<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 30, 1998
FPA Medical Management, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-24276 33-0604264
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3636 Nobel Drive
San Diego, CA 92122
(Address of principal executive offices) (Zip Code)
(619) 453-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
On September 30, 1998, FPA Medical Management, Inc. ("FPA" or
the"Company") filed its Disclosure Statement and Plan of Reorganization (the
"Plan") with the Bankruptcy Court in Wilmington, Delaware. The scheduled filing,
which was first announced in July 1998, was required by the terms of FPA's
debtor-in-possession (DIP) financing agreement and the Bankruptcy Court's
scheduling order entered following the commencement of the Chapter 11 cases of
FPA and various of its affiliates and subsidiaries on July 19, 1998 and closely
follows the prenegotiated term sheet that FPA filed with its first day
petitions. Following approval of the Disclosure Statement by the Bankruptcy
Court, FPA will commence the solicitation of votes of its creditors for the
approval of the Plan.
In both its Disclosure Statement and the related hearing
notice mailed to FPA's creditors and the other interested persons and entities,
FPA also disclosed that The Official Committee of Unsecured Creditors, appointed
on August 3, 1998 in FPA's jointly administered Chapter 11 cases, had informed
the Company that the Committee does not support the Plan as proposed and that
negotiations are continuing among the Company, the Prepetition and DIP Bank
Groups and the Creditors Committee in advance of the Bankruptcy Court hearing
scheduled for October 28, 1998 on the adequacy of the Disclosure Statement.
Terms of the Plan provide for the cancellation of existing
equity holders interests; warrants to be distributed to general unsecured
creditors, including holders of the Company's 6.5% Subordinated Debentures due
2001; and a conversion of all or substantially all of FPA's prepetition secured
debt to equity.
The Company's notice and claims agent is in the process of
mailing notice of the November 17, 1998 general claims bar date established by
the Bankruptcy Court together with proof of claim forms to more than 50,000
creditors, equity holders and other interested persons and entities. FPA and
various of its affiliates and subsidiaries filed petitions under Chapter 11 in
the U.S. Bankruptcy Court for the District of Delaware in Wilmington on July 19,
1998 and various dates thereafter through August 7, 1998.
2
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
2.1 Plan of Reorganization dated September 30, 1998
2.2 Disclosure Statement dated September 30, 1998
99 Press Release dated October 5, 1998.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ Stephen J. Dresnick
------------------------------------
Date: October 6, 1998 Stephen J. Dresnick
Chairman and Chief Executive Officer
4
<PAGE> 5
EXHIBIT INDEX
Number Exhibit
2.1 Plan of Reorganization dated September 30, 1998
2.2 Disclosure Statement dated September 30, 1998
99 Press Release dated October 5, 1998.
5
<PAGE> 1
Exhibit 2.1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
- - - - - - - - - - - - - - - x
: Chapter 11
In re :
:
FPA MEDICAL MANAGEMENT, : Case Nos. 98-1596 (PJW)
INC., et al., : through 98-1685 (PJW)
:
Debtors. :
: Jointly Administered
- - - - - - - - - - - - - - - x
JOINT PLAN OF REORGANIZATION
OF FPA MEDICAL MANAGEMENT, INC.
AND ITS SUBSIDIARIES AND AFFILIATES
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
(ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Attn: John Wm. Butler, Jr.
J. Eric Ivester
J. Gregory St. Clair
- and -
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
LLP
One Rodney Square
Wilmington, Delaware 19899
Attn: Gregg M. Galardi
ATTORNEYS FOR FPA MEDICAL
MANAGEMENT, INC. AND ITS
SUBSIDIARIES AND AFFILIATES
Dated: September 30, 1998
Wilmington, Delaware
<PAGE> 2
TABLE OF CONTENTS
PAGE
INTRODUCTION.................................................................A-1
ARTICLE I DEFINITIONS, RULES OF INTERPRETATION,
AND COMPUTATION OF TIME.....................................A-2
A. Scope of Definitions.................................................A-2
B. Definitions ...................................................A-2
1.1 "Administrative Claim"......................................A-2
1.2 "Administrative Convenience Claim"..........................A-2
1.3 "Affiliates" .........................................A-3
1.4 "Allowed Claim" .........................................A-3
1.5 "Allowed . . . Claim".......................................A-3
1.6 "Avoidance Claims" .........................................A-3
1.7 "Avoidance Claims Expenses".................................A-3
1.8 "Avoidance Claims Recoveries"...............................A-3
1.9 "Ballot" .........................................A-3
1.10 "Bank Agent" .........................................A-4
1.11 "Bankruptcy Code" .........................................A-4
1.12 "Bankruptcy Court" .........................................A-4
1.13 "Bankruptcy Rules" .........................................A-4
1.14 "Bar Date" .........................................A-4
1.15 "Bar Date Order" .........................................A-4
1.16 "Business Day" .........................................A-4
1.17 "Cash" .........................................A-4
1.18 "Causes of Action" .........................................A-4
1.19 "Chapter 11 Cases" .........................................A-4
1.20 "Claim" .........................................A-5
1.21 "Claims Objection Deadline".................................A-5
1.22 "Class" .........................................A-5
1.23 "Combination Transaction"...................................A-5
1.24 "Combining Debtors".........................................A-5
1.25 "Confirmation Date".........................................A-5
1.26 "Confirmation Hearing"......................................A-5
1.27 "Confirmation Hearing Notice"...............................A-5
1.28 "Confirmation Order"........................................A-5
1.29 "Creditors' Committee"......................................A-5
1.30 "Cure" .........................................A-5
1.31 "D&O Insurance" .........................................A-6
1.32 "DIP Agent" .........................................A-6
1.33 "DIP Credit Agreement"......................................A-6
1.34 "DIP Facility" .........................................A-6
1.35 "DIP Facility Claim"........................................A-6
1.36 "DIP Facility Order"........................................A-6
1.37 "DIP Lenders" .........................................A-6
1.38 "Disallowed Claim" .........................................A-6
1.39 "Disbursing Agent" .........................................A-7
1.40 "Disclosure Statement"......................................A-7
1.41 "Disputed Claim" .........................................A-7
A-i
<PAGE> 3
PAGE
1.42 "Distribution Date".........................................A-7
1.43 "Distribution Reserve"......................................A-7
1.44 "Effective Date" .........................................A-7
1.45 "Estates" .........................................A-7
1.46 "Exhibit" .........................................A-7
1.47 "Exhibit Filing Date".......................................A-7
1.48 "Existing Securities".......................................A-7
1.49 "Face Amount" .........................................A-8
1.50 "File" or "Filed" .........................................A-8
1.51 "Final Order" .........................................A-8
1.52 "Fiscal Year" .........................................A-8
1.53 "FPA" .........................................A-8
1.54 "General Unsecured Claim"...................................A-8
1.55 "Holdback Amount" .........................................A-8
1.56 "Holdback Escrow Account"...................................A-8
1.57 "Impaired" .........................................A-8
1.58 "Indemnification Rights"....................................A-8
1.59 "Indemnitee" .........................................A-9
1.60 "Interest" .........................................A-9
1.61 "Internal Revenue Code".....................................A-9
1.62 "Litigation Trust" .........................................A-9
1.63 "Litigation Trustee"........................................A-9
1.64 "Management Stock Option Plan"..............................A-9
1.65 "Miscellaneous Secured Claim"...............................A-9
1.66 "New Common Stock" .........................................A-9
1.67 "New Credit Facility".......................................A-9
1.68 "Old Common Stock" .........................................A-9
1.69 "Other Priority Claim"......................................A-9
1.70 "Person" ........................................A-10
1.71 "Petition Date" ........................................A-10
1.72 "Plan" ........................................A-10
1.73 "Prepetition Agent"........................................A-10
1.74 "Prepetition Credit Facility"..............................A-10
1.75 "Prepetition Credit Facility Claim"........................A-10
1.76 "Prepetition Credit Agreement".............................A-10
1.77 "Prepetition Guarantee and
Collateral Agreement".....................................A-10
1.78 "Prepetition Lenders"......................................A-10
1.79 "Prepetition Notes"........................................A-10
1.80 "Priority Tax Claim".......................................A-11
1.81 "Pro Rata" ........................................A-11
1.82 "Professional Claim".......................................A-11
1.83 "Professional Fee Order"...................................A-11
1.84 "Projections" ........................................A-11
1.85 "Record Date" ........................................A-11
1.86 "Reinstated" or "Reinstatement"............................A-11
1.87 "Reorganized Debtors"......................................A-12
1.88 "Reorganized FPA" ........................................A-12
A-ii
<PAGE> 4
PAGE
1.89 "Reorganized Securities"...................................A-12
1.90 "Scheduled" ........................................A-12
1.91 "Schedules" ........................................A-12
1.92 "Secured Claim" ........................................A-12
1.93 "Sterling Group" ........................................A-12
1.94 "Subordinated Securities Claim"............................A-13
1.95 "Unimpaired" ........................................A-13
1.96 "Voting Deadline" ........................................A-13
1.97 "Warrants" ........................................A-13
C. Rules of Interpretation.............................................A-13
D. Computation of Time.................................................A-14
E. Exhibits ..................................................A-14
ARTICLE II ADMINISTRATIVE EXPENSES
AND PRIORITY TAX CLAIMS....................................A-14
2.1 Administrative Claims......................................A-14
2.2 Priority Tax Claims........................................A-14
ARTICLE III CLASSIFICATION OF CLAIMS AND INTERESTS.....................A-15
3.1 Class 1. ........................................A-15
3.2 Class 2 ........................................A-15
3.3 Class 3 ........................................A-15
3.4 Class 4 ........................................A-15
3.5 Class 5 ........................................A-15
3.6 Class 6 ........................................A-16
3.7 Class 7 ........................................A-16
ARTICLE IV IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS
IMPAIRED AND NOT IMPAIRED BY THE PLAN......................A-16
4.1 Unimpaired Classes of Claims and
Interests..................................................A-16
4.2 Impaired Classes of Claims and
Interests..................................................A-16
ARTICLE V PROVISIONS FOR TREATMENT OF
CLAIMS AND INTERESTS.......................................A-16
5.1 Class 1 (Other Priority Claims)............................A-16
5.2 Class 2 (Prepetition Credit Facility
Claims)....................................................A-16
5.3 Class 3 (Miscellaneous Secured
Claims)....................................................A-16
5.4 Class 4 (Administrative Convenience
Claims)....................................................A-17
5.5 Class 5 (General Unsecured Claims).........................A-17
5.6 Class 6 (Subordinated Securities
Claims)....................................................A-17
5.7 Class 7 (Interests)........................................A-17
A-iii
<PAGE> 5
PAGE
ARTICLE VI ACCEPTANCE OR REJECTION OF THE PLAN;
EFFECT OF REJECTION BY ONE OR MORE
IMPAIRED CLASSES OF CLAIMS OR INTERESTS....................A-18
6.1 Impaired Classes of Claims and
Interests Entitled to Vote.................................A-18
6.2 Acceptance by an Impaired Class............................A-18
6.3 Presumed Acceptances by Unimpaired
Classes....................................................A-18
6.4 Classes Deemed to Reject Plan..............................A-18
6.5 Confirmation Pursuant to Section
1129(b) of the Bankruptcy Code.............................A-18
6.6 Confirmability and Severability of a
Plan.......................................................A-18
ARTICLE VII MEANS FOR IMPLEMENTATION OF THE PLAN.......................A-19
7.1 Continued Corporate Existence..............................A-19
7.2 Directors and Officers.....................................A-19
7.3 Employment, Retirement, Indemnification and Other
Agreements and Incentive Compensation Programs.............A-19
7.4 Articles of Incorporation and Bylaws.......................A-20
7.5 Corporate Action ........................................A-21
7.6 Post-Effective Date Financing..............................A-21
7.7 Issuance of New Common Stock and
Warrants...................................................A-22
7.8 Combination Transactions...................................A-22
7.9 Physician Provider Incentive Program.......................A-23
7.10 Preservation of Causes of Action...........................A-23
7.11 Substantial Contribution Compensation and
Expenses Bar Date..........................................A-23
7.12 Cancellation of Existing Securities
and Agreements.............................................A-24
7.13 Exclusivity Period ........................................A-24
7.14 Intercompany Claims........................................A-24
7.15 Effectuating Documents; Further
Transactions...............................................A-24
ARTICLE VIII UNEXPIRED LEASES AND EXECUTORY CONTRACTS...................A-25
8.1 Assumed Contracts and Leases...............................A-25
8.2 Rejected Contracts and Leases..............................A-25
8.3 Payments Related to Assumption of
Executory Contracts and Unexpired
Leases.....................................................A-26
8.4 Rejection Damages Bar Date.................................A-26
ARTICLE IX PROVISIONS GOVERNING DISTRIBUTIONS.........................A-26
9.1 Time of Distributions......................................A-26
A-iv
<PAGE> 6
PAGE
9.2 Interest on Claims ........................................A-26
9.3 Disbursing Agent ........................................A-27
9.4 Surrender of Securities or Instruments.....................A-27
9.5 Instructions to Disbursing Agent...........................A-28
9.6 Services of Indenture Trustees, Agents and Servicers.......A-28
9.7 Record Date for Distributions to
Holders of Prepetition Notes...............................A-28
9.8 Delivery of Distributions..................................A-28
9.9 Procedures for Treating and Resolving Disputed
and Contingent Claims......................................A-29
9.10 Fractional Securities; De Minimis
Distributions..............................................A-30
ARTICLE X ALLOWANCE AND PAYMENT OF CERTAIN ADMINISTRATIVE
CLAIMS.....................................................A-31
10.1 DIP Facility Claim ........................................A-31
10.2 Professional Claims........................................A-31
10.3 Other Administrative Fees..................................A-32
ARTICLE XI EFFECT OF THE PLAN ON CLAIMS AND INTERESTS.................A-32
11.1 Revesting of Assets........................................A-32
11.2 Discharge of the Debtors...................................A-32
11.3 Compromises and Settlements................................A-33
11.4 Retention of Certain Claims Against
Officers and Directors and Creation
of the Litigation Trust....................................A-33
11.5 Setoffs....................................................A-34
11.6 Satisfaction of Subordination Rights.......................A-35
11.7 Exculpation and Limitation of Liability....................A-35
11.8 Indemnification Obligations................................A-36
11.9 Injunction.................................................A-36
ARTICLE XII CONDITIONS PRECEDENT.......................................A-36
12.1 Conditions to Confirmation.................................A-36
12.2 Conditions to Consummation.................................A-37
12.3 Waiver of Conditions to Confirmation or Consummation.......A-38
ARTICLE XIII RETENTION OF JURISDICTION..................................A-39
ARTICLE XIV MISCELLANEOUS PROVISIONS...................................A-40
14.1 Binding Effect.............................................A-40
14.2 Modification and Amendments................................A-41
14.3 Withholding and Reporting Requirements.....................A-41
A-v
<PAGE> 7
PAGE
14.4 Committees.................................................A-41
14.5 Revocation, Withdrawal or Non-Consummation.................A-41
14.6 Notices....................................................A-42
14.7 Term of Injunctions or Stays...............................A-42
14.8 Governing Law..............................................A-42
EXHIBITS
Exhibit A -- Schedule of Proponents of the Plan and Corresponding
Bankruptcy Case Numbers
Exhibit B -- Management Stock Option Plan
Exhibit C -- Form of Warrant Agreement Regarding Warrants to be Distributed
to the Holders of Class 5 General Unsecured Claims
Exhibit D -- Restated Articles of Incorporation
Exhibit E -- Restated Bylaws
Exhibit F -- Schedule of Rejected Leases and Executory Contracts Regarding
the Sterling Group
Exhibit G -- Schedule of Leases and Executory Contracts to be Assumed by
Certain of the Debtors
A-vi
<PAGE> 8
INTRODUCTION
FPA Medical Management, Inc. ("FPA") and various of its subsidiaries
and Affiliates (as such term is defined herein; and together with FPA, the
"Debtors") as debtors and debtors-in-possession in the above-captioned jointly
administered Chapter 11 reorganization cases, hereby propose the following joint
reorganization plan for the resolution of the Debtors' outstanding creditor
claims and equity interests. Reference is made to the Disclosure Statement (as
defined below) for results of operations, projections for future operations,
risk factors, a summary and analysis of the Plan and certain related matters.
The Debtors are the proponents of this Plan within the meaning of section 1129
of the Bankruptcy Code (as defined below).
These reorganization cases have been consolidated for procedural
purposes only and are being jointly administered pursuant to an order of the
United States Bankruptcy Court for the District of Delaware. This Plan does not
contemplate the substantive consolidation of any of the Debtors for any purpose,
including voting or distribution purposes. Certain of the Debtors will be
dissolved or merged (or combined in another form of transaction) with another
Debtor as a means of implementing this Plan. For voting and distribution
purposes, the Plan contemplates separate classes for each Debtor. The cash and
securities of the Debtors, as reorganized, will be distributed to the claimants
in each of the classes of each of the Debtors, as set forth herein. A list of
each Debtor and its corresponding bankruptcy case number is attached hereto as
Exhibit A.
Under section 1125(b) of the Bankruptcy Code, a vote to accept or
reject the Plan cannot be solicited from a holder of a claim or interest until
such time as the Disclosure Statement has been approved by the Bankruptcy Court
(as defined below) and distributed to holders of claims and interests. ALL
HOLDERS OF CLAIMS ARE ENCOURAGED TO READ THIS PLAN AND THE DISCLOSURE STATEMENT
IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THIS PLAN.
Subject to the restrictions on modifications set forth in section 1127
of the Bankruptcy Code and Bankruptcy Rule 3019 and those restrictions on
modifications set forth in Article XIV of this Plan, the Debtors expressly
reserve their right to alter, amend or modify this Plan, one or more times,
before its substantial consummation.
A-1
<PAGE> 9
ARTICLE I
DEFINITIONS, RULES OF INTERPRETATION,
AND COMPUTATION OF TIME
A. SCOPE OF DEFINITIONS
For purposes of this Plan, except as expressly provided or unless the
context otherwise requires, all capitalized terms not otherwise defined shall
have the meanings ascribed to them in Article I of this Plan. Any term used in
this Plan that is not defined herein, but is defined in the Bankruptcy Code or
the Bankruptcy Rules, shall have the meaning ascribed to that term in the
Bankruptcy Code or the Bankruptcy Rules. The words "herein," "hereof,"
"hereunder," and other words of similar import refer to this Plan as a whole,
not to any particular section, subsection, or clause, unless the context
requires otherwise. Whenever it appears appropriate from the context, each term
stated in the singular or the plural includes the singular and the plural, and
each pronoun stated in the masculine, feminine or neuter includes the masculine,
feminine and the neuter.
B. DEFINITIONS
1.1 "Administrative Claim" means a Claim for payment of an
administrative expense of a kind specified in section 503(b) of the Bankruptcy
Code and entitled to priority pursuant to section 507(a)(1) of the Bankruptcy
Code, including, but not limited to, DIP Facility Claims, the actual, necessary
costs and expenses, incurred after the Petition Date, of preserving the Estates
and operating the business of the Debtors, including wages, salaries or
commissions for services rendered after the commencement of the Chapter 11
Cases, Professional Claims, and all fees and charges assessed against the
Estates under chapter 123 of title 28, United States Code, and all Allowed
Claims that are entitled to be treated as Administrative Claims pursuant to a
Final Order of the Bankruptcy Court under section 546(c)(2)(A) of the Bankruptcy
Code.
1.2 "Administrative Convenience Claim" means a Claim against the
Debtors that otherwise would be classified as a Class 5 General Unsecured Claim
(other than Claims of holders of Prepetition Notes) that is (a) for $500 or
less, or (b) for more than $500 but less than $1,000 if the holder of such Claim
has elected, on the Ballot provided for voting on the Plan within the time fixed
by the Bankruptcy Court for completing and returning such Ballot, to accept $500
in Cash in full satisfaction, discharge and release of such Claim.
A-2
<PAGE> 10
1.3 "Affiliates" means the meaning given such term by section 101(2) of
the Bankruptcy Code.
1.4 "Allowed Claim" means a Claim or any portion thereof (a) that has
been allowed by a Final Order, (b) as to which, on or by the Effective Date, (i)
no proof of claim has been filed with the Bankruptcy Court and (ii) the
liquidated and noncontingent amount of which is Scheduled, other than a Claim
that is Scheduled at zero or as disputed, or (c) for which a proof of claim in a
liquidated amount has been timely filed with the Bankruptcy Court pursuant to
the Bankruptcy Code, any Final Order of the Bankruptcy Court or other applicable
bankruptcy law, and as to which either (i) no objection to its allowance has
been filed within the periods of limitation fixed by the Bankruptcy Code or by
any order of the Bankruptcy Court or (ii) any objection to its allowance has
been settled or withdrawn, or has been denied by a Final Order, or (d) that is
expressly allowed in a liquidated amount in the Plan.
1.5 "Allowed . . . Claim" means an Allowed Claim of the type described.
1.6 "Avoidance Claims" means the Debtors' Claims against Persons
arising under sections 502, 510, 541, 544, 545, 547 through 551 and 553 of the
Bankruptcy Code, or under related state or federal statutes and common law,
including fraudulent transfer laws, whether or nor litigation is commenced to
prosecute such Claims.
1.7 "Avoidance Claims Expenses" means all reasonable costs, expenses
and fees incurred in connection with prosecuting and/or compromising the
Avoidance Claims, including without limitation (a) all reasonable expenses
incurred by the Debtors or the Reorganized Debtors, as the case may be, in
employing attorneys, accountants experts, advisors, consultants, investigators,
appraisers, or other professionals to represent or assist in prosecuting and/or
compromising the Avoidance Claims and (b) all other reasonable costs incurred in
prosecuting and/or compromising the Avoidance Claims.
1.8 "Avoidance Claims Recoveries" means all proceeds realized through
(a) the prosecution to, and collection of, a final judgment of an Avoidance
Claim against a Person or (b) settlement or other compromise of an Avoidance
Claim with a Person.
1.9 "Ballot" means each of the ballot forms that are distributed with
the Disclosure Statement to holders of Claims in Classes that are impaired under
the Plan and
A-3
<PAGE> 11
entitled to vote under Article VI hereof in connection with the solicitation of
acceptances of the Plan.
1.10 "Bank Agent" means the agent for the group of financial
institutions who are party to the New Credit Facility.
1.11 "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as
amended and codified in title 11 of the United States Code, 11 U.S.C.
Sections 101-1330.
1.12 "Bankruptcy Court" means the Bankruptcy Court of the United States
District Court for the District of Delaware or such other court as may have
jurisdiction over the Chapter 11 Cases.
1.13 "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure
and the Official Bankruptcy Forms, as amended, the Federal Rules of Civil
Procedure, as amended, as applicable to the Chapter 11 Cases or proceedings
therein, and the Local Rules of the Bankruptcy Court, as applicable to the
Chapter 11 Cases or proceedings therein, as the case may be.
1.14 "Bar Date" means the deadline for filing all proofs of claims
established by the Bankruptcy Court as November 17, 1998, except Claims of
governmental units for which, in accordance with section 502(b)(9) of the
Bankruptcy Code, the deadline is January 15, 1999.
1.15 "Bar Date Order" means that scheduling order entered by the
Bankruptcy Court on July 21, 1998 and supplemented on September 30, 1998 which
established a deadline for filing proofs of claim.
1.16 "Business Day" means any day, excluding Saturdays, Sundays and
legal holidays, on which commercial banks are open for business in New York
City.
1.17 "Cash" means legal tender of the United States.
1.18 "Causes of Action" means any and all actions, causes of action,
suits, accounts, controversies, agreements, promises, rights to legal remedies,
rights to equitable remedies, rights to payment and claims, whether known,
unknown, reduced to judgment, not reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, secured or
unsecured and whether asserted or assertable directly or derivatively, in law,
equity or otherwise.
A-4
<PAGE> 12
1.19 "Chapter 11 Cases" means the Chapter 11 Cases of the Debtors,
pending in the Bankruptcy Court and being jointly administered with one another,
and "Chapter 11 Case" means any one of the Chapter 11 Cases.
1.20 "Claim" means a claim against one of the Debtors, whether or not
asserted, as defined in section 101(5) of the Bankruptcy Code.
1.21 "Claims Objection Deadline" means that day which is 180 days after
the Effective Date, unless extended by the Bankruptcy Court for cause shown by
the Reorganized Debtors.
1.22 "Class" means a category of holders of Claims or holders of
Interests described in Article II of the Plan.
1.23 "Combination Transaction" means a consolidation, merger,
contribution of assets, or other transaction in which a Combining Debtor merges
with or transfers substantially all of its assets and liabilities to Reorganized
FPA or an Affiliate of Reorganized FPA on or about the Effective Date, as set
forth in the Disclosure Statement.
1.24 "Combining Debtors" means the Debtors shown as entering into a
Combination Transaction in Appendix F to the Disclosure Statement.
1.25 "Confirmation Date" means the date of entry of the
Confirmation Order.
1.26 "Confirmation Hearing" means the hearing on confirmation of the
Plan and related matters under section 1128 of the Bankruptcy Code.
1.27 "Confirmation Hearing Notice" means the notice of, among other
things, the time for submitting Ballots to accept or reject the Plan, the date,
time and place of the Confirmation Hearing and the time for filing objections
to the confirmation of the Plan.
1.28 "Confirmation Order" means the order, entered by the Bankruptcy
Court, confirming the Plan.
1.29 "Creditors' Committee" means the Official Committee of Unsecured
Creditors appointed pursuant to section 1102(a) of the Bankruptcy Code in the
Chapter 11 Cases.
1.30 "Cure" means the distribution within a reasonable period of time
following the Effective Date of Cash, or such other property as may be agreed
upon by the parties or ordered by the Bankruptcy Court, with respect to the
A-5
<PAGE> 13
assumption of an executory contract or unexpired lease, pursuant to section
365(b) of the Bankruptcy Code, in an amount equal to all unpaid monetary
obligations, without interest, or such other amount as may be agreed upon by the
parties, under such executory contract or unexpired lease, to the extent such
obligations are enforceable under the Bankruptcy Code and applicable bankruptcy
law.
1.31 "D&O Insurance" means insurance maintained by the Debtors which
covers the Debtors' officers and directors.
1.32 "DIP Agent" means BankBoston, N.A. in its capacity as
administrative agent for the DIP Lenders under the DIP Credit Agreement.
1.33 "DIP Credit Agreement" means that certain Revolving Credit and
Guarantee Agreement dated as of July 20, 1998, as amended, supplemented or
otherwise modified from time to time, among the Debtors, the DIP Agent, and the
DIP Lenders, which was executed by the Debtors in connection with the DIP
Facility.
1.34 "DIP Facility" means the $50.0 million debtor-in-possession
secured financing facility provided to the Debtors by the DIP Lenders pursuant
to the DIP Credit Agreement, authorized by the Bankruptcy Court pursuant to the
DIP Facility Order.
1.35 "DIP Facility Claim" means all Claims of the DIP Agents and the
DIP Lenders arising under or pursuant to the DIP Facility.
1.36 "DIP Facility Order" means, collectively, the interim order that
was entered by the Bankruptcy Court on July 20, 1998, the August 10, 1998
supplemental order and the final order that was entered by the Bankruptcy Court
on August 20, 1998, authorizing and approving the DIP Facility and the
agreements related thereto.
1.37 "DIP Lenders" mean the lenders who from time to time are parties
to the DIP Credit Agreement.
1.38 "Disallowed Claim" means a Claim, or any portion thereof, that (a)
has been disallowed by a Final Order, (b) is Scheduled at zero or as contingent,
disputed or unliquidated and as to which a proof of claim bar date has been
established but no proof of claim has been filed or deemed timely filed with the
Bankruptcy Court pursuant to either the Bankruptcy Code or any Final Order of
the Bankruptcy Court or otherwise deemed timely filed under applicable law, or
(c) is the subject of an objection filed
A-6
<PAGE> 14
by either the Debtors or the Reorganized Debtors with the Court and which
objection has not been withdrawn or overruled by a Final Order of the Bankruptcy
Court.
1.39 "Disbursing Agent" means the Debtors or the party designated by
the Debtors, in their sole discretion, to serve as a disbursing agent under
Section 9.3 of the Plan.
1.40 "Disclosure Statement" means the written disclosure statement that
relates to this Plan, as approved by the Bankruptcy Court pursuant to section
1125 of the Bankruptcy Code and Bankruptcy Rule 3017, as such disclosure
statement may be amended, modified or supplemented from time to time.
1.41 "Disputed Claim" means a Claim, or any portion thereof, that is
neither an Allowed Claim nor a Disallowed Claim, and includes, without
limitation, Claims that (a) (i) have not been Scheduled by the Debtors or (ii)
have been Scheduled at zero, as unknown or as contingent, unliquidated or
disputed, (b) are not the subject of an objection in the Bankruptcy Court by the
Debtors, and (c) the allowance or disallowance of which is not yet the subject
of a Final Order.
1.42 "Distribution Date" means the date, occurring as soon as
practicable after the Effective Date, upon which distributions are made to
holders of Allowed Class 5 Claims.
1.43 "Distribution Reserve" means the Cash and securities to be
reserved pending allowance of Disputed Claims in accordance with Section 9.9 of
the Plan.
1.44 "Effective Date" means the Business Day on which all conditions to
the consummation of the Plan set forth in Section 12.2 hereof have been
satisfied or waived as provided in Section 12.3 hereof and is the day upon which
this Plan is substantially consummated.
1.45 "Estates" mean the bankruptcy estates of the Debtors pursuant to
section 541 of the Bankruptcy Code.
1.46 "Exhibit" means an exhibit annexed to either this Plan or as an
appendix to the Disclosure Statement.
1.47 "Exhibit Filing Date" means the date that Exhibits to the Plan or
the Disclosure Statement shall be filed with the Court, which date shall be at
least five days prior to the date set by the Bankruptcy Court as the initial
date to consider confirmation of the Plan.
A-7
<PAGE> 15
1.48 "Existing Securities" means, collectively, the
Prepetition Notes and the Old Common Stock.
1.49 "Face Amount" means, (a) when used in reference to a Disputed or
Disallowed Claim, the full stated amount claimed by the holder of such Claim in
any proof of Claim timely filed with the Bankruptcy Court or otherwise deemed
timely filed by any Final Order of the Bankruptcy Court or other applicable
bankruptcy law, and (b) when used in reference to an Allowed Claim, the allowed
amount of such Claim.
1.50 "File" or "Filed" means filed with the Bankruptcy Court in the
Chapter 11 Cases.
1.51 "Final Order" means an order or judgment, the operation or effect
of which has not been stayed, reversed or amended and as to which order or
judgment (or any revision, modification or amendment thereof) the time to appeal
or seek review or rehearing has expired and as to which no appeal or petition
for review or rehearing was filed or, if filed, remains pending.
1.52 "Fiscal Year" means, with respect to the Debtors, the fiscal year
ending on December 31 of each year, or such other fiscal year as the Debtors may
designate.
1.53 "FPA" means FPA Medical Management, Inc. debtor-in-possession in
the above-captioned case number 98-1596(PJW) pending in the Bankruptcy Court.
1.54 "General Unsecured Claim" means a Claim that is not a Secured
Claim, Administrative Claim, Priority Tax Claim, Other Priority Claim or
Subordinated Securities Claim.
1.55 "Holdback Amount" means the amount retained by the Debtors as a
holdback on payment of Professional Claims pursuant to the Professional Fee
Order.
1.56 "Holdback Escrow Account" means the account established by the
Disbursing Agent into which cash equal to the Holdback Amount shall be deposited
on the Effective Dates for the payment of Allowed Professional Claims to the
extent not previously paid or Disallowed.
1.57 "Impaired" refers to any Claim or Interest that is impaired
within the meaning of section 1124 of the Bankruptcy Code.
1.58 "Indemnification Rights" means any obligations
or rights of the Debtors to indemnify or contribute to the
A-8
<PAGE> 16
losses, liabilities or expenses of an Indemnitee pursuant to the Debtors'
certificate of incorporation, bylaws or policy of providing employee
indemnification, or applicable state law or specific agreement in respect of any
claims, demands, suits, causes of action or proceedings against an Indemnitee
based upon any act or omission related to an Indemnitee's service with, for or
on behalf of the Debtors.
1.59 "Indemnitee" means all present and former directors, officers,
employees, agents or representatives of the Debtors who are entitled to assert
Indemnification Rights.
1.60 "Interest" means the rights of any current or former holder or
owner of any shares of Old Common Stock or any other equity securities of the
Debtors authorized and issued prior to the Confirmation Date.
1.61 "Internal Revenue Code" means the Internal Revenue Code of 1986,
as amended.
1.62 "Litigation Trust" means the trust established pursuant to
Section 11.4 hereof.
1.63 "Litigation Trustee" means the Person who shall be selected to
serve as trustee of the Litigation Trust by the Debtors, the Prepetition Lenders
and the Creditors' Committee on or prior to the Effective Date.
1.64 "Management Stock Option Plan" means that certain option
agreement to be executed by and among certain members of management and
Reorganized FPA, a form of which is attached hereto as Exhibit B.
1.65 "Miscellaneous Secured Claim" means any Secured Claim, other than
any Claims arising under the DIP Facility or the Prepetition Credit Facility
including the Secured Claims of ________ and _______.
1.66 "New Common Stock" means the shares of common stock of
Reorganized FPA authorized under Section 7.4 of the Plan and under the articles
of incorporation of Reorganized FPA.
1.67 "New Credit Facility" means the revolving credit facility and
term loan to be issued as a means of implementing the Plan and described in
Section 7.6 hereof.
1.68 "Old Common Stock" means shares of FPA's common stock and all
options, warrants or rights, contractual or otherwise, if any, to acquire any
such common stock.
A-9
<PAGE> 17
1.69 "Other Priority Claim" means a Claim entitled to priority
pursuant to section 507(a) of the Bankruptcy Code other than a Priority Tax
Claim or an Administrative Claim.
1.70 "Person" means an individual, corporation, partnership, joint
venture, association, joint stock company, limited liability company, limited
liability partnership, trust, estate, unincorporated organization or other
entity.
1.71 "Petition Date" means, as to each Debtor, the date on which such
Debtor filed its petition commencing its Chapter 11 Case.
1.72 "Plan" means those plans of reorganization which are herein
jointly proposed by the Debtors for the resolution of outstanding Claims and
Interests in the Chapter 11 Cases, as such plan may be amended from time to time
in accordance with the Bankruptcy Code.
1.73 "Prepetition Agent" means BankBoston, N.A. in its capacity as
administrative agent under the Prepetition Credit Agreement.
1.74 "Prepetition Credit Facility" means the financing accommodations
evidenced by the Prepetition Credit Agreement, Prepetition Guarantee and
Collateral Agreement and related documents.
1.75 "Prepetition Credit Facility Claim" means all Claims of the
Prepetition Agent and the Prepetition Lenders arising under or pursuant to the
Prepetition Credit Facility.
1.76 "Prepetition Credit Agreement" means that certain Credit
Agreement dated June 30, 1997, as amended, supplemented or otherwise modified,
by and among FPA Medical Management, Inc., as borrower, Lehman Commercial Paper
Inc., as arranger and syndication agent, the Prepetition Agent and the
Prepetition Lenders.
1.77 "Prepetition Guarantee and Collateral Agreement" means the
Guarantee and Collateral Agreement dated as of June 30, 1997, as amended,
supplemented or otherwise modified prior to the Petition Date, among the
Prepetition Agent and the Debtors party thereto.
1.78 "Prepetition Lenders" mean those Persons holding a Prepetition
Credit Facility Claim.
1.79 "Prepetition Notes" means, collectively, the 6 1/2% Convertible
Subordinated Debentures due 2001 in the principal amount of approximately $80.5
million issued pursuant to that
A-10
<PAGE> 18
certain Indenture dated as of December 18, 1996, as amended, supplemented or
otherwise modified, by and between FPA Medical Management, Inc. and First Union
National Bank, as Trustee.
1.80 "Priority Tax Claim" means a Claim entitled to priority pursuant
to section 507(a)(8) of the Bankruptcy Code.
1.81 "Pro Rata" means, at any time, the proportion that the Face
Amount of a Claim in a particular Class bears to the aggregate Face Amount of
all Claims (including Disputed Claims, but excluding Disallowed Claims) in such
Class, unless the Plan provides otherwise.
1.82 "Professional Claim" means a Claim of a professional retained in
the Chapter 11 Cases pursuant to sections 327 and 1103 of the Bankruptcy Code or
otherwise, for compensation or reimbursement of costs and expenses relating to
services incurred after the Petition Date and prior to and including the
Effective Date.
1.83 "Professional Fee Order" means the order entered by the
Bankruptcy Court on July 21, 1998, authorizing the interim payment of
Professional Claims subject to the Holdback.
1.84 "Projections" means those financial projections covering the
Debtors' operations through Fiscal Year 2001 set forth by the Debtors in
Appendix E attached to the Disclosure Statement.
1.85 "Record Date" means the record date for purposes of making
distributions under the Plan on account of Allowed Claims, which date shall be
the fifth (5th) Business Day following the Confirmation Date.
1.86 "Reinstated" or "Reinstatement" means (a) leaving unaltered the
legal, equitable and contractual rights to which a Claim entitles the holder of
such Claim so as to leave such Claim Unimpaired in accordance with section 1124
of the Bankruptcy Code, or (b) notwithstanding any contractual provision or
applicable law that entitles the holder of such Claim to demand or receive
accelerated payment of such Claim after the occurrence of a default (i) curing
any such default that occurred before or after the Petition Date, other than a
default of a kind specified in section 365(b)(2) of the Bankruptcy Code; (ii)
reinstating the maturity of such Claim as such maturity existed before such
default; (iii) compensating the holder of such Claim for any damages incurred as
a result of any reasonable reliance by
A-11
<PAGE> 19
such holder on such contractual provision or such applicable law; and (iv) not
otherwise altering the legal, equitable or contractual rights to which such
Claim entitles the holder of such Claim; provided, however, that any contractual
right that does not pertain to the payment when due of principal and interest on
the obligation on which such Claim is based, including, but not limited to,
financial covenant ratios, negative pledge covenants, covenants or restrictions
on merger or consolidation, and affirmative covenants regarding corporate
existence prohibiting certain transactions or actions contemplated by the Plan,
or conditioning such transactions or actions on certain factors, shall not be
required to be reinstated in order to accomplish Reinstatement.
1.87 "Reorganized Debtors" means those of the Debtors who are
reorganized pursuant hereto and who continue in existence after the Effective
Date.
1.88 "Reorganized FPA" means FPA from and after the Effective Date.
1.89 "Reorganized Securities" means, collectively, the New Common Stock
and Warrants.
1.90 "Scheduled" means, with respect to any Claim or Interest, the
status and amount, if any, of such Claim or Interest as set forth in the
Schedules.
1.91 "Schedules" means the schedules of assets and liabilities and the
statements of financial affairs filed in the Bankruptcy Court by the Debtors, as
such schedules or statements have been or may be amended or supplemented from
time to time in accordance with Bankruptcy Rule 1009 or orders of the Bankruptcy
Court.
1.92 "Secured Claim" means a Claim secured by a security interest in
or lien upon property of the Estates to the extent of the value, as of the
Effective Date or such later date as is established by the Bankruptcy Court, of
such security interest or lien as determined by a Final Order of the Bankruptcy
Court pursuant to section 506 of the Bankruptcy Code or as otherwise agreed
upon in writing by the Debtors and the holder of such Claim.
1.93 "Sterling Group" means Sterling Healthcare Group, Inc. and its
direct and indirect subsidiaries which are also Debtors, including Sterling
Anesthesia, Inc., Sterling Credentials Verification Services, Inc., Sterling
Emergency Medical Care, Inc., Sterling Medical Group of Michigan, Inc., Sterling
Mednet Emergency Services, Inc., Sterling Emergency
A-12
<PAGE> 20
Treatment Associates, Inc., Sterling Miami, Inc., Sterling Professional
Emergency Physicians, L.L.C., Sterling Radiology, Inc., Sterling Regional
Emergency Services, Inc., Sterling Sub Texas, Inc., and Mid-level Practitioners,
Inc.
1.94 "Subordinated Securities Claim" means a Claim subject to
subordination under section 510(b) of the Bankruptcy Code that arises from
rescission of, or for damages, reimbursement or contribution with respect to, a
purchase or sale of Old Common Stock or other equity securities of FPA or its
Affiliates prior to the Petition Date.
1.95 "Unimpaired" refers to any Claim or Interest which is not
Impaired.
1.96 "Voting Deadline" means ___________ ___, 1998 at 4:00 p.m. (EDT).
1.97 "Warrants" means those warrants to purchase an aggregate of 3.0%
of New Common Stock to be issued as contemplated by the Plan on the Effective
Date to the holders of General Unsecured Claims pursuant to a warrant agreement
substantially in the form attached hereto as Exhibit C. As more specifically
described in such warrant agreement, the Warrants shall be exercisable over a
five-year period after the Effective Date. The exercise price for the Warrants
shall be equal to 110% of the quotient of (a) the Prepetition Credit Facility
Claims as of the Effective Date (including, without limitation, all accrued and
unpaid interest, costs and other charges through such date, and determined as if
the Bankruptcy Cases had not been filed) divided by, (b) 20,000,000.
C. RULES OF INTERPRETATION
For purposes of the Plan (a) any reference in the Plan to a contract,
instrument, release, indenture or other agreement or document being in a
particular form or on particular terms and conditions means that such document
shall be substantially in such form or substantially on such terms and
conditions, (b) any reference in the Plan to an existing document or exhibit
filed or to be filed means such document or exhibit as it may have been or may
be amended, modified or supplemented, (c) unless otherwise specified, all
references in the Plan to Sections, Articles, Schedules and Exhibits are
references to Sections, Articles, Schedules and Exhibits of or to the Plan, (d)
the words "herein" and "hereto" refer to the Plan in its entirety rather than to
a particular portion of the Plan, (e) captions and headings to Articles and
Sections are inserted for convenience of
A-13
<PAGE> 21
reference only and are not intended to be a part of or to affect the
interpretation of the Plan, and (f) the rules of construction set forth in
section 102 of the Bankruptcy Code and in the Bankruptcy Rules shall apply.
D. COMPUTATION OF TIME
In computing any period of time prescribed or allowed by the Plan,
unless otherwise expressly provided, the provisions of Bankruptcy Rule 9006(a)
shall apply.
E. EXHIBITS
All Exhibits are incorporated into and are a part of the Plan as if set
forth in full herein and, to the extent not annexed hereto, such Exhibits shall
be Filed with the Bankruptcy Court on or before the Exhibit Filing Date. After
the Exhibit Filing Date, copies of Exhibits can be obtained upon written request
to Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 W. Wacker Drive,
Chicago, Illinois 60606 (Attn: John Wm. Butler, Jr., Esq.), counsel to the
Debtors.
ARTICLE II
ADMINISTRATIVE EXPENSES
AND PRIORITY TAX CLAIMS
2.1 Administrative Claims. Subject to the provisions of Article X of
each Plan, on the Effective Date, or as soon thereafter as practicable, a holder
of an Allowed Administrative Claim shall receive, in full satisfaction,
settlement, release and discharge of and in exchange for such Allowed
Administrative Claim, (a) Cash equal to the unpaid portion of such Allowed
Administrative Claim, or (b) such other treatment as to which the Debtors and
such holder shall have agreed upon in writing; provided, however, that Allowed
Administrative Claims with respect to liabilities incurred by the Debtors in the
ordinary course of business during the Chapter 11 Cases shall be paid in the
ordinary course of business in accordance with the terms and conditions of any
agreements relating thereto.
2.2 Priority Tax Claims. With respect to each Allowed Priority Tax
Claim, at the sole option of the relevant Reorganized Debtor, the holder of an
Allowed Priority Tax Claim shall be entitled to receive on account of such
Allowed Priority Tax Claim, in full satisfaction, settlement, release and
discharge of and in exchange for such Allowed Priority Tax Claim, (a) equal Cash
payments made on the last Business Day of every three-month period following the
Effective Date,
A-14
<PAGE> 22
over a period not exceeding six years after the assessment of the tax on which
such Claim is based, totaling the principal amount of such Claim plus simple
interest on any outstanding balance from the Effective Date calculated at the
interest rate available on ninety (90) day United States Treasuries on the
Effective Date, (b) such other treatment agreed to by the holder of such Allowed
Priority Tax Claim and the Debtors or the Reorganized Debtors, provided such
treatment is on more favorable terms to the Debtors or the Reorganized Debtors,
as the case may be, than the treatment set forth in clause (a) hereof, or (c)
payment in full.
ARTICLE III
CLASSIFICATION OF CLAIMS AND INTERESTS
Pursuant to section 1122 of the Bankruptcy Code, set forth below is a
designation of classes of Claims against and Interests in the Debtors. A Claim
or Interest is also placed in a particular Class for the purposes of voting on a
plan of reorganization and of receiving distributions pursuant to the Plan only
to the extent that such Claim or Interest is an Allowed Claim or Interest in
that Class and such Claim or Interest has not been paid, released or otherwise
settled prior to the Effective Date. In accordance with section 1123(a)(1) of
the Bankruptcy Code, Administrative Claims and Priority Tax Claims of the kinds
specified in sections 507(a)(1) and 507(a)(8) of the Bankruptcy Code have not
been classified and their treatment is set forth in Article II above.
As stated above, this Plan includes several joint Plans proposed
separately by each of the Debtors. The classifications set forth below shall be
deemed to apply separately with respect to each Plan proposed by each Debtor.
For example, General Unsecured Claims relating to FPA shall be included in Class
5 of the Plan proposed by FPA, General Unsecured Claims relating to Sterling
Healthcare Group, Inc. shall be included in Class 5 of the Plan proposed by
Sterling Healthcare Group, Inc., etc.
3.1 Class 1. Class 1 consists of all Other Priority Claims.
3.2 Class 2. Class 2 consists of the portion of Prepetition Credit
Facility Claims that are Secured Claims.
3.3 Class 3. Class 3 consists of all Miscellaneous Secured Claims.
A-15
<PAGE> 23
3.4 Class 4. Class 4 consists of all Administrative Convenience Claims.
3.5 Class 5. Class 5 consists of all General Unsecured Claims
including the amount by which the portion of the Prepetition Credit Facility
Claims that are Secured Claims are less than the amount of the Prepetition
Credit Facility
Claims.
6.6 Class 6. Class 6 consists of all Subordinated Securities Claims.
6.7 Class 7. Class 7 consists of all Interests.
ARTICLE IV
IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS
IMPAIRED AND NOT IMPAIRED BY THE PLAN
4.1 Unimpaired Classes of Claims and Interests. Class 1 (Other Priority
Claims), Class 3 (Miscellaneous Secured Claims) and Class 4 (Administrative
Convenience Claims) are not Impaired by the Plan.
4.2 Impaired Classes of Claims and Interests. Class 2 (Prepetition
Credit Facility Claims), Class 5 (General Unsecured Claims), Class 6
(Subordinated Securities Claims) and Class 7 (Interests) are Impaired Classes
under the Plan.
ARTICLE V
PROVISIONS FOR TREATMENT OF
CLAIMS AND INTERESTS
5.1 Class 1 (Other Priority Claims). On the Effective Date, or as soon
as practicable thereafter, each holder of an Allowed Class 1 Other Priority
Claim shall receive, in full satisfaction, settlement, release, and discharge of
and in exchange for such Allowed Class 1 Other Priority Claim, (a) Cash equal to
the amount of such Allowed Class 1 Other Priority Claim, or (b) such other
treatment as to which the Debtors and such holder shall have agreed upon in
writing.
5.2 Class 2 (Prepetition Credit Facility Claims). As the indubitable
equivalent of their Secured Claims against the Debtors, on the Effective Date,
or as soon as practicable thereafter, each holder of an Allowed Class 2
Prepetition Credit Facility Claim shall receive, in full satisfaction,
settlement, release and discharge of and in exchange for such
A-16
<PAGE> 24
Class 2 Prepetition Credit Facility Claim, such holder's Pro Rata share of the
New Common Stock to be issued in connection with this Plan as contemplated in
Section 7.7.
5.3 Class 3 (Miscellaneous Secured Claims). The legal, equitable and
contractual rights of holders of Allowed Miscellaneous Secured Claims shall be
Reinstated. The Debtors' failure to object to such Claims in the Chapter 11
Cases shall be without prejudice to the Reorganized Debtors' right to contest or
otherwise defend against such Claim in the appropriate forum when and if such
Claim is sought to be enforced by the holder thereof. Notwithstanding section
1141(c) or any other provision of the Bankruptcy Code, all prepetition liens on
property of the Debtors held by or on behalf of the holders of Claims in this
Class with respect to such Claims shall survive the Effective Date and continue
in accordance with the contractual terms of the underlying agreements with such
holders until, as to each such holder, the Allowed Claims of such holder in this
Class are paid in full.
5.4 Class 4 (Administrative Convenience Claims). On the Effective Date,
or as soon as practicable thereafter, each holder of an Allowed Class 4
Administrative Convenience Claim shall receive, in full satisfaction,
settlement, release and discharge of and in exchange for such Class 4
Administrative Convenience Claim, Cash equal to (a) the amount of such Allowed
Claim if such amount is less than or equal to $500, or (b) $500, if the amount
of such Allowed Claim is greater than $500 and less than $1,000.
5.5 Class 5 (General Unsecured Claims). On the Distribution Date, each
holder of an Allowed Class 5 General Unsecured Claim shall receive, in full
satisfaction, settlement, release and discharge of and in exchange for such
Class 5 General Unsecured Claim, such holder's Pro Rata share of the Warrants in
accordance with Section 7.4 of the Plan. Notwithstanding the inclusion of any
deficiency Claim related to the Prepetition Credit Facility Claims in this
Class, such holders shall not receive any distribution on account of such
deficiency Claims.
5.6 Class 6 (Subordinated Securities Claims). The holders, if any, of
Allowed Class 6 Subordinated Securities Claims will not receive any distribution
under the Plan on account of such Claims.
5.7 Class 7 (Interests). The holders of Interests will not receive
any distribution of property under the Plan on account of their Interests and,
on the Effective Date, the Interests shall be cancelled.
A-17
<PAGE> 25
ARTICLE VI
ACCEPTANCE OR REJECTION OF THE PLAN;
EFFECT OF REJECTION BY ONE OR MORE
IMPAIRED CLASSES OF CLAIMS OR INTERESTS
6.1 Impaired Classes of Claims and Interests Entitled to Vote. Subject
to Section 6.6 of the Plan, the holders of Claims or Interests in each Impaired
Class of Claims or Interests are entitled to vote as a class to accept or reject
the Plan. Votes will be separately tabulated by each of the Debtors with respect
to each Plan which is contained in this joint Plan.
6.2 Acceptance by an Impaired Class. In accordance with section
1126(c) of the Bankruptcy Code and except as provided in section 1126(e) of the
Bankruptcy Code, an Impaired Class of Claims shall have accepted the Plan if the
Plan is accepted by the holders of at least two-thirds (2/3) in dollar amount
and more than one-half (1/2) in number of the Allowed Claims of such Class that
have timely and properly voted to accept or reject the Plan.
6.3 Presumed Acceptances by Unimpaired Classes. Claims in Class 1
(Other Priority Claims), Class 3 (Miscellaneous Secured Claims) and Class 4
(Administrative Convenience Claims) are Unimpaired by the Plan. Under section
1126(f) of the Bankruptcy Code, the holders of such Claims and Interests are
conclusively presumed to accept the Plan and the votes of such holders will not
be solicited.
6.4 Classes Deemed to Reject Plan. Claims in Class 6 (Subordinated
Securities Claims) and Interests in Class 7 (Interests) are not entitled to
receive or retain any property under the Plan. Under section 1126(g) of the
Bankruptcy Code, the holders of Claims and Interests in such Classes are deemed
to reject the Plan and, accordingly, the votes of such holders will not be
solicited.
6.5 Confirmation Pursuant to Section 1129(b) of the Bankruptcy Code.
To the extent that any Impaired Class entitled to vote rejects the Plan, the
Debtors will request confirmation of the Plan, as it may be modified from time
to time, under section 1129(b) of the Bankruptcy Code.
6.6 Confirmability and Severability of a Plan. The confirmation
requirements of section 1129 of the Bankruptcy Code must be satisfied separately
with respect to each Debtor. The Debtors reserve the right to alter, amend,
modify, revoke or withdraw the Plan as it applies to any
A-18
<PAGE> 26
particular Debtor. A determination by the Bankruptcy Court that the Plan, as it
applies to any particular Debtor, is not confirmable pursuant to section 1129 of
the Bankruptcy Code shall not limit or affect: (1) the Confirmability of the
Plan as it applies to any other Debtor; or (2) the Debtors' ability to modify
the Plan, as it applies to any particular Debtor, to satisfy the confirmation
requirements of section 1129 of the Bankruptcy Code.
ARTICLE VII
MEANS FOR IMPLEMENTATION OF THE PLAN
7.1 Continued Corporate Existence. Subject to the Combination
Transactions, each of the Debtors shall, as a Reorganized Corporation, continue
to exist after the Effective Date as a separate corporate entity, with all the
powers of a corporation under applicable law in the jurisdiction in which it is
incorporated and pursuant to the certificate of incorporation and bylaws in
effect prior to the Effective Date, except to the extent such certificate of
incorporation and bylaws are amended by this Plan, without prejudice to any
right to terminate such existence (whether by merger or otherwise) under
applicable law after the Effective Date.
7.2 Directors and Officers. The existing senior officers of the
Debtors shall serve initially in their current capacities after the Effective
Date. On the Effective Date, the term of the current members of the boards of
directors of the Debtors shall expire. The initial board of directors of
Reorganized FPA will consist of seven (7) directors. Stephen J. Dresnick, M.D.
shall serve as a director and shall be entitled to select an additional
director. The remaining five (5) directors shall be selected by the Prepetition
Lenders by filing with the court and giving to the Debtors not less than five
(5) days prior to the Confirmation Date written notice of the identities of such
members; provided, however, that if and to the extent that the Prepetition
Lenders fail to file and give such notice, the Debtors shall designate the
members of the boards of directors of the Reorganized Debtors by announcing
their identities at the Confirmation Hearing. The boards of directors of the
remaining Reorganized Debtors shall consist of a subset of the board of
directors of Reorganized FPA, as determined by the board of directors for
Reorganized FPA on the Effective Date or thereafter.
7.3 Employment, Retirement, Indemnification and Other Agreements and
Incentive Compensation Programs. To the
A-19
<PAGE> 27
extent that any of the Debtors have in place as of the Effective Date
employment, retirement, indemnification and other agreements with their
respective active directors, officers and employees who will continue in such
capacities after the Effective Date, or retirement income plans, welfare benefit
plans and other plans for such Persons, such agreements, programs and plans
shall remain in place after the Effective Date and the Reorganized Debtors shall
continue to honor such agreements, programs and plans. However, as of the
Effective Date, the Reorganized Debtors shall each have the authority to
terminate, amend or enter into employment, retirement, indemnification and other
agreements with their respective active directors, officers and employees and to
terminate, amend or implement retirement income plans, welfare benefit plans and
other plans for active employees. Such agreements and plans may include equity,
bonus and other incentive plans in which officers and other employees of the
Reorganized Debtors may be eligible to participate; provided, however, that
management of Reorganized FPA shall receive stock options which are more
specifically described in the Management Stock Option Plan and which contain at
least the following terms:
(a) Options to purchase, in the aggregate, 3%
on a fully diluted basis of the shares of New Common Stock issued pursuant to
the Plan. These options would vest on the Effective Date. The exercise price of
such options shall be equal to the price per share of the New Common Stock being
issued to the Prepetition Lenders on the Effective Date (the "Effective Date
Share Price").
(b) Options to purchase, in the aggregate, an
additional 2% on a fully diluted basis of the shares of New Common Stock issued
pursuant to the Plan. These options would vest on the 18 month anniversary of
the Effective Date. The exercise price of such options shall be equal to 115% of
the Effective Date Share Price.
(c) Options to purchase, in the aggregate, an
additional 3% on a fully diluted basis of the shares of New Common Stock issued
pursuant to the Plan. These options would vest on the 36 month anniversary of
the Effective Date. The exercise price of such options shall be equal to 130% of
the Effective Date Share Price.
7.4 Articles of Incorporation and Bylaws. The articles of
incorporation and bylaws of FPA shall be amended as necessary to satisfy the
provisions of the Plan and the Bankruptcy Code. The articles of incorporation of
Reorganized FPA shall be amended to, among other things: (a) authorize
40,000,000 shares of New Common Stock, $0.01 par
A-20
<PAGE> 28
value per share (of which up to 20,000,000 shares will be issued under the
Plan), (b) authorize 1,000,000 shares of preferred stock, and (c) provide,
pursuant to section 1123(a)(6) of the Bankruptcy Code, for (i) a provision
prohibiting the issuance of non-voting equity securities, and, if applicable,
(ii) a provision as to the classes of securities issued pursuant to the Plan or
thereafter possessing voting power, for an appropriate distribution of such
power among such classes, including, in the case of any class of equity
securities having a preference over another class of equity securities with
respect to dividends, adequate provisions for the election of directors
representing such preferred class in the event of default in the payment of
such dividends. The restated articles of incorporation of Reorganized FPA are
attached hereto as Exhibit D and the bylaws of Reorganized FPA are attached
hereto as Exhibit E. Any amendment to the articles of incorporation of
Reorganized FPA may be filed after the Confirmation Date and may become
effective on or prior to the Effective Date or within ten (10) days thereafter.
7.5 Corporate Action. Each of the matters provided for under the Plan
involving the corporate structure of any Debtor or Reorganized Debtor or
corporate action to be taken by or required of any Debtor or Reorganized Debtor
shall, as of the Effective Date, be deemed to have occurred and be effective as
provided herein, and shall be authorized and approved in all respects without
any requirement of further action by stockholders or directors of any of the
debtors or the Reorganized Debtors.
7.6 Post-Effective Date Financing. The Reorganized Debtors expect to
enter into the New Credit Facility in order to obtain the funds necessary to
repay the DIP Facility Claims, make other payments required to be made on the
Effective Date and conduct their post-reorganization operations.
The New Credit Facility, or a commitment letter with respect thereto,
shall be filed by the Debtors with the Bankruptcy Court no later than the
Exhibit Filing Date. Notice of any material modification to the New Credit
Facility or a commitment letter with respect thereto after its filing with the
Bankruptcy Court shall be provided to the Prepetition Agent, the DIP Agent and
the Creditors' Committee. The terms and conditions of the New Credit Facility
shall include in all respects the terms and conditions of the commitment letter
executed between the Debtors and the Bank Agent and the New Credit Facility term
sheet, except to the extent that the Debtors and the Bank Agent agree otherwise.
In the Confirmation Order, the
A-21
<PAGE> 29
Bankruptcy Court shall approve the New Credit Facility in substantially the form
filed with the Bankruptcy Court and authorize the Debtors to execute the same
together with such other documents as the Bank Agent may reasonably require in
order to effectuate the treatment afforded to the lenders under the New Credit
Facility.
7.7 Issuance of New Common Stock and Warrants. On or before the
Distribution Date, FPA shall issue for distribution in accordance with the terms
of the Plan the New Common Stock to holders of Allowed Class 2 Prepetition
Credit Facility Claims and the Warrants to holders of Allowed Class 5 General
Unsecured Claims. The New Common Stock and the Warrants shall be exempt from
registration under applicable securities laws pursuant to section 1145(a) of the
Bankruptcy Code. Without limiting the effect of Section 1145 of the Bankruptcy
Code, Reorganized FPA will enter into a Registration Rights Agreement with each
holder of an Allowed Class 2 Prepetition Credit Facility Claim (a) who by virtue
of holding New Common Stock to be distributed under the Plan and/or its
relationship with the Reorganized Debtors could reasonably be deemed to be an
"affiliate" (as such term is used within the meaning of applicable securities
laws) of the Reorganized Debtors, and (b) who requests in writing that
Reorganized FPA execute such agreement. Drafts of such Registration Rights
Agreements will be filed by FPA with the Bankruptcy Court no later than the
Exhibit Filing Date. The Registration Rights Agreements shall contain certain
shelf, demand and piggyback registration rights for the benefit of the
signatories thereto.
7.8 Combination Transactions. On the Effective Date, each Combining
Debtor shall take such actions as may be necessary or appropriate to effect the
relevant Combination Transaction. Such actions may include: (a) the execution
and delivery of appropriate agreements or other documents of merger,
consolidation or reorganization containing terms that are consistent with the
terms of this Plan and that satisfy the requirements of applicable law; (b) the
execution and delivery of appropriate instruments of transfer, assignment,
assumption or delegation of any property, right, liability, duty or obligation
on terms consistent with the terms of this Plan; (c) the filing of appropriate
certificates of merger or consolidation with the appropriate governmental
authorities under applicable law; and (d) all other actions that such Debtor
determines are necessary or appropriate, including the making of filings or
recordings in connection with the relevant Combination Transaction. The form of
each Combination Transaction shall be determined by the respective Boards of
Directors of such Combining Debtor. Upon the consummation of a Combination
Transaction, each Combining
A-22
<PAGE> 30
Debtor shall cease to exist as a separate corporate entity. On and after the
Effective Date, the Reorganized Debtor with whom a Combining Debtor is merged
shall assume and perform the obligations of each Combining Debtor under this
Plan, or, in the event a Combining Debtor is liquidated, Reorganized FPA shall
assume and perform such obligations.
7.9 Physician Provider Incentive Program. The Reorganized Debtors shall
establish an incentive bonus program for certain medical providers who agree to
perform services for the Reorganized Debtors for a specified period of time
after the Effective Date, which bonus program shall provide cash and/or equity
payments in such amounts and upon such terms as may be determined by the
Reorganized Debtors' Board of Directors.
7.10 Preservation of Causes of Action. In accordance with section
1123(b)(3) of the Bankruptcy Code and except as otherwise provided in the Plan,
the Reorganized Debtors shall retain and may enforce all claims, rights of
action, suits and proceedings, whether in law or in equity, whether known or
unknown, which the Debtors may hold against any entity, including, without
limitation, any Causes of Action brought prior to the Petition Date, actions
against any Persons for failure to pay for products or services rendered by the
Debtors, all claims, Causes of Action, suits and proceedings relating to strict
enforcement of the Debtors' intellectual property rights, including patents,
copyrights and trademarks, and all Causes of Action which may exist under
sections 510, 542, 544 through 550 and 553 of the Bankruptcy Code or under
similar state laws, including, without limitation, fraudulent conveyance claims,
if any, and all other Causes of Action of a trustee and debtor-in-possession
under the Bankruptcy Code. The Reorganized Debtors, in the exercise of their
business judgment, will determine whether to enforce such rights. The
Reorganized Debtors or any successors may pursue such litigation claims in
accordance with the best interests of the Reorganized Debtors or the successors
holding such rights of action.
7.11 Substantial Contribution Compensation and Expenses Bar Date. Any
person or entity who requests compensation or expense reimbursement for making a
substantial contribution in the Chapter 11 Cases pursuant to section 503(b)(3),
(4), and (5) of the Bankruptcy Code must file an application with the clerk of
the Bankruptcy Court, on or before forty-five (45) days after the Effective Date
(the "503 Deadline"), and serve such application on counsel for the Debtors and
as otherwise required by the Bankruptcy Court and the Bankruptcy Code on or
before the 503 Deadline, or be forever barred from seeking such compensation or
expense reimbursement.
A-23
<PAGE> 31
7.12 Cancellation of Existing Securities and Agreements. On the
Effective Date, except as otherwise provided for herein, (a) the Existing
Securities and any other note, bond, indenture, or other instrument or document
evidencing or creating any indebtedness or obligation of the Debtors, except
such notes or other instruments evidencing indebtedness or obligations of the
Debtors that are Reinstated under the Plan, shall be cancelled, and (b) the
obligations of, and/or Claims against, the Debtors under, relating or pertaining
to any agreements, indentures or certificates of designations governing the
Existing Securities and any other note, bond, indenture or other instrument or
document evidencing or creating any indebtedness or obligation of the Debtors,
except such notes or other instruments evidencing indebtedness or obligations of
the Debtors that are Reinstated under the Plan, as the case may be, shall be
released and discharged; provided, however, that each indenture or other
agreement that governs the rights of the holder of a Claim and that is
administered by an indenture trustee, an agent or a servicer shall continue in
effect solely for the purposes of allowing such indenture trustee, agent or
servicer to make the distributions to be made on account of such Claims under
the Plan as provided in Article IX of the Plan; provided, further, that the
provisions of this proviso shall not affect the discharge of the Debtors'
liabilities under the Bankruptcy Code and the Confirmation Order or result in
any expense or liability to the Reorganized Debtors.
7.13 Exclusivity Period. The Debtors shall retain the exclusive right
to amend or modify the Plan, and to solicit acceptances of any amendments to or
modifications of the Plan, through and until the Effective Date.
7.14 Intercompany Claims. All Claims between and among the Debtors
shall be deemed preserved or released, waived and discharged as of the Effective
Date, to the extent that the Debtors or Reorganized Debtors determine
appropriate.
7.15 Effectuating Documents; Further Transactions. The Chairman of the
Board of Directors, the Chief Executive Officer or any other executive officer
of the Debtors, shall be authorized to execute, deliver, file or record such
contracts, instruments, releases, indentures and other agreements or documents,
and take such actions as may be necessary or appropriate to effectuate and
further evidence the terms and conditions of the Plan. The Secretary or
Assistant Secretary of the Debtors shall be authorized to certify or attest to
any of the foregoing actions.
A-24
<PAGE> 32
ARTICLE VIII
UNEXPIRED LEASES AND EXECUTORY CONTRACTS
8.1 Assumed Contracts and Leases. Each executory contract and
unexpired lease to which the Sterling Group is a party shall be deemed
automatically assumed as of the Effective Date, unless such executory contract
or unexpired lease (a) shall have been previously rejected by the Sterling
Group, (b) is the subject of a motion to reject filed on or before the
Confirmation Date, or (c) is listed on the schedule of rejected contracts and
leases annexed hereto as Exhibit F. With respect to executory contracts and
unexpired leases to which Debtors (other than Debtors who are members of the
Sterling Group) are a party, only those executory contracts and unexpired leases
listed on the schedule annexed hereto as Exhibit G shall be deemed automatically
assumed as of the Effective Date. The Confirmation Order shall constitute an
order of the Bankruptcy Court approving such assumptions, pursuant to section
365(b)(1) of the Bankruptcy Code and, to the extent applicable, section
365(b)(3) of the Bankruptcy Code, as of the Effective Date.
Each executory contract and unexpired lease that is assumed and relates
to the use, ability to acquire or occupancy of real property shall include (a)
all modifications, amendments, supplements, restatements or other agreements
made directly or indirectly by any agreement, instrument or other document that
in any manner affect such executory contract or unexpired lease and (b) all
executory contracts or unexpired leases appurtenant to the premises, including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, reciprocal easement agreements and any
other interests in real estate or rights in rem related to such premises, unless
any of the foregoing agreements has been rejected pursuant to a Final Order of
the Bankruptcy Court or is otherwise rejected as a part of this Plan.
8.2 Rejected Contracts and Leases. Except with respect to executory
contracts and unexpired leases that have previously been rejected or are the
subject of a motion to reject filed on or before the Confirmation Date, all
executory contracts and unexpired leases (a) specifically listed on the schedule
of rejected executory contracts and unexpired leases annexed hereto as Exhibit F
with respect to the Sterling Group and (b) that are not listed on Exhibit G with
respect to the Debtors who are not members of the Sterling Group, shall be
deemed automatically rejected as of the Effective Date or such earlier date as
the Debtors may have unequivocally terminated their performance under such
A-25
<PAGE> 33
lease or contract. The Confirmation Order shall constitute an order of the
Bankruptcy Court approving such rejections, pursuant to section 365 of the
Bankruptcy Code. The Debtors reserve the right to file a motion on or before the
Confirmation Date to reject any executory contract or unexpired lease.
8.3 Payments Related to Assumption of Executory Contracts and
Unexpired Leases. Any monetary amounts by which each executory contract and
unexpired lease to be assumed under the Plan may be in default shall be
satisfied, under section 365(b)(1) of the Bankruptcy Code, at the option of the
Debtors or the assignee of the Debtors assuming such contract or lease, by Cure.
In the event of a dispute regarding (a) the nature or the amount of any Cure,
(b) the ability of the Reorganized Debtors or any assignee to provide "adequate
assurance of future performance" (within the meaning of section 365 of the
Bankruptcy Code) under the contract or lease to be assumed, or (c) any other
matter pertaining to assumption, Cure shall occur following the entry of a Final
Order resolving the dispute and approving the assumption and, as the case may
be, assignment.
8.4 Rejection Damages Bar Date. If the rejection by the Debtors,
pursuant to the Plan or otherwise, of an executory contract or unexpired lease
results in a Claim, then such Claim shall be forever barred and shall not be
enforceable against the Debtors or the Reorganized Debtors or the properties of
either of them unless a proof of claim is filed with the clerk of the Bankruptcy
Court and served upon counsel to the Debtors within thirty (30) days after
service of the earlier of (a) notice of the Confirmation Order, or (b) other
notice that the executory contract or unexpired lease has been rejected.
ARTICLE IX
PROVISIONS GOVERNING DISTRIBUTIONS
9.1 Time of Distributions. Except as otherwise provided for herein or
ordered by the Bankruptcy Court, distributions under the Plan shall be made on
the Distribution Date to holders of Allowed Class 2 Claims and Allowed Class 5
Claims, and on the Effective Date, or as soon thereafter as is practicable, to
holders of all other Allowed Claims entitled to receive a distribution under the
Plan.
9.2 Interest on Claims. Unless otherwise specifically provided for in
the Plan, Confirmation Order or DIP Facility Order, or required by applicable
bankruptcy law, postpetition
A-26
<PAGE> 34
interest shall not accrue or be paid on Claims, and no holder of a Claim shall
be entitled to interest accruing on or after the Petition Date on any Claim.
Interest shall not accrue or be paid upon any Disputed Claim in respect of the
period from the Petition Date to the date a final distribution is made thereon
if and after such Disputed Claim becomes an Allowed Claim.
9.3 Disbursing Agent. The Disbursing Agent shall make all
distributions required under this Plan except with respect to a holder of a
Claim whose distribution is governed by an indenture or other agreement and is
administered by an indenture trustee, agent or servicer, which distributions
shall be deposited with the appropriate indenture trustee, agent or servicer,
who shall deliver such distributions to the holders of Claims in accordance with
the provisions of this Plan and the terms of the relevant indenture or other
governing agreement; provided, however, that if any such indenture trustee,
agent or servicer is unable to make such distributions, the Disbursing Agent,
with the cooperation of such indenture trustee, agent or servicer, shall make
such distributions.
9.4 Surrender of Securities or Instruments. On or before the
Distribution Date, or as soon as practicable thereafter, each holder of an
instrument evidencing a Claim on account of Prepetition Notes (a "Certificate")
shall surrender such Certificate to the Disbursing Agent, or, with respect to
indebtedness that is governed by an indenture or other agreement, the respective
indenture trustee, agent or servicer, as the case may be, and such Certificate
shall be cancelled. No distribution of property hereunder shall be made to or on
behalf of any such holder unless and until such Certificate is received by the
Disbursing Agent or the respective indenture trustee, agent or servicer, as the
case may be, or the unavailability of such Certificate is reasonably established
to the satisfaction of the Disbursing Agent or the respective indenture trustee,
agent or servicer, as the case may be. Any such holder who fails to surrender or
cause to be surrendered such Certificate or fails to execute and deliver an
affidavit of loss and indemnity reasonably satisfactory to the Disbursing Agent
or the respective indenture trustee, agent or servicer, as the case may be,
prior to the fifth (5th) anniversary of the Effective Date, shall be deemed to
have forfeited all rights and Claims in respect of such Certificate and shall
not participate in any distribution hereunder, and all property in respect of
such forfeited distribution, including interest accrued thereon, shall revert to
the Reorganized Debtors notwithstanding any federal or state escheat laws to
the contrary.
A-27
<PAGE> 35
9.5 Instructions to Disbursing Agent. Prior to any distribution on
account of any Prepetition Notes, the indenture trustee, agent or servicer of
the Prepetition Notes shall (a) inform the Disbursing Agent as to the amount of
properly surrendered Prepetition Notes and (b) instruct the Disbursing Agent, in
a form and manner that the Disbursing Agent reasonably determines to be
acceptable, of the names of the holders of Prepetition Notes with Allowed Class
5 General Unsecured Claims and denominations of Warrants to be issued and
distributed to or on behalf of such holders of Allowed Class 5 General Unsecured
Claims in exchange for properly surrendered Prepetition Notes.
9.6 Services of Indenture Trustees, Agents and Servicers. The
services, with respect to consummation of the Plan, of indenture trustees,
agents and servicers under indentures and other agreements that govern the
rights of holders of Claims, shall be as set forth in Section 7.12 and elsewhere
in the Plan.
9.7 Record Date for Distributions to Holders of Prepetition Notes. At
the close of business on the Record Date, the transfer ledgers of the indenture
trustees, agents and servicers of the Prepetition Notes shall be closed, and
there shall be no further changes in the record holders of the Prepetition
Notes. The Reorganized Debtors and the indenture trustees, agents and servicers
for such Prepetition Notes and the Disbursing Agent shall have no obligation to
recognize any transfer of such Prepetition Notes occurring after the Record
Date. The Reorganized Debtors and the indenture trustees, agents and servicers
for such Prepetition Notes and the Disbursing Agent shall be entitled instead to
recognize and deal for all purposes hereunder with only those record holders
stated on the transfer ledgers as of the close of business on the Record Date.
9.8 Delivery of Distributions. Distributions to holders of Allowed
Claims shall be made by the Disbursing Agent or the appropriate indenture
trustee, agent or servicer, as the case may be, (a) at the addresses set forth
on the proofs of claim filed by such holders (or at the last known addresses of
such holders if no proof of claim is filed or if the Debtors have been notified
of a change of address), (b) at the addresses set forth in any written notices
of address changes delivered to the Disbursing Agent after the date of any
related proof of claim, (c) at the addresses reflected in the Schedules if no
proof of claim has been filed and the Disbursing Agent has not received a
written notice of a change of address, or (d) in the case of the holder of a
Claim that is governed by an indenture or other agreement and is administered by
an indenture trustee, agent
A-28
<PAGE> 36
or servicer, at the addresses contained in the official records of such
indenture trustee, agent or servicer. If any holder's distribution is returned
as undeliverable, no further distributions to such holder shall be made unless
and until the Disbursing Agent or the appropriate indenture trustee, agent or
servicer is notified of such holder's then current address, at which time all
missed distributions shall be made to such holder without interest. Amounts in
respect of undeliverable distributions made through the Disbursing Agent or the
indenture trustee, agent or servicer shall be returned to the Reorganized
Debtors until such distributions are claimed. All claims for undeliverable
distributions shall be made on or before the fifth (5th) anniversary of the
Effective Date. After such date, all unclaimed property shall revert to the
Reorganized Debtors and the claim of any holder or successor to such holder with
respect to such property shall be discharged and forever barred notwithstanding
any federal or state escheat laws to the contrary.
9.9 Procedures for Treating and Resolving Disputed and Contingent
Claims.
(a) No Distributions Pending Allowance. No payments or
distributions will be made with respect to all or any portion of a Disputed
Claim unless and until all objections to such Disputed Claim have been settled
or withdrawn or have been determined by a Final Order, and the Disputed Claim
has become an Allowed Claim. All objections to Claims must be filed on or before
the Claims Objection Deadline.
(b) Distribution Reserve. The Disbursing Agent will withhold
the Distribution Reserve from the property to be distributed under the Plan. As
to any Disputed Claim, upon a request for estimation by the Debtors, the
Bankruptcy Court will determine what amount is sufficient to withhold as the
Distribution Reserve. The Debtors will request estimation for every Disputed
Claim that is unliquidated and the Disbursing Agent will withhold the
Distribution Reserve based upon the estimated amount of each such Claim as set
forth in a Final Order. The Debtors may also request estimation of a Disputed
Claim that is unliquidated. If the Debtors elect not to request such an
estimation from the Bankruptcy Court with respect to a Disputed Claim that is
unliquidated, the Disbursing Agent will withhold the Distribution Reserve based
upon the Face Amount of such Claim. The Disbursing Agent will also place in the
Distribution Reserve any dividends, payments or other distributions made on
account of, as well as any obligations arising from, the property withheld as
the Distribution
A-29
<PAGE> 37
Reserve, to the extent that such property continues to be withheld as the
Distribution Reserve at the time such distributions are made or such obligations
arise. If practicable, the Disbursing Agent will invest any Cash that is
withheld as the Distribution Reserve in a manner that will yield a reasonable
net return, taking into account the safety of the investment. Nothing in the
Plan or Disclosure Statement will be deemed to entitle the holder of a Disputed
Claim to postpetition interest on such Claim.
Neither the Disbursing Agent, nor any other party, shall be entitled to
vote any shares of the New Common Stock held in the Distribution Reserve. In the
event that any matter requires approval by the shareholders of Reorganized FPA
prior to the distribution or cancellation of all shares of New Common Stock held
in the Distribution Reserve, the shares of New Common Stock held by the
Disbursing Agent shall be deemed only for voting purposes not to have been
issued.
(c) Distributions After Allowance. Payments and distributions
from the Distribution Reserve to each holder of a Disputed Claim, to the extent
that it ultimately becomes an Allowed Claim, will be made in accordance with
provisions of the Plan that govern the Class of Claims to which the respective
holder belongs. Promptly after the date when the order or judgment of the
Bankruptcy Court allowing all or part of such Claim becomes a Final Order, the
Disbursing Agent will distribute to the holder of such Claim any Cash and other
property in the Distribution Reserve that would have been distributed on the
Distribution Date had such Allowed Claim been an Allowed Claim on the
Distribution Date. After a Final Order has been entered, or other final
resolution has been reached, with respect to all Disputed Claims, (i) any
Warrant held in the Distribution Reserve will be distributed Pro Rata to holders
of Allowed Class 5 General Unsecured Claims, and (ii) any Cash or other property
remaining in the Distribution Reserve will become property of the Reorganized
Debtors. All distributions made under this Section of the Plan on account of an
Allowed Claim will be made together with any dividends, payments or other
distributions made on account of, as well as any obligations arising from, the
distributed property as if such Allowed Claim had been an Allowed Claim on the
Distribution Date.
9.10 Fractional Securities; De Minimis Distributions. Any other
provision of the Plan notwithstanding, payments of fractions of shares of New
Common Stock or Warrants shall not be made. Whenever any payment of a fraction
of a share of New Common Stock or Warrants under the Plan would otherwise be
called for, the actual payment made shall reflect a
A-30
<PAGE> 38
rounding of such fraction to the nearest whole share (up or down), with half
shares being rounded down.
ARTICLE X
ALLOWANCE AND PAYMENT OF CERTAIN ADMINISTRATIVE CLAIMS
10.1 DIP Facility Claim. On the Effective Date, all obligations of the
Debtors under the DIP Facility shall be paid or otherwise satisfied in full in
accordance with the terms of the DIP Facility. Upon payment or satisfaction in
full of all obligations under the DIP Facility in accordance with the terms
thereof, all liens and security interests granted to secure such obligations
shall be deemed cancelled and shall be of no further force and effect.
10.2 Professional Claims.
(a) Final Fee Applications. All final requests for payment of
Professional Claims must be filed no later than sixty (60) days after the
Effective Date. After notice and a hearing in accordance with the procedures
established by the Bankruptcy Code and prior orders of the Bankruptcy Court, the
allowed amounts of such Professional Claims shall be determined by the
Bankruptcy Court.
(b) Payment of Interim Amounts. Subject to the Holdback, on
the Effective Date, the Debtors shall pay all amounts owing to Professionals
both for all outstanding amounts relating to prior periods and for the period
from November 1, 1998, through the Effective Date, provided, however, that if
the Effective Date occurs after December 20, 1998, the Professionals shall
prepare a regular monthly fee statement and shall be paid in the manner set
forth in the Professionals Fee Order for the period November 1, 1998 through
November 30, 1998 and shall continue to apply for and receive payment pursuant
to such order to the extent the Effective Date does not occur prior to the first
day of each succeeding month.
The Professionals shall estimate fees and expenses due for periods that
have not been billed as of the Effective Date. Within fifteen (15) days after
the Effective Date, a Professional receiving payment for the estimated period
shall submit a detailed invoice covering such period in the manner and providing
the detail as set forth in the Professionals Fee Order.
(c) The Disbursing Agent shall maintain the Holdback Escrow
Account. On the Effective Date, the Debtors
A-31
<PAGE> 39
shall pay to the Disbursing Agent in order to fund the Holdback Escrow Account,
cash equal to the aggregate amount of the Holdback for all Professionals. The
remaining amount of Professional Claims owing to the Professionals shall be paid
from the Holdback Escrow Account when such claims are finally Allowed by the
Court.
(d) Upon the Effective Date, any requirement that
Professionals comply with sections 327 through 331 of the Bankruptcy Code in
seeking retention or compensation for services rendered after such date will
terminate.
10.3 Other Administrative Fees. All other requests for payment of an
Administrative Claim must be filed with the Bankruptcy Court and served on
counsel for the Debtors no later than thirty (30) days after the Effective Date.
Unless the Debtors object to an Administrative Claim within thirty (30) Business
Days after receipt, such Administrative Claim shall be deemed allowed in the
amount requested. In the event that the Debtors object to an Administrative
Claim, the Bankruptcy Court shall determine the Allowed amount of such
Administrative Claim. Notwithstanding the foregoing, no request for payment of
an Administrative Claim need be filed with respect to an Administrative Claim
which is paid or payable by the Debtors in the ordinary course of business.
ARTICLE XI
EFFECT OF THE PLAN ON CLAIMS AND INTERESTS
11.1 Revesting of Assets. Except as otherwise provided in this Plan, on
the Effective Date all property comprising the Estates of each Debtor (other
than a Dissolving Debtor) shall revest in the relevant Reorganized Debtor or its
successor as a result of a Combination Transaction, free and clear of all
Claims, liens, charges, encumbrances and Interests of creditors and equity
security holders (other than as expressly provided herein). On the Effective
Date, any property of a Dissolving Debtor not previously distributed under this
Plan shall vest in Reorganized FPA, free and clear of all Claims, liens,
charges, encumbrances and Interests of creditors and equity security holders of
such Dissolving Debtor (other than as expressly provided herein). As of the
Effective Date, each Reorganized Debtor may operate its business and use,
acquire and dispose of property and settle and compromise claims or interests
without supervision of the Court free of any restrictions of the Bankruptcy Code
or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan
and Confirmation Order.
A-32
<PAGE> 40
11.2 Discharge of the Debtors. Pursuant to section 1141(d) of the
Bankruptcy Code, except as otherwise specifically provided in this Plan or in
the Confirmation Order, the distributions and rights that are provided in this
Plan shall be in complete satisfaction, discharge and release, effective as of
the Confirmation Date (but subject to the occurrence of the Effective Date), of
Claims and Causes of Action, whether known or unknown, against, liabilities of,
liens on, obligations of and Interests in the Debtors or the Reorganized
Debtors or any of their assets or properties, regardless of whether any property
shall have been distributed or retained pursuant to the Plan on account of such
Claims, including, but not limited to, demands and liabilities that arose before
the Confirmation Date, any liability (including withdrawal liability) to the
extent such Claims relate to services performed by employees of the Debtors
prior to the Petition Date and that arise from a termination of employment or a
termination of any employee or retiree benefit program regardless of whether
such termination occurred prior to or after the Confirmation Date, and all debts
of the kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy
Code, whether or not (i) a proof of claim based upon such debt is filed or
deemed filed under section 501 of the Bankruptcy Code, (ii) a Claim based upon
such debt is Allowed under section 502 of the Bankruptcy Code, or (iii) the
holder of a Claim based upon such debt accepted the Plan. The Confirmation Order
shall be a judicial determination of the discharge of all liabilities of the
Debtors, subject to the Effective Date occurring.
11.3 Compromises and Settlements. Pursuant to Bankruptcy Rule 9019(a),
the Debtors may compromise and settle various Claims (a) against them and (b)
that they have against other Persons. The Debtors expressly reserve the right
(with Bankruptcy Court approval, following appropriate notice and opportunity
for a hearing) to compromise and settle Claims against them and Claims that they
may have against other Persons up to and including the Effective Date. After the
Effective Date, such right shall pass to the Reorganized Debtors pursuant to
Sections 7.10 and 11.1 of the Plan.
11.4 Retention of Certain Claims Against Officers and Directors and
Creation of the Litigation Trust.
(a) Except as provided in this Section 11.4 hereof, each
Debtor (and its successor Reorganized Corporation) hereby waives, releases and
discharges: all current officers, directors, agents, employees and
representatives of the Debtors serving in such capacities as of the Confirmation
Date, from any and all claims and/or
A-33
<PAGE> 41
Causes of Action. Claimants and equity interest holders of each of the Debtors
shall be enjoined from commencing or continuing any action, employment of
process or act to collect, offset or recover any such claim that could be
brought on behalf of or in the name of any of each such Debtor, without any
independent cause of action belonging to the claimant or equity interest holder
asserting such claim; provided, however, that nothing in Section shall
prohibit the Litigation Trustee from commencing whatever actions the Litigation
Trustee deems appropriate against the Debtors' current officers and directors to
the extent and as limited in Section hereof and the release set forth herein
shall not apply to such action or actions, as the case may be.
(b) The Litigation Trustee shall take all steps necessary to
establish the Litigation Trust. As of the Effective Date, the Litigation Trustee
shall be deemed to have assumed all claims, if any, which may exist against the
Debtors' current officers and directors for which (and to the extent) there is
D&O Insurance. The Litigation Trustee shall have no obligation to bring any such
action or actions. In any proceeding brought by the Litigation Trustee, the
Litigation Trustee (i) will obtain recovery solely from the D&O Insurance, and
(ii) will not under any circumstances seek recovery from the personal assets of
any such current officer or director, as the case may be, or seek to execute on
any judgment against any current officer or director except with respect to the
D&O Insurance, even if no D&O Insurance is determined to exist, the D&O
Insurance carrier declines coverage, or the D&O Insurance coverage is
insufficient to satisfy in full any claim or judgment obtained by the Litigation
Trustee. The foregoing shall not preclude, restrict or limit any officer or
director who is sued from defending against or opposing any claim by the
Litigation Trustee or any other person or entity. Any recovery obtained by the
Litigation Trustee shall be used first to reimburse the applicable Reorganized
Debtor prosecuting such action for any payments which either or both may be
required to make to indemnify directors or officers which are not paid by the
D&O Insurance; any funds thereafter remaining shall be used to pay the
reasonable fees and expenses of the Litigation Trustee and any professionals
retained by the Litigation Trustee; and any funds thereafter remaining shall be
distributed to Reorganized FPA.
11.5 Setoffs. The Debtors may, but shall not be required to, set off
against any Claim, and the payments or other distributions to be made pursuant
to the Plan in respect of such Claim, claims of any nature whatsoever that the
Debtors may have against the holder of such Claim; but neither the failure to do
so nor the allowance of any Claim
A-34
<PAGE> 42
hereunder shall constitute a waiver or release by the Debtors of any such claim
that the Debtors may have against such holder.
11.6 Satisfaction of Subordination Rights. All Claims against the
Debtors and all rights and claims between or among holders of Claims relating in
any manner whatsoever to Claims against the Debtors, based upon any claimed
subordination rights (if any), shall be deemed satisfied by the distributions
under the Plan to holders of Claims having such subordination rights, and such
subordination rights shall be deemed waived, released, discharged and terminated
as of the Effective Date. Distributions to the various Classes of Claims
hereunder shall not be subject to levy, garnishment, attachment or like legal
process by any holder of a Claim by reason of any claimed subordination rights
or otherwise, so that each holder of a Claim shall have and receive the benefit
of the distributions in the manner set forth in the Plan.
11.7 Exculpation and Limitation of Liability. Except as otherwise
specifically provided in this Plan, the Debtors, the Reorganized Debtors, any
statutory committee, the Prepetition Lenders, the DIP Lenders, any of such
parties' respective present or former members, officers, directors, employees,
advisors, attorneys, representatives, financial advisors, investment bankers or
agents and any of such parties' successors and assigns, shall not have or incur,
and are hereby released from, any claim, obligation, Cause of Action or
liability to one another or to any holder of a Claim or an Interest, or any
other party in interest, or any of their respective agents, employees,
representatives, financial advisors, attorneys or affiliates, or any of their
successors or assigns, for any act or omission in connection with, relating to
or arising out of the Debtors' Chapter 11 Cases, the pursuit of confirmation of
the Plan, the consummation of the Plan, the administration of the Plan or the
property to be distributed under the Plan, except for their willful misconduct,
and in all respects shall be entitled to reasonably rely upon the advice of
counsel with respect to their duties and responsibilities under the Plan.
Notwithstanding any other provision of this Plan, no holder of a Claim
or Interest, or other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys or affiliates, and no
successors or assigns of the foregoing, shall have any right of action against
the Debtors, the Reorganized Debtors or any statutory committee, the Prepetition
Lenders, the DIP Lenders, or any of such parties' respective present or former
members, officers, directors, employees, advisors, attorneys,
A-35
<PAGE> 43
representatives, financial advisors, investment bankers or agents or such
parties' successors and assigns, for any act or omission in connection with,
relating to or arising out of the Chapter 11 Cases, the pursuit of confirmation
of the Plan, the consummation of the Plan, the administration of the Plan or the
property to be distributed under the Plan, except for their willful misconduct.
11.8 Indemnification Obligations. In satisfaction and compromise of
the Indemnitees' Indemnification Rights: (i) all Indemnification Rights except
those based upon any act or omission arising out of or relating to any
Indemnitee's service with, for or on behalf of the Debtors on or after the
Petition Date (the "Post-Petition Indemnification Rights") shall be released
and discharged on and as of the Effective Date, provided that the Post-Petition
Indemnification Rights shall remain in full force and effect on and after the
Effective Date and shall not be modified, reduced, discharged or otherwise
affected in any way by the Chapter 11 Cases, (ii) the Debtors or the Reorganized
Debtors, as the case may be, covenant to purchase and maintain directors and
officers liability insurance providing coverage for the Indemnitees for a period
of two years after the Effective Date insuring such parties in respect of any
claims, demands, suits, causes of action or proceedings against such Indemnitees
based upon any act or omission related to such Indemnitee's service with, for or
on behalf of the Debtors in at least the scope and amount as currently
maintained by the Debtors (the "Insurance Coverage"), and (iii) the Debtors
hereby indemnify Indemnitees and agree to pay for any deductible or retention
amount that may be payable in connection with any claim covered by either under
the foregoing Insurance Coverage or any prior similar policy.
11.9 Injunction. The satisfaction, release and discharge pursuant to
this Article XI of this Plan shall also act as an injunction against any Person
commencing or continuing any action, employment of process, or act to collect,
offset or recover any Claim or Cause of Action satisfied, released or discharged
under this Plan to the fullest extent authorized or provided by the Bankruptcy
Code, including, without limitation, to the extent provided for or authorized by
sections 524 and 1141 thereof.
ARTICLE XXIV
CONDITIONS PRECEDENT
12.1 Conditions to Confirmation. The following are conditions precedent
to confirmation of the Plan that may be
A-36
<PAGE> 44
satisfied or waived in accordance with Section 12.3 of the Plan:
(a) The Bankruptcy Court shall have approved by Final Order a
disclosure statement with respect to the Plan in form and substance reasonably
acceptable to the Debtors.
(b) The Confirmation Order shall be in form and substance
reasonably acceptable to the Debtors.
12.2 Conditions to Consummation. The Effective Date shall occur on or
prior to December 31, 1998, unless such date is extended by agreement of the
Debtors and Prepetition Agent. The following are conditions precedent to the
occurrence of the Effective Date, each of which may be satisfied or waived in
accordance with Section 12.3 of the Plan:
(a) The Bankruptcy Court shall have entered one or more orders
(which may include the Confirmation Order) authorizing the assumption of leases
and executory contracts by the Reorganized Debtors.
(b) The Debtors shall have entered into the New Credit
Facility and all conditions precedent to the consummation thereof shall have
been waived or satisfied in accordance with the terms thereof.
(c) The Confirmation Order shall have been entered by the
Bankruptcy Court and shall be a Final Order, and no request for revocation of
the Confirmation Order under section 1144 of the Bankruptcy Code shall have been
made, or, if made, shall remain pending.
(d) The Confirmation Date shall have occurred and the
Confirmation Order shall, among other things, provide that:
(i) the provisions of the Confirmation Order
are non-severable and mutually dependent;
(ii) all executory contracts or unexpired
leases assumed by the Debtors during the Chapter 11 Cases or under the Plan
shall be assigned and transferred to, and remain in full force and effect for
the benefit of, the Reorganized Debtors, notwithstanding any provision in such
contract or lease (including those described in sections 365(b)(2) and (f) of
the Bankruptcy Code) that prohibits such assignment or transfer or that enables
or requires termination of such contract or lease;
A-37
<PAGE> 45
(iii) the transfers of property by the Debtors
(A) to the Reorganized Debtors (1) are or shall be legal, valid, and effective
transfers of property, (2) vest or shall vest the Reorganized Debtors with good
title to such property free and clear of all liens, charges, claims,
encumbrances or interests, except as expressly provided in the Plan or
Confirmation Order, (3) do not and shall not constitute avoidable transfers
under the Bankruptcy Code or under applicable nonbankruptcy law, and (4) do not
and shall not subject the Reorganized Debtors to any liability by reason of such
transfer under the Bankruptcy Code or under applicable nonbankruptcy law,
including, without limitation, any laws affecting successor or transferee
liability, and (B) to holders of Claims and Interests under the Plan are for
good consideration and value and are in the ordinary course of the Debtors'
businesses;
(iv) except as expressly provided in the Plan
or the Confirmation Order, the Debtors are discharged effective upon the
Effective Date from any "debt" (as that term is defined in section 101(12) of
the Bankruptcy Code), and the Debtors' liability in respect thereof is
extinguished completely, whether reduced to judgment or not, liquidated or
unliquidated, contingent or noncontingent, asserted or unasserted, fixed or
unfixed, matured or unmatured, disputed or undisputed, legal or equitable, known
or unknown, or that arose from any agreement of the Debtors entered into or
obligation of the Debtors incurred before the Effective Date, or from any
conduct of the Debtors prior to the Effective Date, or that otherwise arose
before the Effective Date, including, without limitation, all interest, if any,
on any such debts, whether such interest accrued before or after the Petition
Date;
(v) the Plan does not provide for the
liquidation of all or substantially all of the property of the Debtors and its
confirmation is not likely to be followed by the liquidation of the Reorganized
Debtors or the need for further financial reorganization;
(vi) except as expressly provided in the Plan,
all Interests shall be terminated effective upon the Effective Date; and
(vii) the Bankruptcy Court shall have
determined that the New Common Stock and the Warrants issued under the Plan in
exchange for Claims against the Debtors are exempt from registration under the
Securities Act of 1933 pursuant to, and to the extent provided by, section 1145
of the Bankruptcy Code.
A-38
<PAGE> 46
12.3 Waiver of Conditions to Confirmation or Consummation. The
conditions set forth in Sections 12.1 and 12.2 of the Plan may be waived by the
Debtors in their sole discretion, without any notice to parties in interest or
the Bankruptcy Court and without a hearing. The failure to satisfy or waive any
condition to the Confirmation Date or the Effective Date may be asserted by the
Debtors in their sole discretion regardless of the circumstances giving rise to
the failure of such condition to be satisfied (including any action or inaction
by the Debtors in their sole discretion). The failure of the Debtors in their
sole discretion to exercise any of the foregoing rights shall not be deemed a
waiver of any other rights, and each such right shall be deemed an ongoing
right, which may be asserted at any time.
ARTICLE XXVI
RETENTION OF JURISDICTION
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code,
the Bankruptcy Court shall have exclusive jurisdiction of all matters arising
out of, and related to, the Chapter 11 Cases and the Plan, including, among
other things, the following matters:
(a) to hear and determine pending motions for the assumption
or rejection of executory contracts or unexpired leases or the assumption and
assignment, as the case may be, of executory contracts or unexpired leases to
which the Debtors are a party or with respect to which the Debtors may be
liable, and to hear and determine the allowance of Claims resulting therefrom
including the amount of Cure, if any, required to be paid to the holders of such
Claims;
(b) to determine any and all pending adversary proceedings,
applications and contested matters;
(c) to ensure that distributions to holders of Allowed Claims
are accomplished as provided herein;
(d) to hear and determine any and all objections to the
allowance or estimation of Claims filed, both before and after the Confirmation
Date, including any objections to the classification of any Claim or Interest,
and to allow or disallow any Claim, in whole or in part;
(e) to enter and implement such orders as may be appropriate
if the Confirmation Order is for any reason stayed, revoked, modified or
vacated;
A-39
<PAGE> 47
(f) to issue orders in aid of execution, implementation or
consummation of the Plan;
(g) to consider any modifications of the Plan, to cure any
defect or omission, or to reconcile any inconsistency in any order of the
Bankruptcy Court, including, without limitation, the Confirmation Order;
(h) to hear and determine all applications for compensation
and reimbursement of Professional Claims under the Plan or under sections 330,
331, 503(b), 1103 and 1129(a)(4) of the Bankruptcy Code;
(i) to determine requests for the payment of Claims entitled
to priority under section 507(a)(1) of the Bankruptcy Code, including
compensation of and reimbursement of expenses of parties entitled thereto;
(j) to hear and determine disputes arising in connection with
the interpretation, implementation or enforcement of the Plan, including
disputes arising under agreements, documents or instruments executed in
connection with this Plan;
(k) to hear and determine all suits or adversary proceedings
to recover assets of the Debtors and property of their Estates, wherever
located;
(l) to hear and determine matters concerning state, local and
federal taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy
Code;
(m) to hear any other matter not inconsistent with the
Bankruptcy Code;
(n) to hear and determine all disputes involving the
existence, nature or scope of the Debtors' discharge, including any dispute
relating to any liability arising out of the termination of employment or the
termination of any employee or retiree benefit program, regardless of whether
such termination occurred prior to or after the Effective Date; and
(o) to enter a final decree closing the Chapter 11 Cases.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
A-40
<PAGE> 48
14.1 Binding Effect. The Plan shall be binding upon and inure to the
benefit of the Debtors, the Reorganized Debtors, all present and former holders
of Claims, all present and former holders of Interests, other parties in
interest and their respective successors and assigns.
14.2 Modification and Amendments. The Debtors may alter, amend or
modify the Plan or any Exhibits thereto under section 1127(a) of the Bankruptcy
Code at any time. After the Confirmation Date and prior to substantial
consummation of the Plan as defined in section 1101(2) of the Bankruptcy Code,
the Debtors may, under section 1127(b) of the Bankruptcy Code, institute
proceedings in the Bankruptcy Court to remedy any defect or omission or
reconcile any inconsistencies in the Plan, the Disclosure Statement or the
Confirmation Order, and such matters as may be necessary to carry out the
purposes and effects of the Plan, so long as such proceedings do not materially
adversely affect the treatment of holders of Claims or holders of Interests
under the Plan; provided, however, that prior notice of such proceedings shall
be served in accordance with the Bankruptcy Rules or order of the Bankruptcy
Court.
14.3 Withholding and Reporting Requirements. In connection with the
Plan and all instruments issued in connection therewith and distributions
thereon, the Debtors shall comply with all withholding and reporting
requirements imposed by any federal, state, local or foreign taxing authority,
and all distributions hereunder shall be subject to any such withholding and
reporting requirements.
14.4 Committees. Effective on the Effective Date, the duties of the
Creditors' Committee shall terminate, except with respect to applications for
Professional Claims.
14.5 Revocation, Withdrawal or Non-Consummation.
(a) Right to Revoke or Withdraw. The Debtors reserve the right
to revoke or withdraw the Plan at any time prior to the Effective Date.
(b) Effect of Withdrawal, Revocation or Non-Consummation. If
the Debtors revoke or withdraw the Plan prior to the Effective Date, or if the
Confirmation Date or the Effective Date does not occur, then the Plan, any
settlement or compromise embodied in the Plan (including the fixing or limiting
to an amount certain any Claim or Class of Claims), the assumption or rejection
of executory contracts or leases effected by the Plan, and any document or
agreement executed pursuant to the Plan shall be null and void. In such event,
nothing contained herein, and no acts taken in
A-41
<PAGE> 49
preparation for consummation of the Plan, shall be deemed to constitute a waiver
or release of any Claims by or against the Debtors or any other Person, to
prejudice in any manner the rights of the Debtors or any Person in any further
proceedings involving the Debtors or to constitute an admission of any sort by
the Debtors or any other Person.
14.6 Notices. Any notice required or permitted to be provided to the
Debtors under the Plan shall be in writing and served by (a) certified mail,
return receipt requested, (b) hand delivery, or (c) overnight delivery service,
to be addressed as follows:
FPA Medical Management, Inc.
5835 Blue Lagoon Drive
Suite 401
Miami, FL 33126-2017
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Attention: John Wm. Butler, Jr., Esq.
14.7 Term of Injunctions or Stays. Unless otherwise provided herein or
in the Confirmation Order, all injunctions or stays provided for in the Chapter
11 Cases under sections 105 or 362 of the Bankruptcy Code or otherwise, and
extant on the Confirmation Date, shall remain in full force and effect until the
Effective Date.
14.8 Governing Law. Unless a rule of law or procedure is supplied by
federal law (including the Bankruptcy Code and Bankruptcy Rules) or unless
otherwise specifically stated, the laws of the State of Delaware shall govern
the construction and implementation of the Plan, any agreements, documents and
instruments executed in connection with the Plan, and corporate governance
matters.
A-42
<PAGE> 50
Dated: Wilmington, Delaware
September 30, 1998
Respectfully submitted,
FPA MEDICAL MANAGEMENT, INC., AND ITS
SUBSIDIARIES AND AFFILIATES WHO ARE ALSO
DEBTORS AND DEBTORS-IN-POSSESSION IN THE
CHAPTER 11 CASES
By:_________________________________________
Its:________________________________________
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
(ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
John Wm. Butler, Jr.
J. Eric Ivester
J. Gregory St. Clair
- and -
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Rodney Square
Wilmington, Delaware 19899
By:________________________________________
Gregg M. Galardi
ATTORNEYS FOR FPA MEDICAL MANAGEMENT, INC.
AND ITS SUBSIDIARIES AND AFFILIATES WHO ARE
ALSO DEBTORS AND DEBTORS-IN-POSSESSION
IN THE CHAPTER 11 CASES
<PAGE> 51
EXHIBIT A
SCHEDULE OF PROPONENTS OF THE PLAN
AND CORRESPONDING BANKRUPTCY CASE NUMBERS
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 52
EXHIBIT B
MANAGEMENT STOCK OPTION PLAN
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 53
EXHIBIT C
FORM OF WARRANT AGREEMENT REGARDING WARRANTS
TO BE DISTRIBUTED TO THE HOLDERS OF
CLASS 5 GENERAL UNSECURED CLAIMS
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 54
EXHIBIT D
RESTATED ARTICLES OF INCORPORATION
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 55
EXHIBIT E
RESTATED BYLAWS
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 56
EXHIBIT F
SCHEDULE OF REJECTED LEASES AND
EXECUTORY CONTRACTS REGARDING THE STERLING GROUP
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 57
EXHIBIT G
SCHEDULE OF LEASES AND EXECUTORY CONTRACTS
TO BE ASSUMED BY CERTAIN OF THE DEBTORS
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 1
Exhibit 2.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
- - - - - - - - - - - - - - - - - x
: Chapter 11
In re :
: Case Nos. 98-1596 (PJW)
FPA MEDICAL MANAGEMENT, INC., : through 98-1685 (PJW)
ET AL., :
: Jointly Administered
Debtors. :
:
- - - - - - - - - - - - - - - - - x
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF FPA MEDICAL MANAGEMENT, INC.
AND ITS SUBSIDIARIES AND AFFILIATES
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Attn: John Wm. Butler, Jr.
J. Eric Ivester
J. Gregory St. Clair
- and -
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Rodney Square
Wilmington, Delaware 19899
Attn: Gregg M. Galardi
ATTORNEYS FOR FPA MEDICAL MANAGEMENT, INC.
AND ITS SUBSIDIARIES AND AFFILIATES,
DEBTORS AND DEBTORS-IN-POSSESSION
Dated: September 30, 1998
Wilmington, Delaware
THIS IS NOT A SOLICITATION OF ACCEPTANCE OR REJECTION
OF THE PLAN. ACCEPTANCES OR REJECTIONS MAY NOT BE
SOLICITED UNTIL THIS DISCLOSURE STATEMENT HAS BEEN
APPROVED BY THE BANKRUPTCY COURT.
<PAGE> 2
DISCLAIMER
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED
HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE JOINT PLAN OF
REORGANIZATION OF FPA MEDICAL MANAGEMENT, INC. AND ITS SUBSIDIARIES AND
AFFILIATES (THE "PLAN") AND MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO
DETERMINE HOW TO VOTE ON THE PLAN. NO PERSON MAY GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATIONS, OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN
THIS DISCLOSURE STATEMENT, REGARDING THE PLAN OR THE SOLICITATION OF ACCEPTANCES
OF THE PLAN.
ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE
STATEMENT AND THE PLAN IN THEIR ENTIRETIES BEFORE VOTING TO ACCEPT OR REJECT THE
PLAN. PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE
QUALIFIED IN THEIR ENTIRETIES BY REFERENCE TO THE PLAN AND THE EXHIBITS ANNEXED
TO THE PLAN AND THIS DISCLOSURE STATEMENT. THE STATEMENTS CONTAINED IN THIS
DISCLOSURE STATEMENT ARE MADE ONLY AS OF THE DATE HEREOF AND THERE CAN BE NO
ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER
THE DATE HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION
1125 OF THE BANKRUPTCY CODE AND RULE 3016(c) OF THE FEDERAL RULES OF BANKRUPTCY
PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES
LAWS OR OTHER NONBANKRUPTCY LAW. THIS DISCLOSURE STATEMENT HAS BEEN NEITHER
APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"),
NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING OR
TRANSFERRING SECURITIES OR CLAIMS OF FPA MEDICAL MANAGEMENT, INC. OR ANY OF THE
AFFILIATED DEBTORS AND DEBTORS-IN-POSSESSION IN THESE CASES SHOULD EVALUATE THIS
DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH THEY WERE
PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE
CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION OR WAIVER, BUT
RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. THIS DISCLOSURE STATEMENT
SHALL NOT BE ADMISSIBLE IN ANY NONBANKRUPTCY PROCEEDING NOR SHALL IT BE
CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES OR OTHER LEGAL EFFECTS
OF THE REORGANIZATION AS TO HOLDERS OF CLAIMS AGAINST, OR EQUITY INTERESTS IN,
FPA MEDICAL MANAGEMENT, INC. OR
i
<PAGE> 3
ANY OF THE AFFILIATED DEBTORS AND DEBTORS-IN-POSSESSION IN THESE CASES.
ii
<PAGE> 4
SUMMARY OF PLAN
The following introduction and summary is qualified in its entirety by,
and should be read in conjunction with, the more detailed information and
financial statements and notes thereto appearing elsewhere in this Disclosure
Statement. All capitalized terms not defined in this Disclosure Statement have
the meanings ascribed to such terms in the Plan, a copy of which is annexed
hereto as Appendix A.
A. BUSINESS OVERVIEW
FPA Medical Management, Inc. ("FPA") is a national physician practice
management company founded in 1986. FPA and those of its Subsidiaries and
Affiliates who are also debtors and debtors-in-possession in the
above-referenced bankruptcy cases (collectively, the "Debtors") provide primary
and specialty care services to managed care enrollees and fee-for-service
patients. Through the Sterling Group, the Debtors also provide physician
management services to hospital emergency departments, urgent care, radiology
and correctional facilities on a fee-for-service basis.
Beginning in 1994, the Debtors commenced a strategy of aggressive
growth through acquisition. From 1994 through the Petition Date, the Debtors
consummated more than 50 acquisitions of physician practices and physician
practice management companies in the primary care and emergency department
sectors. Gross Operating Revenue during this period grew from $136,690,000 in
1994 to $1,166,340,000 for the fiscal year ended December 31, 1997. As of March
31, 1998, the Debtors were affiliated with approximately 7,900 primary care
physicians who provided services to approximately 1.4 million enrollees of 61
different payors in 29 states (including the District of Columbia).
The Debtors' rapid expansion created extensive pressures on their
liquidity and management resources. Difficulties integrating the Debtors'
acquisitions resulted in lower than projected synergies among, and profitability
of, the Debtors' business units, greater than anticipated working capital
requirements and increasing demands on management to resolve operating problems
independent of the core business of managing medical and administrative costs.
Further, increasing cost containment pressures exerted by public and private
health care organizations throughout the United States resulted in the Debtors
achieving lower net recoveries of health care costs than projected, which
negatively affected profitability.
iii
<PAGE> 5
As a result of the Debtors' financial performance and notwithstanding the
additional bank financing obtained by the Debtors, the Debtors' liquidity
deteriorated precipitously in July, 1998, in part, as a result of the Debtors'
payors withholding monthly capitation payments, and on July 19, 1998 and various
dates thereafter through August 7, 1998, the Debtors sought protection under
chapter 11 of the Bankruptcy Code.
During the weeks immediately prior to and since commencing the Chapter
11 Cases, the Debtors have obtained additional bank financing and sold certain
non-core businesses and investments to meet their near term liquidity needs,
exited selected markets, restructured their continuing core businesses around a
medical service organization ("MSO") model and commenced renegotiation of
certain of their principal payor agreements.
The Debtors believe that, by eliminating business operations in certain
unprofitable markets and adopting the more focused medical clinic or MSO
business model, the Debtors will emerge from chapter 11 as an efficient and
profitable enterprise, better able to serve the needs of payors, medical
providers and, most importantly, the thousands of Americans whose medical care
is entrusted with the Debtors.
B. TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN
The Plan constitutes a separate plan of reorganization for each of the
Debtors. Accordingly, the voting and other confirmation requirements of the
Bankruptcy Code must be satisfied for each of the Debtors.
Under the Plan, Claims against and Interests in the Debtors are divided
into Classes. Certain unclassified Claims, including Administrative Claims and
Priority Tax Claims will receive payment in full in Cash either on the Effective
Date, as such Claims are liquidated, in installments over time (as permitted by
the Bankruptcy Code), or as agreed with the holders of such Claims. The DIP
Facility Claims are included as Administrative Claims and will be paid or
otherwise satisfied in full with the consent of the holders of such Claims on
the Effective Date. All other Claims and Interests are classified into seven (7)
Classes and will receive the distributions and recoveries (if any) described in
the following table.
iv
<PAGE> 6
The table summarizes the classification and treatment of the principal
prepetition Claims and Interests under the Plan. The classification and
treatment for all Classes are described in more detail under Section VII.B of
this Disclosure Statement entitled "Classification and Treatment of Claims and
Interests." Estimated Claim amounts in Classes 1 through 5 are based upon the
Debtors' books and records and the proofs of claim filed in the Chapter 11 Cases
and represent an aggregate for a particular class for each Debtor. There can be
no assurance that the amounts estimated in the table are correct and the actual
allowed amount of Claims may be significantly different from the estimates.
CLASS DESCRIPTION TREATMENT UNDER PLAN
CLASS 1 -OTHER PRIORITY On the Effective Date, or as soon as
CLAIMS practicable thereafter, each holder of
an Allowed Class 1 Other Priority Claim
Estimated Allowed Amount shall receive, in full satisfaction,
for all Debtors: settlement, release, and discharge of
$ and in exchange for such Allowed Class 1
Other Priority Claim, (a) Cash equal to
the amount of such Allowed Class 1 Other
Priority Claim, or (b) such other
treatment as to which the Debtors and
such holder shall have agreed upon in
writing. Class 1 Claims are not
Impaired.
v
<PAGE> 7
CLASS DESCRIPTION TREATMENT UNDER PLAN
CLASS 2 -PREPETITION CREDIT As the indubitable equivalent of their
FACILITY CLAIMS Secured Claims against the Debtors, on
the Effective Date, or as soon as
Estimated Allowed Amount practicable thereafter, each holder of
for all Debtors: an Allowed Class 2 Prepetition Credit
$ Facility Claim shall receive, in full
satisfaction, settlement, release and
discharge of and in exchange for such
Class 2 Prepetition Credit Facility
Claim, such holder's Pro Rata share of
the New Common Stock to be issued in
connection with the Plan as contemplated
in Section 7.7 of the Plan. In lieu of a
conversion from debt to equity of the
Prepetition Lenders' entire debt claims,
the Debtors are evaluating their
projected financial condition subsequent
to emergence from these reorganization
proceedings and reserve the right to
alter the proposed distribution to the
Prepetition Lenders to include a
combination of debt and equity depending
upon whether the Reorganized Debtors'
post-Effective Date cash flows will be
sufficient, in the Debtors' business
judgment, to permit the Reorganized
Debtors to service such additional debt
obligations. Class 2 Claims are
Impaired.
CLASS 3 -MISCELLANEOUS The legal, equitable and contractual
SECURED CLAIMS rights of holders of Allowed
Miscellaneous Secured Claims shall be
Estimated Allowed Amount Reinstated. The Debtors' failure to
for all Debtors: object to such Claims in the Chapter 11
$ Cases shall be without prejudice to the
Reorganized Debtors' right to contest or
otherwise defend against such Claim in
the appropriate forum when and if such
Claim is sought to be enforced by the
holder thereof. Notwithstanding section
1141(c) or any other provision of the
Bankruptcy Code, all prepetition liens
on property of the Debtors held by or on
behalf of the holders of Claims in this
Class with respect to such Claims shall
survive the Effective Date and continue
in accordance with the contractual terms
of the underlying agreements with such
holders until, as to each such holder,
the Allowed Claims of such holder in
this Class are paid in full. Class 3
Claims are not Impaired.
vi
<PAGE> 8
CLASS DESCRIPTION TREATMENT UNDER PLAN
CLASS 4 -ADMINISTRATIVE On the Effective Date, or as soon as
CONVENIENCE CLAIMS practicable thereafter, each holder of
an Allowed Class 4 Administrative
Estimated Allowed Amount Convenience Claim shall receive, in
for all Debtors: full satisfaction, settlement, release
$ and discharge of and in exchange for
such Class 4 Administrative Convenience
Claim, Cash equal to (a) the amount of
such Allowed Claim if such amount is
less than or equal to $500, or (b) $500,
if the amount of such Allowed Claim is
greater than $500 and less than $1,000.
Class 4 Claims are not Impaired.
CLASS 5 -GENERAL UNSECURED On the Distribution Date, each holder of
CLAIMS an Allowed Class 5 General Unsecured
Claim shall receive, in full
Estimated Allowed Amount satisfaction, settlement, release and
for all Debtors: discharge of and in exchange for such
$ Class 5 General Unsecured Claim, such
holder's Pro Rata share of the Warrants
in accordance with Section 7.4 of the
Plan. Notwithstanding the inclusion of
any deficiency Claim related to the
Prepetition Credit Facility Claims in
this Class, such holders shall not
receive any distribution on account of
such deficiency Claims. Class 5 Claims
are Impaired.
CLASS 6 -SUBORDINATED The holders, if any, of Allowed Class 6
SECURITIES CLAIMS Subordinated Securities Claims will not
receive any distribution under the Plan
on account of such Claims. Class 6
Claims are Impaired.
CLASS 7 -INTERESTS The holders of Interests will not
receive any distribution of property
under the Plan on account of their
Interests and, on the Effective Date,
the Interests shall be cancelled. Class
7 Interests are Impaired.
C. IMPLEMENTATION OF THE PLAN
The Plan contemplates that the Reorganized Debtors will enter into a
[$_______ million] revolving credit and term loan facility (the "New Credit
Facility") upon their emergence from Chapter 11. The Reorganized Debtors will
use the proceeds of the New Credit Facility to make the Cash distributions
required under the Plan and
vii
<PAGE> 9
to provide working capital for postpetition operation of the core
businesses.
D. RECOVERY ANALYSIS
After careful review of the Debtors' current business operations,
estimated recoveries in a liquidation scenario, and prospects as an ongoing
business, the Debtors have concluded that the recovery to creditors will be
maximized by the Debtors' continued operation as a going concern. The Debtors
believe that their businesses and assets have significant value that would not
be realized in a liquidation, either in whole or in substantial part. According
to the liquidation and other analyses prepared by the Debtors with the
assistance of their financial advisors, the value of the Debtors' Estates is
considerably greater as a going concern than in a liquidation.
Accordingly, the Debtors believe that the Plan provides the best
recoveries possible for the holders of Claims against the Debtors and strongly
recommend that you vote to accept the Plan.
viii
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
I. INTRODUCTION............................................................................................ 1
II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES.................................................. 2
A. Definitions.................................................................................... 2
B. Notice to Holders of Claims and Holders of Interests........................................... 2
C. Solicitation Package........................................................................... 3
D. Voting Procedures, Ballots and Voting Deadline................................................. 3
E. Confirmation Hearing and Deadline for Objections to
Confirmation................................................................................... 4
III. HISTORY OF THE DEBTORS AND COMMENCEMENT OF THE CASES..................................................... 6
A. Overview of Prepetition Business Operations.................................................... 6
B. Prepetition Acquisition Activities............................................................. 15
C. Legal Proceedings.............................................................................. 18
D. Events Leading to the Debtors' Chapter 11 Filing............................................... 23
E. Need for Restructuring and Chapter 11 Relief................................................... 24
F. Development of a New Business Plan............................................................. 25
IV. PREPETITION CAPITAL STRUCTURE OF THE DEBTORS............................................................ 26
A. Liquidity and Capital Resources................................................................ 26
B. The Prepetition Credit Facilities.............................................................. 27
C. Debentures..................................................................................... 29
V. CORPORATE STRUCTURE OF THE DEBTORS...................................................................... 30
A. Current Corporate Structure.................................................................... 30
B. Board of Directors of FPA...................................................................... 30
C. Senior Officers of FPA......................................................................... 31
VI. THE CHAPTER 11 CASES.................................................................................... 33
A. Continuation of Business; Stay of Litigation................................................... 33
B. Significant Events During the Chapter 11 Cases................................................. 33
C. Summary of New Business Plan................................................................... 41
VII. SUMMARY OF THE REORGANIZATION PLAN....................................................................... 45
A. Overall Structure of the Plan.................................................................. 46
B. Classification and Treatment of Claims and Interests........................................... 47
C. Description of Securities To Be Issued in Connection
with the Plan.................................................................................. 53
D. Registration Rights............................................................................ 55
E. Post-Consummation Operations of the Debtors.................................................... 56
F. Distributions Under the Plan................................................................... 59
G. Miscellaneous Matters.......................................................................... 63
</TABLE>
ix
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
<S> <C>
H. Preservation of Rights of Action...............................................................69
I. The Affiliated Bankruptcies....................................................................70
VIII. CERTAIN FACTORS TO BE CONSIDERED...........................................................................70
A. General Considerations.........................................................................71
B. Certain Bankruptcy Considerations..............................................................71
C. Inherent Uncertainty of Financial Projections..................................................71
D. Dividends......................................................................................72
E. Potential Dilution Caused by the Warrants and the
Senior Management Options......................................................................72
F. Access to Financing............................................................................72
G. Competition....................................................................................73
IX. RESALE OF SECURITIES RECEIVED UNDER THE PLAN............................................................73
X. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN.....................................................74
A. Federal Income Tax Consequences to the Debtors.................................................75
B. Federal Income Tax Consequences to Holders of Claims...........................................77
XI. FEASIBILITY OF THE PLAN AND THE BEST
INTERESTS OF CREDITORS..................................................................................80
A. Feasibility of the Plan........................................................................80
B. Acceptance of the Plan.........................................................................81
C. Best Interests of Holders of Claims............................................................82
D. Liquidation Analysis...........................................................................83
E. Valuation of the Reorganized Debtors...........................................................84
F. Application of the "Best Interests" of Creditors Test
to the Liquidation Analysis and the Valuation of the
Reorganized Debtors............................................................................87
G. Confirmation Without Acceptance of All Impaired
Classes: The "Cramdown" Alternative...........................................................87
H. Conditions to Confirmation and/or Consummation.................................................88
I. Waiver of Conditions to Confirmation and/or
Consummation...................................................................................90
J. Retention of Jurisdiction......................................................................91
XII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION
OF THE PLAN.............................................................................................92
A. Continuation of the Chapter 11 Cases...........................................................92
B. Alternative Plans of Reorganization............................................................92
C. Liquidation under Chapter 7 or Chapter 11......................................................93
XIII. VOTING REQUIREMENTS........................................................................................94
</TABLE>
x
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
<S> <C>
A. Parties in Interest Entitled to Vote...........................................................96
B. Classes Impaired Under the Plan................................................................98
XIV. CONCLUSION...............................................................................................98
A. Hearing on and Objections to Confirmation......................................................98
B. Recommendation.................................................................................99
</TABLE>
APPENDICES
Appendix A -- Joint Plan of Reorganization of FPA Medical
Management, Inc. and Its Subsidiaries and
Affiliates
Appendix B -- Charts Depicting Prepetition Corporate Structure
of FPA, Its Subsidiaries and Affiliates Including
the Professional Corporations
Appendix C -- FPA's 10-K for Fiscal Year Ended December 31, 1997 and 10-Q for
the Fiscal Quarter Ended March 31, 1998
Appendix D -- Liquidation Analysis
Appendix E -- Pro Forma Financial Projections
Appendix F -- List of Combining Transactions
xi
<PAGE> 13
DISCLOSURE STATEMENT WITH RESPECT TO PLAN OF REORGANIZATION OF
FPA MEDICAL MANAGEMENT, INC. AND ITS SUBSIDIARIES AND AFFILIATES
I. INTRODUCTION
FPA Medical Management, Inc. ("FPA") and those of its Subsidiaries and
Affiliates who are also debtors and debtors-in-possession in the
above-referenced bankruptcy cases (collectively, the "Debtors") submit this
disclosure statement (the "Disclosure Statement") pursuant to section 1125 of
the Bankruptcy Code, for use in the solicitation of votes on the Joint Plan of
Reorganization of FPA Medical Management, Inc. and its Subsidiaries and
Affiliates (collectively, the "Plan") proposed by the Debtors and filed with the
United States Bankruptcy Court for the District of Delaware on September 30,
1998 a copy of which is annexed as Appendix A of this Disclosure Statement.
This Disclosure Statement sets forth certain information regarding the
Debtors' prepetition operating and financing history, the need to seek chapter
11 protection, significant events that have occurred during the Chapter 11
Cases, and the anticipated organization, operations and financing of the
Reorganized Debtors. This Disclosure Statement also describes terms and
provisions of the Plan, including certain alternatives to the Plan, certain
effects of confirmation of the Plan, certain risk factors associated with
securities to be issued under the Plan, and the manner in which distributions
will be made under the Plan. In addition, this Disclosure Statement discusses
the confirmation process and the voting procedures that holders of Claims in
Impaired Classes must follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS
PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND INTERESTS
IN THE DEBTORS, PLEASE SEE SECTION VII, "SUMMARY OF THE REORGANIZATION PLAN,"
AND SECTION VIII, "CERTAIN FACTORS TO BE CONSIDERED."
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF
THE PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATED TO THE PLAN,
CERTAIN EVENTS IN THE CHAPTER 11 CASES AND CERTAIN FINANCIAL INFORMATION.
ALTHOUGH THE DEBTORS BELIEVE THAT THE PLAN AND RELATED DOCUMENT SUMMARIES ARE
FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT
SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL
INFORMATION CONTAINED IN THIS DISCLOSURE
1
<PAGE> 14
STATEMENT HAS BEEN PROVIDED BY THE DEBTORS' MANAGEMENT, EXCEPT WHERE OTHERWISE
SPECIFICALLY NOTED. THE DEBTORS DO NOT WARRANT OR REPRESENT THAT THE INFORMATION
CONTAINED HEREIN, INCLUDING THE FINANCIAL INFORMATION, IS WITHOUT ANY MATERIAL
INACCURACY OR OMISSION.
II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES
A. DEFINITIONS
Except as otherwise provided herein, capitalized terms not otherwise
defined in this Disclosure Statement have the meanings ascribed to them in the
Plan.
B. NOTICE TO HOLDERS OF CLAIMS AND HOLDERS OF INTERESTS
This Disclosure Statement is being transmitted to certain holders of
Claims against, or Interests in, the Debtors. The purpose of this Disclosure
Statement is to provide adequate information to enable the holders of Claims
against the Debtors to make a reasonably informed decision with respect to the
Plan prior to exercising your right to vote to accept or reject the Plan.
On [___________], 1998, the Bankruptcy Court approved this Disclosure
Statement as containing information of a kind and in sufficient detail adequate
to enable the holders of Claims against the Debtors to make an informed judgment
with respect to acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S
APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE EITHER A GUARANTY OF
THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN OR AN
ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT.
ALL HOLDERS OF CLAIMS AGAINST THE DEBTORS ARE ENCOURAGED TO READ THIS
DISCLOSURE STATEMENT AND ITS APPENDICES CAREFULLY AND IN THEIR ENTIRETIES BEFORE
DECIDING TO VOTE EITHER TO ACCEPT OR TO REJECT THE PLAN. This Disclosure
Statement contains important information about the Plan, considerations
pertinent to acceptance or rejection of the Plan, and developments concerning
the Chapter 11 Cases.
THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE
BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ON THE
PLAN. No solicitation of votes may be made except after distribution of this
Disclosure Statement, and no person has
2
<PAGE> 15
been authorized to distribute any information concerning the Debtors other than
the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY
ITS NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS AND PROJECTIONS
THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS. Except with
respect to the projections set forth in Appendix E annexed hereto (the
"Projections") and except as otherwise specifically and expressly stated herein,
this Disclosure Statement does not reflect any events that may occur subsequent
to the date hereof and that may have a material impact on the information
contained in this Disclosure Statement. Neither the Debtors nor the Reorganized
Debtors intend to update the Projections for the purposes hereof; thus, the
Projections will not reflect the impact of any subsequent events not already
accounted for in the assumptions underlying the Projections. Further, the
Debtors do not anticipate that any amendments or supplements to this Disclosure
Statement will be distributed to reflect such occurrences. Accordingly, the
delivery of this Disclosure Statement shall not under any circumstance imply
that the information herein is correct or complete as of any time subsequent to
the date hereof.
EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED
HEREIN HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTING FIRM AND HAS NOT
BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
C. SOLICITATION PACKAGE
Accompanying this Disclosure Statement are copies of (i) the Plan; (ii)
the notice of, among other things, the time for submitting Ballots to accept or
reject the Plan, the date, time and place of the hearing to consider
confirmation of the Plan and related matters, and the time for filing objections
to confirmation of the Plan (the "Confirmation Hearing Notice"); and (iii) if
you are the holder of Claim(s) entitled to vote on the Plan, one or more Ballots
(and return envelopes) to be used by you in voting to accept or to reject the
Plan.
D. VOTING PROCEDURES, BALLOTS AND VOTING DEADLINE
After carefully reviewing the Plan, this Disclosure Statement and the
detailed instructions accompanying your Ballot, please indicate your acceptance
or rejection of the Plan by voting in
3
<PAGE> 16
favor of or against the Plan on the enclosed Ballot. Please complete and sign
your original Ballot (copies will not be accepted) and return it in the envelope
provided. HOLDERS OF PREPETITION NOTES SHOULD REFER TO "SPECIAL NOTE FOR HOLDERS
OF PREPETITION NOTES" IN SECTION XIII FOR FURTHER INFORMATION REGARDING VOTING
PROCEDURES.
Each Ballot has been coded specially to reflect the Class of Claims it
represents. Accordingly, in voting to accept or reject the Plan, you must use
only the specially coded Ballot or Ballots sent to you with this Disclosure
Statement.
IN ORDER FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE PROPERLY
COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING INSTRUCTIONS ON
THE BALLOT AND RECEIVED NO LATER THAN [____________, 1998, AT _____ P.M.] (EST)
(THE "VOTING DEADLINE") BY WR GRUBER & ASSOCIATES, P.O. BOX 757, LOVELAND, OHIO
45140-0757 (THE "VOTING AGENT"). DO NOT RETURN ANY STOCK CERTIFICATES OR DEBT
INSTRUMENTS WITH YOUR BALLOT.
If you have any questions about (i) the procedure for voting your Claim
or Interest or with respect to the packet of materials that you have received,
(ii) the amount of your Claim, or (iii) if you wish to obtain, at your own
expense, unless otherwise specifically required by Federal Rule of Bankruptcy
Procedure 3017(d), an additional copy of the Plan, this Disclosure Statement or
any appendices or exhibits to such documents, please contact:
WR Gruber & Associates
8520 East Kemper Road
Suite 8
Cincinnati, Ohio 45249
(513) 247-0050
FOR FURTHER INFORMATION AND INSTRUCTION ON VOTING TO ACCEPT OR
REJECT THE PLAN, SEE SECTION XIII, "VOTING REQUIREMENTS."
E. CONFIRMATION HEARING AND DEADLINE FOR OBJECTIONS TO
CONFIRMATION
Pursuant to section 1128 of the Bankruptcy Code and Federal Rule of
Bankruptcy Procedure 3017(c), the Bankruptcy Court has scheduled the
Confirmation Hearing for Wednesday, December 9, 1998, at 10:00 a.m. (EST) before
the Honorable Peter J. Walsh, Chief United States Bankruptcy Judge, at Marine
Midland Plaza, 824 Market
4
<PAGE> 17
Street, 6th Floor, Wilmington, Delaware 19801. The Confirmation Hearing may be
adjourned from time to time by the Bankruptcy Court without further notice
except for the announcement of the adjournment date made at the Confirmation
Hearing or at any subsequent adjourned Confirmation Hearing. The Bankruptcy
Court has directed that objections, if any, to confirmation of the Plan be filed
with the Clerk of the Bankruptcy Court and served so that they are RECEIVED on
or before [__________, 1998, at _____ p.m.] (EST) by:
Counsel for the Debtors
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Attn: John Wm. Butler, Jr.
J. Eric Ivester
J. Gregory St. Clair
- and -
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
Wilmington, Delaware 19899
Attn: Gregg M. Galardi
United States Trustee
The Office of the United States Trustee
601 Walnut Street
Curtis Center, Suite 950-W
Philadelphia, Pennsylvania 19106
Attn: Maria D. Giannirakis
Co-Counsel for the Creditors' Committee
Holleb & Coff
55 East Monroe
Chicago, Illinois 60603
Attn: Keith J. Shapiro
The Bayard Firm
919 Market Street, 16th Floor
P.O. Box 25130
Wilmington, Delaware 19899
5
<PAGE> 18
Attn: Neil B. Glassman
Co-Counsel for the Prepetition Agent
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3914
Attn: Lillian E. Kraemer
Ken S. Ziman
Duane Morris & Heckscher
120 Market Street
Wilmington, Delaware 19899
Attn: Teresa K.D. Currier
THE SUBSTANTIVE TERMS OF THE PROPOSED PLAN ARE IN SUBSTANTIAL
CONFORMITY WITH THE TERMS OF A PRENEGOTIATED PLAN OF REORGANIZATION NEGOTIATED
WITH THE DEBTORS' PREPETITION BANK GROUP, ENDORSED BY THE DEBTORS' BOARD OF
DIRECTORS ON JULY 18, 1998 AND FILED ON JULY 22, 1998 ON FORM 8-K WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS, APPOINTED ON AUGUST 3, 1998 IN THE DEBTORS' JOINTLY ADMINISTERED
CHAPTER 11 CASES, HAS INFORMED THE DEBTORS THAT IT DOES NOT SUPPORT THE PLAN AS
PROPOSED AND NEGOTIATIONS ARE CONTINUING AMONG THE DEBTORS, THE PREPETITION AND
DIP BANK GROUPS AND THE COMMITTEE IN ADVANCE OF THE DISCLOSURE STATEMENT
HEARING.
III. HISTORY OF THE DEBTORS AND COMMENCEMENT OF THE CASES
A. OVERVIEW OF PREPETITION BUSINESS OPERATIONS
FPA is a national physician practice management company. Founded in
1986 by five primary care physicians, FPA and certain of its Subsidiaries
(defined below) manage primary care physician practice networks and provide
contract management services to hospital-based emergency departments. Certain of
the Debtors also provide primary and specialty care services to capitated
managed care enrollees and fee-for-service patients.
1. Core Business Philosophy
Prior to the commencement of the Chapter 11 Cases, through their
various entities, the Debtors sought to manage two primary points of entry into
the managed health care delivery system--the
6
<PAGE> 19
primary care physician's office and the emergency department. The Debtors offer
physicians the opportunity to participate more effectively in managed care
programs by organizing physician groups within geographic areas to contract with
health maintenance organizations ("HMOs") or other prepaid health insurance
plans (collectively, the "Payors"). The Debtors enhance physician practice
management operations by providing 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 integrated information
systems.
2. Summary of the Debtors' Prepetition Business Practices
Prior to the commencement of the Chapter 11 Cases, the Debtors were in
the business of providing primary and specialty care services to capitated
managed care enrollees and fee-for-service patients. As of March 31, 1998, the
Debtors were affiliated with approximately 7,900 primary care physicians
(including emergency department physicians) who provided services to
approximately 1,416,800 enrollees of 61 different Payors in 29 states (including
the District of Columbia).
FPA's relationships with its subsidiaries (the "Subsidiaries") and
affiliated professional corporations (the "Professional Corporations"), other
providers of medical services and Payors offer physicians the opportunity to
participate more effectively in managed care programs by organizing physician
groups within geographic areas to contract with Payors. The Debtors believe that
their management model is appealing to physicians because it allows the
physicians to retain control of their own practices while gaining access to more
patients through participation in a managed care program.
The Debtors manage and are financially responsible for all covered
primary and specialty medical care for each enrollee who selects an affiliated
physician as his or her primary care physician in exchange for monthly fixed or
percent-of-premium payments ("professional capitation") pursuant to contracts
with Payors. Certain physicians also provide services on a fee-for-service basis
(as opposed to professional capitation). Specialty care physician services,
inpatient hospitalization and certain other services managed by primary care
physicians are subject to pre-authorization guidelines and are provided through
contracts based on discounted fee-for-service, per diem or professional
7
<PAGE> 20
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. Certain of the
Subsidiaries and Professional Corporations also accept financial responsibility
for hospital and ancillary health care services in addition to primary and
specialty medical care in return for payment from the Payors on a capitated or
percent-of-premium basis ("global capitation"). Pursuant to global capitation
arrangements, the Debtors, through their affiliated physicians, provide the
majority of covered health care services to enrollees and contracts with
hospitals and other health care providers for the balance of the covered
services.
Through the Sterling Group, the Debtors also provide physician
management services pursuant to approximately 150 contracts to hospital
emergency departments, urgent care, radiology and correctional facilities. The
Debtors recruit physicians and contract for their services to provide staffing
of hospital emergency departments and related facilities. The Sterling Group
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.
3. Physician Practice Management
The Debtors historically have provided physician practice management
services to affiliated physicians pursuant to long-term administrative services
agreements (the "Administrative Services Agreements"). The Debtors' physician
practice management revenue is derived primarily from Payor contracts that
compensate certain of the Subsidiaries and Professional Corporations on a
capitated basis and from the provision of fee-for-service medical services.
Pursuant to Payor contracts, the Professional Corporations or
Subsidiaries provide covered medical services (including, in certain instances,
hospital and ancillary health care services) and receive capitation payments
from Payors for each enrollee who selects a Debtor-affiliated physician as his
or her primary care physician. Contracts with Payors generally provide for terms
of one to thirty years and are subject to annual renegotiation of capitation
rates, covered benefits and other terms and conditions. At times, Payor
contracts may be continued on a month-to-month basis while the parties
renegotiate the terms of the contracts. See Section VI.B, "Significant Events
During the Chapter 11 Cases,"
8
<PAGE> 21
for a discussion of recent developments regarding the Payor contracts.
Certain of the affiliated physicians who render services on a
fee-for-service basis (as opposed to professional capitation) typically bill
various Payors, such as governmental programs (e.g., Medicare and Medicaid),
private insurance plans and managed care plans, for the health care services
provided to their patients. Payors can deny reimbursement if they determine that
treatment was not performed in accordance with the cost-effective treatment
methods established by such Payors, was experimental or for other reasons.
The Debtors, through certain of the Subsidiaries and the Professional
Corporations, contract with a variety of providers, including primary and
specialty care physicians, hospitals and other ancillary providers. 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.
Certain of the Debtors (sometimes, "MSO Debtors") provide certain
services to the Professional Corporations pursuant to the Administrative
Services Agreements. These services are as follows:
a. Integrated Information Systems
The Debtors developed and now maintain integrated information systems
("IS") in order to support their growth and acquisition plans. The IS consist of
an on-line database that provides inpatient and outpatient utilization
statistics and patient encounter reporting and tracking. This data plays an
integral role in the specialty care physician and hospital utilization review
process by enabling the medical directors and utilization review nurses to
monitor encounter data, case management decisions and patient outcomes. Further,
the MSO Debtors use the IS to perform administrative functions, including
insurance verification, payment of accounts payable, financial reporting and
claims payment. The IS also include the customer service documentation system
which assists the Debtors in resolving concerns enrollees may have and in
evaluating patient and physician satisfaction. In addition, the
9
<PAGE> 22
Debtors have developed IS specific to hospital and clinical management services.
The IS collect data regarding patient flow utilization, physician efficiency and
other data used by the Sterling Group and hospital clients. In particular, the
Sterling Group uses the data to develop emergency room staffing patterns.
b. Claims Administration and Billing Services
The MSO Debtors perform complete medical bill review and claims
processing, invoicing and payment functions. This includes determining enrollee
eligibility, identifying appropriate benefits, issuing payments to providers,
processing hospital and outpatient facility charges for the payment of claims,
invoicing fee-for-service visits and providing and analyzing encounter data.
c. Utilization Management
Debtor-affiliated physicians have established a utilization management
program to help ensure the delivery of high quality, cost-effective health care.
Utilization management encourages affiliated physicians to provide
cost-effective, quality care by emphasizing preventive medicine and by
eliminating unnecessary tests, procedures, surgeries, hospitalizations and
specialty care physician referrals. 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. The Debtors have developed separate utilization management
committees on a regional basis due to expansion into new geographic markets.
d. 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
10
<PAGE> 23
basis for enrollees experiencing selected health problems, such as
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 ensures a continuum of quality care throughout the extended treatment
period.
e. Quality Assurance
The Debtors maintain, as a service to both their 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.
f. Physician Credentialing and Recruitment
As a service to Payors and the Professional Corporations, the MSO
Debtors verify that the credentials of affiliated physicians meet the minimum
requirements specified in Payor contracts. In addition, the MSO Debtors assist
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 affiliated physicians are licensed to practice medicine in the state
where they provide medical services and are generally either board certified or
board eligible.
g. Succession Agreements
In certain states in which the Debtors conduct or may conduct business,
general business corporations are not permitted to practice medicine, exercise
control over physicians who practice medicine or engage in certain practices
such as fee-splitting with physicians. Through the succession agreements, the
Debtors retain direct or indirect unilateral and perpetual control over the
assets and operations of the Professional Corporations whose operations the
Debtors consolidate. Charts depicting the prepetition corporate structure of FPA
and its Subsidiaries and Affiliates
11
<PAGE> 24
including the Professional Corporations are attached hereto as Appendix B.
4. Emergency Department Management
The Sterling Group provides management services to 143 hospital
emergency departments, one radiology department, three urgent care clinics and
three correctional institutional health facilities in 28 states pursuant to 151
contracts. The Sterling Group contracts with approximately 1,700 affiliated
physicians who typically provide all necessary physician coverage for these
services on a 24-hour per day basis to approximately 1.95 million patients
annually.
In this capacity, the Sterling Group regularly identifies and recruits
physicians as candidates for admission to a client's medical staff and
coordinates the ongoing scheduling of staff physicians, who provide clinical
coverage primarily in the area of emergency medicine. The Sterling Group also
provides on-site medical directors for the hospitals' emergency departments, who
work directly with the hospital medical staff and administration in such areas
as quality assurance, risk management and departmental accreditation.
a. Physician Contracts
The Sterling Group contracts with physicians as independent contractors
to provide services to hospital clients. The physicians are typically
compensated on a flat rate based on the number of hours of coverage provided.
Some physicians may receive additional compensation based upon departmental
performance and their individual contribution to such performance. Affiliating
with the Sterling Group for the provision of emergency department services
offers physicians the opportunity to minimize their administrative burden and
concentrate on the practice of medicine. As a provider of contract management
services across a broad geographic spectrum, the Sterling Group 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.
12
<PAGE> 25
b. Emergency Department Contracts
The Sterling Group's services to hospitals are provided under
fee-for-service and flat-rate contracts. Pursuant to the contracts, the
hospitals authorize the Sterling Group and their contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by the contracted health care professionals. The
Sterling Group 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 the Sterling Group's
services. Pursuant to such arrangements, the Sterling Group 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 Payors and
uncollectibility of accounts.
5. Prepetition Financial Results
a. Selected Financial Data for the Fiscal Year Ended
December 31, 1997
The Debtors maintained consolidated financial accounting records and
filed consolidated federal tax returns prior to filing for protection under
chapter 11 of the Bankruptcy Code. For the fiscal year ending December 31, 1997,
FPA reported consolidated revenues of approximately $1.2 billion, with a net
loss of approximately $876,000. At the same time, the Debtors reported total
assets of approximately $831 million and total liabilities of approximately $649
million.
b. Selected Financial Data as of March 31, 1998
As of March 31, 1998, FPA administered assets of approximately $1.01
billion at book value, including intangible assets of $537.2 million (e.g.,
goodwill). As of March 31, 1998, FPA's total current and long-term liabilities
equaled $796.6 million.
The following tables set forth selected financial data as of March 31,
1998, as reported in FPA's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, as filed with the Securities and Exchange Commission ("SEC").
13
<PAGE> 26
The first table sets forth the condensed consolidated statements of
operations (unaudited) for the three months ended March 31, 1997 and 1998 (in
thousands) as reported in FPA's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
<TABLE>
<CAPTION>
(in thousands) THREE MONTHS ENDED
---------------------------
MARCH 31, 1998 MARCH 31, 1997
--------- ---------
<S> <C> <C>
Managed Care Revenue $ 317,980 $ 228,652
Fee-for-service Revenue, Net of 50,223 47,829
Contractual Deductions
Management Services Revenue 8,769 8,084
Other Operating Revenue 15,262 10,312
--------- ---------
Operating Revenue 392,234 294,877
Medical Services Expense 312,632 212,943
--------- ---------
79,602 81,934
General and Administrative Expense 64,524 67,553
Depreciation and Amortization 8,733 7,161
Merger, Restructuring and Other 15,460 36,834
Unusual Expenses
--------- ---------
Loss from Operations (9,115) (29,614)
Interest and Other Income 831 1,299
Interest Expense (6,447) (4,430)
--------- ---------
Total Other Expense (5,616) (3,131)
--------- ---------
Loss Before Minority Interests and (14,731) (32,745)
Income Taxes
Minority Interests' Shares in Net Loss -- 102
Income Tax Benefit 5,598 8,110
--------- ---------
Net Loss $ (9,133) $ (24,533)
</TABLE>
The following two tables set forth, as to the Debtors' primary business
segments, for the three months ended March 31, 1997 and 1998 selected financial
data by business segment (in thousands) and selected financial data expressed as
a percentage of operating revenue, as reported in the Debtors' March 31, 1998
10-Q.
14
<PAGE> 27
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF THREE MONTHS ENDED
OPERATIONS
------------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1998 MARCH 31, 1997
------------------------------------------------------ --------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 344,511 $ 47,723 $ 392,234 $ 258,870 $ 36,007 $ 294,877
Medical Services Expense 276,195 36,437 312,632 186,435 26,508 212,943
General and Administrative Expense 57,944 6,580 64,524 61,475 6,078 67,553
Depreciation and Amortization 7,591 1,142 8,733 6,312 849 7,161
Merger, Restructuring and Other 15,460 -- 15,460 36,834 -- 36,834
Unusual Charges
--------- --------- --------- --------- --------- ---------
Income (Loss) from Operations (12,679) 3,564 (9,115) (32,186) 2,572 (29,614)
Other (Income) Expense 5,575 41 5,616 3,109 22 3,131
--------- --------- --------- --------- --------- ---------
Income (Loss) Before Minority (18,254) 3,523 (14,731) (35,295) 2,550 (32,745)
Interests and Income Taxes
Minority Interests' Shares -- -- -- 102 -- 102
in Net Loss
Income Tax Benefit (Expense) 6,937 (1,339) 5,598 8,742 (632) 8,110
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (11,317) $ 2,184 $ (9,133) $ (26,451) $ 1,918 $ (24,533)
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF THREE MONTHS ENDED
OPERATIONS
-----------------------------------------------------------------
PERCENTAGE OF OPERATING REVENUE MARCH 31, 1998 MARCH 31, 1997
------------------------------ ------------------------------
(IN THOUSANDS) MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Medical Services Expense 80.2% 76.3% 79.7% 72.0% 73.6% 72.2%
General and Administrative Expense 16.8% 13.8% 16.5% 23.7% 16.9% 22.9%
Depreciation and Amortization 2.2% 2.4% 2.2% 2.4% 2.3% 2.4%
Merger, Restructuring and Other 4.5% 0.0% 3.9% 14.2% 0.0% 12.5%
Unusual Charges
----- ----- ----- ----- ----- -----
Income (Loss) from Operations (3.7)% 7.5% (2.3)% (12.3)% 7.2% (10.0)%
Other (Income) Expense 1.6% 0.1% 1.4% 1.2% 0.1% 1.1%
----- ----- ----- ----- ----- -----
Income (Loss) Before Minority (5.3)% 7.4% (3.7)% (13.5)% 7.1% (11.1)%
Interests and Income Taxes
Minority Interests' Shares 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
in Net Loss
Income Tax Benefit (Expense) 2.1% (2.8)% 1.4% 3.4% (1.7)% 2.8%
----- ----- ----- ----- ----- -----
Net Income (Loss) (3.2)% 4.6% (2.3)% (10.1)% 5.4% (8.3)%
</TABLE>
c. Selected Financial Data as of ________________, 1998
[Information to come]
15
<PAGE> 28
B. PREPETITION ACQUISITION ACTIVITIES
Prior to seeking chapter 11 relief, the Debtors' strategy was to
increase enrollment by adding new Payor relationships and new providers to the
Debtors' network and by expanding into new geographic areas where the
penetration of managed health care was growing. The Debtors' primary method of
implementing this business strategy was by acquiring medical groups, independent
practice associations ("IPAs") and physician practice management companies
("PPMs").
FPA and certain of the Subsidiaries completed the following
acquisitions in the fiscal year ended December 31, 1997 (all information
relating to the number of physicians and enrollees is at the time of
acquisition):
- In March 1997, the Debtors acquired AHI Healthcare Systems, Inc.
("AHI") in a stock-for-stock merger accounted for as a pooling of
interests. AHI developed integrated health care delivery networks and
provide managed care services primarily in California, Texas and
Florida.
- In June 1997, the Debtors acquired HealthCap, Inc. in a
stock-for-stock merger accounted for as a pooling of interests.
HealthCap, Inc. provided PPM services primarily in California,
Florida, Georgia, Missouri and Nevada.
- In September 1997, the Debtors acquired Emergency Medical Care, Inc.
for cash and stock. Emergency Medical Care, Inc. provided PPM services
to hospital emergency departments and radiology departments in
Missouri and Illinois.
- In September 1997, the Debtors acquired Axminster Medical Group, Inc.
("Axminster") in a stock-for-stock merger accounted for as a pooling
of interests. Axminster is a medical group which employed
approximately 20 physicians in the Los Angeles, California area and
served approximately 17,000 enrollees.
- In October 1997, the Debtors acquired Health Partners, Inc. ("Health
Partners") in a stock-for-stock merger accounted for as a pooling of
interests. Health Partners is a PPM which invested in and managed
multi-specialty group practices and IPAs, primarily in the New York
City metropolitan area,
16
<PAGE> 29
northern Virginia, Washington, D.C., northern Kentucky and San
Antonio, Texas.
- In October 1997, the Debtors acquired Carolina Health Care Group for
cash. Carolina Health Care Group is a medical group which employed
approximately 14 physicians in the Charlotte, North Carolina area and
served approximately 26,000 enrollees.
- In November 1997, the Debtors acquired Cornerstone Physicians
Corporation ("Cornerstone") in a stock-for-stock merger accounted for
as a pooling of interests. Cornerstone provided management and
administrative services to physician groups.
The Debtors also completed certain acquisitions or entered into
acquisition arrangements after December 31, 1997 and prior to the Petition Date,
as follows:
- In January 1998, the Debtors acquired Avanti Health Systems of Texas,
Inc. and its affiliated professional corporations. Avanti Health
Systems of Texas, Inc. managed 20 health care clinics in Houston and
Dallas, Texas and employed approximately 60 physicians which served
approximately 50,000 enrollees.
- In January 1998, the Debtors completed the acquisition of Physicians
Quality Care, Ltd. and Associates in Managed Care, Ltd. Physicians
Quality Care, Ltd. provided physician practice management services in
the Chicago, Illinois area. Associates in Managed Care, Ltd. was
affiliated with approximately 420 primary care physicians who provided
services to approximately 27,000 enrollees.
- In February 1998, the Debtors completed the acquisition of Emergency
Treatment Associates, Inc. Emergency Treatment Associates, Inc.
provided contract management services to six hospitals in two states
through approximately 40 affiliated emergency department physicians.
- On March 20, 1998, the Debtors acquired Orange Coast Managed Care
Services, Inc. and St. Joseph Medical Corporation in a stock-for-stock
transaction in which shares of the Debtors' common stock were issued
in exchange for all the outstanding shares of capital stock and
options of St. Joseph
17
<PAGE> 30
Medical Corporation and Orange Coast Managed Care Services, Inc.
(except for certain shares which were cancelled without consideration
in connection with the merger). The merger with St. Joseph Medical
Corporation was accounted for as a pooling of interests, while the
merger with Orange Coast Managed Care Services, Inc. was treated as a
purchase. Orange Coast Managed Care Services, Inc. provided
administrative management services to St. Joseph Medical Corporation's
IPA and medical group physicians in Orange County, California. Orange
Coast Managed Care Services, Inc. and St. Joseph Medical Corporation
served approximately 120,000 managed care enrollees through
approximately 250 primary care physicians as of December 31, 1997.
- On April 1, 1998, the Debtors completed the acquisition of Meridian
Medical Group, Inc. ("Meridian") and certain assets of the Meridian
clinic sites for cash and stock. The purchase price of Meridian
consisted of the issuance of 1,051,770 shares of FPA common stock,
approximately $4 million of cash and notes payable, as well as future
contingent consideration of up to $5 million payable in cash, based on
the achievement of certain performance criteria. The purchase price of
the assets consisted of $2.5 million cash and up to approximately $9.8
million in future capitation payment reductions. Meridian was
affiliated with 65 physicians and provided services to approximately
70,000 enrollees in the Atlanta, Georgia area.
Most of the Debtors' significant acquisitions have been accounted for
as poolings of interests for accounting and financial reporting purposes.
C. LEGAL PROCEEDINGS
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
Debtors require all affiliated physicians to carry certain minimum amounts of
malpractice insurance coverage. The Professional Corporations and certain
Subsidiaries maintain their own malpractice insurance. The Debtors also maintain
an errors and omissions insurance policy which covers utilization review
18
<PAGE> 31
activities. The Debtors maintain professional liability insurance for
themselves, their hospital clients and their contracted physicians, in amounts
the Debtors deem to be appropriate, based upon historical claims and the nature
and risks of their business. In addition to any general potential tort liability
of the Debtors, the Sterling Group's contracts with hospitals generally contain
provisions under which the Sterling Group agrees to indemnify the hospitals for
certain losses resulting from the negligence of the hospital or hospital
personnel.
The Debtors have been and continue to be parties to such legal actions
arising in the ordinary course of business. The commencement of the Chapter 11
Cases acted to stay these actions. While there can be no assurance that the
Debtors will be successful in any such litigation, the Debtors do not believe
any such litigation will have a material adverse effect on the Debtors' results
of operations or financial condition.
1. Class Action Lawsuits
The Debtors have received notice of, or have been served with, several
federal and state court purported class action lawsuits, some of which are
described below.
a. Steven Friedland, Trustee, on Behalf of Himself and
All Others Similarly Situated
In Steven Friedland, Trustee, on Behalf of Himself and All Others
Similarly Situated vs. FPA Medical Management, Inc., et al, Number 98 CV 930 JM,
filed in the United States District Court, Southern District of California, on
May 18, 1998, the plaintiff, a current or former stockholder of FPA, seeks to
bring this lawsuit on behalf of all persons who purchased common stock of FPA
between March 6, 1998 and May 14, 1998 (the "Friedland Class Period"). In this
lawsuit, the plaintiff alleges violations of federal securities laws. In this
connection, the plaintiff alleges that during the Friedland Class Period, the
defendants (which include FPA and certain of its current and former officers and
directors) provided false and misleading information, by issuing materially
false financial statements and a series of materially false and misleading
statements about FPA's operations and financial condition, that these materially
false and misleading public statements artificially inflated the market price of
FPA's stock during the Friedland Class Period, and that certain of the
defendants and other FPA officers, prior to the disclosure of
19
<PAGE> 32
materially false and misleading statements, sold shares of FPA common stock at
artificially inflated prices for a profit. The plaintiff seeks money damages for
all losses and injuries suffered by the plaintiff and the class as a result of
the acts described in the complaint.
b. Michael Giglio and Roger Rubinger, on Behalf of
Themselves and All Others Similarly Situated
In Michael Giglio and Roger Rubinger, on Behalf of Themselves and All
Others Similarly Situated vs. FPA Medical Management, Inc., et al, Number 98 CV
931 S, filed in the United States District Court, Southern District of
California, on May 18, 1998, the plaintiffs, current or former stockholders of
FPA, seek to bring this lawsuit on behalf of all persons who purchased common
stock of FPA between February 27, 1997 and May 14, 1998 (the "Giglio Class
Period"). In this lawsuit, the plaintiffs allege violations of federal
securities laws. In this connection, the plaintiffs allege that during the
Giglio Class Period, the defendants (which include FPA and certain of its
current and former officers and directors) issued a series of false and
misleading statements as part of a scheme to artificially inflate the market
price of FPA's common stock and to defraud purchasers of that stock during the
Giglio Class Period. The plaintiffs seek compensatory damages, fees and expenses
and extraordinary, equitable and/or injunctive relief.
c. Harold M. Sucher, Individually, and on Behalf of a
Class of Persons Similarly Situated
In Harold M. Sucher, Individually, and on Behalf of a Class of Persons
Similarly Situated vs. FPA Medical Management, Inc., et al, Number 98 CV 932 JM,
filed in the United States District Court, Southern District of California, on
May 18, 1998, the plaintiff, a current or former stockholder of FPA, seeks to
bring this lawsuit on behalf of all persons who purchased common stock of FPA
between February 27, 1997 and May 15, 1998 (the "Sucher Class Period"). In this
lawsuit, the plaintiff alleges violations of federal securities laws. In this
connection, the plaintiff alleges that during the Sucher Class Period, the
defendants (which include FPA and certain of its current and former officers and
directors) misrepresented the truth about FPA, its finances, revenues, gross
margins and future business prospects; in particular, defendants misrepresented
FPA's financial results and operations for each of the quarters of fiscal 1997,
as well as FPA's prospects for the first fiscal quarter of 1998 and as a result
of these material
20
<PAGE> 33
misrepresentations, FPA's securities traded at inflated prices on the NASDAQ
National Market System; and while in possession of material adverse non-public
information about FPA's business and financial condition, certain of the
defendants sold shares of FPA's common stock at a profit. The plaintiff seeks
compensatory damages, fees and expenses and such other relief as the court deems
just and proper.
d. Rick Penick and Coralette Penick, Albert D.
Barnabei and Nancy M. Barnabei, and Frederick M.
Garson on Behalf of Themselves and All Others
Similarly Situated
In Rick Penick and Coralette Penick, Albert D. Barnabei and Nancy M.
Barnabei, and Frederick M. Garson on Behalf of Themselves and All Others
Similarly Situated vs. FPA Medical Management, Inc., et al, Number 98 CV 928 S,
filed in the United States District Court, Southern District of California on
May 18, 1998, the plaintiffs, current or former stockholders of FPA, seek to
bring this lawsuit on behalf of all persons who purchased common stock of FPA
between February 27, 1997 and May 14, 1998 (the "Penick Class Period"). In this
lawsuit, the plaintiffs allege violations of federal securities laws. In this
connection, the plaintiffs allege that during the Penick Class Period, the
defendants (which include FPA and certain of its current and former officers and
directors and Foundation Health Corporation, an alleged controlling person of
FPA during the Penick Class Period) knowingly or recklessly misrepresented the
operating performance of FPA; in so doing, defendants allegedly materially
misled the public by issuing false financial statements that were prepared in
violation of generally accepted accounting principles and that the defendants'
fraudulent scheme and deceptive course of business artificially inflated and
maintained the trading price of FPA common stock during the Penick Class Period
and thereby injured the plaintiffs and other purchasers of FPA stock. The
plaintiffs seek compensatory damages, fees and expenses, extraordinary,
equitable and/or injunctive relief and such other relief as the court deems just
and proper.
e. Natale Longordo, on Behalf of Herself and All
Others Similarly Situated
In Natale Longordo, on Behalf of Herself and All Others Similarly
Situated vs. FPA Medical Management, Inc., et al, Number 98CV 939 K, filed in
the United States District Court, Southern District of California, on May 19,
1998, the plaintiff, a current
21
<PAGE> 34
or former stockholder of FPA, seeks to bring this lawsuit on behalf of all
persons who purchased common stock of FPA between February 27, 1997 and May 14,
1998 (the "Longordo Class Period"). In this lawsuit, the plaintiff alleges
violations of federal securities laws. In this connection, the plaintiff alleges
that during the Longordo Class Period, defendants (which include FPA and certain
of its current and former officers and directors) issued a series of false and
misleading statements as part of a scheme to artificially inflate the market
price of FPA's common stock and to defraud purchasers of that stock during the
Longordo Class Period. The plaintiff seeks compensatory damages, fees and
expenses, extraordinary, equitable and/or injunctive relief and such other
relief as the court deems just and proper.
f. Murray Lebowitz, on Behalf of Himself and All
Others Similarly Situated
In Murray Lebowitz, on Behalf of Himself and All Others Similarly
Situated vs. FPA Medical Management, Inc., et al, Number 98 CV 949 TEG, filed in
the United States District Court, Southern District of California, on May 20,
1998, the plaintiff, a current or former stockholder of FPA, seeks to bring this
lawsuit on behalf of all persons who purchased common stock of FPA between
February 27, 1997 and May 14, 1998 (the "Lebowitz Class Period"). In this
lawsuit, the plaintiff alleges violations of federal securities laws. In this
connection, the plaintiff alleges that during the Lebowitz Class Period,
defendants (which include FPA and certain of its current and former officers and
directors) issued a series of false and misleading statements as part of a
scheme to artificially inflate the market price of FPA's common stock and to
defraud purchasers of that stock during the Lebowitz Class Period. The plaintiff
seeks compensatory damages, fees and expenses, extraordinary, equitable and/or
injunctive relief and such other relief as the court deems just and proper.
g. Dan J. Craddock, on Behalf of Himself and All
Others Similarly Situated
In Dan J. Craddock, on Behalf of Himself and All Others Similarly
Situated vs. FPA Medical Management, Inc., et al, Number 721102, filed in the
Superior Court of the State of California, County of San Diego, on June 1, 1998,
the plaintiff, a current or former stockholder of FPA, seeks to bring this
lawsuit on behalf of all persons who purchased common stock of FPA between
February 27, 1997 and May 15, 1998 (the "Craddock Class Period"). In this
22
<PAGE> 35
lawsuit, the plaintiff alleges violations of state securities laws by the
defendants (which include FPA and certain of its current and former officers and
directors). In this connection, the plaintiff alleges that during the Craddock
Class Period, a series of false and misleading statements were made by
defendants issued as part of a scheme to artificially inflate the market price
of FPA securities during the Craddock Class Period. The plaintiff seeks
compensatory damages, fees and expenses and extraordinary, equitable and/or
injunctive relief.
h. Additional Lawsuits
In addition to each of the above, the Debtors are aware of several
additional lawsuits which have been filed recently. While most of them have been
served on the Debtors, the Debtors are still in the process of reviewing and
evaluating the complaints and are currently unable to assess the merits of any
of the claims contained in these or any of the other complaints set forth
herein, the outcome of any of the lawsuits resulting from the filing of the
complaints or the length of time it will take to resolve them.
2. In re AHI Healthcare Systems, Inc. Securities Litigation
In addition, AHI, one of the Subsidiaries, 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, prior to the merger of AHI with the Debtors. 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
23
<PAGE> 36
statements of securities analysts following AHI remain in the suit.
3. Securities and Exchange Commission Informal Inquiry
In addition to the above, the Debtors presently are assisting the
Securities and Exchange Commission ("SEC") with its informal inquiry into events
relating to the Debtors' transactions and activities between January 1, 1997 and
May 15, 1998. In conjunction with the SEC inquiry, the Debtors have made
available witnesses and will be voluntarily providing documents.
4. National Association of Securities Dealers Informal Inquiry
[Information to come]
D. EVENTS LEADING TO THE DEBTORS' CHAPTER 11 FILING
Since 1994, the Debtors have pursued an aggressive growth strategy,
primarily through acquisitions, including those outlined above. The cost of
these acquisitions, along with the associated transaction costs (e.g.,
redeployment of manpower, fees and expenses, etc.) caused a severe drain on the
Debtors' liquidity and operational resources.
The process of integrating management services, which includes
management information systems, claims administration and billing services,
utilization management of medical services, care coordination and case
management, quality and cost monitoring and physician recruitment, as well as
administrative functions, facilities and other aspects of operations, also
proved more difficult than expected. The rapid expansion was extremely taxing on
the Debtors' management resources. Though historically the Debtors' strength has
been their ability to manage medical and administrative costs effectively and
efficiently, the result of the rapid expansion activity was to interfere with
that ability.
In addition, the Debtors' businesses are impacted by trends in the
United States health care industry. As health care expenditures have grown as a
percentage of the United States gross national product, public and private
health care cost-containment measures have pressured health care providers'
profit margins.
24
<PAGE> 37
E. NEED FOR RESTRUCTURING AND CHAPTER 11 RELIEF
The Debtors' prepetition financial condition was a product of these
integration and industry-wide factors, as well as unexpected losses from certain
operations and a failure to realize events upon which the Debtors' financial
performance was predicated. The working capital requirements of recent
acquisitions combined with prepetition losses caused the Debtors to experience
severe working capital shortages prior to filing.
The Debtors' operational, financial and capital problems, including a
nonrecurring $15.5 million charge related to, among other things, acquisitions
reported in the first quarter of 1998, resulted in FPA reporting a loss of $9.1
million for the first quarter ending March 31, 1998. Also, at such time, FPA
announced that it anticipated recording a $200 million restructuring charge in
the second quarter of 1998.
As a result of operating losses and costs associated with their
prepetition acquisition activities, the Debtors began experiencing severe
working capital shortages which had a negative effect on their day-to-day
operations. The Debtors fell behind in making timely payments to providers and
were similarly unable to pay vendors on customary trade terms. In response,
several of the Debtors' Payors attempted to divert capitation payments from the
Debtors directly to the medical care providers, thus exacerbating the Debtors'
liquidity problems.
In an effort to forestall this liquidity crisis, the Debtors attempted
to raise funds in a high yield financing and also sought investors for a private
placement of debt and equity securities. The Debtors' efforts to raise such
financing were unsuccessful.
In June 1998, the Debtors, through the Sterling Group, obtained from
certain of the Prepetition Lenders (the "Sterling Lenders") a $25.0 million term
loan. Proceeds from the loan were used to pay certain insurance premiums and
providers and make other payments necessary to preserve the going concern value
of the Debtors' operations.
F. DEVELOPMENT OF A NEW BUSINESS PLAN
In July of 1998, the Debtors and the Pre-Petition Lenders reached an
agreement in principle on the terms of DIP Financing and the Plan whereby. among
other things, all of the debt claims of the
25
<PAGE> 38
Prepetition Lenders would be cancelled in exchange for distributions to the
Prepetition Lenders of common stock of Reorganized FPA to be issued pursuant to
the Plan. In lieu of a conversion from debt to equity of the Prepetition
Lenders' entire debt claims, the Debtors are evaluating their projected
financial condition subsequent to emergence from these reorganization
proceedings and reserve the right to alter the proposed distribution to the
Prepetition Lenders to include a combination of debt and equity depending upon
whether the Reorganized Debtors' post-Effective Date cash flows will be
sufficient, in the Debtors' business judgment, to permit the Reorganized Debtors
to service such additional debt obligations.
As a result of those negotiations, the Debtors were able to develop a
new business plan for going forward. This business plan contemplated the
elimination of underperforming operations and the consolidation of certain
markets, as well as obtaining funding to finance go-forward operations. While
the Debtors were well under way in accomplishing these tasks prior to the
filing, the business plan contemplated the commencement of these Cases to
achieve certain of the goals.
On July 18, 1998, the Debtors' Board of Directors formally endorsed the
terms of the prenegotiated plan of reorganization and authorized the
commencement of these reorganization cases. On July 19, 1998 and various dates
thereafter through August 7, 1998, the Debtors filed for protection under
chapter 11 of the Bankruptcy Code in order to implement that plan.
As part of the implementation of the Debtors' PPM-based core business
strategy, the Debtors have closed numerous underperforming locations and have
ceased certain operations in markets that were either unprofitable or outside of
the Debtors' new core business areas. The core businesses around which the
Debtors propose to reorganize include (i) the emergency department management
business through the Sterling Group, (ii) medical clinics employing
physicians/owned medical groups including Florida Medical Group, Health
Partners, San Antonio/Gonzaba Medical Group, Meridian, Axminster, and smaller
medical groups in California, Kansas and North Carolina, and (iii) MSO services
through Cornerstone. The Debtors are continuing to evaluate each of these
businesses, and there can be no assurance that any such business will be a part
of the Reorganized Debtors. The Debtors are also evaluating various of their
other operations which they believe may become a part of their go-forward
operations after emergence from chapter 11. For
26
<PAGE> 39
a detailed description of each of the groups within these core businesses and
their role in the Reorganized Debtors, see Section VI.C, "Summary of New
Business Plan," herein.
Upon emergence from chapter 11, the Debtors will be more focused and
efficient with an appropriate balance sheet and financial resources, and
positioned both to meet the needs and expectations of the Debtors' key
constituencies going forward and for future growth.
IV. PREPETITION CAPITAL STRUCTURE OF THE DEBTORS
A. LIQUIDITY AND CAPITAL RESOURCES
The Debtors have used their capital primarily to develop physician
networks, acquire physician practices and establish an infrastructure in new
regions as well as in acquired practices. Capitation arrangements positively
impact cash flow if the Debtors have accepted claims payment responsibility
because the Debtors generally receive capitation revenue prior to the provision
of, and payment for, medical services. In those arrangements where the payor
retains claims payment responsibility, the payor generally withholds a
substantial part of the capitation revenue to pay the claims on behalf of the
Debtors. Thus, the Debtors do not receive the benefit of cash flow for the
withheld funds.
Shared risk arrangements negatively impact cash flow because
settlements in connection with these arrangements typically are not collected
until significantly after the end of the period in which they are accrued.
Fee-for-service revenues also negatively impact cash flow as payment for
services rendered generally is not collected until 90 to 120 days after the
service is provided.
In addition, to satisfy their obligations, the Debtors rely on the flow
of revenue from the Subsidiaries to FPA in the form of dividend payments, loans
or other transfers of cash. The Debtors also receive cash flow from revenues
received pursuant to administrative services agreements with the Professional
Corporations.
At March 31, 1998, the Debtors had cash, cash equivalents and
marketable securities of $12.4 million and a working capital deficit (current
liabilities in excess of current assets) of $33.1 million compared to cash, cash
equivalents and marketable
27
<PAGE> 40
securities of $23.9 million and working capital surplus of $1.8 million at
December 31, 1997.
During the three months ended March 31, 1998, non-operating sources of
cash included $15 million of advances, net of repayments, pursuant to the Credit
Agreement (as described below) and proceeds from the exercise of stock options
and warrants of approximately $754,000. Non-operating uses of cash include the
purchase of property and equipment for approximately $6.9 million and the
payment of approximately $8.4 million in long-term debt.
As of March 17, 1998, there were approximately 587 holders of record of
the 43,297,224 outstanding shares of common stock of FPA. The approximate market
value as of such date of such shares was $767 million. The Debtors did not
declare any cash dividends during 1996 or 1997.
B. THE PREPETITION CREDIT FACILITIES
On January 29, 1996, the Debtors entered into a $55 million credit,
security, guarantee and pledge agreement (the "1996 Credit Agreement") with four
financial institutions. Permitted Borrowings, as defined in the 1996 Credit
Agreement, generally included those for acquisitions and capital expenditures.
Borrowings bore interest at rates ranging from either LIBOR plus 2.5%, 2.75% or
3.0% or prime rate plus 1.0%, 1.25%, or 1.5%, as defined in the 1996 Credit
Agreement. At December 31, 1996, the Debtors had borrowed the maximum of $55
million under the Credit Agreement. At June 30, 1997, the outstanding obligation
under this agreement was paid in full in conjunction with the execution of a new
credit agreement on June 30, 1997.
On June 30, 1997, the Debtors entered into a credit agreement for a
$175 million three-year revolving line of credit ("Line of Credit") and a $100
million four and one-quarter year term loan ("Term Loan") (collectively, the
"Prepetition Credit Agreement"). A maximum of $155 million and $30 million of
the proceeds of the Line of Credit were to be used to refinance debt and to
secure the Debtors' capitation deposits, respectively. The Debtors were to use
the remaining proceeds of the Line of Credit for working capital. The proceeds
of the Term Loan were to be used to refinance debt. Outstanding amounts owed
pursuant to the 1996 Credit Agreement were paid in full with proceeds advanced
pursuant to the Prepetition Credit Agreement. The borrowings bore interest based
on the prime rate plus 50-75 basis points or the Interbank
28
<PAGE> 41
Eurodollar rate plus 150-175 basis points, as defined in the Credit Agreement.
The Credit Agreement contained customary terms, events of default and covenants
(including financial covenants) which, among other things, limited payment of
cash dividends, the consummation of certain acquisitions and the incurrence of
additional debt. The obligations of the Debtors under the Credit Agreement were
collateralized by the assets of the Debtors and the capital stock and assets of
certain Subsidiaries and Professional Corporations.
On December 9, 1997, the Debtors entered into an interest rate cap
transaction to effectively limit the base LIBOR rate on the Term Loan to 7.5%.
The interest rate cap was to be effective from December 9, 1997 through the
maturity date of the Term Loan (September 30, 2001). The consideration granted
to the financial institution providing the interest rate cap was an option to
swap the Debtors' floating base LIBOR rate to a fixed rate of 6.07% at June 30,
1999, through the maturity date of the Term Loan.
The Credit Agreement was further amended effective January 9, 1998, to
increase the Line of Credit to $215 million. At December 31, 1997, the Company
had $127.8 million outstanding on the Line of Credit and $99.8 million
outstanding under the Term Loan. In lieu of a capitation deposit, two letters of
credit in the amount of $27.5 million and $2.5 million, respectively, were
established. At December 31, 1997, no amounts had been drawn against either
letter of credit.
At March 31, 1998, there was $142.8 million outstanding on the Line of
Credit and $99.6 million outstanding under the Term Loan. At May 15, 1998, there
was $185 million outstanding on the Line of Credit and $99.6 million outstanding
under the Term Loan. As of May 15, 1998, no additional borrowing capacity
existed under the Credit Agreement as then structured. During each of these
dates, the letters of credit referred to in the preceding paragraph remained
outstanding.
On June 30, 1998, the Sterling Group, BankBoston, N.A., as Agent, and
several lenders from time to time that are parties thereto (the "Sterling
Lenders"), entered into a Credit Agreement under which, among other things, the
Sterling Lenders agreed to advance up to $25 million (the "Sterling Loan") to
provide financing for the repayment of certain existing indebtedness of the
Sterling Group and working capital for use in the ordinary course of business of
Sterling and its subsidiaries. Pursuant to the
29
<PAGE> 42
terms of the Master Guarantee and Collateral Agreement dated as of June 30,
1998, direct and indirect Subsidiaries of Sterling (the "Sterling Affiliates")
guaranteed repayment of the Sterling Loan, and Sterling and the Sterling
Affiliates granted to the Sterling Agent, for the ratable benefit of the
Sterling Lenders, a security interest in, and first priority lien on,
substantially all of their assets.
Further, pursuant to the terms of the Parent Guarantee and Collateral
Agreement dated as of June 30, 1998, FPA granted to the Sterling Agent, for the
ratable benefit of the Sterling Lenders, a first security interest in, and first
priority lien on, substantially all of its assets including its common stock
interests in Sterling. Pursuant to the Intercreditor Agreement, dated as of June
30, 1998, between the Prepetition Lenders and the Sterling Lenders, the
Prepetition Lenders expressly subordinated their liens in and to certain
collateral securing the Prepetition Credit Facility, and, in some instances,
right to payment under the Prepetition Credit Agreement, to the Sterling Lenders
with respect to the Sterling Loan.
The Sterling Loan was repaid in full on or about July 21, 1998 with
proceeds advanced pursuant to the DIP Facility.
C. DEBENTURES
In December 1996, FPA issued $75 million of convertible subordinated
Debentures due in December 2001 (the "Debentures"), which resulted in net
proceeds to FPA of approximately $73.1 million. The notes bear interest at 6.5%,
payable semiannually, and are convertible into shares of FPA's stock at $25.95
per share. The Debentures are redeemable by FPA 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 a portion of the
overallotment option granted to the initial purchasers of the Debentures, the
Debtors issued $5.5 million of additional Debentures with the same terms for net
proceeds of approximately $5.5 million.
At the time it issued the Debentures described above, FPA believed that
the cash generated from operations together with the borrowing capacity under
the 1996 Credit Agreement and subsequent borrowing facilities would be adequate
to satisfy the Debtors' working capital needs. However, factors discussed in
sections
30
<PAGE> 43
III.D and III.E above severely limited the Debtors' working capital. As a
result, FPA missed the June 15, 1998 interest payment due under the Debentures.
V. CORPORATE STRUCTURE OF THE DEBTORS
A. CURRENT CORPORATE STRUCTURE
FPA owns either directly or indirectly substantially all of the equity
interests in each of the Subsidiaries. Many states prohibit the corporate
practice of medicine. In such states, a professional association or corporation
("Professional Corporation(s)") owned by a licensed physician or physicians
(typically an officer or employee of FPA or its Subsidiaries) is formed. The
Professional Corporations receive payments from the Payors and contract with
physicians and other medical providers. Substantially all of the Professional
Corporations have entered into service agreements with FPA or one of the
Subsidiaries whereby such parties agree to provide the Professional Corporation
with the various administrative and support services described above.
B. BOARD OF DIRECTORS OF FPA
The following persons currently comprise the Board of Directors of FPA:
Stephen J. Dresnick, M.D. was elected Chairman of the Board of
Directors on July 14, 1998. Prior to that he served as Vice Chairman and member
of the Board since October 1996, when Sterling Healthcare Group, Inc. was
acquired by FPA. Dr. Dresnick is a director of Orthodontix, Inc., formerly known
as Embassy Acquisition Corp. Dr. Dresnick also serves as President and Chief
Executive Officer of FPA, and has been President of Sterling Healthcare Group
since 1987.
Herbert A. Wertheim, O.D. has been Vice Chairman of the Board of
Directors of FPA since March 1998. Dr. Wertheim has been the Chairman and Chief
Executive Officer of Brain Power Incorporated, a manufacturer of optical
instruments and chemicals, since 1971. Dr. Wertheim is a director of Bacou USA,
Inc. and a trustee of Florida International University. Dr. Wertheim has been a
director of FPA since 1996.
31
<PAGE> 44
Kevin M. Ellis, D.O. has served as a member of the Board of Directors
since 1986. Dr. Ellis also has served as Executive Vice President and Chief
Medical Officer of FPA since April 1995. Prior thereto, Dr. Ellis served as
Chief Operating Officer of FPA from 1988 to April 1995.
Sol Lizerbram, D.O. has been a director of FPA since 1986. Dr.
Lizerbram served as Chairman of the Board of Directors from 1986 until July 14,
1998, and was President of FPA from 1986 through October 31, 1996. Dr. Lizerbram
also served as both a member and Chairman of the Board of MedNet, MPC
Corporation, a publicly held managed pharmacy service company which he
co-founded.
Sheldon Derezin has served as a member of the Board of Directors since
1995. Mr. Derezin has been managing partner of Derezin Breier & Company, a
public accounting firm, since 1982.
On the Effective Date, each of the existing members of the Board of
Directors will be deemed to have resigned. The initial Board of Directors of
Reorganized FPA will be selected as described in Section 7.2 of the Plan.
C. SENIOR OFFICERS OF FPA
In conjunction with the Debtors' prepetition assessment of regional
operations and their respective contributions to the Debtors' operational and
financial performance, FPA realigned its management to better address the
challenges facing the Debtors in bankruptcy. In March 1998, FPA assembled a new
management team when Stephen J. Dresnick, M.D., Herbert A. Wertheim, O.D., and
James A. Lebovitz were elected President and Chief Executive Officer, Vice
Chairman of the Board of Directors and Executive Vice President and General
Counsel, respectively. In addition, Thomas J. Allison, who has extensive
experience in turnaround management and the medical services industry, was
elected effective July 1, 1998 to serve as interim Chief Financial Officer for
FPA.
The following is a list of FPA's executive officers and their positions
with FPA as of September 25, 1998. There can be no assurance that the Board of
Directors of Reorganized FPA will not make one or more changes in senior
management after the Effective Date. It is anticipated that any changes which
are proposed to be made prior to the Confirmation Hearing will be disclosed at
or prior to such hearing.
32
<PAGE> 45
Stephen J. Dresnick, M.D. has been President and Chief Executive
Officer of FPA since March 26, 1998. Dr. Dresnick also serves as an officer of
each of the affiliates in these bankruptcy cases and has been President of
Sterling Healthcare Group since 1987. Since July 14, 1998, Dr. Dresnick has also
served as Chairman of the Board of Directors.
Kevin M. Ellis, D.O. has served as Executive Vice President and Chief
Medical Officer since April 1995. Prior thereto, Dr. Ellis served as Chief
Operating Officer of FPA from 1988 to April 1995. Dr. Ellis has been a director
of FPA since 1986.
Jack S. Greenman has served as Executive Vice President since May of
1998. Mr. Greenman is also Executive Vice President, Chief Financial Officer,
Principal Accounting Officer and Treasurer of Sterling Healthcare Group.
James A. Lebovitz has served as Executive Vice President, General
Counsel and Secretary since March of 1998. From March 1996 to March 1998, Mr.
Lebovitz served as Senior Vice President, General Counsel and Secretary of the
Company. Prior to joining FPA, Mr. Lebovitz was a partner in the law firm of
Ballard Spahr Andrews & Ingersoll, LLP.
Thomas J. Allison was elected effective July 1, 1998 to serve as
interim Chief Financial Officer for FPA. Mr. Allison is a partner with Arthur
Andersen LLP in its corporate recovery services department. Prior to his
appointment as FPA's Chief Financial Officer and since January 9, 1998, Mr.
Allison served as interim Chief Financial Officer of United American Healthcare.
Prior to that, Mr. Allison acted as Chief Executive Officer for the fifth
largest food distributor in the world.
VI. THE CHAPTER 11 CASES
A. CONTINUATION OF BUSINESS; STAY OF LITIGATION
On July 19, 1998 and various dates thereafter through August 7, 1998
(as to each Debtor, the "Petition Date"), FPA and 100 of its Subsidiaries and
Affiliates filed petitions for relief under chapter 11 of the Bankruptcy Code.
Since the Petition Date, the Debtors have continued to operate as
debtors-in-possession subject to the supervision of the Bankruptcy Court and in
accordance with the Bankruptcy Code. Although the Debtors are authorized to
33
<PAGE> 46
operate in the ordinary course of business, transactions out of the ordinary
course of business have required Bankruptcy Court approval. In addition, the
Bankruptcy Court has supervised the Debtors' employment of attorneys,
accountants, financial advisors and other professionals.
An immediate effect of the filing of the Debtors' bankruptcy petitions
was the imposition of the automatic stay under the Bankruptcy Code which, with
limited exceptions, enjoined the commencement or continuation of all collection
efforts by creditors, the enforcement of liens against property of the Debtors
and the continuation of litigation against the Debtors. This relief provided the
Debtors with the "breathing room" necessary to assess and reorganize their
business. The automatic stay remains in effect, unless modified by the
Bankruptcy Court, until consummation of a plan of reorganization.
B. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASES
1. First Day Orders
The Debtors filed several motions on the first day of these cases
seeking the relief provided by certain so-called "first day orders." First day
orders are intended to ensure a seamless transition between a debtor's
prepetition and postpetition business operations by approving certain regular
business conduct that may not be authorized specifically under the Bankruptcy
Code or as to which the Bankruptcy Code requires prior approval by the
Bankruptcy Court.
The first day orders in these cases authorized, among other relief:
- the retention of the following professionals to serve on
behalf of the Debtors: Skadden, Arps, Slate, Meagher & Flom
(Illinois) and its affiliated law practices, including
Skadden, Arps, Slate, Meagher & Flom LLP, as counsel to the
Debtors; Arthur Andersen LLP, as crisis and restructuring
advisors; Wasserstein Perella & Co., Inc., as investment
bankers; and WR Gruber & Associates as Claims Agent;
- the continued retention of professionals regularly employed by
the Debtors in the ordinary course of their business;
34
<PAGE> 47
- the maintenance of the Debtors' bank accounts and operation of
their cash management system substantially as it existed prior
to the Petition Date;
- the payment of employees' accrued prepetition wages and
employee benefit claims;
- the payment of certain prepetition hospital contract related
expenses;
- the implementation of a program to pay certain prepetition
claims of medical care providers;
- the continuation of utility services during the pendency of
the Chapter 11 Cases;
- the payment of certain prepetition tax claims;
- the payment of refunds to managed care enrollees;
- the provision of financial accommodations on an interim basis
in accordance with the DIP Facility (defined below) that
provided the Debtors with the ability to fund ongoing
operations during the Chapter 11 Cases;
- the joint administration of each of the Debtors' bankruptcy
cases; and
- the prohibition of the Payors from withholding and offsetting
payments due to the Debtors or paying medical care providers
directly on account of prepetition claims (described in more
detail below).
2. Appointment of Creditors' Committee
On August 5, 1998, the United States Trustee for the District of
Delaware appointed the following entities to the Official Committee of Unsecured
Creditors of the Debtors (the "Creditors' Committee"): First Union National
Bank, Prudential HealthCare, Optimal Integrated Solutions, Staff Care, Inc.,
Alliance Capital Management, Inc., NYLCare Health Plans of the Gulf Coast, Inc.,
and Memorial Hermann Hospital System. First Union and Prudential HealthCare
serve as co-chairs of the Creditors' Committee.
35
<PAGE> 48
The Creditors' Committee retained the law firms of Holleb & Coff and
The Bayard Firm as co-counsel. The Bankruptcy Court approved the retention of
Holleb & Coff on September 4, 1998, and The Bayard Firm on [________________].
3. DIP Facility
On July 20, 1998, the Debtors entered into a Debtor-in-Possession
Credit Agreement (the "DIP Facility") with a group of lenders (the "DIP
Lenders") comprised of four of the Prepetition Lenders. The current DIP Lenders
are (a) BankBoston, N.A., (b) Goldman Sachs Credit Partners L.P., (c) Lehman
Commercial Paper, Inc., and (d) Van Kampen American Capital Prime Rate Income
Trust.
On July 20, 1998, the Bankruptcy Court entered an order approving the
DIP Facility on an interim basis, and supplemented the interim order with an
order on August 10, 1998. On August 20, 1998, the Bankruptcy Court entered a
final order approving the DIP Facility (the "DIP Facility Order"). Under the DIP
Facility Order, the Bankruptcy Court authorized the Debtors to obtain secured
postpetition financing in an aggregate principal amount not to exceed $50
million. The Debtors also obtained authority to use the cash collateral of, and
to provide adequate protection to, the lenders under the Prepetition Credit
Agreement. The Bankruptcy Court further granted superpriority administrative
status to the DIP Lenders for all of the Debtors' obligations under the DIP
Facility.
To secure the repayment of the borrowings and all other obligations
arising under the DIP Facility, pursuant to sections 364(c) and 364(d) of the
Bankruptcy Code, the Debtors granted liens to the DIP Lenders on all of the
Debtors' presently owned and after-acquired property. The liens granted by the
DIP Facility are senior to all other liens with the exception of certain
prepetition liens, certain liens arising by operation of law, and certain other
liens, all as more specifically set forth in the DIP Facility, and a $3 million
"Carve Out" for professional fees incurred in the Chapter 11 Cases.
The California Department of Corporations has appealed the Bankruptcy
Court's order approving the Debtors' DIP Facility to the United States District
Court for the District of Delaware. On September 3, 1998, United States District
Court Judge Susan L. Robinson denied a motion for a stay pending appeal. The
appeal has
36
<PAGE> 49
not yet been docketed; both parties have designated the issues and record on
appeal pursuant to Bankruptcy Rule 8006.
As of September 18, 1998, the outstanding balance under the DIP
Facility was approximately $38.1 million. Cash on hand as of such date was
$10,478,899.
4. The Payor Litigation
Prior to the commencement of these Chapter 11 Cases, the Debtors'
liquidity problems caused them to experience difficulties in meeting certain of
their obligations to provider groups. As a result, several of the Debtors'
Payors withheld the Debtors' capitation income stream from the Debtors, and, in
some instances, paid the Debtors' Providers directly. As a result, the Debtors'
liquidity problems quickly deteriorated.
Upon the commencement of these Chapter 11 Cases, the Debtors moved the
Bankruptcy Court for relief preventing the Payors from withholding captation
payments or paying the Debtors' Providers directly. On July 20, 1998, in
conjunction with the Debtors' other first-day motions, the Bankruptcy Court
granted the Debtors' request and issued a blanket order (the "Payor Order")
enjoining the Debtors' Payors from withholding capitation payments, and
establishing a procedure by which the Payors could present claims for amounts
due. The Payor Order provided for a 15-day reconsideration period from the date
of entry of the Payor Order.
Within the reconsideration period, several of the affected Payors filed
various pleadings requesting that the Bankruptcy Court vacate, modify or
otherwise reconsider the Payor Order. Among the responding Payors (the
"Objecting Payors") were: (1) PacifiCare of Texas, Inc., PacifiCare of Arizona,
Inc., PacifiCare of Nevada, Inc. and PacifiCare of California; (2) CIGNA
HealthCare of Georgia, Inc., CIGNA HealthCare of California, Inc., CIGNA
HealthCare of Texas, Inc., and their respective parents, subsidiaries and
affiliates ("CIGNA"); (3) Rio Grande HMO, Inc. d/b/a HMO Blue Southeast Texas,
HMO Blue Northeast Texas and HMO Blue Central Texas ("HMO Blue"); (4) Aetna U.S.
Healthcare Inc. and Aetna U.S. Healthcare of California, Inc. and their related
subsidiaries and affiliates; (5) NYLCare Health Plans, Inc. and NYLCare of the
Southwest, Inc.; (6) NYLCare Health Plans, Inc., NYLCare Health Care Plans of
the Gulf Coast, Inc. and their related subsidiaries and affiliates; (7) Blue
Cross of California; (8) Sharp Health Plan; (9) Universal Care, Inc.; (10)
MaxiCare Health Plans, Inc.,
37
<PAGE> 50
MaxiCare, MaxiCare South Carolina, Inc., California Physicians' Service d/b/a
Blue Shield of California and CareAmerica, Southern California, Inc.
("MaxiCare"); (11) United Healthcare of California, Inc., United Healthcare
Corporation of New York, Inc., United Healthcare Corporation of Georgia, Inc.
and United Healthcare Corporation of Nevada, Inc.; (12) One Health Plan of
California, Inc. and One Health Plan of Texas, Inc. ("One Health"); (13) The
Prudential Insurance Company of America, Prudential Health Care Plan, Inc.,
Prudential Health Care Plan of California, Inc. and Prudential Health Care Plan
of Georgia, Inc.; and (14) Humana, Inc. In addition to the Objecting Payors, the
Bankruptcy Court also received requests for reconsideration from the State of
Texas, on behalf of its Department of Insurance, and the Memorial Hermann
Hospital System.
The Debtors initially responded to the request by HMO Blue, but when it
became apparent that the sheer volume of the pleadings was prohibitive and that
the majority of the nonfactual issues were similar if not identical, the Debtors
sought and received permission of the Bankruptcy Court to file an Omnibus
Response and to have the nonfactual issues heard at the August 18, 1998 omnibus
hearing. On Monday, August 17, 1998, BankBoston, N.A., the agent under the DIP
Facility and First Union National Bank, as Indenture Trustee, both filed
pleadings in support of the Payor Order. That same day, the Debtors filed their
Omnibus Response in Opposition to Motions to Vacate, Modify or Reconsider the
Payor Order. In their Omnibus Response, the Debtors sought, among other things,
clarification by way of a modified Payor Order (the "Modified Payor Order") that
the relief granted in the Payor Order was procedural and not substantive, and by
entry of the Modified Payor Order, an order by the Bankruptcy Court continuing
the prohibition against postpetition withholding by the Payors of capitation
payments due to the Debtors for having rendered postpetition services to the
Payors in order to pay prepetition amounts allegedly owed to the Payors.
In preparation for the August 18, 1998 omnibus hearing in the Chapter
11 Cases, the Debtors engaged in significant settlement negotiations with the
Objecting Payors and other responding parties. Prior to the hearing, the Debtors
were able to reach consensual agreements with ten of the Objecting Parties and
the State of Texas. The five Objecting Payors who continued to prosecute their
objections at the hearing were CIGNA, HMO Blue, Blue Cross of California,
MaxiCare and One Health.
38
<PAGE> 51
At the August 18, 1998 hearing, the Bankruptcy Court heard arguments
from counsel for all remaining parties. In addition, the Creditors' Committee
voiced its support for the Modified Payor Order. After protracted arguments
before the Bankruptcy Court, the Bankruptcy Court ruled that the Debtors had
shown more than adequate need and legal support for the issuance of the
requested relief. While the Bankruptcy Court permitted the parties two days to
resolve their differences regarding the form, and not the substance, of the
Modified Payor Order, the Bankruptcy Court decided in favor of the Debtors on
the issues before the Bankruptcy Court and, on Thursday, August 20, 1998, signed
and entered the Modified Payor Order.
Subsequent to the entry of Modified Payor Order, several of the
Objecting Payors have continued to prosecute their objections by filing various
pleadings before the Bankruptcy Court. In addition to the relief from stay
actions anticipated by the Modified Payor Order, Blue Cross of California filed
a notice of appeal of the Modified Payor Order on August 28, 1998 and HMO Blue
filed a notice of appeal on September 4, 1998.
5. Other Significant Court Actions
In addition to the matters described above, the Debtors have sought and
obtained certain orders from the Bankruptcy Court that are of particular
importance in the operation of the Debtors' business or in the administration of
the Chapter 11 Cases. Included among such orders are those authorizing:
- Retention of Special Counsel. On August 10, 1998, the
Bankruptcy Court authorized the Debtors' retention of
Richards, Layton & Finger, P.A., as special counsel to the
Debtors. Richards Layton was retained to represent the Debtors
in those matters for which the Debtors' principal bankruptcy
counsel, Skadden, Arps, was precluded from representing the
Debtors, to continue to represent the Debtors in litigation
commenced prepetition for which Richards Layton was previously
retained, and to provide the Debtors with general corporate
advice, as Richards Layton had done prior to the Petition
Date.
- Rejection of Nonresidential Real Property Leases. Pursuant to
orders of the Bankruptcy Court dated August 18, 1998 and
September 23, 1998, the Debtors were authorized to reject
certain leases of nonresidential
39
<PAGE> 52
real property in connection with their strategic operating
plan to consolidate their business and discontinue operations
in certain regions.
In connection with the rejection orders, the Bankruptcy Court
also approved arrangements for the Debtors to use on a
short-term basis reduced space at their former headquarters in
San Diego and a claims processing facility in Mission Valley,
California.
- Assumption of Executory Contracts with Billing Services
Providers. On July 31, 1998, the Debtors filed a motion
seeking to assume certain executory contracts with billing
services providers who provide vital "back office" billing
services to the Sterling Group. On August 18, 1998, the
Bankruptcy Court approved the motion and entered an order
granting the Debtors authority to assume such contracts, thus
preserving a substantial portion of the Debtors' revenues and
cash flow.
- Procurement of Stop-Loss Insurance. On August 18, 1998, the
Bankruptcy Court authorized the Debtors to procure stop-loss
insurance coverage to help mitigate the effect of occasional
high utilization of health care services. Such coverage is
necessary because, if revenues are insufficient to cover costs
or the Debtors are unable to maintain stop-loss coverage at
favorable rates, the Debtors' results of operations and
financial condition could be adversely affected.
- Establishment on Notice Procedures. On August 20, 1998, the
Bankruptcy Court approved an order establishing procedures for
the filing of pleadings and other documents in the Chapter 11
Cases and limiting the parties entitled receive automatic
notice of all pleadings.
- Authorization to Pay Prepetition Claims of Medical Care
Providers. On August 20, 1998, the Bankruptcy Court approved
an amended order authorizing the Debtors to implement a
program to pay certain prepetition Claims of the Debtors'
Providers.
- Extension of Time to Assume or Reject Leases. On September 23,
1998, the Bankruptcy Court approved an
40
<PAGE> 53
order extending the dates by which the Debtors are required to
assume or reject leases under section 365 of the Bankruptcy
Code. Under the extension, the Debtors have until the earlier
of December 16, 1998, or the confirmation of a plan of
reorganization to assume or reject leases of nonresidential
real property, except as provided for in a separate order with
respect to certain landlords.
- Employee Retention Program. On September 23, 1998, the
Bankruptcy Court approved a program designed to retain key
executives and employees. The retention program features
bonuses to be paid on certain key dates and upon successful
emergence from chapter 11.
- Sale of Orange Coast Business. On September 23, 1998, the
Bankruptcy Court approved the sale of the assets of a business
located in Orange County, California to an affiliate of St.
Joseph Health System in exchange for $8.5 million. The sale
enabled the Debtors to realize the going concern value of the
business for its stakeholders while avoiding further operating
losses.
- Approval of FF&E Sale Procedures. In connection with the
orderly wind down of discontinued operations, on September 23,
1998, the Bankruptcy Court approved a procedure to enable the
Debtors to sell furniture, fixtures and equipment located at
closed facilities to third parties without further order from
the Bankruptcy Court.
- Cessation of Operations for Three Medical Clinics in Northern
Virginia. On September 23, 1998, the Bankruptcy Court
authorized the Debtors to transition three unprofitable
medical clinics formerly operated by Debtors Gateway Physician
Services, Inc. and Virginia Medical Associates, P.C. to
medical groups formed by physicians formerly employed by the
Debtors. In connection with the transition, the Bankruptcy
Court approved the consensual use of cash collateral held by
Crestar Bank, N.A., a secured creditor.
- Rejection of Payor Contracts Relating to Discontinued
Operations. On September 23, 1998, the Bankruptcy court
approved the Debtors' decision to reject payor contracts
41
<PAGE> 54
relating to the Debtors' discontinued business operations.
- Establishment of Bar Date. On July 21, 1998, the Bankruptcy
Court entered an order establishing the deadline for filing
proofs of claim against the Debtors (the "Bar Date"). That
deadline is November 17, 1998 for all Claims except Claims of
governmental units for which, in accordance with section
502(b)(9) of the Bankruptcy Code, the deadline is January 15,
1999. [On September 30, 1998, the Bankruptcy Court
supplemented that order and approved the form of notice of the
Bar Date.] Those notices were to be distributed on October 5,
1998. For claims arising from the Debtors' rejection of leases
or contracts, the Bankruptcy Court fixed as a deadline for
filing proofs of claim the later of the Bar Date or 30 days
after rejection of the lease or contract. The Bankruptcy Court
also specifically excluded a limited number of claims (e.g.,
Administrative Claims and certain Other Priority Claims) from
the Bar Date deadline.
Proofs of claim aggregating in excess of $[_____] million have
been filed. The Debtors are in the process of evaluating,
objecting to and resolving such proofs of claim, which process
will continue after the Confirmation Date.
C. SUMMARY OF NEW BUSINESS PLAN
Prior to petitioning for bankruptcy relief, the Debtors recognized the
need to develop a business plan to complete the consolidation and restructuring
of the Debtors' business units. As a result of the Debtors' rapid expansion, the
Debtors were faced with the task of integrating many diverse business units,
determining which of the acquired business units would be profitable on a
going-forward basis, based upon anticipated trends in the health care industry,
and assessing their consolidated financing requirements based on, among other
things, expected relationships with their Payors.
Though the Debtors initiated these tasks prior to filing the Chapter 11
Cases, the Debtors also recognized that a prenegotiated plan of reorganization
would permit the Debtors to achieve the benefits of the new business plan while
best preserving the assets of the Debtors for the benefit of all parties in
interest.
42
<PAGE> 55
The Debtors' new business plan (around which the prenegotiated plan of
reorganization was developed) provides for the Debtors to exit from chapter 11
with a new Board of Directors and a de-leveraged capital structure. As part of
the implementation of the Debtors' new strategic direction, the Debtors have
closed numerous facilities and have ceased certain operations in markets that
were either unprofitable or outside of the Debtors' new core business areas.
Upon emergence from chapter 11, the Reorganized Debtors are expected to
be the third largest PPM company in the United States with annual revenue of
approximately $800 million. The Reorganized Debtors will be more focused and
efficient with an appropriate balance sheet and financial resources, and
positioned both to meet the needs and expectations of the Reorganized Debtors'
key constituencies going forward and for future growth. The Debtors anticipate
that the Reorganized Debtors will achieve a positive cashflow and EBITDA, in
addition to improved quality of earnings, in fiscal 1999.
The Reorganized Debtors will achieve these results with a realigned and
simplified corporate structure, focused around three core business. These
businesses include (i) the emergency department management business through the
Sterling Group, (ii) medical clinics employing physicians/owned medical groups
including Florida Medical Group, Health Partners, San Antonio/Gonzaba Medical
Group, Meridian, Axminster, and smaller medical groups in California, Kansas,
North Carolina and Texas, and (iii) MSO services through Cornerstone. The
Debtors are continuing to evaluate each of these businesses, and there can be no
assurance that any such business will be part of the Reorganized Debtors. The
Debtors are also evaluating various of their other operations which they believe
may become a part of their go-forward operations after emergence from chapter
11.
The primary care physician practice entities and MSO service company
will be grouped by geographic region, while the Sterling Group will maintain a
separate position within the corporate hierarchy. Of the six medical clinics and
MSO service companies, Axminster, Cornerstone and Gonzaba will be grouped in the
Western Region, while Florida Medical Group, Health Partners and Meridian will
be placed in the Eastern Region.
The role in the Reorganized Debtors of each of these go-forward
businesses is described in detail below.
43
<PAGE> 56
1. Sterling Healthcare Group, Inc.
The Sterling Group currently operates five regional offices in four
states and staffs 145 operational locations in 26 different states. The Debtors
currently have key management in place at Sterling, including Stephen J.
Dresnick, M.D., Jack S. Greenman, Karen Marsh, Christopher Lutes, Alfred Damus,
M.D., Mark Price and Nancy Watkin, to guide the Sterling Group as it takes
advantage of these opportunities.
As part of the Debtors' new business plan, the Sterling Group will
continue to provide emergency department management services throughout the
United States on a fee-for-service basis after the Debtors' reorganization. The
Debtors believe that, after the reorganization, the Sterling Group will be in a
position to take advantage of the numerous opportunities available in this
fragmented industry. Over 5,000 hospital emergency departments exist in the
United States and the Sterling Group's main competitors, as well as the
industry, are in turmoil. Moreover, emerging from chapter 11 as a more efficient
business, the Debtors and the Sterling Group will be in a prime position to take
advantage of the industry's situation.
2. Florida Medical Group
The Florida Medical Group will serve the Debtors' go-forward operations
through the operation of medical centers providing primary medical care. The
majority of revenues to be realized in connection with the Florida Medical Group
will result from global capitation payments from contracts with such Payors as
Humana and PCA.
The Florida Medical Group currently provides services to over 70,000
enrollees, comprised of approximately 30,000 Medicaid enrollees, 20,000 Medicare
enrollees and an additional 21,000 enrollees through commercial plans. The
Florida Medical Group currently utilizes a total of 86 medical care providers to
fulfill the Debtors' obligations pursuant to its contracts with Humana and PCA.
The Debtors believe that the management team of Mary Granoff, Joseph F. Garcia,
Alfredo L. Ginory, M.D., and Richard Collado is in the position to expand the
operations of the Florida Medical Group through exploring entry into new markets
and opportunities with additional Payors.
44
<PAGE> 57
3. Health Partners, Inc.
Health Partners currently manages physician medical groups through two
administrative offices and 39 facilities in selected metropolitan markets,
including Virginia, Kentucky, New York and Washington, D.C. Under contractual
relationships with seven IPA networks and contracts on a capitated basis with
HMOs such as Oxford Health Plans, PHS and Foundation Healthcare, Health Partners
provides managed care services to over 145,000 patients, including 102,000
commercial plan enrollees, 26,500 Medicaid and 16,800 Medicare patients. Health
Partners has nearly 2,900 physician relationships, consisting of 120 employed
primary care physicians, 775 contracted primary care physicians, 30 employed
specialist physicians and 1,944 contracted specialist physicians.
After the reorganization, the Debtors believe this core business will
be in a position to take advantage of its established presence in the northeast
and opportunities to assist Oxford Health Plans as that Payor restructures its
operations, as well as opportunities with additional Payors. Health Partners
will continue to provide such services under the direction of Charles D.
Phillips and Thomas E. Brophy, after the Debtors' reorganization.
4. San Antonio/Gonzaba Medical Group
The Debtors provide medical care to HMO members and support services
through IPAs to physicians and through company-owned and operated medical
centers as part of San Antonio/Gonzaba Medical Group ("Gonzaba"). Charles
Sanders and Peter Schill are Gonzaba's key management members who oversee
Gonzaba's operations as it provides services to 33 physicians and over 35,000
patients, including approximately 27,000 commercial plan enrollees, 7,000 senior
citizens and 1,400 Medicaid patients.
Although Gonzaba has relationships with several Payors, including
Humana, PCA, PacifiCare, NYLCare, WellChoice and HMO Blue, the Debtors believe
that, as part of the Debtors' strategic, go-forward operating plan, Gonzaba can
take advantage of additional opportunities with these and other Payors to
further enhance the operations of this long-standing, established group.
5. Meridian Medical Group
Meridian provides managed health care services through one
administrative office, one warehouse, and nine different facilities
45
<PAGE> 58
in the Atlanta, Georgia area. Meridian's network of 61 physicians and 23
associated providers serve over 88,000 commercial plan enrollees.
The Debtors believe that under the direction of Gregg Miller and Ken
Washington, Meridian's presence in the major Atlanta market places Meridian in a
position to take advantage of Payor opportunities in addition to the
relationships that already exist between Meridian and Prudential, United
Intensivists, Aetna, HPC and United Healthcare.
6. Axminster Medical Group
Axminster focuses on providing managed health care services through
five facilities in the Los Angeles, California metropolitan area. Axminster's
network of 19 medical care providers provides managed care services to over
12,000 enrollees of commercial plans and nearly 2,900 senior citizens. Axminster
provides such services under the direction of Ron Robinson and Ray Jing.
The Debtors believe that, after the Debtors' reorganization,
Axminster's presence in the Los Angeles market will continue to benefit
Axminster and its payor relationships with Aetna, Blue Cross, Blue Shield,
CareAmerica, CIGNA, MaxiCare, One Health Plan, PacifiCare and United Healthcare.
7. Cornerstone Management Group
Cornerstone provides turnkey management services and systems for
medical providers in the Tucson, Arizona area. This core business currently
manages over 50 primary care physicians and is positioned to take advantage of
additional opportunities in the Tucson area under the guidance of John R. Seitz.
8. Other Businesses
The Debtors are also evaluating the viability of certain of their other
businesses including clinics in Kansas City and North Carolina. The Debtors will
soon decide about whether these operations will become a part of the Debtors'
on-going businesses after emergence.
46
<PAGE> 59
VII. SUMMARY OF THE REORGANIZATION PLAN
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE, CLASSIFICATION,
TREATMENT AND IMPLEMENTATION OF THE PLAN AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT, AND TO THE
EXHIBITS ATTACHED THERETO.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES
OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE
PRECISE OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR
DOCUMENTS REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH
DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN WILL CONTROL THE
TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS UNDER THE PLAN AND WILL, UPON
THE EFFECTIVE DATE, BE BINDING UPON HOLDERS OF CLAIMS AGAINST, OR INTERESTS IN,
THE DEBTORS, THE REORGANIZED DEBTORS AND OTHER PARTIES IN INTEREST.
A. OVERALL STRUCTURE OF THE PLAN
Prior to filing for relief under chapter 11 of the Bankruptcy Code, the
Debtors focused on the formulation of a plan of reorganization that would
enable them to emerge quickly from chapter 11 and preserve their value as a
going concern. The Debtors recognize that in the competitive industry in which
they operate, a lengthy and uncertain chapter 11 case could detrimentally affect
the confidence in the Debtors by their respective Payors, Providers, and
employees, impair their financial condition and dim the prospects for a
successful reorganization.
The Plan constitutes a separate plan of reorganization for each of the
Debtors. Accordingly, the voting and other confirmation requirements of the
Bankruptcy Code must be satisfied for each of the Debtors. Under the Plan,
Claims against, and Interests in, the Debtors are divided into Classes according
to their relative seniority and other criteria.
If the Plan is confirmed by the Bankruptcy Court and consummated, (i)
the Claims in certain Classes will be reinstated or modified and receive
distributions equal to the full amount of such Claims, (ii) the Claims in other
Classes will be modified and
47
<PAGE> 60
receive distributions constituting a partial recovery on such Claims, and (iii)
in some cases, the Claims or Interests in other Classes will receive no
distribution. On the Effective Date, the Distribution Date and at certain times
thereafter, the Reorganized Debtors will distribute Cash, securities and other
property in respect of certain Classes of Claims as provided in the Plan. The
Classes of Claims against the Debtors created under the Plan, the treatment of
those Classes under the Plan and the securities and other property to be
distributed under the Plan are described below.
The terms of the Plan are based upon, among other things, the Debtors'
assessment of their ability to achieve the goals of the business plan, make the
distributions contemplated under the Plan, and pay their continuing obligations
in the ordinary course of the Reorganized Debtors' businesses.
Following consummation of the Plan, the Reorganized Debtors will to
operate their businesses with a reduced level of indebtedness and operating
expenses. The ownership of Reorganized FPA will be transferred to the
Prepetition Lenders in satisfaction of their Allowed Secured Claims, subject to
dilution upon the exercise of certain Warrants and options issued to unsecured
creditors and management, respectively.
THE SUBSTANTIVE TERMS OF THE PROPOSED PLAN ARE IN SUBSTANTIAL
CONFORMITY WITH THE TERMS OF A PRENEGOTIATED PLAN OF REORGANIZATION NEGOTIATED
WITH THE DEBTORS' PREPETITION BANK GROUP, ENDORSED BY THE DEBTORS' BOARD OF
DIRECTORS ON JULY 18, 1998 AND FILED ON JULY 22, 1998 ON FORM 8-K WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS, APPOINTED ON AUGUST 3, 1998 IN THE DEBTORS' JOINTLY ADMINISTERED
CHAPTER 11 CASES, HAS INFORMED THE DEBTORS THAT IT DOES NOT SUPPORT THE PLAN AS
PROPOSED AND NEGOTIATIONS ARE CONTINUING AMONG THE DEBTORS, THE PREPETITION AND
DIP BANK GROUPS AND THE COMMITTEE IN ADVANCE OF THE DISCLOSURE STATEMENT
HEARING.
B. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
Section 1122 of the Bankruptcy Code requires that a plan of
reorganization classify the claims of a debtor's creditors and the interests of
its equity holders. The Bankruptcy Code also provides that, except for certain
claims classified for administrative convenience, a plan of reorganization may
place a claim of a creditor or an interest of an equity holder in a particular
class
48
<PAGE> 61
only if such claim or interest is substantially similar to the other claims of
such class.
The Bankruptcy Code also requires that a plan of reorganization
provide the same treatment for each claim or interest of a particular class
unless the holder of a particular claim or interest agrees to a less favorable
treatment of its claim or interest. The Debtors believe that they have complied
with such standard. If the Bankruptcy Court finds otherwise, it could deny
confirmation of the Plan if the holders of Claims and Interests affected do not
consent to the treatment afforded them under the Plan.
The Plan classifies the following: (i) Other Priority Claims, (ii)
Prepetition Credit Facility Claims, (iii) Miscellaneous Secured Claims, (iv)
Administrative Convenience Claims, (v) General Unsecured Claims, (vi)
Subordinated Securities Claims, and (vii) Interests in separate Classes.
The Debtors believe that they have classified all Claims and Interests
in compliance with the requirements of section 1122 of the Bankruptcy Code. If a
Creditor or Interest holder challenges such classification of Claims or
Interests and the Bankruptcy Court finds that a different classification is
required for the Plan to be confirmed, the Debtors, to the extent permitted by
the Bankruptcy Court, intend to make such reasonable modifications to the
classifications of Claims under the Plan to provide for whatever classification
might be required by the Bankruptcy Court for confirmation. EXCEPT TO THE EXTENT
THAT SUCH MODIFICATION OF CLASSIFICATION ADVERSELY AFFECTS THE TREATMENT OF A
HOLDER OF A CLAIM OR INTEREST AND REQUIRES RESOLICITATION, ACCEPTANCE OF THE
PLAN BY ANY HOLDER OF A CLAIM OR INTEREST PURSUANT TO THIS SOLICITATION WILL BE
DEEMED TO BE A CONSENT TO THE PLAN'S TREATMENT OF SUCH HOLDER OF A CLAIM OR
INTEREST REGARDLESS OF THE CLASS AS TO WHICH SUCH HOLDER ULTIMATELY IS DEEMED TO
BE A MEMBER.
As stated above, this Plan includes several joint Plans proposed
separately by each of the Debtors. The classifications set forth below shall be
deemed to apply separately with respect to each Plan proposed by each Debtor.
For example, General Unsecured Claims relating to FPA shall be included in Class
5 of the Plan proposed by FPA, General Unsecured Claims relating to Sterling
Healthcare Group, Inc. shall be included in Class 5 of the Plan proposed by
Sterling Healthcare Group, Inc., etc.
49
<PAGE> 62
1. Treatment of Unclassified Claims
a. Administrative Claims
Administrative Claims consist of the costs and expenses of
administration of the Chapter 11 Cases. They include, but are not limited to,
Claims arising under the DIP Facility, the cost of operating the Debtors'
businesses since the Petition Date, the outstanding unpaid fees and expenses of
the professionals retained by the Debtors and the Creditors' Committee as
approved by the Bankruptcy Court, Allowed Claims for reclamation pursuant to
section 546(c) of the Bankruptcy Code, and the payments necessary to cure
prepetition defaults on unexpired leases and executory contracts that are being
assumed under the Plan ("Cure"). All payments to professionals in connection
with the Chapter 11 Cases for compensation and reimbursement of expenses and all
payments to reimburse expenses of members of the Creditors' Committee will be
made in accordance with the procedures established by the Bankruptcy Code and
the Bankruptcy Rules and are subject to approval of the Bankruptcy Court as
being reasonable.
As of September 18, 1998, the outstanding balance under the DIP
Facility was approximately $38.1 million. Assuming that the Plan is confirmed in
December, 1998, the Debtors estimate that unpaid Professional Fees as of the
Effective Date will be [$_________] million and that other unpaid Administrative
Claims as of the Effective Date, excluding Administrative Claims to be paid in
the ordinary course of business which are not yet due, will be approximately
[$_________]. The procedures for the allowance of Administrative Claims are
described in Section VII.F.7 of this Disclosure Statement.
Subject to the provisions of Article X of each Plan, on the Effective
Date, or as soon thereafter as practicable, a holder of an Allowed
Administrative Claim shall receive, in full satisfaction, settlement, release
and discharge of and in exchange for such Allowed Administrative Claim, (a) Cash
equal to the unpaid portion of such Allowed Administrative Claim, or (b) such
other treatment as to which the Debtors and such holder shall have agreed upon
in writing; provided, however, that Allowed Administrative Claims with respect
to liabilities incurred by the Debtors in the ordinary course of business during
the Chapter 11 Cases shall be paid in the ordinary course of business in
accordance with the terms and conditions of any agreements relating thereto.
50
<PAGE> 63
b. Priority Tax Claims
Priority Tax Claims are those tax Claims entitled to priority pursuant
to section 507(a)(8) of the Bankruptcy Code.
The Plan provides that Priority Tax Claims, if any, are Unimpaired.
Under the Plan, each holder of an Allowed Priority Tax Claim, at the sole option
of the Reorganized Debtors, shall be entitled to receive on account of such
Allowed Priority Tax Claim, in full satisfaction, settlement, release and
discharge of and in exchange for such Allowed Priority Tax Claim, (a) equal Cash
payments made on the last Business Day of every three-month period following the
Effective Date, over a period not exceeding six years after the assessment of
the tax on which such Claim is based, totaling the principal amount of such
Claim plus simple interest on any outstanding balance from the Effective Date
calculated at the interest rate available on 90-day United States Treasuries on
the Effective Date, (b) such other treatment agreed to by the holder of such
Allowed Priority Tax Claim and the Debtors or the Reorganized Debtors, provided
such treatment is on more favorable terms to the Debtors or the Reorganized
Debtors, as the case may be, than the treatment set forth in clause (a) above,
or (c) payment in full.
Under the Plan, no holder of an Allowed Priority Tax Claim shall be
entitled to any payments on account of any pre-Effective Date interest accrued
on or penalty arising after the Petition Date with respect to or in connection
with an Allowed Priority Tax Claim. Any such Claim or demand for any such
accrued postpetition interest or penalty will be discharged upon Confirmation by
section 1141(d)(1) of the Bankruptcy Code, and the holder of an Allowed Priority
Tax Claim shall not assess or attempt to collect such accrued interest or
penalty from the Reorganized Debtors or their property.
2. Unimpaired Classes of Claims
a. Class 1 - Other Priority Claims
Class 1, Other Priority Claims, consists of Claims other than
Administrative Claims and Tax Priority Claims entitled to priority under section
507(a) of the Bankruptcy Code.
On the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Class 1 Other Priority Claim shall receive, in full
satisfaction, settlement, release, and discharge
51
<PAGE> 64
of and in exchange for such Allowed Class 1 Other Priority Claim, (a) Cash equal
to the amount of such Allowed Class 1 Other Priority Claim, or (b) such other
treatment as to which the Debtors and such holder shall have agreed upon in
writing.
The Debtors estimate that Other Priority Claims will not exceed
$___________.
b. Class 3 - Miscellaneous Secured Claims
Class 3, Miscellaneous Secured Claims, consists of all Secured Claims
under section 506(a) of the Bankruptcy Code other than any Claims arising under
the DIP Facility or the Prepetition Credit Facility. Each holder of a
Miscellaneous Secured Claim shall be deemed to be in a separate subclass.
The legal, equitable and contractual rights of holders of Allowed
Miscellaneous Secured Claims shall be Reinstated. The Debtors' failure to object
to such Claims in the Chapter 11 Cases shall be without prejudice to the
Reorganized Debtors' right to contest or otherwise defend against such Claim in
the appropriate forum when and if such Claim is sought to be enforced by the
holder thereof. Notwithstanding section 1141(c) or any other provision of the
Bankruptcy Code, all prepetition liens on property of the Debtors held by or on
behalf of the holders of Claims in this Class with respect to such Claims shall
survive the Effective Date and continue in accordance with the contractual terms
of the underlying agreements with such holders until, as to each such holder,
the Allowed Claims of such holder in this Class are paid in full.
The Debtors estimate that the aggregate amount of Miscellaneous
Secured Claims will not exceed $_________.
c. Class 4 - Administrative Convenience Claims
Class 4, Administrative Convenience Claims, consists of Claims against
the Debtors that would otherwise be classified as Class 5 General Unsecured
Claims (other than Claims of holders of Debentures), that are (i) for $500 or
less, or (ii) for more than $500 but less than $1,000 if the holder of such
Claim has elected, on the Ballot provided for voting on the Plan within the time
fixed by the Bankruptcy Court for completing and returning such Ballot, to
accept $500 in Cash in full satisfaction, discharge and release of such Claim.
52
<PAGE> 65
On the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Class 4 Administrative Convenience Claim shall receive, in
full satisfaction, settlement, release and discharge of and in exchange for such
Class 4 Administrative Convenience Claim, Cash equal to (a) the amount of such
Allowed Claim if such amount is less than or equal to $500, or (b) $500, if the
amount of such Allowed Claim is greater than $500 and less than $1,000.
The Debtors estimate that the aggregate amount of Allowed Class 4
Administrative Convenience Claims will not exceed $_________.
3. Impaired Classes of Claims and Interests
a. Class 2 - Prepetition Credit Facility Claims
Class 2, Prepetition Credit Facility Claims, consists of all Secured
Claims of the Prepetition Lenders arising under or pursuant to the Prepetition
Credit Facility, the financing accommodations owed by the Debtors pursuant to
the Prepetition Credit Agreement and related documents.
The Debtors estimate that the aggregate amount of Prepetition Credit
Facility Claims is $_________.
As the indubitable equivalent of their Secured Claims against the
Debtors, on the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Class 2 Prepetition Credit Facility Claim shall receive, in
full satisfaction, settlement, release and discharge of and in exchange for such
Class 2 Prepetition Credit Facility Claim, such holder's Pro Rata share of the
New Common Stock to be issued in connection with the Plan as contemplated in
Section 7.7 of the Plan.
In lieu of a conversion from debt to equity of the Prepetition Lenders'
entire debt claims, the Debtors are evaluating their projected financial
condition subsequent to emergence from these reorganization proceedings and
reserve the right to alter the proposed distribution to the Prepetition Lenders
to include a combination of debt and equity depending upon whether the
Reorganized Debtors' post-Effective Date cash flows will be sufficient, in the
Debtors' business judgment, to permit the Reorganized Debtors to service such
additional debt obligations.
53
<PAGE> 66
b. Class 5 - General Unsecured Claims
Class 5, General Unsecured Claims, consists of all Unsecured Claims
that are not a Secured Claim, Administrative Claim, Priority Tax Claim, Other
Priority Claim or Subordinated Securities Claim.
On the Distribution Date, each holder of an Allowed Class 5 General
Unsecured Claim shall receive, in full satisfaction, settlement, release and
discharge of and in exchange for such Class 5 General Unsecured Claim, such
holder's Pro Rata share of the Warrants in accordance with Section 7.4 of the
Plan. Notwithstanding the inclusion of any deficiency Claim related to the
Prepetition Credit Facility Claims in this Class, such holders shall not receive
any distribution on account of such deficiency Claims.
For a discussion of the Debentures, see Section IV.C herein; for a
discussion of the attributes of the securities to be issued in connection with
the Plan, see Section VII.C.
c. Class 6 - Subordinated Securities Claims
Class 6, Subordinated Securities Claims, consists of Claims subject to
subordination pursuant to section 510(b) of the Bankruptcy Code that arise from
rescission of, or for damages, reimbursement or contribution with respect to, a
purchase or sale of Old Common Stock or other equity securities of FPA or its
Affiliates prior to the Petition Date.
The holders, if any, of Allowed Class 6 Subordinated Securities Claims
will not receive any distribution under the Plan on account of such Claims.
d. Class 7 - Interests
Class 7, Interests, consists of the rights of any current or former
holder or owner of any shares of Old Common Stock or other equity securities of
the Debtors authorized and issued prior to the Confirmation Date.
The holders of Interests will not receive any distribution of property
under the Plan on account of their Interests and, on the Effective Date, the
Interests shall be cancelled.
54
<PAGE> 67
C. DESCRIPTION OF SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
On the Effective Date, except as otherwise provided for in the Plan,
the Existing Securities and any other note, bond, indenture, or other instrument
or document evidencing or creating any indebtedness or obligation of the
Debtors, except such notes or other instruments evidencing indebtedness or
obligations of the Debtors that are Reinstated under the Plan, shall be
cancelled.
Under the Plan, the Reorganized Debtors will issue three forms of
securities. First, with respect to holders of Allowed Class 2 Prepetition Credit
Facility Claims, the Debtors will issue and distribute, in full satisfaction,
settlement, release and discharge of and in exchange for such Prepetition Credit
Facility Claims, New Common Stock to the holders of such Claims as the
indubitable equivalent of such Claims, subject to the possible inclusion of
combination of debt and equity discussed in Section VII.3.a above. Second, with
respect to holders of Class 5, General Unsecured Claims, the Debtors will issue
and distribute certain Warrants in full satisfaction, settlement, release and
discharge of and in exchange for such General Unsecured Claims. Finally, the
Debtors will issue 1 million shares of New Preferred Stock in connection with
the Plan.
1. New Common Stock
Under the Restated Articles of Incorporation, Reorganized FPA's
authorized capital stock will consist of (a) 40 million shares of New Common
Stock (of which up to 20 million shares will be issued under the Plan), none of
which will be issued and outstanding as of the Effective Date. All shares of the
New Common Stock, when issued pursuant to the Plan, will be fully paid and
nonassessable. Pursuant to the terms of the Plan, as of the Effective Date, all
shares of the New Common Stock to be issued under the Plan will be issued to
holders of Allowed Prepetition Credit Facility Claims. See the Restated Articles
of Incorporation and Restated Bylaws attached to the Plan as Exhibit D and
Exhibit E, respectively.
Subject to the preferential rights of any series of New Preferred Stock
which may be issued by the Reorganized Debtors on or before the Distribution
Date, and to any restrictions on payment of dividends imposed by the New Credit
Facility or any future credit facility, the holders of New Common Stock will be
entitled
55
<PAGE> 68
to such dividends (whether payable in cash, property or capital stock) as may be
declared from time to time by the Board of Directors of the Reorganized Debtors
from funds, property or stock legally available therefor, and will be entitled,
after payment of all prior claims, to receive Pro Rata all assets of the
Reorganized Debtors upon the liquidation, dissolution or winding up of the
Reorganized Debtors. Holders of New Common Stock have no redemption, conversion
or preemptive rights to purchase or subscribe for securities of the Reorganized
Debtors.
The respective holders of New Common Stock shall vote on all matters as
a single class and each holder of New Common Stock shall be entitled to one vote
for each share of the New Common Stock that it owns. Holders of New Common Stock
will not have cumulative voting rights.
2. Warrants
Reorganized FPA shall issue warrants (the "Warrants") to purchase an
aggregate of 3.0% of New Common Stock pursuant to the Plan. These Warrants will
be exercisable over a five-year period from the Effective Date. The exercise
price for the Warrants shall be equal to 110% of the quotient of (a) the claims
of the Prepetition Bank Group as of the Effective Date (including, without
limitation, all accrued and unpaid interest, costs and other charges through
such date, and determined as if the Bankruptcy Cases had not been filed) divided
by, (b) 20,000,000. The Warrants will be subject to dilution by, among other
things, securities issued by the Reorganized Debtors after the Distribution Date
other than as contemplated by the Plan.
3. New Preferred Stock
The authorized capital stock of the Reorganized Debtors will include
1,000,000 shares of New Preferred Stock, none of which will be issued or
outstanding upon consummation of the Plan.
D. REGISTRATION RIGHTS
The New Common Stock and the Warrants shall be exempt from registration
under applicable securities laws pursuant to section 1145(a) of the Bankruptcy
Code. Without limiting the effect of Section 1145 of the Bankruptcy Code,
Reorganized FPA will enter into a Registration Rights Agreement with each holder
of an Allowed Class 2 Prepetition Credit Facility Claim (a) who by virtue of
56
<PAGE> 69
holding New Common Stock to be distributed under the Plan and/or its
relationship with the Reorganized Debtors could reasonably be deemed to be an
"affiliate" (as such term is used within the meaning of applicable securities
laws) of the Reorganized Debtors, and (b) who requests in writing that
Reorganized FPA execute such agreement. Drafts of such Registration Rights
Agreements will be filed by FPA with the Bankruptcy Court no later than the
Exhibit Filing Date. The Registration Rights Agreements shall contain certain
shelf, demand and piggyback registration rights for the benefit of the
signatories thereto.
E. POST-CONSUMMATION OPERATIONS OF THE DEBTORS
1. Reorganized Debtors
Subject to the Combination Transactions, each of the Debtors will, as a
Reorganized Corporation, continue to exist after the Effective Date as a
separate corporate entity, with all the powers of a corporation under applicable
law in the jurisdiction in which it is incorporated and pursuant to the
certificate of incorporation and bylaws in effect prior to the Effective Date,
except to the extent such certificate of incorporation and bylaws are amended by
this Plan, without prejudice to any right to terminate such existence (whether
by merger or otherwise) under applicable law after the Effective Date.
2. Management and Directors of the Reorganized Debtors
a. Officers
The existing senior officers of the Debtors will serve initially in
their current capacities after the Effective Date.
b. Board of Directors
On the Effective Date, the term of the current members of the boards of
directors of the Debtors will expire. The initial board of directors of
Reorganized FPA will consist of seven (7) directors. Stephen J. Dresnick, M.D.
will serve as a director and shall be entitled to select an additional director.
The remaining five (5) directors will be selected by the Prepetition Lenders by
filing with the court and giving to the Debtors not less than five (5) days
prior to the Confirmation Date written notice of the identities of such
members; provided, however, that if and to the extent that the Prepetition
Lenders fail to file and give such
57
<PAGE> 70
notice, the Debtors will designate the members of the boards of directors of the
Reorganized Debtors by announcing their identities at the Confirmation Hearing.
The boards of directors of the remaining Reorganized Debtors will consist of a
subset of the board of directors of Reorganized FPA, as determined by the board
of directors for Reorganized FPA on the Effective Date or thereafter.
3. Employment, Retirement, Indemnification and Other Agreements
and Incentive Compensation Programs
To the extent that any of the Debtors have in place as of the Effective
Date employment, retirement, indemnification and other agreements with their
respective active directors, officers and employees who will continue in such
capacities after the Effective Date, or retirement income plans, welfare benefit
plans and other plans for such Persons, such agreements, programs and plans will
remain in place after the Effective Date and the Reorganized Debtors will
continue to honor such agreements, programs and plans. However, as of the
Effective Date, the Reorganized Debtors will each have the authority to
terminate, amend or enter into employment, retirement, indemnification and
other agreements with their respective active directors, officers and employees
and to terminate, amend or implement retirement income plans, welfare benefit
plans and other plans for active employees. Such agreements and plans may
include equity, bonus and other incentive plans in which officers and other
employees of the Reorganized Debtors may be eligible to participate; provided,
however, that management of Reorganized FPA will receive stock options which are
more specifically described in the Management Stock Option Plan and which
contain at least the following terms:
(a) Options to purchase, in the aggregate, 3% on a fully diluted basis
of the shares of New Common Stock issued pursuant to the Plan. These options
would vest on the Effective Date. The exercise price of such options will be
equal to the price per share of the New Common Stock being issued to the
Prepetition Lenders on the Effective Date (the "Effective Date Share Price");
(b) Options to purchase, in the aggregate, an additional 2% on a fully
diluted basis of the shares of New Common Stock issued pursuant to the Plan.
These options would vest on the 18 month anniversary of the Effective Date. The
exercise price of such options will be equal to 115% of the Effective Date Share
Price; and
58
<PAGE> 71
(c) Options to purchase, in the aggregate, an additional 3% on a fully
diluted basis of the shares of New Common Stock issued pursuant to the Plan.
These options would vest on the 36 month anniversary of the Effective Date. The
exercise price of such options will be equal to 130% of the Effective Date Share
Price.
4. Post-Consummation Working Capital Facility
Amounts due and owing under the DIP Facility must be repaid in full on
the earlier of (a) February 1, 1999, (b) the Effective Date, or (c) other
termination of the DIP Facility pursuant to its terms (the "DIP Repayment
Date"), unless otherwise expressly agreed by the DIP Lenders. The DIP Lenders
cannot be required to extend such financing beyond the DIP Repayment Date.
Accordingly, following the DIP Repayment Date and as a condition to consummation
of the Plan, the Debtors will need to replace the DIP Facility.
The Reorganized Debtors therefore expect to enter into the New Credit
Facility in order to obtain the funds necessary to repay the DIP Facility
Claims, make other payments required to be made on the Effective Date and
conduct their post-reorganization operations.
The Debtors anticipate that the New Credit Facility will be in the
amount of approximately [$________ million] of availability to be secured by all
or substantially all of the Reorganized Debtors' assets. Proceeds from this
financing will be used (a) to retire amounts owing with respect to the DIP
Facility, (b) to pay funding requirements under the Plan including the payment
of Administrative Claims, and (c) for the Reorganized Debtors' working capital
needs.
The Debtors expect that the terms of such financing will include a
three- to five-year revolving line of credit, based upon customary lending
formulas, sublimits and other terms, with a letter of credit subfacility. The
rates for such financing are expected to be based upon a Prime (Base of
Reference) rate and LIBOR rate plus an additional margin that is consistent with
other similar size and types of credits. The Debtors also expect to pay other
standard fees and expenses typical of a transaction of this type.
The proposed financing will be subject to several conditions precedent,
and borrowings under the New Credit Facility also will be subject to the
Reorganized Debtors satisfying customary financial covenants and ratios.
59
<PAGE> 72
The New Credit Facility, or a commitment letter with respect thereto,
will be filed by the Debtors with the Bankruptcy Court no later than the Exhibit
Filing Date. Notice of any material modification to the New Credit Facility or a
commitment letter with respect thereto after its filing with the Bankruptcy
Court must be provided to the Prepetition Agent, the DIP Agent and the
Creditors' Committee. The terms and conditions of the New Credit Facility will
include in all respects the terms and conditions of the commitment letter
executed between the Debtors and the Bank Agent and the New Credit Facility term
sheet, except to the extent that the Debtors and the Bank Agent agree otherwise.
In the Confirmation Order, the Bankruptcy Court will approve the New Credit
Facility in substantially the form filed with the Bankruptcy Court and authorize
the Debtors to execute the same together with such other documents as the Bank
Agent may reasonably require in order to effectuate the treatment afforded to
the lenders under the New Credit Facility.
F. DISTRIBUTIONS UNDER THE PLAN
1. Time of Distributions
Except as otherwise provided for in the Plan or ordered by the
Bankruptcy Court, distributions under the Plan shall be made on the Distribution
Date to holders of Allowed Class 2 Claims and Allowed Class 5 Claims, and on the
Effective Date, or as soon thereafter as is practicable, to holders of all other
Allowed Claims entitled to receive a distribution under the Plan.
2. Disbursing Agent
The Plan calls for the Debtors or a party designated by the Debtors, in
their sole discretion, to serve as a Disbursing Agent. The Disbursing Agent will
make all distributions required under this Plan except with respect to a holder
of a Claim whose distribution is governed by an indenture or other agreement and
is administered by an indenture trustee, agent or servicer, which distributions
will be deposited with the appropriate indenture trustee, agent or servicer, who
shall deliver such distributions to the holders of Claims in accordance with the
provisions of the Plan and the terms of the relevant indenture or other
governing agreement; provided, however, that if any such indenture trustee,
agent or servicer is unable to make such distributions, the Disbursing Agent,
with the cooperation of such indenture trustee, agent or servicer, will make
such distributions.
60
<PAGE> 73
3. Delivery of Distributions
Distributions to holders of Allowed Claims will be made by the
Disbursing Agent or the appropriate indenture trustee, agent or servicer, as the
case may be, (a) at the addresses set forth on the proofs of claim filed by such
holders (or at the last known addresses of such holders if no proof of claim is
filed or if the Debtors have been notified of a change of address), (b) at the
addresses set forth in any written notices of address changes delivered to the
Disbursing Agent after the date of any related proof of claim, (c) at the
addresses reflected in the Schedules if no proof of claim has been filed and the
Disbursing Agent has not received a written notice of a change of address, or
(d) in the case of the holder of a Claim that is governed by an indenture or
other agreement and is administered by an indenture trustee, agent or servicer,
at the addresses contained in the official records of such indenture trustee,
agent or servicer.
4. Undeliverable Distributions
If any holder's distribution is returned as undeliverable, no further
distributions to such holder will be made unless and until the Disbursing Agent
or the appropriate indenture trustee, agent or servicer is notified of such
holder's then current address, at which time all missed distributions will be
made to such holder without interest. Amounts in respect of undeliverable
distributions made through the Disbursing Agent or the indenture trustee, agent
or servicer will be returned to the Reorganized Debtors until such distributions
are claimed. All claims for undeliverable distributions must be made on or
before the fifth (5th) anniversary of the Effective Date. After such date, all
unclaimed property will revert to the Reorganized Debtors and the claim of any
holder or successor to such holder with respect to such property will be
discharged and forever barred notwithstanding any federal or state escheat laws
to the contrary.
5. Procedures for Treating and Resolving Disputed and Contingent
Claims
a. No Distributions Pending Allowance
Under the Plan, no payments or distributions will be made with respect
to all or any portion of a Disputed Claim unless and until all objections to
such Disputed Claim have been settled or withdrawn or have been determined by a
Final Order, and the
61
<PAGE> 74
Disputed Claim has become an Allowed Claim. All objections to Claims must be
filed on or before the Claims Objection Deadline.
b. Distribution Reserve
The Disbursing Agent will withhold the Distribution Reserve from the
property to be distributed under the Plan. As to any Disputed Claim, upon a
request for estimation by the Debtors, the Bankruptcy Court will determine what
amount is sufficient to withhold as the Distribution Reserve. The Debtors may
request estimation for every Disputed Claim that is unliquidated and the
Disbursing Agent will withhold the Distribution Reserve based upon the estimated
amount of each such Claim as set forth in a Final Order. The Debtors may also
request estimation of a Disputed Claim that is unliquidated. If the Debtors
elect not to request such an estimation from the Bankruptcy Court with respect
to a Disputed Claim that is unliquidated, the Disbursing Agent will withhold the
Distribution Reserve based upon the Face Amount of such Claim. The Disbursing
Agent will also place in the Distribution Reserve any dividends, payments or
other distributions made on account of, as well as any obligations arising from,
the property withheld as the Distribution Reserve, to the extent that such
property continues to be withheld as the Distribution Reserve at the time such
distributions are made or such obligations arise. If practicable, the
Disbursing Agent will invest any Cash that is withheld as the Distribution
Reserve in a manner that will yield a reasonable net return, taking into account
the safety of the investment. Nothing in the Plan or herein will be deemed to
entitle the holder of a Disputed Claim to postpetition interest on such Claim.
Neither the Disbursing Agent, nor any other party, is entitled to vote
any shares of the New Common Stock held in the Distribution Reserve. In the
event that any matter requires approval by the shareholders of Reorganized FPA
prior to the distribution or cancellation of all shares of New Common Stock held
in the Distribution Reserve, the shares of New Common Stock held by the
Disbursing Agent will be deemed only for voting purposes not to have been
issued.
c. Distributions After Allowance
Payments and distributions from the Distribution Reserve to each holder
of a Disputed Claim, to the extent that it ultimately becomes an Allowed Claim,
will be made in accordance with provisions of the Plan that govern the Class of
Claims to which the
62
<PAGE> 75
respective holder belongs. Promptly after the date when the order or judgment of
the Bankruptcy Court allowing all or part of such Claim becomes a Final Order,
the Disbursing Agent will distribute to the holder of such Claim any Cash and
other property in the Distribution Reserve that would have been distributed on
the Distribution Date had such Allowed Claim been an Allowed Claim on the
Distribution Date. After a Final Order has been entered, or other final
resolution has been reached, with respect to all Disputed Claims, (i) any
Warrant held in the Distribution Reserve will be distributed Pro Rata to holders
of Allowed Class 5 General Unsecured Claims, and (ii) any Cash or other property
remaining in the Distribution Reserve will become property of the Reorganized
Debtors. All distributions made under the Plan on account of an Allowed Claim
will be made together with any dividends, payments or other distributions made
on account of, as well as any obligations arising from, the distributed property
as if such Allowed Claim had been an Allowed Claim on the Distribution Date.
6. Fractional Securities; De Minimis Distributions.
Under the Plan, no Payments of fractions of shares of New Common Stock
or Warrants will be made. Whenever any payment of a fraction of a share of New
Common Stock or Warrants under the Plan would otherwise be called for, the
actual payment made will reflect a rounding of such fraction to the nearest
whole share (up or down), with half shares being rounded down.
7. Allowance of Certain Claims
a. DIP Facility Claim
On the Effective Date, all obligations of the Debtors under the DIP
Facility will be paid or otherwise satisfied in full in accordance with the
terms of the DIP Facility.
b. Professional Claims
Under the Plan, all final requests for payment of Professional Claims
must be filed no later than sixty (60) days after the Effective Date. After
notice and a hearing in accordance with the procedures established by the
Bankruptcy Code and prior orders of the Bankruptcy Court, the allowed amounts of
such Professional Claims will be determined by the Bankruptcy Court.
63
<PAGE> 76
Subject to the Holdback, on the Effective Date, the Debtors will pay
all amounts owing to Professionals both for all outstanding amounts relating to
prior periods and for the period from November 1, 1998, through the Effective
Date, provided, however, that if the Effective Date occurs after December 20,
1998, the Professionals must prepare a regular monthly fee statement and will be
paid in the manner set forth in the Professionals Fee Order for the period
November 1, 1998 through November 30, 1998 and must continue to apply for and
receive payment pursuant to such order to the extent the Effective Date does not
occur prior to the first day of each succeeding month.
The Professionals must estimate fees and expenses due for periods that
have not been billed as of the Effective Date. Within fifteen (15) days after
the Effective Date, a Professional receiving payment for the estimated period
must submit a detailed invoice covering such period in the manner and providing
the detail as set forth in the Professionals Fee Order.
The Disbursing Agent will maintain the Holdback Escrow Account. On the
Effective Date, the Debtors will pay to the Disbursing Agent in order to fund
the Holdback Escrow Account, cash equal to the aggregate amount of the Holdback
for all Professionals. The remaining amount of Professional Claims owing to the
Professionals will be paid from the Holdback Escrow Account when such claims are
finally Allowed by the Court.
Upon the Effective Date, any requirement that Professionals comply with
sections 327 through 331 of the Bankruptcy Code in seeking retention or
compensation for services rendered after such date will terminate.
c. Other Administrative Fees
All other requests for payment of an Administrative Claim must be filed
with the Bankruptcy Court and served on counsel for the Debtors no later than
thirty (30) days after the Effective Date. Unless the Debtors object to an
Administrative Claim within thirty (30) Business Days after receipt, such
Administrative Claim will be deemed allowed in the amount requested. In the
event that the Debtors object to an Administrative Claim, the Bankruptcy Court
will determine the Allowed amount of such Administrative Claim. Notwithstanding
these provisions of the Plan, no request for payment of an Administrative Claim
need be filed with respect to an
64
<PAGE> 77
Administrative Claim which is paid or payable by the Debtors in the ordinary
course of business.
8. Termination of DIP Facility
Upon payment or satisfaction in full of all obligations under the DIP
Facility in accordance with the terms thereof, all liens and security interests
granted to secure such obligations shall be deemed cancelled and shall be of no
further force and effect.
G. MISCELLANEOUS MATTERS
1. Postpetition Interest
Unless otherwise specifically provided for in the Plan, Confirmation
Order or DIP Facility or DIP Facility Order, or required by applicable
bankruptcy law, postpetition interest will not accrue or be paid on Claims, and
no holder of a Claim is entitled to interest accruing on or after the Petition
Date on any Claim. Interest will not accrue or be paid upon any Disputed Claim
in respect of the period from the Petition Date to the date a final distribution
is made thereon if and after such Disputed Claim becomes an Allowed Claim.
2. Substantial Contribution Compensation and Expenses Bar Date
Any person or entity who requests compensation or expense reimbursement
for making a substantial contribution in the Chapter 11 Cases pursuant to
section 503(b)(3), (4), and (5) of the Bankruptcy Code must file an application
with the clerk of the Bankruptcy Court, on or before forty-five (45) days after
the Effective Date (the "503 Deadline"), and serve such application on counsel
for the Debtors and as otherwise required by the Bankruptcy Court and the
Bankruptcy Code on or before the 503 Deadline, or be forever barred from seeking
such compensation or expense reimbursement.
3. Miscellaneous Disputes and Litigation in Which the Debtors
Hold an Interest
a. Continuing Litigation to Which the Debtors are a
Party
65
<PAGE> 78
The Debtors hold a variety of claims and/or currently are prosecuting
causes of action against third parties. In addition, various Debtors have been
and continue to be parties to legal actions arising in the ordinary course of
business. The commencement of the Chapter 11 Cases acted to stay these actions.
b. The Litigation Trust
Under the Plan, each Debtor (and its successor Reorganized Corporation)
waives, releases and discharges: all current officers, directors, agents,
employees and representatives of the Debtors serving in such capacities as of
the Confirmation Date, from any and all claims and/or Causes of Action.
Claimants and equity interest holders of each of the Debtors are enjoined from
commencing or continuing any action, employment of process or act to collect,
offset or recover any such claim that could be brought on behalf of or in the
name of any of each such Debtor, without any independent cause of action
belonging to the claimant or equity interest holder asserting such claim;
provided, however, that nothing in the Plan prohibits the Litigation Trustee
from commencing whatever actions the Litigation Trustee deems appropriate
against the Debtors' current officers and directors.
The Litigation Trustee is charged with taking all steps necessary to
establish the Litigation Trust. As of the Effective Date, the Litigation Trustee
will be deemed to have assumed all claims, if any, which may exist against the
Debtors' current officers and directors for which (and to the extent) there is
D&O Insurance. The Litigation Trustee has no obligation to bring any such action
or actions. In any proceeding brought by the Litigation Trustee, the Litigation
Trustee (i) will obtain recovery solely from the D&O Insurance, and (ii) will
not under any circumstances seek recovery from the personal assets of any such
current officer or director, as the case may be, or seek to execute on any
judgment against any current officer or director except with respect to the D&O
Insurance, even if no D&O Insurance is determined to exist, the D&O Insurance
carrier declines coverage, or the D&O Insurance coverage is insufficient to
satisfy in full any claim or judgment obtained by the Litigation Trustee. Any
recovery obtained by the Litigation Trustee will be used first to reimburse the
applicable Reorganized Debtor prosecuting such action for any payments which
either or both may be required to make to indemnify directors or officers which
are not paid by the D&O Insurance; any funds thereafter remaining will be used
to pay the reasonable fees and expenses of the Litigation Trustee and any
66
<PAGE> 79
professionals retained by the Litigation Trustee; and any funds thereafter
remaining will be distributed to Reorganized FPA.
c. Compromises and Settlements
Pursuant to Bankruptcy Rule 9019(a), the Debtors may compromise and
settle various Claims (a) against them and (b) that they have against other
Persons. The Debtors expressly reserve the right (with Bankruptcy Court
approval, following appropriate notice and opportunity for a hearing) to
compromise and settle Claims against them and Claims that they may have against
other Persons up to and including the Effective Date. After the Effective Date,
such right shall pass to the Reorganized Debtors pursuant to Sections 7.10 and
11.1 of the Plan.
d. Setoffs.
Under the Plan, the Debtors may, but are not required to, set off
against any Claim, and the payments or other distributions to be made pursuant
to the Plan in respect of such Claim, claims of any nature whatsoever that the
Debtors may have against the holder of such Claim; but neither the failure to do
so nor the allowance of any Claim under the Plan will constitute a waiver or
release by the Debtors of any such claim that the Debtors may have against such
holder.
4. Treatment of Executory Contracts and Unexpired Leases
The Debtors are parties to hundreds of leases and executory contracts
with service providers and other entities. Several of these executory contracts
involve license agreements the Debtors have entered into with various companies
for the use and maintenance of computer software. The overwhelming majority of
the executory contracts that have not been previously rejected involve equipment
leases, service contracts or medical care provider agreements which the Debtors
intend to assume as part of the Plan.
a. Assumed Executory Contracts and Leases
Each executory contract and unexpired lease to which the Sterling Group
will be automatically assumed as of the Effective Date, unless such executory
contract or unexpired lease (a) was previously rejected by the Sterling Group,
(b) is the subject of a motion to reject filed on or before the Confirmation
Date, or (c)
67
<PAGE> 80
is listed on the schedule of rejected contracts and leases annexed as Exhibit F
to the Plan.
With respect to executory contracts and unexpired leases to which
Debtors (other than Debtors who are members of the Sterling Group) are a party,
only those executory contracts and unexpired leases listed on the schedule
annexed as Exhibit G to the Plan shall be deemed automatically assumed as of the
Effective Date. The Confirmation Order shall constitute an order of the
Bankruptcy Court approving such assumptions, pursuant to section 365(b)(1) of
the Bankruptcy Code and, to the extent applicable, section 365(b)(3) of the
Bankruptcy Code, as of the Effective Date.
Each executory contract and unexpired lease that is assumed and relates
to the use, ability to acquire or occupancy of real property will include (a)
all modifications, amendments, supplements, restatements or other agreements
made directly or indirectly by any agreement, instrument or other document that
in any manner affect such executory contract or unexpired lease and (b) all
executory contracts or unexpired leases appurtenant to the premises, including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, reciprocal easement agreements and any
other interests in real estate or rights in rem related to such premises, unless
any of the foregoing agreements has been rejected pursuant to a Final Order of
the Bankruptcy Court or is otherwise rejected as a part of this Plan.
b. Rejected Executory Contracts and Leases.
Except with respect to executory contracts and unexpired leases that
have been previously rejected or are the subject of amotion to reject on or
before the Confirmation Date, all executory contracts and unexpired leases (a)
specifically listed on the schedule of rejected executory contracts and
unexpired leases annexed as Exhibit F to the Plan with respect to the Sterling
Group and (b) that are not listed on Exhibit G of the Plan with respect to the
Debtors who are not members of the Sterling Group, will be automatically
rejected as of the Effective Date or such earlier date as the Debtors may have
unequivocally terminated their performance under such lease or contract.
c. Payments Related to Assumed Executory Contracts and
Leases
68
<PAGE> 81
Any monetary amounts by which each executory contract and unexpired
lease to be assumed under the Plan may be in default will be satisfied, under
section 365(b)(1) of the Bankruptcy Code, at the option of the Debtors or the
assignee of the Debtors assuming such contract or lease, by Cure. "Cure" means
the distribution within a reasonable period of time following the Effective Date
of Cash, or such other property as may be agreed upon by the parties or ordered
by the Bankruptcy Court, with respect to the assumption of an executory contract
or unexpired lease, pursuant to section 365(b) of the Bankruptcy Code, in an
amount equal to all unpaid monetary obligations, without interest, or such other
amount as may be agreed upon by the parties, under such executory contract or
unexpired lease, to the extent such obligations are enforceable under the
Bankruptcy Code and applicable bankruptcy law.
In the event of a dispute regarding (a) the nature or the amount of any
Cure, (b) the ability of the Reorganized Debtors or any assignee to provide
"adequate assurance of future performance" (within the meaning of section 365 of
the Bankruptcy Code) under the contract or lease to be assumed, or (c) any other
matter pertaining to assumption, Cure shall occur following the entry of a Final
Order resolving the dispute and approving the assumption and, if applicable, the
assignment.
d. Bar Date for Rejection Damage Claims
If the rejection by the Debtors, pursuant to the Plan or otherwise, of
an executory contract or unexpired lease results in a Claim, then such Claim
will be forever barred and will not be enforceable against the Debtors or the
Reorganized Debtors or the properties of either of them unless a proof of claim
is filed with the clerk of the Bankruptcy Court and served upon counsel to the
Debtors within thirty (30) days after service of the earlier of (a) notice of
entry of the Confirmation Order, or (b) other notice that the executory contract
or unexpired lease has been rejected.
5. Indemnity Claims
In satisfaction and compromise of the Indemnitees' Indemnification
Rights: (i) all Indemnification Rights except those based upon any act or
omission arising out of or relating to any Indemnitee's service with, for or on
behalf of the Debtors on or after the Petition Date (the "Post-Petition
Indemnification Rights") are released and discharged on and as of the Effective
Date, provided that the Post-Petition Indemnification Rights remain
69
<PAGE> 82
in full force and effect on and after the Effective Date and are not modified,
reduced, discharged or otherwise affected in any way by the Chapter 11 Cases,
(ii) the Debtors or the Reorganized Debtors, as the case may be, covenant in the
Plan to purchase and maintain directors and officers liability insurance
providing coverage for the Indemnitees for a period of two years after the
Effective Date insuring such parties in respect of any claims, demands, suits,
causes of action or proceedings against such Indemnitees based upon any act or
omission related to such Indemnitee's service with, for or on behalf of the
Debtors in at least the scope and amount as currently maintained by the Debtors
(the "Insurance Coverage"), and (iii) the Debtors indemnify Indemnitees and
agree to pay for any deductible or retention amount that may be payable in
connection with any claim covered by either under the foregoing Insurance
Coverage or any prior similar policy.
6. Exculpation and Limitation of Liability
The Debtors, the Reorganized Debtors, any statutory committee, the
Prepetition Lenders, the DIP Lenders, any of such parties' respective present or
former members, officers, directors, employees, advisors, attorneys,
representatives, financial advisors, investment bankers or agents and any of
such parties' successors and assigns, shall not have or incur, and are under the
Plan released from, any claim, obligation, Cause of Action or liability to one
another or to any holder of a Claim or an Interest, or any other party in
interest, or any of their respective agents, employees, representatives,
financial advisors, attorneys or affiliates, or any of their successors or
assigns, for any act or omission in connection with, relating to or arising out
of the Debtors' Chapter 11 Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan, the administration of the Plan or the property to be
distributed under the Plan, except for their willful misconduct, and in all
respects shall be entitled to reasonably rely upon the advice of counsel with
respect to their duties and responsibilities under the Plan.
Notwithstanding any other provision of the Plan, no holder of a Claim
or Interest, or other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys or affiliates, and no
successors or assigns of the foregoing, have any right of action against the
Debtors, the Reorganized Debtors or any statutory committee, the Prepetition
Lenders, the DIP Lenders, or any of such parties' respective present or former
members, officers, directors, employees,
70
<PAGE> 83
advisors, attorneys, representatives, financial advisors, investment bankers or
agents or such parties' successors and assigns, for any act or omission in
connection with, relating to or arising out of the Chapter 11 Cases, the pursuit
of confirmation of the Plan, the consummation of the Plan, the administration of
the Plan or the property to be distributed under the Plan, except for their
willful misconduct.
7. Injunction
The satisfaction, release and discharge pursuant to Article XI of the
Plan also acts as an injunction against any Person commencing or continuing any
action, employment of process, or act to collect, offset or recover any Claim or
Cause of Action satisfied, released or discharged under the Plan to the fullest
extent authorized or provided by the Bankruptcy Code, including, without
limitation, to the extent provided for or authorized by sections 524 and 1141
thereof.
H. PRESERVATION OF RIGHTS OF ACTION
In accordance with section 1123(b)(3) of the Bankruptcy Code and except
as provided in the Plan, the Reorganized Debtors retain and may enforce all
claims, rights of action, suits and proceedings, whether in law or in equity,
whether known or unknown, which the Debtors may hold against any entity,
including, without limitation, any Causes of Action brought prior to the
Petition Date, actions against any Persons for failure to pay for products or
services rendered by the Debtors, all claims, Causes of Action, suits and
proceedings relating to strict enforcement of the Debtors' intellectual property
rights, including patents, copy rights and trademarks, and all Causes of Action
which may exist under sections 510, 542, 544 through 550 and 553 of the
Bankruptcy Code or under similar state laws, including, without limitation,
fraudulent conveyance claims, if any, and all other Causes of Action of a
trustee and debtor-in-possession under the Bankruptcy Code. The Reorganized
Debtors, in the exercise of their business judgment, will determine whether to
enforce such rights. The Reorganized Debtors or any successors may pursue such
litigation claims in accordance with the best interests of the Reorganized
Debtors or the successors holding such rights of action.
71
<PAGE> 84
I. THE AFFILIATED BANKRUPTCIES
These Chapter 11 Cases have been consolidated for procedural purposes
only and are being jointly administered pursuant to an order of the United
States Bankruptcy Court for the District of Delaware. The Joint Plan does not
contemplate the substantive consolidation of any of the Debtors for any purpose,
including voting or distribution purposes. Certain of the Debtors will be
dissolved or merged (or combined in another form of transaction) with another
Debtor as a means of implementing this Plan. For voting and distribution
purposes, the Plan contemplates separate classes for each Debtor. The Cash and
Reorganized Securities of the Debtors, as reorganized, will be distributed to
the claimants and equity interest holders in each of the classes of each of the
Debtors, as set forth in the Plan. A description of each Debtor and its
corresponding bankruptcy case number is attached to the Plan as Exhibit A.
VIII. CERTAIN FACTORS TO BE CONSIDERED
The holder of a Claim against or Interest in the Debtors should read
and carefully consider the following factors, as well as the other information
set forth in this Disclosure Statement (and the documents delivered together
herewith and/or incorporated by reference herein), before deciding whether to
vote to accept or to reject the Plan.
A. GENERAL CONSIDERATIONS
The formulation of a reorganization plan is the principal purpose of a
chapter 11 case. The Plan sets forth the means for satisfying the holders of
Claims against the Debtors. Certain Claims and Interests receive no
distributions pursuant to the Plan. See Section VII.B, "Classification and
Treatment of Claims and Interests," herein. Reorganization of the Debtors'
businesses and operations under the proposed Plan also avoids the potentially
adverse impact of a liquidation on the Debtors' employees, and many of their
Payors, Providers, and lessors.
B. CERTAIN BANKRUPTCY CONSIDERATIONS
If the Plan is not confirmed and consummated, there can be no assurance
that the Chapter 11 Cases will continue rather than be converted to a
liquidation or that any alternative plan of
72
<PAGE> 85
reorganization would be on terms as favorable to the holders of the Impaired
Claims as the terms of the Plan. If a liquidation or protracted reorganization
were to occur, there is a substantial risk that there would be little, if any,
value available for distribution to the holders of Claims (other than Secured
Claims). In addition, if a liquidation or protracted reorganization were to
occur, there is a substantial risk that holders of Secured Claims would receive
less than they will receive under the Plan. See Appendix D annexed to the
Disclosure Statement for a liquidation analysis.
If the Plan is confirmed, but the Debtors do not enter into the New
Credit Facility, it would become necessary to amend the Plan to provide for
alternative treatment of Claims. To the extent that the Debtors do not enter
into the New Credit Facility as contemplated by the Plan, there can be no
assurance that the Chapter 11 Cases will continue rather than be converted to a
liquidation or that any alternative plan of reorganization would be on terms as
favorable to the holders of the Impaired Claims as the terms of the Plan. If any
modifications to the Plan are material, it will be necessary to resolicit votes
from those adversely affected by the modifications with respect to such amended
Plan.
C. INHERENT UNCERTAINTY OF FINANCIAL PROJECTIONS
The Projections set forth in Appendix E annexed hereto cover the
Debtors' operations through Fiscal Year 2001. These Projections are based on
numerous assumptions including the timing, confirmation and consummation of the
Plan in accordance with its terms, the anticipated future performance of the
Reorganized Debtors, industry performance, general business and economic
conditions and other matters, many of which are beyond the control of the
Reorganized Debtors and some or all of which may not materialize. In addition,
unanticipated events and circumstances occurring subsequent to the date that
this Disclosure Statement was approved by the Bankruptcy Court may affect the
actual financial results of the Reorganized Debtors' operations. These
variations may be material and may adversely affect the ability of the
Reorganized Debtors to make payments with respect to post-Effective Date
indebtedness. Because the actual results achieved throughout the periods covered
by the Projections may vary from the projected results, the Projections should
not be relied upon as a guaranty, representation or other assurance of the
actual results that will occur.
73
<PAGE> 86
Except with respect to the projections and except as otherwise
specifically and expressly stated herein, this Disclosure Statement does not
reflect any events that may occur subsequent to the date hereof and that may
have a material impact on the information contained in this Disclosure
Statement. Neither the Debtors nor the Reorganized Debtors intend to update the
Projections for the purposes hereof; thus, the Projections will not reflect the
impact of any subsequent events not already accounted for in the assumptions
underlying the Projections.
D. DIVIDENDS
The Reorganized Debtors do not anticipate that dividends will be paid
with respect to the New Common Stock in the near term.
E. POTENTIAL DILUTION CAUSED BY THE WARRANTS AND THE SENIOR MANAGEMENT
OPTIONS
If the Warrants or the senior management options to purchase the New
Common Stock are exercised, the New Common Stock issued pursuant to such
exercise will dilute the ownership percentage of and value attributable to
holders of New Common Stock issued under the Plan.
F. ACCESS TO FINANCING
The Debtors' operations are dependent on the availability and cost of
working capital financing and may be adversely affected by any shortage or
increased cost of such financing. The Debtors believe that substantially all of
their needs for working capital financing will be met by projected operating
cash flow and the New Credit Facility. However, no assurance can be given that
the Debtors will be successful in consummating the New Credit Facility.
Moreover, if the Debtors require working capital greater than that provided by
the New Credit Facility, they may be required either to (a) seek to increase the
availability under the New Credit Facility, (b) obtain other sources of
financing or (c) curtail their operations. The Debtors believe that the
recapitalization to be accomplished through the Plan will facilitate the
Debtors' ability to obtain additional or replacement working capital financing.
No assurance can be given, however, that any additional replacement financing
will be available on terms that are favorable or acceptable to the Debtors.
Moreover, there can be no assurance that the Debtors will be able to obtain an
acceptable credit facility upon expiration of the New Credit Facility.
74
<PAGE> 87
G. COMPETITION
The health care industry is highly competitive and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. Generally, the Debtors compete with any entity that
contracts with Payors for the provision of prepaid health care services. The
Debtors' physician network also competes with other companies, including PPMs,
which provide management services to health care providers. The Debtors also
compete with local physician groups and hospitals for the provision of physician
practice management services to hospital emergency departments. The Debtors also
compete with other companies for acquisition, affiliation and other expansion
opportunities with national, regional and local 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 do the Debtors.
IX. RESALE OF SECURITIES RECEIVED UNDER THE PLAN
Under section 1145(a) of the Bankruptcy Code, the issuance of the New
Common Stock and the Warrants to be distributed under the Plan in exchange for
Claims against the Debtors, and the subsequent resale of such securities by
entities which are not "underwriters" (as defined in section 1145(b) of the
Bankruptcy Code), is not subject to the registration requirements of Section 5
of the Securities Act of 1933. BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE
QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTORS DO
NOT MAKE ANY REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF
THE NEW COMMON STOCK OR THE WARRANTS TO BE DISTRIBUTED UNDER THE PLAN. MOREOVER,
SUCH SECURITIES, OR THE DOCUMENTS THAT ESTABLISH THE TERMS AND PROVISIONS
THEREOF, MAY CONTAIN TERMS AND LEGENDS THAT RESTRICT OR INDICATE THE EXISTENCE
OF RESTRICTIONS ON THE TRANSFERABILITY OF SUCH SECURITIES AND INSTRUMENTS. THE
DEBTORS RECOMMEND THAT RECIPIENTS OF SUCH SECURITIES UNDER THE PLAN CONSULT WITH
LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF SUCH
SECURITIES.
75
<PAGE> 88
X. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a general summary of certain material federal income
tax consequences of the implementation of the Plan to the Debtors, and holders
of Claims and Interests. This summary does not discuss all aspects of federal
income taxation that may be relevant to the Debtors, to a particular creditor or
shareholder in light of its individual investment circumstances or to certain
creditors or shareholders subject to special treatment under the federal income
tax laws (for example, tax-exempt organizations, foreign corporations or
individuals who are not citizens or residents of the United States). This
summary also does not discuss any aspects of state, local or foreign taxation.
This summary is based upon the Internal Revenue Code of 1986, as
amended (the "IRC"), the Treasury regulations (including temporary regulations)
promulgated thereunder, judicial authorities and current administrative rulings,
all as in effect on the date hereof and all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision. Moreover, due to a lack of definitive judicial or
administrative authority or interpretation, substantial uncertainties exist with
respect to various tax consequences of the Plan as discussed herein. The Debtors
have not requested a ruling from the Internal Revenue Service with respect to
these matters and no opinion of counsel has been sought or obtained by the
Debtors with respect thereto. FOR THE FOREGOING REASONS, CREDITORS AND
SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES (FOREIGN, FEDERAL, STATE AND LOCAL) TO THEM OF THE PLAN. THE
DEBTORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF THE CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY CREDITOR
OR SHAREHOLDER, NOR ARE THE DEBTORS RENDERING ANY FORM OF LEGAL OPINION AS TO
SUCH TAX CONSEQUENCES.
A. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS
1. Cancellation of Indebtedness
Under general tax principles, the Debtors would realize cancellation of
debt ("COD") income to the extent that the Debtors pay a creditor pursuant to
the Plan an amount of consideration in respect of a Claim against the Debtors
that is worth less than the amount of such Claim. For this purpose, the amount
of consideration paid to a creditor generally would equal the amount
76
<PAGE> 89
of Cash or the fair market value of the New Common Stock or other property paid
to such creditor. Because the Debtors will be in a bankruptcy case at the time
the COD income is realized, the Debtors will not be required to include COD
income in gross income, but rather will be required to reduce certain of their
tax attributes by the amount of COD income so excluded. Under the general rules
of IRC section 108, the required attribute reduction would be applied first to
reduce the Debtors' net operating loss carry-forwards ("NOLs") to the extent of
such NOLs, with any excess excluded COD income applied to reduce certain other
tax attributes. The Debtors believe and intend to take the position that any
reduction in tax attributes generally occurs on a separate entity basis, even
though FPA files a consolidated federal income tax return.
IRC section 108(b)(5) provides an election pursuant to which the
Debtors can elect to apply the required attribute reduction to first reduce the
basis of their depreciable property to the extent of such basis, with any excess
applied next to reduce their NOLs and then certain other tax attributes. The
Debtors have not yet determined whether they will make the election under IRC
section 108(b)(5).
2. Limitation on Net Operating Losses
The Debtors will experience an "ownership change" (within the meaning
of IRC section 382) on the Effective Date as a result of the issuance of New
Common Stock to holders of Prepetition Credit Facility Claims. As a result, the
Debtors' ability to use any pre-Effective Date NOLs and capital loss carryovers
to offset their income in any post-Effective Date taxable year (and in the
portion of the taxable year of the ownership change following the Effective
Date) to which such a carryover is made generally (subject to various exceptions
and adjustments, some of which are described below) will be limited to the sum
of (a) a regular annual limitation (prorated for the portion of the taxable
year of the ownership change following the Effective Date), (b) the amount of
the "recognized built-in gain" for the year which does not exceed the excess of
their "net unrealized built-in gain" over previously recognized built-in gains
(as the quoted terms are defined in IRC section 382(h)) and (c) any carryforward
of unused amounts described in (a) and (b) from prior years. IRC Section 382 may
also limit the Debtors' ability to use "net unrealized built-in losses," if any,
to offset future taxable income. The regular annual limitation will generally be
equal to the product of (x) the
77
<PAGE> 90
lesser of the value of the stock of the Debtors immediately after the ownership
change (which will be increased to reflect the increase in value of the Debtors
resulting from the surrender of the creditors' Claims in the reorganization
transactions) or the gross value of the Debtors' assets immediately before the
ownership change (with certain adjustments) and (y) the "long-term tax-exempt
rate" (as defined in IRC section 382(f)). In October 1998, the long-term
tax-exempt rate was 5.02%; however, the rate in effect on the Effective Date may
be different from the October 1998 rate. The loss carryovers will be subject to
further limitations if the Debtors experience additional future ownership
changes or if they do not continue their business enterprise for at least two
years following the Effective Date.
The operation and effect of IRC section 382 will be materially
different from that just described if the Debtors are subject to the special
rules for corporations in bankruptcy provided in IRC section 382(l)(5). In that
case, the Debtors' ability to utilize their pre-Effective Date NOLs would not be
limited as described in the preceding paragraph. However, several other
limitations would apply to the Debtors under IRC section 382(l)(5), including
(a) the Debtors' NOLs would be calculated without taking into account deductions
for interest paid or accrued in the portion of the current tax year ending on
the Effective Date and all other tax years ending during the three-year period
prior to the current tax year with respect to the Prepetition Credit Facility
Claims that are exchanged for New Common Stock pursuant to the Plan, and (b) if
the Debtors undergo another ownership change within two years after the
Effective Date, the Debtors' IRC section 382 limitation with respect to that
ownership change will be zero.
As a general matter, the rules of IRC section 382(l)(5) apply to
certain ownership changes occurring in a chapter 11 bankruptcy case pursuant to
a court-ordered transaction or court-approved plan. These provisions will apply
to the Debtors if the persons that are shareholders and "qualified" creditors of
the Debtors immediately before the ownership change own, after the ownership
change, at least 50% (measured by both vote and value) of the stock of the
Debtors. Certain attribution rules and other requirements apply for purposes of
determining stock ownership for this purpose. It is uncertain whether the
provisions of IRC section 382(l)(5) would apply to the ownership change
occurring as a result of the confirmation of the Plan. However, under IRC
section 382(1)(5)(H), the Debtors may elect not to have the special rules of IRC
section 382(l)(5) apply (in which case the regular IRC section 382 rules,
78
<PAGE> 91
described above, will apply). The Debtors have not yet determined whether they
would elect to have the regular IRC section 382 rules apply to the ownership
change arising from the consummation of the Plan (assuming section 382(l)(5)
would otherwise apply).
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CLAIMS
The federal income tax consequences of the implementation of the Plan
to a creditor will depend upon a number of factors, including whether the
creditor is deemed to have participated in an exchange for federal income tax
purposes, and, if so, whether such exchange transaction constitutes a tax-free
recapitalization or a taxable transaction; whether the creditor's present debt
Claim constitutes a "security" for federal income tax purposes; the type of
consideration received by the creditor in exchange for his Allowed Claim; and
whether the creditor reports the income on the accrual basis.
1. Holders of Other Priority Claims, Prepetition Credit Facility
Claims, Administrative Convenience Claims and Certain General
Unsecured Claims
A holder whose Claim is paid in full or otherwise discharged on the
Effective Date will recognize gain or loss for federal income tax purposes equal
to the difference between the fair market value on the Effective Date of any
payment (e.g., the amount of cash or the fair market value of the New Common
Stock or Warrants) and the holder's adjusted tax basis in the Claim. A holder's
tax basis in New Common Stock or Warrants received in exchange for its claim
would generally be equal to the fair market value of such New Common Stock or
Warrant, as the case may be, on the Effective Date. The holding period for any
such New Common Stock or Warrants will begin on the day after the Effective
Date.
Under the Plan, some New Common Stock or Warrants may be distributed to
holders of certain Claims with respect to their Claims for accrued interest.
Holders of such Claims for accrued interest which previously have not included
such accrued interest in taxable income will be required to recognize ordinary
income equal to the fair market value of the New Common Stock or Warrants, as
applicable, received with respect to such Claims for accrued interest. Holders
of such Claims for accrued interest which have included such accrued interest in
taxable income generally may take an ordinary deduction to the extent that such
Claim is not fully satisfied under the Plan (after allocating the distribution
between
79
<PAGE> 92
principal and accrued interest), even if the underlying Claim is held as a
capital asset. The tax basis of the New Common Stock or Warrants, as applicable,
received in exchange for such Claims for accrued interest will equal the fair
market value of such New Common Stock or Warrants, as applicable, on the
Effective Date and the holding period for the New Common Stock or Warrants
received in exchange for such Claims will begin on the day after the Effective
Date.
The market discount provisions of the IRC may apply to holders of
certain Claims. In general, a debt obligation other than a debt obligation with
a fixed maturity of one year or less that is acquired by a holder in the
secondary market (or, in certain circumstances, upon original issuance) is a
"market discount bond" as to that holder if its stated redemption price at
maturity (or, in the case of a debt obligation having original issue discount,
the revised issue price) exceeds the tax basis of the bond in the holder's hands
immediately after its acquisition. However, a debt obligation will not be a
"market discount bond" if such excess is less than a statutory de minimis
amount. Gain recognized by a creditor with respect to a "market discount bond"
will generally be treated as ordinary interest income to the extent of the
market discount accrued on such bond during the creditor's period of ownership,
unless the creditor elected to include accrued market discount in taxable income
currently. A holder of a market discount bond that is required under the market
discount rules of the IRC to defer deduction of all or a portion of the interest
on indebtedness incurred or maintained to acquire or carry the bond may be
allowed to deduct such interest, in whole or in part, on disposition of such
bond.
2. Holders of General Unsecured Claims with respect to Debentures
Pursuant to the Plan, the Debtors will issue Warrants to the holders of
General Unsecured Claims relating to the Debentures (the "Debenture Claims") in
exchange for such Claims. The federal income tax consequences arising from the
Plan to holders of such Debenture Claims may vary depending upon, among other
things, whether the Claims constitute "securities" for federal income tax
purposes. The determination of whether a debt instrument constitutes a
"security" depends upon an evaluation of the nature of the debt instrument.
Generally, corporate debt instruments with maturities when issued of less than
five years are not considered securities, and corporate debt instruments with
maturities when
80
<PAGE> 93
issued of ten years or more are considered securities. The Debtors believe and
intend to take the position that the Debenture Claims should not be treated as
"securities" for federal income tax purposes.
If the Debenture Claims do not constitute securities for federal income
tax purposes, a holder of a Debenture Claim would be subject to the tax
treatment described above under the heading "Holders of Other Priority Claims,
Prepetition Credit Facility Claims, Administrative Convenience Claims and
Certain General Unsecured Claims." However, if such Debenture Claims constitute
"securities" for federal income tax purposes, the exchange of such Debenture
Claims for Warrants should constitute a "recapitalization." In that case,
except as discussed above with respect to accrued market discount and Claims for
accrued interest, holders of such Debenture Claims should not recognize any gain
or loss on the exchange. In such case, a holder's tax basis in the Warrants
(other than the Warrants received for accrued interest) should be equal to such
holder's tax basis in the Debenture Claims exchanged therefor (exclusive of any
basis attributable to accrued interest), and such Creditor's holding period for
the Warrants (other than the Warrants received for accrued interest) will
include the holding period of the Debenture Claims exchanged therefor, provided
that such Debenture Claims are held as capital assets on the Effective Date. In
addition, under the market discount rules discussed above, any accrued but
unrecognized market discount with respect to Debentures should not be recognized
upon the exchange of such debt instruments for Warrants. In the case of accrued
but unrecognized market discount with respect to the Debentures, such market
discount generally would be treated as ordinary income to the extent of gain
recognized upon the subsequent disposition of Warrants exchanged therefor. The
treatment of accrued market discount in a nonrecognition transaction is,
however, subject to the issuance of Treasury regulations that have not yet been
promulgated. In the absence of such regulations, the application of the market
discount rules in the present transaction is uncertain. If a holder of a
Debenture was required under the market discount rules of the IRC to defer its
deduction of all or a portion of the interest on indebtedness, if any, incurred
or maintained to acquire or carry the Debenture, continued deferral of the
deduction for the interest on such indebtedness may be required. Any such
deferred interest expense would be attributed to the Warrants received in
exchange for the Claim, and would be treated as interest paid or accrued in the
year in which the Warrants are disposed.
81
<PAGE> 94
3. Holders of Miscellaneous Secured Claims
A holder whose Claim is Reinstated will not realize gain or loss as a
result of the Plan unless either (i) such holder is treated as having received
interest, damages or other income in connection with the Reinstatement, or (ii)
such Reinstatement is considered a "significant modification" of the Claim.
4. Holders of Subordinated Securities Claims and Interests
Holders of Subordinated Securities Claims and Interests will not
receive any distribution or property under the Plan and will not retain such
Claims or Interests. Each such holder will recognize a loss in an amount equal
to such holder's adjusted tax basis, if any, in its Subordinated Securities
Claim or Interest.
XI. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS
A. FEASIBILITY OF THE PLAN
In connection with confirmation of the Plan, the Bankruptcy Court will
have to determine that the Plan is feasible pursuant to section 1129(a)(11) of
the Bankruptcy Code, which means that the confirmation of the Plan is not likely
to be followed by the liquidation or the need for further financial
reorganization of the Debtors.
To support their belief in the feasibility of the Plan, the Debtors
have prepared financial Projections for Fiscal Years 1999 through 2001, as set
forth in Appendix E annexed to this Disclosure Statement.
The Projections indicate that the Reorganized Debtors should have
sufficient cash flow to pay and service their debt obligations, including the
New Credit Facility, and to fund their operations as contemplated by the
Business Plan. Accordingly, the Debtors believe that the Plan complies with the
financial feasibility standard of section 1129(a)(11) of the Bankruptcy Code.
As noted in the Projections, however, the Debtors caution that no
representations can be made as to the accuracy of the Projections or as to the
Reorganized Debtors' ability to achieve the projected results. Many of the
assumptions upon which the Projections are based are subject to uncertainties
outside the control of the
82
<PAGE> 95
Debtors. Some assumptions inevitably will not materialize and events and
circumstances occurring after the date on which the Projections were prepared
may be different from those assumed or may be unanticipated, and may adversely
affect the Debtors' financial results. Therefore, the actual results may vary
from the projected results and the variations may be material and adverse. See
Section VIII, "Certain Factors to Be Considered," for a discussion of certain
risk factors that may affect financial feasibility of the Plan.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH
THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN
AUDITED BY THE DEBTORS' INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. ALTHOUGH
PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED UPON A VARIETY
OF ASSUMPTIONS, SOME OF WHICH IN THE PAST HAVE NOT BEEN ACHIEVED AND WHICH MAY
NOT BE REALIZED IN THE FUTURE, AND ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC
AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
CONTROL OF THE DEBTORS. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS
A REPRESENTATION OR WARRANTY BY THE DEBTORS, OR ANY OTHER PERSON, THAT THE
PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
PRESENTED IN THE PROJECTIONS.
B. ACCEPTANCE OF THE PLAN
As a condition to confirmation, the Bankruptcy Code requires that each
Class of Impaired Claims vote to accept the Plan, except under certain
circumstances.
Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by
a class of impaired claims as acceptance by holders of at least two-thirds in
dollar amount and more than one-half in number of claims in that class, but for
that purpose counts only those who actually vote to accept or to reject the
Plan. Thus, a Class will have voted to accept the Plan only if two-thirds in
amount and a majority in number actually voting cast their Ballots in favor of
acceptance. Holders of claims who fail to vote are not counted as either
accepting or rejecting a plan.
83
<PAGE> 96
C. BEST INTERESTS OF HOLDERS OF CLAIMS
As noted above, even if a plan is accepted by each class of holders of
claims and interests, the Bankruptcy Code requires a bankruptcy court to
determine that the plan is in the best interests of all holders of claims and
interests that are impaired by the plan and that have not accepted the plan. The
"best interests" test, as set forth in section 1129(a)(7) of the Bankruptcy
Code, requires a bankruptcy court to find either that all members of an impaired
class of claims have accepted the plan or that the plan will provide a member
who has not accepted the plan with a recovery of property of a value, as of the
effective date of the plan, that is not less than the amount that such holder
would recover if the debtor were liquidated under chapter 7 of the Bankruptcy
Code.
To calculate the probable distribution to members of each impaired
class of holders of claims and interests if the debtor were liquidated under
chapter 7, a bankruptcy court must first determine the aggregate dollar amount
that would be generated from the debtor's assets if its chapter 11 cases were
converted to a chapter 7 case under the Bankruptcy Code. This "liquidation
value" would consist primarily of the proceeds from a forced sale of the
debtor's assets by a chapter 7 trustee.
The amount of liquidation value available to unsecured creditors would
be reduced by, first, the claims of secured creditors to the extent of the value
of their collateral, and, second, by the costs and expenses of liquidation, as
well as by other administrative expenses and costs of both the chapter 7 case
and the chapter 11 cases. Costs of liquidation under chapter 7 of the Bankruptcy
Code would include the compensation of a trustee, as well as of counsel and
other professionals retained by the trustee, asset disposition expenses, all
unpaid expenses incurred by the debtor in its chapter 11 cases (such as
compensation of attorneys, financial advisors and accountants) that are allowed
in the chapter 7 case, litigation costs, and claims arising from the operations
of the debtor during the pendency of the chapter 11 cases. The liquidation
itself would trigger certain priority payments that otherwise would be due in
the ordinary course of business. Those priority claims would be paid in full
from the liquidation proceeds before the balance would be made available to pay
general claims or to make any distribution in respect of equity interests. The
liquidation would also prompt the rejection of a large number of
84
<PAGE> 97
executory contracts and unexpired leases and thereby create a significantly
higher number of unsecured creditors.
Once the court ascertains the recoveries in liquidation of secured
creditors and priority claimants, it must determine the probable distribution to
general unsecured creditors and equity security holders from the remaining
available proceeds in liquidation. If such probable distribution has a value
greater than the distributions to be received by such creditors and equity
security holders under the Plan, then the Plan is not in the best interests of
creditors and equity security holders. The Debtors believe that the members of
each class of impaired claims will receive more under the Plan than they would
receive if the Debtors were liquidated.
D. LIQUIDATION ANALYSIS
The Debtors believe that the Plan meets the "best interests of
creditors" test of section 1129(a)(7) of the Bankruptcy Code. The Debtors
believe that the members of each impaired Class, other than Classes 6 and 7
which will receive no distribution, will receive more under the Plan than they
would in a liquidation. The liquidation analysis is annexed as Appendix D to
this Disclosure Statement.
The Debtors believe that any liquidation analysis is speculative. To
the extent that confirmation of the Plan requires the establishment of
hypothetical amounts for the liquidation value of the Debtors and the amount of
funds available to pay Claims, the Bankruptcy Court will determine those amounts
at the Confirmation Hearing.
The liquidation analysis necessarily contains an estimate of the amount
of Claims which will ultimately become Allowed Claims. This estimate is based
solely upon the Debtors' incomplete review of Claims filed and the Debtors's
books and records. No order or finding has been entered by the Bankruptcy Court
estimating or otherwise fixing the amount of Claims at the projected amounts of
Allowed Claims set forth in the liquidation analysis. In preparing the
liquidation analysis, the Debtors have projected an amount of Allowed Claims
that is at the lowest end of a range of reasonable ness such that, for purposes
of the liquidation analysis, the largest possible liquidation dividend to
holders of Allowed Claims can be assessed. The estimate of the amount of Allowed
Claims set forth in the liquidation analysis should not be relied
85
<PAGE> 98
on for any other purpose, including, without limitation, any determination of
the value of any distribution to be made on account of Allowed Claims under the
Plan.
E. VALUATION OF THE REORGANIZED DEBTORS
In conjunction with the allocation of the distributions under the Plan,
the Debtors determined that it was necessary to estimate post-confirmation
values for the Debtor enterprise and the New Common Stock to provide for
equitable distribution of the value of the Debtors' estates among Classes of
Claims and Classes of Interests. Accordingly, the Debtors directed their
financial advisor, Wasserstein Perella & Co., Inc. ("Wasserstein Perella"), to
prepare a valuation analysis of the Debtors.
In preparing its analysis, Wasserstein Perella: (a) reviewed certain
recent publicly available financial statements of the Debtors; (b) reviewed
certain financial projections prepared by the Debtors for the operations of the
Reorganized Debtors, including those financial Projections set forth in Appendix
E annexed to this Disclosure Statement; (c) reviewed assumptions underlying such
projections; (d) prepared discounted cash flow analyses for the operating
business of the Reorganized Debtors on a going concern basis, based on
projections of cash flow to be available to the Reorganized Debtors, utilizing
various discount rates and the financial projections referred to above; (e)
considered the market values of publicly traded companies that Wasserstein
Perella and the Debtors believe are in businesses reasonably comparable to the
operating business of the Reorganized Debtors; (f) considered certain economic
and industry information relevant to the operating business of the Debtors; (g)
discussed the current operations and prospects of the operating business with
the Debtors; and (h) made such other analyses and examinations as Wasserstein
Perella deemed necessary or appropriate.
Wasserstein Perella assumed, without independent verification, the
accuracy, completeness and fairness of all of the financial and other
information that was available to it from public sources and that was provided
to Wasserstein Perella by the Debtors or their representatives. With respect to
the financial projections supplied to Wasserstein Perella, Wasserstein Perella
assumed that the projections have been reasonably prepared on a basis reflecting
the best currently available estimates and judgment of the Debtors as to the
future operating and financial performance of the Debtors. Such projections
assume the Debtors will operate the
86
<PAGE> 99
businesses reflected in the business plan. To the extent that the Debtors
operate more or fewer businesses during the projection period, such adjustments
may have a material impact on the operating projections and valuations as
presented herein. Wasserstein Perella did not make any independent evaluation of
the Reorganized Debtors' assets, nor did Wasserstein Perella verify any of the
information it reviewed.
With respect to the valuation of the Reorganized Debtors, in addition
to the foregoing, Wasserstein Perella relied upon the following assumptions:
- The Reorganized Debtors' valuation consists of the aggregate
enterprise value of the Debtors and the Debtors' affiliates.
- The valuation range indicated represents the enterprise value
of the Debtors, and assumes the pro forma debt levels (as set
forth in the Projections annexed hereto as Appendix E) to
calculate a range of equity value.
- The Debtors will emerge from chapter 11 on or about December
20, 1998.
- The projections are predicated upon the assumption that the
Debtors will be able to obtain all necessary financing, as
described herein, and that no asset sales will be required to
meet the Debtors' ongoing financial requirement. Wasserstein
Perella does not hereby make any representations as to whether
the Debtors will obtain financing or as to the terms upon
which such financing may be obtained.
- Wasserstein Perella assumes that the Debtors cannot utilize
existing NOLs. The valuation assumes that such NOLs are offset
by cancellation-of-indebtedness income recognized as part of
the reorganization of the Debtors.
- Wasserstein Perella has also assumed the general continuity
of the present senior management of the Debtors following
consummation of the Plan, and has assumed that general
financial and market conditions as of the assumed Effective
Date of the Plan will not differ materially from those
conditions prevailing as of the date of this Disclosure
Statement.
87
<PAGE> 100
As a result of such analyses, reviews, discussions, considerations and
assumptions, Wasserstein Perella estimates that the enterprise value of the
Reorganized Debtors falls in a range between [$________] million and
[$_________] million. This estimated range of values represents a hypothetical
value which reflects the estimated intrinsic value of the Debtors derived
through the application of various valuation techniques. Such analysis does not
purport to represent valuation levels which would be achieved in, or assigned
by, the public markets for debt and equity securities. Wasserstein Perella's
estimate is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to it as of,
the date of this Disclosure Statement. It should be understood that, although
subsequent developments may affect Wasserstein Perella's conclusions,
Wasserstein Perella does not have any obligation to update, revise or reaffirm
its estimate.
The summary set forth above does not purport to be a complete
description of the analyses performed by Wasserstein Perella. The preparation of
an estimate involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods in
the particular circumstances and, therefore, such an estimate is not readily
susceptible to summary description. In performing its analyses, Wasserstein
Perella and the Debtors made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. The analyses
performed by Wasserstein Perella are not necessarily indicative of actual values
or future results, which may be significantly more or less favorable than
suggested by such analyses.
Wasserstein Perella relied on the accuracy and reasonableness of the
projections and the underlying assumptions as prepared by the Debtors.
Wasserstein Perella's valuation assumes that operating results projected by the
Debtors will be achieved in all material respects, including revenue growth,
improvements in operating margins, earnings and cash flow, improvement in
techniques for managing working capital, expenses and other elements. Certain of
the projected results are materially better than the recent historical results
of operations of the Debtors. No assurance can be given that the Debtors will
continue to provide services for the number of individuals or to manage the
number of practice groups or emergency departments currently contemplated or
that the projected results will be achieved. To the extent that
88
<PAGE> 101
the valuation is dependent upon the Debtors' achievement of the projections, the
valuation must be considered speculative.
F. APPLICATION OF THE "BEST INTERESTS" OF CREDITORS TEST TO THE
LIQUIDATION ANALYSIS AND THE VALUATION OF THE REORGANIZED DEBTORS
Under the Plan, an estimated recovery to holders of Class 5 General
Unsecured Claims can be calculated. Using (a) the midpoint of the range of
enterprise values for the Reorganized Debtors (see Section XI.E, "Valuation of
the Reorganized Debtors"), (b) the projected pro forma debt levels, (c) an
estimate of Allowed General Unsecured Claims of [$_________] million, and (d)
estimated values for Warrants, the estimated value to be distributed to holders
of Class 5 General Unsecured Claims would be approximately [$__________]
million, representing a distribution of approximately [________]% of the
estimated amount of Allowed General Unsecured Claims. Such analysis does not
purport to represent valuation levels which would be achieved in, or assigned
by, the public markets for equity securities. Additionally, if either the pro
forma debt level of the Debtors or the actual amount of Allowed General
Unsecured Claims differs from the assumed levels, such equity valuation and
expected distribution may be affected. This estimated equity recovery implies a
significantly greater recovery to holders of Class 5 General Unsecured Claims
than the recovery available in a chapter 7 liquidation. See Section XI.D,
"Liquidation Analysis".]
G. CONFIRMATION WITHOUT ACCEPTANCE OF ALL IMPAIRED CLASSES: THE "CRAMDOWN"
ALTERNATIVE
Section 1129(b) of the Bankruptcy Code provides that a plan can be
confirmed even if the plan is not accepted by all impaired classes, as long as
at least one impaired class of Claims has accepted it. The Bankruptcy Court may
confirm the Plan at the request of the Debtors if the Plan "does not
discriminate unfairly" and is "fair and equitable" as to each impaired class
that has not accepted the Plan. A plan does not discriminate unfairly within the
meaning of the Bankruptcy Code if a dissenting class is treated equally with
respect to other classes of equal rank.
A plan is fair and equitable as to a class of secured claims that
rejects such plan if the plan provides (a)(i) that the holders of claims
included in the rejecting class retain the liens securing those claims whether
the property subject to those liens is
89
<PAGE> 102
retained by the debtor or transferred to another entity, to the extent of the
allowed amount of such claims, and (ii) that each holder of a claim of such
class receives on account of that claim deferred cash payments totaling at least
the allowed amount of that claim, of a value, as of the effective date of the
plan, of at least the value of the holder's interest in the estate's interest in
such property; (b) for the sale, subject to section 363(k) of the Bankruptcy
Code, of any property that is subject to the liens securing the claims included
in the rejecting class, free and clear of the liens, with the liens to attach to
the proceeds of the sale, and the treatment of the liens on proceeds under
clause (a) or (b) of this paragraph; or (c) for the realization by such holders
of the indubitable equivalent of such claims.
A plan is fair and equitable as to a class of unsecured claims which
rejects a plan if the plan provides (a) for each holder of a claim included in
the rejecting class to receives or retains on account of that claim property
that has a value, as of the effective date of the plan, equal to the allowed
amount of such claim; or (b) that the holder of any claim or interest that is
junior to the claims of such class will not receive or retain on account of such
junior claim or interest any property at all.
A plan is fair and equitable as to a class of equity interests that
rejects a plan if the plan provides (a) that each holder of an interest included
in the rejecting class receive or retain on account of that interest property
that has a value, as of the effective date of the plan, equal to the greatest of
the allowed amount of any fixed liquidation preference to which such holder is
entitled, any fixed redemption price to which such holder is entitled, or the
value of such interest; or (b) that the holder of any interest that is junior to
the interest of such class will not receive or retain under the plan on account
of such junior interest any property at all.
H. CONDITIONS TO CONFIRMATION AND/OR CONSUMMATION
1. Conditions to Confirmation
The following are conditions precedent to confirmation of the Plan that
may be satisfied or waived in accordance with Section 12.1 of the Plan:
90
<PAGE> 103
(a) The Bankruptcy Court shall have approved by Final Order a
disclosure statement with respect to the Plan in form and substance reasonably
acceptable to the Debtors.
(b) The Confirmation Order shall be in form and substance
reasonably acceptable to the Debtors.
2. Conditions to Effective Date
The Effective Date shall occur on or prior to December 31, 1998, unless
such date is extended by agreement of the Debtors and Prepetition Agent. The
following are conditions precedent to the occurrence of the Effective Date, each
of which may be satisfied or waived in accordance with Section 12.3 of the Plan:
(a) The Bankruptcy Court shall have entered one or more orders
(which may be the Confirmation Order) authorizing the assumption of all leases
and executory contracts by the Reorganized Debtors.
(b) The Debtors shall have entered into the New Credit
Facility and all conditions precedent to the consummation thereof shall have
been waived or satisfied in accordance with the terms thereof.
(c) The Confirmation Order shall have been entered by the
Bankruptcy Court and shall be a Final Order, and no request for revocation of
the Confirmation Order under section 1144 of the Bankruptcy Code shall have been
made, or, if made, shall remain pending.
(d) The Confirmation Date shall have occurred and the
Confirmation Order shall, among other things, provide that:
(i) the provisions of the Confirmation Order are
non-severable and mutually dependent;
(ii) all executory contracts or unexpired leases
assumed by the Debtors during the Chapter 11 Cases or under the Plan shall be
assigned and transferred to, and remain in full force and effect for the benefit
of, the Reorganized Debtors, notwithstanding any provision in such contract or
lease (including those described in sections 365(b)(2) and 365(f) of the
Bankruptcy Code) that prohibits such assignment or transfer or that enables or
requires termination of such contract or lease;
91
<PAGE> 104
(iii) the transfers of property by the Debtors (A) to
the Reorganized Debtors (1) are or shall be legal, valid, and effective
transfers of property, (2) vest or shall vest the Reorganized Debtors with good
title to such property free and clear of all liens, charges, claims,
encumbrances or interests, except as expressly provided in the Plan or
Confirmation Order, (3) do not and shall not constitute avoidable transfers
under the Bankruptcy Code or under applicable nonbankruptcy law, and (4) do not
and shall not subject the Reorganized Debtors to any liability by reason of such
transfer under the Bankruptcy Code or under applicable nonbankruptcy law,
including, without limitation, any laws affecting successor or transferee
liability, and (B) to holders of Claims and Interests under the Plan are for
good consideration and value and are in the ordinary course of the Debtor's
businesses;
(iv) except as expressly provided in the Plan or the
Confirmation Order, the Debtors are discharged effective upon the Effective Date
from any "debt" (as that term is defined in section 101(12) of the Bankruptcy
Code), and the Debtor's liability in respect thereof is extinguished completely,
whether reduced to judgment or not, liquidated or unliquidated, contingent or
noncontingent, asserted or unasserted, fixed or unfixed, matured or unmatured,
disputed or undisputed, legal or equitable, known or unknown, or that arose from
any agreement of the Debtors entered into or obligation of the Debtors incurred
before the Effective Date, or from any conduct of the Debtors prior to the
Effective Date, or that otherwise arose before the Effective Date, including,
without limitation, all interest, if any, on any such debts, whether such
interest accrued before or after the Petition Date;
(v) the Plan does not provide for the liquidation of
all or substantially all of the property of the Debtors and its confirmation is
not likely to be followed by the liquidation of the Reorganized Debtors or the
need for further financial reorganization;
(vi) all Interests shall be terminated effective upon
the Effective Date; and
(vii) the Bankruptcy Court shall have determined that
the New Common Stock and the Warrants issued under the Plan in exchange for
Claims against the Debtors are exempt from registration under the Securities
Act of 1933 pursuant to, and to the extent provided by, section 1145 of the
Bankruptcy Code.
92
<PAGE> 105
I. WAIVER OF CONDITIONS TO CONFIRMATION AND/OR CONSUMMATION
The conditions set forth in Sections 12.1 and 12.2 of the Plan may be
waived by the Debtors in their sole discretion, without any notice to parties in
interest or the Bankruptcy Court and without a hearing. The failure to satisfy
or waive any condition to the Confirmation Date or the Effective Date may be
asserted by the Debtors in their sole discretion regardless of the circumstances
giving rise to the failure of such condition to be satisfied (including any
action or inaction by the Debtors in their sole discretion). The failure of the
Debtors in their sole discretion to exercise any of the foregoing rights shall
not be deemed a waiver of any other rights, and each such right shall be deemed
an ongoing right, which may be asserted at any time.
J. RETENTION OF JURISDICTION
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, the
Bankruptcy Court shall have exclusive jurisdiction of all matters arising out
of, and related to, the Chapter 11 Cases and the Plan, including, among other
things, (a) to hear and determine pending motions for the assumption or
rejection of executory contracts or unexpired leases or the assumption and
assignment, as the case may be, of executory contracts or unexpired leases to
which the Debtors are a party or with respect to which the Debtors may be
liable, and to hear and determine the allowance of Claims resulting therefrom
including the amount of Cure, if any, required to be paid to the holders of such
Claims; (b) to determine any and all pending adversary proceedings, applications
and contested matters; (c) to ensure that distributions to holders of Allowed
Claims are accomplished as provided in the Plan; (d) to hear and determine any
and all objections to the allowance or estimation of Claims filed, both before
and after the Confirmation Date, including any objections to the classification
of any Claim or Interest, and to allow or disallow any Claim, in whole or in
part; (e) to enter and implement such orders as may be appropriate if the
Confirmation Order is for any reason stayed, revoked, modified or vacated; (f)
to issue orders in aid of execution, implementation or consummation of the Plan;
(g) to consider any modifications of the Plan, to cure any defect or omission,
or to reconcile any inconsistency in any order of the Bankruptcy Court,
including, without limitation, the Confirmation Order; (h) to hear and determine
all applications for compensation and reimbursement of Professional Claims under
the Plan or under sections 330, 331, 503(b), 1103 and 1129(a)(4) of the
Bankruptcy Code; (i) to
93
<PAGE> 106
determine requests for the payment of Claims entitled to priority under section
507(a)(1) of the Bankruptcy Code, including compensation of and reimbursement of
expenses of parties entitled thereto; (j) to hear and determine disputes arising
in connection with the interpretation, implementation or enforcement of the
Plan, including disputes arising under agreements, documents or instruments
executed in connection with this Plan; (k) to hear and determine all suits or
adversary proceedings to recover assets of the Debtors and property of their
Estates, wherever located; (l) to hear and determine matters concerning state,
local and federal taxes in accordance with sections 346, 505 and 1146 of the
Bankruptcy Code; (m) to hear any other matter not inconsistent with the
Bankruptcy Code; (n) to hear and determine all disputes involving the existence,
nature or scope of the Debtors' discharge, including any dispute relating to any
liability arising out of the termination of employment or the termination of any
employee or retiree benefit program, regardless of whether such termination
occurred prior to or after the Effective Date; and (o) to enter a final decree
closing the Chapter 11 Cases.
XII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors believe that the Plan affords holders of Claims and holders
of Interests the potential for the greatest realization on the Debtors' assets
and, therefore, is in the best interests of such holders.
If the Plan is not confirmed, however, the theoretical alternatives
include (a) continuation of the pending Chapter 11 Cases, (b) an alternative
plan or plans of reorganization, or (c) liquidation of the Debtors under chapter
7 or chapter 11 of the Bankruptcy Code.
A. CONTINUATION OF THE CHAPTER 11 CASES
If the Debtors remain in chapter 11, the Debtors could continue to
operate their businesses and manage their properties as debtors-in-possession,
but they would remain subject to the restrictions imposed by the Bankruptcy
Code. It is not clear whether the Debtors could survive as a going concern in
protracted chapter 11 cases. The Debtors could have difficulty sustaining the
high costs, and the erosion of market confidence, which may be caused if the
Debtors remain chapter 11 debtors-in-reorganization.
94
<PAGE> 107
Ultimately, the Debtors (or other parties in interest) could propose another
plan or liquidate under chapter 7.
B. ALTERNATIVE PLANS OF REORGANIZATION
If the Plan is not confirmed, the Debtors, or, if the Bankruptcy Court
did not grant further extensions of the Debtors' exclusive period in which to
solicit a reorganization plan, any other party in interest in the Chapter 11
Cases, could propose a different plan or plans. Such plans might involve either
a reorganization and continuation of the Debtors' businesses, an orderly
liquidation of their assets, or a combination of both.
C. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11
If no plan is confirmed, the Debtors' Chapter 11 Cases may be converted
to cases under chapter 7 of the Bankruptcy Code. In a chapter 7 case, a trustee
or trustees would be appointed to liquidate the assets of the Debtors. It is
impossible to predict precisely how the proceeds of the liquidation would be
distributed to the respective holders of Claims against the Debtors.
The Debtors believe that in liquidation under chapter 7, before
creditors receive any distribution, additional administrative expenses involved
in the appointment of a trustee or trustees and attorneys, accountants and other
professionals to assist such trustees would cause a substantial diminution in
the value of the estate. The assets available for distribution to creditors
would be reduced by such additional expenses and by Claims, some of which would
be entitled to priority, which would arise by reason of the liquidation and from
the rejection of leases and other executory contracts in connection with the
cessation of the Debtors' operations and the failure to realize the greater
going concern value of the Debtors' assets.
The Debtors may also be liquidated pursuant to the provisions of a
chapter 11 plan of reorganization. In a liquidation under chapter 11, the
Debtors' assets could be sold in an orderly fashion over a more extended period
of time than in a liquidation under chapter 7. Thus, chapter 11 liquidation
might result in larger recoveries than in a chapter 7 liquidation, but the delay
in distributions could result in lower present values received and higher
administrative costs. Because a trustee is not required in a chapter 11 case,
expenses for professional fees could be lower than in a chapter 7 case, in which
a trustee must be appointed.
95
<PAGE> 108
Any distribution to the holders of claims under a chapter 11 liquidation plan
probably would be delayed substantially.
The Debtors' liquidation analysis, prepared with their accountants and
financial advisors, is premised upon a liquidation in a chapter 7 case and is
annexed as Appendix D to this Disclosure Statement. In the analysis, the Debtors
have taken into account the nature, status and underlying value of their assets,
the ultimate realizable value of their assets, and the extent to which such
assets are subject to liens and security interests.
The likely form of any liquidation would be the sale of individual
assets. Based on this analysis, it is likely that a liquidation of the Debtors'
assets would produce less value for distribution to creditors than that
recoverable in each instance under the Plan. In the opinion of the Debtors, the
recoveries projected to be available in liquidation are not likely to afford
holders of Claims and holders of Interests as great a realization potential as
does the Plan.
XIII. VOTING REQUIREMENTS
On [____________], 1998, the Bankruptcy Court entered the Procedures
Order, among other things, approving this Disclosure Statement, setting voting
procedures and scheduling the hearing on confirmation of the Plan. A copy of the
notice of the Confirmation Hearing is enclosed with this Disclosure Statement.
The Notice of the Confirmation Hearing sets forth in detail, among other things,
the voting deadlines and objection deadlines. The Notice of Confirmation Hearing
and the instructions attached to the Ballot should be read in connection with
this section of this Disclosure Statement.
If you have any questions about (i) the procedure for voting your Claim
or Interest or with respect to the packet of materials that you have received,
(ii) the amount of your Claim, or (iii) if you wish to obtain, at your own
expense, unless otherwise specifically required by Federal Rule of Bankruptcy
Procedure 3017(d), an additional copy of the Plan, this Disclosure Statement or
any appendices or exhibits to such documents, please contact:
WR Gruber & Associates
8520 East Kemper Road
Suite 8
96
<PAGE> 109
Cincinnati, Ohio 45249
(513) 247-0050
The Bankruptcy Court may confirm the Plan only if it determines that
the Plan complies with the technical requirements of chapter 11 of the
Bankruptcy Code and that the disclosures by the Debtors concerning the Plan have
been adequate and have included information concerning all payments made or
promised by the Debtors in connection with the Plan and the Chapter 11 Cases. In
addition, the Bankruptcy Court must determine that the Plan has been proposed in
good faith and not by any means forbidden by law, and under Bankruptcy Rule
3020(b)(2), it may do so without receiving evidence if no objection is timely
filed.
In particular, the Bankruptcy Code requires the Bankruptcy Court to
find, among other things, that (a) the Plan has been accepted by the requisite
votes of all Classes of impaired Claims and Interests unless approval will be
sought under section 1129(b) of the Bankruptcy Code in spite of the dissent of
one or more such Classes, (b) the Plan is "feasible," which means that there is
a reasonable probability that the Debtors will be able to perform their
obligations under the Plan and continue to operate their businesses without
further financial reorganization or liquidation, and (c) the Plan is in the
"best interests" of all holders of Claims, which means that such holders will
receive at least as much under the Plan as they would receive in a liquidation
under chapter 7 of the Bankruptcy Code. The Bankruptcy Court must find that all
conditions mentioned above are met before it can confirm the Plan. Thus, even if
all the Classes of impaired Claims against and impaired Interests in the Debtors
accept the Plan by the requisite votes, the Bankruptcy Court must make an
independent finding that the Plan conforms to the requirements of the Bankruptcy
Code, that the Plan is feasible, and that the Plan is in the best interests of
the holders of Claims against, and Interests in, the Debtors. These statutory
conditions to confirmation are discussed above.
SPECIAL NOTE FOR HOLDERS OF PREPETITION NOTES
At the close of business on the Record Date, the fifth (5th) Business
Day following the Confirmation Date, the transfer ledgers of the indenture
trustees, agents and servicers of the Prepetition Notes shall be closed, and
there shall be no further changes in the record holders of the Prepetition
Notes. The Reorganized Debtors and the indenture trustees, agents and servicers
for such Prepetition Notes and the Disbursing Agent shall have no obligation
97
<PAGE> 110
to recognize any transfer of such Prepetition Notes occurring after the Record
Date. The Reorganized Debtors and the indenture trustees, agents and servicers
for such Prepetition Notes and the Disbursing Agent shall be entitled instead to
recognize and deal for all purposes hereunder with only those record holders
stated on the transfer ledgers as of the close of business on the Record Date.
On or before the Distribution Date, or as soon as practicable
thereafter, each holder of an instrument evidencing a Claim on account of
Prepetition Notes (a "Certificate") shall surrender such Certificate to the
Disbursing Agent, or, with respect to indebtedness that is governed by an
indenture or other agreement, the respective indenture trustee, agent or
servicer, as the case may be, and such Certificate shall be cancelled. No
distribution of property hereunder shall be made to or on behalf of any such
holder unless and until such Certificate is received by the Disbursing Agent or
the respective indenture trustee, agent or servicer, as the case may be, or the
unavailability of such Certificate is reasonably established to the satisfaction
of the Disbursing Agent or the respective indenture trustee, agent or servicer,
as the case may be. Any such holder who fails to surrender or cause to be
surrendered such Certificate or fails to execute and deliver an affidavit of
loss and indemnity reasonably satisfactory to the Disbursing Agent or the
respective indenture trustee, agent or servicer, as the case may be, prior to
the fifth (5th) anniversary of the Effective Date, shall be deemed to have
forfeited all rights and Claims in respect of such Certificate and shall not
participate in any distribution hereunder, and all property in respect of such
forfeited distribution, including interest accrued thereon, shall revert to the
Reorganized Debtors notwithstanding any federal or state escheat laws to the
contrary.
Prior to any distribution on account of any Prepetition Notes, the
indenture trustee, agent or servicer of the Prepetition Notes shall (a) inform
the Disbursing Agent as to the amount of properly surrendered Prepetition Notes
and (b) instruct the Disbursing Agent, in a form and manner that the Disbursing
Agent reasonably determines to be acceptable, of the names of the holders of
Prepetition Notes with Allowed Class 5 General Unsecured Claims and
denominations of Warrants to be issued and distributed to or on behalf of such
holders of Allowed Class 5 General Unsecured Claims in exchange for properly
surrendered Prepetition Notes.
98
<PAGE> 111
UNLESS THE BALLOT OR MASTER BALLOT BEING FURNISHED IS TIMELY SUBMITTED
TO THE VOTING AGENT ON OR PRIOR TO THE VOTING DEADLINE TOGETHER WITH ANY OTHER
DOCUMENTS REQUIRED BY SUCH BALLOT, THE DEBTORS MAY, IN THEIR SOLE DISCRETION,
REJECT SUCH BALLOT AS INVALID AND, THEREFORE, DECLINE TO COUNT IT AS AN
ACCEPTANCE OR REJECTION OF THE PLAN. IN NO CASE SHOULD A BALLOT OR ANY OF THE
CERTIFICATES BE DELIVERED TO THE DEBTORS OR ANY OF THEIR ADVISORS.
A. PARTIES IN INTEREST ENTITLED TO VOTE
Under section 1124 of the Bankruptcy Code, a class of claims is deemed
to be "impaired" under a plan unless (a) the plan leaves unaltered the legal,
equitable and contractual rights to which such claim or interest entitles the
holder thereof or (b) notwithstanding any legal right to an accelerated payment
of such claim or interest, the plan cures all existing defaults (other than
defaults resulting from the occurrence of events of bankruptcy) and reinstates
the maturity of such claim or interest as it existed before the default.
In general, a holder of a claim or interest may vote to accept or to
reject a plan if (a) the claim or interest is "allowed," which means generally
that no party in interest has objected to such claims or interest, and (b) the
claim or interest is impaired by the Plan. If the holder of an impaired claim or
interest will not receive any distribution under the plan in respect of such
claim or interest, the Bankruptcy Code deems such holder to have rejected the
plan. If the claim or interest is not impaired, the Bankruptcy Code deems that
the holder of such claim or interest has accepted the plan and the plan
proponent and need not solicit such holder's vote.
The holder of a Claim against the Debtors that is "impaired" under the
Plan is entitled to vote to accept or reject the Plan if (a) the Plan provides a
distribution in respect of such Claim, and (b)(i) the Claim has been scheduled
by the Debtors (and such claim is not scheduled as disputed, contingent or
unliquidated), or (ii) it has filed a proof of claim on or before the bar date
applicable to such holder, pursuant to sections 502(a) and 1126(a) of the
Bankruptcy Code and Bankruptcy Rules 3003 and 3018. Any Claim as to which an
objection has been timely filed and has not been withdrawn or dismissed is not
entitled to vote, unless the Bankruptcy Court, pursuant to Bankruptcy Rule
3018(a), upon application of the holder of the Claim with respect to which there
has been objection, temporarily allows the Claim in an amount that
99
<PAGE> 112
the Bankruptcy Court deems proper for the purpose of accepting or rejecting the
Plan.
A vote may be disregarded if the Bankruptcy Court determines, pursuant
to section 1126(e) of the Bankruptcy Code, that it was not solicited or procured
in good faith or in accordance with the provisions of the Bankruptcy Code. The
Procedures Order also sets forth assumptions and procedures for tabulating
Ballots that are not completed fully or correctly.
B. CLASSES IMPAIRED UNDER THE PLAN
The Class 2 Prepetition Credit Facility Claims and Class 5 General
Unsecured Claims are Impaired under, and entitled to vote on, the Plan. Class 6
Subordinated Securities Claims and Class 7 Interests also Impaired under the
Plan but, because the holders of such Claims and Interests will not receive a
distribution under the Plan, are deemed to have rejected the Plan under section
1126(g) of the Bankruptcy Code and their votes will not be solicited.
All other classes of Claims are Unimpaired under the Plan and deemed
under section 1126(f) of the Bankruptcy Code to have accepted the Plan and their
votes to accept or to reject the Plan will not be solicited. Acceptances of the
Plan are being solicited only from those who hold Claims in an Impaired Class
whose members will receive a distribution under the Plan.
XIV. CONCLUSION
[This Disclosure Statement was approved by the Bankruptcy Court after
notice and a hearing. The Bankruptcy Court has determined that this Disclosure
Statement contains information adequate to permit holders of Claims and holders
of Interests to make an informed judgment about the Plan. Such approval,
however, does not mean that the Bankruptcy Court recommends either acceptance
or rejection of the Plan.]
A. HEARING ON AND OBJECTIONS TO CONFIRMATION
1. Confirmation Hearing
The hearing on confirmation of the Plan has been scheduled for December
9, 1998. Such hearing may be adjourned from time to time by announcing such
adjournment in open court, all without further notice to parties in interest,
and the Plan may be modified by the
100
<PAGE> 113
Debtors pursuant to section 1127 of the Bankruptcy Code prior to, during, or as
a result of that hearing, without further notice to parties in interest.
2. Date Set for Filing Objections to Confirmation
The time by which all objections to confirmation of the Plan must be
filed with the Bankruptcy Court and received by the parties listed in the Notice
of the Confirmation Hearing has been set for [_____________, 1998, at 4:00 p.m.
(EST).] A copy of that Notice has been transmitted with this Disclosure
Statement.
B. RECOMMENDATION
The Plan provides for an equitable and early distribution to creditors
and Prepetition Note holders, and preserves the jobs of the Debtors' employees.
The Debtors believe that any alternative to confirmation of the Plan, such as
liquidation or attempts by another party in interest to file a plan, could
result in significant delays, litigation and costs, as well as the loss of jobs
by most of the Debtors' employees. Moreover, the Debtors believe that their
creditors and equity security holders will receive greater and earlier
recoveries under the Plan than those that would be achieved in liquidation. FOR
THESE REASONS, THE DEBTORS URGE YOU TO RETURN YOUR BALLOT ACCEPTING THE PLAN.
101
<PAGE> 114
Dated: Wilmington, Delaware
September 30, 1998
Respectfully submitted,
FPA MEDICAL MANAGEMENT, INC., AND ITS
SUBSIDIARIES AND AFFILIATES WHO ARE ALSO
DEBTORS AND DEBTORS-IN-POSSESSION IN THE
CHAPTER 11 CASES
By:_____________________________________
Its:____________________________________
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
(ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
John Wm. Butler, Jr.
J. Eric Ivester
J. Gregory St. Clair
- and -
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Rodney Square
Wilmington, Delaware 19899
By: _______________________________
Gregg M. Galardi
ATTORNEYS FOR FPA MEDICAL MANAGEMENT, INC.
AND ITS SUBSIDIARIES AND AFFILIATES WHO ARE
ALSO DEBTORS AND DEBTORS-IN-POSSESSION
IN THE CHAPTER 11 CASES
<PAGE> 115
APPENDIX A
JOINT PLAN OF REORGANIZATION OF
FPA MEDICAL MANAGEMENT, INC. AND
ITS SUBSIDIARIES AND AFFILIATES
<PAGE> 116
APPENDIX B
CHARTS DEPICTING PREPETITION CORPORATE STRUCTURE
OF FPA, ITS SUBSIDIARIES AND AFFILIATES
INCLUDING THE PROFESSIONAL CORPORATIONS
TO FOLLOW
<PAGE> 117
APPENDIX C
FPA'S 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997
AND 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
TO FOLLOW
<PAGE> 118
APPENDIX D
LIQUIDATION ANALYSIS
TO FOLLOW
<PAGE> 119
APPENDIX E
PRO FORMA FINANCIAL PROJECTIONS
TO FOLLOW
<PAGE> 120
APPENDIX F
LIST OF COMBINING TRANSACTIONS
TO BE FILED ON OR BEFORE
THE EXHIBIT FILING DATE
<PAGE> 121
FPA MEDICAL MANAGEMENT INC.
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
----------------------------------------------------------
PROJECTED (1) ACTUAL (1) DIFFERENCE
----------------------------------------------------------
A B C = B - A
------------ ------------ ------------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ 1,718,745 $ 1,322,908 $ (395,837)
Cash Receipts:
Fee For Service Billings 25,525,507 23,477,154 (2,048,353)
Claims & Capitation 25,147,157 18,506,124 (6,641,033)
Reimbursement -- 2,377,522 2,377,522
Medicare A/R Collections -- -- --
------------ ------------ ------------
Total Cash Receipts 50,672,664 44,360,800 (6,311,864)
Cash Disbursements:
Employee/Physician Payroll 27,090,333 33,078,710 5,988,378
Catch-up payments to Doctors 228,822 -- (228,822)
Insurance (2) 1,464,950 2,098,081 633,131
Claims & Capitation 17,839,742 5,523,442 (12,316,300)
Patient Refunds 395,000 285,460 (109,540)
Rent 1,914,339 2,261,826 347,487
Utilities 190,326 147,719 (42,607)
Bank Lock-Box Account Fees 17,500 229 (17,272)
Medical Supplies 395,300 190,699 (204,601)
Trade Accounts Payable 11,555,407 4,160,016 (7,395,390)
------------ ------------ ------------
Total Cash Disbursements 61,091,718 47,746,181 (13,345,537)
Net Cash Flow from Operations (10,419,054) (3,385,381) 7,033,673
Financing Charges (3) (2,080,274) (1,577,233) 503,041
Stop Loss Insurance (3) (475,000) (476,091) (1,091)
Retention Costs -- -- --
Utility Company Deposits (43,523) -- 43,523
Professional Fee Retainers -- -- --
Professional Fees (3) -- (146,315) (146,315)
Repayment to HPI (3) (1,000,000) (1,000,000) --
DIP Loan Proceeds (4) 14,132,038 11,100,000 (3,032,038)
ENDING CASH BALANCE $ 1,832,932 $ 5,837,888 $ 4,004,956
------------ ------------ ------------
</TABLE>
1) The projected data reflected herein is based upon the Final DIP Budget
submitted to the Court on July 20, 1998, as amended on August 28, 1998.
The actual data reflected herein is based upon the actual data reported to
the Bank Group in the Weekly Cash Flow Budgets.
2) Insurance expense includes $1,484,789 expended in the week of 7/27 to
7/31/98 for Medical Malpractice expense incurred at the FPA Corporate
level only.
3) Amounts for Financing Charges, Stop Loss Insurance, and Professional Fees
are generally reflected at the FPA Corporate level only. Additionally,
Intercompany transfers occurring between Sterling Healthcare Group, Inc.
and FPA Corporate are not separately reflected herein.
4) The amount is exclusive of $22,000,000 received by the Debtor and Utilized
to repay a prepetition secured claim known as the "Sterling Loan Facility"
pursuant to an Order of Court.
<PAGE> 122
STERLING HEALTHCARE GROUP, INC.
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
-------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------------------
A B C = B - A
----------- ------------ -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ 247,847 $ (2,457,911) $(2,705,758)
Cash Receipts:
Fee For Service Billings 21,400,000 18,193,369 (3,206,631)
Claims & Capitation -- -- --
Reimbursement -- -- --
Medicare A/R Collections -- -- --
----------- ------------ -----------
Total Cash Receipts 21,400,000 18,193,369 (3,206,631)
Cash Disbursements:
Employee/Physician Payroll 13,057,084 12,534,215 (522,869)
Catch-up payments to Doctors -- -- --
Insurance 66,072 6,770 (59,302)
Claims & Capitation -- -- --
Patient Refunds 335,000 284,309 (50,691)
Rent 116,806 115,287 (1,519)
Utilities 30,000 31,181 1,181
Bank Lock-Box Account Fees 17,500 -- (17,500)
Medical Supplies -- 617 617
Trade Accounts Payable 2,302,500 2,676,872 374,372
----------- ------------ -----------
Total Cash Disbursements 15,924,962 15,649,251 (275,711)
Net Cash Flow from Operations 5,475,038 2,544,118 (2,930,920)
Net DIP Advance -- 6,437,928 6,437,928
Financing Charges -- (127,278) (127,278)
Intercompany Transfer 507,000 (3,322,739) (3,829,739)
DIP Loan Proceeds -- -- --
ENDING CASH BALANCE $ 2,844,347 $ 3,074,119 $ 229,772
----------- ------------ -----------
</TABLE>
<PAGE> 123
FPA MEDICAL MANAGEMENT INC.
- --------------------------------------------------------------------------------
(Core Businesses except Sterling.)
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
---------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
---------------------------------------------------------
A B C = B - A
------------ ------------ -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ 1,757,867 $ 1,672,867 $ (85,000)
Cash Receipts:
Fee For Service Billings 2,719,670 2,724,430 4,760
Claims & Capitation 12,781,507 8,887,426 (3,894,081)
Reimbursement -- #REF! #REF!
Medicare A/R Collections -- -- --
------------ ------------ -----------
Total Cash Receipts 15,501,177 #REF! #REF!
Cash Disbursements:
Employee/Physician Payroll 4,938,000 9,596,115 4,658,115
Catch-up payments to Doctors -- -- --
Insurance 48,000 231,584 183,584
Claims & Capitation 8,508,156 4,768,435 (3,739,721)
Patient Refunds -- 1,151 1,151
Rent 1,001,000 1,987,218 986,218
Utilities 77,250 137,619 60,369
Bank Lock-Box Account Fees -- 70,000 70,000
Medical Supplies 210,000 172,699 (37,301)
Trade Accounts Payable 7,143,341 2,366,621 (4,776,720)
------------ ------------ -----------
Total Cash Disbursements 21,925,747 19,331,443 (2,594,304)
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow (6,424,570) #REF! #REF!
Intercompany Transfers -- 4,896,206 4,896,206
Ending Cash Balance $ (910,275) $ (1,080,275) $ (170,000)
------------ ------------ -----------
</TABLE>
<PAGE> 124
CALIF. (AXMINSTER)
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
--------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------------------
A B C = B - A
----------- ----------- -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ (6,500) $ 1,723,261 $ 1,729,761
Cash Receipts:
Fee For Service Billings 99,000 411,608 312,608
Claims & Capitation 1,386,000 1,378,655 (7,345)
Reimbursement -- -- --
Medicare A/R Collections -- -- --
----------- ----------- -----------
Total Cash Receipts 1,485,000 1,790,263 305,263
Cash Disbursements:
Employee/Physician Payroll 732,000 511,074 (220,926)
Catch-up payments to Doctors -- -- --
Insurance -- -- --
Claims & Capitation 477,250 506,367 29,117
Patient Refunds -- -- --
Rent 157,500 115,731 (41,769)
Utilities 27,000 -- (27,000)
Bank Lock-Box Account Fees -- -- --
Medical Supplies 60,000 2,408 (57,592)
Trade Accounts Payable 24,000 65,195 41,195
----------- ----------- -----------
Total Cash Disbursements 1,477,750 1,200,775 (276,975)
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow 7,250 589,488 582,238
Intercompany Transfers -- (1,752,302) (1,752,302)
Ending Cash Balance $ (257,000) $ 560,447 $ 817,447
----------- ----------- -----------
</TABLE>
<PAGE> 125
CORNERSTONE
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
---------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------------
A B C = B - A
--------- --------- ---------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ (23,500) $ (20,207) $ 3,293
Cash Receipts:
Fee For Service Billings 668,000 345,068 (322,932)
Claims & Capitation -- -- --
Reimbursement -- -- --
Medicare A/R Collections -- -- --
--------- --------- ---------
Total Cash Receipts 668,000 345,068 (322,932)
Cash Disbursements: 156,914
Employee/Physician Payroll 328,500 -- (328,500)
Catch-up payments to Doctors -- -- --
Insurance -- -- --
Claims & Capitation -- -- --
Patient Refunds -- -- --
Rent 22,500 -- (22,500)
Utilities 9,750 -- (9,750)
Bank Lock-Box Account Fees -- -- --
Medical Supplies -- -- --
Trade Accounts Payable 121,500 80,946 (40,554)
--------- --------- ---------
Total Cash Disbursements 482,250 80,946 (401,304)
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow 185,750 107,208 (78,542)
Intercompany Transfers -- (87,000) (87,000)
Ending Cash Balance $(156,500) $ -- $ 156,500
--------- --------- ---------
</TABLE>
<PAGE> 126
FLORIDA (CLINICS AND HUMANA)
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
--------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
--------------------------------------------------------
A B C = B - A
------------ ----------- -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ (355,633) $ 1,575,276 $ 1,930,909
Cash Receipts:
Fee For Service Billings 1,102,170 868,770 (233,400)
Claims & Capitation 7,261,691 1,655,014 (5,606,677)
Reimbursement -- --
Medicare A/R Collections -- --
------------ ----------- -----------
Total Cash Receipts 8,363,861 2,523,784 (5,840,077)
Cash Disbursements:
Employee/Physician Payroll -- 3,305,014 3,305,014
Catch-up payments to Doctors -- --
Insurance -- --
Claims & Capitation 5,394,906 2,483 (5,392,423)
Patient Refunds -- --
Rent -- 605,175 605,175
Utilities -- 72,107 72,107
Bank Lock-Box Account Fees -- --
Medical Supplies -- 63,710 63,710
Trade Accounts Payable 6,450,341 462,255 (5,988,087)
------------ ----------- -----------
Total Cash Disbursements 11,845,247 4,510,743 (7,334,504)
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow (3,481,386) (1,986,959) 1,494,427
Intercompany Transfers -- 411,682 411,682
Ending Cash Balance $ (1,602,275) $ -- $ 1,602,275
------------ ----------- -----------
</TABLE>
<PAGE> 127
SAN ANTONIO (GONZABA)
- --------------------------------------------------------------------------------
DIP BUDET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
-------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------------------
A B C = B - A
----------- ----------- -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ (496,500) $(2,795,651) $(2,299,151)
Cash Receipts:
Fee For Service Billings 100,500 190,198 89,698
Claims & Capitation 1,976,000 4,343,615 2,367,615
Reimbursement -- -- --
Medicare A/R Collections -- -- --
----------- ----------- -----------
Total Cash Receipts 2,076,500 4,533,813 2,457,313
Cash Disbursements:
Employee/Physician Payroll 1,202,500 2,974,821 1,772,322
Catch-up payments to Doctors -- --
Insurance 48,000 91,584 43,584
Claims & Capitation 536,000 695,595 159,595
Patient Refunds -- 610 610
Rent 189,000 477,875 288,875
Utilities 40,500 25,411 (15,089)
Bank Lock-Box Account Fees -- -- --
Medical Supplies 150,000 67,969 (82,031)
Trade Accounts Payable 37,500 119,071 81,571
----------- ----------- -----------
Total Cash Disbursements 2,203,500 4,452,936 2,249,436
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow (127,000) 80,877 207,877
Intercompany Transfers -- 2,714,774 2,714,774
Ending Cash Balance $ (524,500) $ -- $ 524,500
----------- ----------- -----------
</TABLE>
<PAGE> 128
MERIDIAN
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
-------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------------------
A B C = B - A
----------- ----------- -----------
<S> <C> <C> <C>
BEGINNING CASH BALANCE $ 2,640,000 $ 438,212 $(2,201,788)
Cash Receipts:
Fee For Service Billings 750,000 615,161 (134,839)
Claims & Capitation 2,157,816 2,187,166 29,350
Reimbursement -- -- --
Medicare A/R Collections -- -- --
----------- ----------- -----------
Total Cash Receipts 2,907,816 2,802,327 (105,489)
Cash Disbursements:
Employee/Physician Payroll 2,675,000 2,499,488 (175,512)
Catch-up payments to Doctors -- --
Insurance -- --
Claims & Capitation 2,100,000 999,079 (1,100,921)
Patient Refunds -- 541 541
Rent 632,000 554,020 (77,980)
Utilities -- 14,351 14,351
Bank Lock-Box Account Fees -- -- --
Medical Supplies -- 50,352 50,352
Trade Accounts Payable 510,000 318,143 (191,857)
----------- ----------- -----------
Total Cash Disbursements 5,917,000 4,435,974 (1,481,026)
Agreed Cash Adjustments -- -- --
Less: Interest -- -- --
Net Cash Flow (3,009,184) 1,375,537 4,384,721
Intercompany Transfers -- 1,770,443 1,770,443
Ending Cash Balance $ 1,630,000 $(1,054,992) $(2,684,992)
----------- ----------- -----------
</TABLE>
<PAGE> 129
TENTATIVE & CLOSURES
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
----------------------------------------------------------
PROJECTED ACTUAL DIFFERENCE
----------------------------------------------------------
A B C = B - A
------------ ------------ ------------
<S> <C> <C> <C>
Initial Cash Balance $ 1,594,031 $ 2,859,931 $ 1,265,900
Cash Receipts:
Fee For Service Billings 1,405,837 2,852,980 1,447,143
Claims & Capitation 12,365,650 8,941,673 (3,423,977)
Medicare & Collections -- 2,377,522 2,377,522
------------ ------------ ------------
Total Cash Receipts 13,771,487 14,172,175 400,688
Less: Cash Disbursements:
Employee & Physician Payroll 9,095,249 11,097,184 2,001,935
Catch-up payments to Doctors 228,822 -- (228,822)
Insurance 1,350,878 514,939 (835,939)
Claims & Capitation 9,331,586 3,319,919 (6,011,667)
Patient Refunds 60,000 -- (60,000)
Rent 796,533 393,738 (402,795)
Utilities 83,076 4,669 (78,407)
Bank Lock Box -- 229 229
Medical Supply 185,300 5,643 (179,657)
Other 2,109,566 437,535 (1,672,031)
------------ ------------ ------------
Total Cash Disbursements 23,241,009 15,773,855 (7,467,154)
Agreed Cash Adjustments
Less: Interest
Net Cash Flow (9,469,522) (1,601,680) 7,867,842
Net DIP Advance 2,800,000 2,800,000
Intercompany Transfers (1,507,000) (2,429,936) (922,936)
Ending Cash Balance $ (9,382,491) 1,628,315 $ 11,010,806
------------ ------------ ------------
</TABLE>
Source: Information reflected above was obtained from the books and records of
FPA Medical Management Group, Inc.
<PAGE> 130
HEALTH PARTNERS INC.
- --------------------------------------------------------------------------------
DIP BUDGET
DIP PROJECTED VS. ACTUAL CASH FLOWS
CUMULATIVE TOTALS
<TABLE>
<CAPTION>
For the Period 7/19 to 8/24/98
-------------------------------------------
PROJECTED ACTUAL DIFFERENCE
-------------------------------------------
A B C = B - A
--- ---------- ---------
<S> <C> <C> <C>
Initial Cash Balance $-- 2,229,932 $--
Cash Receipts:
Fee For Service Billings -- 4,477,989 --
Claims & Capitation -- 3,622,373 --
Medicare & Collections -- --
--- ---------- ---
Total Cash Receipts -- 8,100,362 --
Less: Cash Disbursements:
Employee & Physician Payroll -- 4,586,075 --
Catch-up payments to Doctors -- 215,425 --
Insurance -- 266,089 --
Claims & Capitation -- 1,964,346 --
Patient Refunds -- 12,327 --
Rent -- 330,742 --
Utilities -- 11,889 --
Bank Lock Box -- --
Medical Supply -- 166,126 --
Other -- 844,403 --
--- ---------- ---
Total Cash Disbursements -- 8,397,422 --
Agreed Cash Adjustments
Less: Interest
Net Cash Flow -- (297,060) --
Net DIP Advance --
Intercompany Transfers -- 1,000,000 --
Ending Cash Balance $-- 2,932,872 $--
--- ---------- ---
</TABLE>
General:
Health Partners Inc. is reported for cash flow purposes as a stand
alone entity. These transactions are not included as a part of the FPA Medical
Management, Inc. roll-up.
<PAGE> 1
Exhibit 99
Contact: Sitrick And Company
Ann Julsen
Brenda Adrian
310-788-2850
FOR IMMEDIATE RELEASE
FPA MEDICAL MANAGEMENT, INC. FILES DISCLOSURE STATEMENT
AND PLAN OF REORGANIZATION WITH BANKRUPTCY COURT
NOTICES OF OCTOBER 28, 1998 DISCLOSURE STATEMENT HEARING
AND NOVEMBER 17, 1998 BAR DATE MAILED TO INTERESTED PARTIES
MIAMI, FLA. - OCTOBER 5, 1998 - FPA Medical Management, Inc. (OTC
Bulletin Board: FPAMQ) announced that it filed its Disclosure Statement and Plan
of Reorganization with the Bankruptcy Court in Wilmington, Delaware on September
30, 1998. The scheduled filing, which was first announced in July 1998, was
required by the terms of the FPA's debtor-in-possession (DIP) financing
agreement and the Bankruptcy Court's scheduling order entered following the
commencement of the Chapter 11 cases of FPA and various of its affiliates and
subsidiaries on July 19, 1998 and closely follows the prenegotiated term sheet
that FPA filed with its first day petitions. Following approval of the
Disclosure Statement by the Bankruptcy Court, FPA will commence the solicitation
of votes of its creditors for the approval of its Plan of Reorganization.
In both its Disclosure Statement and the related hearing notice mailed
to FPA's creditors and other interested persons and entities, FPA also disclosed
that The Official Committee of Unsecured Creditors, appointed on August 3, 1998
in FPA's jointly administered Chapter 11 cases, had informed the Company that
the Committee does not support the Plan as proposed and that negotiations are
continuing among the Company, the Prepetition and DIP Bank Groups and
<PAGE> 2
the Creditors' Committee in advance of the Bankruptcy Court hearing scheduled
for October 28, 1998 on the adequacy of the Disclosure Statement.
"The Company has worked diligently to keep its reorganization process
on a fast-track schedule to be successfully completed at the earliest
opportunity. We were fortunate to have reached agreement with our senior
creditors as we began our reorganization and appreciate their continued support
as we move through this process," said Stephen J. Dresnick, M.D., FACEP,
chairman and chief executive officer of FPA. "We are cautiously optimistic that
the discussions with our unsecured creditors, which are continuing this week,
will result in a consensual plan supported by our lenders, unsecured creditors
and payors."
Terms of the filed plan provide for the cancellation of existing equity
holder interests; warrants to be distributed to general unsecured creditors,
including holders of the Company's 6.5% Subordinated Debentures due 2001; and a
conversion of all or substantially all of FPA's prepetition secured debt to
equity. The Disclosure Statement and Plan of Reorganization will be filed with
the Securities and Exchange Commission.
The Company also announced that is notice and claims agent was mailing
notice of the November 17, 1998 general claims bar date established by the
Bankruptcy Court together with proof of claim forms to more than 50,000
creditors, equity holders and other interested persons and entities. FPA Medical
Management, Inc. and various of its affiliates and subsidiaries filed petitions
under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware in
Wilmington on July 19, 1998 and various dates thereafter through August 7, 1998.
FPA Medical Management, Inc. is a national physician practice
management organization that organizes and manages primary care physician
networks to contract with HMOs and other
2
<PAGE> 3
prepaid insurance plans to provide physician and related health care services
and provides contract management support services to hospital emergency
departments.
This press release contains statements which constitute
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995. "Forward-looking statements" in this press
release include the intent, belief or current expectations of the Company and
members of its senior management team with respect to the timing of, completion
of and scope of the current restructuring, reorganization plan, strategic
business plan, bank financing and debt and equity market conditions and the
Company's future liquidity, as well as the assumptions upon which such
statements are based. While the Company believes that its expectations are based
on reasonable assumptions within the bounds of its knowledge of its business and
operations, prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance, and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those contemplated by the forward-looking statements in this press release
include, but are not limited to, further adverse developments with respect to
the Company's liquidity position or operations of the Company's various
businesses, adverse developments in the Company's efforts to renegotiate its
funding and adverse developments in the bank financing or public or private
markets for debt or equity securities, or adverse developments in the timing or
results of the Company's current strategic business plan (including the time
line to emerge from Chapter 11), the difficulty in controlling health care costs
and integrating new operations, the ability of the Company to realize the
anticipated general and administrative expense savings and overhead reductions
presently contemplated, the ability of the Company to return the Company's
operations to profitability, the level and nature of any restructuring and other
one-time charges, the difficulty in estimating costs relating to exiting certain
markets and consolidating and closing certain operations, and the possible
negative effects of prospective health care reform. Additional factors that
would cause actual results to differ materially from those contemplated within
this press release can also be found in the Company's Form 8-K periodic filings
during 1998, Form 10-Q for the quarter ended March 31, 1998, and the Company's
Form 10-K for the year ended December 31, 1997.
3
