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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3636 NOBEL DRIVE,
(STATE OR OTHER JURISDICTION OF SUITE 200,
INCORPORATION OR ORGANIZATION) SAN DIEGO, CA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
33-0604264 92122
(I.R.S. EMPLOYER (ZIP CODE)
IDENTIFICATION NO.)
Registrant's telephone number, including area code: (619) 453-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.002 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 17, 1998 was $766,909,974.
The number of shares outstanding of the registrant's common stock as of
March 17, 1998 was 43,297,224.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report
on Form 10-K.
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FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward Looking Statements. Statements in this document that are not
historical facts are hereby identified as "forward looking statements" for the
purpose of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"). FPA Medical Management, Inc.
("FPA" or the "Company") cautions readers that such "forward looking
statements," including without limitation, those relating to the Company's
future business prospects, revenues, working capital, liquidity, capital needs,
interest costs and income, wherever they may appear in this document or in other
statements attributable to the Company, are necessarily estimates reflecting the
best judgment of the Company's senior management and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those suggested by the "forward looking statements." Such "forward looking
statements" should, therefore, be considered in light of various important
factors, including those set forth below and others set forth from time to time
in the Company's reports and registration statements filed with the Securities
and Exchange Commission (the "SEC").
These "forward looking statements" are found at various places throughout
this document. Additionally, the discussions herein under the captions
"Business--Strategy," "Business -Acquisition Activity," "Business--The Managed
Care Industry," "Business--Physician Practice Management Business,"
"Business-Emergency Department Business," "Business--Government Regulation,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are susceptible to the risks and
uncertainties discussed below. Moreover, the Company, through its senior
management, may from time to time make "forward looking statements" about the
matters described herein or other matters concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements."
Factors That May Affect Future Results. The health care industry in
general and the physician practice management ("PPM") business in particular are
in a state of significant change. This, together with the circumstance that the
Company has an on-going acquisition program, makes the Company particularly
susceptible to various factors that may affect future results such as the
following: no assurance of successful integration of acquisitions and expanded
service offerings; risks of financial leverage; growth strategy and difficulty
in maintaining growth; risks related to intangible assets; difficulty in
controlling health care costs and capitated nature of revenue; risks related to
full risk capitation; risks related to fee-for-service contracts; dependence on
government and other third party payors; reliance on certain payors;
terminability of payor contracts; dependence on primary care physicians and
emergency medicine physicians; risks related to classification of physicians as
independent contractors; state laws regarding prohibition of corporate practice
of medicine; possible negative effects of prospective health care reform;
possible negative effects of governmental regulations; anti-trust regulation;
competitive market forces; potential liabilities; fluctuations in quarterly
results; possible volatility of stock price; dependence upon key personnel and
employment contracts; risk of dilution and additional capital needs; shares
eligible for future sale; and anti-takeover effect of certain provisions of the
Company's charter documents and credit facilities.
For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
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PART I
ITEM 1. BUSINESS
GENERAL
FPA is a national physician practice management company which acquires,
organizes and manages primary care physician practice networks and provides
contract management services to hospital-based emergency departments. The
Company provides primary and specialty care services to capitated managed care
enrollees and fee-for-service patients. As of December 31, 1997, FPA was
affiliated with approximately 7,690 primary care physicians (including emergency
department physicians), who provided services to approximately 1,193,800
enrollees of 53 health maintenance organizations ("HMOs") or other prepaid
health insurance plans (collectively, "Payors") in 29 states (including the
District of Columbia). FPA, through its subsidiary, Sterling Healthcare Group,
Inc. ("Sterling"), provides physician management services pursuant to
approximately 150 contracts to hospital emergency departments, urgent care,
radiology and correctional facilities.
FPA's relationships with its subsidiaries and affiliated professional
corporations (the "Professional Corporations"), other providers of medical
services and Payors (collectively, the "FPA Network"), offer physicians the
opportunity to participate more effectively in managed care programs by
organizing physician groups within geographic areas to contract with Payors. FPA
enhances physician practice 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. The Company believes that its management model is appealing
to physicians because it allows the physicians to retain control of their own
practices while gaining access to more patients through participation in a
managed care program.
The FPA Network manages and is financially responsible for all covered
primary and specialty medical care for each enrollee who selects an FPA Network
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 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 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 Company's 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, FPA,
through its affiliated physicians, provides 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. Because the subsidiaries and
Professional Corporations are obligated to provide medical services for fixed
capitation fees, FPA's profitability may vary based on the ability of the
subsidiaries and Professional Corporations to control the costs of the health
care provided in return for such payments.
In December 1996, the California Department of Corporations (the "DOC")
issued a restricted health care service plan license to one of FPA's
subsidiaries in accordance with the requirements of the Knox-Keene Health Care
Service Plan Act of 1975 (the "Knox-Keene Act"), which authorizes such
subsidiary to operate as a health care service plan in California. FPA utilizes
such restricted license to allow the subsidiary to contract with Payors for a
broad range of health care services.
Sterling recruits physicians and contracts for their services to provide
staffing of hospital emergency departments and related facilities. Sterling also
assists its hospital clients in such areas as physician scheduling, operations
support, quality assurance and departmental accreditation as well as billing and
record keeping.
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Listed below is a breakdown of enrollees, primary care physicians
(including emergency department physicians) and emergency department business
contracts (including seven radiology, urgent care and correctional facility
contracts) by state (including District of Columbia) at December 31, 1997.
<TABLE>
<CAPTION>
EMERGENCY
PRIMARY CARE DEPARTMENT
ENROLLEES PHYSICIANS CONTRACTS
---------- ------------ ----------
<S> <C> <C>
Alabama -- 140 7
Arizona 189,200 430 3
Arkansas -- 20 2
California 301,400 1,530 --
Delaware 13,500 90 --
Florida 167,900 430 12
Georgia 31,500 210 6
Hawaii -- 10 1
Illinois -- 100 10
Indiana -- 40 3
Kentucky 12,000 110 5
Louisiana 8,400 180 17
Maryland -- 110 4
Michigan 39,500 500 13
Mississippi -- 110 8
Missouri 13,000 150 13
Nevada 42,600 240 --
New Jersey 55,800 900 --
New York 115,500 470 2
North Carolina 37,100 210 11
Ohio -- 40 5
Oklahoma -- 10 1
Pennsylvania -- 360 1
South Carolina 1,200 170 3
Tennessee -- 90 8
Texas 133,600 990 13
Virginia 17,200 30 1
Washington, D.C. 14,400 10 --
West Virginia -- 10 1
---------- ------ ----
Total 1,193,800 7,690 150
========== ====== ====
</TABLE>
STRATEGY
FPA's strategy is to increase enrollment by adding new Payor relationships
and new providers to the existing FPA Network and by expanding the FPA Network
into new geographic areas where the penetration of managed health care is
growing. FPA believes it can attract new Payor and provider relationships
because of its ability to manage the cost of health care without sacrificing
quality. The Company seeks to manage two primary points of entry into the
managed health care delivery system - the primary care physician's office and
the emergency department - which the Company believes will enable it to more
fully coordinate patient care as it pursues global capitation arrangements. The
Company has recently entered into, and continues to pursue, several state and
national Payor contracts, which the Company believes will facilitate more rapid
development of provider networks in new markets and thus should enable FPA to
increase enrollment in an accelerated manner.
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA Network. This growth may come from (i)
affiliations with, or acquisitions of, group physician practices or independent
practice associations ("IPAs") serving enrollees of Payors in the FPA Network or
of new Payors, (ii) increased membership in plans of Payors with which the
Professional Corporations or subsidiaries of FPA have contracts and whose
members are patients of physicians in the FPA Network or (iii) agreements with
Payors, physicians and hospitals in other geographic markets. The Company is
also placing greater emphasis on developing and enhancing its infrastructure in
order to expand internal and same market growth.
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ACQUISITION ACTIVITY
FPA implements its business strategy through growth in existing markets,
expansion into new markets through (i) acquisitions of physician practices, (ii)
enhancement of its management capabilities by acquisition of practice management
companies in both the physician and emergency department fields and, (iii)
agreements with Payors, physicians and hospitals in other geographic markets.
The Company's principal methods of expansion are acquisitions of medical groups,
IPAs and physician practice management companies.
The Company completed the following acquisitions in 1997 (all information
relating to the number of physicians and enrollees is at the time of
acquisition):
- In March 1997, the Company 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 provided managed care services primarily in California, Texas
and Florida.
- In June 1997, the Company acquired HealthCap, Inc. ("HealthCap") in
a stock-for-stock merger accounted for as a pooling of interests.
HealthCap provided PPM services primarily in California, Florida,
Georgia, Missouri and Nevada.
- In September 1997, the Company acquired Emergency Medical Care
Incorporated ("EMC") for cash and stock. EMC provided PPM services
to hospital emergency departments and radiology departments in
Missouri and Illinois.
- In September 1997, the Company 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 Company 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, northern Virginia, Washington, D.C.,
northern Kentucky and San Antonio, Texas.
- In October 1997, the Company acquired Carolina Health Care Group
("CHCG") for cash. CHCG 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 Company 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 Company has completed certain acquisitions or entered into acquisition
arrangements since December 31, 1997 as follows:
- In January 1998, the Company acquired Avanti Health Systems of
Texas, Inc. and its affiliated professional corporations ("Avanti").
Avanti managed 20 health care clinics in Houston and Dallas, Texas
and employs approximately 60 physicians which served approximately
50,000 enrollees.
- In January 1998, the Company completed the acquisition of Physicians
Quality Care, Ltd. ("PQC") and Associates in Managed Care, Ltd.
("AMC"). PQC provided physician practice management services in the
Chicago area. AMC was affiliated with approximately 420 primary care
physicians who provided services to approximately 27,000 enrollees.
- In February 1998, the Company completed the acquisition of Emergency
Treatment Associates, Inc. ("ETA"). ETA provided contract management
services to six hospitals in two states through approximately 40
affiliated emergency department physicians.
- On March 20, 1998, the Company acquired Orange Coast Managed Care
Services, Inc. ("OCMCS") and St. Joseph Medical Corporation ("SJMC")
in a stock-for-stock transaction in which up to 2,828,680 shares of
the Company's common stock will be issued in exchange for all the
outstanding shares of capital stock and options of SJMC and OCMCS
(except for certain shares which were canceled without consideration
in connection with the merger). The merger with SJMC will be
accounted for as a pooling of interests, while the merger with OCMCS
will be treated as a purchase. OCMCS provides administrative
management services to SJMC's IPA and medical group physicians in
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Orange County, California. OCMCS and SJMC served approximately
120,000 managed care enrollees through approximately 250 primary
care physicians as of December 31, 1997.
- On February 10, 1998, the Company entered into an Agreement and Plan
of Merger between the Company and Meridian Medical Group, Inc.
("Meridian"). Meridian provided physician services through
approximately 65 physicians to approximately 70,000 enrollees in the
Atlanta, Georgia area as of December 31, 1997. Consummation of the
merger, which is anticipated to occur in the second quarter of 1998,
is subject to certain closing conditions, including Meridian
shareholder approval and other customary conditions.
Most of the Company's significant acquisitions have been accounted for as
poolings of interests for accounting and financial reporting purposes. As a
result, the Company's operating income has been reduced by related merger
expenses resulting in a net loss for the year ended December 31, 1997. Such
merger expenses as well as integration costs may result in future losses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's success in continuing its growth strategy will be dependent
upon many factors, including, its ability to identify suitable growth
opportunities and to integrate acquired practices. The process of identifying
and consummating suitable acquisitions of, or affiliations with, physician
groups can be lengthy and complex. The environment for such acquisitions is
subject to increasing competitive pressures. The Company is regularly in
discussions with potential acquisition candidates and may from time to time
enter into letters of intent or definitive agreements with respect to the
acquisition of such businesses. There can be no assurance that FPA will be
successful in identifying or acquiring additional physician groups or IPAs, that
the Company will be able to secure adequate financing to fund such acquisitions
or that the Professional Corporations or subsidiaries of FPA will be able to
contract with new Payors. In addition, there can be no assurance that the
Company's acquisitions will be successfully integrated on a timely basis or that
the anticipated benefits of these acquisitions will be realized. Failure to
continue its growth strategy or to effectively accomplish the integration of
acquired entities may have a material adverse effect on FPA's results of
operations and financial condition. FPA's ability to expand is also dependent
upon its ability to comply with legal and regulatory requirements in the
jurisdictions in which it operates or will operate and to obtain necessary
regulatory approvals, certificates and licenses.
THE MANAGED CARE INDUSTRY
Concerns over the costs of health care have resulted in the rapid growth
of managed care in recent years. According to InterStudy Publications, HMO
enrollment grew 13% to over 66.8 million members in 1996. As markets evolve from
traditional fee-for-service arrangements to managed care, HMOs and health care
providers confront market pressures to provide high quality care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce premiums and to bring about greater accountability of HMOs and
providers with respect to accessibility, choice of provider, quality of care and
other matters that are fundamental to consumer satisfaction. The increasing
focus on cost-containment has placed small to mid-sized physician groups and
solo practitioners at a disadvantage. They typically have higher operating costs
and little purchasing power with suppliers, they often lack the capital to
purchase new technologies that can improve quality and reduce costs and they do
not have the cost accounting and quality management systems necessary for entry
into sophisticated risk-sharing contracts with payors.
Primary care physicians have increasingly become the conduit for the
delivery of medical care by acting as "case managers" or "gate-keepers" and
directing referrals to certain specialists, hospitals, alternate-site facilities
and diagnostic facilities. By contracting directly with Payors, organizations
such as the Company which manage primary care physicians are able to reduce the
administrative overhead expenses incurred by Payors and thereby reduce the cost
of delivering medical services.
As HMO enrollment and physician membership in group practices have
continued to increase, health care providers have sought to reorganize
themselves into health care delivery systems that are better suited to the
managed care environment. Physician groups and IPAs are joining with hospitals,
pharmacies and other institutional providers in various arrangements to create
vertically integrated delivery systems that provide medical and hospital
services ranging from community-based primary medical care to specialized
inpatient services. These health care delivery systems contract with Payors to
provide hospital and medical services to enrollees pursuant to full risk
contracts. Under these contracts, providers assume the obligation to provide
both the professional and institutional components of health care services to
the Payor's enrollees.
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In order to compete effectively in this evolving environment, the Company
believes many physicians are concluding that they must obtain control over the
delivery and financial impact of a broader range of health care services through
global capitation arrangements. Groups of independent physicians and medium to
large medical groups are taking steps to assume the responsibility and the risk
associated with health care services that they do not provide, such as
hospitalization and pharmacy services. Physicians are increasingly abandoning
traditional private practice in favor of affiliation with larger organizations
such as the Company that offer skilled and innovative management, sophisticated
information systems and significant capital resources. Many Payors and their
intermediaries, including governmental entities and HMOs, are also looking to
outside providers of physician services to develop and maintain quality
outcomes, management programs and patient care data. In addition, such payors
and intermediaries look to share the risk of providing health care services
through capitation arrangements. Medical groups and independent physicians seem
to be concluding that while the acceptance of greater responsibility and risk
affords the opportunity to retain and enhance market share and to operate at a
higher level of profitability, the acceptance of global capitation carries with
it significant requirements for enhanced infrastructure, information systems,
capital, network resources and financial and medical management. As a result,
physicians are turning to organizations such as the Company to provide the
resources necessary to function effectively in a managed care environment.
In addition to physician practices, hospitals have been affected by the
changing health care industry. Cost considerations are important to hospital
operations, particularly with respect to emergency room departments. FPA
believes that hospital emergency departments play a central role in determining
levels of admissions and profitability as well as in establishing a hospital's
reputation in the community. However, the ability of hospitals to provide high
quality health care services, including emergency care services, has been
adversely affected by recent trends in the United States health care industry.
Continuing cost-containment pressures are causing hospitals to seek new ways to
provide high quality services in a cost-effective manner. In addition, hospitals
face numerous problems in managing their emergency departments, including
difficulties in recruiting, evaluating, scheduling and retaining emergency
physicians. Hospital emergency departments also continue to experience
increasing patient volumes, a shortage of board certified emergency department
physicians and extensive use for routine primary care, particularly at night and
on weekends.
PHYSICIAN PRACTICE MANAGEMENT BUSINESS
FPA provides physician practice management services to physicians in the
FPA Network pursuant to long-term administrative services agreements (the
"Administrative Services Agreements"). FPA's physician practice management
revenue is derived primarily from Payor contracts that compensate certain of
FPA's subsidiaries and the Professional Corporations on a capitated basis and
from the provision of fee-for-service medical services.
Contracts with Payors. Contracts with Payors generally provide for terms
of one to thirty years, may be terminated earlier without cause, upon notice and
upon renewal or in a number of other circumstances 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. 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 an FPA Network physician as his or her primary care physician. During
the years ended December 31, 1995, 1996 and 1997, 76.6%, 57.7% and 52.4%,
respectively, of the Company's managed care business operating revenues was
derived from professional capitation arrangements and 12.1%, 28.9% and 38.8%,
respectively, of the Company's managed care business operating revenues during
the same period was derived from global capitation arrangements. To the extent
that enrollees require more care than is anticipated or require supplemental
medical care that is not otherwise reimbursed by Payors, aggregate capitation
payments may be insufficient to cover the costs associated with the treatment of
enrollees. The Company maintains stop-loss insurance coverage, which mitigates
the effect of occasional high utilization of health care services. If revenues
are insufficient to cover costs or the Company is unable to maintain stop-loss
coverage at favorable rates, the Company's results of operations and financial
condition could be adversely affected. The loss of significant Payor contracts
and the failure to regain or retain such Payor's members or the related revenues
without entering into new Payor relationships could have a material adverse
effect on FPA's results of operations and financial condition.
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FPA is pursuing national and multi-state Payor contracts, which FPA
believes will facilitate more rapid development of provider networks in new
markets and thus should enable FPA to increase enrollment in an accelerated
manner. FPA has recently entered into several national and multi-state Payor
relationships, including agreements with NYLCare Health Plans, Inc., Oxford
Health Plans ("Oxford"), Humana, Inc., PacifiCare Health Systems, Inc.
("PacifiCare"), Aetna U.S. Healthcare and Foundation Health Systems, Inc.
("Foundation"). These agreements generally provide that managed care members of
the Payors in designated states or other geographic regions may utilize the FPA
Network.
For the years ended December 31, 1995, 1996 and 1997, revenue related to
Payor contracts with FHP/PacifiCare Health Systems, Inc. accounted for
approximately 21.8%, 13.3% and 10.3%, respectively, of the Company's operating
revenue. For the years ended December 31, 1996 and 1997, revenue related to
Payor contracts with PCA Humana accounted for approximately 13.3% and 15.0%,
respectively, of operating revenue. For the year ended December 31, 1997,
revenue related to Payor contracts with Foundation and Oxford accounted for
approximately 17.3% and 13.2%, respectively, of operating revenue. As of
December 31, 1997, approximately 27.5%, 12.9%, 11.2% and 9.3% of the Company's
membership is pursuant to Payor contracts with Foundation, PCA Humana,
PacifiCare and Oxford, respectively. A significant modification to or
termination of such agreements could have a material adverse effect on FPA's
results of operations and financial condition.
Fee-for-Service Arrangements. Certain of the FPA Network physicians who
render services on a fee-for-service basis (as opposed to 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. During the years ended December 31, 1995,
1996 and 1997, approximately 3.3%, 5.6% and 4.5%, respectively, of the Company's
managed care business operating revenues was derived from fee-for-service
payments. The Company anticipates that fee-for-service revenue as a percentage
of total managed care business operating revenues will decrease over time as the
Company enters into more professional capitation and global capitation
contracts. There can be no assurance that payments under governmental programs
or from other Payors will remain at present levels. In addition, Payors can deny
reimbursement if they determine that treatment was not performed in accordance
with the cost-effective treatment methods established by such Payors or was
experimental or for other reasons.
Contracts with Providers. FPA, through certain of its subsidiaries and the
Professional Corporations, contracts with a variety of providers, including
primary and specialty care physicians, hospitals and other ancillary providers.
These agreements generally have terms up to three years, are automatically
renewable and are terminable by either party at specified periods upon at least
90 days prior notice. A primary care physician's affiliation and compensation
arrangement with a Professional Corporation or subsidiary may take one of
several forms, including (i) capitation payments based on the number of
enrollees "linked" to such physician and additional compensation based upon
efficiency in utilizing the services of specialty care providers and compliance
with contractual quality standards, (ii) base compensation plus performance
bonuses, or (iii) base compensation plus a percentage of a Professional
Corporation's net revenues generated by physicians employed by such Professional
Corporation. Physicians may also participate in FPA's Physician Stock Option
Plan if they reach objective quality performance standards set by FPA. FPA
periodically surveys physician compensation patterns and programs in HMO and
other group practice settings to ensure that FPA Network physicians'
compensation and benefits are competitive within the geographic area in which
each physician is employed.
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.
Administrative Services Agreements. FPA generally provides the following
services to the Professional Corporations pursuant to the Administrative
Services Agreements:
Integrated Information Systems. FPA develops and maintains integrated
information systems ("IS") to support its growth and acquisition plans. FPA
maintains an on-line database that provides inpatient and outpatient utilization
statistics and patient encounter reporting and tracking. FPA believes that the
availability of timely information on utilization patterns improves primary care
physician productivity and effectiveness. This data also plays an integral role
in the specialty care physician and hospital utilization review process by
enabling the medical directors and utilization review
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nurses to monitor encounter data, case management decisions and patient
outcomes. Further, the IS assist FPA in performing various 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 FPA in resolving concerns enrollees may have
and in evaluating patient and physician satisfaction. In addition, Sterling has
developed IS specific to hospital and clinical management services. The IS
collect data regarding patient flow utilization, physician efficiency and other
data used by Sterling and hospital clients. In particular, Sterling uses the
data to develop staffing patterns.
Claims Administration and Billing Services. FPA performs comprehensive
complete medical bill review and claims processing, invoicing and payment
functions. These capabilities include 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.
Utilization Management. Physicians within the FPA Network have established
a utilization management program to help ensure the delivery of high quality,
cost-effective health care. Utilization management encourages physicians in the
FPA Network to provide cost-effective, quality care by emphasizing preventive
medicine and by eliminating unnecessary tests, procedures, surgeries,
hospitalizations and 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. FPA has developed separate
utilization management committees on a regional basis due to expansion into new
geographic markets.
Case Management. Case management is a service administered by the various
utilization management committees and is a clinical and administrative process
by which health care services are identified, coordinated, implemented and
evaluated on an ongoing basis for enrollees experiencing selected health
problems. Such selected health problems include chronic disability, complex
medical cases or problems requiring long-term care. Case management involves the
coordination of a variety of services, including home nursing, home infusion and
the provision of durable medical equipment. This approach ensures a continuum of
quality care throughout the extended treatment period.
Quality Assurance. The FPA Network maintains, as a service to both its
physicians and Payors, a comprehensive quality assurance program designed to
improve patient care. The quality assurance program incorporates peer review,
patient satisfaction surveys, medical records audit, continuing medical staff
development and regular continuing medical education seminars as required by
accrediting organizations, state law and licensing requirements. Medical staff
development includes the provision of training and support programs to encourage
the team-oriented delivery of high quality, cost-effective medical care.
Physician Credentialing and Recruitment. As a service to Payors and the
Professional Corporations, FPA verifies that the credentials of physicians in
the FPA Network meet the minimum requirements specified in Payor contracts. In
addition, FPA assists the Professional Corporations in the recruitment of highly
competent physicians who share in the philosophy of prepaid managed health care.
The recruitment process includes a lengthy series of interviews and reference
checks incorporating a number of credentialing and competency assurance
protocols. All of the FPA Network's physicians are licensed to practice medicine
in the state where they provide medical services and are generally either board
certified or board eligible.
Succession Agreements. In certain states in which FPA conducts or may
conduct business, general business corporations are not permitted to practice
medicine, exercise control over physicians who practice medicine or engage in
certain practices such as fee-splitting with physicians. As stated in Note 1 to
FPA's Consolidated Financial Statements, FPA believes it has direct or indirect
unilateral and perpetual control over the assets and operations of the
Professional Corporations whose operations FPA consolidates.
9
<PAGE> 10
EMERGENCY DEPARTMENT BUSINESS
FPA provides management services to 143 hospital emergency departments,
one radiology department, three urgent care clinics and three correctional
institutional health facilities in 24 states pursuant to 150 contracts. FPA
contracts with approximately 1,700 affiliated physicians who typically provide
all necessary physician coverage for these services on a 24-hour, 365-day basis.
The Company identifies and recruits physicians as candidates for admission to a
client's medical staff and coordinates the on-going scheduling of staff
physicians, who provide clinical coverage primarily in the area of emergency
medicine. The Company 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.
Physician Contracts. The Company 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 FPA for the provision of emergency department services offers
physicians the opportunity to minimize their administrative burden and
concentrate on the practice of medicine. The Company believes that many
physicians enjoy the relative freedom from the business aspects of medicine,
including the development of a patient base, the financing of a practice and the
complexity associated with billing and collection procedures, that results from
these arrangements. As a provider of contract management services across a broad
geographic spectrum, the Company 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.
Emergency Department Contracts. The Company's services to hospitals are
provided under fee-for-service and flat-rate contracts. A substantial portion of
the Company's hospital-based net revenues are derived from payments made on a
fee-for-service basis. During the years ended December 31, 1995, 1996 and 1997,
84.4%, 83.7% and 80.0%, respectively, of the Company's emergency department
revenues was derived from fee-for-service payments. Agreements with hospitals to
provide contract management services generally have terms of one or two years
and are renewable automatically unless either party gives written notice of its
intent not to renew at least 90 days prior to the end of the term. Many of these
agreements provide for termination by the hospital without cause on relatively
short notice. There can be no assurance that any of such contracts will not be
terminated early, will be renewed or that they will contain favorable terms.
Since January 1994, a number of Sterling's hospital agreements have been
terminated as a result of non-renewal, termination by the hospital, termination
by Sterling or hospital closure. Future consolidation in the health care
industry may result in future hospital agreements being terminated. The loss of
certain hospital contracts and the failure to regain or retain related revenues
without entering into new hospital contracts could have a material adverse
effect on FPA's results of operations and financial condition. Pursuant to the
contracts, the hospitals authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by the contracted health care professionals. The
Company 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 Company's services. Pursuant
to such arrangements, the Company 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. All of
these factors are taken into consideration by the Company in arriving at
contractual arrangements with health care institutions and professionals.
Hospitals with flat-rate contracts pay fees to the Company based on the hours of
physician coverage provided. Sterling's fee-for-service hospital billing and
collection services are provided by a nonaffiliated billing firm (the "Billing
Firm"). The Billing Firm's parent has publicly disclosed that the government was
investigating allegations concerning certain applications of the coding process
of the Billing Firm's operations. According to the disclosure, the government
has requested that the Billing Firm voluntarily produce records, and the Billing
Firm is complying with that request. Neither Sterling nor the Company has been
requested to produce records. The Company does not believe that an adverse
result in the investigation of the Billing Firm will have a material adverse
effect on the Company's results of operations or financial condition.
In November 1997, Sterling received letters from certain Medicare carriers
requesting specific information on Sterling's compliance with the Health Care
Financing Administration's ("HCFA") requirement regarding the Medicare
reassignment for claims for services rendered by Sterling's independent
contractor physicians. Sterling believes that other emergency department
management companies received similar letters regarding this HCFA requirement.
Since February 1997, Sterling has been working with HCFA's Central and Region 4
offices to reach an agreement on the issues raised by such Medicare carriers.
Sterling is in the final stages of obtaining approval of its compliance plan
from the individual carriers. As a result of this process, Sterling's
reimbursement for Medicare billings has been significantly delayed. While the
Company believes that it will favorably resolve the issues raised by such
Medicare carriers, there can be no assurance that Medicare payments to the
Company will not be further delayed as a result of these inquiries. The accounts
receivable related to this inquiry are reflected in the accompanying financial
statements as estimated collectible amounts of approximately $10 million as of
December 31, 1997.
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<PAGE> 11
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, FPA and the Professional Corporations
compete with any entity that contracts with Payors for the provision of prepaid
health care services. The FPA Network also competes with other companies,
including PPMs, which provide management services to health care providers. FPA
also competes with local physician groups and hospitals for the provision of
physician practice management services to hospital emergency departments. FPA
also competes with other companies for 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 does the
Company.
GOVERNMENTAL REGULATION
General. As a participant in the health care industry, the Company's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company believes its operations are in material compliance with applicable laws.
Nevertheless, many aspects of the Company's business operations have not been
the subject of state or federal regulatory interpretation. Thus, there can be no
assurance that a review of the Company's or the Professional Corporations'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
the Professional Corporations. Nor can there be any assurance that the health
care regulatory environment will not change so as to restrict the Company's or
the Professional Corporations' existing operations or their expansion. Any
significant restriction could have a material adverse effect on the Company's
operating results and financial condition.
Federal Reimbursement, Fraud and Abuse and Referral Laws. During 1997,
approximately 36.9% of the Company's revenues was derived from payments made by
government-sponsored health care programs (principally, Medicare and
state-reimbursed programs). As a result, the Company is subject to the laws and
regulations that govern reimbursement under Medicare and Medicaid. Any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. There are also state and
federal civil and criminal statutes imposing substantial penalties (including
civil penalties and criminal fines and imprisonment) on health care providers
that fraudulently or wrongfully bill governmental or other third-party payors
for health care services. The Company believes it is in material compliance with
such laws, but there can be no assurance that the Company's activities will not
be challenged or scrutinized by governmental authorities or that any such
challenge or scrutiny would not have a material adverse effect on the Company's
results of operations and financial condition.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subject. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the Department of Health and Human Services (the "DHHS") has
the authority to exclude anyone, including individuals or entities, who has
committed any of the prohibited acts from participation in the Medicare or
Medicaid programs. If applied to the Company or any of its subsidiaries or
Professional Corporations, such exclusion could result in a significant loss of
reimbursement for the Company, which could have a material adverse effect on the
Company's results of operations and financial condition. Although the Company
believes that it is not in violation of the Anti-Kickback Statute or similar
state statutes, its operations do not fit within any of the existing or proposed
federal safe harbors.
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce: (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or services; or (iii) the purchase, lease or order of, or arranging or
recommending purchasing, leasing or ordering of, any item or service, in each
case, reimbursable under Medicare or Medicaid (the "Medicare Referral Payments
Law"). The federal government has announced a policy of increased scrutiny of
joint ventures and other transactions among health care providers in an
11
<PAGE> 12
effort to reduce potential fraud and abuse relating to Medicare patients. The
applicability of these provisions to many kinds of business transactions in the
health care industry has not yet been subject to judicial and regulatory
interpretation. In addition, federal legislation restricts the ability of
physicians to refer patients to entities providing "designated health services"
in which the physicians have an ownership interest or other compensation
arrangement. Some states have also enacted anti-kickback and anti-referral laws.
FPA believes that its business operations do not violate the Medicare
Referral Payments Law because compensation arrangements with primary care
physicians who make referrals are designed to discourage referrals to the extent
they are unnecessary. These physicians are paid either on a capitation or
fee-for-service basis and do not receive any financial benefit from making
referrals. FPA also believes that its business arrangements do not involve the
referral of patients to entities with whom referring physicians have an
ownership interest or compensation arrangement within the meaning of federal and
state anti-referral laws, because most referrals are made directly to other
providers rather than to entities in which referring physicians have an
ownership or compensation arrangement. FPA further believes its compensation
arrangements with physicians fall within various exceptions to state and federal
anti-referral laws, including exceptions for ownership or compensation
arrangements with certain managed care organizations and for physician incentive
plans that limit referrals. In addition, FPA believes that the methods used to
acquire existing physician practices and to recruit new physicians do not
violate anti-kickback and anti-referral laws and regulations. A determination of
liability under the anti-kickback or anti-referral laws and regulations could
have a material adverse effect on FPA's results of operations and financial
condition.
Corporate Practice of Medicine Laws. The laws of many states prohibit
physicians from splitting fees with non-physicians and prohibit non-physician
entities from practicing medicine. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. As stated in Note 1 to the Company's consolidated
financial statements, the Company believes its has perpetual and unilateral
control over the assets and operations of substantially all of the Professional
Corporations whose operations it consolidates. However, there can be no
assurance that regulatory authorities will not take the position that such
control, through the Administrative Services Agreements and Succession
Agreements, conflicts with state laws regarding the practice of medicine or
other federal restrictions. Although the Company believes its operations as
currently conducted are in material compliance with existing applicable laws,
there can be no assurance that the existing organization of the Company and its
contractual arrangements with the Professional Corporations will not be
successfully challenged as constituting the unlicensed practice of medicine or
that the enforceability of the provisions of such arrangements, including
non-competition agreements, will not be limited. There can be no assurance that
review of the business of the Company and the Professional Corporations by
courts or regulatory authorities will not result in a determination that could
adversely affect their operations or that the health care regulatory environment
will not change so as to restrict existing operations or expansion thereof. In
the event of action by any regulatory authority limiting or prohibiting the
Company or any affiliate from carrying on its business or from expanding the
operations of the Company and the Professional Corporations to certain
jurisdictions, structural and organizational modifications of the Company may be
required, which could have a material adverse effect on the Company's results of
operations and financial condition.
Insurance Laws. The assumption of risk on a capitation basis by health
care provider networks is occurring with increasing frequency, and the practice
is being reviewed by various state insurance commissioners as well as the
National Association of Insurance Commissioners to determine whether the
practice constitutes the business of insurance. The Company believes that it is
currently in material compliance with the insurance laws in the states in which
it operates, and it intends to comply with interpretative and legislative
changes as they develop. There can be no assurance, however, that the Company's
activities will not be challenged or scrutinized by governmental authorities.
Knox-Keene Act. State laws in California, operations in which represented
approximately 17.3% of FPA's operating revenues for the year ended December 31,
1997, require entities such as FPA to be licensed as health care service plans.
In December 1996, the DOC issued a restricted Knox-Keene license to one of FPA's
California subsidiaries. The loss or revocation of such license would have a
material adverse effect on FPA's results of operations and financial condition.
In addition, there can be no assurance that regulatory authorities in the other
states in which FPA or its affiliates operate will not impose similar
requirements.
Future Legislation and Regulation. As a result of the continued escalation
of health care costs and the inability of many individuals to obtain health
insurance, numerous proposals have been introduced or may be introduced in the
United
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<PAGE> 13
States Congress and state legislatures relating to health care reform.
Legislation is pending in various states and in Congress to more intensely
regulate managed care, including managed care liability legislation which would
enable managed care companies to be named as defendants in medical malpractice
actions, legislation, such as the Patient Access to Responsible Care Act to
provide consumers of health care with more information and choice in health care
and legislation to address quality of care issues. The adoption of such
legislation or regulations may make it more difficult for the Company to control
health care costs and could adversely affect the Company's results of operations
and financial condition.
EMPLOYEES
At December 31, 1997, the Company had approximately 4,700 full time
employees. Management believes that its employee relations are good. On December
5, 1996, the Thomas-Davis Medical Centers, P.C., a Professional Corporation
("TDMC") physicians located in Tucson, Arizona (the "Petitioners") voted to be
represented by the Federation of Physicians and Dentists (the "Union"). On
February 13, 1997, the TDMC employees located in Tucson, Arizona voted to be
represented by the Union of Health and Hospital Care Employees. On September 24,
1997, the District Court Judge for the United States District Court for the
District of Arizona granted a temporary injunction and ordered, among other
things, FPA and TDMC to recognize the Union as the exclusive bargaining agent
for the Petitioners and to refrain from making unilateral changes in the terms
and conditions of employment, and upon request of the Union, to recognize and
bargain in good faith with the Union as the exclusive collective bargaining
agent of the Petitioners concerning wages, hours and other terms and conditions
of employment. TDMC and the Union commenced bargaining on October 1, 1997. TDMC
and FPA are in the process of appealing certain aspects related to such
representation; however, there can be no assurance as to the outcome of such
appeals. Although FPA does not expect union affiliations of its Arizona
employees to have a material adverse effect on its results of operations or
financial condition, there can be no assurance that future affiliations and/or
collective bargaining arrangements will not have a material adverse effect on
FPA's results of operations or financial condition.
ITEM 2. PROPERTIES
The Company leases approximately 26,200 square feet of rental space at
3636 Nobel Drive, Suite 200, San Diego, California, where the Company's
executive offices are located. The Company pays approximately $52,000 per month
in rent pursuant to a lease which expires in December 2001 for such space.
Additionally, the Company has administrative offices in approximately eight
states. The Company believes that these arrangements and other available space
are adequate for its current uses and anticipated growth. The Company also
leases or subleases clinic facilities where physicians provide medical services
in approximately 21 states. The Company anticipates that as the Company acquires
or affiliates with additional physician practices, expanded facilities will be
required; however, the Company believes that suitable facilities will be
available for its purposes.
ITEM 3. 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
Company requires all physicians in the FPA Network to carry certain minimum
amounts of malpractice insurance coverage. The Professional Corporations and
certain subsidiaries maintain their own malpractice insurance. The Company also
maintains an errors and omissions insurance policy which covers utilization
review activities. The Company maintains professional liability insurance for
itself, its hospital clients and its contracted physicians, in amounts it deems
to be appropriate, based upon historical claims and the nature and risks of its
business. In addition to any potential tort liability of the Company, Sterling's
contracts with hospitals generally contain provisions under which Sterling
agrees to indemnify the hospitals for certain losses resulting from the
negligence of the hospital or hospital personnel. FPA and certain of its
subsidiaries and Professional Corporations are parties to certain legal actions
arising in the ordinary course of business. While there can be no assurance that
FPA, the subsidiaries or Professional Corporations will be successful in any
such litigation, management of the Company does not believe any such litigation
will have a material adverse effect on the Company's results of operations or
financial condition.
AHI, a subsidiary of the Company, is a defendant in a purported class
action securities lawsuit entitled In re AHI Healthcare Systems, Inc. Securities
Litigation filed in the United States District Court for the Central District of
California, Western Division. The suit was initially filed against AHI, certain
of its officers and directors, and its underwriters on December 20, 1995 prior
to the merger of AHI with the Company. The suit asserts that AHI artificially
inflated the price
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<PAGE> 14
of its stock by, among other things, misleading securities analysts and by
failing to disclose in its initial public offering prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997 the district court (a)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (b) denied summary judgment on the claims relating to the proposed
acquisition of Lakewood Health Plan, Inc. As a result, only those claims
relating to Lakewood Health Plan and AHI's alleged liability for the public
statements of securities analysts following AHI remain in the suit. FPA intends
to vigorously defend this lawsuit and does not expect that the outcome of this
lawsuit will have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 15
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FPA's common stock is traded on the NASDAQ Stock Market under the symbol
FPAM. The table below shows the high and low bid prices for FPA's common stock
for each quarter during 1996 and 1997.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter $13.0000 $ 8.6250
2nd Quarter $19.8750 $12.3750
3rd Quarter $26.8750 $12.5000
4th Quarter $29.3750 $16.3750
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter $28.5000 $18.2500
2nd Quarter $24.5000 $14.8750
3rd Quarter $35.1250 $23.5000
4th Quarter $39.8125 $16.8750
</TABLE>
At March 17, 1998, there were approximately 587 holders of record of
common stock. FPA declared no cash dividends during 1996 or 1997 and has no
plans to declare cash dividends in the foreseeable future.
UNREGISTERED SALES OF SECURITIES
The following table indicates all unregistered sales of the Company's
common stock during the last three years:
<TABLE>
<CAPTION>
TRANSACTION PURPOSE AND AMOUNT SOLD DATE
- ----------- ----------------------- ----
<S> <C> <C>
$2.5 million Convertible Promissory Note Note converted to 243,191 shares of FPA common 1996
stock
Emergency Medical Care Incorporated Merger; 372,959 shares of FPA common stock September 2, 1997
Axminster Medical Group, Inc. Merger; 482,372 shares of FPA common stock September 30, 1997
Cornerstone Physicians Corporation Merger; 1,416,804 shares of FPA common stock November 26, 1997
Avanti Corporate Health Systems, Inc. Stock Acquisition; 1,402,123 shares of FPA common January 1, 1998
stock
Physicians Quality Care, Ltd. and Associates in Stock Acquisition; 299,165 shares of FPA common January 1, 1998
Managed Care, Ltd. stock
Emergency Treatment Associates, Inc. Merger; 142,288 shares of FPA common stock February 17, 1998
J. T. M. S. O. , Inc. Merger; 11,432 shares of FPA common stock February 2, 1998
</TABLE>
None of these sales were underwritten, and all of the shares issued were
taken for investment by the entity or individual to whom they were issued. The
Company believes all of the securities issued were exempt from registration
under Section 4(2) of the Securities Act.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated statement of operations data and balance sheet
data have been derived from the audited consolidated financial statements of the
Company. The selected financial data below should be read in conjunction with
the consolidated financial statements and notes thereto, included elsewhere in
this report. All amounts in the following table have been restated to give
effect to the poolings of interests of FPA with Sterling, AHI, HealthCap,
Axminster, Health Partners and Cornerstone.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
(in thousands, except share and per share data)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Operating revenue $ 59,766 $ 136,679 $ 340,822 $ 678,462 $ 1,166,340
Medical services expense 41,791 92,544 235,889 519,409 841,936
------------ ------------ ------------ ------------ ------------
17,975 44,135 104,933 159,053 324,404
General and administrative expense 16,063 46,174 111,031 188,975 268,523
Merger, restructuring and other unusual charges -- -- 1,590 52,572 55,005
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 1,912 (2,039) (7,688) (82,494) 876
Other income (expense), net 125 385 (1,126) (3,847) (13,667)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 2,037 (1,654) (8,814) (86,341) (12,791)
Minority interests -- 367 683 866 122
Income tax (expense) benefit (85) (1,709) (1,692) (1,276) 891
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,952 $ (2,996) $ (9,823) $ (86,751) $ (11,778)
============ ============ ============ ============ ============
PER SHARE DATA - BASIC AND DILUTIVE:
Net income (loss) per share $ 0.18 $ (0.20) $ (0.43) $ (2.66) $ (0.29)
Weighted average shares outstanding 10,887,401 14,625,625 22,817,097 32,639,412 40,402,267
CONSOLIDATED BALANCE SHEET DATA:
Cash and marketable securities $ 7,621 $ 19,726 $ 50,695 $ 69,486 $ 16,143
Working capital surplus (deficit) 3,063 22,585 40,636 (41,219) 7,752
Total assets 17,930 88,910 265,761 638,822 831,159
Long-term liabilities 371 13,009 28,640 199,701 373,724
Stockholders' equity 2,862 41,026 154,390 160,287 182,273
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company derives substantially all of its operating revenue from (i)
the payments made by Payors to the Professional Corporations and certain of the
Company's subsidiaries for managed care medical services, (ii) fee-for-service
revenues for the performance of medical services, (iii) fee-for-service revenues
from emergency department medical services, and (iv) medical management services
revenue.
MANAGED CARE BUSINESS
The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
covered primary and specialty medical care ("professional capitation"
contracts). Under global capitation contracts, the Company receives a fixed
monthly amount per enrollee for which the Company is financially responsible to
provide the enrollee with necessary covered inpatient and outpatient care. Under
professional capitation contracts, the Company receives a fixed monthly amount
per enrollee for which the Company is financially responsible to provide the
enrollee with all necessary covered primary and specialty medical care.
Additionally, under professional capitation contracts, the Company is generally
a party to shared risk arrangements with Payors which generally reward the
Company for the efficient utilization of hospital inpatient services. Under
these shared risk arrangements, the Company shares any surplus or, in some
cases, deficit, of amounts pre-established by the Payor in relation to inpatient
expense. Revenue under global capitation contracts represented 12.1%, 28.9% and
38.8% for 1995, 1996 and 1997, respectively, of managed care business operating
revenue. Revenue under professional capitation contracts represented 76.6%,
57.7% and 52.4% for 1995, 1996 and 1997, respectively, of managed care business
operating revenue.
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<PAGE> 17
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations and its subsidiaries.
These revenues are presented net of contractual deductions and represented 3.3%,
5.6% and 4.5% for 1995, 1996 and 1997, respectively, of managed care business
operating revenue.
Management services revenue represented 7.1%, 5.4% and 2.9% of managed
care business operating revenues in 1995, 1996 and 1997, respectively.
Management services revenue is generated from several different types of
arrangements, including (i) contracted sharing of revenue and profits and (ii)
cost plus either a percentage of revenue or a fixed dollar amount or revenue
minus expenses. The ranges and types of management services fees payable are (i)
5% to 14% of revenue as defined in the applicable administrative services
agreements; (ii) cost plus $.4 million to cost plus $1 million or cost plus 8%
of revenue as defined in the administrative services agreements, or (iii)
revenues minus expenses.
Through the Professional Corporations and certain of its subsidiaries, the
Company contracts with various health care providers to provide primary care and
specialty medical services to covered enrollees. Primary care physicians are
compensated on either a salary or capitation basis. Specialty care physician
services are paid for on either a fee-for-service or capitation basis.
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of
December 31, 1997, the Company provided management services on a contract basis
to 143 emergency departments, one radiology department, three correctional
health care facilities and three urgent care clinics located in 24 states. As of
December 31, 1997, the Company contracted with approximately 1,700 physicians
who provided certain medical services to approximately 1.6 million patients.
The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by such professionals. Fee-for-service contracts may,
depending on the hospital's patient volume and payor mix, involve the payment of
a subsidy to the Company by the hospital. In 1995, 1996 and 1997, 84.4%, 83.7%
and 80.0%, respectively, of the Company's emergency department business
operating revenue was earned on a fee-for-service basis. The Company emphasizes
fee-for-service reimbursement arrangements in its marketing activities.
Medical services expense for the emergency department business consists
primarily of payments made to independent contractor and employee physicians
("Physician Costs") and, to a lesser extent, the costs of medical supplies,
malpractice insurance and laboratory fees. In 1995, 1996 and 1997, Physician
Costs accounted for 91.8%, 92.1% and 95.7%, respectively, of emergency
department medical services expense.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following tables set forth for 1995, 1996 and 1997 selected financial
data and selected financial data expressed as a percentage of operating revenue
(in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996
-------------------------------------------------------------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 225,162 $ 115,660 $ 340,822 $ 541,701 $ 136,761 $ 678,462
Medical services
expense 159,903 75,986 235,889 425,159 94,250 519,409
General and
administrative
expense 74,560 29,313 103,873 145,911 27,656 173,567
Depreciation and
amortization 4,889 2,269 7,158 12,204 3,204 15,408
Merger, restructuring
and other unusual
charges -- 1,590 1,590 34,767 17,805 52,572
----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
from operations (14,190) 6,502 (7,688) (76,340) (6,154) (82,494)
Other (income)
expense (632) 1,758 1,126 2,993 854 3,847
----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before minority
interests and income
taxes (13,558) 4,744 (8,814) (79,333) (7,008) (86,341)
Minority interests'
share in net loss 683 -- 683 866 -- 866
Income tax benefit
(expense) 220 (1,912) (1,692) (1,276) -- (1,276)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (12,655) $ 2,832 $ (9,823) $ (79,743) $ (7,008) $ (86,751)
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
------------------------------------------
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenue $ 1,009,314 $ 157,026 $ 1,166,340
Medical services
expense 724,232 117,704 841,936
General and
administrative
expense 216,488 24,246 240,734
Depreciation and
amortization 24,023 3,766 27,789
Merger, restructuring
and other unusual
charges 55,005 -- 55,005
----------- ----------- -----------
Income (loss)
from operations (10,434) 11,310 876
Other (income)
expense 13,587 80 13,667
----------- ----------- -----------
Income (loss)
before minority
interests and income
taxes (24,021) 11,230 (12,791)
Minority interests'
share in net loss 122 -- 122
Income tax benefit
(expense) 891 -- 891
----------- ----------- -----------
Net income (loss) $ (23,008) $ 11,230 $ (11,778)
=========== =========== ===========
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996
----------------------------------------------------------------------------------------------
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 71.0% 65.7% 69.2% 78.5% 68.9% 76.6%
General and
administrative
expense 33.1% 25.3% 30.5% 26.9% 20.3% 25.6%
Depreciation and
amortization 2.2% 2.0% 2.1% 2.3% 2.3% 2.3%
Merger, restructuring
and other unusual
charges 0.0% 1.4% 0.5% 6.4% 13.0% 7.7%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations (6.3)% 5.6% (2.3)% (14.1)% (4.5)% (12.2)%
Other (income)
expense (0.3)% 1.5% 0.3% 0.6% 0.6% 0.6%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before minority
interests and income
taxes (6.0)% 4.1% (2.6)% (14.7)% (5.1)% (12.8)%
Minority interests'
share in net loss 0.3% 0.0% 0.2% 0.2% 0.0% 0.2%
Income tax benefit
(expense) 0.1% (1.7)% (0.5)% (0.2)% 0.0% (0.2)%
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (5.6)% 2.4% (2.9)% (14.7)% (5.1)% (12.8)%
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
-----------------------------------------------
MANAGED EMERGENCY
CARE DEPARTMENT
BUSINESS BUSINESS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Medical services
expense 71.8% 75.0% 72.2%
General and
administrative
expense 21.4% 15.4% 20.6%
Depreciation and
amortization 2.4% 2.4% 2.4%
Merger, restructuring
and other unusual
charges 5.4% 0.0% 4.7%
---------- ---------- ----------
Income (loss) from
operations (1.0)% 7.2% 0.1%
Other (income)
expense 1.3% 0.0% 1.2%
---------- ---------- ----------
Income (loss)
before minority
interests and income
taxes (2.3)% 7.2% (1.1)%
Minority interests'
share in net loss 0.0% 0.0% 0.0%
Income tax benefit
expense 0.1% 0.0% 0.1%
---------- ---------- ----------
Net income (loss) (2.2)% 7.2% (1.0)%
========== ========== ==========
</TABLE>
19
<PAGE> 20
MANAGED CARE BUSINESS
YEARS ENDED DECEMBER 31, 1995, 1996 and 1997
OPERATING REVENUE: The Company's managed care business operating revenue
increased to $1.01 billion in 1997 from $541.7 million in 1996 and $225.2
million in 1995. The increase in revenue is attributable to increases in
enrollment to 1,193,800, resulting from acquisitions, internal growth,
enrollment from new Payor contracts and the transition of existing Payor
contracts to capitated arrangements from fee-for-service. In 1997, managed care
business operations generated net fee-for-service revenue of $45.8 million
compared to 1996 net fee-for-service revenue of $30.6 million and $7.4 million
in 1995. The growth in fee-for-service revenue is attributable to the increasing
number of medical facilities managed by the Company, as well as the Company's
recent acquisitions, as these companies have historically had proportionally
greater fee-for-service revenue than the Company. This trend is not expected to
continue as the Company negotiates contracts with existing Payors to move from
fee-for-service to capitation arrangements. Management services revenue for 1997
was $29.2 million or 2.9% of managed care business operating revenue compared to
$29.1 million or 5.4% of such operating revenue in 1996 and $16.0 million or
7.1% of such operating revenue in 1995. The decrease, in recent years, in
management services revenue as a percentage of managed care business operating
revenue can be attributed to the increase in total managed care business
operating revenue combined with the stability of management services revenue.
MEDICAL SERVICES EXPENSE: Medical services expense for 1997 was $724.2
million or 71.8% of managed care business operating revenue as compared to
$425.2 million or 78.5% of such operating revenue in 1996 and $160.0 million or
71.0% of such operating revenue in 1995. The decrease in medical services
expense as a percentage of such operating revenue from 1996 to 1997 resulted
from referrals to physicians who have subcapitated contracts and a continued
decline in hospital utilization. The increase in medical services expense as a
percentage of such operating revenue from 1995 to 1996 resulted primarily from
significantly increased membership under global capitation contracts which
initially experience a higher medical loss ratio than professional capitation
contracts.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization for 1997 was $240.5 million or 23.8% of
managed care business operating revenue as compared to $158.1 million or 29.2%
of such operating revenue in 1996 and $79.5 million or 35.3% of such operating
revenue in 1995. The percentage decrease resulted from integration of acquired
companies, achievement of synergies and an increase in efficiencies.
MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES: During 1997, the managed
care business of the Company incurred approximately $55.0 million in merger,
restructuring and other unusual charges. This amount relates to the AHI,
HealthCap, Axminster and Health Partners mergers, and is comprised of investment
bankers' fees, attorneys' fees, accountants' fees, wind-down costs and severance
and compensation paid as part of the mergers. As these mergers were accounted
for as poolings of interests, generally accepted accounting principles require
that transaction costs be expensed in the period in which the merger was
consummated.
During 1996, the managed care business of the Company incurred
approximately $34.8 million in merger, restructuring and other unusual charges.
Approximately $21.1 million resulted from write-offs of goodwill and other
assets related to unprofitable operations in Arizona and California.
Approximately $11.7 million related to costs of legal fees, accounting fees,
investment bankers' fees and other costs associated with the Sterling merger.
Approximately $2.0 million arose from the costs of severance payments, lease
terminations and other costs associated with consolidating medical centers and
adjusting staffing in Florida, Arizona and as a result of the Sterling merger.
NET INCOME (LOSS) FROM OPERATIONS: In 1997, the managed care business of
the Company generated a loss from operations of $23.0 million including merger,
restructuring and other unusual charges. Excluding such merger, restructuring
and other unusual charges, income from operations was $32.0 million in 1997 as
compared to a loss from operations of $45.0 million in 1996 and $12.7 million in
1995. The increase in managed care business income from operations in 1997
results primarily from the increase in average enrollment, growth through
acquisitions and reduction in operating expenses through increased efficiencies.
The increase in the managed care business loss from operation (excluding merger,
restructuring and other unusual charges) from 1995 to 1996 can be attributed to
the increased
20
<PAGE> 21
membership under global capitation contracts which initially experience a higher
medical loss ratio, as well as a decrease in general and administrative expense
which is a result of integration of acquired companies, achievement of synergies
and increased efficiencies.
EMERGENCY DEPARTMENT BUSINESS
YEARS ENDED DECEMBER 31, 1995, 1996 and 1997
OPERATING REVENUE: Emergency department business operating revenue
consists of patient revenue, net of contractual deductions, plus other revenue,
which consists principally of hospital subsidy payments, flat-rate hospital
contract revenue and non-patient generated revenues. Emergency department
business operating revenue increased to $157.0 million in 1997 as compared to
$136.8 million in 1996 and $115.7 million in 1995. On a percentage basis, the
emergency department business operating revenue grew 18.2% in 1996 and 14.8% in
1997. The increases were primarily attributable to the increases in the number
of the Company's hospital emergency department contracts from 89 in 1995 and 104
in 1996 to 143 in 1997.
MEDICAL SERVICES EXPENSE: Medical services expense increased to $117.7
million in 1997 as compared to $94.2 million in 1996 and $76.0 million in 1995.
The increase in medical services expense is primarily due to the increase in the
number of health care professionals under contract, resulting from the increase
in the number of the Company's emergency department contracts, as well as
negotiated increases in fees paid to certain health care professionals. Medical
services expense as a percentage of emergency department business operating
revenue was 75.0% in 1997, 68.9% in 1996 and 65.7% in 1995.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization was $28.0 million in 1997, $30.9 million
in 1996 and $31.6 million in 1995. As a percentage of emergency department
business operating revenue, general and administrative expense was 17.8% in
1997, 22.6% in 1996 and 27.3% in 1995. The decrease in general and
administrative expense is primarily attributable to internal growth without
added administrative infrastructure and reductions in expense as a result of the
Sterling Merger.
MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES: During 1996, the
emergency department business incurred approximately $17.8 million in merger,
restructuring and other unusual charges. Approximately $12.4 million resulted
from write-offs of goodwill and other assets related to terminated emergency
department contracts. Approximately $5.1 million related to costs of legal fees,
accounting fees, investment bankers' fees and other costs associated with the
Sterling merger. Approximately $.3 million related to restructuring charges
which arose from the costs of severance payments, lease terminations and other
costs associated with the Sterling merger.
NET INCOME (LOSS) FROM OPERATIONS: In 1997, the emergency department
business generated income from operations of $11.2 million. Excluding merger,
restructuring and other unusual charges, the emergency department business
income from operations would have been $10.8 million in 1996 and $4.4 million in
1995. The increase in emergency department business income from operations is
attributable to the increase in emergency department contracts, internal growth
and reduction in operating expenses through increased efficiencies.
21
<PAGE> 22
QUARTERLY RESULTS
The following table presents financial information for the eight quarters
ended December 31, 1997. In the opinion of management, this information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this report and all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the amounts
presented below to present fairly the quarterly results when read in conjunction
with the audited consolidated financial statements of the Company and notes
thereto. The Company's quarterly results have been subject to fluctuation in the
past and as a result, the operating results for any quarter are not necessarily
indicative of results for any future period. All amounts in the following table
are in thousands and have been restated to give effect to the poolings of
interests of FPA with Sterling, AHI, HealthCap, Axminster, Health Partners and
Cornerstone for all periods presented.
22
<PAGE> 23
<TABLE>
<CAPTION>
QUARTERS ENDED
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 130,508 $ 147,458 $ 184,291 $ 216,205 $ 270,067 $ 287,350
Medical services
expense 95,249 110,953 141,793 171,414 194,453 206,947
General and
administrative
expense 33,686 37,996 42,878 59,007 61,350 59,869
Depreciation and
amortization 2,931 3,247 3,911 5,319 7,031 7,755
Merger, restructuring
and other unusual
charges -- -- 1,707 50,865 36,834 1,171
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from
operations (1,358) (4,738) (5,998) (70,400) (29,601) 11,608
Other (income)
expense 86 517 673 2,571 3,144 847
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before
minority interest
and income taxes (1,444) (5,255) (6,671) (72,971) (32,745) 10,761
Minority interests'
share of net loss 220 132 164 350 102 67
Income tax benefit
(expense) (1,187) (2,044) (1,997) 3,952 8,110 (4,772)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ (2,411) $ (7,167) $ (8,504) $ (68,669) $ (24,533) $ 6,056
============ ============ ============ ============ ============ ============
Net income (loss) per
share -- basic
and dilutive $ (.07) $ (.22) $ (.25) $ (1.93) $ (.63) $ .15
============ ============ ============ ============ ============ ============
Weighted average shares
outstanding -- basic
and dilutive 32,569,234 32,211,372 33,661,579 35,542,571 39,155,605 40,867,538
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
- -----------------------------------------------------------
(in thousands, except share
and per share data)
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
Operating revenue $ 285,960 $ 322,963
Medical services
expense 210,588 229,948
General and
administrative
expense 59,400 60,115
Depreciation and
amortization 5,499 7,504
Merger, restructuring
and other unusual
charges -- 17,000
------------ ------------
Income (loss) from
operations 10,473 8,396
Other (income)
expense 5,037 4,639
------------ ------------
Income (loss) before
minority interest
and income taxes 5,436 3,757
Minority interests'
share of net loss (47) --
Income tax benefit
(expense) (5,926) 3,479
------------ ------------
Net income (loss) $ (537) $ 7,236
============ ============
Net income (loss) per
share -- basic
and dilutive $ (.01) $ .17
============ ============
Weighted average shares
outstanding -- basic
and dilutive 39,981,522 43,594,548
</TABLE>
23
<PAGE> 24
Operating and medical services expense during the first and third quarters
have been and continue to be affected by movements of members in Payor plans
from one plan to another during periods of open enrollment for Payors.
Retroactive capitation rate increases generally take effect during the second
quarter, while medical services expense increases tend to occur ratably
throughout the year. Quarterly results may be affected by final settlements of
shared risk distributions which generally occur between six and eighteen months
following the respective shared risk year end. Final settlements may differ from
estimated amounts. As the Company adds new Payors into the FPA Network, the
timing of these adjustments may vary and, consequently, quarterly results may be
affected in the future, especially due to the start-up of operations in new
regions where there is no operating history. Similarly, if medical services
expense varies from amounts previously accrued for claims incurred but not
reported ("IBNR"), quarterly operating results may fluctuate. A portion of the
Company's expansion strategy includes the acquisition of individual and group
physician practices by the FPA Network, and any such acquisition may materially
affect quarterly operating results, causing quarterly fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish infrastructure in new regions as well
as in acquired practices. Capitation arrangements positively impact cash flow
because FPA generally receives capitation revenue prior to paying costs
associated with services provided under those agreements. However, shared risk
arrangements negatively impact cash flow because settlements in connection with
these arrangements are typically not collected until significantly after the end
of the period in which they were accrued. Fee-for-service revenues also
negatively impact cash flow because payment for services rendered generally lags
by 90 to 120 days.
At December 31, 1997, the Company had cash, cash equivalents and
marketable securities of $16.1 million and working capital of $7.8 million
compared to cash, cash equivalents and marketable securities of $69.5 million
and working capital deficit (current liabilities in excess of current assets) of
$41.2 million at December 31, 1996.
During 1997, non-operating sources of cash include net borrowings pursuant
to the Credit Agreement (as described below) of approximately $227.6 million,
proceeds of approximately $5.5 million from the exercise by the initial
purchasers of the overallotment option granted to them in connection with the
1996 offering of convertible subordinated debentures as described below and
proceeds from the exercise of stock options and warrants of approximately as
$8.2 million. Non-operating uses of cash include the purchase of property and
equipment for approximately $17.5 million, payment on long-term debt of
approximately $186.0 million and approximately $15.9 million of cash payments in
connection with acquisitions.
At December 31, 1997, approximately 55% of the Company's current
liabilities consist of amounts accrued as payable to specialty care physicians,
ancillary providers, hospital and other providers of medical services. These
accrued liabilities include claims received by the Company which have not yet
been paid as well as an estimate of costs for IBNR claims. These amounts are not
due and payable until after the provider has presented a claim and are typically
paid within 45 business days of receipt of such claims. The increase in claims
payable, including IBNR, from approximately $110.5 million at December 1996 to
$150.3 million at December 31, 1997 resulted primarily from significantly
increased membership and membership under global capitation contracts (which
includes hospital services).
During 1997, the Company 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
"Credit Agreement"). A maximum of $155 million and $30 million of the proceeds
of the Line of Credit can be used to refinance debt and to secure the Company's
capitation deposits, respectively. The remaining proceeds of the Line of Credit
can be used for working capital. The proceeds of the Term Loan may be used to
refinance debt. The borrowings bear interest based on the prime rate plus 50-75
basis points or the Interbank Eurodollar rate plus 150-175 basis points, as
defined in the Credit Agreement. The Credit Agreement contains customary terms,
events of default and covenants (including financial covenants) which, among
other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. The obligations of the
Company under the Credit Agreement are collateralized by the assets of the
Company and the capital stock and assets of its subsidiaries and the
Professional Corporations. The Credit Agreement was further amended effective
January 8, 1998, to increase the Line of Credit to
24
<PAGE> 25
$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.
During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement (the "1996 Credit Agreement") with four financial
institutions. Permitted Borrowings, as defined in the Credit Agreement,
generally include acquisitions and capital expenditures. Borrowings under this
agreement bear interest at either LIBOR plus 2.50%, 2.75% or 3.0%, or prime rate
plus 1.0%, 1.25% or 1.50%, as defined in the agreement. At December 31, 1996,
the Company had borrowed the maximum of $55.0 million under the Credit
Agreement. At June 30, 1997, the outstanding obligations under this agreement
were paid in full in conjunction with the execution of the Credit Agreement
described above.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures, which resulted in net proceeds to the Company of
approximately $73.0 million. The notes bear interest at 6.50%, payable
semiannually, and are convertible into shares of the Company's stock at $25.95
per share. The debentures are redeemable by the Company after December 20, 1999.
Upon the occurrence of a Repurchase Event, as defined in the debentures, each
holder has the right to require repayment of the debentures at 100% of the
principal amount plus accrued interest. In January 1997, the underwriters
exercised their overallotment option and purchased an additional $5.5 million of
the debentures with identical terms.
The increase in long-term debt from $263.5 million at December 31, 1996 to
$334.0 million at December 31, 1997 resulted primarily from approximately $227.6
million in borrowings net of repayments under the Credit Agreement, $5.5 million
in subordinated debentures overallotment issuance and issuance of long-term
debt in connection with acquisitions net of repayments of acquisition debt of
approximately $172.4 million. At December 31, 1997, long-term debt exceeded
stockholders' equity.
The Company believes that its cash on hand and anticipated cash flows from
its operations will be sufficient to meet the Company's operating capital needs
into the second quarter of 1998. The Company intends to seek financing to
support planned expansion through financing alternatives including private and
public offerings of debt and equity-related securities. There can be no
assurance that the Company will be able to obtain such financing or that it will
be able to issue debt or equity-related securities on terms satisfactory to it.
To the extent that additional financing is not available, the Company will delay
certain potential acquisitions or certain geographic expansion or may seek
alternate sources of financing.
RISKS ASSOCIATED WITH YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's information systems to
process data having dates on or after January 1, 2000 (the "Year 2000" issues).
Processing errors due to software failures arising from calculations using the
Year 2000 date are a recognized risk. The Company is addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business transactions to assess whether they are Year 2000 compliant.
The Company does not believe that it will incur a material financial impact from
the risk, or from assessing the risk, arising from the Year 2000 issues.
However, there can be no guarantee that the Company's initial assessment of the
financial impact of this risk will be accurate; actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences, include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
--------- ---------
<S> <C> <C>
(in thousands, except
share data)
ASSETS
Current assets:
Cash and cash equivalents $ 29,486 $ 16,143
Marketable securities 40,000 --
Accounts receivable -- net of allowance for uncollectible accounts of
$63,739 and $99,367 at December 31, 1996 and 1997, respectively 107,463 211,736
Accounts receivable - other 31,006 41,608
Notes receivable from affiliate 1,328 --
Income taxes receivable -- 5,320
Prepaid expenses 8,528 7,593
Capitation deposit 15,410 --
Deferred income tax asset 3,479 514
--------- ---------
Total current assets 236,700 282,914
Property and equipment - net 57,209 59,933
Restricted cash and deposits 489 500
Goodwill and intangibles -- net of accumulated amortization of $10,397 and $30,018 at
December 31, 1996 and 1997, respectively 324,006 464,264
Deferred income tax asset 3,190 9,470
Other assets 17,228 14,078
--------- ---------
Total $ 638,822 $ 831,159
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 70,857 $ 76,254
Claims payable, including incurred but not reported claims 110,523 150,256
Accrued payroll and related liabilities 4,534 11,942
Income taxes payable 2,294 --
Other current liabilities 15,350 24,856
Accrued liability for professional liability claims, current portion 1,298 700
Long-term debt, current portion 73,063 11,154
--------- ---------
Total current liabilities 277,919 275,162
Long-term debt, net of current portion 190,454 322,873
Accrued liability for professional liability claims, net of current portion 4,217 2,800
Other long-term liabilities 5,030 48,051
--------- ---------
Total liabilities 477,620 648,886
Minority interests 915 --
Stockholders' equity:
Preferred stock, $.001 par value per share, 2,000,000 shares authorized,
no shares outstanding -- --
Common stock, $.002 par value, 98,000,000 shares authorized, 39,025,000
and 42,801,000 shares issued and outstanding at December 31, 1996
and 1997, respectively 78 86
Additional paid-in capital 265,851 299,600
Stock payable 535 573
Due from stockholder (450) (427)
Accumulated deficit (105,727) (117,559)
--------- ---------
Total stockholders' equity 160,287 182,273
--------- ---------
Total $ 638,822 $ 831,159
========= =========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(in thousands, except share and per share data)
Managed care revenue $ 199,780 $ 469,079 $ 919,974
Fee-for-service revenue, net of contractual deductions 105,060 144,990 171,424
Management services revenue 16,022 29,103 29,151
Other operating revenue 19,960 35,290 45,791
------------ ------------ ------------
Operating revenue 340,822 678,462 1,166,340
Medical services expense 235,889 519,409 841,936
------------ ------------ ------------
104,933 159,053 324,404
General and administrative expense 103,873 173,567 240,734
Depreciation and amortization expense 7,158 15,408 27,789
Merger, restructuring and other unusual charges (Note 8) 1,590 52,572 55,005
------------ ------------ ------------
Income (loss) from operations (7,688) (82,494) 876
Other income (expense):
Interest and other income 1,698 2,876 7,744
Interest expense (2,824) (6,723) (21,411)
------------ ------------ ------------
Total other expense (1,126) (3,847) (13,667)
------------ ------------ ------------
Loss before minority interests and income taxes (8,814) (86,341) (12,791)
Minority interests' share in net loss 683 866 122
Income tax benefit (expense) (1,692) (1,276) 891
============ ============ ============
Net loss $ (9,823) $ (86,751) $ (11,778)
============ ============ ============
Net loss per share - basic and dilutive $ (.43) $ (2.66) $ (.29)
============ ============ ============
Weighted average shares outstanding - basic and dilutive 22,817,097 32,639,412 40,402,267
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)
<TABLE>
<CAPTION>
(STOCK
SUBSCRIPTIONS
ADDITIONAL RECEIVABLE)/
COMMON PAID-IN- STOCK DUE TO (FROM)
STOCK CAPITAL PAYABLE STOCKHOLDER
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 $ 47 $ 47,447 $ (14) $ (26)
Common stock issued through
public offering for cash, net of
costs 11 94,929 -- --
Common stock issued in exchange for
cash in private placement, net of costs 4 17,297 -- --
Common stock issued in
connection with acquisitions -- 13,890 -- --
Common stock payable issued in
connection with acquisitions -- -- 567 --
Net loss for the year -- -- -- --
Other (1) 622 14 (450)
------------ ------------ ------------ ------------
Balances, December 31, 1995 61 174,185 567 (476)
Stock options and warrants
exercised 1 10,306 -- --
Common stock and stock payable issued
in connection with acquisitions 3 52,200 42 --
Common stock issued in exchange for
cash in private placement, net of costs 4 25,842 -- --
Common stock issued in connection
with conversion of debt 1 3,499 -- --
Net loss for the year -- -- -- --
Other 8 (181) (74) 26
------------ ------------ ------------ ------------
Balances, December 31, 1996 78 265,851 535 (450)
Stock options and warrants
exercised 2 8,175 -- --
Common stock and stock payable issued
in connection with acquisitions 4 18,906 461 --
Common stock issued in exchange for
cash in private placement, net of costs 1 2,635 -- --
Tax benefit from exercise of options -- 3,588 -- --
Net loss for the year -- -- -- --
Other 1 445 (423) 23
------------ ------------ ------------ ------------
Balances, December 31, 1997 $ 86 $ 299,600 $ 573 $ (427)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEFERRED
EARNINGS/ COMPENSATION
(DEFICIT) STOCK OPTIONS TOTAL
------------ ------------- ------------
<S> <C> <C> <C>
Balances, January 1, 1995 $ (9,722) $ (447) $ 37,285
Common stock issued through
public offering for cash, net of
costs -- -- 94,940
Common stock issued in exchange for
cash in private placement, net of costs -- -- 17,301
Common stock issued in
connection with acquisitions -- -- 13,890
Common stock payable issued in
connection with acquisitions -- -- 567
Net loss for the year (9,823) -- (9,823)
Other (58) 103 230
------------ ------------ ------------
Balances, December 31, 1995 (19,603) (344) 154,390
Stock options and warrants
exercised -- -- 10,307
Common stock and stock payable issued
in connection with acquisitions -- -- 52,245
Common stock issued in exchange for
cash in private placement, net of costs -- -- 25,846
Common stock issued in connection
with conversion of debt -- -- 3,500
Net loss for the year (86,751) -- (86,751)
Other 627 344 750
------------ ------------ ------------
Balances, December 31, 1996 (105,727) -- 160,287
Stock options and warrants
exercised -- -- 8,177
Common stock and stock payable issued
in connection with acquisitions -- -- 19,371
Common stock issued in exchange for
cash in private placement, net of costs -- -- 2,636
Tax benefit from exercise of options -- -- 3,588
Net loss for the year (11,778) -- (11,778)
Other (54) -- (8)
------------ ------------ ------------
Balances, December 31, 1997 $ (117,559) $ -- $ 182,273
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net loss $ (9,823) $ (86,751) $ (11,778)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization expense 7,158 15,408 27,789
Minority interests' share in net loss (683) (866) (122)
Impairment of goodwill 435 34,201 --
Other 994 999 --
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts and notes receivable (23,600) (67,528) (113,542)
Income taxes receivable/payable (1,874) 3,397 (7,615)
Capitation deposit -- (15,410) 15,410
Deferred income taxes (814) (3,395) 273
Accounts payable and accrued expenses 5,160 19,605 (9,609)
Claims payable, including incurred but not reported 3,144 67,983 33,733
claims
Accrued liability for professional liability claims (739) 2,465 (5,253)
Accrued payroll and related liabilities 380 2,581 6,181
Prepaid expenses and other assets (2,472) 153 2,371
Other liabilities 1,106 319 (25,102)
--------- --------- ---------
Total adjustments (11,805) 59,912 (75,486)
--------- --------- ---------
Net cash used by operating activities (21,628) (26,839) (87,264)
Cash flows from investing activities:
Purchase of property and equipment (11,344) (16,472) (17,501)
Payments for intangible assets (1,690) (13,342) --
Net payments (to) from affiliate (677) (801) 1,328
Investment in affiliate (1,995) (3,000) --
Net sale(purchase) of marketable securities 1,851 (31,771) 40,000
Acquisitions, net of cash acquired (44,332) (18,694) (15,949)
Other (1,732) 2,299 7
--------- --------- ---------
Net cash provided (used) by investing activities (59,919) (81,781) 7,885
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 112,241 25,903 2,636
Redemption of common stock (18) -- (104)
Net proceeds from issuance of convertible subordinated
notes payable -- 73,125 5,536
Proceeds from exercise of stock options and warrants 156 10,575 8,177
Proceeds from issuance of notes payable 13,515 59,978 8,176
Net borrowings under bank credit facilities 7,815 -- 227,570
Payments on long-term debt (19,754) (73,841) (186,051)
Other 17 (120) 96
--------- --------- ---------
Net cash provided by financing activities 113,972 95,620 66,036
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 32,425 (13,000) (13,343)
Cash and cash equivalents, beginning of year 10,061 42,486 29,486
--------- --------- ---------
Cash and cash equivalents, end of year $ 42,486 $ 29,486 $ 16,143
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,182 $ 4,425 $ 20,675
Cash paid for income taxes 6,197 1,053 3,718
Equipment acquired under capital leases 477 2,130 557
Effects of acquisitions:
Fair value of assets acquired $ 117,684 $ 340,707 $ 149,669
Liabilities assumed (59,462) (269,768) (114,349)
Common stock issued in connection with acquisitions (13,890) (52,245) (19,371)
--------- --------- ---------
Net cash paid for acquisitions $ 44,332 $ 18,694 $ 15,949
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
FPA Medical Management, Inc. ("FPA"), a Delaware corporation incorporated
in 1994, is a national physician practice management company, which, through its
network of primary care physicians, affiliated professional corporations
("Professional Corporations") and subsidiaries, contracts with health
maintenance organizations ("HMOs") and other prepaid health insurance plans
(collectively, "Payors") to provide and manage physician and related health care
services to enrollees who select FPA Network primary care physicians. FPA also
provides contract management and support services to hospital emergency and
radiology departments, correctional health care facilities and rural health
urgent care clinics.
BASIS OF PRESENTATION
The mergers of FPA with each of Sterling Healthcare Group, Inc.
("Sterling"), AHI Healthcare Systems, Inc. ("AHI") , HealthCap, Inc.
("HealthCap"), Axminster Medical Group, Inc. ("Axminster"), Health Partners,
Inc. ("Health Partners") and Cornerstone Physicians Corporation ("Cornerstone")
have been accounted for as poolings of interests and, accordingly, the
consolidated financial statements include the results of FPA, Sterling, AHI,
HealthCap, Axminster, Health Partners and Cornerstone for all periods presented.
Information concerning common stock and per share data has been restated on an
equivalent share basis. The consolidated financial statements present the
financial position and results of operations of FPA and the predecessor
entities, including the accounts of FPA subsidiaries and certain Professional
Corporations (collectively, the "Company").
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as highly liquid financial instruments with
maturities of three months or less when acquired. A substantial portion of the
Company's cash and cash equivalents are deposited in two financial institutions.
The Company monitors financial conditions of each financial institution and does
not believe that the deposits are subject to a significant degree of risk.
MARKETABLE SECURITIES
Marketable securities consist of corporate debt securities and
certificates of deposit. Such securities have been classified as available for
sale in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The estimated fair value of the Company's marketable
securities is based on quoted market prices, which approximate cost, and
therefore no unrealized gains or losses have been recorded in the accompanying
consolidated financial statements. Marketable securities at December 31, 1996
consisted of Eurodollar certificates of deposit.
CAPITATION DEPOSITS
Capitation deposits represent funds on deposit from a significant Payor in
Florida. In accordance with the Payor contract, 60% of the capitation revenue
earned each month was retained by the Payor for payment of claims. An accrual
was included in claims payable, including incurred but not reported claims in
the accompanying consolidated balance sheet for the estimated amount of claims
payable related to this Payor contract. The Company was entitled to all of the
interest earned on this account. The contract required a minimum balance in this
account.
30
<PAGE> 31
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the assets, generally three to seven
years and thirty years for buildings. Leasehold improvements are amortized over
the lesser of the estimated useful term or the remaining life of the related
lease. If management concludes that the carrying value will not be recovered, an
impairment write-down is recorded to reduce the asset to its estimated fair
value. The Company periodically assesses its ability to recover the carrying
value of its long-lived assets.
RESTRICTED CASH AND DEPOSITS
The Company records as restricted cash funds escrowed for payment of
claims, for future acquisitions, and other funds contractually required to be
segregated from the Company's operating cash.
GOODWILL AND INTANGIBLE ASSETS
The Company has classified as goodwill the excess of the purchase price
over the fair value of the net assets of entities acquired. Intangible assets
consist primarily of value assigned to managed care contracts and noncompete
agreements recorded in connection with certain acquisitions. Goodwill and
intangibles are amortized on a straight-line basis over the estimated periods of
future benefit of 5 to 40 years. At each balance sheet date, the Company reviews
the carrying value of the goodwill and intangibles to determine if facts and
circumstances suggest that they may be impaired or that the amortization period
may need to be changed. The Company considers external factors, as well as
internal factors, relating to each acquired business, including hospital and
physician contract changes, local market developments, changes in third party
payments, national health care trends, and other publicly available information.
If these external and internal factors indicate that the goodwill will not be
recoverable, as determined based upon undiscounted cash flows before interest
charges of the business acquired over the remaining amortization period, the
carrying value of the goodwill or intangibles will be reduced. The Company does
not believe there currently are any indicators that would require an adjustment
to the carrying value of the goodwill or intangibles or their remaining useful
lives.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Fee-for-service revenue is reported on the accrual basis, net of estimated
third-party contractual deductions. Further adjustments are recorded to reflect
amounts estimated to be uncollectible based upon individual contract experience.
The allowance considered necessary to cover contractual deductions and
uncollectible accounts is based on an analysis of current and past due accounts,
collection experience in relation to amounts billed and other relevant
information. Accounts receivable represents amounts due from third-party payors
including Medicare and Medicaid, patients and others for services rendered.
Accounts receivable - other represents amounts due from third party payors
related to claims reimbursements, management services receivables, subsidy
receivables and amounts advanced to non-affiliated professional corporations.
For emergency department receivables, the concentration of credit risk
relating to accounts and subsidy receivables is limited by the number and
geographic dispersion of hospital emergency departments managed by the Company,
as well as by the large number of patients and Payors, including various
governmental agencies, in the states in which the Company operates.
In 1995, 1996 and 1997, revenues from governmental agencies made up
approximately 31.7%, 39.0% and 36.9%, respectively, of operating revenue.
MANAGED CARE BUSINESS
The Company currently manages the provision of prepaid managed health care
services for networks of primary care physicians in numerous states. The FPA
Network consists of FPA, its subsidiaries, the Professional Corporations and
various independent practitioners.
31
<PAGE> 32
The Professional Corporations and certain subsidiaries contract with
Payors to provide for the delivery of health care services on a capitation basis
(i.e., a fixed payment per enrollee per month). Through administrative services
agreements, the Professional Corporations assign payments from Payors to the
Company in return for management services, specialty medical care claims
administration and payment, and other services.
FPA has a controlling financial interest in the Professional Corporations
(except as described below with respect to certain Health Partners affiliated
professional corporations and independent practice associations ("IPAs")) for
all periods presented, other than by means of owning the majority of the voting
stock of the Professional Corporations. FPA and its subsidiaries are unable to
own a majority interest in the Professional Corporations in states which
prohibit the corporate practice of medicine. The Professional Corporations have
as shareholders and directors certain physicians who are employees of FPA or one
of its subsidiaries. Each shareholder/director has entered into a succession
agreement which requires such shareholder/director to sell to a designee of FPA
such shareholder/director's shares of stock for a nominal amount if such
shareholder/director is terminated from employment with FPA. This ensures
unilateral and perpetual control over the Professional Corporations by FPA. Due
to a parent-subsidiary relationship under generally accepted accounting
principles, FPA has consolidated the financial statements of the Professional
Corporations (except as described below). FPA believes that consolidation of the
financial statements of these Professional Corporations is necessary to present
fairly the financial position and results of operations of the Company.
All significant inter-entity transactions have been eliminated in consolidation.
As part of the Health Partners merger, the Company acquired certain
affiliated medical corporations and independent practice associations in which
it does not have a controlling financial interest. Accordingly, the Company
recognizes only the net revenue of such entities in which it does not exercise
control as management services revenue in the consolidated financial statements.
Capitation payments from Payors are paid monthly and are recognized as
revenue during the period in which enrollees are entitled to receive services.
Contracts with Payors have terms of one to 30 years, with automatic renewal
periods and are generally terminable with prior notice (generally between 30 and
180 days).
The Company has two types of managed care Payor contracts: contracts for
both inpatient and outpatient services ("global capitation" contracts) and those
limited to covered primary and specialty medical care ("professional capitation"
contracts). Under global capitation contracts, which accounted for approximately
12.1%, 28.9% and 38.8% of managed care business operating revenue in 1995, 1996
and 1997, respectively, the Company receives a fixed monthly amount per enrollee
for which the Company is financially responsible to provide the enrollee with
necessary covered inpatient and outpatient care. Under professional capitation
contracts, the Company receives a fixed monthly amount per enrollee for which
the Company is financially responsible to provide the enrollees with all
necessary covered primary and specialty medical care. Revenue under professional
capitation contracts represented 76.6%, 57.7% and 52.4% of managed care business
operating revenue in 1995, 1996 and 1997, respectively. Additionally, under
professional capitation contracts, the Company is generally a party to shared
risk arrangements with Payors which generally reward the Company for the
efficient utilization of hospital inpatient services. Under these shared risk
arrangements, the Company shares any surplus or, in some cases, deficit of
inpatient cost in relation to amounts pre-established in the Payor contract.
Estimates of shared risk amounts to be received or paid by the Company are
recorded based on estimates of hospital utilization costs. Differences between
actual settlements and amounts estimated as receivable (or payable) relating to
the shared risk arrangements are recorded at the time of settlement, which can
be as much as six to eighteen months following the respective shared risk
contract year end. The Company does not believe that the final settlements of
these shared risk arrangements will differ materially from the estimated amounts
recorded in the financial statements.
Fee-for-service revenue is recorded by the Professional Corporations and
certain subsidiaries for the performance of medical services. Such revenues are
presented net of contractual deductions and represented 3.3%, 5.6% and 4.5% for
1995, 1996 and 1997, respectively, of managed care business operating revenue.
Management services revenue is based on several different types of
arrangements including contracted sharing of revenue and profits, cost plus
either a percentage of revenue or a fixed dollar amount, or revenue minus
expenses. The ranges of management fees receivable are (i) 5% to 14% percent of
revenue as defined in the administrative services agreements; (ii) cost plus $.4
million to cost plus $1 million or cost plus 8% of revenue as defined in the
administrative services agreements, or (iii) revenue minus expenses. Management
services revenue represented 7.1%, 5.4%, and 2.9% of managed care business
operating revenue in 1995, 1996 and 1997, respectively.
32
<PAGE> 33
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily for hospital emergency departments. As
of December 31, 1997, the Company provided management services on a contract
basis to 143 emergency departments, one radiology department, three correctional
health care facilities and three health urgent care clinics located in 24
states. As of December 31, 1997, the Company contracted with approximately 1,700
physicians who provide certain medical services to approximately 1.6 million
patients pursuant to these contracts. Contractual arrangements with hospitals
are primarily fee-for-service whereby hospitals agree to authorize the Company
and its contracted health care professionals to bill and collect for the
professional component of the charges for medical services rendered by the
Company's contracted health care professionals.
Through the emergency department business, the Company generates
fee-for-service revenues, net of contractual deductions, representing 84.4%,
83.7% and 80.0% of the emergency department business operating revenues in 1995,
1996 and 1997, respectively. In addition, the Company has arrangements with
certain hospitals for monthly subsidy amounts which compensate for patient
revenues not achieving specified levels.
MEDICAL SERVICES EXPENSE
Through the Professional Corporations and certain subsidiaries, the
Company contracts with various health care providers to provide medical services
to covered enrollees. Primary care physicians are compensated pursuant to
compensation arrangements with the Professional Corporations on either a salary
or capitation basis. The costs of referrals to specialty care physicians are
paid on either a fee-for-service or capitation basis. Under global capitation
contracts, the Company contracts for inpatient services which are paid on a
fee-for-service or per diem basis.
The Company purchases stop-loss insurance protection which provides
thresholds or "attachment points", generally $100,000 for inpatient services, at
which substantially all financial exposure for inpatient service of an enrollee
beyond such threshold is contractually shifted to the insurer up to a specified
level (generally $1 million), at which point the risk of loss returns to the
Company. In California only, the stop-loss insurance protection threshold is
$125,000 for inpatient services. The Company does not purchase stop-loss
insurance protection for outpatient services.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes," which requires the use of the liability method
for deferred income taxes (see Note 9).
EARNINGS PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted
average number of shares and dilutive share equivalents (options and warrants)
outstanding, giving retroactive effect to all stock splits and dividends.
The Company accounts for earnings per common share in accordance with SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock.
STOCK-BASED COMPENSATION
SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Corporations are permitted, however, to continue to apply Accounting Principles
Board ("APB") Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company has
33
<PAGE> 34
continued to apply APB Opinion No. 25 to its stock-based compensation awards to
employees and has disclosed the required pro forma effect on net loss and net
loss per share (See Note 6).
PROFESSIONAL LIABILITY COVERAGE
The Company maintains professional liability coverage for the Company and
its employee and independent contractor physicians on a claims-made basis. The
Company records an estimate of its liabilities for medical malpractice. Such
liabilities are not discounted.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform to current year classifications.
2. BUSINESS COMBINATIONS
The following acquisitions were accounted for as poolings of interests:
On October 31, 1996, FPA and Sterling consummated a business combination
(the "Sterling Merger"). Pursuant to the Sterling Merger, 8,097,781 shares of
FPA common stock were issued in exchange for all the outstanding shares of
Sterling capital stock.
On March 17, 1997, FPA and AHI consummated a business combination (the
"AHI Merger"). Pursuant to the AHI Merger, 5,797,968 shares of FPA common stock
were issued in exchange for all the outstanding shares of AHI capital stock.
On June 30, 1997, FPA and HealthCap consummated a business combination
(the "HealthCap Merger") . Pursuant to the HealthCap Merger, 1,940,960 shares of
FPA common stock were issued in exchange for all the outstanding shares of
HealthCap capital stock.
On September 30, 1997, FPA and Axminster consummated a business
combination (the "Axminster Merger"). Pursuant to the Axminster Merger, 482,372
shares of FPA common stock were issued in exchange for all the outstanding
shares of Axminster capital stock.
On October 13, 1997, FPA and Health Partners consummated a business
combination (the "Health Partners Merger"). Pursuant to the Health Partners
Merger, 5,227,273 shares of FPA common stock were issued in exchange for all the
outstanding shares of capital stock of Health Partners.
On November 26, 1997, FPA and Cornerstone consummated a business
combination (the "Cornerstone Merger"). Pursuant to the Cornerstone Merger,
1,416,804 shares of FPA common stock were issued in exchange for all the
outstanding shares of capital stock of Cornerstone.
34
<PAGE> 35
In recording business combinations, the Company's prior period financial
statements have been restated to reflect the foregoing poolings of interests.
The results of operations for the separate entities, up to the date of the
respective merger, are presented in the following table:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(in thousands)
OPERATING REVENUE
FPA $ 52,692 $ 339,569 $ 982,296
Sterling 115,660 100,750 --
AHI 114,283 118,786 31,380
HealthCap 10,658 27,226 20,571
Axminster 15,187 16,322 11,413
Health Partners 31,976 74,569 115,831
Cornerstone 366 1,240 4,849
----------- ----------- -----------
$ 340,822 $ 678,462 $ 1,166,340
=========== =========== ===========
NET INCOME (LOSS):
FPA $ 1,003 $ (19,158) $ 10,375
Sterling 2,832 3,442 --
AHI (3,101) (54,268) (4,682)
HealthCap (1,890) (3,814) (3,590)
Axminster 20 (11) 2,407
Health Partners (7,171) (9,471) (11,355)
Cornerstone (1,516) (3,471) (4,933)
----------- ----------- -----------
$ (9,823) $ (86,751) $ (11,778)
=========== =========== ===========
</TABLE>
The following is a summary of material acquisitions consummated during
1996 and 1997 by the Company, its subsidiaries or one of the Professional
Corporations. Such acquisitions were accounted for using the purchase method of
accounting. Goodwill totaling approximately $385 million was recorded (inclusive
of approximately $106 million of goodwill recorded in 1997 subsequent to
independent valuations of assets acquired and liabilities assumed in connection
with acquisitions consummated during 1996). Goodwill is amortized over periods
ranging from 25 to 30 years. In connection with these acquisitions, the Company
issued common stock valued at approximately $87.7 million, notes payable of
$169.8 million, paid cash of $29.7 million and $4.3 million in other
consideration.
VIP, IPA, A Professional Corporation January 1996
Foundation Health IPA January 1996
Century Family Medical Group, IPA January 1996
Century Family Medical Group, Inc. January 1996
Chabot Medical Group IPA January 1996
Physicians First, Inc. June 1996
Family First Pharmacy, Inc. June 1996
FPA Family Pharmacy, Inc. June 1996
Physicians Medical Group of Florida, Inc. June 1996
FHC IPA, Inc. July 1996
Intergroup IPA, P. C. July 1996
Foundation Health Medical Services December 1996
Foundation Health Medical Group, Inc. December 1996
FHMG/TDMC Medical Group, A Professional Corporation December 1996
Thomas Davis Medical Centers, P. C. December 1996
Emergency Medical Care, Incorporated. September 1997
Carolina HealthCare Group, Inc. October 1997
35
<PAGE> 36
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land, buildings and leasehold improvements $ 14,475 $ 14,314
Furniture, fixtures and equipment 57,498 69,139
Vehicles 312 389
-------- --------
Total 72,285 83,842
Accumulated depreciation and amortization (15,076) (23,909)
-------- --------
Property and equipment, net $ 57,209 $ 59,933
======== ========
</TABLE>
4. DEBT
CONVERTIBLE SUBORDINATED DEBENTURES
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures due December 2001, which resulted in net proceeds to the
Company of approximately $73.1 million. The notes bear interest at 6.5%, with
interest payable semiannually, and are convertible into FPA common stock at
$25.95 per share. The debentures are redeemable by the Company after December
20, 1999. Upon the occurrence of a Repurchase Event, as defined in the
debenture, each holder has the right to require repayment of the debentures at
100% of the principal amount plus accrued interest. In January 1997, upon
exercise of the overallotment option granted to the initial purchasers, the
Company issued $5.5 million of additional convertible subordinated debentures
with the same terms for net proceeds of $5.5 million.
NOTES PAYABLE
The following is a summary of long-term debt at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Notes payable, interest ranging from 7% to 10.25% , principal due through December 2000 $ 12,211 $ 7,024
Convertible debentures payable, interest at 6.5% , principal due December 2001 75,000 80,535
Term Loan with a financial institution, interest at LIBOR (7.625%, including
applicable basis points at December 31, 1997), principal due September 2001 -- 99,750
Revolving Line of Credit with a financial institution, interest at LIBOR (7.75%, including
applicable basis points at December 31, 1997), principal due September 2001 -- 107,820
Note payable to a financial institution, interest at 9.0%, principal due September 2001 -- 20,000
Notes payable to former stockholders of Sterling, interest at rates ranging from 5% to 5.54% 759 --
Note payable, interest at LIBOR (6.5%, including applicable basis points at December 31, 1997),
payable in six quarterly installments through March 1999 -- 5,000
Notes payable to financial institutions, interest at 5.5%, due October 1997 55,000 --
Note payable, interest at LIBOR, 59 payments of principal and interest
due commencing February 1999 through December 2003 97,759 --
Notes payable, interest at 6.02%, principal due January 2006 20,175 10,222
Other 2,613 3,676
-------- --------
Total 263,517 334,027
Less current portion 73,063 11,154
-------- --------
Long term debt, net of current portion $190,454 $322,873
======== ========
</TABLE>
36
<PAGE> 37
At December 31, 1997, scheduled future payments on long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
NOTES PAYABLE CAPITAL
AND OTHER LEASES
-------------- ---------------
<S> <C> <C>
1998 $ 9,680 $ 1,708
1999 5,498 976
2000 11,688 210
2001 298,296 50
2002 1,433 58
Thereafter 4,821 --
-------------- ---------------
$ 331,416 3,002
==============
Amount representing interest on capital leases (391)
----------------
Present value of net minimum capital lease payments 2,611
Notes payable and other 331,416
---------------
Total $ 334,027
===============
</TABLE>
CREDIT AGREEMENT
On January 29, 1996, the Company entered into a credit, security,
guarantee and pledge agreement (the "1996 Credit Agreement") with four financial
institutions. Permitted Borrowings, as defined in the 1996 Credit Agreement,
generally include those for acquisitions and capital expenditures. Borrowings
bear 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 Company had borrowed the maximum of $55.0 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 Company 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
"Credit Agreement"). A maximum of $155 million and $30 million of the proceeds
of the Line of Credit can be used to refinance debt and to secure the Company's
capitation deposits, respectively. The remaining proceeds of the Line of Credit
can be used for working capital. The proceeds of the Term Loan may be used to
refinance debt. The borrowings bear interest based on the prime rate plus 50-75
basis points or the Interbank Eurodollar rate plus 150-175 basis points, as
defined in the Credit Agreement. The Credit Agreement contains customary terms,
events of default and covenants (including financial covenants) which, among
other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. The obligations of the
Company under the Credit Agreement are collateralized by the assets of the
Company and the capital stock and assets of its subsidiaries and the
Professional Corporations. 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 a $2.5 million,
respectively, have been established. At December 31, 1997, no amounts have been
drawn against either letter.
On December 9, 1997, the Company 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 is 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 Company's floating base LIBOR rate to a fixed rate of 6.07% at June 30,
1999, through the maturity date of the Term Loan.
5. COMMITMENTS AND CONTINGENCIES
LEGAL
The Company is party to certain legal actions arising in the ordinary
course of business including the following lawsuit involving AHI, a subsidiary
of the Company. AHI is a defendant in a purported class action securities
lawsuit entitled In re AHI Healthcare Systems, Inc. Securities Litigation filed
in the United States District Court for the Central District of California,
Western Division. The suit was initially filed against AHI, certain of its
officers and directors, and its underwriters on December 20, 1995 prior to the
merger of AHI with the Company. The suit asserts that AHI artificially inflated
the price of its stock by, among other things, misleading securities analysts
and by failing to disclose in its initial public offering prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997 the district court (a)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (b) denied summary judgment on the claims relating to the proposed
acquisition of Lakewood Health Plan, Inc. As a result, only those claims
relating to Lakewood Health Plan and AHI's alleged liability for the public
statements of securities analysts following AHI remain in the suit. FPA intends
to vigorously defend this lawsuit and does not expect that the outcome of this
lawsuit will have a material adverse effect on its financial condition or
results of operations.
Management of the Company does not believe any legal actions, including
the AHI lawsuit discussed above, will have a material adverse effect on the
Company's financial condition or results of operations. The Company maintains
professional liability, errors and omissions and directors and officers
liability insurance in amounts it deems appropriate.
37
<PAGE> 38
OPERATING LEASES
The Company is party to certain facilities and equipment leases which
terminate at various dates through 2005. Future minimum lease payments required
under all operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 27,939
1999 23,640
2000 20,084
2001 13,946
2002 11,676
Thereafter 24,169
--------
Total $121,454
========
</TABLE>
For 1995, 1996 and 1997, total expense under these non-cancelable
operating leases was $9.3 million, $16.8 million and $28.2 million,
respectively.
6. STOCKHOLDERS' EQUITY
The accompanying consolidated financial statements and notes retroactively
reflect all stock splits, and a one-for-one common stock dividend distributed
April 3, 1995 to stockholders of record on March 1, 1995. All share, per share
and stock option data have been restated to reflect the stock splits and
dividend.
In 1995, a director of a subsidiary purchased 32,000 shares of common
stock for $450,000 by delivery of a note which is payable in monthly
installments commencing January 1996 through May 2002. The note is
collateralized by the purchased shares and is included in Due from Stockholder
in the accompanying consolidated balance sheet. In addition, the Company granted
this director 42,675 stock options exercisable in installments over a seven-year
period at $14.06 per share.
STOCK OPTION PLANS
Under the Company's Amended Omnibus Stock Option Plan (the "Omnibus
Plan"), options granted may be either incentive stock options or nonqualified
stock options, which expire no later than 10 years from the date of grant.
Options generally vest over three to five years. The Company has reserved
8,500,000 shares of common stock for the granting of options under the Omnibus
Plan. During the years ended December 31, 1995, 1996 and 1997, the Company
granted nonqualified stock options to purchase 709,072, 4,391,384 and 1,617,680
shares, respectively, of the Company's common stock at prices equal to the fair
market value of the stock on the date of grant. As of December 31, 1996 and
1997, the total number of options outstanding under the Omnibus Plan were
5,725,120 and 6,586,776, respectively. In 1997, the stockholders of the Company
approved an amendment to the Omnibus Plan which increased the number of shares
available for the grant of options from 6,500,000 to 8,500,000.
Under the Company's 1994 Physician Stock Option Plan (the "Physician
Plan"), options granted are nonqualified stock options, which expire no later
than 10 years from the date of grant. Options generally vest over two to five
years. The Company has reserved 1,500,000 shares of common stock for the
granting of options under the Physician Plan. During the years ended December
31, 1995, 1996 and 1997, the Company granted nonqualified stock options to
purchase 477,460, 184,292 and 600,971 shares, respectively, of the Company's
common stock at prices equal to the fair market value of the stock on the date
of grant. As of December 31, 1996 and 1997, the total number of options
outstanding under the Physician Plan were 637,427 and 1,170,707, respectively.
Under the Company's 1995 Non-employee Directors Nonqualified Stock Option
Plan (the "1995 Directors Plan"), options granted are nonqualified stock
options, which expire no later than 10 years from the date of grant. Options
vest on the first anniversary of the date of grant. The Company has reserved
200,000 shares of common stock for the granting of options under the 1995
Directors Plan. During the years ended December 31, 1995, 1996 and 1997, the
Company granted nonqualified stock options to purchase 17,500, 12,500 and 74,000
shares, respectively, of the Company's common stock at prices equal to the fair
market value of the stock on the date of grant. As of December 31, 1996 and
1997, the total number of options outstanding under the 1995 Directors Plan were
25,000 and 89,000, respectively. In 1997, the stockholders of
38
<PAGE> 39
the Company approved amendments to the 1995 Directors Plan which increased the
number of shares of common stock to 15,000 that may be purchased pursuant to the
automatic grant of options and which increased the annual grant to non-employee
directors.
During the year ended December 31, 1997, in connection with the HealthCap
Merger, the Company assumed certain incentive stock options and nonqualified
stock outstanding under stock option plans maintained by HealthCap, Inc. (the
"HealthCap Plans"). As of December 31, 1997, the total number of options
outstanding under the HealthCap Plans was 112,236. No further options are
available for grant pursuant to the HealthCap Plans. Options expire no later
than ten years from the date of grant.
39
<PAGE> 40
Stock option transactions and prices are summarized as follows:
<TABLE>
<CAPTION> HEALTHCAP
1995 MANAGEMENT
NON-EMPLOYEE GROUP, INC.
DIRECTORS QUALITY
NONQUALIFIED CONSULTANT HEALTHCAP INC.
OMNIBUS STOCK 1994 PHYSICIAN STOCK OPTION STOCK OPTION 1994 STOCK
OPTION PLAN OPTION PLAN PLAN PLAN OPTION PLAN
------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at January 1, 1995 855,254 -- -- -- --
Granted 709,072 477,460 17,500 -- --
Exercised -- -- -- -- --
Canceled (13,692) (25) -- -- --
------------ ------------ ------------ ------------ ------------
Outstanding at December 31, 1995 1,550,634 477,435 17,500 -- --
Granted 4,391,384 184,292 12,500 -- --
Exercised (181,421) (14,200) (5,000) -- --
Canceled (35,477) (10,100) -- -- --
------------ ------------ ------------ ------------ ------------
Outstanding at December 31, 1996 5,725,120 637,427 25,000 -- --
Grants assumed in HealthCap merger -- -- -- 66,369 340,887
Granted 1,617,680 600,971 74,000 -- --
Exercised (686,114) (51,697) (10,000) (7,448) (280,796)
Canceled (69,910) (15,994) -- (6,776) --
------------ ------------ ------------ ------------ ------------
Outstanding at December 31, 1997 6,586,776 1,170,707 89,000 52,145 60,091
============ ============ ============ ============ ============
Average option price per share:
At December 31, 1995 $ 6.27 $ 7.02 $ 8.40 N/A N/A
At December 31, 1996 $ 13.75 $ 9.33 $ 13.51 N/A N/A
At December 31, 1997 $ 16.05 $ 18.09 $ 21.61 $ 7.97 $ 4.96
Options exercisable:
At December 31, 1995 215,332 31,500 -- -- --
At December 31, 1996 1,705,560 146,689 12,500 -- --
At December 31, 1997 2,070,447 300,414 15,000 13,715 60,091
</TABLE>
40
<PAGE> 41
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized in the Company's
consolidated financial statements. However, had compensation cost been
determined consistent with SFAS No. 123, the Company's pro forma net income
(loss) and net income (loss) per share would have been as follows (in thousands,
except for per share data):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Net Income (loss)
As reported $ (9,823) $(86,751) $(11,778)
Pro forma (11,790) (92,910) (26,979)
Net income (loss) per share
As reported $ (.43) $ (2.66) $ (.29)
Pro forma (.52) (2.85) (.67)
</TABLE>
The average fair value of options granted during 1995, 1996 and 1997 was
$3.22, $8.63, and $8.60, respectively, per share. Fair value is estimated based
on the Black Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Risk free interest rate 5.7% 5.7% 5.4%
Dividend yield 0.0% 0.0% 0.0%
Expected life 3 years 3 years 4 years
Expected volatility .48 .48 .50
</TABLE>
The following table summarizes information about the Company's incentive
and nonqualified stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
PRICES OUTSTANDING CONTRACTUAL LIFE (OUTSTANDING) EXERCISABLE (EXERCISABLE)
- ------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.3000-$ 10.8125 2,175,421 7.40 $ 7.6725 1,032,443 $ 6.5421
$ 10.8750-$17.3750 1,757,668 7.21 14.6813 897,403 13.3876
$17.5000-$19.7500 2,208,882 9.05 19.1659 170,992 19.0415
$19.8750-$35.1875 1,816,748 8.60 24.5857 358,829 22.2205
--------- ----- --------- ---------- ---------
$ 0.3000-$35.1875 7,958,719 8.09 $16.2711 2,459,667 $12.1959
========= ===== ======== ========= ========
</TABLE>
7. RELATED PARTY TRANSACTIONS
In Texas, the Company leases its main facility, certain leasehold
improvements, and certain medical and office equipment from a related party of a
Texas subsidiary pursuant to a noncancelable operating lease agreement expiring
November 8, 2005. The agreement provides for monthly payments of $58,654,
subject to certain increases based on the consumer price index. The lease also
contains certain provisions that may, at the option of the lease holder, require
FPA to acquire the facility at its fair market value.
Effective October 1, 1996, a Professional Corporation and FPA acquired
substantially all of the assets and assumed certain liabilities of Family
Practice Associates of San Diego, an Osteopathic Corporation ("FPASD"), owned by
certain officers of the Company. The purchase price was supported by an
independent valuation and approved by a committee of the independent directors
of the Company.
The Company currently leases from the presidents and other physicians of
certain Health Partners subsidiaries have entered into lease agreements whereby
medical space and/or medical equipment is leased to certain Health Partners
subsidiaries at fair market value and terms ranging from one to fifteen years.
Annual rental payments were approximately $475,000, $1,275,000 and $1,463,000 in
1995, 1996 and 1997, respectively.
8. MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES
In 1995, the Company recorded merger, restructuring and other unusual
charges of $1.6 million. This amount includes a $434,000 charge for impairment
of goodwill, a $773,000 charge for the loss on disposition of businesses and
$375,000 relating to the bankruptcy of one of its hospital clients. In 1995, the
Company sold six and closed two primary care clinics (seven in Florida and one
in Texas). The goodwill impairment and loss on sale are directly related to the
sale and closure
41
<PAGE> 42
of the primary care clinics. These clinics accounted for approximately $2.1
million in revenue and generated an operating loss (including the unusual items)
of $3.7 million during 1995.
In 1996, the Company recorded merger, restructuring and other unusual
charges of $52.6 million. This amount is comprised of (i) costs related to the
Sterling Merger in the amount of $16.8 million comprised of investment bankers'
fees, attorneys' fees, accountants' fees, legal fees, and severance and
compensation required to be paid as part of the Merger, (ii) write-offs of
goodwill and other assets in the amount of $33.5 million related to terminated
emergency room contracts and an unprofitable acquisition in Arizona, and (iii)
restructuring charges in the amount of $2.3 million primarily related to
severance for terminated employees.
In 1997, the Company recorded merger, restructuring and other unusual
charges of $55.0 million. This amount relates to the AHI, HealthCap, Axminster
and Health Partners mergers, collectively, and is comprised of investment
bankers' fees, attorneys' fees, accountants' fees, wind-down costs, and
severance and compensation paid as part of the mergers.
9. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal expense (benefit):
Current $ 2,191 $ 5,273 $ 575
Deferred (755) (4,622) (2,583)
State expense (benefit):
Current 556 1,825 1,849
Deferred (300) (1,200) (732)
======= ======= =======
Total $ 1,692 $ 1,276 $ (891)
======= ======= =======
</TABLE>
The reconciliation of the provision based on the federal statutory income
tax rate to the Company's income tax provision is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate (34.0)% (35.0)% (35.0)%
State taxes, net of federal income tax benefit 1.1% (1.0)% 9.6%
Nondeductible goodwill amortization 7.5% 8.1% (5.4%)
Nondeductible acquisition costs 0.0% 4.0% 21.5%
Valuation allowance 44.3% 23.7% 0.0%
Other 1.9% 1.7% 2.2%
====== ====== ======
20.8% 1.5% (7.1%)
====== ====== ======
</TABLE>
42
<PAGE> 43
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 18,416 $ 28,058
Management fees 4,351 4,351
Accrued liability for professional liability claims 595 2,946
Goodwill 4,435 853
Geographic expansion costs -- 702
Deferred compensation 194 197
Allowance for uncollectible accounts 2,750 --
Other 1,257 566
-------- --------
Total deferred tax assets: $ 31,998 $ 37,673
-------- --------
Deferred tax liabilities:
Allowance for uncollectible accounts $ -- $ (1,552)
Depreciation and amortization (643) (1,270)
State income tax (384) (957)
Geographic expansion costs (392) --
-------- --------
Total deferred tax liabilities: $ (1,419) $ (3,779)
-------- --------
Valuation allowance: (23,910) (23,910)
-------- --------
Net deferred tax assets: $ 6,669 $ 9,984
======== ========
</TABLE>
10. SEGMENT INFORMATION
FPA manages the provision of prepaid managed health care services for
networks of primary care physicians ("Managed Care Business"). Sterling is
engaged in the business of providing contract management and support services
primarily to hospital-based emergency departments ("Emergency Department
Business"). The activities relating to the Managed Care Business segment and the
Emergency Department Business segment are included in the following table (in
thousands):
<TABLE>
<CAPTION>
EMERGENCY
MANAGED CARE DEPARTMENT
BUSINESS BUSINESS CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Operating revenues $ 1,009,314 $ 157,026 $ 1,166,340
Operating income (loss) (10,434) 11,310 876
Assets employed at year-end 748,352 82,807 831,159
Depreciation and amortization 24,023 3,766 27,789
Capital expenditures 16,781 720 17,501
YEAR ENDED DECEMBER 31,1996
Operating revenues $ 541,701 $ 136,761 $ 678,462
Operating loss (76,340) (6,154) (82,494)
Assets employed at year-end 560,922 77,900 638,822
Depreciation and amortization 12,204 3,204 15,408
Capital expenditures 15,822 650 16,472
YEAR ENDED DECEMBER 31,1995
Operating revenues $ 225,162 $ 115,660 $ 340,822
Operating income (loss) (14,190) 6,502 (7,688)
Assets employed at year-end 187,153 78,608 265,761
Depreciation and amortization 4,888 2,270 7,158
Capital expenditures 9,710 1,634 11,344
</TABLE>
43
<PAGE> 44
11. MAJOR PAYORS
For the years ended December 31, 1995, 1996 and 1997, revenue related to
Payor contracts with FHP/PacifiCare Health Systems, Inc. accounted for
approximately 21.8%, 13.3% and 10.3%, respectively, of the Company's operating
revenue. For the years ended December 31, 1996 and 1997, revenue related to
Payor contracts with PCA Humana accounted for approximately 13.3% and 15.0%,
respectively, of operating revenue. For the year ended December 31, 1997,
revenue related to Payor contracts with Foundation and Oxford Health Plans
accounted for approximately 17.3% and 13.2%, respectively, of operating revenue.
As of December 31, 1997, approximately 27.5%, 12.9%, 11.2% and 9.3% of the
Company's membership is pursuant to Payor contracts with Foundation, PCA Humana,
FHP/PacifiCare Health Systems, Inc. and Oxford Health Plans, respectively. A
significant modification to or termination of such agreements could have a
material adverse effect on FPA's results of operations and financial condition.
12. LICENSURE
The application of FPA Medical Management of California, Inc. (formerly,
Family and Senior Care, Inc.), a wholly-owned subsidiary of FPA, for a
restricted health care service plan license was approved by the California
Department of Corporations on December 5, 1996. Following that date, all of the
Company's managed care activity in the State of California occurred in this
subsidiary.
13. BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
Effective January 1, 1997, the Company adopted the Amended and Restated
FPA Medical Management, Inc. 401(k) Savings Plan (the "Plan"). The Plan is
intended to be qualified under Sections 401(a) and 401(k) of the Internal
Revenue Code (the "Code"). The Plan requires the attainment of the age of 21 and
a minimum of 30 days employment to become a participant in the Plan. Service for
a predecessor employer will be considered for participation requirements in the
Plan for employees employed through acquisition activities. Certain of the
entities that were acquired or merged into the Company during 1997 also had
various employee retirement plans that were either terminated prior to the
acquisition or merger or that will or have been incorporated into the Company's
Plan. Participants may contribute up to 15% of their annual compensation to the
Plan on a pre-tax basis. Generally, the Company does not make matching
contributions to the Plan.
DEFERRED COMPENSATION PLANS
The Company maintains several deferred compensation retirement plans
pursuant to which certain members of management may defer payment from one
percent to 100% of their compensation. At December 31, 1997, the Company was
liable for approximately $2.4 million under a frozen plan assumed in connection
with a 1996 acquisition. In connection with such acquisition, the Company has
implemented a new deferred compensation plan with a liability of $2.3 million at
December 31, 1997. The Company also has implemented a deferred compensation plan
for certain senior level executives, which has a liability of approximately
$10,000 at December 31, 1997.
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company acquired Avanti Health
Systems of Texas, Inc., Physicians Quality Care, Ltd., Associates in Managed
Care, Ltd., Emergency Treatment Associates, Inc., J.T.M.S.O., Inc., Temple
Jackson, P.L.L.C. and San Antonio Network of Physicians for total consideration
consisting of 1.8 million shares of FPA common stock valued at approximately
$35.2 million and $6.8 million cash. These transactions will be accounted for as
purchases.
The Company has entered into an Agreement and Plan of Merger dated
February 10, 1998 between the Company and Meridian Medical Group, Inc.
("Meridian"). Meridian provided physician services through approximately 65
physicians to approximately 70,000 enrollees in the Atlanta, Georgia area as of
December 31, 1997. Consummation of the merger is subject to certain closing
conditions, including Meridian shareholder approval and other customary
conditions.
44
<PAGE> 45
On March 20, 1998, the Company acquired Orange Coast Managed Care
Services, Inc. ("OCMCS") and St. Joseph Hospital Corporation ("SJMC") in a
stock-for-stock transaction in which up to 2,828,680 shares of the Company's
common stock will be issued in exchange for all the outstanding shares of
capital stock and options of SJMC and OCMCS (except for certain outstanding
shares of OCMCS which were cancelled without consideration in connection with
the merger). OCMS provides administrative management services to SJMC's IPA and
medical group physicians in Orange County, California.
The acquisition of SJMC will be accounted for as a pooling of interests,
and, accordingly, prior period operating results of FPA will be restated to
reflect this transaction. The acquisition of OCMCS, valued at approximately $26
million, will be accounted for as a purchase, and, accordingly, the operating
results will be included in the Company's consolidated financial statements from
the date of acquisition. As such, the excess of the purchase price over the
estimated fair value of the acquired net assets, which approximates $16 million,
will be recorded as goodwill. The following unaudited pro forma financial data
summarizes the combined operating results of the Company, SJMC and OCMCS as if
the mergers had occurred at the beginning of the periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(in thousands, except per share data)
Revenues $ 411,538 $ 769,913 $ 1,258,023
Net loss (10,105) (99,023) (9,264)
Net loss per share (.39) (2.79) (0.21)
</TABLE>
The amounts are based upon certain assumptions and estimates, and do not
reflect any benefit of economies which might be achieved from combined
operations. The pro forma data is for informational purposes only and may not be
indicative of the results of future combined operations of FPA.
The Company is in the process of determining the appropriate values to be
assigned to the assets acquired and liabilities assumed in connection with the
acquisitions described above. Accordingly, any estimated assigned values are
subject to revision upon completion of an independent valuation which may result
in an adjustment to goodwill.
45
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
To the Stockholders of FPA Medical Management, Inc.:
We have audited the consolidated balance sheets of FPA Medical Management, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The 1996 consolidated financial statements give retroactive effect
to the 1997 mergers of FPA Medical Management, Inc. with AHI Healthcare
Systems, Inc., HealthCap, Inc., Axminister Medical Group, Inc., Health
Partners, Inc., and Cornerstone Physicians Corporation, which have been
accounted for as poolings of interests as described in Note 1 to the
consolidated financial statements. We did not audit the financial statements of
Health Partners, Inc. for the year ended December 31, 1996, which statements
reflect total assets and revenues of $47,669,000 and $74,822,000, respectively,
of the related 1996 consolidated totals. These statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for Health Partners, Inc. for 1996, is based solely
on the report of the other auditors.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of FPA Medical Management, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
operations, changes in stockholders' equity and cash flows of FPA Medical
Management, Inc. for the years ended December 31, 1995, prior to their
restatement for the poolings of interests with Sterling Healthcare Group, Inc.
in 1996, and AHI Healthcare Systems, Inc. and Health Partners, Inc. in 1997, as
described in Note 1 to the consolidated financial statements. Separate
financial statements of Sterling Healthcare Group, Inc., AHI Healthcare
Systems, Inc., and Health Partners, Inc. included in the 1995 restated
consolidated financial statements were audited and reported on separately by
other auditors; such separate financial statements reflect total revenues of
the respective entities for the year ended December 31, 1995 of $115,660,000,
$114,284,000 and $32,141,000. We also audited the combination of the
accompanying consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 1995, after restatement
for the 1996 and 1997 poolings of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 to the
consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 20, 1998
46
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sterling Healthcare Group, Inc.
Coral Gables, Florida
We have audited the consolidated statements of operations, changes in
stockholders' equity, and cash flows of Sterling Healthcare Group, Inc. for the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Sterling Healthcare Group, Inc. for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND LLP
Miami, Florida
March 15, 1996
47
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Health Partners, Inc.:
We have audited the accompanying consolidated statements of financial
position of Health Partners, Inc. and Subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Partners, Inc. and Subsidiaries as of December 31, 1996 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
White Plains, New York
February 28, 1997
48
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
AHI HealthCare Systems, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of AHI HealthCare Systems, Inc. for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also incudes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations of AHI HealthCare
System, Inc. and its cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 22, 1996
49
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Effective March 25, 1998, Seth Flam resigned as President and Chief
Executive Officer of the Company and Stephen Dresnick was elected President and
Chief Executive Officer of the Company. Steven Lash is now Executive Vice
President of the Company and Douglas Kerner is Vice President, Treasurer and
Acting Chief Financial Officer. See "Employment Agreement" for additional
information regarding these arrangements. The following table sets forth certain
information about the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------------------------------------------
<S> <C> <C>
Stephen J. Dresnick 48 President and Chief Executive Officer, Director
Sol Lizerbram 50 Chairman of the Board, Director
Herbert A. Wertheim 58 Vice Chairman of the Board, Director
Kevin Ellis 41 Executive Vice President, Chief Medical Officer, Director
Howard Hassman 41 Executive Vice President - Corporate Development, Director
Steven M. Lash 43 Executive Vice President
James A. Lebovitz 40 Executive Vice President, General Counsel and Secretary
Sheldon Derezin 50 Director
Michael P. Morris 51 Vice President, Finance and Chief Accounting Officer
Douglas E. Kerner 40 Vice President, Treasurer and Acting Chief Financial Officer
</TABLE>
Stephen Dresnick, M.D., has been President and Chief Executive Officer of
the Company since March 1998 and was Vice Chairman of the Board of Directors of
the Company from October 1996 until March 1998. Dr. Dresnick has been President
of Sterling Healthcare Group, Inc. since 1987. Dr. Dresnick is a director of
Embassy Acquisition Corp. and Technical Chemicals & Products, Inc. Dr. Dresnick
has been a director of the Company since 1996.
Sol Lizerbram, D.O., has been Chairman of the Board of Directors of the
Company since 1986 and was President from 1986 through October 31, 1996. Dr.
Lizerbram has been a director of the Company since 1986.
Herbert A. Wertheim, O.D., has been Vice Chairman of the Board of
Directors of the Company 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 trustee, Florida International University. Dr. Wertheim has
been a director of the Company since 1996.
Kevin Ellis, D.O., has been Executive Vice President, Chief Medical
Officer of the Company since April 1995. Prior thereto, Dr. Ellis served as
Chief Operating Officer of the Company from 1988 until April 1995. Dr. Ellis has
been a director of the Company since 1986.
Howard Hassman, D.O., has been Executive Vice President, Corporate
Development of the Company since September 1994. Prior thereto, Dr. Hassman
served as Chief Financial Officer of the Company from 1986 until September 1994.
Dr. Hassman has been a director of the Company since 1986.
Steven M. Lash has been Executive Vice President of the Company since
March 1998 and was Executive Vice President and Chief Financial Officer of the
Company from September 1994 until March 1998. Mr. Lash was Executive Vice
President for Institutional Care at Sharp Healthcare, a health care system
providing medical services throughout San Diego, California, from April 1993 to
September 1994. Prior thereto, Mr. Lash was Senior Vice President of Business
Affairs and Chief Financial Officer of San Diego Hospital Association, doing
business as Sharp Healthcare, from 1981 to April 1993.
James A. Lebovitz has been Executive Vice President, General Counsel and
Secretary of the Company since March 1998 and was Senior Vice President,
General Counsel and Secretary of the Company from March 1996 until March 1998.
Prior thereto, Mr. Lebovitz was a partner in the law firm of Ballard Spahr
Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania from 1991 until March 1996.
50
<PAGE> 51
Sheldon Derezin has been managing partner of Derezin Breier & Company, a
public accounting firm, since 1982. Mr. Derezin has been a director of the
Company since 1995.
Michael P. Morris has been Vice President, Finance and Chief Accounting
Officer of the Company since September 1997 and was Corporate Controller of the
Company from March 1997 through September 1997. Prior thereto, Mr. Morris was
Chief Financial Officer of Nugget Market, Inc., a private holding company, from
May 1994 through February 1997 and Controller from April 1991 through April
1994. Prior thereto, Mr. Morris was a partner in the public accounting firm KPMG
Peat Marwick LLP.
Douglas E. Kerner has been Vice President, Treasurer and Acting Chief
Financial Officer of the Company since March 1998 and was Vice President,
Treasurer from February 1998 to March 1998. Prior thereto, Mr. Kerner was Vice
President and Treasurer of Total Petroleum (North America) Ltd., from 1994
through 1997, Marketing Controller from 1993 though 1994, Director of Tax and
Internal Audit from 1992 to 1993 and Director of Tax from 1991 to 1992.
CLASSIFIED BOARD OF DIRECTORS. The Company's Board of Directors is
classified into three classes. Directors are elected, by a plurality of the
votes of the shares of the Company's common stock present or represented at each
annual meeting and constituting a quorum, at each annual meeting of stockholders
and serve until the third annual meeting of stockholders following their
election and until their successors are elected and qualified or until their
earlier removal or resignation. Dr. Ellis and Dr. Wertheim have terms expiring
in 1998; Dr. Hassman, Dr. Dresnick and Mr. Derezin have terms expiring in 1999;
and Dr. Lizerbram has a term expiring in 2000.
COMMITTEES OF THE BOARD OF DIRECTORS. The Company has an Audit Committee,
a Compensation Committee and a Nominating Committee.
The Audit Committee, comprising Mr. Derezin (Chairman) and Dr. Wertheim,
reviews, with the Company's independent auditors, the scope and results of such
auditors' engagement, the adequacy of the Company's management information
systems and internal accounting controls.
The Compensation Committee, comprising Dr. Wertheim (Chairman) and Mr.
Derezin, reviews and approves the compensation of the Company's executive
officers and administers the Company's stock option plans.
The Nominating Committee, comprising Drs. Dresnick (Chairman), Lizerbram,
Ellis and Wertheim, will consider written recommendations from stockholders for
nominees for election to the Board of Directors, provided that such
recommendations, together with (i) such information regarding each nominee as
would be required to be included in a proxy statement filed pursuant to the
Securities Exchange Act of 1934, (ii) a description of all arrangements or
understandings among the recommending stockholder and each nominee and any other
person with respect to such nomination and (iii) the consent of each nominee to
serve as a director of the Company if so elected, are received by the Secretary
of the Company by, in the case of an annual meeting of stockholders, not later
than the date specified in the most recent proxy statement of the Company as the
date by which stockholder proposals for consideration at the next annual meeting
of stockholders must be received and, in the case of special meetings of
stockholders, not later than the tenth day after the giving of notice of such
meeting.
COMPENSATION OF DIRECTORS. Non-employee directors currently receive $1,000
per Board of Directors or committee meeting attended. The Company also
reimburses directors for expenses incurred in connection with attendance at
meetings of the Board of Directors and committees.
51
<PAGE> 52
\ In addition, under the Company's 1995 Non-Employee Directors'
Non-Qualified Stock Option Plan (the "1995 Directors' Plan"), non-employee
directors receive an annual grant of options to purchase 15,000 shares of the
Company's common stock at a price equal to the fair market value of the common
stock on the date the option is granted (following each annual meeting of
stockholders). Each option generally expires upon the earlier of twelve months
after the optionee ceases to be a director of the Company or ten years after the
date of grant. The purpose of the 1995 Directors' Plan is to attract and retain
independent directors and to strengthen the mutuality of interests between such
directors and the Company's stockholders
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the directors,
certain officers of FPA and beneficial owners of more than ten percent of FPA
common stock to file reports of securities ownership and changes in such
ownership with the Securities and Exchange Commission. Based solely upon a
review of the copies of such forms furnished to FPA and the representations made
by such persons to FPA, FPA believes that during the last fiscal year its
directors, officers and ten percent beneficial owners complied with all
reporting requirements under Section 16(a) of the Securities Exchange Act of
1934.
52
<PAGE> 53
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
from FPA which was awarded to, earned by, or paid to FPA's Chief Executive
Officer and the four other most highly compensated executive officers during the
years ended December 31, 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------
LONG TERM
COMPENSATION AWARDS
-------------------
SHARES ALL OTHER
NAME AND PRINCIPAL POSITION UNDERLYING COMPENSATION
YEAR SALARY BONUS OPTIONS/SARS (#) (1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Seth Flam, President and 1995 $ 300,000 -- 60,000 $ 3,608
Chief Executive Officer(2) 1996 237,646(3) $ 1,133,123 671,000 1,204
1997 446,978(4) 665,522 200,250 9,549
Sol Lizerbram, Chairman of 1995 189,750 -- 60,000 16,397
the Board of Directors (5) 1996 237,646(6) 1,133,123 671,000 14,474
1997 446,978(7) 665,522 200,250 16,900
Stephen Dresnick, 1995 325,000 234,542 --
Vice Chairman of the Board of 1996 325,000(9) 1,819,180 722,502(10) 481,250
Directors, President, 1997 325,000 1,487,500 75,000 34,809
Sterling
Healthcare Group, Inc.(8)
Steven Lash, Executive 1995 205,000 50,000 20,000 2,933
Vice President and Chief 1996 215,417(12) 1,084,584 437,250 113,125
Financial Officer(11) 1997 361,705(13) 500,795 100,000 6,626
Howard Hassman, 1995 174,750 -- 60,000 6,566
Executive Vice President -- 1996 201,604(14) 1,052,251 303,000 7,026
Corporate Development 1997 271,417(15) 403,584 250 9,726
</TABLE>
- ----------
(1) Includes shares of FPA Common Stock received by Mr. Lash in 1996 valued at
$106,500. Includes life and disability insurance premiums paid by FPA
on behalf of each such officer.
(2) Dr. Flam was elected President effective November 1, 1996. Dr. Flam
resigned as President and Chief Executive Officer of the Company as of
March 25, 1998.
(3) Includes deferred compensation of $66,548.
(4) Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.
(5) Dr. Lizerbram served as President until November 1, 1996.
(6) Includes deferred compensation of $66,548.
(7) Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.
(8) Dr. Dresnick became President and Chief Executive Officer of the Company
as of March 25, 1998.
(9) Includes deferred compensation of $37,500.
(10) Includes 572,502 options granted by FPA after completion of the merger
with Sterling to replace options previously granted to Dr. Dresnick by
Sterling.
(11) Mr. Lash served as Executive Vice President and Chief Financial Officer
until March 1998 at which time he became Executive Vice President of the
Company.
(12) Includes deferred compensation of $47,584.
(13) Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.
(14) Includes deferred compensation of $32,965.
(15) Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.
53
<PAGE> 54
STOCK OPTION GRANTS. The following table sets forth information concerning
stock options granted to the named executive officers in 1997.
OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
SHARES % OF TOTAL VALUE AT ASSUMED ANNUAL
UNDERLYING OPTIONS/ RATES OF STOCK PRICE
OPTIONS/ SARS EXERCISE APPRECIATION FOR
SARS GRANTED TO OR BASE OPTION TERM(3)
GRANTED EMPLOYEES PRICE EXPIRATION ----------------------------
NAME (#)(1) DURING YEAR ($/SH)(2) DATE 5%($) 10%($)
---- ---------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Seth Flam 250(A) .01 $ 20.25 1/20/07 $ 3,184 $ 8,068
200,000(B) 8.85 19.75 5/30/07 2,484,134 6,295,283
Sol Lizerbram 250(A) .01 20.25 1/20/07 3,184 8,068
200,000(B) 8.85 19.75 5/30/07 2,484,134 6,295,283
Stephen Dresnick 75,000(A) 3.32 23.5625 7/23/07 1,111,375 2,816,442
Steven Lash 100,000(B) 4.42 19.75 5/30/07 1,242,067 3,147,641
Howard Hassman 250(A) .01 20.25 1/20/07 3,184 8,068
</TABLE>
- ----------
(1) (A) Grant vests in equal amounts over a three year period. (B) Grant vests
in equal amounts over a five year period based on attainment of certain
agreed upon performance targets.
(2) The option exercise price may be paid in shares of FPA's common stock, in
cash, or in any other form of valid consideration or a combination of any
of the foregoing, as determined by the Compensation Committee of FPA's
Board in its discretion.
(3) The potential realizable value portion of the foregoing table illustrates
the value that might be realized should the granted options be exercised
immediately prior to their expiration date and assumes that the respective
rates of appreciation on FPA's common stock compound annually until such
exercise. These figures make no allowance for any reduction of potential
value which may be caused because of the termination of the options
following termination of employment, nontransferability or vesting over
periods of up to five years.
54
<PAGE> 55
STOCK OPTION EXERCISES IN 1997 AND STOCK OPTION VALUES. The following
tables set forth information concerning the number of stock options granted
during 1997 and the value of unexercised options to purchase FPA's common stock
held by the named executive officers at December 31, 1997.
OPTION EXERCISES DURING 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
SHARES ACQUIRED ON UNEXERCISED OPTIONS/SARS VALUE OF UNEXERCISED IN-THE-MONEY
EXERCISE VALUE REALIZED AT YEAR END OPTION/SARS AT YEAR END
------------------------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Seth Flam -- -- 118,500 862,750 $ 853,438 $1,747,938
Sol Lizerbram -- -- 118,500 862,750 853,438 1,747,938
Stephen Dresnick -- -- 587,502 210,000 2,922,394 --
Steven Lash 79,000 $1,478,094 192,170 555,354 2,152,671 1,692,037
Howard Hassman 49,000 972,937 42,500 321,750 205,000 1,269,938
</TABLE>
- ----------
(1) The closing price for the common stock as reported on the NASDAQ National
Market on December 31, 1997 was $18.875. Value is calculated on the basis
of the difference, if any, between the option exercise price and $18.875,
multiplied by the number of shares of the FPA's common stock issuable upon
exercise of the option.
EMPLOYMENT AGREEMENTS. FPA has entered into an employment agreement with
Dr. Lizerbram as Chairman of the Board of Directors effective as of October 1,
1996, as amended as of March 25, 1998 (such agreement, as amended, is referred
to herein as the "Lizerbram Employment Agreement"). Pursuant to the Lizerbram
Employment Agreement, Dr. Lizerbram shall receive base salary of $1,112,500 for
services rendered from March 25, 1998 until March 25, 1999. The Lizerbram
Employment Agreement terminates on September 30, 2001, except that on September
30, 2000 and on each subsequent anniversary thereof, the term shall be extended
for a one-year period, unless no later than six months prior to such date,
either FPA or Dr. Lizerbram has provided notice that it does not wish to extend
the Lizerbram Employment Agreement. Notwithstanding the preceding sentence, the
term of the Lizerbram Employment Agreement shall not be extended beyond
September 30, 2003 without the prior consent of both FPA and Dr. Lizerbram. If
the Lizerbram Employment Agreement is not extended as of September 30, 2003, Dr.
Lizerbram shall be entitled to severance benefits as described below; provided,
further, that if Dr. Lizerbram's employment is terminated for any reason
(including cause) between March 25, 1998 and March 31, 1999, (a) Dr. Lizerbram
shall resign his position as Chairman and director of the Company, (b) the
Lizerbram Employment Agreement shall be terminated, (c) FPA shall make a lump
sum payment equal to $1,112,500 minus aggregate payments made between March 25,
1998 and the date of termination to Dr. Lizerbram and, (d) in the event Dr.
Lizerbram executes a release, he shall be entitled to severance benefits as
described below (including the acceleration of vesting of all of Dr. Lizerbram's
options) and shall serve as a consultant for a period of eight (8) months after
the termination date. Dr. Lizerbram shall receive $1,000,000 as compensation for
such consulting services. Upon termination of the Lizerbram Employment
Agreement, Dr. Lizerbram shall be entitled to severance payments of $3,337,500
payable in equal monthly payments over 36 months. If a change of control, as
defined in the Lizerbram Employment Agreement, occurs within six months after
the termination of Dr. Lizerbram's employment, Dr. Lizerbram shall receive in
lieu of the severance payment described above, a lump sum equal to approximately
three times the previous year's salary and bonus and shall be entitled to
certain gross-up payments. Upon termination of employment, Dr. Lizerbram shall
not compete with FPA for a period of 18 months. The Lizerbram Employment
Agreement also provides Dr. Lizerbram with professional fees, vacation and term
life, medical, disability and liability insurance.
FPA has entered into an employment agreement with Mr. Lash as Executive
Vice President effective as of October 1, 1996, as amended as of March 25, 1998
(such agreement, as amended, is referred to herein as the "Lash Employment
Agreement"). Pursuant to the Lash Employment Agreement, Mr. Lash receives annual
base salary of $345,000 and a maximum annual bonus of up to 150% of base salary
based on pre-established performance targets for each year and certain
subjective determinations. The Lash Employment Agreement terminates on September
30, 2001, except that on September 30, 2000 and on each subsequent anniversary
thereof, the term shall be extended for a one-year period, unless no later than
six months prior to such date, either FPA or Mr. Lash has provided notice that
it does not wish to extend the Lash Employment Agreement. Notwithstanding the
preceding sentence, the term of the Lash Employment Agreement shall not be
extended beyond September 30, 2003 without the prior consent of both FPA and Mr.
Lash. If the Lash Employment Agreement is not extended as of September 30, 2003,
Mr. Lash shall be entitled to severance benefits as described below; provided,
further, that if Mr. Lash's employment is terminated for any reason (including
cause) between March 25, 1998 and September 15, 1999, (a) Mr. Lash shall resign
his position as Executive Vice President of the Company, (b) the Lash Employment
Agreement shall be terminated and, (c) in the event Mr. Lash executes a release,
55
<PAGE> 56
he shall be entitled to severance benefits as described below (including the
acceleration of vesting of all of Mr. Lash's options) and shall serve as a
consultant for a period of eight (8) months after the termination date. Mr. Lash
shall receive $1,000,000 as compensation for such consulting services. Upon
termination of the Lash Employment Agreement, Mr. Lash shall be entitled to
severance payments of $2,587,500 payable in equal monthly payments over 36
months. If a change of control, as defined in the Lash Employment Agreement,
occurs within six months after the termination of Mr. Lash's employment, Mr.
Lash shall receive in lieu of the severance payment described above, a lump sum
equal to approximately three times the previous year's salary and bonus and
shall be entitled to certain gross-up payments. Upon termination of employment,
Mr. Lash shall not compete with FPA so long as Mr. Lash is receiving the
payments described above. The Lash Employment Agreement also provides Mr. Lash
with a car allowance, professional fees, vacation and term life, medical,
disability and liability insurance.
FPA has entered into an employment agreement with Dr. Hassman as Executive
Vice President-Corporate Development effective as of October 1, 1996 (the
"Hassman Employment Agreement"). Pursuant to the Hassman Employment Agreement,
Dr. Hassman receives an annual base salary of $270,000 and a maximum annual
bonus of up to 150% of base salary based on pre-established performance targets
for each year and certain subjective determinations. The Hassman Employment
Agreement terminates on September 30, 2001, except that on September 30, 2000
and on each subsequent anniversary thereof, the term shall be extended for a
one-year period, unless no later than six months prior to such date, either
party has provided notice that it does not wish to extend the agreement. The
Hassman Employment Agreement generally provides that if Dr. Hassman is
terminated other than for cause, Dr. Hassman is entitled to full salary plus
bonus and benefits for 36 months after termination. In the event of a change of
control, as defined in the Hassman Employment Agreement, Dr. Hassman is entitled
to a lump sum payment equal to approximately three times the previous year's
base salary and bonus. The Hassman Employment Agreement also provides Dr.
Hassman with a car allowance, professional fees, vacation and term life,
medical, disability and liability insurance. The Hassman Employment Agreement
contains a covenant not to compete during employment and for six months
thereafter if Dr. Hassman is terminated for cause by FPA.
Effective as of March 25, 1998, Dr. Dresnick was elected President and
Chief Executive Officer of the Company. FPA has an amended employment agreement
with Dr. Dresnick (the "Dresnick Employment Agreement"), effective as of October
31, 1996, pursuant to which Dr. Dresnick receives an annual base salary of
$325,000, which salary is subject to annual increases, and an annual bonus
calculated as a percentage of base salary based on pre-established performance
targets of FPA and Sterling. Upon termination of the Dresnick Employment
Agreement for reasons other than cause or Dr. Dresnick's voluntary termination
or upon a change of control, Dr. Dresnick is entitled to full salary plus bonus
based on the two prior fiscal years payable in a lump sum at the time of
termination. The Dresnick Employment Agreement provides Dr. Dresnick with
specified periodic lump sum payments, a car allowance, vacation and medical
insurance and contains a covenant not to compete during employment and for two
years thereafter.
56
<PAGE> 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of shares of common stock as of March 17, 1998 by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the Company's directors who
owns shares of common stock, (iii) each executive officer named in the table
under the caption "Executive Compensation" and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) STOCK BENEFICIALLY OWNED
- ---------------------------------------- ---------------- ------------------
<S> <C> <C>
Sol Lizerbram (2) 430,097 *
Seth Flam (3) 455,669 1.05%
Kevin Ellis (4) 452,084 1.04%
Howard Hassman (5) 353,858 *
Stephen Dresnick (6) 1,884,569 4.29%
Sheldon Derezin (7) 42,000 *
Steven Lash (8) 250,788 *
Herbert Wertheim (9) 222,394 *
All directors and executive officers
as a group (11 persons) (10) 4,132,459 9.23%
</TABLE>
- ----------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the persons named above
is in care of FPA at 3636 Nobel Drive, Suite 200, San Diego, California
92122. A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days of March 17, 1998 upon the
exercise of options or warrants. Each beneficial owner's number of shares
is determined by assuming that options or warrants that are held by such
person (but not those held by any other person) and that are exercisable
within 60 days of March 17, 1998 have been exercised. The total
outstanding shares used to calculate each beneficial owner's percentage
includes such options and warrants. Unless otherwise noted, FPA believes
that all persons named in the table have sole voting and investment power
with respect to all shares of FPA common stock beneficially owned by them.
(2) Shares attributable to Dr. Lizerbram are held by the Lizerbram Family
Trust, of which Dr. Lizerbram is Trustee and together with his wife, the
sole beneficiaries. Includes options to acquire 143,584 shares of FPA
common stock within 60 days of March 17, 1998.
(3) Shares attributable to Dr. Flam are held by Dr. Flam as trustee of the
Flam Family Trust dated January 24, 1995, as sole shareholder of corporate
managing partner of F S & J, L.P. and J & J Flam, L.P., record holders.
Includes options to acquire 143,584 shares of FPA common stock within 60
days of March 17, 1998. Dr. Flam resigned as President and Chief Executive
Officer of the Company as of March 25, 1998.
(4) Includes options to acquire 81,584 shares of FPA common stock within 60
days of March 17, 1998
(5) Shares attributable to Dr. Hassman are held by Hassman, L.P., a limited
partnership of which Clinical Partners Medical Group, P.C. is the General
Partner, of which Dr. Hassman is the sole shareholder. Includes options to
acquire 57,584 shares of FPA common stock within 60 days of March 17,
1998.
(6) Shares attributable to Dr. Dresnick are held by several corporations and
limited partnerships in which Dr. Dresnick or a corporation owned by him
is the sole stockholder and limited and general partners. Includes options
to acquire 587,502 shares of FPA common stock within 60 days of March 17,
1998.
(7) Includes options to acquire 23,500 shares of FPA common stock within 60
days of March 17, 1998
(8) Includes options to acquire 227,788 shares of FPA common stock within 60
days of March 17, 1998
(9) Includes options to acquire 162,101 shares of FPA common stock within 60
days of March 17, 1998
(10) Includes options to acquire shares of FPA common stock within 60 days of
March 17, 1998 as follows: Dr. Lizerbram, 143,584; Dr. Flam, 143,584; Dr.
Ellis, 81,584; Dr. Hassman, 57,584; Dr. Dresnick, 587,502; Mr. Derezin,
23,500; Mr. Lash, 227,788; Dr. Wertheim, 162,101; and all directors and
executive officers as a group, 1,466,227.
57
<PAGE> 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets, December 31, 1996 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the consolidated Financial
Statements or Notes thereto.
(3) Exhibits:
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
3.3 Certificate of Amendment of Certificate of Incorporation filed
October 20, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
3.3).
4.1 Specimen of common stock Certificate.*
4.2 Form of Warrant.*
4.3 Indenture dated as of December 18, 1996, by and between FPA and the
Trustee for the 6.5% Convertible Subordinated Debentures
(incorporated by reference to FPA's Current Report on Form 8-K dated
December 18, 1996).
4.4 Registration Rights Agreement dated December 13, 1996 by and among
FPA and the Initial Purchasers of the 6.5% Convertible Subordinated
Debentures (incorporated by reference to FPA's Current Report on
Form 8-K dated December 18, 1996).
4.5 Form of Rule 144A Restricted Global Debenture (incorporated by
reference to FPA's Current Report on Form 8-K dated December 18,
1996).
58
<PAGE> 59
Exhibit
Number Description
- ------ -----------
4.6 Form of Regulation S Global Debenture (incorporated by reference to
FPA's Current Report on Form 8-K dated December 18, 1996).
4.7 Registration Rights Agreement dated June 30, 1997 by and among FPA
and certain stockholders of HealthCap, Inc. (incorporated by
reference to Registration Statement No. 333-31351 at Exhibit No.
4.7).
4.8 Form of Registration Rights Agreement by and among FPA and certain
holders of Health Partners, Inc. common stock and Preferred Stock
(incorporated by reference to Registration Statement No. 333-32687
at Exhibit No. 4.8).
4.9 Registration Rights Agreement dated September 2, 1997 by and among
FPA and the shareholders of Emergency Medical Care Incorporated
(incorporated by reference to Registration Statement No. 333-32687
at Exhibit No. 4.9).
4.10 Registration Rights Agreement dated November 26, 1996 by and among
FPA and the shareholders of Cornerstone Physicians Corporation
(incorporated by reference to Registration Statement No. 333-41989
at Exhibit No. 4.10).
4.11 Registration Rights Agreement dated November 19, 1997 by and between
FPA and Avanti Corporate Health Systems, Inc. (incorporated by
reference to Registration Statement No. 333-41989 at Exhibit No.
4.11).
4.12 Registration Rights Agreement dated January 1,1998 by and among FPA
and the shareholders of Physicians Quality Care, Ltd. and Associates
in Managed Care, Ltd.
4.13 Registration Rights Agreement dated February 17, 1998 by and among
FPA, John G. Keene, Robert W. Strauss and Marc V. Weiner.
4.14 Registration Rights Agreement dated February 27, 1998 by and between
FPA and Richard E. Thorner.
10.1 IPA Medicare Partial Risk Services Agreement between Pacificare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994.* **
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995
between FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
Pacificare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as
of October 1, 1996 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit No. 10.12). Amendment to
Employment Agreement between FPA and Dr. Sol Lizerbram dated as of
March 25, 1998.+
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
October 1, 1996
59
<PAGE> 60
Exhibit
Number Description
- ------ -----------
(incorporated by reference to Registration Statement No. 333-32687
at Exhibit No. 10.13). Consulting and Settlement Agreement between
FPA and Seth Flam dated as of March 25, 1998.+
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of October 1, 1996 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit No. 10.14).+
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
October 1, 1996 (incorporated by reference to Registration Statement
No. 333-32687 at Exhibit No. 10.15).+
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective October 1, 1996 (incorporated by reference to
Registration Statement No. 333-32687 at Exhibit No. 10.16).
Amendment to Employment Agreement between FPA and Steven M. Lash
dated as of March 25, 1998.+
10.17 Employment Agreement between FPA and Robert J. Burg effective
December 1, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
10.27).+
10.18 Employment Agreement between FPA and James A. Lebovitz effective as
of February 1, 1997 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit 10.18).+
10.19 FPA Amended Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 333-34027 at Exhibit 99).+
10.20 Amended and Restated Employment Contract between Sterling Healthcare
Group, Inc. ("Sterling") and Stephen J. Dresnick, M.D. ("Dresnick"),
dated July 15, 1994, Amendment No. 1 to Amended and Restated
Employment Contract between Sterling and Dresnick entered into as of
October 31, 1998 and Amendment No. 2 to Amended and Restated
Employment Contract between Sterling and Dresnick entered into as of
July 1997 (incorporated by reference to Registration Statement
No. 333-32687 at Exhibit 10.20).+
10.21 [Reserved]
10.22 [Reserved]
10.23 [Reserved]
10.24 401(k) Salary Savings Plan effective January 1, 1994 (incorporated
by reference to Registration Statement No. 333-79714 at Exhibit
10.20). +
10.25 1995 Directors Stock Option Plan. *+
10.26 1994 Physicians Stock Option Plan. *+
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.28 Agreement and Plan of Merger among FPA, FPA Acquisition Corporation
and AHI Healthcare Systems, Inc. made November 8, 1996, as amended
by Amendment No. 1 to Agreement and Plan of Merger, dated as of
February 5, 1997 (incorporated by reference to Registration
Statement No. 333-21721 at Exhibit No. 2).
10.29 Form of Indemnification Agreement.*
10.30 Stock and Note Purchase Agreement among, inter alia, FPA and
Foundation Health Corporation dated as of June 28, 1996
(incorporated by reference to FPA's Current Report on Form 8-K dated
June 21, 1996).
10.31 Agreement and Plan of Merger dated June 5, 1997 by and among FPA,
FPA Acquisition Corp. and HealthCap, Inc. (incorporated by reference
to Registration Statement No. 333-31351 at Exhibit No. 10.31).
10.32 Credit Agreement dated June 30, 1997 by and among FPA, BankBoston,
N.A., Lehman
60
<PAGE> 61
Exhibit
Number Description
- ------ -----------
Commercial Paper, Inc. and the lenders parties thereto (incorporated
by reference to Registration Statement No. 333-31351 at Exhibit No.
10.32).
10.33 HealthCap Management Group, Inc. 1994 Stock Option Plan
(incorporated by reference to Registration Statement No. 333-31341
at Exhibit No. 99.1).+
10.34 HealthCap Management Group, Inc. Quality Consultant Stock Option
Plan (incorporated by reference to Registration Statement No.
333-31341 at Exhibit No. 99.2).+
10.34 Agreement and Plan of Merger dated as of January 21, 1998, as
amended as of January 28, 1998, by and among FPA, FPA Medical
Management of California, Inc., Orange Coast Managed Care Services,
Inc. and St. Joseph Medical Corporation (incorporated by reference
to Registration Statement No. 333-46013 at Exhibit No. 2).
10.35 Agreement and Plan of Merger dated as of February 10, 1998, by and
between FPA and Meridian Meridian Medical Group, Inc. (incorporated
by reference to Registration Statement No. 333-46153 at Exhibit No.
2).
21 Subsidiaries of FPA.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Ernst & Young LLP.
24 Power of Attorney (included on signature page).
- ----------
* Incorporated by reference to the exhibit to FPA's Registration Statement
on Form S-1, Reg. No. 33-97456, at the exhibit number set forth opposite
such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed as an
Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K. FPA filed the following current Reports on Form
8-K during the quarter ended December 31, 1997 and through March 27, 1998:
DATE OF REPORT ITEMS REPORTED
-------------- --------------
December 10, 1997 Item 5. Other Events
(Restated Financial
Statements)
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FPA Medical Management, Inc. has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on March 30, 1998.
FPA MEDICAL MANAGEMENT, INC.
(Registrant)
By: /s/ STEPHEN J. DRESNICK
-------------------------------------
Stephen J. Dresnick
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of FPA in the
capacities indicated on March 30, 1998.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below in so signing also makes, constitutes and appoints Stephen J. Dresnick and
James A. Lebovitz, and each of them, as true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments to this
Report, with exhibits thereto and other documents in connection therewith,
granting unto said attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all that said attorneys-in-fact and
agents or their or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ STEPHEN J. DRESNICK President, Chief Executive Officer and Director
- --------------------------------- (Principal Executive Officer)
Stephen J. Dresnick
/s/ SOL LIZERBRAM Director and Chairman of the Board of
- --------------------------------- Directors
Sol Lizerbram
/s/ DOUGLAS E. KERNER Vice President, Treasurer and Acting Chief
- --------------------------------- Financial Officer (Principal Financial Officer)
Douglas E. Kerner
/s/ SHELDON DEREZIN Director
- ---------------------------------
Sheldon Derezin
Director
- ---------------------------------
Kevin Ellis
Director
- ---------------------------------
Howard Hassman
/s/ HERBERT A. WERTHEIM Director and Vice Chairman of the Board
- --------------------------------- of Directors
Herbert A. Wertheim
/s/ MICHAEL P. MORRIS Vice President, Finance and Chief
- --------------------------------- Accounting Officer (Principal
Michael P. Morris Accounting Officer)
</TABLE>
62
<PAGE> 63
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
3.3 Certificate of Amendment of Certificate of Incorporation filed
October 20, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
3.3).
4.1 Specimen of common stock Certificate.*
4.2 Form of Warrant.*
4.3 Indenture dated as of December 18, 1996, by and between FPA and the
Trustee for the 6.5% Convertible Subordinated Debentures
(incorporated by reference to FPA's Current Report on Form 8-K dated
December 18, 1996).
4.4 Registration Rights Agreement dated December 13, 1996 by and among
FPA and the Initial Purchasers of the 6.5% Convertible Subordinated
Debentures (incorporated by reference to FPA's Current Report on
Form 8-K dated December 18, 1996).
4.5 Form of Rule 144A Restricted Global Debenture (incorporated by
reference to FPA's Current Report on Form 8-K dated December 18,
1996).
4.6 Form of Regulation S Global Debenture (incorporated by reference to
FPA's Current Report on Form 8-K dated December 18, 1996).
4.7 Registration Rights Agreement dated June 30, 1997 by and among FPA
and certain stockholders of HealthCap, Inc. (incorporated by
reference to Registration Statement No. 333-31351 at Exhibit No.
4.7).
4.8 Form of Registration Rights Agreement by and among FPA and certain
holders of Health Partners, Inc. common stock and Preferred Stock
(incorporated by reference to Registration Statement No. 333-32687
at Exhibit No. 4.8).
4.9 Registration Rights Agreement dated September 2, 1997 by and among
FPA and the shareholders of Emergency Medical Care Incorporated
(incorporated by reference to Registration Statement No. 333-32687
at Exhibit No. 4.9).
4.10 Registration Rights Agreement dated November 26, 1996 by and among
FPA and the shareholders of Cornerstone Physicians Corporation
(incorporated by reference to Registration Statement No. 333-41989
at Exhibit No. 4.10).
4.11 Registration Rights Agreement dated November 19, 1997 by and between
FPA and Avanti Corporate Health Systems, Inc. (incorporated by
reference to Registration Statement No. 333-41989 at Exhibit No.
4.11).
4.12 Registration Rights Agreement dated January 1,1998 by and among FPA
and the shareholders of Physicians Quality Care, Ltd. and Associates
in Managed Care, Ltd.
4.13 Registration Rights Agreement dated February 17, 1998 by and among
FPA, John G. Keene, Robert W. Strauss and Marc V. Weiner.
4.14 Registration Rights Agreement dated February 27, 1998 by and between
FPA and Richard E. Thorner.
10.1 IPA Medicare Partial Risk Services Agreement between Pacificare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994.* **
63
<PAGE> 64
Exhibit
Number Description
- ------ -----------
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995
between FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
Pacificare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as
of October 1, 1996 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit No. 10.12). Amendment to
Employment Agreement between FPA and Dr. Sol Lizerbram dated as of
March 25, 1998.+
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
October 1, 1996 (incorporated by reference to Registration Statement
No. 333-32687 at Exhibit No. 10.13). Consulting and Settlement
Agreement between FPA and Seth Flam dated as of March 25, 1998.+
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of October 1, 1996 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit No. 10.14).+
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
October 1, 1996 (incorporated by reference to Registration Statement
No. 333-32687 at Exhibit No. 10.15).+
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective October 1, 1996 (incorporated by reference to
Registration Statement No. 333-32687 at Exhibit No. 10.16).
Amendment to Employment Agreement between FPA and Steven M. Lash
dated as of March 25, 1998.+
10.17 Employment Agreement between FPA and Robert J. Burg effective
December 1, 1994 (incorporated by reference to FPA's Annual Report
on Form 10-K for the year ended December 31, 1994 at Exhibit No.
10.27).+
10.18 Employment Agreement between FPA and James A. Lebovitz effective as
of February 1, 1997 (incorporated by reference to Registration
Statement No. 333-32687 at Exhibit 10.18).+
10.19 FPA Amended Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 333-34027 at Exhibit 99).+
10.20 Amended and Restated Employment Contract between Sterling Healthcare
Group, Inc. ("Sterling") and Stephen J. Dresnick, M.D. ("Dresnick"),
dated July 15, 1994, Amendment No. 1 to Amended and Restated
Employment Contract between Sterling and Dresnick entered into as of
October 31, 1998 and Amendment No. 2 to Amended and Restated
Employment Contract between Sterling and Dresnick entered into as of
July 1997 (incorporated by reference to Registration Statement
No. 333-32687 at Exhibit 10.20).+
10.21 [Reserved]
10.22 [Reserved]
10.23 [Reserved]
10.24 401(k) Salary Savings Plan effective January 1, 1994 (incorporated
by reference to Registration Statement No. 333-79714 at Exhibit
10.20). +
64
<PAGE> 65
Exhibit
Number Description
- ------ -----------
10.25 1995 Directors Stock Option Plan. *+
10.26 1994 Physicians Stock Option Plan. *+
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.28 Agreement and Plan of Merger among FPA, FPA Acquisition Corporation
and AHI Healthcare Systems, Inc. made November 8, 1996, as amended
by Amendment No. 1 to Agreement and Plan of Merger, dated as of
February 5, 1997 (incorporated by reference to Registration
Statement No. 333-21721 at Exhibit No. 2).
10.29 Form of Indemnification Agreement.*
10.30 Stock and Note Purchase Agreement among, inter alia, FPA and
Foundation Health Corporation dated as of June 28, 1996
(incorporated by reference to FPA's Current Report on Form 8-K dated
June 21, 1996).
10.31 Agreement and Plan of Merger dated June 5, 1997 by and among FPA,
FPA Acquisition Corp. and HealthCap, Inc. (incorporated by reference
to Registration Statement No. 333-31351 at Exhibit No. 10.31).
10.32 Credit Agreement dated June 30, 1997 by and among FPA, BankBoston,
N.A., Lehman Commercial Paper, Inc. and the lenders parties thereto
(incorporated by reference to Registration Statement No. 333-31351
at Exhibit No. 10.32).
10.33 HealthCap Management Group, Inc. 1994 Stock Option Plan
(incorporated by reference to Registration Statement No. 333-31341
at Exhibit No. 99.1).+
10.34 HealthCap Management Group, Inc. Quality Consultant Stock Option
Plan (incorporated by reference to Registration Statement No.
333-31341 at Exhibit No. 99.2).+
10.34 Agreement and Plan of Merger dated as of January 21, 1998, as
amended as of January 28, 1998, by and among FPA, FPA Medical
Management of California, Inc., Orange Coast Managed Care Services,
Inc. and St. Joseph Medical Corporation (incorporated by reference
to Registration Statement No. 333-46013 at Exhibit No. 2).
10.35 Agreement and Plan of Merger dated as of February 10, 1998, by and
between FPA and Meridian Meridian Medical Group, Inc. (incorporated
by reference to Registration Statement No. 333-46153 at Exhibit No.
2).
21 Subsidiaries of FPA.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Ernst & Young LLP.
24 Power of Attorney (included on signature page).
65
<PAGE> 66
- ----------
* Incorporated by reference to the exhibit to FPA's Registration Statement
on Form S-1, Reg. No. 33-97456, at the exhibit number set forth opposite
such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed as an
Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
66
<PAGE> 1
EXHIBIT 4.12
REGISTRATION RIGHTS AGREEMENT
Dated as of January 1, 1998
by and among
FPA MEDICAL MANAGEMENT, INC.
as the Company,
and
Persons Listed on Schedule I hereto
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of
January1, 1998, by and among FPA Medical Management, Inc., a Delaware
corporation (the "Company"), and the Persons listed on Schedule I hereto (the
"Holders").
BACKGROUND
This Agreement is made pursuant to the Stock Purchase Agreement, dated as
of December 22, 1997 (the "Purchase Agreement"), by and among the Company, FPA
Medical Group of Illinois, Ltd., an Illinois professional corporation,
Physicians Quality Care, Ltd., an Illinois corporation ("PQC"), Associates in
Managed Care, Ltd., an Illinois medical corporation ("AMC"), the Individual PQC
Shareholders and the Physician Owners (as such terms are defined in the Purchase
Agreement. The execution of this Agreement is a condition to the closing of the
transactions contemplated by the Merger Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Advice: As defined in the last paragraph of Section 4 hereof.
Affiliate: As to any specified Person shall mean any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
Agreement: This Registration Rights Agreement, as the same may be amended,
supplemented or modified from time to time in accordance with the terms hereof.
Business Day: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or other applicable place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
Closing Date: As defined in the Purchase Agreement.
Commission: The Securities and Exchange Commission.
Common Stock: Common stock, $0.02 par value per share, of the Company.
1
<PAGE> 3
Company: FPA Medical Management, Inc., a Delaware corporation, and any
successor corporation thereto.
Effectiveness Period: As defined in Section 2(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission pursuant thereto.
Filing Date: The 180th day following the Closing Date.
Indemnified Person: As defined in Section 6(a) hereof.
Person: Any individual, partnership, joint venture, corporation, trust or
unincorporated organization.
Proceeding: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the Person subject thereto,
threatened.
Prospectus: The prospectus included in the Shelf Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated pursuant to the Securities
Act), as amended or supplemented by any prospectus supplement, with respect to
the terms of the resale of any portion of the Restricted Securities covered by
such Shelf Registration Statement, and all other amendments and supplements to
any such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
Holders: The Persons listed on Schedule I hereto.
Shelf Registration Statement: The registration statement of the Company
that covers the resale of any of the Restricted Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference, if any, in such
registration statement.
Rule 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 158: Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
2
<PAGE> 4
Rule 174: Rule 174 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 415: Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated by the Commission thereunder.
Restricted Securities: The shares of Common Stock received by each Holder
pursuant to the terms of the Merger Agreement and any stock dividends with
respect to such shares until, in the case of any such share of Common Stock, (i)
the date on which it has been registered effectively pursuant to the Securities
Act and disposed of in accordance with the Shelf Registration Statement relating
to it, or (ii) the date on which the shares of Common Stock are distributed to
the public pursuant to Rule 144 (or any similar provisions then in effect) or
are salable pursuant to Rule 144(k) promulgated by the Commission pursuant to
the Securities Act.
2. Shelf Registration
(a) The Company agrees to file with the Commission after the Closing Date,
but in no event earlier than the Filing Date, a Shelf Registration Statement for
an offering to be made on a continuous basis pursuant to Rule 415 covering all
of the Restricted Securities. The Shelf Registration Statement shall initially
be on Form S-3 under the Securities Act or another appropriate form permitting
registration of such Restricted Securities for resale by the Holders in the
manner or manners reasonably designated by them. The Company shall use its
reasonable efforts, as described in Section 4, to cause the Shelf Registration
Statement to be declared effective pursuant to the Securities Act as promptly as
is practicable following the filing thereof, and (subject to Section 8 hereof)
to keep the Shelf Registration Statement continuously effective under the
Securities Act thereafter for the period ending one (1) year after the Closing
Date (except during periods following the filing of a post effective amendment
thereto and prior to the declaration of the effectiveness of such post effective
amendment; provided, the Company shall use its reasonable efforts to cause any
such post effective amendment to be declared effective as soon as practicable)
(subject to extension pursuant to clause (b)), or such shorter period as may be
specified by the Commission pursuant to Rule 144 or ending when there cease to
be outstanding any Restricted Securities (the "Effectiveness Period").
(b) The Company shall use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective (except during periods following
the filing of a post effective amendment thereto and prior to the declaration of
the effectiveness of such post effective amendment; provided, the Company shall
use its reasonable best efforts to cause any such post
3
<PAGE> 5
effective amendment to be declared effective as soon as practicable) by
supplementing and amending the Shelf Registration Statement as required by the
rules, regulations or instructions applicable to the registration form used for
such Shelf Registration Statement if required by the Securities Act or
reasonably requested by the Holders.
3. Piggy Back Registration Rights.
(a) If at any time during the period commencing on the Closing Date (as
defined in the Purchase Agreement) and ending on the earliest to occur of the
following: (i) all Registrable Securities covered by a Registration Statement
have been sold under such Registration Statement, or (ii) a subsequent
Registration Statement covering all of the Registrable Securities has been
declared effective under the Securities Act, or (iii) Holders no longer hold any
Registrable Securities or (iv) all Registrable Securities held by Holders may be
sold in compliance with Rule 144, the Company proposes to register any of its
securities under the Securities Act on any form for the registration of
securities under the Securities Act, whether or not for its own account (other
than by a registration statement on Form S-4 or Form S-8 or other form which
does not include substantially the same information as would be required in a
form for the general registration of securities or would not be available for
the Registrable Securities) (a "Piggy Back Registration"), it shall as
expeditiously as possible give written notice to the Holders of its intention to
do so and of the Holders' rights under Sections 3 through 5. (Such rights are
referred to hereinafter as "Piggy Back Registration Rights.") Upon the written
request of any of such Holders made within five (5) business days after receipt
of any such notice (which request shall specify the Registrable Securities
intended to be disposed of by each such Holder), the Company shall use its best
efforts to (i) include in the Registration Statement (and in any underwriting
relating thereto) all of the Registrable Securities with respect to which the
Company has received such requests and (ii) have such Registration Statement
declared effective by the Commission and maintain the effectiveness thereof for
the period necessary for the Holders to effect the proposed sale or other
disposition (but in no event for a period greater than 90 days).
(b) If at any time after giving written notice of its intention to
register any securities in a Piggy Back Registration but prior to the effective
date of the related Registration Statement, the Company shall determine for any
reason not to register such securities, the Company shall give written notice of
such determination to the Holders and thereupon shall be relieved of its
obligation to register any Registrable Securities in connection with such Piggy
Back Registration.
(c) If a Piggy Back Registration involves an offering by or through one or
more underwriters, then the Holders, provided they have requested to have
Registrable Securities included in the Company's Registration Statement, shall
agree to sell their Registrable Securities to the underwriters selected by the
Company on the same terms and conditions as apply to other selling shareholders
and enter into an underwriting agreement with such underwriters containing
customary selling shareholder representations and warranties.
(d) The Registration Statement filed in accordance with this Section may
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
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<PAGE> 6
If a Piggy Back Registration involves an offering by or through one or
more underwriters, the Company shall not be required to include Registrable
Securities therein if and to the extent the underwriter managing the offering
reasonably believes in good faith and advises the Company in writing (which in
turn so advises the Holders in writing) that such inclusion would materially
adversely affect such offering as a result of marketing factors. The number of
Registrable Securities that may be included, if any, following such underwriting
cutback shall be allocated among the exercising Holders on a pro rata basis
according to the number of Registrable Securities requested to be included in
such Piggy Back Registration.
4. Registration Procedures
In connection with the Company's registration obligations hereunder, the
Company shall effect such registration on the appropriate form available for the
sale of the Restricted Securities to permit the sale of the Restricted
Securities in accordance with the method or methods of disposition thereof
specified by the Holders, and pursuant thereto the Company shall as
expeditiously as reasonably possible:
(a) No fewer than five Business Days prior to the initial filing of the
Shelf Registration Statement or Prospectus and, if practical, no fewer than two
Business Days prior to the filing of any amendment or supplement thereto (other
than any document that would be incorporated or deemed to be incorporated
therein by reference), furnish to the Holders, copies of all such documents
proposed to be filed, which documents, if practical (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders. The Company shall not file such Shelf Registration
Statement or related Prospectus or any amendments or supplements thereto to
which the Holders covered thereby shall reasonably object on a timely basis;
(b) Prepare and file with the Commission such amendments, including
post-effective amendments, to each Shelf Registration Statement as may be
necessary to keep such Shelf Registration Statement continuously effective for
the Effectiveness Period; cause the related Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
securities covered by such Shelf Registration Statement during such period in
accordance with the intended methods of disposition by the selling Holders
thereof contemplated hereby and set forth in such Shelf Registration Statement
as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders promptly (and in the case of an event specified by
clause (i)(A) of this paragraph, if practical, in no event fewer than two
Business Days prior to such filing), and (if requested by any such Person),
confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus
Supplement or post-effective amendment is proposed to be filed, and (B) with
respect to the Shelf Registration Statement or any post-effective amendment,
when the same has become effective, (ii) of any request by the Commission or any
other federal or state governmental authority for amendments or supplements to
the Shelf Registration Statement or related Prospectus or for additional
information, (iii) of the issuance by the Commission, any state securities
commission, any other governmental agency or any court of any stop order, order
or injunction
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<PAGE> 7
suspending or enjoining the use or the effectiveness of the Shelf Registration
Statement or the Initiation of any proceedings for that purpose, (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Restricted
Securities for sale in any jurisdiction, or the initiation or threat of any
proceeding for such purpose, and (v) of the happening of any event that makes
any statement made in such Shelf Registration Statement or related Prospectus or
any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes in
such Shelf Registration Statement, Prospectus or documents so that, in the case
of the Shelf Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, not misleading, and that
in the case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of any order enjoining or suspending the use or
effectiveness of the Shelf Registration Statement or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Restricted Securities for sale in any jurisdiction, at the earliest reasonable
practicable moment;
(e) If requested by the Holders, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information as Holders indicate
relates to them or otherwise reasonably request be included therein, and (ii)
make all required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification of
the matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this Section 4(e) that would, in the opinion of counsel for
the Company, violate applicable law;
(f) Furnish to each Holder without charge, at least one conformed copy of
the Shelf Registration Statement and each amendment thereto, including financial
statements (but excluding schedules, all documents incorporated or deemed to be
incorporated therein by reference);
(g) Deliver to each Holder as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons reasonably request; and the Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the Holders in connection with the offering and sale of the
Restricted Securities covered by such Prospectus and any amendment or supplement
thereto;
(h) Prior to any public offering of the Restricted Securities, use its
reasonable best efforts to register or qualify or cooperate with the Holders in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Restricted Securities for offer and sale
under the securities or "Blue Sky" laws of such jurisdictions within the United
States as any Holder reasonably requests in writing and to cause the offering of
the Restricted Securities covered by the Shelf Registration Statement to be
registered with or approved by such
6
<PAGE> 8
other governmental agencies or authorities within the United States, except as
may be required as a consequence of the selling Holder's business (in which case
the Company will cooperate in all reasonable respects with the filing of such
Shelf Registration Statement therewith and granting of approvals thereby), as
may be necessary to enable the selling Holders to consummate the disposition of
such Restricted Securities; keep each such registration or qualification (or
exemption therefrom) or approval effective during the period such Shelf
Registration Statement is required to be kept effective and do any and all other
acts necessary or advisable to enable the disposition in such jurisdictions of
the Restricted Securities covered by the Shelf Registration Statement; provided,
however, that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any tax
in any such jurisdiction where it is not then so subject;
(i) In connection with any sale or transfer of the Restricted Securities
that will result in such securities no longer being the Restricted Securities,
cooperate with the Holders to facilitate the timely preparation and delivery of
certificates representing the Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company and to enable such
Restricted Securities to be in such denominations and registered in such names
as the Holders may request at least two Business Days prior to any sale of the
Restricted Securities;
(j) Upon the occurrence of any event contemplated by Section 4(c)(v)
hereof, as promptly as practicable, prepare a supplement or amendment,
including, if appropriate, a post-effective amendment, to the Shelf Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, such Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(k) Comply with applicable rules and regulations of the Commission and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act), no later than 45
days after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) commencing on the first day of
the first fiscal quarter after the effective date of the Shelf Registration
Statement, which statement shall cover said period, consistent with the
requirements of Rule 158; and
(l) List all Common Stock covered by such Shelf Registration Statement on
the exchange or system, if any, on which the Common Stock of the Company is then
listed.
(m) If necessary in connection with a disposition of Registrable
Securities, make available for inspection, at the offices where normally kept
during reasonable business hours, by a representative of any Holder and any
attorney or accountant retained by such Holder, financial and other records,
pertinent corporate documents and properties of the Company and its subsidiaries
as they may reasonably request, and cause the officers, directors and employees
of
7
<PAGE> 9
the Company and its subsidiaries to supply all information reasonably requested
by any such representative, attorney or accountant in connection with such
disposition, provided, that all records, information or documents made available
for inspection by the Company shall be deemed to be confidential and at the time
of delivery of such records, information or documents shall be kept confidential
by such Persons, and such Persons shall so agree in writing, unless (i) such
records, information or documents are in the public domain or otherwise publicly
available, (ii) disclosure of such records, information or documents is required
by court or administrative order or is necessary to respond to inquiries of
regulatory authorities or (iii) disclosure of such records, information or
documents is otherwise required by law (including, without limitation, pursuant
to the requirements of the Securities Act).
(n) Take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities.
The Company may require each seller of the Restricted Securities as to
which any registration is being effected to: (i) furnish to the Company such
information regarding the distribution of such Restricted Securities as is
required by law to be disclosed in the Shelf Registration Statement and (ii)
provide to the Company a signed writing accepting and acknowledging its rights
and obligations hereunder. The Company may exclude from such registration the
Restricted Securities of any holder of Restricted Securities who unreasonably
fails to furnish such information or signed writing at least 5 Business Days
prior to the effective date of such Shelf Registration Statement.
Each Holder agrees by acquisition of the Restricted Securities that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 3(c)(ii), 4(c)(iii), 4(c)(iv), or 4(c)(v) hereof, such
Holder will forthwith discontinue disposition of such Restricted Securities
covered by such Shelf Registration Statement or Prospectus until such Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 4(i) hereof, or until it is advised in writing (the "Advice") by the
Company that the use of the applicable Prospectus may be resumed, and, in either
case, has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus.
The registration rights of the Holders pursuant to this Agreement and the
ability to offer and sell Restricted Securities pursuant to the Shelf
Registration Statement are subject to the conditions and limitations contained
in this paragraph, and each Holder will be deemed to have agreed with the
Company that if the Board of Directors of the Company determines in its good
faith judgment, as evidenced by a resolution of the Board of Directors, that the
use of any Prospectus would require the disclosure of material information that
the Company has a bona fide business purpose for preserving as confidential or
the disclosure of which would impede the Company's ability to consummate a
significant transaction, and that the Company is not otherwise required by
applicable securities laws or regulations to disclose, upon written notice of
such determination by the Company, the rights of the Holders to offer, sell or
distribute any Restricted Securities pursuant to the Shelf Registration
Statement or to require the Company to take action with respect to the
registration or sale of any Restricted Securities pursuant to the Shelf
Registration Statement shall be suspended until the date upon which the Company
notifies the
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<PAGE> 10
Holders in writing that suspension of such rights for the grounds set forth in
this paragraph is no longer necessary subject to the limits set forth herein,
and the Company agrees to give such notice as promptly as practicable following
the date that such suspension of rights is no longer necessary.
5. Registration Expenses
All fees and expenses incident to the performance of or compliance with
this Agreement by the Company shall be borne by it whether or not the Shelf
Registration Statement is filed or becomes effective and whether or not any
securities are issued or sold pursuant to the Shelf Registration Statement. The
fees and expenses referred to in the foregoing sentence shall include, without
limitation, (a) all registration and filing fees (including, without limitation,
fees and expenses in compliance with securities or "Blue Sky" laws (b) printing
expenses (including, without limitation, expenses of printing Prospectuses), (c)
messenger, telephone and delivery expenses, (d) fees and disbursements of
counsel for the Company; (e) Securities Act liability insurance, if the Company
desires such insurance, and (f) fees and expenses of all other Persons retained
by the Company. In addition, the Company shall pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, and the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange. Notwithstanding the
foregoing or anything in this Agreement to the contrary, each Holder shall pay
all underwriting discounts and commissions of any underwriters or broker-dealers
with respect to any Restricted Securities sold by it.
6. Indemnification
(a) The Company agrees to indemnify and hold harmless each Holder and his
representatives and agents (an "Indemnified Person"), from and against any and
all losses, claims, damages, liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in the Shelf
Registration Statement, Prospectus or form of Prospectus or in any amendment or
supplement thereto or in any preliminary Prospectus, or caused by (i) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in the case
of any Prospectus or form of Prospectus or supplement thereto, in the light of
the circumstances under which they were made, not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Indemnified Person furnished to the Company by or on
behalf of such Indemnified Person or (ii) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law; provided that the foregoing indemnity with respect to
any preliminary Prospectus shall not inure to the benefit of any Indemnified
Person from whom the Person asserting such losses, claims, damages, liabilities
and judgments purchased securities if such untrue statement or omission or
alleged untrue statement or omission made in such preliminary Prospectus is
eliminated or remedied in the Prospectus and a copy of the Prospectus shall not
have been furnished to such Person in a timely manner provided such failure is
not as a result of an action or inaction on the part of the Indemnifying Person.
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<PAGE> 11
(b) In case any action shall be brought against any Indemnified Person,
based upon the Shelf Registration Statement or any such Prospectus or any
amendment or supplement thereto and with respect to which indemnity may be
sought against the Company, such Indemnified Person shall promptly notify the
Company in writing and the Company shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Person and
payment of all fees and expenses. Any Indemnified Person shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person, unless (i) the employment of such counsel shall have
been specifically authorized in writing by the Company, (ii) the Company shall
have failed to assume the defense and employ counsel for the Indemnified Parties
or (iii) the named parties to any such action (including any impleaded parties)
include both such Indemnified Person and the Company and such Indemnified Person
shall have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company (in which case the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Person), provided, however,
that the Company shall not, in connection with any such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Indemnified Persons, which firm shall be designated in
writing by such Indemnified Persons; and provided, however, that all such fees
and expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action effected without its written
consent but if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Indemnified Person from and against
any loss or liability by reason of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(c) In connection with the Shelf Registration Statement, each Holder
participating in such Shelf Registration Statement agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its officers
and any Person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Indemnified Person but only with
reference to information relating to such Indemnified Person furnished in
writing by or on behalf of such Indemnified Person. In case any action shall be
brought against the Company, any of its directors, any such officer or any
Person controlling the Company based on such Shelf Registration Statement and in
respect of which indemnity may be sought against any Indemnified Person, the
Indemnified Person shall have the rights and duties given to the Company (except
that if the Company shall have assumed the defense thereof, such Indemnified
Person shall not be required to do so, but may employ separate counsel therein
and participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person), and the Company, its
directors, any such officers and any Person controlling the Company shall have
the rights and duties specified for Indemnified Persons in Section 6(b) hereof.
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<PAGE> 12
(d) If the indemnification provided for in this Section 6 is unavailable
to an indemnified party in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claim, damages,
liabilities and judgments in such proportion as is appropriate to reflect the
relative fault of the Company and each such Indemnified Person in connection
with the statements, omissions or violations which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company and each such
Indemnified Person shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or such Indemnified Person and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and equitable
if contribution pursuant to this Section 6(d) were determined by pro rata
allocation (even if the Indemnified Persons were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6, no Indemnified Person shall be
required to contribute any amount in excess of the amount by which the total net
proceeds received by it in connection with the sale of the Restricted Securities
pursuant to this Agreement exceeds the amount of any damages which such
Indemnified Person has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The Indemnified Persons'
obligations to contribute pursuant to this Section 6(d) are several in
proportion to the respective amount of Restricted Securities included in any
such Shelf Registration Statement by each Indemnified Person and not joint.
7. Rule 144
The Company shall use its reasonable best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it will, upon the
request of any Holder, make available other information as required by, and so
long as necessary to permit, sales of its Restricted Securities pursuant to Rule
144.
8. Miscellaneous
(a) Remedies. In the event of a breach by the Company, or by a Holder of
any of their obligations under this Agreement, each Holder or the Company, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific
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<PAGE> 13
performance of its rights under this Agreement. The Company and each Holder
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense that a remedy
at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, without the written consent of each of the Holders.
(c) Notices. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified first
class mail, return receipt requested, telex or telecopy:
If the Company:
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Tel: (619) 453-1000
Fax: (619) 453-1941
Attn: Chief Financial Officer
with copies to:
James A. Lebovitz, Esq.
Senior Vice President,
General Counsel and Secretary
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
and
Pillsbury Madison & Sutro LLP
101 West Broadway, Suite 1800
San Diego, California 92101
Tel: (619) 234-5000
Fax: (619) 236-1995
Attention: David R. Snyder, Esq.
If to any Holder:
at the address and telephone numbers set forth for such Holder
on Schedule 1 hereto
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with a copy to:
James Frame, M.D., J.D.
-----------------------------
22114 Princeton Circle
-----------------------------
Frankfurt, Illinois 60423
-----------------------------
Tel: (815) 469-8959
Fax: (815) 469-2837
Attn: _______________________
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (i) delivered by hand, if
personally delivered, (ii) one Business Day after being timely delivered to a
next-day air courier, (iii) five Business Days after being deposited in the
mail, postage prepaid, if mailed, (iv) when answered back, if telexed or (v)
when receipt is acknowledged by the recipient's telecopier machine, if
telecopied.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. Notwithstanding the foregoing, no
transferee shall have any of the rights granted under this Agreement until such
transferee shall acknowledge its rights and obligations hereunder by a signed
written statement of such transferee's acceptance of such rights and
obligations.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, as applied to contracts
made and performed within the State of California without regard to principles
of conflicts of law.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
(h) Authority. The Company hereby represents to the parties listed on
Schedule I hereto that this Agreement has been duly authorized, executed and
delivered.
(i) Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover reasonably attorneys' fees in addition to any other
available remedy.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
--------------------------------
Name: James A. Lebovitz
------------------------------
Title: Senior Vice President
-----------------------------
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
Holders' Representative
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
14
<PAGE> 16
SCHEDULE I
[Names and Addresses of Shareholders of Physicians Quality Care, Ltd.]
[Names and Addresses of Shareholders of Associates in Managed Care, Ltd.]
1
<PAGE> 1
EXHIBIT 4.13
REGISTRATION RIGHTS AGREEMENT
Dated as of February 17, 1998
by and among
FPA MEDICAL MANAGEMENT, INC.
and
JOHN G. KEENE, M.D., ROBERT W. STRAUSS, M.D.
AND MARC V. WEINER
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of February
17, 1998, by and among FPA Medical Management, Inc., a Delaware corporation (the
"Company") and John G. Keene, M.D., Robert W. Strauss, M.D. and Marc V. Weiner
(the "Holders").
BACKGROUND
This Agreement is made pursuant to the Agreement and Plan of Merger, dated
as of February 17, 1998 (the "Merger Agreement"), by and among the Company, ETA
Acquisition Corp., a New York corporation, Emergency Treatment Associates, Inc.,
a New York corporation ("ETA"), and the Holders. The execution of this Agreement
is a condition to the closing of the transactions contemplated by the Merger
Agreement. Terms not defined herein shall have the meanings defined in the
Merger Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Advice: As defined in the last paragraph of Section 3 hereof.
Affiliate: As to any specified Person shall mean any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
Agreement: This Registration Rights Agreement, as the same may be amended,
supplemented or modified from time to time in accordance with the terms hereof.
Business Day: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or other applicable place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
Closing Date: As defined in the Merger Agreement.
Commission: The Securities and Exchange Commission.
<PAGE> 3
Common Stock: Common stock, $0.002 par value per share, of the Company.
Company: FPA Medical Management, Inc., a Delaware corporation, and any
successor corporation thereto.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission pursuant thereto.
Holders: John G. Keene, M.D., Robert W. Strauss, M.D. and Marc V. Weiner.
Indemnified Person: As defined in Section 5(a) hereof.
Person: Any individual, partnership, joint venture, corporation, trust or
unincorporated organization.
Proceeding: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the Person subject thereto,
threatened.
Prospectus: The prospectus included in the Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated pursuant to the Securities
Act), as amended or supplemented by any prospectus supplement, with respect to
the terms of the resale of any portion of the Restricted Securities covered by
such Registration Statement, and all other amendments and supplements to any
such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
Registration Statement: The registration statement of the Company that
covers the resale of any of the Restricted Securities pursuant to the provisions
of this Agreement, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference, if any, in such registration statement.
Restricted Securities: The shares of Common Stock received by each Holder
pursuant to the terms of the Merger Agreement and any stock dividends with
respect to such shares until, in the case of any such share of Common Stock, (i)
the date on which it has been registered effectively pursuant to the Securities
Act and disposed of in accordance with the Registration Statement relating to
it, or (ii) the date on which the shares of Common Stock are distributed to the
public pursuant to Rule 144 (or any similar provisions then in effect) or are
salable pursuant to Rule 144(k) promulgated by the Commission pursuant to the
Securities Act.
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<PAGE> 4
Rule 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 158: Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 174: Rule 174 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 415: Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated by the Commission thereunder.
2. Piggy Back Registration Rights.
(a) If at any time during the period commencing on the Closing Date (as
defined in the Merger Agreement) and ending on the earliest to occur of the
following: (i) all Registrable Securities covered by a Registration Statement
have been sold under such Registration Statement, or (ii) a subsequent
Registration Statement covering all of the Registrable Securities has been
declared effective under the Securities Act, or (iii) Holders no longer hold any
Registrable Securities or (iv) all Registrable Securities held by Holders may be
sold in compliance with Rule 144, the Company proposes to register any of its
securities under the Securities Act on any form for the registration of
securities under the Securities Act, whether or not for its own account (other
than by a registration statement on Form S-4 or Form S-8 or other form which
does not include substantially the same information as would be required in a
form for the general registration of securities or would not be available for
the Registrable Securities) (a "Piggy Back Registration"), it shall as
expeditiously as possible give written notice to the Holders of its intention to
do so and of the Holders' rights under Sections 2 through 4. (Such rights are
referred to hereinafter as "Piggy Back Registration Rights.") Upon the written
request of any of such Holders made within five (5) business days after receipt
of any such notice (which request shall specify the Registrable Securities
intended to be disposed of by each such Holder), the Company shall use its best
efforts to (i) include in the Registration Statement (and in any
3
<PAGE> 5
underwriting relating thereto) all of the Registrable Securities with respect to
which the Company has received such requests and (ii) have such Registration
Statement declared effective by the Commission and maintain the effectiveness
thereof for the period necessary for the Holders to effect the proposed sale or
other disposition (but in no event for a period greater than 90 days).
(b) If at any time after giving written notice of its intention to
register any securities in a Piggy Back Registration but prior to the effective
date of the related Registration Statement, the Company shall determine for any
reason not to register such securities, the Company shall give written notice of
such determination to the Holders and thereupon shall be relieved of its
obligation to register any Registrable Securities in connection with such Piggy
Back Registration; provided, however, that the Company shall concurrently give a
similar notice to all other holders of the Company's securities selling such
securities under such Registration Statement pursuant to piggy back registration
rights.
(c) If a Piggy Back Registration involves an offering by or through one or
more underwriters, then the Holders, provided they have requested to have
Registrable Securities included in the Company's Registration Statement, shall
agree to sell their Registrable Securities to the underwriters selected by the
Company on the same terms and conditions as apply to other selling shareholders
and enter into an underwriting agreement with such underwriters containing
customary selling shareholder representations and warranties.
(d) The Registration Statement filed in accordance with this Section may
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(e) If a Piggy Back Registration involves an offering by or through one or
more underwriters, the Company shall not be required to include Registrable
Securities therein if and to the extent the underwriter managing the offering
reasonably believes in good faith and advises the Company in writing (which in
turn so advises the Holders in writing) that such inclusion would adversely
affect such offering as a result of marketing factors. The number of Registrable
Securities that may be included, if any, following such underwriting cutback
shall be allocated among the exercising Holders and all other holders selling
securities under such Registration Statement pursuant to piggy back registration
rights on a pro rata basis according to the number of Registrable Securities
requested to be included in such Piggy Back Registration.
3. Registration Procedures
In connection with the Company's registration obligation hereunder, the
Company shall effect such registration on the appropriate form available for the
sale of the Restricted Securities to permit the sale of the Restricted
Securities in accordance with the method or methods of disposition thereof
specified by the Holders, and pursuant thereto the Company shall as
expeditiously as reasonably possible:
4
<PAGE> 6
(a) No fewer than five (5) Business Days prior to the initial filing of
the Registration Statement or Prospectus and, if practical, no fewer than two
(2) Business Days prior to the filing of any amendment or supplement thereto
(other than any document that would be incorporated or deemed to be incorporated
therein by reference), furnish to the Holders, copies of all such documents
proposed to be filed, which documents, if practical (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders. The Company shall not file such Registration Statement
or related Prospectus or any amendments or supplements thereto to which the
Holders covered thereby shall reasonably object on a timely basis;
(b) Prepare and file with the Commission such amendments, including
post-effective amendments, to each Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the Effectiveness
Period; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
and the Exchange Act with respect to the disposition of all securities covered
by such Registration Statement during such period in accordance with the
intended methods of disposition by the selling Holders thereof contemplated
hereby and set forth in such Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders promptly (and in the case of an event specified by
clause (i)(A) of this paragraph, if practical, in no event fewer than two (2)
Business Days prior to such filing), and (if requested by any such Person),
confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus
Supplement or post-effective amendment is proposed to be filed, and (B) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the Commission or any other
federal or state governmental authority for amendments or supplements to the
Registration Statement or related Prospectus or for additional information,
(iii) of the issuance by the Commission, any state securities commission, any
other governmental agency or any court of any stop order, order or injunction
suspending or enjoining the use or the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Restricted
Securities for sale in any jurisdiction, or the initiation or threat of any
proceeding for such purpose, and (v) of the happening of any event that makes
any statement made in such Registration Statement or related Prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in such
Registration Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, not misleading, and that in
the case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
5
<PAGE> 7
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of any order enjoining or suspending the use or
effectiveness of the Registration Statement or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the Restricted
Securities for sale in any jurisdiction, at the earliest reasonable practicable
moment;
(e) If requested by the Holders, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information as the Holders indicate
relates to them or otherwise reasonably request be included therein, and (ii)
make all required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification of
the matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this Section 3(e) that would, in the opinion of counsel for
the Company, violate applicable law;
(f) Furnish to each Holder without charge, at least one conformed copy of
the Registration Statement and each amendment thereto, including financial
statements (but excluding schedules and all documents incorporated or deemed to
be incorporated therein by reference);
(g) Deliver to each Holder as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons reasonably request; and the Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the Holders in connection with the offering and sale of the
Restricted Securities covered by such Prospectus and any amendment or supplement
thereto;
(h) Prior to any public offering of the Restricted Securities, use its
reasonable best efforts to register or qualify or cooperate with the Holders in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Restricted Securities for offer and sale
under the securities or "Blue Sky" laws of such jurisdictions within the United
States as any Holder reasonably requests in writing and to cause the offering of
the Restricted Securities covered by the Registration Statement to be registered
with or approved by such other governmental agencies or authorities within the
United States, except as may be required as a consequence of the selling
Holder's business (in which case the Company will cooperate in all reasonable
respects with the filing of such Registration Statement therewith and granting
of approvals thereby), as may be necessary to enable the selling Holders to
consummate the disposition of such Restricted Securities; keep each such
registration or qualification (or exemption therefrom) or approval effective
during the period such Registration Statement is required to be kept effective
and do any and all other acts necessary or advisable to enable the disposition
in such jurisdictions of the Restricted Securities covered by the Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would
6
<PAGE> 8
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any tax in any such jurisdiction
where it is not then so subject;
(i) In connection with any sale or transfer of the Restricted Securities
that will result in such securities no longer being Restricted Securities,
cooperate with the Holders to facilitate the timely preparation and delivery of
certificates representing the Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company and to enable such
Restricted Securities to be in such denominations and registered in such names
as the Holders may request at least two (2) Business Days prior to any sale of
the Restricted Securities;
(j) Upon the occurrence of any event contemplated by Section 3(c)(v)
hereof, as promptly as practicable, prepare a supplement or amendment,
including, if appropriate, a post-effective amendment, to the Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, such Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(k) Comply with applicable rules and regulations of the Commission and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act), no later than 45
days after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) commencing on the first day of
the first fiscal quarter after the effective date of the Registration Statement,
which statement shall cover said period, consistent with the requirements of
Rule 158;
(l) List all Common Stock covered by such Registration Statement on the
exchange or system, if any, on which the Common Stock of the Company is then
listed;
(m) If necessary in connection with a disposition of Registrable
Securities, make available for inspection, at the offices where normally kept
during reasonable business hours, by a representative of any Holder and any
attorney or accountant retained by such Holder, financial and other records,
pertinent corporate documents and properties of the Company and its subsidiaries
as they may reasonably request, and cause the officers, directors and employees
of the Company and its subsidiaries to supply all information reasonably
requested by any such representative, attorney or accountant in connection with
such disposition, provided, that all records, information or documents made
available for inspection by the Company shall be deemed to be confidential and
at the time of delivery of such records, information or documents shall be kept
confidential by such Persons, and such Persons shall so agree in writing, unless
(i) such records, information or documents are in the public domain or otherwise
publicly available, (ii) disclosure of such records, information or documents is
required by court or administrative
7
<PAGE> 9
order or is necessary to respond to inquiries of regulatory authorities or (iii)
disclosure of such records, information or documents is otherwise required by
law (including, without limitation, pursuant to the requirements of the
Securities Act; and.
(n) Take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities.
The Company may require each seller of the Restricted Securities as to
which any registration is being effected to: (i) furnish to the Company such
information regarding the distribution of such Restricted Securities as is
required by law to be disclosed in the Registration Statement and (ii) provide
to the Company a signed writing accepting and acknowledging its rights and
obligations hereunder. The Company may exclude from such registration the
Restricted Securities of any holder of Restricted Securities who unreasonably
fails to furnish such information or signed writing at least five (5) Business
Days prior to the effective date of such Registration Statement.
Each Holder agrees by acquisition of the Restricted Securities that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), or 3(c)(v) hereof, such
Holder will forthwith discontinue disposition of such Restricted Securities
covered by such Registration Statement or Prospectus until such Holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
3(i) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus.
The registration rights of the Holders pursuant to this Agreement and the
ability to offer and sell Restricted Securities pursuant to the Registration
Statement are subject to the conditions and limitations contained in this
paragraph, and each Holder will be deemed to have agreed with the Company that
if the Board of Directors of the Company determines in its good faith judgment,
as evidenced by a resolution of the Board of Directors, that the use of any
Prospectus would require the disclosure of material information that the Company
has a bona fide business purpose for preserving as confidential or the
disclosure of which would impede the Company's ability to consummate a
significant transaction, and that the Company is not otherwise required by
applicable securities laws or regulations to disclose, upon written notice of
such determination by the Company, the rights of the Holders to offer, sell or
distribute any Restricted Securities pursuant to the Registration Statement or
to require the Company to take action with respect to the registration or sale
of any Restricted Securities pursuant to the Registration Statement shall be
suspended until the date upon which the Company notifies the Holders and all
other holders selling securities under such Registration Statement in writing
that suspension of such rights for the grounds set forth in this paragraph is no
longer necessary subject to the limits set forth herein, and the Company agrees
to give such notice as promptly as practicable following the date that such
suspension of rights is no longer necessary.
8
<PAGE> 10
4. Registration Expenses
All fees and expenses incident to the performance of or compliance with
this Agreement by the Company shall be borne by it whether or not the
Registration Statement is filed or becomes effective and whether or not any
securities are issued or sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (a) all registration and filing fees (including, without limitation,
fees and expenses in compliance with securities or "Blue Sky" laws), (b)
printing expenses (including, without limitation, expenses of printing
Prospectuses), (c) messenger, telephone and delivery expenses, (d) fees and
disbursements of counsel for the Company; (e) Securities Act liability
insurance, if the Company desires such insurance, and (f) fees and expenses of
all other Persons retained by the Company. In addition, the Company shall pay
its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit, and the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange.
Notwithstanding the foregoing or anything in this Agreement to the contrary,
each Holder shall pay all underwriting discounts and commissions of any
underwriters or broker-dealers with respect to any Restricted Securities sold by
it.
5. Indemnification
(a) The Company (as an "Indemnifying Person") agrees to indemnify and hold
harmless each Holder and his representatives and agents (an "Indemnified
Person"), from and against any and all losses, claims, damages, liabilities and
judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, Prospectus or form of
Prospectus or in any amendment or supplement thereto or in any preliminary
Prospectus, or caused by (i) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the case of any Prospectus or form of Prospectus or
supplement thereto, in the light of the circumstances under which they were
made, not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Indemnified Person furnished to the Company in writing by or on behalf of such
Indemnified Person for the specific purpose of inclusion in the Registration
Statement or (ii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law; provided that the foregoing indemnity with respect to any
preliminary Prospectus shall not inure to the benefit of any Indemnified Person
from whom the Person asserting such losses, claims, damages, liabilities and
judgments purchased securities if such untrue statement or omission or alleged
untrue statement or omission made in such preliminary Prospectus is eliminated
or remedied in the Prospectus and a copy of the Prospectus shall not have been
furnished to such Person in a timely manner provided such failure is not as a
result of an action or inaction on the part of the Indemnifying Person.
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<PAGE> 11
(b) In case any action shall be brought against any Indemnified Person,
based upon the Registration Statement or any such Prospectus or any amendment or
supplement thereto and with respect to which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify the Company in writing
and the Company shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Person and payment of all
fees and expenses. Any Indemnified Person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Person, unless (i) the employment of such counsel shall have been
specifically authorized in writing by the Company, (ii) the Company shall have
failed to assume the defense and employ counsel for the Indemnified Parties or
(iii) the named parties to any such action (including any impleaded parties)
include both such Indemnified Person and the Company and such Indemnified Person
shall have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company (in which case the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Person), provided, however,
that the Company shall not, in connection with any such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Indemnified Persons, which firm shall be designated in
writing by such Indemnified Persons; and provided, however, that all such fees
and expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action effected without its written
consent but if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Indemnified Person from and against
any loss or liability by reason of such settlement. No Indemnifying Person
shall, without the prior written consent of the Indemnified Person, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Person, unless such settlement includes an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such proceeding.
(c) In connection with the Registration Statement, each Holder
participating in such Registration Statement agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers and any
Person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Indemnified Person but only with
reference to information relating to such Indemnified Person furnished in
writing by or on behalf of such Indemnified Person for the specific purpose of
inclusion in the Registration Statement. In case any action shall be brought
against the Company, any of its directors, any such officer or any Person
controlling the Company based on such Registration Statement and in respect of
which indemnity may be sought against any Indemnified Person, the Indemnified
Person shall have the rights and duties given to the Company (except that if the
Company shall have assumed the defense thereof, such Indemnified Person shall
not be required to do so, but may employ separate counsel therein and
participate in the defense thereof but the fees and expenses of such counsel
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<PAGE> 12
shall be at the expense of such Indemnified Person), and the Company, its
directors, any such officers and any Person controlling the Company shall have
the rights and duties specified for Indemnified Persons in Section 5(b) hereof.
(d) If the indemnification provided for in this Section 5 is unavailable
to an Indemnified Person in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such Indemnified Person, shall contribute to the amount paid or
payable by such Indemnified Person as a result of such losses, claim, damages,
liabilities and judgments in such proportion as is appropriate to reflect the
relative fault of the Company and each such Indemnified Person in connection
with the statements, omissions or violations which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company and each such
Indemnified Person shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or such Indemnified Person and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation (even if the Indemnified Persons were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5, no Indemnified Person shall be
required to contribute any amount in excess of the amount by which the total net
proceeds received by it in connection with the sale of the Restricted Securities
pursuant to this Agreement exceeds the amount of any damages which such
Indemnified Person has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The Indemnified Persons'
obligations to contribute pursuant to this Section 5(d) are several in
proportion to the respective amount of Restricted Securities included in any
such Registration Statement by each Indemnified Person and not joint.
6. Rule 144
The Company shall use its reasonable best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it
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will, upon the request of any Holder, make available other information as
required by, and so long as necessary to permit, sales of its Restricted
Securities pursuant to Rule 144.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company, or by a Holder of
any of their obligations under this Agreement, each Holder or the Company, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company and each Holder agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of any of the provisions of this Agreement and hereby further agrees that,
in the event of any action for specific performance in respect of such breach,
it shall waive the defense that a remedy at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, without the written consent of each of the Holders.
(c) Notices. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified first
class mail, return receipt requested, telex or telecopy:
If to the Company:
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, CA 92122
Tel: (619) 453-1000
Fax: (619) 453-1941
Attn: Chief Financial Officer
with a copy to:
James A. Lebovitz, Esq.
Senior Vice President,
General Counsel and Secretary
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, CA 92122
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If to any Holder:
c/o Sterling Emergency Treatment Associates, Inc.
201 South Avenue, Suite 404
Poughkeepsie, NY 12601
Tel: (914) 471-0015
Fax: (914) 471-0291
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Tel: (312) 876-8000
Fax: (312) 876-7934
Attn: J. Ross Docksey, Esq.
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (i) delivered by hand, if
personally delivered, (ii) one (1) Business Day after being timely delivered to
a next-day air courier, (iii) five (5) Business Days after being deposited in
the mail, postage prepaid, if mailed, (iv) when answered back, if telexed or (v)
when receipt is acknowledged by the recipient's telecopier machine, if
telecopied.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. Notwithstanding the foregoing, no
transferee shall have any of the rights granted under this Agreement until such
transferee shall acknowledge its rights and obligations hereunder by a signed
written statement of such transferee's acceptance of such rights and
obligations.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, as applied to contracts
made and performed within the State of California without regard to principles
of conflicts of law.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the hereof. All
references made in this Agreement to
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"Section" and "paragraph" refer to such Section or paragraph of this Agreement,
unless expressly stated otherwise.
(h) Authority. The Company hereby represents to the parties listed on
Schedule I hereto that this Agreement has been duly authorized, executed and
delivered.
(i) Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover reasonably attorneys' fees in addition to any other
available remedy.
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ STEVEN M. LASH
--------------------------------
Name: Steven M. Lash
------------------------------
Title: Executive Vice President
-----------------------------
and Chief Financial Officer
-----------------------------
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
JOHN G. KEENE
/s/ JOHN G. KEENE
-----------------------------------
ROBERT W. STRAUSS
/s/ ROBERT W. STRAUSS
-----------------------------------
MARC V. WEINER
/s/ MARC V. WEINER
-----------------------------------
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<PAGE> 1
EXHIBIT 4.14
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of February
27, 1998, by and between FPA Medical Management, Inc., a Delaware corporation
(the "Company"), and Richard E. Thorner (the "Holder").
BACKGROUND
This Agreement is made pursuant to the Agreement and Plan of Merger, dated
as of February 27, 1998 (the "Merger Agreement"), by and among the Company, FPA
Medical Management of Texas, Inc., a Texas corporation, and the Selling
Shareholder. The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Merger Agreement. Terms not defined herein
shall have the meanings defined in the Merger Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Advice: As defined in the last paragraph of Section 3 hereof.
Affiliate: As to any specified Person shall mean any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
Agreement: This Registration Rights Agreement, as the same may be amended,
supplemented or modified from time to time in accordance with the terms hereof.
Business Day: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or other applicable place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
Closing Date: As defined in the Merger Agreement.
Commission: The Securities and Exchange Commission.
Common Stock: Common stock, $0.02 par value per share, of the Company.
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Company: FPA Medical Management, Inc., a Delaware corporation, and any
successor corporation thereto.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission pursuant thereto.
Holder: Richard E. Thorner.
Indemnified Person: As defined in Section 5(a) hereof.
Person: Any individual, partnership, joint venture, corporation, trust or
unincorporated organization.
Proceeding: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the Person subject thereto,
threatened.
Prospectus: The prospectus included in the Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated pursuant to the Securities
Act), as amended or supplemented by any prospectus supplement, with respect to
the terms of the resale of any portion of the Restricted Securities covered by
such Registration Statement, and all other amendments and supplements to any
such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
Registration Statement: The registration statement of the Company that
covers the resale of any of the Restricted Securities pursuant to the provisions
of this Agreement, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference, if any, in such registration statement.
Restricted Securities: The shares of Common Stock received by the Holder
pursuant to the terms of the Merger Agreement and any stock dividends with
respect to such shares until, in the case of any such share of Common Stock, (i)
the date on which it has been registered effectively pursuant to the Securities
Act and disposed of in accordance with the Registration Statement relating to
it, or (ii) the date on which the shares of Common Stock are distributed to the
public pursuant to Rule 144 (or any similar provisions then in effect) or are
salable pursuant to Rule 144(k) promulgated by the Commission pursuant to the
Securities Act.
Rule 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
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<PAGE> 3
Rule 158: Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 174: Rule 174 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 415: Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated by the Commission thereunder.
2. Piggy Back Registration Rights.
(a) If at any time during the period commencing on the Closing Date (as
defined in the Agreement) and ending on the earliest to occur of the following:
(i) all Registrable Securities covered by a Registration Statement have been
sold under such Registration Statement, or (ii) a subsequent Registration
Statement covering all of the Registrable Securities has been declared effective
under the Securities Act, or (iii) the Holder no longer holds any Registrable
Securities or (iv) all Registrable Securities held by the Holder may be sold in
compliance with Rule 144, the Company proposes to register any of its securities
under the Securities Act on any form for the registration of securities under
the Securities Act, whether or not for its own account (other than by a
registration statement on Form S-4 or Form S-8 or other form which does not
include substantially the same information as would be required in a form for
the general registration of securities or would not be available for the
Registrable Securities) (a "Piggy Back Registration"), it shall as expeditiously
as possible give written notice to the Holder of its intention to do so and of
the Holder's rights under Sections 2 through 4. (Such rights are referred to
hereinafter as "Piggy Back Registration Rights.") Upon the written request of
the Holder made within five (5) business days after receipt of any such notice
(which request shall specify the Registrable Securities intended to be disposed
of by the Holder), the Company shall use its best efforts to (i) include in the
Registration Statement (and in any underwriting relating thereto) all of the
Registrable Securities with respect to which the Company has received such
request and (ii) have such Registration Statement declared effective by the
Commission and maintain the effectiveness thereof for the period necessary for
the Holder to effect the proposed sale or other disposition (but in no event for
a period greater than 90 days).
(b) If at any time after giving written notice of its intention to
register any securities in a Piggy Back Registration but prior to the effective
date of the related Registration Statement,
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<PAGE> 4
the Company shall determine for any reason not to register such securities, the
Company shall give written notice of such determination to the Holder and
thereupon shall be relieved of its obligation to register any Registrable
Securities in connection with such Piggy Back Registration.
(c) If a Piggy Back Registration involves an offering by or through one or
more underwriters, then the Holder, provided he has requested to have
Registrable Securities included in the Company's Registration Statement, shall
agree to sell his Registrable Securities to the underwriters selected by the
Company on the same terms and conditions as apply to other selling shareholders
and enter into an underwriting agreement with such underwriters containing
customary selling shareholder representations and warranties.
(d) The Registration Statement filed in accordance with this Section may
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(e) If a Piggy Back Registration involves an offering by or through one or
more underwriters, the Company shall not be required to include Registrable
Securities therein if and to the extent the underwriter managing the offering
reasonably believes in good faith and advises the Company in writing (which in
turn so advises the Holder in writing) that such inclusion would adversely
affect such offering as a result of marketing factors. The number of Registrable
Securities that may be included, if any, following such underwriting cutback
shall be allocated among the exercising Holders on a pro rata basis according to
the number of Registrable Securities requested to be included in such Piggy Back
Registration (based on all securities requested to be included in such Piggy
Back Registration regardless of whether such request is solely based on the
Registrable Securities hereunder or on registrable securities subject to other
registration rights agreements between the holders thereof and the Company).
3. Registration Procedures
In connection with the Company's registration obligation hereunder, the
Company shall effect such registration on the appropriate form available for the
sale of the Restricted Securities to permit the sale of the Restricted
Securities in accordance with the method or methods of disposition thereof
specified by the Holders, and pursuant thereto the Company shall as
expeditiously as reasonably possible:
(a) No fewer than five (5) Business Days prior to the initial filing of
the Registration Statement or Prospectus and, if practical, no fewer than two
(2) Business Days prior to the filing of any amendment or supplement thereto
(other than any document that would be incorporated or deemed to be incorporated
therein by reference), furnish to the Holders, copies of all such documents
proposed to be filed, which documents, if practical (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders. The Company shall not file such Registration Statement
or related Prospectus or any amendments or supplements thereto to which the
Holders covered thereby shall reasonably object on a timely basis;
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<PAGE> 5
(b) Prepare and file with the Commission such amendments, including
post-effective amendments, to each Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the Effectiveness
Period; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
and the Exchange Act with respect to the disposition of all securities covered
by such Registration Statement during such period in accordance with the
intended methods of disposition by the selling Holders thereof contemplated
hereby and set forth in such Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holder promptly (and in the case of an event specified by
clause (i)(A) of this paragraph, if practical, in no event fewer than two (2)
Business Days prior to such filing), and (if requested by any such Person),
confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus
Supplement or post-effective amendment is proposed to be filed, and (B) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the Commission or any other
federal or state governmental authority for amendments or supplements to the
Registration Statement or related Prospectus or for additional information,
(iii) of the issuance by the Commission, any state securities commission, any
other governmental agency or any court of any stop order, order or injunction
suspending or enjoining the use or the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Restricted
Securities for sale in any jurisdiction, or the initiation or threat of any
proceeding for such purpose, and (v) of the happening of any event that makes
any statement made in such Registration Statement or related Prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in such
Registration Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, not misleading, and that in
the case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of any order enjoining or suspending the use or
effectiveness of the Registration Statement or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the Restricted
Securities for sale in any jurisdiction, at the earliest reasonable practicable
moment;
(e) If requested by the Holder, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information as the Holder indicates
relates to him or otherwise reasonably requests be included therein, and (ii)
make all required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification of
the matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
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<PAGE> 6
action pursuant to this Section 3(e) that would, in the opinion of counsel for
the Company, violate applicable law;
(f) Furnish to the Holder without charge, at least one conformed copy of
the Registration Statement and each amendment thereto, including financial
statements (but excluding schedules and all documents incorporated or deemed to
be incorporated therein by reference);
(g) Deliver to the Holder as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons reasonably request; and the Company hereby consents to the use of
such Prospectus and each amendment or supplement thereto by the Holder in
connection with the offering and sale of the Restricted Securities covered by
such Prospectus and any amendment or supplement thereto;
(h) Prior to any public offering of the Restricted Securities, use its
reasonable best efforts to register or qualify or cooperate with the Holder in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Restricted Securities for offer and sale
under the securities or "Blue Sky" laws of such jurisdictions within the United
States as the Holder reasonably requests in writing and to cause the offering of
the Restricted Securities covered by the Registration Statement to be registered
with or approved by such other governmental agencies or authorities within the
United States, as may be necessary to enable the Holder to consummate the
disposition of such Restricted Securities; keep each such registration or
qualification (or exemption therefrom) or approval effective during the period
such Registration Statement is required to be kept effective and do any and all
other acts necessary or advisable to enable the disposition in such
jurisdictions of the Restricted Securities covered by the Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
tax in any such jurisdiction where it is not then so subject;
(i) In connection with any sale or transfer of the Restricted Securities
that will result in such securities no longer being Restricted Securities,
cooperate with the Holders to facilitate the timely preparation and delivery of
certificates representing the Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company and to enable such
Restricted Securities to be in such denominations and registered in such names
as the Holders may request at least two (2) Business Days prior to any sale of
the Restricted Securities;
(j) Upon the occurrence of any event contemplated by Section 3(c)(v)
hereof, as promptly as practicable, prepare a supplement or amendment,
including, if appropriate, a post-effective amendment, to the Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, such Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading;
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<PAGE> 7
(k) Comply with applicable rules and regulations of the Commission and
make generally available to its security holders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act), no later than 45
days after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) commencing on the first day of
the first fiscal quarter after the effective date of the Registration Statement,
which statement shall cover said period, consistent with the requirements of
Rule 158;
(l) List all Common Stock covered by such Registration Statement on the
exchange or system, if any, on which the Common Stock of the Company is then
listed;
(m) If necessary in connection with a disposition of Registrable
Securities, make available for inspection, at the offices where normally kept
during reasonable business hours, by a representative of the Holder and any
attorney or accountant retained by the Holder, financial and other records,
pertinent corporate documents and properties of the Company and its subsidiaries
as they may reasonably request, and cause the officers, directors and employees
of the Company and its subsidiaries to supply all information reasonably
requested by any such representative, attorney or accountant in connection with
such disposition, provided, that all records, information or documents made
available for inspection by the Company shall be deemed to be confidential and
at the time of delivery of such records, information or documents shall be kept
confidential by such Persons, and such Persons shall so agree in writing, unless
(i) such records, information or documents are in the public domain or otherwise
publicly available, (ii) disclosure of such records, information or documents is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities or (iii) disclosure of such records,
information or documents is otherwise required by law (including, without
limitation, pursuant to the requirements of the Securities Act; and.
(n) Take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities.
The Company may require each seller of the Restricted Securities as to
which any registration is being effected to: (i) furnish to the Company such
information regarding the distribution of such Restricted Securities as is
required by law to be disclosed in the Registration Statement and (ii) provide
to the Company a signed writing accepting and acknowledging its rights and
obligations hereunder. The Company may exclude from such registration the
Restricted Securities of any holder of Restricted Securities who unreasonably
fails to furnish such information or signed writing at least five (5) Business
Days prior to the effective date of such Registration Statement.
Each Holder agrees by acquisition of the Restricted Securities that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), or 3(c)(v) hereof, such
Holder will forthwith discontinue disposition of such Restricted Securities
covered by such Registration Statement or Prospectus until such Holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
3(i) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional
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<PAGE> 8
or supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus.
The registration rights of the Holder pursuant to this Agreement and the
ability to offer and sell Restricted Securities pursuant to the Registration
Statement are subject to the conditions and limitations contained in this
paragraph, and the Holder will be deemed to have agreed with the Company that if
the Board of Directors of the Company determines in its good faith judgment, as
evidenced by a resolution of the Board of Directors, that the use of any
Prospectus would require the disclosure of material information that the Company
has a bona fide business purpose for preserving as confidential or the
disclosure of which would impede the Company's ability to consummate a
significant transaction, and that the Company is not otherwise required by
applicable securities laws or regulations to disclose, upon written notice of
such determination by the Company, the rights of the Holder to offer, sell or
distribute any Restricted Securities pursuant to the Registration Statement or
to require the Company to take action with respect to the registration or sale
of any Restricted Securities pursuant to the Registration Statement shall be
suspended until the date upon which the Company notifies the Holder in writing
that suspension of such rights for the grounds set forth in this paragraph is no
longer necessary subject to the limits set forth herein, and the Company agrees
to give such notice as promptly as practicable following the date that such
suspension of rights is no longer necessary.
4. Registration Expenses
All fees and expenses incident to the performance of or compliance with
this Agreement by the Company shall be borne by it whether or not the
Registration Statement is filed or becomes effective and whether or not any
securities are issued or sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (a) all registration and filing fees (including, without limitation,
fees and expenses in compliance with securities or "Blue Sky" laws), (b)
printing expenses (including, without limitation, expenses of printing
Prospectuses), (c) messenger, telephone and delivery expenses, (d) fees and
disbursements of counsel for the Company; (e) Securities Act liability
insurance, if the Company desires such insurance, and (f) fees and expenses of
all other Persons retained by the Company. In addition, the Company shall pay
its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit, and the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange.
Notwithstanding the foregoing or anything in this Agreement to the contrary, the
Holder shall pay all underwriting discounts and commissions of any underwriters
or broker-dealers with respect to any Restricted Securities sold by it.
5. Indemnification
(a) The Company (as an "Indemnifying Person") agrees to indemnify and hold
harmless the Holder and his representatives and agents (an "Indemnified
Person"), from and against any and all losses, claims, damages, liabilities and
judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, Prospectus or form of
Prospectus or in any amendment or supplement thereto or in any
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<PAGE> 9
preliminary Prospectus, or caused by (i) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the case of any Prospectus or form of
Prospectus or supplement thereto, in the light of the circumstances under which
they were made, not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Indemnified Person furnished to the Company by or on behalf of such Indemnified
Person or (ii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law; provided that the foregoing indemnity with respect to any
preliminary Prospectus shall not inure to the benefit of any Indemnified Person
from whom the Person asserting such losses, claims, damages, liabilities and
judgments purchased securities if such untrue statement or omission or alleged
untrue statement or omission made in such preliminary Prospectus is eliminated
or remedied in the Prospectus and a copy of the Prospectus shall not have been
furnished to such Person in a timely manner provided such failure is not as a
result of an action or inaction on the part of the Indemnifying Person.
(b) In case any action shall be brought against any Indemnified Person,
based upon the Registration Statement or any such Prospectus or any amendment or
supplement thereto and with respect to which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify the Company in writing
and the Company shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Person and payment of all
fees and expenses. Any Indemnified Person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Person, unless (i) the employment of such counsel shall have been
specifically authorized in writing by the Company, (ii) the Company shall have
failed to assume the defense and employ counsel for the Indemnified Parties or
(iii) the named parties to any such action (including any impleaded parties)
include both such Indemnified Person and the Company and such Indemnified Person
shall have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company (in which case the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Person), provided, however,
that the Company shall not, in connection with any such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Indemnified Persons, which firm shall be designated in
writing by such Indemnified Persons; and provided, however, that all such fees
and expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action effected without its written
consent but if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Indemnified Person from and against
any loss or liability by reason of such settlement. No Indemnifying Person
shall, without the prior written consent of the Indemnified Person, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Person, unless such settlement includes an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such proceeding.
9
<PAGE> 10
(c) In connection with the Registration Statement, each Holder
participating in such Registration Statement agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers and any
Person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Indemnified Person but only with
reference to information relating to such Indemnified Person furnished in
writing by or on behalf of such Indemnified Person. In case any action shall be
brought against the Company, any of its directors, any such officer or any
Person controlling the Company based on such Registration Statement and in
respect of which indemnity may be sought against any Indemnified Person, the
Indemnified Person shall have the rights and duties given to the Company (except
that if the Company shall have assumed the defense thereof, such Indemnified
Person shall not be required to do so, but may employ separate counsel therein
and participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person), and the Company, its
directors, any such officers and any Person controlling the Company shall have
the rights and duties specified for Indemnified Persons in Section 5(b) hereof.
(d) If the indemnification provided for in this Section 5 is unavailable
to an Indemnified Person in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such Indemnified Person, shall contribute to the amount paid or
payable by such Indemnified Person as a result of such losses, claim, damages,
liabilities and judgments in such proportion as is appropriate to reflect the
relative fault of the Company and each such Indemnified Person in connection
with the statements, omissions or violations which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company and each such
Indemnified Person shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or such Indemnified Person and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Holder agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation (even if the Indemnified Persons were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5, no Indemnified Person shall be
required to contribute any amount in excess of the amount by which the total net
proceeds received by it in connection with the sale of the Restricted Securities
pursuant to this Agreement exceeds the amount of any damages which such
Indemnified Person has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The Indemnified Persons'
obligations to contribute pursuant to this Section
10
<PAGE> 11
5(d) are several in proportion to the respective amount of Restricted Securities
included in any such Registration Statement by each Indemnified Person and not
joint.
6. Rule 144
The Company shall use its reasonable best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it will, upon the
request of the Holder, make available other information as required by, and so
long as necessary to permit, sales of its Restricted Securities pursuant to Rule
144.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company, or by the Holder of
any of their obligations under this Agreement, each Holder or the Company, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company and the Holder agree that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of any of the provisions of this Agreement and hereby further agrees that,
in the event of any action for specific performance in respect of such breach,
it shall waive the defense that a remedy at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, without the written consent of the Holder.
(c) Notices. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified first
class mail, return receipt requested, telex or telecopy:
If the Company:
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Tel: (619) 453-1000
Fax: (619) 453-1941
Attn: Chief Financial Officer
11
<PAGE> 12
with copies to:
James A. Lebovitz, Esq.
Senior Vice President,
General Counsel and Secretary
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
If to the Holder:
Richard E. Thorner
with a copy to:
Oppenheimer, Blend, Harrison & Tate, Inc.
711 Navarro, Sixth Floor
San Antonio, Texas 78205-1796
Attn: Stanley Blend, Esq.
Telephone No.: (210) 224-2000
Facsimile No.: (210) 224-7540
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (i) delivered by hand, if
personally delivered, (ii) one (1) Business Day after being timely delivered to
a next-day air courier, (iii) five (5) Business Days after being deposited in
the mail, postage prepaid, if mailed, (iv) when answered back, if telexed or (v)
when receipt is acknowledged by the recipient's telecopier machine, if
telecopied.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of the Holder. Notwithstanding the foregoing, no
transferee shall have any of the rights granted under this Agreement until such
transferee shall acknowledge its rights and obligations hereunder by a signed
written statement of such transferee's acceptance of such rights and
obligations.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, as applied to contracts
made and performed within the State of Delaware without regard to principles of
conflicts of law.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
12
<PAGE> 13
(h) Authority. The Company hereby represents to the parties listed on
Schedule I hereto that this Agreement has been duly authorized, executed and
delivered.
(i) Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover reasonably attorneys' fees in addition to any other
available remedy.
13
<PAGE> 14
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
--------------------------------
Name: James A. Lebovitz
------------------------------
Title: Senior Vice President
-----------------------------
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
RICHARD E. THORNER
/s/ RICHARD E. THORNER
-----------------------------------
14
<PAGE> 1
Exhibit 10.12
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT (this "Amendment"), dated as of March 25, 1998, to
the Employment Agreement dated as of October 1, 1996 (the "Employment Agree-
ment"), by and between FPA Medical Management, Inc., a Delaware corporation (the
"Company"), and Sol Lizerbram ("Employee").
WHEREAS, the Company and Employee have previously entered
into the Employment Agreement;
WHEREAS, it is mutually in the best interests of the Company
and Employee to modify and amend the Employment Agreement in the manner stated
herein.
NOW, THEREFORE, in order to effect the foregoing, in consider-
ation of the premises and the respective covenants and agreements of the parties
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows (capitalized terms used but not defined herein having the
meanings ascribed to such terms in the Employment Agreement):
1. Compensation and Other Benefits
Sections 3(a) and (b) of the Employment Agreement are hereby
amended to read in their entirety as follows:
"(a) Base Salary. As compensation for his employment under the
Agreement from March 25, 1998 until March 25, 1999, the Company shall pay to
Employee an aggregate amount equal to $1,112,500, payable in equal biweekly
installments.
(b) Intentionally blank.
2. Special Termination Rights.
Notwithstanding the provisions of Section 4 of the Employment
Agreement, effective as of the date hereof and continuing during the period
ending on March 31, 1999, in the event Employee's employment is terminated for
any
<PAGE> 2
reason (including for Cause) by the Company or Employee, the following
provisions shall apply:
(a) Effective as of the date of Employee's termination of
employment (the "Employment Termination Date"),
Employee hereby resigns his position as Chairman of the
Company and as a director of the Company and shall
resign as an officer and director, as applicable, of
each of the Company's direct or indirect subsidiaries
and affiliated professional corporations. Except as
provided in paragraph (d) below, effective as of the
Employment Termination Date, the Employment Agreement
shall be terminated and the Company and Employee shall
have no further rights or obligations under the
Employment Agreement, provided that in the event
Employee is terminated by the Company prior to March 25,
1999, the Company shall, in addition to the amounts
payable pursuant to paragraph (b) below, make a lump sum
payment to Employee equal to $1,112,500 minus the
aggregate amount of payments made to Employee after the
date hereof pursuant to Section 3(a) of the Employment
Agreement (as amended by Section 1(a) above) (the "Base
Salary Pay ment"). Employee shall execute and deliver
such further instruments and do such further acts as
may be reasonably necessary to effect the resignation of
his positions pursuant to this Section 2.
(b) So long as Employee has executed and delivered and not
revoked the Release (as defined below), Employee's
termination shall be deemed to be a termination for
other than Cause and Employee shall be entitled to
receive the Severance Benefits consistent with the terms
of Section 4(a)(ii) of the Employment Agreement
(including without limitation the acceleration of the
vesting of all Employee's stock options pursuant to
Section 4(a)(ii)(B)).
(c) The Company and Employee acknowledge and agree that the
aggregate amount to be paid to Employee in equal
payments over the 36 month period pursuant to Section
4(a)(ii)(A) of the Employment Agreement shall be
$3,337,500. The Company and Employee acknowledge and
agree that the benefit due to
2
<PAGE> 3
Employee pursuant to Section 4(a)(ii)(B) relating to
Section 3(c)(v) of the Employment Agreement shall be
paid in equal monthly payments.
(d) Notwithstanding paragraph (a) above and other provisions
of this Amendment, except as modified herein, the
provisions of Sections 4(a), 4(d), 4(e), 4(f), 4(g),
4(h), 4(i), 4(j), 5 and 6 of the Employment Agreement
shall survive the termination of the Employment
Agreement (the "Surviving Provisions").
(e) Employee and the Company agree to execute and deliver to
each other a release, substantially in the form attached
as Exhibit A hereto (the "Release"), within two (2) days
of the Employment Termination Date.
(f) If a Change of Control occurs within six (6) months
after the Employment Termination Date, Employee shall be
entitled to receive, in lieu of the payments and
benefits described in paragraphs (b) and (c) above, the
Severance Package consistent with the terms of Section
4(a)(iii) of the Employment Agreement and shall have the
right to receive the Gross-Up Payments described in
Section 4(a)(iii)(E). Employee and the Company
acknowledge and agree that the amount payable to
Employee as part of the Severance Package shall be
determined utilizing the amounts set forth in paragraph
(c) above.
(g) Employee shall be entitled to exercise all of his
employee stock options during the eight months following
the Employment Termination Date during which Employee
serves as a consultant to the Company pursuant to
Section 3 below and for one (1) month thereafter,
consistent with the terms of the Company's stock option
plans.
(h) So long as Employee has executed and delivered and not
revoked the Release, the Company shall retain Employee
as a consultant pursuant to Section 3 below for a period
of eight (8) months following the Employment Termination
Date. Employee shall be entitled to receive, as payment
for the consulting services provided pursuant to Section
3 below and the execution
3
<PAGE> 4
and delivery of the Release, a cash lump sum, in an
amount equal to $1,000,000 (the "Consulting Payment").
(i) The Consulting Payment and the Base Salary Payment, if
any, shall be made by wire transfer in the name of Sol
Lizerbram to the account designated by Employee in
writing to the Company no later then ten (10) days
following the Employment Termination Date, provided
that Employee has delivered the Release within two (2)
days of the Employment Termination Date and has not
exercised his right to revoke the Release pursuant to
Section 2 thereof. Employee acknowledges and agrees
that, in the event that he revokes the Release pursuant
to Section 2 thereof, he shall have no rights pursuant
to this Amendment (including, the receipt of the
Consulting Payment and the Base Salary Payment).
3. Retention as a Consultant.
(a) If Employee's employment is terminated on or before March
31, 1999, the Company agrees to retain Employee as a consultant to the Company
for a period of eight (8) months (the "Consulting Period") following the
Employment Termination Date.
(b) During the Consulting Period, in consideration of the
payments to be made to Employee pursuant to Section 2 above and the mutual
covenants contained herein, Employee shall render such consulting services to
the Company and its affiliates as Employee and the Company agree upon from time
to time that are reasonably related to the transition of duties from Employee to
his successor; it being understood, however, that, subject to Section 4 below,
the obligation of Employee to render such services shall not preclude his
undertaking full-time employment for another employer.
(c) Employee shall perform his duties hereunder at such
locations as are acceptable to him and the Company and consistent with the
nature of the services or by telephone consultation.
4. Non-Competition.
4
<PAGE> 5
In consideration of the payments to be made to Employee
pursuant to Section 2 above and the mutual covenants contained herein, Employee
agrees not to compete with the Company pursuant to the terms set forth in
Section 4(e) of the Employment Agreement; provided that the "Non-Competition
Period" set forth in Section 4(e) of the Employment Agreement for purposes of
this Agreement shall begin on the Employment Termination Date and continue for a
period of eighteen (18) months thereafter.
5. Nondisparagement and Litigation Support.
(a) Neither the Company nor Employee will make any derogatory
or negative statements about the other party that may adversely affect the
current or potential business relationships of the other. The Company agrees
that Employee will have the right to reasonably approve the content of any press
release containing specific reference to Employee.
(b) Employee agrees to make himself and his records available
to the Company for consultation, testimony and related matters in connection
with any claim, action, proceeding or investigation instituted by or against the
Company before any court or governmental authority, in any manner as may be
reasonably requested by the Company.
6. Successor; Binding Agreement.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to Employee, to expressly assume
and agree to perform this Amendment in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
5
<PAGE> 6
(b) This Amendment and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable or benefits would still be provided to him and/or his family hereunder
if he had continued to live, all such amounts and benefits, unless otherwise
provided herein, shall be paid or provided in accordance with the terms of this
Amendment to Employee's devisees, legatees, or other designees or, if there be
no such designee, to Employee's estate.
7. Withholding.
All amounts payable hereunder shall be subject to such
withholding taxes as may be required by law.
8. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
9. No Further Amendment.
6
<PAGE> 7
Except as otherwise modified or amended herein, all terms and
conditions of the Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company and Employee have caused this
Amendment to be executed as of the day and year first above written.
FPA MEDICAL MANAGEMENT, INC.
/s/ STEPHEN DRESNICK
-----------------------------------------
By: Stephen Dresnick
Its: President and Chief Executive Officer
SOL LIZERBRAM
/s/ SOL LIZERBRAM
-----------------------------------------
7
<PAGE> 8
EXHIBIT A
FORM OF RELEASE
RELEASE (this "Release"), dated as of ________ __, 199_, among
FPA Medical Management, Inc., a Delaware corporation (the "Company") and Sol
Lizerbram ("Lizerbram").
WHEREAS, the Company and Lizerbram have previously entered
into that certain Employment Agreement, dated as of October 1, 1996 (the
"Employment Agreement"), as amended pursuant to that certain Amendment to the
Employment Agreement (the "Amendment"), dated as of March 25, 1998; and
WHEREAS, pursuant to the Amendment, the Company and Lizerbram
agreed, upon the occurrence of certain circumstances, to enter into this
Release.
NOW, THEREFORE, in order to effect the foregoing, in
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound, the parties hereto
agree as follows:
1. Releases.
(a) In furtherance of the provisions of the Amendment,
Lizerbram hereby knowingly and voluntarily, fully and
finally releases, acquits and forever discharges as of
the date hereof and as of the Employment Termination
Date (as defined in the Amendment), the Company and its
affiliates, and their past and present officers,
directors, shareholders, partners, trustees,
beneficiaries, managers, employees, attorneys, agents,
successors or assigns (the "Company Released Parties")
from any and all claims, charges, complaints, liens,
demands, causes of action, obligations, damages and
liabilities, known or unknown, suspected or unsuspected,
that he had, has, or may claim to have against the
Company Released Parties arising out of or relating in
any way to Lizerbram's relationship with the Company as
an employee, officer, director or representative or the
termination thereof, or the termination of the
Employment Agreement (including without limitation the
federal Age Discrimination in Employment Act or
equivalent state law). Notwithstanding the generality of
the foregoing, nothing contained herein shall release
the Company or in any way impair Lizerbram's rights to
indemnification from the Company arising from or
relating in any way to Lizerbram's service as an
employee, officer or director as provided by law or
under the Company's bylaws, or under any applicable
indemnification agreement or insurance policy to which
the Company is a party, including, but not limited to,
Lizerbram's rights to reimbursement, coverage or
indemnification in connection with any current or future
litigation matter arising from or relating in any way to
Lizerbram's services as an employee, officer, director
or representative of the Company; nor shall the
foregoing release the Company from any claim relating to
the breach by the Company of its obligations set forth
in the Employment Agreement (including
A-1
<PAGE> 9
the provisions of the Amendment) or the right to receive
any payments or benefits to which Employee is entitled
pursuant to any Company employee benefit plan.
Notwithstanding the generality of the foregoing, nothing
in this Agreement shall be construed to effect a release
of any right or claim by Employee in connection with his
rights as a stockholder of the Company.
(b) As a material inducement to enter into this Release, the
Company likewise hereby knowingly and voluntarily, fully
and finally releases, acquits, and forever discharges as
of the date hereof and the Employment Termination Date,
Lizerbram and his agents, employees, successors, heirs,
beneficiaries or assigns (the "Lizerbram Released
Parties") from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages
and liabilities, known or unknown, suspected or
unsuspected, that it had, has, or may claim to have
against Lizerbram Released Parties arising out of or
relating in any way to Lizerbram's relationship with the
Company as an employee, officer, director or
representative, whether or not previously asserted
before any state or federal court or before any state,
federal or regulatory agency or governmental entity.
Notwithstanding the generality of the foregoing, nothing
contained herein shall release Lizerbram from any claim
relating to the
A-2
<PAGE> 10
breach by Lizerbram of any confidentiality agreements
with the Company or any of its affiliates or the
obligations set forth in the Employment Agreement and
the Amendment.
(c) Each of the Company and Lizerbram acknowledges that such
party has been advised by legal counsel regarding, is
familiar with and expressly waives all rights afforded
by Section 1542 of the Civil Code of the State of
California ("Section 1542"), or any statute of similar
effect in any other jurisdiction in which any action
might be brought, with respect to the claims described
in paragraphs (a) and (b) of this Section 1. Section
1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company and Lizerbram
understands and agrees that this Release is intended to include all claims, if
any, described in paragraphs (a) (in the case of Lizerbram) and (b) (in the case
of the Company) above, which either party may have and which neither party now
knows or suspects to exist in such party's favor against the Company Released
Parties (in the case of Lizerbram) or Lizerbram Released Parties (in the case of
the Company) and this Release extinguishes those claims.
2. Lizerbram Right to Revoke.
Lizerbram acknowledges that the Company has advised him to
consult with an attorney of his choosing prior to signing this Release and that
he has been given at least twenty-one (21) days during which to consider the
provisions of this Release. Lizerbram further acknowledges that he has been
advised by the Company that he has the right to revoke this Release for a period
of seven (7) days after the execution of this Release and that this Release
shall not become effective or enforceable until such seven (7) day revocation
period has expired. Lizerbram acknowledges and agrees that, if he wishes to
revoke this Release, he must do so in writing, signed by Lizerbram and received
by the Company at its headquarters no
A-3
<PAGE> 11
later than 5:00 p.m. Pacific Standard Time on the seventh (7th) day after the
execution of this Release. Lizerbram acknowledges and agrees that, in the event
that he revokes this Release, he shall have no right to receive any payment
pursuant to the Employment Agreement and the Amendment. Lizerbram understands
and agrees that the Company is under no obligation to offer such payment and
that he is under no obligation to consent to the release set forth in paragraph
1(a) of this Release. Lizerbram represents that he has read this Release and
understands its terms and that he enters into this Release freely, voluntarily,
and without coercion.
This Release shall be deemed a part of the Amendment and
accordingly shall be construed under the laws of the State of California and
may be executed in counterparts.
A-4
<PAGE> 12
IN WITNESS WHEREOF, each of the parties has executed this
Release as of the date set forth below.
FPA MEDICAL MANAGEMENT, INC.
-----------------------------
By:
Its:
--------------------------------
Sol Lizerbram
Date:
A-5
<PAGE> 1
Exhibit 10.13
CONSULTING AND SETTLEMENT AGREEMENT
CONSULTING AND SETTLEMENT AGREEMENT (this "Agreement"), dated
as of March 25, 1998 (the "Effective Date"), between FPA Medical Management,
Inc., a Delaware corporation (the "Company") and Seth Flam (the "Executive").
WHEREAS, the Company and the Executive have previously entered
into that certain Employment Agreement, dated as of October 1, 1996 (the
"Employment Agreement");
WHEREAS, it is mutually in the best interests of the Executive
and the Company to modify and settle certain provisions of the Employment
Agreement and to provide for its earlier termination;
WHEREAS, the Company desires to continue to benefit from the
experience and ability of the Executive in the capacity of a consultant to the
Company upon termination of his employment relationship with the Company and the
Executive is willing to commit himself to serve in the capacity of a consultant
to the Company; and
WHEREAS, the parties desire to enter into this Agreement
setting forth the terms and conditions related to the termination of the
Executive's employment relationship with the Company and the terms and
conditions of the retention of the Executive as a consultant to the Company.
NOW, THEREFORE, in order to effect the foregoing, in
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows (capitalized terms used but not defined herein having
the meanings ascribed to such terms in the Employment Agreement):
1. Termination of Employment.
(a) Effective as of the Effective Date, the Executive hereby
resigns his position as President and Chief Executive Officer and as a director
of the Company and hereby resigns as an officer and director, as applicable, of
each of the Company's direct or indirect subsidiaries and affiliated
professional corporations.
<PAGE> 2
Except as provided in paragraph (b) below, effective as of the Effective Date,
the Employment Agreement shall be terminated and the Company and the Executive
shall have no further rights or obligations under the Employment Agreement. The
Executive shall execute and deliver such further instruments and do such
further acts as may be reasonably necessary to effect the resignation of his
positions pursuant to this Section 1(a).
(b) Notwithstanding paragraph (a) above and other
provisions of this Agreement, except as modified herein, the provisions of
Sections 4(a), 4(d), 4(e), 4(f), 4(g), 4(h), 4(i), 4(j), 5 and 6 of the
Employment Agreement shall survive the termination of the Employment Agreement
(the "Surviving Provisions").
(c) The Company acknowledges and agrees that, effective
as of the Effective Date, the Executive's employment shall be deemed to have
been terminated for other than Cause and the Executive shall be entitled to
receive the Severance Benefits consistent with the terms of Section 4(a)(ii) of
the Employment Agreement, provided that the severance payments (as described in
Section 4(a)(ii)(A) of the Employment Agreement) to which the Executive would
otherwise be entitled on the Effective Date shall begin on the six (6) month
anniversary of the Effective Date (the "Severance Payment Date"). The Company
acknowledges and agrees that, commencing on the Effective Date, the Company
shall provide all benefits described in Section 4(a)(ii)(B) of the Employment
Agreement for the period of time set forth therein (including but not limited to
the vesting of all stock options then held by the Executive). The Executive
shall be entitled to exercise all of his employee stock options during the
fourteen months following the Effective Date during which the Executive serves
as a consultant to the Company pursuant to Section 2 below and for one (1) month
thereafter, consistent with the terms of the Company's stock option plans.
(d) The Company and the Executive acknowledge and agree
that the aggregate amount to be paid to the Executive over the 36 month period
pursuant to Section 4(a)(ii)(A) of the Employment Agreement shall be $3,337,500.
The Company and the Executive acknowledge and agree that the benefit due to the
Executive pursuant to Section 4(ii)(B) relating to Section 3(c)(v) of the
Employment Agreement shall be paid in equal monthly payments. The Company and
the Executive acknowledge and agree that the aggregate amount to be paid to the
Executive pursuant to Section 4(a)(ii)(C) of the Employment Agreement shall be
$213,942, payable within twenty (20) days of the date hereof.
2
<PAGE> 3
(e) Notwithstanding Section 1(c) above, in the event of
a Change of Control within six (6) months following the Effective Date, the
Executive shall be entitled to receive, in lieu of the payments and benefits
described in Section 1(c) and 1(d), the Severance Package described in and
payable pursuant to Section 4(a)(iii) of the Employment Agreement and shall have
the right to receive the Gross-Up Payments described in Section 4(a)(iii)(E).
The Executive and the Company acknowledge and agree that the amount payable to
the Executive as part of the Severance Package shall be determined utilizing the
amounts set forth in paragraph (d) above.
2. Retention as a Consultant.
(a) The provisions of this Section 2 shall commence upon the
Effective Date and shall expire fourteen (14) months thereafter (the "Consulting
Period").
(b) During the Consulting Period, the Executive shall render
such consulting services to the Company and its affiliates as the Executive and
the Company agree upon from time to time; provided, however, that, subject to
Section 3 below, the obligation of the Executive to render such services shall
not preclude his undertaking full-time employment for another employer.
(c) The Executive shall perform his duties hereunder at such
locations as are acceptable to him and the Company and consistent with the
nature of the services or by telephone consultation.
3. Non-Competition.
In consideration of the payments to be made to the Executive
pursuant to Section 4 below and the mutual covenants contained herein, the
Executive agrees not to compete with the Company pursuant to the terms set forth
in Section 4(e) of the Employment Agreement; provided that the "Non-Competition
Period" set forth in Section 4(e) of the Employment Agreement for purposes of
this Agreement shall begin on the Effective Date and continue for a period of
eighteen (18) months thereafter.
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<PAGE> 4
4. Compensation and Related Matters.
(a) As compensation for services rendered during the
course of the Consulting Period and in consideration of the Executive's
agreement not to compete with the Company pursuant to Section 3 above, the
Company shall pay the Executive $1,250,000, payable as follows:
(i) the Company shall make a total of six (6)
monthly payments to the Executive of $41,667
on the 15th of each month following the
Effective Date commencing on April 15, 1998;
and
(ii) On the date which is the six month
anniversary of the Effective Date, the
Company shall pay to the Executive a cash
lump sum, paid by wire transfer in
accordance with instructions to be provided
to the Company by the Executive in writing,
in an amount equal to $1,000,000.
(b) The Company shall reimburse the Executive for reasonable
business expenses incurred in the performance of the Executive's duties
hereunder; provided, that such expenses shall be incurred and accounted for in
accordance with the policies and procedures established by the Company from time
to time for its senior executives.
5. Releases.
(a) As a material inducement to enter into this Agreement, the
Executive hereby knowingly and voluntarily, fully and finally releases, acquits
and forever discharges as of the Effective Date, the Company and its affiliates,
and their past and present officers, directors, shareholders, partners,
trustees, beneficiaries, managers, employees, attorneys, agents, successors or
assigns (the "Company Released Parties") from any and all claims, charges,
complaints, liens, demands, causes of action, obligations, damages and
liabilities, known or unknown, suspected or unsuspected, that he had, has, or
may claim to have against the Company Released Parties arising out of or
relating in any way to the Executive's relationship with the Company as an
employee, officer, director, or representative or the termination thereof, or
the termination of the Employment Agreement (including without limitation the
federal Age Discrimination in Employment Act or equivalent state
4
<PAGE> 5
law). Notwithstanding the generality of the foregoing, nothing contained herein
shall release the Company or in any way impair the Executive's rights to the
benefits of insurance coverage or reimbursement or indemnification from the
Company arising from or relating in any way to the Executive's service as an
employee, officer or director as provided by law or under the Company's bylaws,
or under any applicable indemnification agreement or insurance policy to which
the Company is a party, including, but not limited to, the Executive's rights to
reimbursement, coverage or indemnification in connection with any current or
future litigation matter arising from or relating in any way to the Executive's
services as an employee, officer, director or representative of the Company; nor
shall the foregoing release the Company from any claim relating to the breach by
the Company of its obligations set forth herein, or set forth in the Surviving
Provisions, or the right to receive any payments or benefits to which the
Executive is entitled pursuant to any Company employee benefit plan.
Notwithstanding the foregoing, nothing in this Agreement shall be construed to
effect a release of any right or claim by the Executive in connection with his
rights as a stockholder of the Company.
(b) As a material inducement to enter into this
Agreement, the Company, likewise hereby knowingly and voluntarily, fully and
finally releases, acquits, and forever discharges as of the Effective Date, the
Executive and his agents, employees, successors, heirs, beneficiaries or assigns
(the "Executive Released Parties") from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages and liabilities, known or
unknown, suspected or unsuspected, that it had, has, or may claim to have
against the Executive Released Parties arising out of or relating in any way to
the Executive's relationship with the Company as an employee, officer, director
or representative, whether or not previously asserted before any state or
federal court or before any state, federal or regulatory agency or governmental
entity. Notwithstanding the generality of the foregoing, nothing contained
herein shall release the Executive from any claim relating to the breach by the
Executive of any confidentiality agreements with the Company or any of its
affiliates or the obligations set forth herein, or set forth in the Surviving
Provisions.
(c) Each of the Company and the Executive acknowledges
that such party has been advised by legal counsel regarding, is familiar with
and expressly waives all rights afforded by Section 1542 of the Civil Code of
the State of California ("Section 1542"), or any statute of similar effect in
any other jurisdiction in which any action might be brought, with respect to the
claims described in paragraphs (a) and (b) of this Section 4. Section 1542
states as follows:
5
<PAGE> 6
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company and the Executive
understands and agrees that this Agreement is intended to include all claims, if
any, described in paragraphs (a) (in the case of the Executive) and (b) (in the
case of the Company) above, which either party may have and which neither party
now knows or suspects to exist in such party's favor against the Company
Released Parties (in the case of the Executive) or the Executive Released
Parties (in the case of the Company) and that this Agreement extinguishes those
claims.
6. Right to Revoke.
The Executive acknowledges that the Company has advised him to
consult with an attorney of his choosing prior to signing this Agreement and
that he has been given the opportunity, if he so desired, to consider the
provisions of this Agreement for at least twenty-one (21) days. The Executive
further acknowledges that he has been advised by the Company that he has the
right to revoke this Agreement for a period of seven (7) days after the
execution of this Agreement and that this Agreement shall not become effective
or enforceable until such seven (7) day revocation period has expired. The
Executive acknowledges and agrees that, if he wishes to revoke this Agreement,
he must do so in writing, signed by the Executive and received by the Company at
its headquarters no later than 5:00 p.m. Pacific Standard Time on the seventh
(7th) day after the Effective Date. The Executive acknowledges and agrees that,
in the event that he revokes this Agreement, he shall have no right to receive
any payment hereunder. The Executive understands and agrees that the Company is
under no obligation to offer such payment and that he is under no obligation to
consent to the release set forth in Section 5 of this Agreement. The Executive
represents that he has read this Agreement and understands its terms and that he
enters into this Agreement freely, voluntarily, and without coercion.
6
<PAGE> 7
7. Nondisparagement and Litigation Support.
(a) Neither the Company on the one hand, nor the Executive on
the other hand, will make any derogatory or negative statements about the other
party that may adversely affect the current or potential business relationships
of the other. The Company agrees that the Executive will have the right to
reasonably approve the content of any press release containing specific
reference to the Executive.
(b) The Executive agrees to make himself and his records
available to the Company for consultation, testimony and related matters in
connection with any claim, action, proceeding or investigation instituted by or
against the Company before any court or governmental authority, in any manner
as may be reasonably requested by the Company.
8. Internet Product Negotiation. The Company and the Executive
shall negotiate in good faith a license to the Executive or a company or other
entity controlled by the Executive of the Company's internet browser product for
use by the Executive or such entity in certain businesses that do not compete
with the Company.
9. Successor; Binding Agreement.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor to its business and/or assets and each
entity that, directly or indirectly, becomes a parent corporation of the
Company.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable
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<PAGE> 8
or benefits would still be provided to him and/or his family hereunder if he had
continued to live, all such amounts and benefits, unless otherwise provided
herein, shall be paid or provided in accordance with the terms of this Agreement
to the Executive's devisees, legatees, or other designees or, if there be no
such designee, to the Executive's estate.
10. Notice.
For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certificated or registered mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Dr. Seth Flam
P.O. Box 675271
Rancho Santa Fe, CA 92067
If to the Company:
FPA Medical Management, Inc.
3636 Nobel Drive
San Diego, CA 92122
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
11. Withholding.
All amounts payable hereunder shall be subject to such
withholding taxes as may be required by law.
12. Modification of Agreement; Governing Law.
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<PAGE> 9
No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer of the Company as may be
specifically designated by the board of directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto or, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without regard to its conflicts of law principles.
13. Validity.
The validity or enforceability of any provision or provisions
of this Agreement shall not be affected by the invalidity or unenforceability of
any other provision of this Agreement, and such valid and enforceable provisions
shall remain in full force and effect.
14. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
15. Entire Agreement.
This Agreement, including all schedules and exhibits, together
with the Employment Agreement as amended hereby upon its execution and delivery,
set forth the entire agreement of the parties hereto in respect of the subject
matter contained herein and supersedes all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
which are related to the subject matter of the Employment Agreement or the
termination thereof.
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<PAGE> 10
IN WITNESS WHEREOF, each of the parties has executed this
Agreement as of the date and year first written above.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ STEPHEN DRESNICK
-----------------------------
Name: Stephen Dresnick
Title: President and Chief
Executive Officer
/s/ SETH FLAM
--------------------------------
SETH FLAM
10
<PAGE> 1
Exhibit 10.16
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT (this "Amendment"), dated as of March 25, 1998, to
the Employment Agreement dated as of October 1, 1996 (the "Employment
Agreement"), by and between FPA Medical Management, Inc., a Delaware corporation
(the "Company"), and Steven Lash ("Employee").
WHEREAS, the Company and Employee have previously entered into
the Employment Agreement;
WHEREAS, it is mutually in the best interests of the Company
and Employee to modify and amend the Employment Agreement in the manner stated
herein.
NOW, THEREFORE, in order to effect the foregoing, in consider-
ation of the premises and the respective covenants and agreements of the parties
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows (capitalized terms used but not defined herein having the
meanings ascribed to such terms in the Employment Agreement):
1. Employment Duties.
Section 1(a) of the Employment Agreement is hereby amended to
read in its entirety as follows:
"(a) Capacity. The Company shall employ Employee, and Employee
shall serve as an Executive Vice President of the Company, on the terms and
subject to the conditions set forth in the Agreement and the Amendment to
Employment Agreement, dated as of March 25, 1998, by and between the parties
hereto."
Section 1(b) of the Employment Agreement is hereby amended to
read in its entirety as follows:
"(b) Scope and Duties. Employee shall perform such duties as
are consistent with the position of an executive vice president and shall
perform such additional duties and accept election or appointment to such
additional offices or positions of the Company or its subsidiaries as may be
specified by the Chief Executive Officer of the Company or his designee. The
duties of Employee shall be performed primarily in San Diego, California, except
for such travel in the ordinary
<PAGE> 2
course of the business of the Company as may from time to time be reasonably
required. Employee's principal place of business shall be at the offices of the
Company in San Diego, California."
2. Special Termination Rights.
Notwithstanding the provisions of Section 4 of the Employment
Agreement, effective as of the date hereof and continuing during the period
ending on September 25, 1999, in the event Employee's employment is terminated
for any reason (including for Cause) by the Company or Employee, the following
provisions shall apply:
(a) So long as Employee has executed and delivered and
not revoked the Release (as defined below),
Employee's termination shall be deemed to be a
termination for other than Cause and Employee shall
be entitled to receive the Severance Benefits
consistent with the terms of Section 4(a)(ii) of the
Employment Agreement (including without limitation
the acceleration of the vesting of all Employee's
stock options pursuant to Section 4(a)(ii)(B)).
(b) The Company and Employee acknowledge and agree that
the aggregate amount to be paid to Employee over the
36 month period pursuant to Section 4(a)(ii)(A) of
the Employment Agreement shall be $2,587,500. The
Company and Employee acknowledge and agree that the
benefit due to Employee pursuant to Section
4(a)(ii)(B) relating to Section 3(c)(v) of the
Employment Agreement shall be paid in equal monthly
payments.
(c) Effective as of the date of Employee's termination of
employment (the "Employment Termination Date"),
Employee hereby resigns his position as Executive
Vice President and as a director of each of the
direct or indirect subsidiaries, as applicable.
Except as provided in paragraph (c) below, effective
as of the Employment Termination Date, the Employment
Agreement shall be terminated and the Company and
Employee shall have no further rights or obligations
under the Employment Agreement. Employee shall
execute and deliver such further instruments and do
such further acts as may be reasonably necessary
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<PAGE> 3
to effect the resignation of his positions pursuant
to this Section 2.
(d) Notwithstanding paragraph (c) above and other
provisions of this Amendment, except as modified
herein, the provisions of Sections 4(a), 4(d), 4(e),
4(f), 4(g), 4(h), 4(i), 4(j), 5 and 6 of the
Employment Agreement shall survive the termination of
the Employment Agreement (the "Surviving
Provisions").
(e) Employee and the Company agree to execute and deliver
to each other a release, substantially in the form
attached as Exhibit A hereto (the "Release"), within
two (2) days of the Employment Termination Date.
(f) If a Change of Control occurs within six (6) months
after the Employment Termination Date, Employee shall
be entitled to receive, in lieu of the payments and
benefits described in paragraphs (a) and (b) above,
the Severance Package consistent with the terms of
Section 4(a)(iii) of the Employment Agreement and
shall have the right to receive the Gross-Up Payments
described in Section 4(a)(iii)(E). Employee and the
Company acknowledge and agree that the amount
payable to Employee as part of the Severance Package
shall be determined utilizing the amounts set forth
in paragraph (b) above.
(g) Employee shall be entitled to exercise all of his
employee stock options during the eight months
following the Employment Termination Date during
which Employee serves as a consultant to the Company
pursuant to Section 3 below and for one (1) month
thereafter, consistent with the terms of the
Company's stock option plans.
(h) So long as Employee has executed and delivered and
not revoked the Release, the Company shall retain
Employee as a consultant pursuant to Section 3 below
for a period of eight (8) months following the
Employment Termination Date. Employee shall be
entitled to receive, as payment for the consulting
services provided pursuant to Section 3 below and the
execution
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<PAGE> 4
and delivery of the Release, a cash lump sum, in an
amount equal to $1,000,000 (the "Payment").
(i) The Payment shall be made by wire transfer in the name
of Steven Lash to the account designated by Employee in
writing to the Company no later then ten (10) days
following the Employment Termination Date, provided
that Employee has delivered the Release within two (2)
days of the Employment Termination Date and has not
exercised his right to revoke the Release pursuant to
Section 2 thereof. Employee acknowledges and agrees
that, in the event that he revokes the Release pursuant
to Section 2 thereof, he shall have no rights pursuant
to this Amendment (including, the receipt of the
Payment).
3. Retention as a Consultant.
(a) If Employee's employment is terminated on or before
September 25, 1999, the Company agrees to retain Employee as a consultant to the
Company for a period of eight (8) months (the "Consulting Period") following the
Employment Termination Date.
(b) During the Consulting Period, in consideration of
the payments to be made to Employee pursuant to Section 2 above and the mutual
covenants contained herein, Employee shall render such consulting services to
the Company and its affiliates as Employee and the Company agree upon from time
to time that are reasonably related to the transition of duties from Employee to
his successor (including, without limitation, attendance at Company meetings on
not less than a monthly basis); it being understood, however, that, subject to
Section 4 below, the obligation of Employee to render such services shall not
preclude his undertaking full-time employment for another employer.
(c) Employee shall perform his duties hereunder at such
locations as are acceptable to him and the Company and consistent with the
nature of the services or by telephone consultation.
4. Non-Competition.
In consideration of the payments to be made to Employee
pursuant to Section 2 above and the mutual covenants contained herein, Employee
agrees not to
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<PAGE> 5
compete with the Company pursuant to the terms set forth in Section 4(e) of the
Employment Agreement; provided that the "Non-Competition Period" set forth in
Section 4(e) of the Employment Agreement for purposes of this Agreement shall
begin on the Employment Termination Date and continue for so long as Employee is
receiving payments pursuant to Section 2 hereof.
5. Nondisparagement and Litigation Support.
(a) Neither the Company nor Employee will make any
derogatory or negative statements about the other party that may adversely
affect the current or potential business relationships of the other. The Company
agrees that Employee will have the right to reasonably approve the content of
any press release containing specific reference to Employee.
(b) Employee agrees to make himself and his records
available to the Company for consultation, testimony and related matters in
connection with any claim, action, proceeding or investigation instituted by or
against the Company before any court or other tribunal, in any manner as may be
reasonably requested by the Company.
6. Successor; Binding Agreement.
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to Employee, to expressly assume
and agree to perform this Amendment in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
(b) This Amendment and all rights of Employee hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable or benefits would still be provided to him and/or his family hereunder
if he had continued to live, all such amounts and benefits, unless otherwise
provided herein, shall be paid or provided in accordance with the terms of this
Amendment to Employee's devisees, legatees, or other designees or, if there be
no such designee, to Employee's estate.
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<PAGE> 6
7. Withholding.
All amounts payable hereunder shall be subject to such
withholding taxes as may be required by law.
8. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
9. No Further Amendment.
Except as otherwise modified or amended herein, all terms and
conditions of the Employment Agreement shall remain in full force and effect.
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<PAGE> 7
IN WITNESS WHEREOF, the Company and Employee have caused this
Amendment to be executed as of the day and year first above written.
FPA MEDICAL MANAGEMENT, INC.
/s/ STEPHEN DRESNICK
-------------------------------
By: Stephen Dresnick
Its: President and Chief Executive Officer
STEVEN LASH
/s/ STEVEN LASH
-------------------------------
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<PAGE> 8
EXHIBIT A
FORM OF RELEASE
RELEASE (this "Release"), dated as of ________ __, 199_, among
FPA Medical Management, Inc., a Delaware corporation (the "Company") and Steven
Lash ("Lash").
WHEREAS, the Company and Lash have previously entered into
that certain Employment Agreement, dated as of October 1, 1996 (the "Employment
Agreement"), as amended pursuant to that certain Amendment to the Employment
Agreement (the "Amendment"), dated as of March __, 1998; and
WHEREAS, pursuant to the Amendment, the Company and Lash
agreed, upon the occurrence of certain circumstances, to enter into this
Release.
NOW, THEREFORE, in order to effect the foregoing, in
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound, the parties hereto
agree as follows:
1. Releases.
(a) In furtherance of the provisions of the Amendment,
Lash hereby knowingly and voluntarily, fully and
finally releases, acquits and forever discharges as
of the date hereof and as of the Employment
Termination Date (as defined in the Amendment), the
Company and its affiliates, and their past and
present officers, directors, shareholders, partners,
trustees, beneficiaries, managers, employees,
attorneys, agents, successors or assigns (the
"Company Released Parties") from any and all claims,
charges, complaints, liens, demands, causes of
action, obligations, damages and liabilities, known
or unknown, suspected or unsuspected, that he had,
has, or may claim to have against the Company
Released Parties arising out of or relating in any
way to Lash's relationship with the Company as an
employee, officer, director or representative or the
termination thereof, or the termination of the
Employment Agreement (including without limitation
the federal Age Discrimination in Employment Act or
A-1
<PAGE> 9
equivalent state law). Notwithstanding the generality
of the foregoing, nothing contained herein shall
release the Company or in any way impair Lash's
rights to indemnification from the Company arising
from or relating in any way to Lash's service as an
employee, officer or director as provided by law or
under the Company's bylaws, or under any applicable
indemnification agreement or insurance policy to
which the Company is a party, including, but not
limited to, Lash's rights to reimbursement, coverage
or indemnification in connection with any current or
future litigation matter arising from or relating in
any way to Lash's services as an employee, officer,
director or representative of the Company; nor shall
the foregoing release the Company from any claim
relating to the breach by the Company of its
obligations set forth in the Employment Agreement
(including the provisions of the Amendment) or the
right to receive any payments or benefits to which
Employee is entitled pursuant to any Company employee
benefit plan.
(b) As a material inducement to enter into this Release,
the Company likewise hereby knowingly and
voluntarily, fully and finally releases, acquits,
and forever discharges as of the date hereof and the
Employment Termination Date, Lash and his agents,
employees, successors, heirs, beneficiaries or
assigns (the "Lash Released Parties") from any and
all claims, charges, complaints, liens, demands,
causes of action, obligations, damages and
liabilities, known or unknown, suspected or
unsuspected, that it had, has, or may claim to have
against Lash Released Parties arising out of or
relating in any way to Lash's relationship with the
Company as an employee, officer, director or
representative, whether or not previously asserted
before any state or federal court or before any
state, federal or regulatory agency or governmental
entity. Notwithstanding the generality of the
foregoing, nothing contained herein shall release
Lash from any claim relating to the breach by Lash
of any confidentiality agreements with the Company
or any of its affiliates or the obligations set
forth in the Employment Agreement and the Amendment.
A-2
<PAGE> 10
(c) Each of the Company and Lash acknowledges that such
party has been advised by legal counsel regarding, is
familiar with and expressly waives all rights
afforded by Section 1542 of the Civil Code of the
State of California ("Section 1542"), or any statute
of similar effect in any other jurisdiction in which
any action might be brought, with respect to the
claims described in paragraphs (a) and (b) of this
Section 1. Section 1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company and Lash
understands and agrees that this Release is intended to include all claims, if
any, described in paragraphs (a) (in the case of Lash) and (b) (in the case of
the Company) above, which either party may have and which neither party now
knows or suspects to exist in such party's favor against the Company Released
Parties (in the case of Lash) or Lash Released Parties (in the case of the
Company) and this Release extinguishes those claims.
2. Lash Right to Revoke.
Lash acknowledges that the Company has advised him to consult
with an attorney of his choosing prior to signing this Release and that he has
been given at least twenty-one (21) days during which to consider the provisions
of this Release. Lash further acknowledges that he has been advised by the
Company that he has the right to revoke this Release for a period of seven (7)
days after the execution of this Release and that this Release shall not become
effective or enforceable until such seven (7) day revocation period has expired.
Lash acknowledges and agrees that, if he wishes to revoke this Release, he must
do so in writing, signed by Lash and received by the Company at its headquarters
no later than 5:00 p.m. Pacific Standard Time on the seventh (7th) day after the
execution of this Release. Lash acknowledges and agrees that, in the event that
he revokes this Release, he shall have no right to receive any payment pursuant
to the Employment Agreement and the Amendment. Lash understands and agrees that
the Company is under no obligation to offer such
A-3
<PAGE> 11
payment and that he is under no obligation to consent to the release set forth
in paragraph 1(a) of this Release. Lash represents that he has read this
Release and understands its terms and that he enters into this Release freely,
voluntarily, and without coercion.
This Release shall be deemed a part of the Amendment and
accordingly shall be construed under the laws of the State of California and
may be executed in counterparts.
A-4
<PAGE> 12
IN WITNESS WHEREOF, each of the parties has executed this
Release as of the date set forth below.
FPA MEDICAL MANAGEMENT, INC.
-----------------------------
By:
Its:
--------------------------------
Steven Lash
Date:
A-5
<PAGE> 1
EXHIBIT 21
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
AHI (Texas) Healthcare Systems, Inc. California
AHI Healthcare Systems, Inc. Delaware
AMG Management Company California
Avanti Health Systems of Texas, Inc. Texas
B.H.P. IPA, Inc. New York
Cincinnati Health Partners, Inc. Delaware
Comprehensive Primary Care MSO, Inc. Delaware
ConneKt, LLC California
Cornerstone Physicians Corporation California
Cornerstone Physicians of Phoenix, Inc. Arizona
FPA Acquisition Corporation Florida
FPA Holding Company of California, Inc. California
FPA Medical Foundation Texas
FPA Medical Group of Florida, Inc. Florida
FPA Medical Group of Kentucky, Inc. Kentucky
<PAGE> 2
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
FPA Medical Management of Arizona, Inc. Arizona
FPA Medical Management of California, Inc. Delaware
FPA Medical Management of Florida, Inc. Florida
FPA Medical Management of Georgia, Inc. Georgia
FPA Medical Management of Illinois, Inc. Illinois
FPA Medical Management of Kentucky, Inc. Kentucky
FPA Medical Management of Louisiana, Inc. Louisiana
FPA Medical Management of Michigan, Inc. Michigan
FPA Medical Management of Missouri, Inc. Missouri
FPA Medical Management of North Carolina, Inc. North Carolina
FPA Medical Management of South Carolina, Inc. Delaware
FPA Medical Management of Tennessee, Inc. Tennessee
FPA Medical Management of Texas, Inc. Texas
FPA Medical Management of the Mid-Atlantic, Inc. Delaware
FPA Surgical Center, Inc. Texas
FPA Women's Care of Georgia, Inc. Georgia
FPA of Georgia, Inc. Georgia
G.P.M. IPA, Inc. New York
Gateway IPA, Inc. Virginia
Gateway Physicians Services, Inc. Virginia
Gotham Management, Inc. Delaware
Gotham Mid-Town Management, Inc. New York
Health One Associates, Inc. New York
Health Partners, Inc. Delaware
HealthCap - Missouri, Inc. California
HealthCap - Nevada, Inc. California
HealthCap, Inc. California
<PAGE> 3
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Mid-Level Practitioners, Inc. Missouri
OB-GYN Management, Inc. California
Physicians Medical Group of Florida, Inc. Florida
San Antonio Health Partners, Inc. Delaware
Sterling Anesthesia, Inc. Florida
Sterling Credentials Verification Services, Inc. Florida
Sterling Emergency Medical Care Incorporated Delaware
Sterling Emergency Treatment Associates, Inc. New York
Sterling Healthcare Group, Inc. Florida
Sterling Medical Group of Michigan, Inc. Florida
Sterling Mednet Emergency Services, Inc. Texas
Sterling Miami, Inc. Florida
Sterling Professional Emergency Physicians, LLC Maryland
Sterling Radiology, Inc. Florida
Sterling Regional Emergency Services, Inc. Florida
Sterling Sub Texas, Inc. Texas
Virginia Health Partners, Inc. Delaware
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 333-41989, 333-31351 and 333-20007) and Form S-8 (Nos. 333-31341,
333-34027, 333-16741 and 33-00074) of FPA Medical Management, Inc., of our
report dated March 20, 1998, appearing in this Annual Report on Form 10-K of
FPA Medical Management, Inc., for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 27, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FPA Medical Management, Inc. on Forms S-3 (File Nos. 333-41989, 333-20007, and
333-31351) and Forms S-8 (File Nos. 333-31341, 333-34027, 333-16741 and
33-00074) of our report dated March 15, 1996, on our audit of the consolidated
financial statements of Sterling Healthcare Group, Inc. for the year ended
December 31, 1995, which is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
- ---------------------------------
Coopers & Lybrand L.L.P.
Miami, Florida
March 27, 1998
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Health Partners, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-41989, 333-20007, and 333-31351) on Form S-3 and registration
statements (Nos. 333-31341, 333-34027, 333-16741 and 33-00074) on Form S-8 of
FPA Medical Management, Inc. of our report dated February 28, 1997, with respect
to the consolidated statement of financial position of Health Partners, Inc. and
Subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1996, which report
appears in the Annual Report on Form 10-K of FPA Medical Management, Inc. dated
March 27, 1998.
(signed) KPMG PEAT MARWICK LLP
White Plains, New York
March 27, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statements (No. 333-41989; 333-31351, 333-20007) on Form S-3 of FPA
Medical Management, Inc. and in the related Prospectus, and in the Registration
Statements (333-31341; 333-34027; 33-00074; 333-16741) on Form S-8 of FPA
Medical Management, Inc., and to the incorporation by reference of our report
dated February 22, 1996, with respect to the 1995 consolidated financial
statements of AHI Healthcare Systems, Inc. included in the Annual Report on Form
10-K of FPA Medical Management, Inc. for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
March 27, 1998
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