to make
Salary Reduction Contributions on such Eligible Employee's behalf in the amount
of such reduction. Such election shall be effective as soon as practicable
following receipt of his election by the Committee.
2.4 Participation in Matching Contributions.
(a) An Eligible Employee shall share in Matching
Contributions, if any, provided for under Section 3.4(a) hereof for any Plan
Year if Salary Reduction Contributions are made on his behalf in such Plan Year.
(b) An Eligible Employee shall share in Matching
Contributions, if any, provided for under Section 3.4(b) hereof for any Plan
Year if Salary Reduction Contributions are made on his behalf in such Plan Year
and he has completed 1,000 Hours of Service during the Plan Year and is a
Covered Employee on the last day of such Plan Year; provided, however, that no
Matching Contributions made pursuant to Section 3.4(b) hereof shall be allocated
to any Eligible Employee who (1) has had a Separation from Service during the
Plan Year, (2) has completed not more than 500 Hours of Service during such Plan
Year, and (3) is not an Employee on the last day of such Plan Year.
Notwithstanding the foregoing, an Eligible Employee who has had Salary Reduction
Contributions made on his behalf in any Plan Year shall share in Matching
Contributions, if any, under Section 3.4(b) hereof for such Plan Year, if,
during such Plan Year, he retires under Article V hereof, or dies, or suffers a
Total Disability.
2.5 Eligibility to Participate - Profit Sharing Contributions.
Each Covered Employee shall become a Profit Sharing Participant if and when he
becomes an Eligible Employee.
2.6 Participation in Profit Sharing Contributions. A Profit
Sharing Participant shall share in Profit Sharing Contributions, if any, under
Section 3.5 hereof for any Plan Year during which he (a) completes at least
1,000 Hours of Service, and (b) is a Covered Employee actively employed by a
Participating Company on the last day of the Plan Year. Notwithstanding the
foregoing, a Profit Sharing Participant shall
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share in Profit Sharing Contributions under Section 3.5 hereof for any Plan Year
in which he receives Compensation if, during such Plan Year, he retires under
Article V hereof, or dies, or suffers a Total Disability.
2.7 Data. Each Eligible Employee shall furnish to the
Committee such data as the Committee may consider necessary for the
determination of the Eligible Employee's rights and benefits under the Plan and
shall otherwise cooperate fully with the Committee in the administration of the
Plan.
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ARTICLE III
CONTRIBUTIONS TO THE PLAN
3.1 Salary Reduction Contributions.
(a) When an Eligible Employee files an election under
Section 2.4 hereof to have Salary Reduction Contributions made on his behalf, he
shall elect the percentage by which his Compensation shall be reduced on account
of such Salary Reduction Contributions. Subject to Section 3.8 hereof, this
percentage may be between one percent (1%) and fifteen percent (15%) of such
Compensation, rounded to the nearer whole percent. In addition, the Eligible
Employee may elect to reduce by one hundred percent (100%) his Compensation that
is attributable to "excess flex dollars" as described under the FPA Medical
Management, Inc. FlexCare Plan. The Participating Company shall contribute an
amount equal to such percentage of the Eligible Employee's Compensation to the
Fund for credit to the Eligible Employee's Salary Reduction Account provided
that such contributions may be prospectively limited as provided in Section 3.9
hereof.
(b) Salary Reduction Contributions made on behalf of
an Eligible Employee under this Plan together with elective deferrals under any
other plan or arrangement maintained by any Participating Company or Affiliated
Company shall not exceed $9,500 (as adjusted in accordance with section 402(g)
of the Code) for any calendar year. To the extent necessary to satisfy this
limitation for any year:
(1) elections under Subsection (a) of this
Section shall be prospectively restricted; and,
(2) after application of Subparagraph (1),
the excess Salary Reduction Contributions and excess elective deferrals under
any other plan or arrangement maintained by any Participating Company or
Affiliated Company (with earnings thereon, but reduced by any amounts previously
distributed under Section 3.9 hereof for the year) shall be paid to the
Participant on or before the April 15 first following the calendar year in which
such contributions were made.
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If the Salary Reduction Contributions plus elective deferrals described above do
not exceed such limitation, but Salary Reduction Contributions, plus the
elective deferrals, as defined in section 402(g)(3) of the Code, under any other
plan for any Participant exceed such limitation for any calendar year, upon the
written request of the Participant made on or before the March 1 first following
such calendar year, the excess, including any earnings attributable thereto,
designated by the Participant to be distributed from the Plan shall be paid to
the Participant on or before the April 15 first following such calendar year.
3.2 Change of Percentage Rate. A Participant may without
penalty change the percentage of Compensation designated by him as his
contribution rate under Section 3.1(a) hereof, to any percentage permitted by
that Section, and such percentage shall remain in effect until so changed. Any
such change shall become effective as of the first day of the Payroll Period
next following receipt of the change by the Committee.
3.3 Discontinuance of Salary Reduction Contributions. A
Participant may discontinue his Salary Reduction Contributions at any time. Such
discontinuance shall become effective as of the first day of the Payroll Period
next following receipt of the discontinuance by the Committee. A Participant who
discontinues his Salary Reduction Contributions may resume his Salary Reduction
Contributions as of the first day of the Payroll Period next following receipt
by the Committee of a new election pursuant to Section 3.1 hereof.
3.4 Matching Contribution.
(a) Subject to Sections 3.8 and 3.10 hereof and
within thirty (30) days prior to the beginning of a Plan Year, the Company may
contribute to the Fund for such Plan Year a percentage from 0% to 100% of each
Participant's Salary Deferral Contributions as the Company shall determine in
its sole discretion, as a Matching Contribution, provided that such
contributions may be prospectively limited as provided in Section 3.9 hereof and
provided further that the Matching Contribution under this Subsection for any
Plan Year shall not cause the total contributions by the Company to exceed the
maximum allowable current deduction under the applicable provisions of the Code.
Matching Contributions made pursuant to this Subsection shall be credited to the
Matching Contribution Accounts of Participants
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<PAGE> 21
determined in accordance with Section 2.4(a) hereof in proportion to their
Salary Reduction Contributions for the Plan Year not in excess five percent (5%)
of each such Participant's Compensation.
(b) Within no more than thirty (30) days after the
end of a Plan Year and subject to Sections 3.8 and 3.10 hereof, the Company may
contribute to the Fund for such Plan Year such amount as the Company shall
determine, in its sole discretion, as a Matching Contribution, provided that
such Matching Contribution under this Subsection for any Plan Year shall not
cause the total contribution by the Company to exceed the maximum allowable
current deduction under the applicable provisions of the Code. Matching
Contributions made pursuant to this Subsection shall be credited to the Matching
Contribution Accounts of the Participants determined in accordance with Section
2.4(b) hereof in proportion to their Salary Reduction Contributions for the Plan
Year.
3.5 Profit Sharing Contribution.
(a) Each Participating Company shall contribute to
the Fund for each Plan Year such amount as it shall determine in its sole
discretion as of the close of the Participating Company's fiscal year, provided
that the contribution under this Subsection for any Plan Year shall not cause
the total contributions by the Company to exceed the maximum allowable current
deduction under the applicable provisions of the Code. Such contributions shall
be allocated to the Profit Sharing Accounts of Profit Sharing Participants
eligible to share in Profit Sharing Contributions in accordance with Section 2.6
hereof in proportion to their Compensation for the Plan Year.
(b) Except with respect to tax deductibility, the
Profit Sharing Contribution for any Plan Year shall include both the amount
contributed by the Company for such Plan Year and the amount of Profit Sharing
Contributions forfeited during such Plan Year.
3.6 Timing and Deductibility of Contributions. Profit Sharing
and Matching Contributions for any Plan Year under this Article shall be made no
later than the last date on which amounts so paid may be deducted for Federal
income tax purposes for the taxable year of the employer in which the Plan Year
ends. All contributions to the Plan are expressly conditioned upon
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<PAGE> 22
their deductibility for Federal income tax purposes. Amounts contributed as
Salary Reduction Contributions, or Rollover Contributions, will be remitted to
the Trustee as soon as practicable, but no later than the 15th business day
following the end of the month in which such contributions were received or
withheld from the Participant's Compensation.
3.7 Fund. The contributions deposited by the Company in the
Fund in accordance with this Article shall constitute a fund held for the
benefit of Participants and their eligible beneficiaries under and in accordance
with this Plan. No part of the principal or income of the Fund shall be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants and their eligible beneficiaries (including necessary
administrative costs); provided, that (a) in the case of a contribution made by
the Company as a mistake of fact, or for which a tax deduction is disallowed, in
whole or in part, by the Internal Revenue Service, the Company shall be entitled
to a refund of said contributions, which must be made within one year after
payment of a contribution made as a mistake of fact, or within one year after
disallowance of the tax deduction, to the extent of such disallowance, and (b)
in the case of contributions made by the Company which are conditioned on the
initial qualification of the Plan under section 401 of the Code, if the Plan is
the subject of an adverse determination with respect to its initial
qualification, then the Company shall be entitled to a refund of said
contributions, but only if the application for the determination is made by the
time prescribed by law for filing the Company's federal income tax return for
the taxable year in which the Plan is adopted or such later date as may be
permitted by applicable Treasury regulation or other applicable administrative
pronouncements.
3.8 Limitation on Salary Reduction Contributions and Matching
Contributions.
(a) For any Plan Year, the Average Actual Deferral
Percentage for the Highly Compensated Eligible Employees shall not exceed the
greater of:
(1) one hundred twenty-five percent (125%)
of the Average Actual Deferral Percentage for all other Eligible Employees in
the immediately prior Plan Year; or
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<PAGE> 23
(2) the lesser of:
(A) two hundred percent (200%) of
the Average Actual Deferral Percentage for all other Eligible Employees in the
immediately prior Plan Year; or
(B) two percent (2%) plus the
Average Actual Deferral Percentage for all other Eligible Employees for the
immediately prior Plan Year.
(3) At the election of the Company, the
Average Actual Deferral Percentage for Eligible Employees other than Highly
Compensated Eligible can be determined for the current Plan Year rather than the
immediately prior Plan Year. Once this election is made, it can be changed only
with the approval of the Internal Revenue Service.
(b) For any Plan Year, the Average Contribution
Percentage for the Highly Compensated Eligible Employees shall not exceed the
greater of:
(1) one hundred twenty-five (125%) of the
Average Contribution Percentage for all other Eligible Employees for the
immediately prior Plan Year; or
(2) the lesser of:
(A) two hundred percent (200%) of
the Average Contribution Percentage for all other Eligible Employees the
immediately prior Plan Year; or
(B) two percent (2%) plus the
Average Contribution Percentage for all other Eligible Employees the immediately
prior Plan Year.
(3) At the election of the Company, the
Average Contribution Percentage for Eligible Employees other than Highly
Compensated Eligible can be determined for the current Plan Year rather than the
immediately prior Plan Year. Once this election is made, it can be changed only
with the approval of the Internal Revenue Service.
(c) For any Plan Year, the sum of the Average Actual
Deferral Percentage and the Average Contribution
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Percentage for the Highly Compensated Eligible Employees shall not exceed the
greater of:
(1) the sum of:
(A) one hundred twenty-five percent
(125%) of the greater of the Average Actual Deferral Percentage or the Average
Contribution Percentage for all other Eligible Employees for the immediately
prior Plan Year; plus
(B) the lesser of:
(i) two hundred percent
(200%) of the lesser of the Average Actual Deferral Percentage or the Average
Contribution Percentage for all other Eligible Employees for the immediately
prior Plan Year; or
(ii) two percent (2%) plus
the lesser of the Average Actual Deferral Percentage or the Average Contribution
Percentage for all other Eligible Employees for the immediately prior Plan Year;
or
(2) the sum of:
(A) one hundred twenty-five percent
(125%) of the lesser of the Average Actual Deferral Percentage or the Average
Contribution Percentage for all other Eligible Employees for the immediately
prior Plan Year; plus
(B) the lesser of:
(i) two hundred percent
(200%) of the greater of the Average Actual Deferral Percentage or the Average
Contribution Percentage for all other Eligible Employees for the immediately
prior Plan Year; or
(ii) two percent (2%) plus
the greater of the Average Actual Deferral Percentage or the Average
Contribution Percentage for all other Eligible Employees for the immediately
prior Plan Year.
(d) If the Plan and any other plan(s) maintained by a
Participating Company or an Affiliated Company are treated as a single plan for
purposes of section 401(a)(4) or section
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410(b) of the Code, the limitations in Subsections (a) through (d) of this
Section shall be applied by treating the Plan and such other plan(s) as a single
plan.
(e) The application of this Section shall satisfy
sections 401(k) and 401(m) of the Code and such other requirements as may be
prescribed by the Secretary of the Treasury.
3.9 Prevention of Violation of Limitation on Salary Reduction
Contributions and Matching Contributions. The Committee shall monitor the level
of Participants' Salary Reduction Contributions and Matching Contributions and
elective deferrals, employee contributions, and employer matching contributions
under any other qualified retirement plan maintained by a Participating Company
or any Affiliated Company to insure against exceeding the limits of Section 3.8
hereof. To the extent practicable, the Committee may prospectively limit (i)
some or all of the Highly Compensated Eligible Employees' Salary Reduction
Contributions to reduce the Average Actual Deferral Percentage of the Highly
Compensated Eligible Employees to the extent necessary to satisfy Section 3.8(a)
hereof, and/or (ii) some or all of the Highly Compensated Eligible Employees'
Matching Contributions to reduce the Average Contribution Percentage of the
Highly Compensated Eligible Employees to the extent necessary to satisfy Section
3.8(b) hereof, and/or (iii) some or all of the Highly Compensated Eligible
Employees' Salary Reduction Contributions, and Matching Contributions to the
extent necessary to satisfy Section 3.8(c) hereof. If the Committee determines
after the end of the Plan Year that the limits of Section 3.8 hereof may be or
have been exceeded, it shall take the appropriate following action for such Plan
Year:
(a) (1) (A) The Average Actual Deferral Percentage
for the Highly Compensated Eligible Employees shall be reduced to the extent
necessary to satisfy Section 3.8(a) hereof.
(B) The reduction shall be accomplished by
reducing the maximum Salary Reduction Contribution for any Highly Compensated
Eligible Employee to an adjusted maximum Salary Reduction Contribution, which
shall be the highest Salary Reduction Contribution that would cause one of the
tests in section 3.8(a) hereof to be satisfied, if each Highly Compensated
Eligible Employee with a higher Salary Reduction Contribution had
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<PAGE> 26
instead made the adjusted maximum Salary Reduction Contribution, reducing the
Highly Compensated Eligible Employee's Salary Reduction Contributions and
elective deferrals under any other qualified retirement plan maintained by a
Participating Company or any Affiliated Company (less any amounts previously
distributed under Section 3.1 hereof for the year) in order, beginning with the
Highly Compensated Eligible Employee(s) with the greatest Salary Reduction
Contributions.
(C) Not later than the end of the
Plan Year following the close of the Plan Year for which the Salary Reduction
Contributions were made, the difference between a Highly Compensated Eligible
Employee's actual Salary Reduction Contribution and the Highly Compensated
Eligible Employee's adjusted maximum Salary Reduction Contribution shall be paid
to the Highly Compensated Eligible Employee, with earnings attributable thereto
(as determined in accordance with applicable Treasury Regulations);
provided, however, that for any Participant who is also a participant in any
other qualified retirement plan maintained by a Participating Company or any
Affiliated Company under which the Participant makes elective deferrals for such
year, the Committee shall coordinate corrective actions under this Plan and such
other plan for the year.
(2) In lieu of or in addition to the action
described in Section 3.9(a)(1) hereof, the Company may, in its sole discretion,
make:
(A) a Profit Sharing Contribution
under Section 3.8 hereof, which contribution shall be allocated pro rata based
on Compensation among the Profit Sharing Accounts of only those Profit Sharing
Participants who are not Highly Compensated Eligible Employees; and/or
(B) a Matching Contribution under
Section 3.4 hereof, which contribution shall be allocated pro rata based on
Salary Reduction Contributions among the Matching Contribution Accounts of only
those Eligible Employees who are not Highly Compensated Eligible Employees, in
an amount necessary to satisfy at least one of the tests in Section 3.8(a)
hereof. Profit Sharing and Matching Contributions made pursuant to this
Subsection (a)(2) shall be accounted for separately, shall be
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100% nonforfeitable and shall not be eligible for withdrawal under Article VIII
hereof prior to the Participant's attainment of Age 59-1/2.
(b) (1) (A) The Average Contribution Percentage for
the Highly Compensated Eligible Employees shall be reduced to the extent
necessary to satisfy at least one of the tests in Section 3.8(b) hereof.
(B) The reduction shall be accomplished by
reducing the maximum Matching Contribution for any Highly Compensated Eligible
Employee to an adjusted maximum Matching Contribution, which shall be the
highest Matching Contribution that would cause one of the tests in Section
3.8(b) hereof to be satisfied, if each Highly Compensated Eligible Employee with
a higher Matching Contribution had instead the adjusted maximum Matching
Contribution, reducing, in the following order of priority, the Highly
Compensated Eligible Employees' Matching Contributions and employee
contributions and employer matching contributions under any other qualified
retirement plan maintained by a Participating Company or an Affiliated Company,
in order beginning with the Highly Compensated Eligible Employee(s) with the
highest Matching Contribution.
(C) Not later than the end of the Plan
Year following the close of the Plan Year for which such contributions were
made, the difference between a Highly Compensated Eligible Employee's Matching
Contribution and the Highly Compensated Eligible Employee's adjusted maximum
Matching Contribution, with earnings attributable thereto (as determined in
accordance with applicable Treasury Regulations), at the Committee's direction,
shall be treated as a forfeiture of the Highly Compensated Eligible Employee's
Matching Contribution for the Plan Year to the extent such contributions are
forfeitable (which forfeiture shall be used to reduce future Matching
Contributions), or paid to the Highly Compensated Eligible Employee to the
extent such contributions are nonforfeitable; provided, however, that, for any
Participant who is also a participant in any other qualified retirement plan
maintained by a Participating Company or any Affiliated Company under which the
Participant makes employee contributions or is credited with employer matching
contributions for the year, the Committee shall coordinate corrective actions
under this Plan and such other plan for the year.
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(2) In lieu of or in addition to the action
described in this Section 3.9(b)(1), the Company may, in its sole discretion,
make:
(A) a Profit Sharing Contribution
under Section 3.5 hereof which contribution shall be allocated pro rata based on
Compensation among the Profit Sharing Accounts of only those Profit Sharing
Participants who are not Highly Compensated Eligible Employees; and/or
(B) a Matching Contribution under
Section 3.4 hereof, which contribution shall be allocated pro rata based on
Salary Reduction Contributions among the Matching Contribution Accounts of only
those Eligible Employees who are not Highly Compensated Eligible Employees,
in an amount necessary to satisfy at least one of the tests in Section 3.8(b)
hereof. Profit Sharing and Matching Contributions made pursuant to this
Subsection (b)(2) shall be accounted for separately, shall be 100%
nonforfeitable, and shall not be eligible for withdrawal under Article VIII
hereof prior to the Participant's attainment of Age 59-1/2.
(c) (1) The Average Contribution Percentage
and/or the Average Actual Deferral Percentage (as determined under Subsection
(2) below) for the Highly Compensated Eligible Employees shall be reduced to
satisfy the test in Section 3.8(c), in a manner and to the extent determined by
the Committee.
(2) The reduction(s) shall be accomplished
in the same manner as is set forth in Subsections (a) and (b) of Section 3.8,
whichever is appropriate. A reduction to the Average Actual Deferral Percentage
shall be charged against the appropriate Highly Compensated Eligible Employees'
Salary Reduction Accounts. A reduction to the Average Contribution Percentage
shall be charged against the appropriate Highly Compensated Eligible Employees'
Matching Contribution Accounts. Notwithstanding the foregoing, for any
Participant who is also a participant in any other qualified retirement plan
maintained by a Participating Company or any Affiliated Company under which the
Participant makes employee contributions or elective deferrals or is credited
with employer matching contributions for such year,
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<PAGE> 29
the Committee shall coordinate corrective actions under this Plan and such other
plan for the year.
(d) If the corrective payment to a Highly Compensated
Eligible Employee of his Salary Reduction Contributions pursuant to Subparagraph
(a)(1)(C) or Subsection (c) of this Section causes Matching Contributions made
on his behalf for the Plan Year (excluding such Matching Contributions that were
forfeited or paid to the Participant pursuant to Subsection (b)(2) or Subsection
(c) of this Section) to exceed one hundred percent (100%) of his remaining
Salary Reduction Contributions for the Plan Year, the Matching Contributions in
excess of one hundred percent (100%) of his Salary Reduction Contributions for
the Plan Year that were not distributed to him shall be forfeited, and used to
offset future Matching Contributions.
(e) If the Plan and any other plan maintained by a
Participating Company or an Affiliated Company are treated as a single plan
pursuant to Section 3.8 hereof, the Committee shall coordinate corrective
actions under the Plan and such other plan for the year.
3.10 Maximum Allocation. The provisions of this Section 3.10
shall be construed to comply with section 415 of the Code.
(a) Notwithstanding anything in this Plan to the
contrary, in no event shall the sum of:
(1) any Matching Contributions, Profit
Sharing Contributions, Salary Reduction Contributions and other employer
contributions; any forfeitures, and any employee contributions allocated for any
Limitation Year to any Participant (including any such amounts distributed
pursuant to Section 3.9 hereof, but not amounts distributed pursuant to Section
3.1(b) hereof under this and any other defined contribution plan maintained by
the Participating Company or any 50% Affiliated Company; and
(2) all amounts allocated to any Participant
after March 31, 1984, to an individual medical account (within the meaning of
Code section 415(l)(2)) which is part of a pension
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or annuity plan maintained by a Participating Company or any 50% Affiliated
Company; and
(3) all amounts derived from contributions
paid or accrued after December 31, 1985, in taxable years ending after such date
which are attributable to post-retirement medical benefits allocated to a
separate account of a Participant who is a key employee, as defined in section
419A(d)(3) of the Code, under a welfare benefit fund maintained by a
Participating Company or any 50% Affiliated Company;
exceed the lesser of $30,000, (or such other dollar limitation in effect for the
Limitation Year under section 415(c)(1)(A) of the Code) or twenty-five percent
(25%) of such Participant's Compensation for the Limitation Year. The 25%
Compensation limitation shall not apply to any contribution for medical benefits
(within the meaning of section 401(h) or 419A(f)(2) of the Code) which is
otherwise treated as an annual addition under section 415(l)(1) or 419A(d)(2) of
the Code.
(b) If the amount otherwise allocable to the Account
of a Participant would exceed the amount described in Subsection (a) of this
Section as a result of the reallocation of forfeitures, a reasonable error in
estimating the Participant's Compensation, a reasonable error in determining the
amount of Salary Reduction Contributions that may be made with respect to a
Participant under the limits of this Section, or such other circumstances as
permitted by law, the Committee shall determine which portion, if any, of such
excess amount is attributable to the Participant's Salary Reduction
Contributions, Matching Contributions, if any, and/or Profit Sharing
Contributions, if any, until such amount has been exhausted, and shall take the
following appropriate steps to correct such violation:
(1) Excess Salary Reduction Contributions
and earnings thereon shall be paid to the Participant as soon as is
administratively feasible.
(2) (A) While the Participant remains a
Covered Employee, his excess Matching Contributions and Profit Sharing
Contributions shall be held in a suspense account (which shall share in
investment gains and losses of the Fund) by the Trustee until the following Plan
Year (or any succeeding Plan Years), at which time such amounts shall be
allocated to the
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Participant's Account before any Matching Contributions or Profit Sharing
Contributions, as appropriate, are made on his behalf for such Plan Year; and
(B) When the Participant ceases to
be a Covered Employee, his excess Matching Contributions and Profit Sharing
Contributions, along with earnings thereon, held in the suspense account shall
be allocated in the following Plan Year (or any succeeding Plan Years) to the
Accounts of other Participants in the Plan.
(c) If, in any Limitation Year, a Participant in this
Plan is also a participant in one or more defined benefit plans maintained by
the Participating Company or any 50% Affiliated Company, the projected annual
benefit referred to in Subsection (c)(1) shall be reduced, if necessary, so that
the sum of the fractions described in (1) and (2) does not exceed 1.0 for such
Limitation Year.
(1) Defined Benefit Fraction - a fraction,
the numerator of which is the Participant's projected annual benefit under all
such defined benefit pension plans determined as of the close of the limitation
years of such plans, and the denominator of which is the lesser of:
(A) 1.25 x $90,000 (or such other
dollar limitation determined for the Limitation Year under section 415(b)(1)(A)
of the Code); or
(B) one hundred forty percent (140%)
of the Participant's highest average Compensation over any three consecutive
calendar years;
provided, however, that the denominator of the defined benefit fraction shall be
determined after taking into account any adjustments to the dollar limit
described in Subparagraph (A) or to the compensation limit described in
Subparagraph (B) prescribed by section 415(b) or 415(d) of the Code, as
appropriate. For the purpose of this Subsection (c)(1), "projected annual
benefit" means the annual benefit to which a Participant would be entitled under
the terms of a defined benefit plan if he had continued employment until his
normal retirement date under such plan and if his compensation counted for the
purpose of such plan had continued at the same rate.
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<PAGE> 32
(2) Defined Contribution Fraction - a
fraction, the numerator of which is the sum of the annual additions to the
Participant's accounts under all defined contribution plans sponsored by the
Participating Company or any 50% Affiliated Company for all limitation years,
and the denominator of which is the sum of the lesser of the following amounts,
determined for each of such limitation years and for each prior limitation year
of service with the Participating Company or 50% Affiliated Company:
(A) 1.25 x $30,000 (or such other
dollar limitation in effect for the Limitation Year under section 415(c)(1)(A)
of the Code); or
(B) thirty-five percent (35%) of the
Participant's Compensation for such limitation year.
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<PAGE> 33
ARTICLE IV
PARTICIPANTS' ACCOUNTS
4.1 Accounts. All contributions and earnings thereon may be
invested in one commingled Fund for the benefit of all Participants. However, in
order that the interest of each Participant may be accurately determined and
computed, separate Accounts shall be maintained for each Participant and each
Participant's Accounts shall be made up of subaccounts reflecting his investment
elections pursuant to Section 11.5 hereof. These Accounts shall represent the
Participant's individual interest in the Fund. All contributions shall be
credited to Participants' Accounts as set forth in Article III hereof.
4.2 Valuation. The value of each Investment Medium in the Fund
shall be computed by the Trustee as of the close of business on each Valuation
Date on the basis of the fair market value of the assets of the Fund.
4.3 Apportionment of Gain or Loss. The value of each
Investment Medium in the Fund, as computed pursuant to Section 4.2 hereof, shall
be compared with the value of such Investment Medium in the Fund as of the
preceding Valuation Date. Any difference in the value, not including
contributions or distributions made since the preceding Valuation Date, shall be
the net increase or decrease of such Investment Medium in the Fund, and such
amount shall be ratably apportioned by the Trustee on its books, among the
Participants' Accounts which are invested in such Investment Medium at the
current Valuation Date.
4.4 Accounting for Allocations. The Committee shall establish
or provide for the establishment of accounting procedures for the purpose of
making the allocations, valuations and adjustments to Participants' Accounts
provided for in this Article. From time to time such procedures may be modified
for the purpose of achieving equitable and nondiscriminatory allocations among
the Accounts of Participants in accordance with the general concepts of the Plan
and the provisions of this Article.
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<PAGE> 34
ARTICLE V
DISTRIBUTION
5.1 General. The interest of each Participant in the Fund
shall be distributed in the manner, in the amount, and at the time provided in
this Article, except as provided in Article VIII hereof and except in the event
of the termination of the Plan. The provisions of this Article shall be
construed in accordance with section 401(a)(9) of the Code, including the
incidental death benefit requirements of section 401(a)(9)(G) of the Code.
5.2 Separation from Service. A Participant who attains a
Severance from Service Date for reasons other than death or Total Disability
shall have his nonforfeitable interest in his Account paid to him or applied for
his benefit in accordance with the provisions of this Article.
5.3 Death. If a Participant dies before his entire
nonforfeitable interest in his Account has been paid to him, his remaining
nonforfeitable interest shall be paid to, or applied for the benefit of, his
beneficiary in accordance with the provisions of this Article.
5.4 Total Disability.
(a) If a Participant who is an Employee suffers a
Total Disability and attains a Severance from Service Date due to his Total
Disability, his Account shall be paid to him or applied for his benefit in
accordance with the provisions of this Article following the determination of
his Total Disability and his Separation from Service.
(b) Total Disability shall be determined by the
Committee, which may consult with a medical examiner selected by it. The medical
examiner shall have the right to make such physical examinations and other
investigations as may be reasonably required to determine Total Disability.
5.5 Valuation for Distribution. For the purposes of paying the
amounts to be distributed to a Participant or his beneficiaries under the
provisions of this Article, the value of
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<PAGE> 35
the Fund and the amount of the Participant's nonforfeitable interest shall be
determined in accordance with the provisions of Article IV hereof as of the
Valuation Date immediately preceding the date of any payment under this Article.
Such amount shall be adjusted to take into account any additional contributions
and forfeitures, if any, which have been or are to be allocated to the
Participant's Account since that Valuation Date, and any distributions or
withdrawals made since that date. Notwithstanding the above, the Participant's
Account shall be reduced by the amount necessary to repay any outstanding loan
from the Plan and interest thereon to the date the Committee declares such loan
satisfied, unless such loan is repaid as provided in Section 9.4(e) hereof.
5.6 Timing of Distribution.
(a) Any Participant who attains a Severance from
Service Date for any reason other than death shall be entitled to receive his
nonforfeitable interest in his Account, pursuant to the following rules:
(1) Except as provided in Subsection (a)(2)
hereof, if the Participant's nonforfeitable interest in his Account is $3,500 or
less, or the Participant has attained Normal Retirement Age, the Participant's
Benefit Commencement Date shall be the earliest practicable Valuation Date
following his Severance from Service Date.
(2) If the Participant has not attained
Normal Retirement Age and his nonforfeitable interest exceeds, or has ever
exceeded at the time of any prior distribution, $3,500, his Benefit Commencement
Date shall be the earliest practicable Valuation Date following his Severance
from Service Date, except that, if the Participant does not consent to such
distribution, distribution of his benefits shall commence on any later date
elected by the Participant, that is not later than his Normal Retirement Date,
at which time his nonforfeitable interest shall be automatically paid to him. A
Participant's election to receive payment prior to his Normal Retirement Date
may be made no earlier than 90 days prior to the Benefit Commencement Date
elected by the Participant.
(3) The Committee shall inform each
Participant who is subject to Subsection (a)(2) of his right to
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<PAGE> 36
defer distribution. Such notice shall be furnished not less than 30 days nor
more than 90 days prior to the date of any distribution that occurs prior to his
Normal Retirement Date, except that such notice may be furnished less than 30
days prior to the date of distribution if (A) the Committee informs the
Participant that the Participant has the right to a period of at least 30 days
after receiving such notice to consider the decision whether to elect a
distribution and if applicable, the mode in which he desires such distribution
to be made, and (B) the Participant, after receiving such notice, affirmatively
elects a distribution.
(4) Notwithstanding the foregoing, the
Participant's Benefit Commencement Date shall be no later than the 60th day
following the close of the Plan Year in which the Participant attains his Normal
Retirement Age or has a Separation from Service, whichever occurs last. In no
event, however, shall a Participant's Benefit Commencement Date be later than
his Required Beginning Date. In the event the Participant defaults on an
outstanding loan such that the unpaid balance becomes due and payable pursuant
to Article IX hereof and the Participant fails to repay the loan in accordance
with Section 9.4(e) hereof, that portion of the Participant's Account pledged as
security for the loan shall be applied to repay the loan and shall be deemed
distributed to the Participant within 60 days of the default; in which case, the
Participant may defer commencement of the balance of his Account as described
above.
(b) If a Participant dies before his entire
nonforfeitable interest in his Account has been paid to him, his remaining
nonforfeitable interest shall be distributed to his beneficiary commencing as
soon as practicable following the Participant's death, unless the beneficiary is
the Participant's spouse, in which case not beyond December 31 of the later of
(1) the calendar year containing the fifth anniversary of the Participant's
death or (2) the calendar year in which the Participant would have attained Age
70-1/2.
5.7 Mode of Distribution.
(a) Except as provided to the contrary in Section
5.11 hereof, a Participant shall have his Account paid to him, and benefits
payable under Section 5.3 hereof upon the death of a
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<PAGE> 37
Participant shall be distributed, in a single sum payment in cash or in kind, or
part in cash and part in kind.
(b) If a Participant has not attained a Severance
from Service Date as of his Required Beginning Date, he may elect to receive
distribution of his Account while he remains employed, commencing not later than
his Required Beginning Date, over a period certain not extending beyond the life
expectancy of the Participant or the life expectancy of the Participant and his
spouse. Notwithstanding the Participant's election to receive distribution as
described above, the portion of the Participant's nonforfeitable interest
remaining upon his actual Severance from Service Date will be distributed to him
in a single sum on the earliest practicable date following the Valuation Date
coincident with or next following his Severance from Service Date, but not later
than the 60th day after the close of the Plan Year in which his Severance from
Service Date occurs.
(c) Benefits payable under Section 5.3 hereof upon
the death of a Participant shall be distributed in a single sum payment.
Notwithstanding the foregoing, in the event that the Participant's death
constitutes a default on an outstanding loan such that the unpaid balance
becomes due and payable pursuant to Article IX hereof and the beneficiary fails
to repay the loan in accordance with Section 9.4(e) hereof, that portion of the
Participant's Account pledged as security for the loan shall be applied to repay
the loan; in which case, the beneficiary may elect to receive the balance of the
Participant's Account in accordance with this Subsection.
5.8 Beneficiary Designation.
(a) Except as provided in this Section and in Section
5.11 hereof, a Participant may designate the beneficiary or beneficiaries who
shall receive, on or after his death, his interest in the Fund. Such designation
shall be made by executing and filing with the Committee a written instrument in
such form as may be prescribed by the Committee for that purpose. Except as
provided in this Section and Section 5.11 hereof, the Participant may also
revoke or change, at any time and from time to time, any beneficiary
designations previously made. Such revocations and/or changes shall be made by
executing and filing with the Committee a written instrument in such form as may
be prescribed by the Committee for that purpose. If a Participant
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<PAGE> 38
names a trust as beneficiary, a change in the identity of the trustees or in the
instrument governing such trust shall not be deemed a change in beneficiary.
(b) No designation, revocation, or change of
beneficiaries shall be valid and effective unless and until filed with the
Committee.
(c) A Participant who does not establish to the
satisfaction of the Committee that he has no spouse may not designate someone
other than his spouse to be his beneficiary unless:
(1) (A) such spouse (or the spouse's legal
guardian if the spouse is legally incompetent) executes a written instrument
whereby such spouse consents not to receive such benefit and consents either:
(i) to the specific
beneficiary or beneficiaries designated by the Participant; or
(ii) to the Participant's
right to designate any beneficiary without further consent by the spouse;
(B) such instrument acknowledges the
effect of the election to which the spouse's consent is being given; and
(C) such instrument is witnessed by
a Plan representative or notary public;
(2) the Participant:
(A) establishes to the satisfaction
of the Committee that his spouse cannot be located; or
(B) furnishes a court order to the
Committee establishing that the Participant is legally separated or has been
abandoned (within the meaning of local law), unless a qualified domestic
relations order pertaining to such Participant provides that the spouse's
consent must be obtained; or
(3) the spouse has previously given consent
in accordance with this Subsection and consented to the
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<PAGE> 39
Participant's right to designate any beneficiary without further consent by the
spouse.
The consent of a spouse in accordance with this Subsection (c) shall not be
effective with respect to other spouses of the Participant prior to the
Participant's Benefit Commencement Date, and an election to which Subsection
(c)(2) applies shall become void if the circumstances causing the consent of the
spouse not to be required no longer exist prior to the Participant's Benefit
Commencement Date.
(d) If a Participant has no beneficiary under
Subsection (a) of this Section, if the Participant's beneficiary(ies) predecease
the Participant, or if the beneficiary(ies) cannot be located by the Committee,
the interest of the deceased Participant shall be paid to the Participant's
estate.
5.9 Recalculation of Life Expectancy. If pursuant to Section
5.11 hereof, a Participant's Account is payable over the life expectancy of the
Participant and/or his spouse and/or another beneficiary, the applicable life
expectancy shall not be recalculated after the Benefit Commencement Date.
5.10 Transfer of Account to Other Plan.
(a) If (i) a Participant entitled to receive a
distribution from the Plan, either pursuant to this Article or pursuant to
Article VIII hereof, or (ii) the spouse or former spouse of a Participant who is
entitled to receive a distribution from the Plan pursuant to a qualified
domestic relations order, directs the Committee to have the Trustee transfer all
or a portion (not less than $500) of the amount to be distributed directly to:
(1) an individual retirement account
described in section 408(a) of the Code,
(2) an individual retirement annuity
described in section 408(b) of the Code (other than an endowment contract),
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<PAGE> 40
(3) a qualified defined contribution
retirement plan described in section 401(a) of the Code the terms of which
permit the acceptance of rollover contributions, or
(4) an annuity plan described in section
403(a), all or a portion (not less than $500) of the amount to be distributed
shall be so transferred.
(b) In addition, if a Participant's surviving spouse
is entitled to receive a distribution from the Plan under Section 5.3 hereof,
and such surviving spouse directs the Committee to have the Trustee transfer all
or a portion (not less than $500) of the amount to be distributed directly to:
(1) an individual retirement account
described in section 408(a) of the Code, or
(2) an individual retirement annuity
described in section 408(b) of the Code (other than an endowment contract), all
or a portion (not less than $500) of the amount to be distributed shall be so
transferred.
(c) The Participant, spouse or former spouse must
specify the name of the plan to which the Participant, spouse or former spouse
wishes to have the amount transferred, plus such other information as may be
requested by the Committee, on a form and in a manner prescribed by the
Committee.
(d) Subsections (a) and (b) hereof shall not apply to
the following distributions:
(1) any distribution which is one of a
series of substantially equal payments (not less frequently than annually) over
either (A) a period of 10 years or more, or (B) a period equal to the life or
life expectancy of the Participant or the joint lives or joint life expectancy
of the Participant and his beneficiary, or
(2) any distribution if the total
distributions paid or payable from the Plan to the same
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<PAGE> 41
individual during the same calendar year are reasonably expected by the
Committee to be less than $200,
(3) that portion of any distribution after
the Participant's Required Beginning Date that is required to be distributed to
the Participant by the minimum distribution rules of section 401(a)(9) of the
Code, or
(4) such other distributions as may be
exempted by applicable statute or regulation from the requirements of section
401(a)(31) of the Code.
5.11 Transfers from Certain Plans. With respect to the
Transfer Account of any Participant to whom the Plan is a transferee from a
defined benefit or defined contribution plan, other than a Predecessor Plan,
with modes of distribution other than a single sum payment, the provisions of
this Section shall supersede the prior provisions of this Article.
(a) (1) The normal mode of payment for a
Participant whose nonforfeitable interest in his Account exceeds (or has
exceeded at the time of any prior distribution) $3,500 and who does not
establish to the satisfaction of the Committee that he has no spouse as of his
Benefit Commencement Date shall be a joint and survivor annuity that is the
actuarial equivalent of the Participant's Transfer Account, with monthly
installments payable after the death of the retired Participant to his surviving
spouse, if he leaves one, for the life of such surviving spouse in an amount
equal to fifty percent (50%) of the benefit paid to the retired Participant
during his life.
(2) The normal mode of payment for a
Participant whose nonforfeitable interest in his Account exceeds (or has
exceeded at the time of any prior distribution) $3,500 and who establishes to
the satisfaction of the Committee that he has no spouse as of his Benefit
Commencement Date shall be a single life annuity that is the actuarial
equivalent of his Transfer Account with equal monthly installments payable to
the retired Participant for his lifetime.
(3) Except as provided in Subsections (1)
and (2) above, the normal mode of payment to a Participant whose nonforfeitable
interest in his Account does not exceed $3,500 as
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<PAGE> 42
of his Benefit Commencement Date shall be a single sum payment of his entire
interest in his Transfer Account.
(b) A Participant whose nonforfeitable interest in
his Account exceeds (or has exceeded at the time of any prior distribution)
$3,500 and who does not establish to the satisfaction of the Committee that he
has no spouse on his Benefit Commencement Date may elect to receive an optional
mode of payment under Section 5.7 hereof:
(1) (A) his spouse (or the spouse's
legal guardian if the spouse is legally incompetent) executes a written
instrument whereby such spouse:
(i) consents not to receive
the normal mode of payment described in Section 5.11(a)(1) hereof;
(ii) consents to the
specific optional mode elected by the Participant or to the Participant's right
to choose any optional mode without any further consent by the spouse; and
(iii) if applicable,
consents either:
(I) to the specific
beneficiary or beneficiaries designated by the Participant pursuant to his
election; or
(II) to the
Participant's right to designate any beneficiary or beneficiaries without
further consent by the spouse; and
(B) such instrument acknowledges the
effect of the election to which the spouse's consent is being given and is
witnessed by a Plan representative or a notary public;
(2) the Participant:
(A) establishes to the satisfaction
of the Committee that his spouse cannot be located; or
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<PAGE> 43
(B) furnishes a court order to the
Committee establishing that the Participant is legally separated or has been
abandoned (within the meaning of local law), unless a qualified domestic
relations order pertaining to such Participant provides that the spouse's
consent must be obtained; or
(3) the spouse has previously given consent
in accordance with this Subsection and consented to the Participant's right to
choose any optional mode and to designate any beneficiary without further
consent by the spouse.
The consent of a spouse in accordance with this Subsection (b) shall not be
effective with respect to other spouses of the Participant prior to the
Participant's Benefit Commencement Date and an election to which this Subsection
(b) applies shall become void if the circumstances causing the consent of the
spouse not to be required no longer exist prior to the Participant's Benefit
Commencement Date.
(c) A Participant may revoke an election under
Subsection (b) hereof. Such revocation may be made at any time during the
election period in which such election can be made. Such revocation shall not
void any prospectively effective consent given by his spouse in connection with
the revoked election.
(d) The Committee shall provide to each Participant
no less than 30 days and no more than 90 days before his Benefit Commencement
Date a written explanation of:
(1) the terms and conditions of the normal
mode of payment under Subsection 5.11(a) and of each optional mode of payment,
including information explaining the relative values of each mode of payment, in
accordance with applicable governmental regulations under section 401(a)(11) of
the Code;
(2) the Participant's right to waive the
normal mode of payment and to elect an optional mode of payment and the effect
of such waiver and election;
(3) the rights of the Participant's spouse
with respect to such waiver and election; and
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<PAGE> 44
(4) the Participant's right to revoke an
election to receive an optional mode of payment and the effect of such
revocation.
(e) (1) If such a Participant dies before his
Benefit Commencement Date and has a surviving spouse, the Participant's spouse
shall receive an annuity for the life of the spouse that is the Actuarial
Equivalent of the Participant's nonforfeitable interest in his Account as of
the date of his death. Such annuity may commence at any time following the date
of the Participant's death, as elected in writing by the spouse, but not later
than December 31 of the calendar year in which the Participant would have
attained Age 70-1/2.
(2) A Participant may elect to waive the
spouse's annuity described in Paragraph (1) of this Subsection and have his
Transfer Account be payable in a single sum to his spouse or to have his
Transfer Account be payable in a single sum to a beneficiary other than his
spouse, in the event of his death prior to his Benefit Commencement Date.
(3) Such election shall not be valid if the
Participant's nonforfeitable interest in his Account exceeds (or has exceeded at
the time of any prior distribution) $3,500 unless:
(A) (i) his spouse (or the spouse's
legal guardian if the spouse is legally incompetent) executes a written
instrument whereby such spouse:
(I) consents not to receive the
spouse's annuity described in Paragraph (1) of this Subsection; and
(II) if applicable, consents
either:
(a) to the specific
beneficiary or
beneficiaries designated by the Participant pursuant to his waiver of the
spouse's annuity; or
(b) to the
Participant's right
to
designate any beneficiary or beneficiaries without further consent by the
spouse; and
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<PAGE> 45
(ii) such instrument
acknowledges
the effect of the election to which the spouse's consent is being given and is
witnessed by a notary public; or
(B) the Participant:
(i) establishes to the
satisfaction
of the Committee that his spouse cannot be located; or
(ii) furnishes a court order
to the
Committee establishing that the Participant is legally separated or has been
abandoned (within the meaning of local law), unless a qualified domestic
relations order pertaining to such Participant provides that the spouse's
consent must be obtained; or
(C) the spouse has previously given
consent in accordance with this Subsection and consented to the Participant's
right to choose any optional mode of payment and to designate any beneficiary
without further consent by the spouse.
The consent of a spouse in accordance with this Paragraph (3) shall not be
effective with respect to other spouses of the Participant prior to the
Participant's Benefit Commencement Date, and an election to which Subparagraph
(B) of this Paragraph (3) applies shall become void if the circumstances causing
the consent of the spouse not to be required no longer exist prior to the
Participant's Benefit Commencement Date.
(4) Such election may be made at any time
during the period beginning on the first day of the Plan Year in which the
Participant attains Age 35 and ending on the earlier of the date of his death or
his Benefit Commencement Date. In the case of a Participant who has a Separation
from Service prior to his attainment of Age 35, the period during which such
election may be made with respect to benefits accrued as of his Separation from
Service shall begin no later than the date of his Separation from Service.
(5) The spouse of a deceased Participant who
did not make the election described in Paragraph (2) of this Subsection who is
eligible to receive the annuity described in Paragraph (1) of this Subsection
may elect to receive the
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<PAGE> 46
Participant's nonforfeitable interest in his Account in a single sum in lieu of
such annuity.
(6) The Committee shall provide to each
Participant a written explanation of:
(A) the terms and conditions of the
spouse's annuity under Subsection (1) of this Subsection;
(B) the Participant's and the
spouse's rights to waive the spouse's annuity and the effect of such waiver;
(C) the rights of the Participant's
spouse with respect to the Participant's waiver of such annuity; and
(D) the Participant's right to
revoke a waiver of the spouse's annuity and the effect of such revocation.
(7) The written explanation described in
Subsection (6) hereof shall be provided once during the three-year period that
begins on the first day of the Plan Year in which the Participant attains Age
32. In the case of an Employee who first becomes a Participant after he has
attained Age 35, such written notice shall be provided no later than one year
after the date the Employee first becomes a Participant. With regard to a
Participant who has a Separation from Service before attaining Age 35, such
written notice shall be provided no earlier than one year before and no later
than one year after the Participant's Separation from Service.
(f) Annuity forms of payment shall be provided
through the purchase of annuity contracts from an insurance company.
(g) A Participant whose nonforfeitable interest in
his Account exceeds (or has exceeded at the time of any prior distribution)
$3,500 and who does not establish to the satisfaction of the Committee that he
has no spouse may use his Transfer Account as security for a loan under Article
IX hereof only if:
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<PAGE> 47
(1) (A) his spouse (or the spouse's
legal guardian if the spouse is legally incompetent) executes a written
instrument whereby such spouse consents to the use of the Participant's
Transfer Account as security for the loan within the 90 day period ending on
the date the Participant receives the loan; and
(B) such instrument acknowledges the
effect of the election to which the spouse's consent is being given and is
witnessed by a notary public; or
(2) the Participant:
(A) establishes to the satisfaction
of the Committee that his spouse cannot be located; or
(B) furnishes a court order to the
Committee establishing that the Participant is legally separated or has been
abandoned (within the meaning of local law), unless a qualified domestic
relations order pertaining to such Participant provides that the spouse's
consent must be obtained.
The consent of a spouse to a loan in accordance with this section 5.11(g) shall
remain effective with respect to other spouses of the Participant.
5.12 Other Distributions.
(a) Upon the sale to an entity, that is not an
Affiliated Company, of substantially all the assets used by a Participating
Company in the trade or business of such Participating Company, a Participant
who continues employment with the corporation acquiring such assets shall be
entitled to have his Account paid to him.
(b) Upon the sale by a Participating Company to an
entity, that is not an Affiliated Company, of such Participating Company's
interest in a subsidiary, a Participant who continues employment with such
subsidiary shall be entitled to have his Account paid to him.
Distributions to Participants described in sections 5.12(a) and (b) hereof shall
be made pursuant to the provisions of this Article as if the Participant's
Separation from Service had
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<PAGE> 48
occurred on the closing date of the sale; provided, however that no distribution
shall be made under this Section unless:
(1) it is a lump sum distribution as defined
by section 402(d)(4) of the Code, without regard to clauses (i), (ii), (iii) and
(iv) of subparagraph (A), subparagraph (B), or subparagraph (H); and
(2) the Participating Company continues to
maintain the Plan.
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<PAGE> 49
ARTICLE VI
VESTING
6.1 Nonforfeitable Amounts.
(a) A Participant shall have a 100% nonforfeitable
interest at all times in his Salary Reduction, Rollover, and, except as
otherwise may be provided in Appendix A, his Transfer Accounts.
(b) (1) A Participant who is credited with one or
more Hours of Service as an Employee on or after the Effective Date shall have a
nonforfeitable interest in his Matching Contribution and Profit Sharing Accounts
determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Nonforfeitable Interest
---------------- -----------------------
<S> <C>
less than 1 year 0 percent
1 year 20 percent
2 years 40 percent
3 years 60 percent
4 years 80 percent
5 years or more 100 percent
</TABLE>
(2) Notwithstanding the foregoing, a
Participant shall have a 100% nonforfeitable interest in his Matching
Contribution and Profit Sharing Accounts upon his attainment of Normal
Retirement Age while an Employee, his death while an Employee, or his suffering
a Total Disability while an Employee.
6.2 Years of Service for Vesting.
(a) For the purposes of this Article, an Employee
shall be credited with Years of Service equal to the number of whole years in
all of the Employee's Periods of Service. To determine the number of whole years
in all of an Employee's Periods of Service, non-contiguous periods shall be
aggregated.
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<PAGE> 50
(b) Years of Service shall be calculated on the basis
that 30 days equals a completed month or one-twelfth (1/12) of a year and twelve
completed months equal one year.
(c) If a former Employee is reemployed by a
Participating Company or an Affiliated Company before he incurs a One-Year
Period of Severance and if such Employee's Period of Severance commenced with a
quit, discharge or retirement, the Employee shall be credited with Years of
Service for the Period of Severance.
(d) If an Employee severs from service by reason of a
quit, discharge, or retirement during an absence from service for 12 months or
less for any reason other than a quit, discharge or retirement, and if he then
performs an Hour of Service within 12 months of the date on which he was first
absent from service, he shall be credited with Years of Service for his Period
of Severance.
(e) Notwithstanding any provision of the Plan to the
contrary, an Employee shall not be credited with Years of Service for the same
period twice.
6.3 Breaks in Service and Loss of Service. An Employee's Years
of Service shall be cancelled if he incurs a One-Year Period of Severance before
his Normal Retirement Date and at a time when (a) he has no nonforfeitable
interest in any of his Accounts other than his Rollover or Transfer Account(s)
or (b) he has no Accounts under the Plan.
6.4 Restoration of Service. The Years of Service of an
Employee whose Years of Service have been cancelled pursuant to Section 6.3
hereof shall be restored to his credit if he thereafter completes an Hour of
Service at a time when the number of his consecutive One-Year Periods of
Severance is less than the greater of (a) the number of Years of Service to his
credit when the first such One-Year Period of Severance occurred, or (b) five.
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6.5 Forfeitures and Restoration of Forfeited Amounts upon
Reemployment.
(a) If a Participant who has had a Separation from
Service does not thereafter complete an Hour of Service before the end of the
Plan Year in which occurs the earlier of:
(1) the date on which he receives or is
deemed to receive a distribution of his entire nonforfeitable interest in his
Account, which is less than 100%; or
(2) the date on which he incurs his fifth
consecutive One-Year Period of Severance, his Profit Sharing Account and
Matching Contribution Account, if any, shall be closed, and the forfeitable
amount held therein shall be forfeited.
For purposes of this Subsection (a), a Participant who has a Separation from
Service at a time when his nonforfeitable interest in the Plan is zero shall be
deemed to have received a distribution described in Paragraph (1) of this
Subsection on the date of such Separation from Service.
(b) Amounts forfeited from a Participant's Profit
Sharing Account under Section 6.5(a) hereof shall be reallocated to the Profit
Sharing Accounts of Profit Sharing Participants as of the end of the Plan Year
during which the forfeiture occurs pursuant to Section 3.5 hereof. Amounts
forfeited from a Participant's Matching Contribution Account under Section
6.5(a) hereof shall be used to reduce future Matching Contributions.
(c) If a Participant who has received (or is deemed
to have received) a distribution described in Section 6.5(a)(1) hereof, whereby
any part of his Account has been forfeited, again becomes a Covered Employee
prior to incurring five consecutive One-Year Periods of Severance, the amount so
forfeited shall be restored to his new Profit Sharing Account and Matching
Contribution Account, if, and only if, he repays the full amount of such
distribution (if any) prior to the earlier of (1) the fifth anniversary of the
date on which he subsequently becomes a Covered Employee or (2) the first date
the Participant incurs five consecutive One-Year Periods of Severance following
the date of the distribution; provided, however, that a
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Participant described in the preceding Subsection who is deemed to receive a
distribution of his entire nonforfeitable interest shall be deemed to repay such
distribution on the date he again becomes a Covered Employee. Amounts restored
under this Subsection shall be charged against the following amounts in the
following order of priority: (A) forfeitures for the Plan Year, (B) income or
gains to the Plan, and (C) Company contributions for the Plan Year. If the
foregoing amounts are insufficient, the Participating Company by whom such
Participant is reemployed shall make any additional contribution necessary to
accomplish the restoration.
(d) If a Participant has received a distribution
under the Plan, other than a distribution of his entire nonforfeitable interest
in his Account upon his Separation from Service, at a time when he has less than
a 100% nonforfeitable interest in his entire Account and prior to the date on
which he incurs his fifth consecutive One-Year Period of Severance, his
nonforfeitable interest in his Account at all times prior to the date on which
he incurs his fifth consecutive One-Year Period of Severance, shall be the
difference between:
(1) the amount his nonforfeitable interest
would have been if he had not received the distribution; and
(2) the amount to which the distribution
would have increased or decreased if it had remained in the Fund. Immediately
after the Participant has five consecutive One-Year Periods of Severance, his
nonforfeitable interest determined under this Subsection, if in excess of zero,
shall be established as a separate account, and he shall at all times have a
nonforfeitable interest therein. If the Participant is later reemployed as a
Covered Employee, any allocations to him shall be credited to a new account, and
his nonforfeitable interest therein shall be determined under Section 6.1
hereof.
(e) If a Participant has had five consecutive
One-Year Periods of Severance and again becomes a Covered Employee, the amount
forfeited under Section 6.5(a) hereof shall not be restored to his new Profit
Sharing Account and Matching Contribution Account under any circumstances.
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ARTICLE VII
ROLLOVER CONTRIBUTIONS
7.1 Rollover Contributions.
(a) Subject to the restrictions set forth in
Subsection (b), a Covered Employee may transfer or have transferred directly to
the Fund, from any qualified retirement plan of a former employer, all or a
portion of his interest in the distributing plan. In addition, a Covered
Employee who has established an individual retirement account to hold
distributions received from qualified retirement plans of former employers may
transfer all of the assets of such individual retirement account to the Fund.
Such individual retirement account shall not contain nondeductible contributions
made by the Employee while he was a participant in such plans.
(b) The Trustee shall not accept a distribution from
any other qualified retirement plan or from an individual retirement account
unless the following conditions are met:
(1) (A) the distribution being transferred
must come directly from the fiduciary of the plan of the former employer, or
(B) it must come from the Employee
within 60 days after the Employee receives a distribution from such other
qualified retirement plan or individual retirement account and must comply with
the provisions of section 402(c), 403(a)(4), or 408(d)(3) of the Code, whichever
applies;
(2) distributions from a plan for a
self-employed person shall not be transferred to this Plan, unless the transfer
is directly to the Fund from the funding agent of the distributing plan;
(3) the interest being transferred shall not
include assets from any plan to the extent that the Committee determines that
the transfer of such interest (A) would impose upon this Plan requirements as to
form of distribution that would not otherwise apply hereunder, or (B) would
otherwise result in the elimination of Code section 411(d)(6) protected
benefits; and
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(4) the interest being transferred shall not
contain nondeductible contributions made to the distributing plan by the
Employee unless the transfer to the Fund is directly from the funding agent of
the distributing plan.
7.2 Vesting and Distribution of Rollover and Transfer
Accounts.
(a) The distributions transferred by or for a Covered
Employee from another qualified retirement plan or from an individual retirement
account shall be credited to the Employee's Rollover Account, unless it is
credited to his Transfer Account, in accordance with Subsection (b). An Employee
shall be fully vested at all times in his Rollover Account and, except as
otherwise may be provided in Appendix A, his Transfer Account.
(b) Any distribution, transferred by or for an
Employee that will cause the plan to be a direct or indirect transferee of a
plan to which the joint and survivor annuity requirements of sections 401(a)(11)
and 417 of the Code apply, will be credited to the Employee's Transfer Account.
(c) An Employee's Rollover Account and Transfer
Account shall be distributed as otherwise provided under the Plan.
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ARTICLE VIII
WITHDRAWALS
8.1 Withdrawals Not Subject to Section 401(k) Restrictions.
(a) A Participant may withdraw, not more than once
during any Plan Year, up to the total value of the amount in the following
Accounts:
(1) his Rollover Account; and
(2) his Transfer Account, to the extent not
attributable to elective deferrals, qualified nonelective contributions and/or
qualified matching contributions received from the transferor plan; and
(b) Withdrawals under this Section 8.1 shall be
charged against a Participant's Accounts in the following order of priority:
(1) the portion of the Participant's
Rollover and Transfer Account, if any, that consists of the Participant's
employee contributions made before January 1, 1987, if any, less any amounts
previously withdrawn therefrom; and
(2) the balance of the Participant's
Rollover and Transfer Account after the application of Subsection (b)(1), if
any, less any amounts previously withdrawn therefrom.
8.2 Withdrawals Subject to Section 401(k) Restrictions.
(a) In addition to the withdrawals permitted under
Section 8.1 hereof, a Participant may withdraw, under the rules set forth in
Sections 8.2(b) through 8.2(e) hereof, the following amounts:
(1) the sum of his Salary Reduction
Contributions made after the Effective Date;
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(2) the portion of his Transfer Account that
is not eligible for withdrawal under Section 8.1 hereof and is attributable to
elective deferrals and investment earnings thereon credited to the Participant
on or before December 31, 1988, less amounts previously withdrawn therefrom, by
submitting his written request to the Committee.
(b) A withdrawal under Section 8.2(a) hereof shall be
permitted only if the Committee finds that:
(1) it is made on account of immediate and
heavy financial need (as defined in Section 8.2(c) hereof) of the Participant;
and
(2) it is necessary (as defined in
Subsection (d) of this Section) to satisfy such immediate and heavy financial
need.
(c) A withdrawal under Subsection 8.2(a) hereof will
be deemed to be on account of an immediate and heavy financial need if the
Participant requests such withdrawal on account of:
(1) expenses for medical care described in
section 213(d) of the Code and previously incurred by the Participant, his
spouse, or any of the Participant's dependents (as defined in section 152 of the
Code) or necessary for such individuals to obtain such medical care;
(2) costs directly related to the purchase
(excluding mortgage payments) of a principal residence of the Participant;
(3) the payment of tuition, related
educational fees, and room and board expenses, for the next 12 months of
post-secondary education for the Participant, his spouse, children, or
dependents (as defined in section 152 of the Code);
(4) the need to prevent the eviction of the
Participant from his principal residence or foreclosure on the mortgage of his
principal residence; or
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(5) such other circumstances or events as
may be prescribed by the Secretary of the Treasury or his delegate.
(d) A withdrawal under Subsection (a) shall be deemed
to be necessary if:
(1) the amount of the withdrawal does not
exceed the amount of the Participant's immediate and heavy financial need,
including any amounts necessary to pay any federal, state or local income taxes
or penalties reasonably anticipated to result from the withdrawal;
(2) the Participant has obtained all
currently permissible distributions (other than hardship distributions) and
non-taxable loans, if any, under this and all other plans maintained by the
Participating Company and all Affiliated Companies; and
(3) the Participant agrees in writing to be
bound by the rules of Subsection (e).
(e) If a Participant withdraws any amount from his
Salary Reduction Account pursuant to Subsection (a), or withdraws any elective
deferrals under any other qualified retirement plan maintained by the
Participating Company or any Affiliated Company, which other plan conditions
such withdrawal upon the Participant's being subject to rules similar to those
stated in this Subsection and Subsection (d), such Participant:
(1) may not make Salary Reduction
Contributions under this Plan or employee contributions (other than mandatory
contributions under a defined benefit plan) or elective deferrals under any
other qualified or non-qualified plan of deferred compensation (which does not
include any health or welfare plan, including a health or welfare plan that is
part of a cafeteria plan described in section 125 of the Code) maintained by the
Participating Company or an Affiliated Company for a period of 12 months
commencing on the date of his receipt of the withdrawal; and
(2) in the calendar year next following the
calendar year of such withdrawal, may not make Salary Reduction Contributions or
elective deferrals under any other qualified
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retirement plan maintained by the Participating Company or an Affiliated Company
in excess of:
(A) the dollar amount described in
Section 3.1(b) hereof for such year, minus
(B) the total Salary Reduction
Contributions under this Plan and elective deferrals under any other qualified
plan made by the Participant during the calendar year of the withdrawal.
8.3 Withdrawals On and After Attainment of Age 59-1/2. Upon
his attainment of Age 59-1/2, a Participant who has a nonforfeitable interest in
his Account may withdraw, not more than once during any Plan Year, up to the
vested portion in his Account, less amounts previously withdrawn therefrom, by
submitting his written request to the Committee.
8.4 Amount and Payment of Withdrawals. The amount of any
withdrawal will be determined on the basis of the value of the Participant's
Account and the sum of the Participant's Salary Reduction Contributions valued
as of the Valuation Date coincident with or immediately preceding the date of
the withdrawal. Payment will be made in a single sum; provided, however, that if
the value of the nonforfeitable portion of the Participant's Account exceeds (or
has exceeded at the time of any prior distribution) $3,500, a withdrawal of all
or any portion of the Participant's Transfer Account under this Article VIII
shall be paid in the normal mode of payment described in Section 5.11(a) hereof,
as applicable, unless the Participant elects to receive a single sum payment. No
election to receive a single sum payment of any amount from the Participant's
Transfer Account shall be valid (if the value of the nonforfeitable portion of
the Participant's Account exceeds (or has exceeded at the time of any prior
distribution) $3,500), if it would not constitute a valid election under Section
5.11(b) hereof. Any withdrawal requested under this Section shall be paid as
soon as practicable following the Committee's determination that the requested
withdrawal complies with the terms and conditions set forth in this Section.
8.5 Withdrawals Not Subject to Replacement. A Participant may
not replace any portion of his Accounts withdrawn under this Plan.
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8.6 Pledged Amounts. No amount that has been pledged as
security for a loan under Article IX hereof may be withdrawn under this Article.
8.7 Investment Medium to be Charged with Withdrawal. A
Participant may specify to which Investment Medium or Investment Media any
withdrawal under this Article is to be charged. Unless so specified,
distribution will be made out of the Participant's interest in the various
Investment Media in proportion to the Participant's share in such Investment
Media.
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ARTICLE IX
LOANS TO PARTICIPANTS
9.1 Loan Application. Each Participant who is an Employee of a
Participating Company and any other Participant or beneficiary who is a party in
interest as defined in ERISA may apply for a loan from the Plan. All
applications shall be made to the Committee on forms which it prescribes, and
the Committee shall rule upon such applications in a uniform and
nondiscriminatory manner in accordance with the rules and guidelines established
in this Article IX.
9.2 Loan Rejection. The Committee shall have the right to
reject a loan application if the Participant has the present intention to take a
personal leave of absence during the period of loan repayment or on the basis of
a Participant's credit worthiness and financial need or such other factors as
would be considered in a normal commercial setting by an entity in the business
of making loans and as the Committee determines necessary to safeguard the Fund.
9.3 Amount of Loan.
(a) In no event shall a Participant be permitted to
have more than one loan outstanding at any time from this Plan.
(b) The amount of any loan, when added to the amount
of a Participant's outstanding loans under the Plan and all other plans
qualified under section 401(a) of the Code which are sponsored by a
Participating Company or any Affiliated Company shall not exceed the lesser of:
(1) $50,000, reduced by the excess (if any)
of:
(A) the Participant's highest
outstanding balance of loans during the one-year period ending on the day before
the date on which such loan is made to the Participant, over
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(B) the outstanding balance of any
loan made to the Participant on the date such loan is made to the Participant;
or
(2) fifty percent (50%) of the value of the
Participant's nonforfeitable Account, provided that the application of this
Section 9.3(b)(2) shall not reduce the amount that may be borrowed below
$10,000.
9.4 Terms of Loan.
(a) The interest rate on loans shall be one percent
(1%) over the prime rate that is in effect on the last of the month before the
loan is approved, as such prime rate is reported in the Wall Street Journal.
Security for each loan granted pursuant to this Article IX shall be, to the
extent necessary, the currently unpledged portion of the Participant's Rollover
Account, next, the Participant's Transfer Account, next, the vested portion of
the Participant's Matching Contribution Account and Profit Sharing Account, and
finally the Participant's Salary Reduction Account. In no event shall more than
fifty percent (50%) of the Participant's vested Account as of the date the loan
is made be used as security for the loan. In its sole discretion, the Committee
may require such additional security as it deems necessary. If the Participant's
Transfer Account contains amounts that are subject to the joint and survivor
annuity requirements of sections 401(a)(11) and 417 of the Code, the
Participant's Transfer Account may not be used as security for a loan unless:
(1) (A) the Participant's spouse
consents in writing to the use of the Participant's Transfer Account as
security for the loan within the 90 day period ending on the date the
Participant receives the loan;
(B) such consent acknowledges its
own effect; and
(C) such consent is witnessed by a
notary public; or
(2) the Participant establishes to the
satisfaction of the Committee that he has no spouse or that his
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spouse's consent is not required because of such circumstances as are prescribed
in applicable governmental regulations.
(b) Each loan shall be evidenced by the Participant's
execution of a personal installment note on such form as shall be supplied by
the Committee. Each such note shall specify that, to the extent repayment is not
required sooner by the terms of Section 9.4(d) hereof of this Section, repayment
shall be included in installments not to exceed 60 months from the date on which
the loan is distributed; however, if the purpose of the loan is to acquire any
dwelling unit which is to be used within a reasonable period of time as the
principal residence of the Participant, the period of repayment may be as long
as, but shall not exceed 180 months. All loans from the Plan shall be
non-renewable. Each note shall also specify the interest rate as determined by
the Committee at the time the loan is approved.
(c) All loans shall be repaid in approximately equal
installments (not less frequently than quarterly) through payroll deductions or
in such other manner as the Committee may determine. A Participant may repay the
outstanding balance of any loan in one lump sum at any time by notifying the
Committee of his intent to do so and by forwarding to the Committee payment in
full of the then outstanding balance, plus interest accrued to the date of
payment. The amount of principal and interest repaid by a Participant shall be
credited to a Participant's Account as each repayment is made.
(d) Notwithstanding the above, in the event a
Participant who has an outstanding loan takes a personal leave of absence for a
period of not more than one year or any periodic loan repayment is not made in
full due to a temporary reduction in the Participant's Compensation that is not
expected to continue for a period of more than one year, the Committee shall
waive payment on the loan during the leave of absence or the period during which
the Participant's Compensation is reduced. In such case, (1) if the loan is for
a period of less than 60 months, the period of repayments shall be extended for
the period necessary to permit repayment, or (2) otherwise, the loan shall be
reamortized over its remaining term; provided, however, that the period of
repayment for any loan shall not exceed a total of 60 months.
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(e) If, and only if:
(1) the Participant dies;
(2) the Participant (other than a
Participant who continues to be a party in interest) has a Separation from
Service;
(3) the Compensation of a Participant who is
an Employee of a Participating Company is discontinued or decreased below the
amount necessary to amortize the loan and such status continues for more than
one year;
(4) the loan is not repaid by the time the
note matures including any extensions pursuant to Subsection (d);
(5) the Participant attempts to revoke any
payroll deduction authorization for repayment of the loan without the consent of
the Committee;
(6) the Participant fails to pay any
installment of the loan when due and the Committee elects to treat such failure
as default; or
(7) any other event occurs which the
Committee, in its sole discretion, believes may jeopardize the repayment of the
loan;
before a loan is repaid in full, the unpaid balance thereof, with interest due
thereon, shall become immediately due and payable. The Participant (or his
beneficiary, in the event of the Participant's death) may satisfy the loan by
paying the outstanding balance of the loan within 30 days. If the loan and
interest are not repaid within the time specified, the Committee shall satisfy
the indebtedness from the amount of the Participant's vested interest in his
Account as provided in Section 9.5 hereof before making any payments otherwise
due hereunder to the Participant or his beneficiary.
9.5 Enforcement. The Committee shall give written notice to
the Participant (or his beneficiary in the event of the Participant's death) of
an event of default described in Section 9.4 (d) hereof. If the loan and
interest are not paid within thirty (30) days of the date of the notice, the
amount of the
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Participant's vested interest in his Account, excluding his Salary Reduction
Account, shall be reduced by the amount of the unpaid balance of the loan, with
interest due thereon, and the Participant's indebtedness shall thereupon be
discharged to the extent of the reduction. In addition, if the value of the
Participant's total vested interest in his Account (exclusive of his Salary
Reduction Account) pledged as security for the loan is insufficient to discharge
fully the Participant's indebtedness, the Participant's Salary Reduction Account
shall be used to reduce the Participant's indebtedness at such time as the
Participant is entitled to a distribution under Article V hereof or a withdrawal
under Article VIII hereof from his Salary Reduction Account, and any remaining
amounts in his Matching Contribution Account and/or Profit Sharing Account shall
be used to reduce the Participant's indebtedness. Such action shall not operate
as a waiver of the rights of the Company, the Committee, the Trustee, or the
Plan under applicable law. The Committee also shall be entitled to take any and
all other actions necessary and appropriate to foreclose upon any property other
than the Participant's Account pledged as security for the loan or to otherwise
enforce collection of the outstanding balance of the loan.
9.6 Additional Rules. The Committee may establish additional
rules relating to Participant loans under the Plan, which rules shall be applied
on a uniform and nondiscriminatory basis.
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ARTICLE X
ADMINISTRATION
10.1 Committee. If the Company designates one or more
individuals as a Savings Plan Committee, the powers and duties of the Committee
under the Plan shall be exercised by the Savings Plan Committee; otherwise all
such powers and duties shall be exercised by the Company. The Savings Plan
Committee shall be the named fiduciary which shall control and manage the
operation of the Plan and shall administer the Plan. The Savings Plan Committee
members may, but need not, be Employees, and they shall serve at the pleasure of
the Company. They shall be entitled to reimbursement of expenses, but those
members of the Savings Plan Committee who are also Employees of a Participating
Company shall receive no compensation for their service on the Savings Plan
Committee. Any reimbursement of expenses of the Committee members shall be paid
directly by the Company. The Savings Plan Committee shall be responsible for the
general administration of the Plan under the policy guidance of the Company.
10.2 Duties and Powers of Committee. In addition to the duties
and powers described elsewhere hereunder, the Committee shall have the following
specific duties and powers:
(a) to retain such consultants, accountants and
attorneys as may be deemed necessary or desirable to render statements, reports,
and advice with respect to the Plan and to assist the Committee in complying
with all applicable rules and regulations affecting the Plan; any consultants,
accountants and attorneys may be the same as those retained by the Company;
(b) to decide appeals under this Article;
(c) to enact uniform and nondiscriminatory rules and
regulations to carry out the provisions of the Plan;
(d) to resolve questions or disputes relating to
eligibility for benefits or the amount of benefits under the Plan;
(e) to construe and interpret and supply omissions
with respect to the provisions of the Plan;
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(f) to determine whether any domestic relations order
received by the Plan is a qualified domestic relations order as provided in
section 414(p) of the Code;
(g) to evaluate administrative procedures; and
(h) to delegate such duties and powers as the
Committee shall determine from time to time to any person or persons. To the
extent of any such delegation, the delegate shall have the duties, powers,
authority and discretion of the Committee.
Any decisions and determinations made by the Committee pursuant to its duties
and powers described in the Plan shall be conclusive and binding upon all
parties. The Committee shall have sole discretion in carrying out its
responsibilities. The expenses incurred by the Committee in connection with the
operation of the Plan, including, but not limited to, the expenses incurred by
reason of the engagement of professional assistants and consultants, shall be
expenses of the Plan and shall be payable from the Fund at the direction of the
Committee. The Participating Companies shall have the option, but not the
obligation, to pay any such expenses, in whole or in part, and, by so doing, to
relieve the Fund from the obligation of bearing such expenses. Payment of any
such expenses by a Participating Company on one occasion shall not bind that
Participating Company to pay any similar expenses on any subsequent occasion.
10.3 Functioning of Committee. The Committee and those persons
or entities to whom the Committee has delegated responsibilities shall keep
accurate records and minutes of meetings, interpretations, and decisions. The
Committee shall act by majority vote of the members, and such action shall be
evidenced by a written document.
10.4 Disputes.
(a) If the Committee denies, in whole or in part, a
claim for benefits by a Participant or his beneficiary, the Committee shall
furnish notice of the denial to the claimant, setting forth:
(1) the specific reasons for the denial;
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(2) specific reference to the pertinent Plan
provisions on which the denial is based;
(3) a description of any additional
information necessary for the claimant to perfect the claim and an explanation
of why such information is necessary; and
(4) appropriate information as to the steps
to be taken if the claimant wishes to submit his claim for review.
Such notice shall be forwarded to the claimant within 90 days of the Committee's
receipt of the claim; provided, however, that in special circumstances the
Committee may extend the response period for up to an additional 90 days, in
which event it shall notify the claimant in writing of the extension, and shall
specify the reason or reasons for the extension.
(b) Within 60 days of receipt of a notice of claim
denial, a claimant or his duly authorized representative may petition the
Committee in writing for a full and fair review of the denial. The claimant or
his duly authorized representative shall have the opportunity to review
pertinent documents and to submit issues and comments in writing to the
Committee. The Committee shall review the denial and shall communicate its
decision and the reasons therefor to the claimant in writing within 60 days of
receipt of the petition; provided, however, that in special circumstances the
Committee may extend the response period for up to an additional 60 days, in
which event it shall notify the claimant in writing prior to the commencement of
the extension. The appeals procedure set forth in this Subsection (b) shall be
the exclusive means for contesting a decision denying benefits under the Plan.
10.5 Indemnification. Each member of the Committee, and any
other person who is an Employee or director of a Participating Company or an
Affiliated Company shall be indemnified and held harmless by the Company against
and with respect to all damages, losses, obligations, liabilities, liens,
deficiencies, costs and expenses, including without limitation, reasonable
attorney's fees and other costs incident to any suit, action, investigation,
claim or proceedings to which he may be a party by reason of his performance of
administrative functions
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and duties under the Plan, except in relation to matters as to which he shall be
held liable for an act of willful misconduct in the performance of his duties.
The foregoing right to indemnification shall be in addition to such other rights
as the Committee member or other person may enjoy as a matter of law or by
reason of insurance coverage of any kind. Rights granted hereunder shall be in
addition to and not in lieu of any rights to indemnification to which the
Committee member or other person may be entitled pursuant to the by-laws of the
Participating Company.
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ARTICLE XI
THE FUND
11.1 Designation of Trustee. The Company on behalf of itself
and each other Participating Company, by appropriate resolution of its Board of
Directors, shall name and designate a Trustee and shall enter into a Trust
Agreement. The Company shall have the power, by appropriate resolution of its
Board of Directors, to amend the Trust Agreement, remove the Trustee, and
designate a successor Trustee, as provided in the Trust Agreement. All of the
assets of the Plan shall be held by the Trustee for use in accordance with the
Plan.
11.2 Exclusive Benefit. Prior to the satisfaction of all
liabilities under the Plan in the event of termination of the Plan, no part of
the corpus or income of the Fund shall be used for or diverted to purposes other
than for the exclusive benefit of Participants and their beneficiaries except as
expressly provided in this Plan and in the Trust Agreement.
11.3 No Interest in Fund. No person shall have any interest in
or right to any part of the assets or income of the Fund, except to the extent
expressly provided in this Plan and in the Trust Agreement.
11.4 Trustee. The Trustee shall be the named fiduciary with
respect to management and control of Plan assets held by it and, except as
provided in Section 11.5 hereof, shall have exclusive and sole responsibility
for the custody and investment thereof in accordance with the Trust Agreement.
11.5 Investments and Voting FPA Common Stock.
(a) Except as provided in Section 11.5(e) hereof, the
Trustee shall invest Salary Reduction Contributions, Rollover Contributions,
Matching Contributions and Profit Sharing Contributions paid to it and income
thereon in such Investment Media as each Participant may select in accordance
with this Section 11.5. Such investments acquired in the manner prescribed by
the Plan shall be held by or for the Trustee.
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<PAGE> 70
(b) Except as provided in Section 5.11(e), a
Participant shall select one or more of the Investment Media in which his
Accounts shall be invested, and the percentage thereof that shall be invested in
each Investment Medium selected. In the event a Participant fails to make an
election pursuant to this Section, amounts allocated to his Account shall be
invested in the most conservative of the Investment Media as determined by the
Committee. A Participant may amend such selection by prior notice to the
Committee, effective as of such dates determined by the Committee, by giving
prior notice to the Committee. Such amendments will be subject to the other
requirements of this Section.
(c) A Participant may transfer, effective as of such
dates determined by the Committee, such portion of the value of his interest in
any Investment Medium to another Investment Medium, as may be permitted by the
Committee.
(d) The Trustee shall vote shares of FPA Common Stock
pursuant to instructions from Participants, for which purpose the Trustee shall
aggregate fractional shares and vote them in proportion to instructions from
Participants with respect to whole shares. Shares for which no instructions are
received shall not be voted.
(e) At the time of the mailing to stockholders of the
notice of any stockholders' meeting of the Company, the Company, in conjunction
with the Trustee, shall use its reasonable best efforts to cause to be delivered
to each such Participant, who has shares of FPA Common Stock allocated to his
Account, such notices and informational statements as are furnished to the
Company's stockholders in respect of the exercise of voting rights, together
with forms by which the Participant may confidentially instruct the Trustee, or
revoke such instruction, with respect to the voting of the shares of FPA Common
Stock allocated to his Account. Upon timely receipt of directions, the Trustee
shall vote the FPA Common Stock allocated to a Participant's Account on each
matter as directed by the Participant.
(f) If there is a tender offer for, or a request or
invitation for tenders of, the shares of FPA Common Stock held by the Trustee
for Participants, then
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(1) the Committee shall furnish to the
Trustee, who shall then furnish to each Participant, prompt notice of any such
tender offer for, or request or invitation for tenders of, the shares of FPA
Common Stock; and
(2) the Trustee shall request from each
Participant instructions as to the tendering of the shares of FPA Common Stock,
if any, allocated to the Participant's Account. The Trustee shall tender only
such shares of FPA Common Stock for which the Trustee has received (within the
time specified in the notification) tender instructions.
(g) All instructions received by the Trustee from
Participants pursuant to this Section 11.5 shall be held by the Trustee in
strict confidence and shall not be divulged to any person, including employees,
officers and directors of the Company or any Affiliated Company; provided,
however, that to the extent necessary for the operation of the Plan, such
instructions may be relayed by the Trustee to a recordkeeper, auditor or other
person providing services to the Plan if such person (1) is not the Company, an
affiliate or any employee, officer or director thereof, and (2) agrees not to
divulge such directions to any other person, including employees, officers and
directors of the Company and any Affiliated Company.
(h) The amounts contributed by all Participants to
each Investment Medium shall be commingled for investment purposes.
(i) The Trustee may hold assets of the Fund and make
distributions therefrom in the form of cash without liability for interest, if
for administrative purposes it becomes necessary or practical to do so.
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ARTICLE XII
AMENDMENT OR TERMINATION OF THE PLAN
12.1 Power of Amendment and Termination.
(a) It is the intention of each Participating Company
that its participation in this Plan will be permanent. However, subject to any
applicable collective bargaining agreement, each Participating Company, other
than the Company, reserves the right to terminate its participation in this Plan
at any time by or pursuant to action of its board of directors or other
governing body. Furthermore, subject to any applicable collective bargaining
agreement, the Company reserves the power to amend or terminate the Plan at any
time by or pursuant to action of the Board of Directors.
(b) Each amendment to the Plan shall be binding on
each Participating Company if such Participating Company, by or pursuant to
action by its board of directors or other governing body, (1) consents to such
amendment at any time; or (2) fails to object thereto within thirty days after
receiving notice thereof.
(c) Any amendment or termination of the Plan shall
become effective as of the date designated by the Board of Directors or its
delegate. Except as expressly provided elsewhere in the Plan, prior to the
satisfaction of all liabilities with respect to the benefits provided under this
Plan, no amendment or termination shall cause any part of the monies contributed
hereunder to revert to the Participating Companies or to be diverted to any
purpose other than for the exclusive benefit of Participants and their
beneficiaries. Upon termination or partial termination of the Plan, or upon
complete discontinuance of contributions, the rights of all affected persons to
benefits accrued to the date of such termination shall be nonforfeitable. Upon
termination of the plan without establishment or maintenance of another defined
contribution plan (other than an employee stock ownership plan as defined in
section 4975(e)(7) of the Code or a simplified employee pension plan as defined
in section 408(k) of the Code), Accounts shall be distributed in accordance with
applicable law.
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<PAGE> 73
12.2 Merger. The Plan shall not be merged with or consolidated
with, nor shall its assets be transferred to, any other qualified retirement
plan unless each Participant would receive a benefit after such merger,
consolidation, or transfer (assuming the Plan then terminated) which is of
actuarial value equal to or greater than the benefit he would have received from
his Account if the Plan had been terminated on the day before such merger,
consolidation, or transfer.
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ARTICLE XIII
TOP-HEAVY PROVISIONS
13.1 General. The following provisions shall apply
automatically to the Plan and shall supersede any contrary provisions for each
Plan Year in which the Plan is a Top-Heavy Plan (as defined below). It is
intended that this Article shall be construed in accordance with the provisions
of section 416 of the Code.
13.2 Definitions. The following definitions shall supplement
those set forth in Article I hereof of the Plan:
(a) "Aggregation Group" means this plan and each
other qualified retirement plan (including a frozen plan or a plan which has
been terminated during the 60-month period ending on the Determination Date) of
a Participating Company or an Affiliated Company:
(1) in which a Key Employee is a
participant; or
(2) which enables any plan in which a Key
Employee participates to meet the requirements of sections 401(a)(4) or 410 of
the Code; or
(3) without the inclusion of which, the
plans in the Aggregation Group would be Top-Heavy Plans, but, with the inclusion
of which, the plans in the Aggregation Group are not Top-Heavy Plans and, taken
together, meet the requirements of sections 401(a)(4) and 410 of the Code.
(b) "Determination Date" means, for any Plan Year,
the last day of the preceding Plan Year, except that for the first Plan Year it
means the last day thereof.
(c) "Key Employee" means, with respect to any
Plan Year:
(1) any Employee or former Employee who at
any time during the 60-month period ending on the Determination Date was:
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<PAGE> 75
(A) an officer of a Participating
Company having Compensation for a Plan Year during such period greater than
fifty percent (50%) of the amount in effect under section 415(b)(1)(A) of the
Code for the calendar year in which such Plan Year ends; provided, that no more
than 50 Employees (or, if less, the greater of three Employees or ten percent
(10%) of the greatest number of Employees employed by all Participating
Companies and all Affiliated Companies during such 60-month period, but
excluding employees described in section 414(q)(8) of the Code) shall be treated
as officers; or
(B) one of the 10 Employees having
Compensation greater than the amount described in section 415(c)(1)(A) of the
Code and owning (or are considered as owning, within the meaning of section 318
of the Code) the largest interests in any Participating Company or Affiliated
Company, provided that such interest exceeds one-half of one percent (0.5%) of
the total share ownership of the Participating Company or Affiliated Company,
the total number of individuals described in this Subparagraph (B) being limited
to 10 for the entire 60-month period; or
(C) a 5-percent owner of a
Participating Company; or
(D) a one-percent owner of a
Participating Company having Compensation in excess of $150,000; or
(2) a beneficiary of an individual described
in Paragraph (1) of this Subsection.
For purposes of this Subsection, Compensation shall include elective deferrals
under sections 125, 402(a)(8), 402(h) and 403(b) of the Code. Determinations
under this Subsection shall be made in accordance with section 416(i) of the
Code.
(d) "Key Employee Ratio" means, for any Determination
Date, the ratio of the amount described in Paragraph (1) of this Subsection to
the amount described in Paragraph (2) of this Subsection, after deducting from
each such amount any portion thereof described in Paragraph (3) of this
Subsection, where:
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<PAGE> 76
(1) the amount described in this Paragraph
is the sum of:
(A) the present value of all accrued
benefits of Key Employees under all qualified defined benefit plans included in
the Aggregation Group;
(B) the balances in all of the
accounts of Key Employees under all qualified defined contribution plans
included in the Aggregation Group; and
(C) the amounts distributed from all
plans in such Aggregation Group to or on behalf of any Key Employee during the
period of five Plan Years ending on the Determination Date, except any benefit
paid on account of death to the extent it exceeds the accrued benefits or
account balances immediately prior to death;
(2) the amount described in this Paragraph
is the sum of:
(A) the present value of all accrued
benefits of all participants under all qualified defined benefit plans included
in the Aggregation Group;
(B) the balances in all of the
accounts of all participants under all qualified defined contribution plans
included in the Aggregation Group; and
(C) the amounts distributed from all
plans in such Aggregation Group to or on behalf of any participant during the
period of five Plan Years ending on the Determination Date; and
(3) the amount described in this Paragraph
is the sum of:
(A) all rollover contributions (or
fund to fund transfers) to the Plan by an Employee after December 31, 1983 from
a plan sponsored by an employer which is not a Participating Company or an
Affiliated Company;
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<PAGE> 77
(B) any amount that is included in
Paragraphs (1) and (2) of this Subsection for a person who is a Non-Key Employee
as to the Plan Year of reference but who was a Key Employee as to any earlier
Plan Year; and
(C) for Plan Years beginning after
December 31, 1984, any amount that is included in Paragraphs (1) and (2) of this
Subsection for a person who has not performed any services for any Participating
Company during the five-year period ending on the Determination Date.
The present value of accrued benefits under any defined benefit plan shall be
determined on the basis of the actuarial assumptions used by such defined
benefit plan under the method used for accrual purposes for all plans maintained
by all Participating Companies and Affiliated Companies if a single method is
used by all such plans, or, otherwise, the slowest accrual method permitted
under section 411(b)(1)(C) of the Code.
(e) "Non-Key Employee" means, for any Plan Year:
(1) an Employee or former Employee who is
not a Key Employee with respect to such Plan Year; or
(2) a beneficiary of an individual described
in Paragraph (1) of this Subsection.
(f) "Super Top-Heavy Plan" means, for any Plan Year,
each plan in the Aggregation Group for such Plan Year if, as of the applicable
Determination Date, the Key Employee Ratio exceeds ninety percent (90%).
(g) "Top-Heavy Compensation" means, for any
Participant for any Plan Year, the average of his annual Compensation over the
period of five consecutive Plan Years (or, if shorter, the longest period of
consecutive Plan Years during which the Participant was in the employ of any
Participating Company) yielding the highest average, disregarding:
(1) Compensation for Plan Years ending prior
to January 1, 1984; and
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<PAGE> 78
(2) Compensation for Plan Years after the
close of the last Plan Year in which the Plan was a Top-Heavy Plan.
(h) "Top-Heavy Plan" means, for any Plan Year, each
plan in the Aggregation Group for such Plan Year if, as of the applicable
Determination Date, the Key Employee Ratio exceeds sixty percent (60%).
(i) "Year of Top-Heavy Service" means, for any
Participant, a Plan Year in which he completes 1,000 or more Hours of Service,
excluding:
(1) Plan Years commencing prior to January
1, 1984; and
(2) Plan Years in which the Plan is not a
Top-Heavy Plan.
13.3 Minimum Contribution for Non-Key Employees.
(a) In each Plan Year in which the Plan is a
Top-Heavy Plan, each Eligible Employee who is a Non-Key Employee (except an
Eligible Employee who is a Non-Key Employee as to the Plan Year of reference but
who was a Key Employee as to any earlier Plan Year) and who is an Employee on
the last day of such Plan Year will receive a total minimum Participating
Company or Affiliated Company contribution (including forfeitures) under all
plans described in Paragraphs (a)(1) and (a)(2) of Section 13.2 of not less than
three percent (3%) of the Eligible Employee's Compensation for the Plan Year.
Elective deferrals to such plans made on behalf of a Participant in plan years
beginning after December 31, 1984 but before January 1, 1989 shall be deemed to
be Company contributions for the purpose of this Subsection. Elective deferrals
and employer matching contributions to such plans in plan years beginning on or
after January 1, 1989 shall not be used to meet the minimum contribution
requirements of this Subsection.
(b) The percentage set forth in Subsection (a) shall
be reduced to the percentage at which contributions, including forfeitures, are
made (or are required to be made) for a Plan Year for the Key Employee for whom
such percentage is the highest for that Plan Year. This percentage shall be
determined
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<PAGE> 79
for each Key Employee by dividing the contribution for such Key Employee by his
Compensation for the Plan Year. All defined contribution plans required to be
included in an Aggregation Group shall be treated as one plan for the purpose of
this Section; however, this Section shall not apply to any plan which is
required to be included in the Aggregation Group if such plan enables a defined
benefit plan in the group to meet the requirements of section 401(a)(4) or
section 410 of the Code.
(c) If a Non-Key Employee described in Subsection (a)
participates in both a defined benefit plan and a defined contribution plan
described in Paragraphs (a)(1) and (a)(2) of Section 13.2, the Participating
Company is not required to provide such Employee with both the minimum benefit
under the defined benefit plan and the minimum contribution. In such event, the
Non-Key Employee shall receive a total minimum Company contribution (including
forfeitures) under all plans in the Aggregation Group of not less than five
percent (5%) of the Non-Key Employee's Compensation, unless he is entitled to
the contribution described in Subsection 13.6(c).
13.4 Vesting. The vested interest in his Profit Sharing
Account and Matching Contribution Account of each Participant with one or more
Hours of Service in a Plan Year in which the Plan is a Top-Heavy Plan shall
continue to be determined in accordance with the schedule provided in Section
6.1.
13.5 Social Security. The Plan, for each Plan Year in which it
is a Top-Heavy Plan, must meet the requirements of this Article without regard
to any Social Security or similar contributions or benefits.
13.6 Adjustment to Maximum Benefit Limitation.
(a) For each Plan Year in which the Plan is (1) a
Super Top-Heavy Plan or (2) a Top-Heavy Plan and the Board of Directors does not
make the election to amend the Plan to provide the minimum contribution
described in Subsection (c), the 1.25 factor in the defined benefit and defined
contribution fractions described in section 415(e) of the Code shall be reduced
to 1.0. The adjustment described in this Subsection shall not apply to a
Participant during any period in which the Participant earns no additional
accrued benefit under any defined benefit plan and has
79
<PAGE> 80
no employer contributions, forfeitures, or voluntary nondeductible contributions
allocated to his accounts under any defined contribution plan.
(b) In the case of any Top-Heavy Plan to which
section 415(e)(6) of the Code applies, "$41,500" shall be substituted for
"$51,875" in the calculation of the numerator of the transition fraction.
(c) If, in any Plan Year in which the Plan is a
Top-Heavy Plan but not a Super Top-Heavy Plan, the Aggregation Group also
includes a defined benefit plan, the Board of Directors may elect to use a
factor of 1.25 in computing the denominator of the defined benefit and defined
contribution fractions described in section 415(e)(3) of the Code. In the event
of such election, the minimum contribution described in Section 13.3(a) for each
Non-Key Employee who is not covered under a defined benefit plan shall be
increased to four percent (4%), and the minimum Company contribution described
in Section 14.3(c) hereof for each Non-Key Employee who is covered under a
defined benefit plan (but who does not have a minimum benefit under the defined
benefit plan equal to the lesser of (1) three percent (3%) of his Top-Heavy
Compensation multiplied by his Years of Top-Heavy Service or (2) thirty-percent
(30%) of his Top-Heavy Compensation) shall be increased to seven and one-half
percent (7-1/2%).
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ARTICLE XIV
GENERAL PROVISIONS
14.1 No Employment Rights. Neither the action of the Company
in establishing the Plan, nor of any Participating Company in adopting the Plan,
nor any provisions of the Plan, nor any action taken by the Company, any
Participating Company or the Committee shall be construed as giving to any
Employee the right to be retained in the employ of the Company or any
Participating Company, or any right to payment except to the extent of the
benefits provided in the Plan to be paid from the Fund.
14.2 Governing Law. Except to the extent superseded by ERISA,
all questions pertaining to the validity, construction, and operation of the
Plan shall be determined in accordance with the laws of the state in which the
principal place of business of the Company is located.
14.3 Severability of Provisions. If any provision of this Plan
is determined to be void by any court of competent jurisdiction, the Plan shall
continue to operate and, for the purposes of the jurisdiction of that court
only, shall be deemed not to include the provisions determined to be void.
14.4 No Interest in Fund. No person shall have any interest
in, or right to, any part of the principal or income of the Fund, except as and
to the extent expressly provided in this Plan and in the Trust Agreement.
14.5 Spendthrift Clause. No benefit payable at any time under
this Plan and no interest or expectancy herein shall be anticipated, assigned,
or alienated by any Participant or beneficiary, or subject to attachment,
garnishment, levy, execution, or other legal or equitable process, except for
(1) a Federal tax levy made pursuant to section 6331 of the Code and (2) any
benefit payable pursuant to a qualified domestic relations order. Any attempt to
alienate or assign a benefit hereunder, whether currently or hereafter payable,
shall be void.
14.6 Incapacity. If the Committee deems any Participant who is
entitled to receive payments hereunder incapable of receiving or disbursing the
same by reason of Age,
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illness, infirmity, or incapacity of any kind, the Committee may direct the
Trustee to apply such payments directly for the comfort, support, and
maintenance of such Participant, or to pay the same to any responsible person
caring for the Participant who is determined by the Committee to be qualified to
receive and disburse such payments for the Participant's benefit; and the
receipt of such person shall be a complete acquittance for the payment of the
benefit. Payments pursuant to this Section shall be complete discharge to the
extent thereof of any and all liability of the Participating Companies, the
Committee, the Trustee, and the Fund.
14.7 Withholding. The Committee and the Trustee shall have the
right to withhold any and all state, local, and Federal taxes which may be
withheld in accordance with applicable law.
14.8 Missing Persons. Neither the Trustee nor any
Participating Company shall be obliged to search for or ascertain the
whereabouts of any individual entitled to benefits under the Plan. Any
individual entitled to benefits under the Plan who does not file a timely claim
for his benefits will be allowed to file a claim at any later date, and payment
of his benefits will commence after that later date, except that, in the event
the Participating Company is satisfied that a Participant has no spouse or that
a Participant's spouse cannot be located (as described in Section 5.8, and the
Participant is in fact married or the spouse is later located, whichever is
applicable, such spouse shall not be deemed an individual entitled to benefits
under the Plan.
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ARTICLE XV
RIGHTS OF ALTERNATE PAYEES
15.1 General. Except as otherwise provided in this Article, an
Alternate Payee shall have no rights to a Participant's benefit and shall have
no rights under this Plan other than those rights specifically granted to the
Alternate Payee pursuant to a Qualified Domestic Relations Order.
Notwithstanding the foregoing, an Alternate Payee shall have the right to appeal
the denial of a claim for any benefits awarded to the Alternate Payee pursuant
to a Qualified Domestic Relations Order, as provided in Section 10.4. Any
interest of an Alternate Payee in the Accounts of a Participant, other than an
interest payable solely upon the Participant's death pursuant to a Qualified
Domestic Relations Order which provides that the Alternate Payee shall be
treated as the Participant's surviving spouse, shall be separately accounted for
by the Trustee in the name and for the benefit of the Alternate Payee.
15.2 Distribution.
(a) Notwithstanding anything in this Plan to the
contrary, a Qualified Domestic Relations Order may provide that any benefits of
a Participant payable to an Alternate Payee shall be distributed immediately or
at any other time specified in the order. If the order does not specify the time
at which benefits shall be payable to the Alternate Payee, the benefits shall be
distributed to the Alternate Payee immediately.
(b) If a Qualified Domestic Relations Order does not
provide the form of distribution of benefits payable to an Alternate Payee, the
Alternate Payee shall have the right to elect distribution in any form provided
under Article V, except that benefits to be paid in installments may not be paid
over a period exceeding the life expectancy of the Alternate Payee, determined
as of the date of the first distribution.
(c) If the Qualified Domestic Relations Order does
not specify the Investment Media from which amounts shall be paid to an
Alternate Payee, such amounts shall be distributed from the Investment Media in
which such Accounts are invested on a pro rata basis.
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15.3 Withdrawals. Unless a Qualified Domestic Relations Order
provides to the contrary, an Alternate Payee shall not be permitted to make any
withdrawals under Article VIII.
15.4 Death Benefits. Unless a Qualified Domestic Relations
Order provides to the contrary, an Alternate Payee shall have the right to
designate a beneficiary, in the same manner as provided in Section 5.8 with
respect to a Participant (except that no spousal consent shall be required), who
shall receive benefits payable to the Alternate Payee which have not been
distributed at the time of the Alternate Payee's death. If the Alternate Payee
does not designate a beneficiary, or if the beneficiary predeceases the
Alternate Payee, benefits payable to the Alternate Payee which have not been
distributed shall be paid to the Alternate Payee's estate.
15.5 Investment Direction. Unless a Qualified Domestic
Relations Order provides to the contrary, an Alternate Payee shall have the
right to direct the investment of any portion of a Participant's Accounts
payable to the Alternate Payee under such order in the same manner as provided
in Article XI with respect to a Participant, which amounts shall be separately
accounted for by the Trustee in the Alternate Payee's name.
Executed by the duly authorized officers of the Company on
behalf of the Company and each other Participating Company this 20th day of
December, 1996.
FPA MEDICAL MANAGEMENT, INC.
By: /s/Cheryl A. Moore
--------------------------------
Title:
Attest: /s/J. A. Lebovitz
-------------------------------
Secretary
[SEAL]
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SCHEDULE A
MINIMUM DISTRIBUTION INCIDENTAL BENEFIT TABLE
TABLE I
<TABLE>
<CAPTION>
Excess of Age of Participant Applicable
over Age of beneficiary percentage
----------------------- ----------
<S> <C>
10 years or less.....................100%
11................................... 96%
12................................... 93%
13................................... 90%
14................................... 87%
15................................... 84%
16................................... 82%
17................................... 79%
18................................... 77%
19................................... 75%
20................................... 73%
21................................... 72%
22................................... 70%
23................................... 68%
24................................... 67%
25................................... 66%
26................................... 64%
27................................... 63%
28................................... 62%
29................................... 61%
30................................... 60%
31................................... 59%
32................................... 59%
33................................... 58%
34................................... 57%
35................................... 56%
36................................... 56%
37................................... 55%
38................................... 55%
39................................... 54%
40................................... 54%
41................................... 53%
42................................... 53%
43................................... 53%
</TABLE>
85
<PAGE> 86
<TABLE>
<CAPTION>
<S> <C>
44 and greater....................... 52%
</TABLE>
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<PAGE> 87
APPENDIX A
PREDECESSOR PLANS
A.1 Predecessor Plans. The following plans have been merged into the
Plan effective January 1, 1997, and have had their assets transferred to the
Plan as soon as practicable thereafter:
(a) Arizona Managed Care Providers, Ltd. 401(k) Profit
Sharing Plan (the "Arizona Plan")
(b) FPA Medical Group of California, An Osteopathic
Medical Corporation, 401(k) Salary Savings Plan
(the "California Plan")
(c) Family Practice Associates of San Diego, Inc.
401(k) Salary Savings Plan (the "San Diego Plan")
(d) Gonzaba Medical Group 401(k) Plan (the "Gonzaba
Plan")
A.2 Special Provisions Applicable to Participants with Transfer
Accounts. The following provisions shall apply only to the Participants who had
participated in a specified Predecessor Plan and have Transfer Accounts
hereunder. Additionally, the following provisions supplement the provisions of
the Plan, and to the extend there is any discrepancy, the terms of this Appendix
shall control.
(a) Arizona Plan.
(1) Distribution of Transfer Accounts. With respect
to a Participant who has a Transfer Account from the Arizona Plan:
(A) The provisions of Section 5.11 shall
apply with respect to such Transfer Account.
(B) In addition to the modes of distribution
provided under Sections 5.7 and 5.11 of the Plan, the Participant may elect in
writing to have his interest in his Transfer Account paid to him or applied for
his benefit in approximately equal
A-1
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monthly, quarterly, or annual installments over a period not to exceed the
lesser of:
(i) the life expectancy of the
Participant or the joint and survivor life expectancy of the Participant and his
beneficiary (with such life expectancy to be determined in accordance with
applicable regulations under the Code); or
(ii) unless the sole beneficiary is
the Participant's spouse, the maximum number of years determined under Table I
of this Appendix A.
(C) Notwithstanding any Plan provision to
the contrary, each Transfer Account shall be distributed in a manner that
permits the Plan to satisfy the requirements of section 401(a)(9) of the Code
and regulations thereunder, including the incidental death benefit requirements
of section 401(a)(9)(G) of the Code.
(b) California Plan.
(1) Distribution of Transfer Account.
(A) A Participant may elect to have the
distribution of his Transfer Account paid in cash, in securities, or other
assets in-kind, or in any combination thereof.
(B) In addition to the normal mode of
distribution provided under Section 5.7 of the Plan, a Participant who has a
Transfer Account from the San Diego Plan may elect in writing to have his
interest in his Transfer Account paid to him or applied for his benefit in
approximately equal installments that are made at least annually over a period
not to exceed the lesser of:
(i) the life expectancy of the
Participant or the joint and survivor life expectancy of the Participant and his
beneficiary (with such life expectancy to be determined in accordance with
applicable regulations under the Code); or
A-2
<PAGE> 89
(ii) unless the sole beneficiary is
the Participant's spouse, the maximum number of years determined under Table I
of this Appendix A.
(C) Notwithstanding any Plan provision to
the contrary, each Transfer Account shall be distributed in a manner that
permits the Plan to satisfy the requirements of section 401(a)(9) of the Code
and regulations thereunder, including the incidental death benefit requirements
of section 401(a)(9)(G) of the Code.
(c) San Diego Plan.
(1) Normal Retirement Age. For a Participant who
participated in the San Diego Plan prior to January 1, 1997, Normal Retirement
Age shall mean the attainment of Age 55 or, if later, the 10th anniversary of
the date of participation in the Plan; but in no event later than Age 65.
(2) Distribution of Transfer Account.
(A) A Participant may elect to have the
distribution of his Transfer Account paid in cash, in securities, or other
assets in-kind, or in any combination thereof.
(B) In addition to the normal mode of
distribution provided under Section 5.7 of the Plan, a Participant who has a
Transfer Account from the San Diego Plan may elect in writing to have his
interest in his Transfer Account paid to him or applied for his benefit in
(i) approximately equal monthly,
quarterly, or annual installments over a period not to exceed the lesser of:
(I) the life expectancy of the
Participant or the joint and survivor life expectancy of the Participant and his
beneficiary (with such life expectancy to be determined in accordance with
applicable regulations under the Code); or
(II) unless the sole
beneficiary is the Participant's spouse, the maximum number of years
determined under Table I of this Appendix A; or
A-3
<PAGE> 90
(ii) a single sum payment; or
(iii) a combination of the above.
(C) Notwithstanding any Plan provision to
the contrary, each Transfer Account shall be distributed in a manner that
permits the Plan to satisfy the requirements of section 401(a)(9) of the Code
and regulations thereunder, including the incidental death benefit requirements
of section 401(a)(9)(G) of the Code.
(d) Gonzaba Plan.
(1) Normal Retirement Date. For a Participant who
participated in the Gonzaba Plan prior to January 1, 1997, Normal Retirement
Date shall mean the first of the month in which the Participant attains Normal
Retirement Age.
(2) Distribution of Transfer Account. In addition to
the normal mode of distribution provided under Section 5.7 of the Plan, a
Participant who has a Transfer Account from the Gonzaba Plan may elect in
writing to have his interest in his Transfer Account paid to him or applied for
his benefit in approximately equal monthly installments over a period not to
exceed the lesser of:
(A) the life expectancy of the Participant
or the joint and survivor life expectancy of the Participant and his beneficiary
(with such life expectancy to be determined in accordance with applicable
regulations under the Code); or
(B) unless the sole beneficiary is the
Participant's spouse, the maximum number of years determined under Table I of
this Appendix A.
(3) Notwithstanding any Plan provision to the
contrary, each Transfer Account shall be distributed in a manner that permits
the Plan to satisfy the requirements of section 401(a)(9) of the Code and
regulations thereunder, including the incidental death benefit requirements of
section 401(a)(9)(G) of the Code.
A-4
<PAGE> 91
<TABLE>
<CAPTION>
TABLE I TO APPENDIX A
Age of Participant
in calendar year
preceding Required
Beginning Date Maximum Years
-------------- -------------
Remaining
---------
<S> <C>
70................................................................... 26.2
71................................................................... 25.3
72................................................................... 24.4
73................................................................... 23.5
74................................................................... 22.7
75................................................................... 21.8
76................................................................... 20.9
77................................................................... 20.1
78................................................................... 19.2
79................................................................... 18.4
80................................................................... 17.6
81................................................................... 16.8
82................................................................... 16.0
83................................................................... 15.3
84................................................................... 14.5
85................................................................... 13.8
86................................................................... 13.1
87................................................................... 12.4
88................................................................... 11.8
89................................................................... 11.1
90................................................................... 10.5
91................................................................... 9.9
92................................................................... 9.4
93................................................................... 8.8
94................................................................... 8.3
95................................................................... 7.8
96................................................................... 7.3
97................................................................... 6.9
98................................................................... 6.5
99................................................................... 6.1
100................................................................... 5.7
101................................................................... 5.3
102................................................................... 5.0
103................................................................... 4.7
104................................................................... 4.4
105................................................................... 4.1
</TABLE>
A-5
<PAGE> 92
<TABLE>
<CAPTION>
<S> <C>
106................................................................... 3.8
107................................................................... 3.6
108................................................................... 3.4
109................................................................... 3.2
110................................................................... 2.8
111................................................................... 2.6
112................................................................... 2.4
113................................................................... 2.2
114................................................................... 2.0
115 and older......................................................... 1.8
</TABLE>
A-6
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AHI (Texas) Healthcare Systems, Inc., a CA corporation
AHI Arizona Healthcare Systems, Inc., an AZ corporation
AHI Arizona Holdings, Inc., an AZ corporation
AHI Atlanta Healthcare Systems, Inc., a GA corporation
AHI Downey Healthcare Systems Management, Inc., a CA
corporation
AHI Florida Healthcare Systems, Inc., a FL corporation
AHI Florida Holdings, Inc., a FL corporation
AHI Gardena Healthcare Systems Management, Inc., a CA
corporation
AHI Georgia Healthcare Management, Inc., a GA
corporation
AHI Georgia Healthcare Systems, Inc., a GA corporation
AHI Georgia Holdings, Inc., a GA corporation
AHI Healthcare Systems, Inc., a DE corporation
AHI Kentucky Healthcare Systems, Inc., a KY corporation
AHI LAMN Healthcare Systems Management, Inc., a CA
corporation
AHI Louisiana Healthcare Systems, Inc., a LA corporation
AHI South Florida Healthcare Systems, Inc., a FL corporation
AHI St. Francis Care Healthcare Systems Management, Inc., a CA corporation
AHI Tennessee Healthcare Systems, Inc., a TN corporation
AHI Whittier Healthcare Systems Management, Inc., a CA corporation
Arizona Managed Care Physicians IPA, Inc., an AZ corporation
Family and Senior Care, Inc., a DE corporation
Family First Medical Centers, Inc., a FL corporation
Foundation Health Medical Services, a CA corporation
FPA-Gonzaba Management Services Organization, Inc., a TX corporation
FPA Acquisition Corporation, a FL corporation
FPA Family Pharmacy, Inc., a FL corporation
FPA Medical Management of Arizona, Inc., an AZ corporation
FPA Medical Management of California, Inc., a DE corporation
FPA Medical Management of Michigan, Inc. dba QualNet of Michigan, a MI
corporation
FPA Medical Management of South Carolina, Inc., a DE corporation
Health Services Alliance, Inc., a CA corporation
OPSU, Inc. dba Gonzaba Surgical Center (GSC), a TX corporation
Physicians First, Inc., a DE corporation
Physicians Medical Group of Florida, Inc., a FL corporation
PrimeCare, Inc., a NJ corporation
Sterling Anesthesia, Inc., a FL corporation
Sterling Billing Services Corp., a FL corporation
Sterling Healthcare Group, Inc., a FL corporation
Sterling Medical Group of Florida, Inc., a FL corporation
<PAGE> 2
Sterling Medical Group of Michigan, Inc., a FL corporation
Sterling Medical Group, Inc., a FL corporation
Sterling Mednet Administrative Services, Inc., a TX corporation
Sterling Mednet Emergency Services, Inc., a TX corporation
Sterling Miami, Inc., a FL corporation
Sterling Physician Services of America, Inc., a FL corporation
Sterling Physicians Group of Texas, Inc., a TX corporation
Sterling Professional Emergency Physicians, LLC, a MD corporation
Sterling Real Property Melbourne, Inc., a FL corporation
Sterling Regional Emergency Services, Inc., a FL corporation
Sterling Sub Texas, Inc., a TX corporation
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 333-3760 and 333-2007) and Form S-8 (Nos. 33-00074, 33-00076,
333-16741 and 333-15755) of FPA Medical Management, Inc. of our report dated
March 21, 1997, appearing in this Annual Report on Form 10-K of FPA Medical
Management, Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
San Diego, California
March 28, 1997
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
FPA Medical Management, Inc. on Form S-3 (File Nos. 333-3760 and 333-2007) and
on Form S-8 (File Nos. 333-00076, 333-16741 and 333-15755) of our report dated
March 15, 1996, on our audits of the consolidated financial statements of
Sterling Healthcare Group, Inc. as of December 31, 1995, and for the year ended
December 31, 1995 and for the period from June 1, 1994 to December 31, 1994,
which report is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND LLP
Miami, Florida
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,594,877
<SECURITIES> 40,000,000
<RECEIVABLES> 216,272,051
<ALLOWANCES> 59,796,488
<INVENTORY> 0
<CURRENT-ASSETS> 228,356,136
<PP&E> 46,497,830
<DEPRECIATION> 6,358,498
<TOTAL-ASSETS> 577,270,277
<CURRENT-LIABILITIES> 240,434,392
<BONDS> 0
<COMMON> 49,542
0
0
<OTHER-SE> 143,468,497
<TOTAL-LIABILITY-AND-EQUITY> 577,270,277
<SALES> 0
<TOTAL-REVENUES> 440,318,613
<CGS> 0
<TOTAL-COSTS> 313,706,608
<OTHER-EXPENSES> 137,201,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,127,244)
<INCOME-PRETAX> (15,716,426)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,716,426)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,716,426)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
