<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 17, 1997
FPA MEDICAL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-24276 33-0604264
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3636 Nobel Drive
Suite 200
San Diego, California 92122
(Address of principal executive offices) (Zip Code)
(619) 453-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of AHI Healthcare Systems, Inc.
(b) Pro Forma Financial Information.
<PAGE> 3
ITEM 7(a). AHI Healthcare Systems, Inc.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 1996, 1995 and 1994
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this current report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
---------------------------------
Date: May 30, 1997 Title: Senior Vice President,
General Counsel and Secretary
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
AHI Healthcare Systems, Inc.
We have audited the accompanying consolidated balance sheet of AHI Healthcare
Systems, Inc., as of December 31, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended.
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 audit. The financial statements of the Company for the years ended
December 31, 1995 and 1994 were audited by other auditors whose report, dated
February 22, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such 1996 financial statements present fairly, in all material
respects, the consolidated financial position of AHI Healthcare Systems, Inc.
at December 31, 1996, and the consolidated results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 9 to the consolidated financial statements, AHI Healthcare
Systems, Inc. completed a merger with FPA Medical Management, Inc. on March 17,
1997.
DELOITTE & TOUCHE LLP
San Diego, California
May 2, 1997
<PAGE> 6
REPORT OF INDEPENDENT AUDITORS
Stockholder and Board of Directors
AHI Healthcare Systems, Inc.
We have audited the accompanying consolidated balance sheet of AHI Healthcare
Systems, Inc., as of December 31, 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial 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 consolidated financial position of AHI
Healthcare Systems, Inc., at December 31, 1995, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 22, 1996
<PAGE> 7
AHI Healthcare Systems, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,868,000 $ 31,608,000
Accounts receivable, net of allowances of $3,704,000 in
1996 and $1,293,000 in 1995 10,613,000 12,639,000
Due from related parties and minority stockholders 141,000 177,000
Prepaid expenses 1,101,000 880,000
Recoverable income taxes (Note 3) - 1,050,000
Deferred income taxes (Note 3) - 858,000
--------------------------------
Total current assets 21,723,000 47,212,000
Equipment and leasehold improvements:
Equipment 9,590,000 5,738,000
Leasehold improvements 1,396,000 1,168,000
--------------------------------
10,986,000 6,906,000
Less: accumulated depreciation and amortization (4,736,000) (3,412,000)
--------------------------------
6,250,000 3,494,000
Deposits and other assets 309,000 422,000
Goodwill and other intangible assets, net (Notes 2 and 9) 11,306,000 25,128,000
--------------------------------
Total assets $ 39,588,000 $ 76,256,000
================================
</TABLE>
<PAGE> 8
AHI Healthcare Systems, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued medical claims $ 32,070,000 $ 15,442,000
Accounts payable 15,757,000 11,526,000
Notes payable and capital lease obligations, current portion
(Note 5) 437,000 3,364,000
Unsecured notes payable to stockholders, current portion
(Note 4) - 333,000
------------------------------------
Total current liabilities 48,264,000 30,665,000
Notes payable and capital lease obligations (Note 5) 1,094,000 1,203,000
Contingencies (Note 8)
Stockholders' equity:
8% cumulative convertible voting preferred stock, $0.01
par value, 25,000,000 shares authorized, none issued
-- --
Common stock, $0.01 par value, 75,000,000 shares authorized, 14,523,000
shares issued and outstanding at December 31, 1996 and 1995, respectively
(Note 2 and 6)
145,000 145,000
Additional paid-in capital 47,753,000 47,753,000
Accumulated deficit (57,267,000) (2,999,000)
Unamortized deferred compensation expense - (61,000)
Due from stockholder (401,000) (450,000)
-------------------------------------
(9,770,000) 44,388,000
-------------------------------------
Total liabilities and stockholders' equity $ 39,588,000 $ 76,256,000
=====================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
AHI Healthcare Systems, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Total operating revenue $ 118,786,000 $ 114,284,000 $ 60,746,000
Cost of medical services 117,911,000 88,997,000 43,464,000
-------------------------------------------------------------
Gross margin 875,000 25,287,000 17,282,000
-------------------------------------------------------------
Operating expenses:
Medical network operating expenses 9,721,000 6,717,000 2,883,000
General and administrative 23,738,000 11,586,000 7,377,000
Goodwill writedown 14,601,000 - -
Depreciation and amortization 2,728,000 2,167,000 760,000
Network development 4,229,000 9,127,000 4,223,000
-------------------------------------------------------------
55,017,000 29,597,000 15,243,000
-------------------------------------------------------------
Operating income (loss) (54,142,000) (4,310,000) 2,039,000
Interest income 1,139,000 520,000 115,000
Interest expense (185,000) (530,000) (210,000)
-------------------------------------------------------------
Net interest income (expense) 954,000 (10,000) (95,000)
-------------------------------------------------------------
Income (loss) before income taxes and minority
interest (53,188,000) (4,320,000) 1,944,000
Minority interest - - 332,000
-------------------------------------------------------------
Income (loss) before income taxes (53,188,000) (4,320,000) 2,276,000
Income taxes expense (benefit) 1,080,000 (1,219,000) 725,000
-------------------------------------------------------------
Net income (loss) $ (54,268,000) $ (3,101,000) $ 1,551,000
=============================================================
Historical net income (loss) per share $ (3.74) $ (0.26) $ 0.13
=============================================================
Pro forma information:
Historical net income (loss) $ (54,268,000) $ (3,101,000) $ 1,551,000
Charge in lieu of income taxes for Subchapter S
Corporations (Note 3) - (262,000) -
-------------------------------------------------------------
Pro forma net income (loss) $ (54,268,000) $ (3,363,000) $ 1,551,000
=============================================================
Pro forma net income (loss) per share $ (3.74) $ (0.29) $ 0.13
=============================================================
Weighted average shares outstanding 14,523,000 11,800,000 11,998,000
See accompanying notes.
</TABLE>
<PAGE> 10
AHI Healthcare Systems, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Retained
Common Stock Preferred Paid-In Earnings
Shares Amount Stock Capital (Deficit)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 13,276,000 $133,000 - $ 752,000 $ 614,000
Issuance of common stock in
acquisition 192,000 2,000 1,980,000
Repurchase and cancellation of
common stock (2,577,000) (26,000) 26,000 (1,483,000)
Issuance of common stock for
stockholder notes 2,577,000 26,000 2,974,000
Exchange of common stock for
Series T preferred stock (2,577,000) (26,000) 26,000
Redemption of Series T
preferred stock (26,000) (2,974,000)
Other equity transactions (16,000)
Amortization
Net income 1,551,000
Dividends paid (522,000)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 10,891,000 109,000 - 2,742,000 160,000
Undistributed S-Corporation
earnings reclassified to
additional paid-in capital 58,000 (58,000)
Issuance of common stock to
a related party 32,000 450,000
Issuance of common stock in
initial public offering 3,600,000 36,000 44,503,000
Amortization
Net Loss (3,101,000)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 14,523,000 145,000 - 47,753,000 (2,999,000)
Amortization
Payments received on notes
receivable from stockholder
Net loss (54,268,000)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 14,523,000 $ 145,000 $ - $ 47,753,000 $(57,267,000)
============================================================================
Unamortized
Deferred
Compensation Due from
Expense Stockholder Total
-----------------------------------------------
<C> <C> <C>
$ (140,000) $ - $ 1,359,000
1,982,000
(1,483,000)
(3,000,000) -
-
3,000,000 -
(16,000)
39,000 39,000
1,551,000
(522,000)
-----------------------------------------------
(101,000) - - 2,910,000
-
(450,000) -
44,539,000
40,000 40,000
(3,101,000)
-----------------------------------------------
(61,000) (450,000) 44,388,000
61,000 61,000
49,000 49,000
(54,268,000)
-----------------------------------------------
$ - $ (401,000) $ (9,770,000)
===============================================
</TABLE>
See accompanying notes.
<PAGE> 11
AHI Healthcare Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(54,268,000) $(3,101,000) $ 1,551,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Goodwill writedown 14,601,000
Depreciation and amortization 2,728,000 2,167,000 760,000
Amortization of deferred compensation expense 61,000 40,000 23,000
Severance settlement financed through issuance of debt - - 1,200,000
Minority interest in income of consolidated subsidiary - - (332,000)
Changes in operating assets and liabilities:
Accounts receivable 2,026,000 (4,253,000) (2,380,000)
Due from related parties 36,000 118,000 37,000
Prepaid expenses (221,000) (596,000) (44,000)
Recoverable and deferred income taxes 1,908,000 (1,406,000) (399,000)
Deposits and other assets 113,000 (139,000) (121,000)
Accrued medical claims 16,250,000 (2,448,000) (233,000)
Accounts payable 3,256,000 3,785,000 1,027,000
Income taxes payable - (810,000) 744,000
-------------------------------------------------
Net cash provided by (used in) operating activities (13,510,000) (6,643,000) 1,833,000
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (4,080,000) (2,140,000) (1,597,000)
Acquisition of subsidiaries, net of cash acquired (503,000) (2,481,000) (1,238,000)
-------------------------------------------------
Net cash used in investing activities (4,583,000) (4,621,000) (2,835,000)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable and
Bank Facility borrowings 5,550,000 12,065,000 222,000
Principal payments on notes payable and Bank Facility
borrowings (9,246,000) (14,387,000) (237,000)
Proceeds from payments of notes receivable from stockholder 49,000 - -
Dividends paid - - (522,000)
Issuance of common stock - 44,539,000 20,000
Purchase of treasury shares - - (1,253,000)
-------------------------------------------------
Net cash provided by (used in) financing activities (3,647,000) 42,217,000 (1,770,000)
-------------------------------------------------
Increase (decrease) in cash and cash equivalents (21,740,000) 30,953,000 (2,772,000)
Cash and cash equivalents at beginning of year 31,608,000 655,000 3,427,000
-------------------------------------------------
Cash and cash equivalents at end of year $ 9,868,000 $31,608,000 $ 655,000
=================================================
</TABLE>
<PAGE> 12
AHI Healthcare Systems, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stockholder note receivable issued in connection
with common stock issuance $ - $ 450,000 $ -
Issuance of promissory note for severance
settlement 1,200,000
Issuance of common stock for stockholder notes 3,000,000
Exchange of common stock for Series T
preferred stock (3,000,000)
Issuance of common stock for Series T
preferred stock 3,000,000
Redemption of Series T preferred stock (3,000,000)
Issuance of promissory note for repurchase and
cancellation of common stock 230,000
DETAILS OF BUSINESSES ACQUIRED IN PURCHASE
TRANSACTIONS:
Fair value of assets acquired $ 2,173,000 $ 19,305,000 $ 9,895,000
Less:
Issuance of promissory notes 327,000 1,703,000 3,193,000
Other liabilities assumed 1,343,000 14,166,000 3,197,000
Common stock issued - - 1,962,000
----------------------------------------------
Cash paid for acquisitions (503,000) (3,436,000) (1,543,000)
Cash of acquired businesses - 955,000 305,000
----------------------------------------------
Net cash paid $ (503,000) $ (2,481,000) $(1,238,000)
==============================================
</TABLE>
See accompanying notes.
<PAGE> 13
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
AHI Healthcare Systems, Inc., a Delaware corporation ("AHI") is a health care
management services organization which integrates individual and small groups of
primary care physicians and specialists into local managed health care delivery
systems ("Physician Networks"), for which AHI provides medical management
systems and services. AHI currently manages the provision of prepaid health care
services for 10 Physician Networks in Southern California, three in Northern
California, 24 in Texas, six in Florida and eight in Georgia. AHI is developing
additional Physician Networks in several other states. AHI, its subsidiaries and
the Physician Networks are collectively referred to herein as the "Company."
In states, such as Florida, where general business corporations are permitted
to own medical practices, the Company's Physician Networks are owned by
wholly-owned subsidiaries. In states, such as California and Texas, that
prohibit the corporate practice of medicine, the Physician Networks are owned
by one or more physicians qualified under the laws of such states to hold an
ownership interest therein (a "Qualified Physician"). Qualified Physicians
typically are providers of medical services to the Physician Network in which
they hold an ownership interest and also may have other contractual,
employment, or independent contractor relationships with the Company. In some
of the Southern California Physician Networks, for all periods presented
minority interests exist in such networks. These minority interests have no
rights or ability to make decisions or prevent AHI from exercising its
unilateral control over the Physician Networks. For the networks where a
minority interest exists, at least a majority ownership interest in each
Physician Network is held by at least one or more Qualified Physicians who are
also officers, directors or significant stockholders of AHI. Effective January
31, 1997, all such minority interest have been acquired by the applicable
Physician Network for aggregate consideration consisting of AHI common stock
valued at approximately $200,000.
Effective January 1, 1994, two of the Physician Networks, and January 1, 1995,
the remaining Physician Networks, entered into a Management Agreement (the
"Agreements") with AHI. The Agreements codify AHI's previously existing
unilateral and perpetual control over the business enterprise of the Physician
Networks. Such Agreements reflect the intent and operating practices of the
Company during all periods prior to the execution of the Agreements. The
Agreements have terms of 20 years, which renew automatically and perpetually for
successive 10 year periods, and may only be terminated for cause by the
Physician Networks. The Company may unilaterally terminate the Agreements
without cause. Under the Agreements, in return for the assignment of revenue of
the
<PAGE> 14
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
Physician Networks, AHI has agreed to provide financial management, information
systems, marketing and public relations, risk management, and administrative
support for claims processing, utilization review and quality of care. As
compensation for its services, AHI retains that portion of each Physician
Network's assigned revenue which equals the total of (i) a reimbursement of all
of its direct and indirect costs, including an allocated portion of AHI's
overhead expense, (ii) a fixed monthly marketing fee, (iii) a percentage of the
assigned gross revenues and (iv) any and all profits earned in shared risk pools
between the Physician Network, HMOs and hospitals. In addition, through its
control over the board of directors of the Physician Network, AHI has the right
and ability to cause the Physician Network to declare and pay a discretionary
bonus to AHI. This bonus is based in part on the cost savings AHI has generated,
but is not based on any predetermined formula. Consequently, the above
contractual arrangement results in all profits of the Physician Network inuring
to the benefit of AHI, and thus AHI has all of the interest in any residual
profits of the Physician Network. Should such amount remitted not be sufficient
to pay the obligations of the Physician Network, AHI has the right, but not the
obligation, to loan funds to the Physician Network based upon terms (including
interest rate) and conditions agreeable to both parties.
Most states within which the Company operates prohibit AHI from owning an
organization which engages in the practice of medicine. Therefore,
notwithstanding the aforementioned services provided by AHI, the Physician
Networks are solely responsible for the practice of medicine and delivery of
medical services, including but not limited to diagnosis, treatment, referrals,
quality assurance, utilization management, surgery and therapy. Additionally,
the Physician Networks retain full authority of approval over all provider and
payor contracts and physician credentialing. At its cost, AHI has assumed the
obligations for all facilities, medical and non-medical supplies, and the
employment of non-physician personnel. Also, AHI has the right to sell, purchase
and encumber all assets of the Physician Networks.
AHI has direct or indirect unilateral and perpetual control over the assets and
operations of each of the Physician Networks for all periods presented by means
other than owning the majority of the voting stock of those Physician Networks
that are required by state law to be owned by Qualified Physicians. In such
states, Qualified Physician shareholders have entered into a succession or
similar agreement which requires such shareholders to sell to a designee of AHI
such shareholders' shares of stock for a nominal amount if such shareholders'
employment or other contractual relationship with AHI is terminated or otherwise
in the sole discretion of AHI. This ensures
<PAGE> 15
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
unilateral and perpetual control over the Physician Networks by AHI. Moreover,
AHI's determination that it has unilateral and perpetual control over the
Physician Networks is supported by the significant level of responsibilities
delegated to AHI by the Physician Networks through the Agreements as well as the
terms of these Agreements. By virtue of the Agreements, each of AHI's Physician
Networks operates exclusively on behalf of AHI and conducts no business nor
holds any assets other than the contracts it has with AHI, HMOs and independent
physicians. AHI controls each of the Physician Networks' business enterprise by
structuring, negotiating and executing all of their physician, payor and
management contracts, by operating as the single source of all business
decisions made on behalf of the Physician Network, by employing significantly
all of the personnel which operate the Physician Network, and by unilaterally
controlling the purchase, sale, maintenance and risk management of all Physician
Network assets, including the leveraging of such assets, as is demonstrated with
the Bank Facility agreement (see Note 5). Additionally, as described above,
because of the management fee arrangement between AHI and the Physician Network,
and due to AHI's unilateral control of the Physician Networks, there is no
residual interest in the Physician Networks which inures to the benefit of the
shareholders of the Physician Networks from profits of the Physician Networks,
or a disposition of the Physician Networks by the Company, should a disposition
occur. Therefore, notwithstanding the lack of legal majority ownership in the
states which prohibit the corporate practice of medicine, but due to a
parent-subsidiary relationship under generally accepted accounting principles,
as described above, AHI has consolidated the financial statements of the
Physician Networks. It is AHI's belief that consolidation of the financial
statements of the Physician Networks 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 Company also consolidates all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
<PAGE> 16
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
The Company managed health care services for prepaid covered lives under
contract with various health plans as follows:
<TABLE>
<CAPTION>
Enrollees at
December 31
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Commercial 162,119 147,982 104,839
Senior 20,865 24,048 10,857
Medicaid 23,505 7,528 2,632
-----------------------------------
206,489 179,558 118,328
===================================
</TABLE>
RISKS AND UNCERTAINTIES
The preparation of the consolidated 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.
CASH AND CASH EQUIVALENTS
Cash equivalents are considered to be liquid investments with a maturity of
three months or less when purchased.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents, shared-risk receivables and
stop-loss receivables. Cash and cash equivalents are invested in an investment
fund of a financial institution. The Company's credit risk with respect to
shared-risk and stop-loss receivables is limited since amounts are generally due
from large HMOs or insurance companies.
<PAGE> 17
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated on the basis of cost.
Depreciation of equipment is provided using the straight-line method over the
estimated useful lives of the assets, and amortization of leasehold improvements
is provided using the straight-line method over the shorter of the lease period
or the estimated useful lives of the leasehold improvements.
GOODWILL
Goodwill totaling $28,667,000 arose as the result of several acquisitions in
1996, 1995 and 1994. This amount represents the excess of the consideration paid
and liabilities assumed over the fair value of the assets acquired. Such
acquisitions are discussed in Note 2. At each reporting period, the Company
reviews the carrying value of goodwill to determine if facts and circumstances
exist which would suggest that goodwill may be impaired, or that the
amortization period needs to be modified. Among the factors considered by the
Company in making the evaluation are changes in the Company's payor or physician
contracts, local market developments, changes in regulations, national health
care trends, changes in third party payment patterns and other factors. Using
these factors, if events or circumstances are present which may indicate
impairment, the Company will prepare a projection of the undiscounted cash flows
of the acquired enterprise and determine if goodwill is recoverable based on
these undiscounted cash flows. If an impairment is indicated, then an adjustment
will be made. Because substantially all of the acquisitions by AHI have not
included acquisition of other long-lived assets, the adjustment will be equal to
the difference between the carrying value of the goodwill balance and the
undiscounted cash flows. Based upon a review of the carrying value of goodwill
and the Company's significant operating loss in 1996 resulting primarily from
recent adjustments to increase risk share receivable and medical costs reserves
and high administrative service costs as a percentage of revenue compared to the
industry, the Company recorded a $14,601,000 charge to write off goodwill
balances associated with these acquisitions, except for goodwill associated with
The Healthcare Partnership ("THP") acquisition in Houston, Texas. Although, THP
had a deficiency in its assets at the February 1995 acquisition date, the
Company has made modifications to the payor and physician contracts, and
increased administrative efficiencies to address the operating deficiencies at
THP. As a result of these changes, the Company estimates that it will be able to
recover the goodwill acquired in the THP transaction.
<PAGE> 18
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
Goodwill has been recorded at cost and is being amortized on the straight-line
method over 20 years. Accumulated amortization was $1,199,000 and $1,365,000 at
December 31, 1996 and 1995, respectively.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which was effective for the Company beginning January 1, 1996. SFAS No. 121
requires that long-lived assets and certain intangible assets associated with
those assets be reviewed for impairment. None of the Company's goodwill
described above is associated with any other long-lived assets. The adoption of
SFAS No. 121 at January 1, 1996 had no significant impact on the Company's
financial statements when adopted.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123") "Accounting for
Stock-Based Compensation," which became effective for the current fiscal year.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
expense 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 expense 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 6).
DEFERRED COMPENSATION EXPENSE
Upon the consummation of employment agreements with certain physician employees,
the Company sold such employees shares of AHI common stock at a price below
fair value. Differences between the purchase price of shares sold and the fair
value of AHI shares at the date of sale were recorded as deferred compensation
expense. The deferred compensation expense is amortized on the straight-line
method over the related employment periods.
<PAGE> 19
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEDICAL REVENUES AND COST RECOGNITION
Operating revenue of the Company consists primarily of fees for medical services
provided by the Physician Networks under capitated contracts with various
managed care payors including health maintenance organizations (HMOs). For the
years ended December 31, 1996, 1995 and 1994, FHP Inc. represented approximately
17%, 22% and 35%, respectively, of the Company's total operating revenue, and
CareAmerica Southern California, Inc. represented approximately 6%, 11% and 22%,
respectively, of the Company's total operating revenue. Upon completion of the
THP acquisition in February 1995, the Company's revenue from PacifiCare Health
Systems, Inc. represented approximately 33% and 28%, respectively, of AHI's
total operating revenue for the years ended December 31, 1996 and 1995. On a pro
forma basis for each of the fiscal years 1996 and 1995, after giving effect to
the merger between FHP, Inc. and PacifiCare Health Systems, Inc., approximately
50% of the Company's total operating revenue would have been attributable to
payor agreements with the merged FHP/PacifiCare entity. Capitation revenue under
HMO contracts is prepaid monthly to the Physician Networks (and assigned to AHI)
based on the number of enrollees electing any one of the Physician Networks as
their health care provider. HMO contracts also include provisions to share in
the risk for hospitalization whereby the Company can earn additional incentive
revenue or incur penalties based upon the utilization of hospital services.
Estimated shared-risk amounts receivable from the HMOs are recorded based upon
hospital utilization and associated costs incurred by HMO enrollees, compared to
budgeted costs. Differences between actual contract settlements and estimated
receivables relating to HMO risk-sharing arrangements are recorded in the year
of final settlement. Included in accounts receivable as of December 31, 1996 and
1995 are $4,177,000 and $6,624,000, respectively, of estimated amounts due under
these arrangements.
In connection with providing services to HMO enrollees, the Physician Network is
responsible for the medical services its affiliated physicians provide to
assigned HMO enrollees. The cost of health services is recognized in the period
in which it is provided and includes an estimate of the cost of services which
have been incurred but not yet reported. The estimate for accrued medical costs
is based on actuarial projections of costs using historical studies of claims
paid. Estimates are continually monitored and reviewed and, as settlements are
made or estimates adjusted, differences are reflected in current operations.
The Company participates in reinsurance protection programs which limit the
amount of risk it ultimately bears by providing reimbursement payments once
medical services provided to an individual enrollee exceed an agreed-upon
amount. Estimates of reinsurance recoveries are
<PAGE> 20
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEDICAL REVENUES AND COST RECOGNITION (CONTINUED)
included in accounts receivable in the accompanying consolidated financial
statements and, in the opinion of management, adjustments, if any, would not
have a material effect on the consolidated financial position of the Company.
MEDICAL MALPRACTICE LIABILITY INSURANCE
The Company maintains claims-made basis medical malpractice insurance coverage
for their employed physicians of $1,000,000 per incident and $3,000,000 in the
aggregate on an annual basis. Claims-made coverage covers only those claims
reported during the policy period. An estimate of losses, if any, for incurred
but unreported claims is recorded based upon historical experience. In December
1996, the Company renewed its existing policies and expects to be able to
continue to obtain coverage in future years. Further, it has been the Company's
experience that substantially all claims are reported within a year of the
incident date.
The individual physicians who contract with the Physician Networks carry their
own medical malpractice insurance.
In addition to the above insurance coverage, the Company maintains comprehensive
health care liability insurance on a modified occurrence basis with total
coverage of $5,000,000 per claim.
MEDICAL NETWORK OPERATING EXPENSES
Medical network operating expenses consist primarily of salary-related expenses
for the provision of medical management services to the Physician Networks. The
majority of costs associated with medical management services fluctuate
commensurate with enrollment and the number of contracted providers, and consist
primarily of claims administration, eligibility management, quality and
utilization management, credentialing and other costs related to the Company's
service center.
NETWORK DEVELOPMENT EXPENSES
Network development costs are expensed as incurred.
<PAGE> 21
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company (except Camino Real Medical Group, Inc. which is a C-Corporation)
operated as Subchapter S Corporations through December 31, 1993. Effective
January 1, 1994, AHI and subsidiaries elected to operate as a C-Corporation,
while the Physician Networks continued to elect S-Corporation status through
December 31, 1994. Effective January 1, 1995, all except two of the Physician
Networks, and effective January 1, 1996, all but one of the Physician Networks,
elected C-Corporation status. As a result of the S-Corporation status, the
Company through December 31, 1993, was not subject to federal income taxes;
however, the Physician Networks through December 31, 1994 (and AHI through
December 31, 1993) were subject to California franchise tax at a reduced rate of
2.5%.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.109"), under which
deferred income tax assets and liabilities are recognized for the differences
between financial and income tax reporting bases of assets and liabilities based
on enacted tax rates and laws. The cumulative effect of adopting SFAS 109 was
not significant, and the impact on the combined results of operations for the
three years ended December 31, 1996 also was not significant. Income taxes have
been provided using the liability method in accordance with SFAS No.109.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of common
shares and common equivalent shares for stock options and a warrant (when
dilutive) outstanding during the period for which the calculation is made,
giving retroactive effect to the November 1994 122:1 stock split, the June 1995
1.36004:1 stock split, and the September 1995 reverse stock split of .78444:1.
The stock options and warrants were anti-dilutive for the years ended December
31, 1996 and 1995 and were dilutive for the year ended December 31, 1994.
In February 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earning per Share." This
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock. SFAS No.
128 is not in effect for the Company for 1996, but will be in effect for
financial statements issued for period ending after December 15, 1997,
including interim periods. The Company does not expect the adoption of SFAS No.
128 to have a material effect on its net income per share.
PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) and pro forma net income (loss) per share have been
determined assuming the Company had been taxed as a C-Corporation for all
periods presented.
RECLASSIFICATIONS
Certain reclassifications of 1995 and 1994 amounts have been made to correspond
with the 1996 presentation.
<PAGE> 22
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
During the years ended December 31, 1996 and 1995, AHI made acquisitions as set
forth below, each of which has been accounted for as a purchase. The
consolidated financial statements include the operating results of each business
from the date of acquisition.
PRIVATE PHYSICIANS GROUP AT STANFORD ("PPGS")
Effective February 28, 1996, AHI, through a physician stockholder of a Physician
Network, acquired PPGS for consideration totaling $327,000. This acquisition
resulted in goodwill totaling $2,229,000.
PRIMARY CARE MEDICAL GROUP AT LITTLE COMPANY AT MARY HOSPITAL, INC. ("PCMG")
On February 28, 1995, AHI, through its stockholders, purchased the entire 50%
minority interest from five minority stockholders of PCMG for cash consideration
totaling $2,000,000. Each of the five minority stockholders also entered into a
covenant not-to-compete with the Company for $29,000 per stockholder per year
for 10 years, payable in quarterly installments of approximately $7,000 per
stockholder beginning June 1, 1995. The intangible asset associated with the
covenant not-to-compete was written off in connection with the Goodwill
write-off (Note 1). In addition, the Company entered into provider agreements
with each minority stockholder for a period of 10 years, which contain certain
minimum payment guarantees. The purchase price in excess of assets acquired was
$4,133,000.
SOUTHWEST MEDICAL CARE, INC., DBA THE HEALTHCARE PARTNERSHIP ("THP")
On February 1, 1995, AHI, through its stockholder, purchased substantially all
assets and assumed certain liabilities of THP, a medical group operating in
Texas for $1,138,000 in cash and $35,000 in a note payable. The acquisition
price in excess of assets acquired was $12,505,000.
INTEGRATED MEDICAL MANAGEMENT SYSTEMS, INC. AND INTEGRATED MEDICAL MARKETING
SYSTEMS, INC. (COLLECTIVELY, "IMMS")
On December 12, 1994, the Company issued approximately 192,000 shares of AHI
common stock and notes payable of $303,000 in exchange for the outstanding
common stock of IMMS. Based on valuation of the common stock issued at $10.22
per share, the purchase price totaled $2,265,000 and resulted in goodwill of
$2,493,000.
Concurrent with the acquisition, non-qualified stock options to purchase 942,413
shares of AHI common stock at an exercise price of $14.06 per share were granted
under the LT Plan to two former stockholders of IMMS, who became senior officers
of the Company. In addition, options
<PAGE> 23
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
to purchase an additional 71,113 shares of AHI common stock at $14.06 per share
under the LT Plan were granted to these senior officers.
CAMINO REAL MEDICAL GROUP, INC. ("CRMG")
Effective August 1, 1994, AHI, through a physician stockholder, purchased CRMG
for consideration totaling $4,250,000, consisting of $1,360,000 in cash and a
promissory note of $2,890,000 bearing interest at the applicable Federal
short-term rate payable quarterly over three years. Principal is due in two
installments of $850,000 and $2,040,000 in February 1996 and July 1997,
respectively (see Note 5). In a series of transactions to effect the purchase,
AHI advanced the medical group $1,360,000. The acquisition resulted in goodwill
of $7,141,000.
Summarized below are the unaudited pro forma consolidated results of operations
for the Company as if the acquisitions of the above mentioned businesses had
taken place as of January 1, 1995. Such pro forma results are not necessarily
indicative of what the actual consolidated results of operations might have been
if the acquisitions had been effective at the beginning of each year.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------
<S> <C> <C>
Total operating revenues $119,051,000 $119,011,000
Net loss (54,350,000) (3,627,000)
Net loss per share $ (3.74) $ (0.31)
</TABLE>
3. INCOME TAXES
Deferred income taxes arise principally from the use of different asset lives
for income tax purposes than for financial statement purposes.
<PAGE> 24
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES (CONTINUED)
The components of the provision for income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 43,000 $ - $ 922,000
State 62,000 20,000 220,000
---------------------------------------------
105,000 1,142,000
20,000
Deferred:
Federal 608,000 (960,000) (358,000)
State 367,000 (279,000) (59,000)
---------------------------------------------
975,000 (1,239,000) (417,000)
Total:
Federal 651,000 (960,000) 564,000
State 429,000 (259,000) 161,000
=============================================
$ 1,080,000 $(1,219,000) $725,000
=============================================
</TABLE>
Temporary differences and carryforwards that result in deferred income tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Deferred income tax assets:
Depreciation and amortization $ 76,000 $ 22,000
Net operating loss carryforward 13,961,000 895,000
Accrued expenses 1,267,000 434,000
-----------------------------
15,304,000 1,351,000
Valuation allowance (15,304,000) (493,000)
=============================
Net deferred income taxes $ -0- $ 858,000
=============================
</TABLE>
<PAGE> 25
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES (CONTINUED)
The differences between the provision for income tax expense at the federal
statutory rate of 34% and that showing in the Consolidated Statements of
Operations are summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Tax provision (credit) at statutory rate $(18,084,000) $ (1,469,000) $ 774,000
State taxes, net of federal benefit (283,000) (259,000) 123,000
Effect of S-Corporation elections and
revocations - - (121,000)
Goodwill amortization 5,226,000 498,000 53,000
Loss (with)/without carryforward
benefit 14,189,000 - (57,000)
Other 32,000 11,000 (47,000)
-------------------------------------------------
$ 1,080,000 $ (1,219,000) $ 725,000
=================================================
</TABLE>
Effective January 1, 1995, all but two of the Physician Networks, and effective
January 1, 1996, all but one of the Physician Networks, revoked their
S-Corporation status. As a result, approximately $750,000 of net operating
losses are not available to offset future California income otherwise taxable at
1.5%.
The Company has net operating loss carryforwards of approximately $48,400,000
which may be utilized in future years before expiring between 2007 and 2011. Of
this amount, approximately $1,200,000 arose from pre-acquisition losses of an
acquired Physician Network, the use of which is limited to future taxable income
of this Physician Network.
Taxes paid totaled approximately $100,000, $1,253,000 and $363,000 in 1996, 1995
and 1994, respectively.
<PAGE> 26
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
4. RELATED PARTY TRANSACTIONS
AHI entered into an employment agreement with Leonardo A. Berezovsky, M.D.,
AHI's Chairman and Chief Executive Officer, effective November 1, 1994. The
agreement provides for an initial base salary of $250,000 per annum, which may
be increased or decreased (but not below the initial base salary) in subsequent
years by the Compensation Committee of the Board of Directors based upon such
Committee's review of Dr. Berezovsky's performance. Dr. Berezovsky is also
eligible to receive, at the discretion of the Compensation Committee and based
upon performance, a bonus of up to 50% of his base salary. The agreement is for
a term of six years and, every 12 months during the term, automatically renews
for an additional 12 months. The agreement may only be terminated for cause and,
in the event of a "change of control" (as defined in the agreement), Dr.
Berezovsky is entitled to a lump sum payment equal to the sum of his annual base
salary through the remaining term of the agreement plus the value of his bonus
compensation, other incentive awards and benefits received in the year prior to
the change of control multiplied by the remaining years of the term of the
agreement. Dr. Berezovsky was paid approximately $1,600,000 in accordance with
the terms of his agreement as a result of the merger between the Company and
FPA Medical Management, Inc.
In May 1995, AHI entered into an employment agreement with a Director of
AHI for a term of seven years, expiring in May 2002, which provides for
annual compensation of $25,000. Additionally, this Director's medical
corporation entered into consulting agreements with three of the Physician
Networks for the same period, with each agreement providing compensation of
approximately $50,000 annually.
In connection with the purchase of IMMS, the Company assumed the obligation to
repay certain working capital loans totaling $299,000 plus accrued interest of
$17,000 to the former owners of IMMS, who became stockholders and officers of
AHI. These notes bear interest at 8% and were paid in January 1996. Interest
expense on these notes totaled $-0-, $23,000 and $1,000 in 1996, 1995 and 1994,
respectively. Additionally, the Company leases certain property from a trust of
a former owner of IMMS. Annual rental payments totaled approximately $94,000,
$75,000 and $-0- in 1996, 1995 and 1994, respectively. The lease expires in
April 2001, unless renewed by the Company for up to an additional ten years.
In addition, the Company issued promissory notes to the former stockholders of
IMMS in the amount of $303,000 as part of the purchase price. These notes are
non-interest bearing and have monthly installments ranging from $17,000 to
$30,000. The balance of these notes were paid in full as of February 1996.
Through December 31, 1993, three stockholders of AHI collectively advanced
$475,000 to a Physician Network for operations. Of these advances, $125,000 was
repaid in 1994 and the remaining $350,000 was paid in 1995. Interest expense on
these notes totaled $16,000 in 1995 and $41,000 in 1994.
The Company has capitated and fee-for-service provider contracts with physician
professional corporations owned by physician stockholders of the Company.
Medical costs incurred totaled approximately $989,000, $760,000 and $391,000 for
1996, 1995, and 1994, respectively.
<PAGE> 27
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
In August 1994, the Company issued shares of common stock to two of its
directors, one of which is an officer, in exchange for promissory notes, each in
the amount $1,500,000. The promissory notes were secured by other shares in the
Company held by these directors. The common stock was exchanged by the Company
for an equal number of shares of Series T preferred stock issued by the Company
in November 1994. These shares of preferred stock were redeemed by the Company
on December 31, 1994, in exchange for cancellation by the Company of the
outstanding obligations under the promissory notes.
Effective January 1, 1994, the Company entered into a consulting agreement with
one of its directors to assist the Company in analyzing claims and related
procedures. The consulting agreement provides for monthly payments of $7,500 and
can be terminated without cause by the Company. In exchange for services
provided, the Company paid $90,000 in 1996, 1995 and 1994, respectively. This
agreement was terminated in March 1997.
<PAGE> 28
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------
<S> <C> <C>
Note payable for the acquisition of Camino Real Medical Group, interest at the
applicable Federal short-term rate (6.58% at August 31, 1996 and 6.08% at
December 31, 1995), payable quarterly with principal due in two installments
in February 1996 and July 1997. Note is collateralized by a
letter of credit. $ - $2,890,000
Note payable to certain physicians in connection with acquisition
of the remaining minority interest in Affiliate for covenant not
to compete, payable quarterly through March 2005. Payment
is guaranteed by a certain Affiliate. 1,240,000 1,349,000
Note payable to former stockholder, interest at 4.51% annually,
with principal due in full in January 1996. Payment is
guaranteed by certain Affiliates. - 230,000
Other notes payable 291,000 98,000
--------------------------
1,531,000 4,567,000
Less current portion 437,000 3,364,000
--------------------------
$1,094,000 $1,203,000
==========================
</TABLE>
<PAGE> 29
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE (CONTINUED)
The Company has a revolving line of credit with two banks (the "Bank Facility")
totaling $15,000,000 at December 31, 1996. Borrowings under the line of credit
bear interest at either the bank's prime rate plus 0.25% per annum or LIBOR plus
2.50%. The line of credit has a sublimit of $7,500,000 ($4,000,000 in 1994)
available for issuance of standby letters of credit at an annual fee of 2% of
the amount issued. The line of credit expires on May 15, 1997, and is guaranteed
by certain of the Physician Networks. The line is collateralized by AHI and the
guarantor's accounts receivable and unencumbered equipment. The line of credit
was also subject to financial covenants, including maintaining profitability,
minimum cash flow and other financial covenants.
The Company is currently in full compliance with all financial covenants under
the Bank Facility. However, at June 30, 1995, and from October 31, 1995 through
December 31, 1995, the Company was in default on its cash flow coverage ratio
covenant and obtained waivers from the Bank Facility lenders on August 21, 1995
and February 20, 1996, respectively, extending to all periods through March 30,
1996. The Company amended the Bank Facility effective March 31, 1996, namely the
cash flow coverage and debt coverage ratio covenants. Effective June 30, 1996,
the Bank Facility was again amended, deleting all financial covenants, namely
the cash flow coverage and debt coverage ratio covenants. At December 31, 1996,
the Company had no indebtedness under the line of credit agreement.
Interest paid on all obligations totaled $185,000, $427,000, and $59,000, in
1996, 1995, and 1994, respectively.
6. STOCKHOLDERS' EQUITY
STOCK SPLITS
All share amounts have been adjusted to reflect the November 1994 122:1 stock
split, the June 1995 1.36004:1 stock split and the September 1995 reverse stock
split of .78444:1.
STOCK TRANSACTIONS
Effective September 28, 1995, the Company completed an initial public offering
(the "Offering") of its common stock. The Company sold 3,600,000 shares and the
selling stockholders sold an additional 863,000 shares for $14.00 per share.
Proceeds from the Offering and the delivery of the related securities occurred
on October 4, 1995. Net proceeds to the Company totaled $44,539,000, after
deducting underwriting discounts and commissions and Offering costs.
<PAGE> 30
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK TRANSACTIONS (CONTINUED)
In May 1995, a Director of the Company purchased 32,000 shares of the Company's
common stock for $450,000 by delivery of a note which is receivable in monthly
installments commencing from January 1996 through May 2002. The note is secured
by the purchased shares and is included in Due from Stockholder. In addition,
the Company granted this Director 42,675 stock options exercisable in
installments over a seven year period at $14.06 per share.
In August 1994, the Company issued shares of its common stock to two of its
stockholders in exchange for promissory notes totaling $3,000,000. The shares
were exchanged for the Company's Series T Preferred Stock which was subsequently
redeemed in exchange for cancellation of the promissory notes.
On June 28, 1994, the Company entered into a stock repurchase and mutual release
agreement with a former director and stockholder. Pursuant to this agreement,
such stockholder's entire equity interest was repurchased by the Company for
$153,000 in cash and a note payable of $230,000. The note bears interest at the
rate of 4.51% per annum, with interest payable annually and principal and all
accrued but unpaid interest due and payable on January 31, 1996. The promissory
note is guaranteed by certain of the Physician Networks.
On May 5, 1994, the Company entered into a stock repurchase and mutual release
agreement (the Agreement) with a former officer of AHI. Under the terms of the
Agreement, the Company agreed to purchase the former officer's entire equity
interest representing approximately 19% of all the Company's outstanding stock
at the time of repurchase for $1.1 million and to settle all outstanding
employment-related disputes for $1.3 million. The settlement payments were made
in cash ($1.2 million) and a note payable ($1.2 million), which was paid in full
in 1995. The Company incurred $59,000 and $69,000 in interest expense in 1995
and 1994, respectively. This former officer also received an additional $300,000
upon the completion of the Company's initial public offering in 1995 in
connection with the Agreement.
STOCK OPTIONS
The Company has adopted four stock option plans, the AHI Executive Stock Option
Plan (the "Executive Plan"), the 1994 and 1995 AHI Long-Term Incentive Plan (the
"LT Plans"), and the 1995 Non-Employee Directors Stock Option Program. In
November 1993, the options granted under the Executive Plan were exchanged by
the optionholders for 1,075,404 options under the 1994 LT Plan.
<PAGE> 31
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Under the LT Plans, awards of options of AHI common stock may be granted to
employees and consultants as determined by the Compensation Committee. The LT
Plans also contain provisions permitting awards of restricted stock. The terms
of any awards of options and restricted stock will be specified in each
agreement as determined by the Compensation Committee, including, but not
limited to, the purchase price, term, exercise, vesting, restrictions and
employment termination. These options are exercisable ratably over periods up to
five years. Vested options can be subject to a two-year holding period. The LT
Plans and any awards thereunder terminate no later than ten years from date of
grant. A total of 3,028,222 options have been reserved for issuance under the LT
Plans.
On August 1, 1995 the Company adopted the 1995 Non-Employee Directors Stock
Option Program (the "Directors' Plan"). A total of 39,222 shares of Common Stock
have been reserved for issuance under the Directors' Plan. The Directors' Plan
authorizes the initial grant of options to purchase up to 7,500 shares of common
stock to each Non-Employee Director and authorizes an additional 1,000 option
grant annually. The option exercise price is determined by the average of the
fair market value of common stock for the fifth through ninth Nasdaq National
Market trading days following the grant. The term of each option is ten years
from the date of grant and vests over a four year period.
<PAGE> 32
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
1995
Long-Term Non-Employee
Incentive Directors
Plans Plan
-------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 1,075,404
Granted 1,013,526
Exercised -
Canceled -
-------------
Outstanding at December 31, 1994 2,088,930 -
Granted 707,615 15,000
Exercised -
Canceled (74,757)
----------------------------------
Outstanding at December 31, 1995 2,721,788 15,000
Granted 194,000 2,000
Exercised - -
Canceled (221,389)
----------------------------------
Outstanding at December 31, 1996 2,694,399 17,000
==================================
</TABLE>
Stock options are granted at fair market value of the common stock at the date
of grant. Stock options generally expire ten years from the date of grant. Stock
options generally vest over a four to five year period, with equal amounts
vesting on each anniversary from the date of grant.
<PAGE> 33
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The weighted average fair value of the stock options granted during 1996 was
$6.20. 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 dividend yield of 0%; expected life of 1.7 years; and expected
volatility of 48%. The expected life of the 1996 stock option grants was
computed using an expiration date less than the remaining contractual life of
the option because AHI became a subsidiary of FPA Medical Management, Inc. on
March 17, 1997 (see Note 9).
The outstanding stock options at December 31, 1996 have a weighted average
remaining contractual life of 0.21 years. Stock options totaling 1,498,826
shares were exercisable at December 31, 1996 and have a weighted average
exercise price of $10.73 per share.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards because the stock options were granted at
fair market value at the date of grant. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net loss and net loss per
share would have been $(54,591,000) and $(3.76), respectively for 1996 and the
Company's pro forma net loss and net loss per share would have been $(3,217,000)
and $(.27), respectively for 1995. 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.
Following is a summary of outstanding stock options at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Stock Options Remaining Average Stock Options Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices December 31, 1996 Life Price December 31, 1996 Price
----------------- -------------------- -------------- ------------ --------------------- ------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - $ 7.02 1,209,279 0.21 $ 6.9285 709,256 $ 7.0200
$14.00 - $14.33 1,502,120 0.21 14.0526 789,570 14.0558
---------- ---------- -------- ---------- ---------
$ 6.00 - $14.33 2,711,399 $ 0.21 10.8752 $ 1,498,826 10.7264
========== ========== ======== =========== =========
</TABLE>
<PAGE> 34
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Pursuant to AHI's merger with FPA on March 17, 1997 (see Note 9), AHI stock
option grants totaling 1,207,279 shares at prices less than $8.99 per share
became fully exercisable and were converted directly into 108,208 shares of FPA
common stock. AHI stock options granted at a price greater than $8.99 totaling
15,000 shares granted pursuant to the 1995 Non-Employee Director Stock Option
Plan were converted into FPA stock options. The remaining 1,489,120 stock
options outstanding, which were granted at prices greater than $8.99, were
canceled.
WARRANTS
In connection with the Company's revolving line of credit agreement (see Note
5), AHI granted a warrant to the bank to purchase 53,343 shares of its common
stock at $14.06 per share which expires on May 18, 2000. The warrant may be
converted to shares of common stock equal to the aggregate fair value of
issuable shares less the total exercise price divided by the fair value per
share on the conversion date. Pursuant to AHI's merger with FPA on March 17,
1997 (see Note 9), the warrant was converted into an FPA warrant.
7. COMMITMENTS
The Company leases its office facilities and various types of equipment under
operating leases. Lease terms generally range from three to 10 years with
renewal options. Many of the leases provide that the Company pay for taxes,
maintenance, insurance and other expenses, and contain rent escalation clauses.
Future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997 $3,668,000
1998 3,119,000
1999 1,938,000
2000 1,374,000
2001 893,000
Thereafter 2,100,000
-----------
$13,092,000
===========
</TABLE>
Total rent expense was $3,731,000 in 1996, $2,377,000 in 1995, and $910,000 in
1994.
<PAGE> 35
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
8. CONTINGENCIES
The Company is involved in litigation arising in the normal course of business.
Management, in consultation with legal counsel, has determined that any such
contingencies would not materially affect the Company's financial position or
operating results.
The Company is a defendant in a purported class action securities lawsuit
entitled In re AHI Healthcare Systems, Inc. Securities Litigation filed in the
United States District Court for the Central District of California, Western
Division. The suit was initially filed against the Company, certain of its
officers and directors, and its Underwriters on December 20, 1995. The suit
asserts that the Company, among other things, artificially inflated the price of
its stock by misleading securities analysts and by failing to disclose in its
initial public offering prospectus alleged difficulties with the acquisition of
the Lakewood Health Plan. The plaintiffs seek unspecified damages on behalf of
the stockholders who purchased AHI common stock between September 28, 1995 and
December 19, 1995. The Company intends to vigorously defend this lawsuit. The
Company does not expect that the outcome of the lawsuit will have a material
adverse effect on the financial condition or results of operations of the
Company.
9. SUBSEQUENT EVENTS
On March 17, 1997, AHI completed a merger with FPA Medical Management, Inc.
("FPA"). AHI was merged with and into FPA Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of FPA. Pursuant to the merger
agreement, AHI became a wholly-owned subsidiary of FPA and each outstanding
share of AHI common stock was exchanged for 0.391 shares of FPA common stock.
The shares of FPA common stock issued to the AHI stockholders were registered
through a registration statement filed under the Securities Act of 1933, as
amended. AHI's merger with FPA has been treated as a tax-free reorganization and
accounted for as a pooling of interests.
The Department of Corporations ("DOC"), the regulatory body for all managed care
plans in the state of California, and the Company have recently discussed
whether, under the DOC's current regulatory interpretation, the Company's
operations in California, as currently conducted, meet the definition of a
health service plan. As a result of such discussions, the Company voluntarily
determined to commence the process of preparing, through a wholly-owned
subsidiary, an application for restricted licensure as a Knox-Keene health care
service plan for its California operations. The restricted license, if granted,
allows for the receipt of capitation payments for hospital and medical
professional services, but does not allow the marketing of a health care
<PAGE> 36
AHI Healthcare Systems, Inc.
Notes to Consolidated Financial Statements (continued)
9. SUBSEQUENT EVENTS (CONTINUED)
service plan to employers and subscribers. The Company may be required to
restructure its California business operations (which, if such license is not
granted, could result in a reduction of revenue) and/or incur additional
administrative costs in the future to meet applicable regulatory requirements.
Although the Company expects the licensure process to have no material impact on
its operations, there can be no assurances the DOC will not impose requirements
adverse to the Company's business. In 1997, the Company requested the licensure
process be put on hold with the DOC because of its merger with FPA. On
February 24, 1997, FPA submitted a Notice of Material Modification to request
incorporation of the California activity of AHI under FPA's restricted DOC
license. On May 27, 1997, the DOC consented to the withdrawal of AHI's licensure
application.
<PAGE> 37
ITEM 7(b). Pro Forma Financial Information
FPA MEDICAL MANAGEMENT, INC. AND AHI HEALTHCARE SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FPA Medical AHI Healthcare Pro Forma Pro Forma
Management, Inc. Systems, Inc. Adjustments Consolidated
---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,594,877 9,868,000 15,462,877
Marketable securities 40,000,000 40,000,000
Accounts receivable - net 95,306,672 10,613,000 105,919,672
Accounts receivable - other 25,095,247 25,095,247
Due from related parties and minority stockholders 141,000 141,000
Prepaid expenses 5,397,174 1,101,000 6,498,174
Capitation deposit 15,409,771 15,409,771
Deferred income tax asset 3,478,751 3,478,751
------------ ----------- ----------- ------------
Total current assets 190,282,492 21,723,000 212,005,492
Property and equipment - net 40,139,332 6,250,000 46,389,332
Restricted cash and deposits 488,535 488,535
Goodwill - net 284,288,009 11,306,000 295,594,009
Intangible assets - net 6,667,269 6,667,269
Investment in GLHP 4,994,900 4,994,900
Deferred income tax asset 3,189,665 3,189,665
Other assets 9,146,431 309,000 9,455,431
------------ ----------- ----------- ------------
Total $539,196,633 39,588,000 -- 578,784,633
============ =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 46,215,398 15,757,000 35,300,000 A 97,272,398
Claims payable, including incurred but not reported claims 65,618,268 32,070,000 97,688,268
Accrued payroll and related liabilities 3,814,695 3,814,695
Income tax payable 2,294,159 2,294,159
Other liabilities 13,104,704 13,104,704
Current portion of accrued liability for professional
liability claims 1,297,790 1,297,790
Long-term debt, current portion 70,015,734 437,000 70,452,734
------------ ----------- ----------- ------------
Total current liabilities 202,360,748 48,264,000 35,300,000 285,924,748
Long-term debt, net of current portion 184,774,984 1,094,000 185,868,984
Accrued liability for professional liability claims,
net of current portion 4,217,000 4,217,000
Other long-term liabilities 4,325,862 4,325,862
------------ ----------- ----------- ------------
Total liabilities 395,678,594 49,358,000 35,300,000 480,336,594
Stockholders' equity:
Preferred stock
Common stock 49,542 145,000 (133,643) B 60,899
Additional paid-in capital 153,396,348 47,753,000 133,643 B 201,282,991
Stock payable 534,600 534,600
Due from stockholder (401,000) (401,000) (401,000)
Accumulated deficit (10,462,451) (57,267,000) (35,300,000) A (103,029,451)
------------ ----------- ----------- ------------
Total stockholders' equity 143,518,039 (9,770,000) (35,300,000) 98,448,039
------------ ----------- ----------- ------------
Total $539,196,633 39,588,000 -- 578,784,633
============ =========== =========== ============
</TABLE>
See notes to the pro forma condensed consolidated financial statements.
<PAGE> 38
FPA MEDICAL MANAGEMENT, INC. AND AHI HEALTHCARE SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FPA Medical AHI
Management, Healthcare Pro Forma
Inc. Systems, Inc. Consolidated
------------ ------------- ------------
<S> <C> <C> <C>
Managed care revenue $267,641,917 $115,775,000 $383,416,917
Fee-for-service revenue, net of
contractual deductions 172,676,696 3,011,000 175,687,696
------------ ------------- ------------
Operating revenue 440,318,613 118,786,000 559,104,613
Expenses:
Medical services expense 313,706,608 117,911,000 431,617,608
------------ ------------- ------------
126,612,005 875,000 127,487,005
General and administrative expense 99,230,319 40,416,000 139,646,319
Merger, restructuring and other unusual
charges 37,970,868 14,601,000 52,571,868
------------ ------------- ------------
Loss from operations (10,589,182) (54,142,000) (64,731,182)
Other income (expense):
Interest and other income 852,288 1,139,000 1,991,288
Interest expense (5,979,532) (185,000) (6,164,532)
------------ ------------- ------------
Total other income (expense) (5,127,244) 954,000 (4,173,244)
------------ ------------- ------------
Loss before income taxes (15,716,426) (53,188,000) (68,904,426)
Income tax expense -- 1,080,000 1,080,000
------------ ------------- ------------
Net loss $(15,716,426) $(54,268,000) $(69,984,426)
============ ============ ============
Net loss per share [C] $ (.72) $ (9.56) $ (2.56)
============ ============ ============
Weighted average shares outstanding [C] 21,702,786 5,678,509 27,381,295
============ ============ ============
</TABLE>
See notes to the pro forma condensed consolidated financial statements.
23
<PAGE> 39
FPA MEDICAL MANAGEMENT, INC. AND AHI HEALTHCARE SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
FPA Medical AHI Healthcare Pro Forma
Management, Inc. Systems, Inc. Consolidated
---------------- -------------- ------------
<S> <C> <C> <C>
Managed care revenue $ 49,880,875 $110,243,000 $160,123,875
Fee-for-service revenue, net
of contractual deductions 118,470,607 4,041,000 122,511,607
------------ ------------ ------------
Operating revenue 168,351,482 114,284,000 282,635,482
Expenses:
Medical services expense 113,742,878 88,997,000 202,739,878
------------ ------------ ------------
54,608,604 25,287,000 79,895,604
General and administrative expense 44,892,765 29,597,000 74,489,765
Merger, restructuring and other
unusual charges 1,589,908 -- 1,589,908
------------ ------------ ------------
Income (loss) from operations 8,125,931 (4,310,000) 3,815,931
Other income (expense):
Interest and other income 609,297 520,000 1,129,297
Interest expense (2,177,943) (530,000) (2,707,943)
------------ ------------ ------------
Total other expense (1,568,646) (10,000) (1,578,646)
------------ ------------ ------------
Income (loss) before income taxes 6,557,285 (4,320,000) 2,237,285
Income tax expense (benefit) 2,723,320 (1,219,000) 1,504,320
------------ ------------ ------------
Net income (loss) $ 3,833,965 $ (3,101,000) $ 732,965
============ ============ ============
Net income (loss) per share [C] $ .28 $ (.67) $ .04
============ ============ ============
Weighted average shares
outstanding [C] 13,693,192 4,613,800 18,306,992
============ ============ ============
</TABLE>
See notes to the pro forma condensed consolidated financial statements.
23
<PAGE> 40
FPA MEDICAL MANAGEMENT, INC. AND AHI HEALTHCARE SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
FPA Medical AHI Healthcare Pro Forma
Management, Inc. Systems, Inc. Consolidated
---------------- -------------- ------------
<S> <C> <C> <C>
Managed care revenue $ 18,193,286 $ 58,721,000 $ 76,914,286
Fee-for-service revenue, net
of contractual deductions 39,498,164 2,025,000 41,523,164
------------ ------------ ------------
Operating revenue 57,691,450 60,746,000 118,437,450
Expenses:
Medical services expense 41,352,105 43,464,000 84,816,105
------------ ------------ ------------
16,339,345 17,282,000 33,621,345
General and administrative expense 13,607,073 14,911,000 28,518,073
------------ ------------ ------------
Income from operations 2,732,272 2,371,000 5,103,272
Other income (expense):
Interest and other income 186,955 115,000 301,955
Interest expense (187,364) (210,000) (397,364)
------------ ------------ ------------
Total other expense (409) (95,000) (95,409)
------------ ------------ ------------
Income before income taxes 2,731,863 2,276,000 5,007,863
Income tax expense 942,025 725,000 1,667,025
------------ ------------ ------------
Net income $ 1,789,838 $ 1,551,000 $ 3,340,838
============ ============ ============
Pro forma: (Note 2)
Adjustment to income tax expense $ (110,235) $ -- $ (110,235)
Net income $ 1,679,603 $ 1,551,000 $ 3,230,603
Net income per share $ .26 $ .33 $ .30
============ ============ ============
Weighted average shares
outstanding [C] 6,579,828 4,691,218 11,271,046
============ ============ ============
</TABLE>
See notes to the pro forma condensed consolidated financial statements.
24
<PAGE> 41
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES AND
AHI HEALTHCARE SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
(1) On March 17, 1997, FPA Medical Management, Inc. ("FPA") consummated the
merger (the "Merger") of a wholly owned subsidiary of FPA ("Merger Sub"), with
and into AHI Healthcare Systems, Inc., a Delaware corporation ("AHI"), pursuant
to an Agreement and Plan of Merger entered into as of November 8, 1996 as
amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of February
5, 1997 (the "Merger Agreement"). Pursuant to the Merger Agreement, AHI became a
wholly owned subsidiary of the Registrant and each outstanding share of AHI
common stock was converted into approximately .391 shares of FPA's common stock.
The shares of FPA's common stock issued to the AHI shareholders were registered
on a Registration Statement on Form S-4 filed under the Securities Act of 1933,
as amended, which was declared effective on February 13, 1997.
The Merger has been accounted for as a pooling of interests and the Pro
Forma Condensed Consolidated Financial Statements are a restatement of the
historical financial statements of FPA and AHI as if the Merger had been
consummated for all periods presented.
The following adjustments are necessary to reflect the pro forma
effects of the Merger.
<PAGE> 42
[A] Nonrecurring costs estimated to be $35,300,000 will be recorded in
connection with the Merger. These costs consist primarily of professional
fees, certain employee termination costs and charges associated with
conformance of accounting policies. Because such costs are nonrecurring,
they have not been recorded in the accompanying unaudited pro forma
condensed consolidated statements of operations. However, such costs were
charged to income in the period the Merger was consummated.
[B] Reflects the exchange of each share of AHI common stock for .391 shares (the
exchange ratio) of FPA common stock pursuant to the Merger. Based on AHI's
14,533,041 shares outstanding at December 31, 1996, the pro forma number of
additional shares of FPA common stock outstanding is 5,678,507 shares.
[C] The net income (loss) per share and the weighted average shares outstanding
was calculated based on the historical weighted average shares outstanding
(as restated for prior acquisitions and mergers) of FPA and AHI giving
effect to the shares of FPA common stock issued in connection with the
Merger at an exchange ratio of .391.
(2) The pro forma net income and net income per share information in the
1994 consolidated statement of operations for FPA reflect the effect on
historical results as if FPA had been a C Corporation rather than a S
Corporation for income tax purposes, and no tax benefit arose as a result of
the change in tax status.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 33-3760 and 333-2007) and Form S-8 (Nos. 33-00076, 333-16741 and
333-15755) of FPA Medical Management, Inc. of our report dated May 2, 1997, on
the consolidated financial statements of AHI Healthcare System, Inc. for the
year ended December 31, 1996, appearing in this Current Report on Form 8-K/A of
FPA Medical Management, Inc.
DELOITTE & TOUCHE LLP
San Diego, California
May 29, 1997
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-3760 and 333-2007 and Form S-8 Nos. 33-00076, 333-16741 and
333-15755) of FPA Medical Management, Inc. and in the related Prospectuses of
our report dated February 22, 1996, with respect to the 1995 and 1994
consolidated financial statements of AHI Healthcare Systems, Inc. included in
this Current Report (Form 8-K/A) of FPA Medical Management, Inc.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
May 28, 1997
