<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8049 33-0604264
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. LEBOVITZ, ESQ.
SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CALIFORNIA 92122
(619) 453-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JUSTIN P. KLEIN, ESQ. ERIC A. KLEIN, ESQ.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP KLEIN & MARTIN
1735 MARKET STREET, 51ST FLOOR 2029 CENTURY PARK EAST, SUITE 2550
PHILADELPHIA, PENNSYLVANIA 19103-7599 LOS ANGELES, CALIFORNIA 90067
(215) 665-8500 (310) 201-2581
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effectiveness of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and are in compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
======================================================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE FEE(2)
- ------------------------------------------------------------------------------------------------------
Common Stock ($.002 par
value)...................... 3,846,154 shares N/A N/A $1,994
======================================================================================================
</TABLE>
(1) Represents the maximum number of shares of FPA Medical Management, Inc.
common stock, par value $.002 per share, to be issued in exchange for all of
the issued and outstanding shares of capital stock of St. Joseph Medical
Corporation and Orange Coast Managed Care Services, Inc., pursuant to the
Agreement and Plan of Merger dated as of January 21, 1998, as amended as of
January 28, 1998, by and among FPA Medical Management, Inc., FPA Medical
Management of California, Inc., St. Joseph Medical Corporation and Orange
Coast Managed Care Services, Inc.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
the book value of the capital stock of St. Joseph Medical Corporation and
Orange Coast Managed Care Services, Inc. to be exchanged in the merger,
computed in accordance with Rule 457(f) as of December 31, 1997, the latest
practicable date prior to the date of filing of this Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
ST. JOSEPH MEDICAL CORPORATION
505 SOUTH MAIN STREET, SUITE 200
ORANGE, CALIFORNIA 92868
, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
St. Joseph Medical Corporation ("SJMC"), which will be held at a.m., local
time, on , 1998 at
(the "SJMC Special Meeting").
At the SJMC Special Meeting, holders of SJMC Class A Voting Common Stock
and SJMC Class B Non-Voting Common Stock (together, the "SJMC Common Stock")
will be asked to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of January 21, 1998 (the "Merger
Agreement") by and among FPA Medical Management, Inc. ("FPA"), FPA Medical
Management of California, Inc., a wholly owned subsidiary of FPA ("FPA
California"), Orange Coast Managed Care Services, Inc. ("OCMCS") and SJMC. A
copy of the Merger Agreement is included as Appendix A to the attached Proxy
Statement/Prospectus. On the terms and subject to the conditions of the Merger
Agreement, SJMC will be merged with and into FPA California (the "SJMC Merger")
and immediately thereafter OCMCS will be merged with and into FPA California
(the "OCMCS Merger") (together the "Combined Merger"). Both the SJMC Merger and
the OCMCS Merger must be approved for the Combined Merger to be consummated. As
a result of the SJMC Merger and the OCMCS Merger, SJMC and OCMCS will cease to
exist as separate entities.
Upon consummation of the SJMC Merger, each outstanding share of SJMC Common
Stock will be converted into the right to receive a number of shares of FPA
Common Stock equal to the SJMC Exchange Ratio, which is based on a formula set
forth in the Merger Agreement and described in the attached Proxy
Statement/Prospectus. SHAREHOLDERS OF SJMC WILL BE ABLE TO OBTAIN THE SJMC
EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE
SJMC SPECIAL MEETING BY CALLING (800)
- (RESERVATION NUMBER ).
THE BOARD OF DIRECTORS OF SJMC, AFTER CAREFUL CONSIDERATION, HAS APPROVED
THE MERGER AGREEMENT AND DETERMINED THAT THE SJMC MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, SJMC AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
Please complete, sign, date and promptly return the accompanying proxy even
if you are planning to attend the meeting. A return envelope is enclosed for
your use and no postage is required if mailed in the United States. If you do
attend the SJMC Special Meeting and wish to vote in person, you may revoke your
proxy at that time.
Very truly yours,
--------------------------------------
R. William Buster, M.D.
President
<PAGE> 3
ORANGE COAST MANAGED CARE SERVICES, INC.
505 SOUTH MAIN STREET, SUITE 200
ORANGE, CALIFORNIA 92868
, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Orange Coast Managed Care Services, Inc. ("OCMCS"), which will be held at
a.m., local time, on , 1998 at
(the "OCMCS Special Meeting").
At the OCMCS Special Meeting, holders of OCMCS' Common Stock, OCMCS' Series
A Preferred Stock and OCMCS' Series B Preferred Stock (the Series A and Series B
Preferred Stock hereinafter referred to as the "OCMCS Preferred Stock", and
together with the OCMCS Common Stock, hereinafter referred to as the "OCMCS
Voting Securities") will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger dated as of January 21, 1998
(the "Merger Agreement") by and among FPA Medical Management, Inc. ("FPA"), FPA
Medical Management of California, Inc., a wholly owned subsidiary of FPA ("FPA
California"), St. Joseph Medical Corporation ("SJMC") and OCMCS. A copy of the
Merger Agreement is included as Appendix A to the attached Proxy
Statement/Prospectus. On the terms and subject to the conditions of the Merger
Agreement, SJMC will be merged with and into FPA California (the "SJMC Merger")
and immediately thereafter OCMCS will be merged with and into FPA California
(the "OCMCS Merger") (together the "Combined Merger"). Both the SJMC Merger and
the OCMCS Merger must be approved for the Combined Merger to be consummated. As
a result of the SJMC Merger and the OCMCS Merger, SJMC and OCMCS will cease to
exist as separate entities.
Upon consummation of the OCMCS Merger, each outstanding share of OCMCS
Common Stock (including shares of OCMCS Common Stock underlying OCMCS Series B
Preferred Stock, on an as-converted basis, and including shares of OCMCS Common
Stock underlying fully vested options, assuming payment of the exercise price
for such options) will be converted into the right to receive a number of shares
of FPA Common Stock equal to the OCMCS Exchange Ratio, which is based on a
formula set forth in the Merger Agreement and described in the attached Proxy
Statement/Prospectus. STOCKHOLDERS AND OPTIONHOLDERS OF OCMCS WILL BE ABLE TO
OBTAIN THE OCMCS EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY
PRECEDING THE OCMCS SPECIAL MEETING BY CALLING (800) - (RESERVATION NUMBER
).
THE BOARD OF DIRECTORS OF OCMCS, AFTER CAREFUL CONSIDERATION, HAS APPROVED
THE MERGER AGREEMENT AND DETERMINED THAT THE OCMCS MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, OCMCS AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
Please complete, sign, date and promptly return the accompanying proxy even
if you are planning to attend the meeting. A return envelope is enclosed for
your use and no postage is required if mailed in the United States. If you do
attend the OCMCS Special Meeting and wish to vote in person, you may revoke your
proxy at that time.
Very truly yours,
--------------------------------------
Charles T. Madden
President and Chief Executive Officer
<PAGE> 4
<TABLE>
<S> <C> <C>
ST. JOSEPH MEDICAL ORANGE COAST MANAGED FPA MEDICAL
CORPORATION CARE SERVICES, INC. MANAGEMENT, INC.
PROXY STATEMENT PROXY STATEMENT PROSPECTUS
3,846,154 SHARES
COMMON STOCK
</TABLE>
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to the shareholders of St. Joseph Medical Corporation, a California
professional corporation ("SJMC"), and to the stockholders of Orange Coast
Managed Care Services, Inc., a Delaware corporation ("OCMCS"), in connection
with the solicitation of proxies by the Board of Directors of SJMC (the "SJMC
Board") and by the Board of Directors of OCMCS (the "OCMCS Board") for use at a
Special Meeting of SJMC shareholders to be held at on
, 1998, at a.m. local time (the "SJMC Special Meeting")
and at a Special Meeting of OCMCS stockholders to be held at
on 1998, at a.m. local time (the "OCMCS Special
Meeting"). At the SJMC Special Meeting and the OCMCS Special Meeting, the
shareholders of SJMC and the stockholders of OCMCS, respectively, will be asked
to approve the Agreement and Plan of Merger dated as of January 21, 1998, as
amended as of January 28, 1998 (the "Merger Agreement"), by and among FPA
Medical Management, Inc., a Delaware corporation ("FPA"), FPA Medical Management
of California, Inc., a California corporation and wholly owned subsidiary of FPA
("FPA California"), SJMC and OCMCS, relating to the merger of SJMC with and into
FPA California (the "SJMC Merger") and immediately thereafter the merger of
OCMCS with and into FPA California (the "OCMCS Merger" and, collectively with
the SJMC Merger, the "Combined Merger"). Both the SJMC Merger and the OCMCS
Merger must be approved for the Combined Merger to be consummated. As a result
of the Combined Merger, SJMC and OCMCS will cease to exist as separate entities.
See "THE MERGER AGREEMENT -- The Combined Merger." A copy of the Merger
Agreement is included in the Proxy Statement/Prospectus as Appendix A and
incorporated by reference herein.
The aggregate number of shares of FPA Common Stock, par value $.002 per
share ("FPA Common Stock"), to be issued in the Combined Merger (the "Merger
Consideration") shall be determined based on the average of the closing prices
of FPA Common Stock for the twenty-one (21) consecutive trading days ending on
the second trading day prior to Closing (as defined below) as reported on the
Nasdaq National Market System ("Nasdaq") (the "FPA Closing Price"). The
following table sets forth the calculation of the aggregate number of shares of
FPA Common Stock to be issued as the Merger Consideration depending on the FPA
Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE MERGER CONSIDERATION
---------------------------------------------- ----------------------------------------------
<S> <C>
Greater than $24.00 2,500,000
Less than or equal to $24.00 and greater than the quotient equal to $60,000,000 divided by
or equal to $20.6897 FPA Closing Price
Less than $20.6897 and greater than $17.24 2,900,000
Less than or equal to $17.24 the quotient equal to $50,000,000 divided by
FPA Closing Price
</TABLE>
If the FPA Closing Price is less than $15.00, FPA may terminate the Merger
Agreement. See "THE MERGER AGREEMENT -- Termination."
SEE "RISK FACTORS" BEGINNING AT PAGE 29 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS IN EVALUATING THE COMBINED MERGER AND FPA.
In connection with the Combined Merger: (i) each outstanding share of SJMC
Class A Voting Common Stock, par value $.001 per share, and each outstanding
share of SJMC Class B Non-Voting Common Stock, par value $.001 per share
(collectively, the "SJMC Common Stock"), will be exchanged for the right to
receive a number of shares of FPA Common Stock equal to the SJMC Exchange Ratio
(as defined below), and (ii) the shares of OCMCS Common Stock underlying (A)
each outstanding share of OCMCS Series B Preferred Stock, par value $.001 per
share (the "OCMCS Series B Preferred Stock") and (B) each option to purchase
shares of OCMCS Common Stock (the "OCMCS Options") (taking into account
accelerated vesting of such OCMCS Options as a result of the OCMCS Merger), will
be exchanged for the right to receive a number of shares of FPA Common Stock
equal to the OCMCS Exchange Ratio (as defined below) (collectively, the
"Exchange Ratios"). The outstanding shares of OCMCS Common Stock and the shares
of OCMCS Common Stock underlying the OCMCS Series B Preferred Stock and the
shares of OCMCS Common Stock underlying the OCMCS Options are collectively
referred to herein as the "OCMCS Stock."
(continued on next page)
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998.
<PAGE> 5
The outstanding shares of OCMCS Series A Preferred Stock, $.001 par value
per share (the "OCMCS Series A Preferred Stock"), all of which are held by SJMC,
will be cancelled without consideration in connection with the OCMCS Merger. The
portion of the Merger Consideration to be allocated to the SJMC shareholders is
expressed by the fraction, the numerator of which shall be the number of shares
of OCMCS Common Stock into which the shares of OCMCS Series A Preferred Stock
held by SJMC are convertible, and the denominator of which shall be the sum of
(i) the shares of OCMCS Stock and (ii) the number of shares of OCMCS Common
Stock into which the shares of the OCMCS Series A Preferred Stock held by SJMC
are convertible (such fraction is hereinafter referred to as the "SJMC
Percentage"), both as of the Effective Time (as defined below) of the Merger
Agreement. The percentage of the Merger Consideration to be allocated to the
OCMCS stockholders is equal to 100% minus the SJMC Percentage (the "OCMCS
Percentage"). The Exchange Ratios can be represented by the following formulas:
<TABLE>
<S> <C> <C>
Merger Consideration X SJMC Percentage
SJMC Exchange Ratio = Number of shares of SJMC Common Stock
Merger Consideration X OCMCS Percentage
OCMCS Exchange Ratio = Number of shares of OCMCS Stock
</TABLE>
The determination of the Merger Consideration and the calculation of the
SJMC Exchange Ratio and the OCMCS Exchange Ratio are more fully described in
this Proxy Statement/Prospectus. See "THE COMBINED MERGER -- Merger
Consideration." SHAREHOLDERS OF SJMC COMMON STOCK, STOCKHOLDERS OF OCMCS COMMON
STOCK AND OCMCS SERIES B PREFERRED STOCK AND HOLDERS OF OCMCS OPTIONS WILL BE
ABLE TO OBTAIN THE SJMC EXCHANGE RATIO AND THE OCMCS EXCHANGE RATIO BEGINNING AT
THE END OF THE SECOND BUSINESS DAY PRECEDING THE DAY OF THE SJMC SPECIAL MEETING
AND THE OCMCS SPECIAL MEETING BY CALLING (800) .
An affirmative vote for the Merger Agreement by an OCMCS stockholder or
SJMC shareholder shall constitute agreement by such stockholder or shareholder
to the indemnification provisions of the Merger Agreement and shall limit the
ability of FPA and FPA California to claim for indemnification and recover from
such stockholder or shareholder more than the value of the merger consideration
received by such OCMCS stockholder or SJMC shareholder. See "THE MERGER
AGREEMENT -- Indemnification."
The shares of FPA Common Stock are traded on Nasdaq under the symbol
"FPAM." On , 1998, the last trading day prior to the date of this
Proxy Statement/Prospectus, the closing price of FPA Common Stock was
$ . Assuming the FPA Closing Price was equal to $ , and based
on the number of shares of OCMCS Stock and SJMC Common Stock on ,
1998, the Merger Consideration would consist of shares of FPA Common
Stock; of such shares would be allocated to the SJMC Merger (the "SJMC
Merger Consideration") and of such shares would be allocated to the
OCMCS Merger (the "OCMCS Merger Consideration"). The SJMC Exchange Ratio would
be and the OCMCS Exchange Ratio would be .
The shares of FPA Common Stock to be received in exchange for the OCMCS
Common Stock, the OCMCS Preferred Stock and the OCMCS Options (except as
otherwise provided in the Merger Agreement) shall be contractually restricted
from sale, transfer or other disposition for a period of 90 days commencing as
of the Effective Time.
To the extent that FPA, FPA California, SJMC or OCMCS waives compliance
with material provisions of or conditions to consummation of the Combined
Merger, FPA, FPA California, SJMC and OCMCS will amend this Proxy
Statement/Prospectus, and SJMC and OCMCS will resolicit stockholder votes to the
extent required by law.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to shareholders of SJMC and stockholders of OCMCS on or about
, 1998.
This Proxy Statement/Prospectus also constitutes the Prospectus of FPA
filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of FPA Common Stock to be issued to shareholders of SJMC and stockholders
of OCMCS in the Combined Merger.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus in
connection with the solicitation of proxies or the offering of securities made
hereby and, if given or made, such information or representation should not be
relied upon as having been authorized by FPA, FPA California, SJMC or OCMCS.
This Proxy Statement/Prospectus does not constitute an offer to sell, or the
solicitation of an offer to purchase, any securities, or the solicitation of a
proxy, in any jurisdiction in which, or to any person to whom, it is unlawful to
make such offer or solicitation of an offer or proxy solicitation. Neither the
delivery of this Proxy Statement/Prospectus nor any distribution of the
securities offered hereby shall, under any circumstances, create any implication
that there has been no change in the affairs of FPA, FPA California, SJMC or
OCMCS since the date hereof or that the information set forth or incorporated by
reference herein is correct as of any time subsequent to its date. All
information herein with respect to FPA and FPA California has been furnished by
FPA, all information herein with respect to SJMC has been furnished by SJMC, and
all information herein with respect to OCMCS has been furnished by OCMCS.
<PAGE> 6
AVAILABLE INFORMATION
FPA is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the offices of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Regional Offices of the Commission: Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials may be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates or from the Commission's Internet Web
site at http://www.sec.gov. Shares of FPA Common Stock are traded on the Nasdaq
National Market System under the symbol FPAM. Reports and other information
concerning the registrant may be inspected at the Nasdaq National Market.
FPA has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), on Form S-4 with respect to the securities offered hereby.
This Proxy Statement/Prospectus also constitutes the Prospectus of FPA filed as
part of the Registration Statement and does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain parts
of which are omitted in accordance with the rules of the Commission. Statements
made in this Proxy Statement/Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete; with
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including exhibits filed as part thereof, are available for
inspection and copying at the Commission's offices as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by FPA (File No. 0-24276)
with the Commission pursuant to the Exchange Act, are incorporated by reference
in this Proxy Statement/Prospectus:
1. FPA's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 filed with the Commission on March 31, 1997, as amended by Form
10-K/A filed with the Commission on April 29, 1997.
2. FPA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
filed with the Commission on May 15, 1997.
3. FPA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997
filed with the Commission on August 14, 1997.
4. FPA's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997 filed with the Commission on November 14, 1997.
5. FPA's Current Report on Form 8-K dated March 17, 1997 filed with the
Commission on May 16, 1997, as amended by Form 8-K/A filed with the
Commission on May 28, 1997.
6. FPA's Current Report on Form 8-K dated July 31, 1997 filed with the
Commission on July 31, 1997, as amended by Form 8-K/A filed with the
Commission on October 10, 1997.
7. The audited combined balance sheets of Foundation Health Medical
Services (a wholly owned subsidiary of Foundation Health Corporation)
and affiliates as of June 30, 1995 and 1996 and the related combined
statements of operations, shareholders' deficit and cash flows for each
of the three years in the period ended June 30, 1996 contained in FPA's
Registration Statement on Form S-4 dated February 13, 1997.
8. FPA's Current Report on Form 8-K dated December 9, 1997 filed with the
Commission on December 10, 1997.
2
<PAGE> 7
9 The description of the FPA Common Stock contained in FPA's Registration
Statement on Form 8-A dated October 20, 1994.
All documents and reports subsequently filed by FPA pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the OCMCS and SJMC Special
Meetings shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the date of filing of such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or with respect to FPA in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded, except as so modified or superseded, shall not be deemed to
constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHICH THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT CHARGE, ON WRITTEN
OR ORAL REQUEST DIRECTED TO FPA MEDICAL MANAGEMENT, INC., 3636 NOBEL DRIVE,
SUITE 200, SAN DIEGO, CALIFORNIA 92122, ATTENTION: JAMES A. LEBOVITZ (TELEPHONE
NUMBER (619) 453-1000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY , 1998, THE DATE WHICH IS FIVE BUSINESS
DAYS PRIOR TO THE DATE OF THE SJMC AND OCMCS SPECIAL MEETINGS.
Some of the information presented in this Proxy Statement/Prospectus
constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 do not apply to forward looking
statements made by SJMC or OCMCS. Although FPA, FPA California, SJMC and OCMCS
believe that their expectations are based on reasonable assumptions within the
bounds of their knowledge of their respective businesses and operations, there
can be no assurance that actual results of FPA's, FPA California's, SJMC's or
OCMCS' operations will not differ materially from expectations. Factors which
could cause actual results to differ from expectations include, among others,
FPA's ability to successfully integrate acquisitions, FPA's ability to manage
growth, the difficulty of controlling health care costs, the reliance of FPA on
capitated revenue and FPA's ability to comply with governmental and other
regulations, laws and licenses. Specific reference is made to the risks and
uncertainties described under "RISK FACTORS," and contained in FPA's periodic
reports and registration statements filed with the Commission.
3
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
GLOSSARY OF CERTAIN DEFINED TERMS..................................................... 6
SUMMARY............................................................................... 9
FPA MEDICAL MANAGEMENT, INC......................................................... 9
THE COMBINED MERGER................................................................. 13
THE SJMC SPECIAL MEETING............................................................ 23
THE OCMCS SPECIAL MEETING........................................................... 25
FPA, SJMC AND OCMCS COMPARATIVE PER SHARE DATA...................................... 27
MARKET PRICE AND DIVIDEND DATA...................................................... 28
RISK FACTORS.......................................................................... 29
Risks Relating to FPA............................................................... 29
Risks Relating to SJMC and OCMCS.................................................... 39
Risks Relating to the Combined Merger............................................... 41
THE SJMC SPECIAL MEETING.............................................................. 43
Date, Time and Place................................................................ 43
Purpose of the SJMC Special Meeting................................................. 43
Revocation of Proxies............................................................... 43
Quorum.............................................................................. 43
Vote Required....................................................................... 43
Record Date; Stockholders Entitled to Vote.......................................... 44
Voting of Proxies................................................................... 44
Solicitation of Proxies............................................................. 44
Dissenter's Rights.................................................................. 44
Security Ownership of Certain SJMC Beneficial Owners and Management................. 45
THE OCMCS SPECIAL MEETING............................................................. 46
Date, Time and Place................................................................ 46
Purpose of the OCMCS Special Meeting................................................ 46
Revocation of Proxies............................................................... 46
Quorum.............................................................................. 46
Vote Required....................................................................... 47
Record Date; Stockholders Entitled to Vote.......................................... 47
Voting of Proxies................................................................... 47
Solicitation of Proxies............................................................. 47
Stockholders' Rights of Appraisal................................................... 48
Security Ownership of Certain OCMCS Beneficial Owners and Management................ 48
THE COMBINED MERGER................................................................... 50
Effects of the Combined Merger...................................................... 50
Merger Consideration................................................................ 50
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares.... 51
Nasdaq Listing...................................................................... 52
Background of the Combined Merger................................................... 52
Recommendation of the SJMC Board of Directors and Reasons for the SJMC Merger....... 54
Recommendation of the OCMCS Board of Directors and Reasons for the OCMCS Merger..... 56
Opinion of OCMCS' Financial Advisor................................................. 57
Effective Time of the Combined Merger............................................... 60
Interests of Certain Persons in the Combined Merger................................. 61
Certain Federal Income Tax Consequences............................................. 62
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accounting Treatment................................................................ 63
Resale of FPA Common Stock by Affiliates............................................ 63
Certain Regulatory Matters.......................................................... 64
Rights of Dissenting Shareholders and Stockholders.................................. 65
Board of Directors of FPA Following the Merger...................................... 68
Executive Officers of FPA Following the Combined Merger............................. 68
THE MERGER AGREEMENT.................................................................. 69
The Combined Merger................................................................. 69
Effective Time...................................................................... 69
Fractional Shares................................................................... 70
Surrender and Payment............................................................... 70
Treatment of OCMCS Options.......................................................... 70
Certain Representations and Warranties.............................................. 70
Conduct of Business Pending the Combined Merger..................................... 71
Certain Additional Agreements....................................................... 72
Conditions to Consummation of the Combined Merger................................... 76
Termination......................................................................... 77
Effect of Termination............................................................... 77
Indemnification..................................................................... 78
Amendment........................................................................... 79
Waiver.............................................................................. 79
COMPARISON OF RIGHTS OF HOLDERS OF SJMC VOTING SECURITIES, OCMCS VOTING SECURITIES AND
FPA COMMON STOCK.................................................................... 80
Preferred Stock..................................................................... 80
Board of Directors.................................................................. 80
Bylaws.............................................................................. 81
Stockholder Meetings................................................................ 81
Indemnification..................................................................... 81
Stockholder Voting Requirements..................................................... 82
Action by Consent................................................................... 83
SELECTED HISTORICAL AND PRO FORMA INFORMATION......................................... 84
SELECTED HISTORICAL FINANCIAL DATA -- FPA............................................. 92
SELECTED FINANCIAL DATA -- SJMC AND OCMCS............................................. 93
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-- SJMC AND OCMCS................................................................... 94
BUSINESS OF SJMC AND OCMCS............................................................ 97
LEGAL MATTERS......................................................................... 99
ADDITIONAL INFORMATION................................................................ 99
EXPERTS............................................................................... 99
INDEX TO ST. JOSEPH MEDICAL CORPORATION AND ORANGE COAST MANAGED CARE SERVICES, INC.
AUDITED COMBINED FINANCIAL STATEMENTS............................................ F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER DATED AS OF JANUARY 21, 1998 BY AND AMONG
FPA, FPA CALIFORNIA, SJMC AND OCMCS AND AMENDMENT NUMBER ONE TO
AGREEMENT AND PLAN OF MERGER DATED AS OF JANUARY 28, 1998 BY AND AMONG
FPA, FPA CALIFORNIA, SJMC AND OCMCS................................... A-1
APPENDIX B -- OPINION OF COWEN & COMPANY AS FINANCIAL ADVISOR TO OCMCS.............. B-1
APPENDIX C -- CALIFORNIA GENERAL CORPORATION LAW CHAPTER 13......................... C-1
APPENDIX D -- DELAWARE GENERAL CORPORATION LAW SECTION 262.......................... D-1
</TABLE>
5
<PAGE> 10
GLOSSARY OF CERTAIN DEFINED TERMS
AGREEMENT OF MERGER........ The Agreement of Merger to be filed with the
Secretary of State of Delaware and the Secretary of
State of California in connection with the Combined
Merger.
APB NO. 16................. Accounting Principles Board Opinion No. 16, as
amended.
CALIFORNIA CODE............ California General Corporation Law.
CAPITATION................. A per enrollee, per month amount paid pursuant to
Payor contracts in exchange for which the PPM or
physician group is financially responsible to
provide the enrollee with all necessary medical
care specified by the capitation arrangement.
CLOSING.................... The closing of the Combined Merger.
CLOSING DATE............... The date on which the Closing occurs.
CODE....................... The Internal Revenue Code of 1986, as amended.
COMBINED MERGER............ The SJMC Merger and the OCMCS Merger.
COMMISSION................. The Securities and Exchange Commission.
COWEN...................... Cowen & Company, financial advisor to OCMCS with
respect to the Combined Merger.
DELAWARE ACT............... Delaware General Corporation Law.
DEPARTMENT................. The California Department of Corporations.
DOJ........................ The United States Department of Justice.
EFFECTIVE TIME............. The time at which the Combined Merger will become
effective as provided for in the Agreement of
Merger or such other time as to which FPA, FPA
California, SJMC and OCMCS shall agree.
EXCHANGE ACT............... Securities Exchange Act of 1934, as amended.
EXCHANGE AGENT............. American Stock Transfer & Trust Company or another
bank or trust company designated by FPA acting as
an exchange agent.
FPA........................ FPA Medical Management, Inc.
FPA BOARD.................. The Board of Directors of FPA Medical Management,
Inc.
FPA CALIFORNIA............. FPA Medical Management of California, Inc.
FPA CLOSING PRICE.......... The average closing price of FPA Common Stock as
reported on Nasdaq for the twenty-one (21)
consecutive trading days ending on the second
trading day prior to the Closing Date.
FPA COMMON STOCK........... FPA Medical Management, Inc. Common Stock, par
value $.002 per share.
FPA NETWORK................ Professional Corporations, other providers of
medical services and Payors affiliated with FPA.
FTC........................ The United States Federal Trade Commission.
GLOBAL CAPITATION.......... A capitation arrangement whereby the PPM or
physician group generally is financially
responsible to provide enrollees with all necessary
inpatient and outpatient medical care.
HMO........................ Health maintenance organization.
HSR ACT.................... Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
IPA........................ Independent practice association.
6
<PAGE> 11
KNOX-KEENE ACT............. Knox-Keene Health Care Service Plan Act.
MERGER AGREEMENT........... The Agreement and Plan of Merger dated as of
January 21, 1998, as amended as of January 28,
1998, by and among FPA, FPA California, SJMC and
OCMCS.
MERGER CONSIDERATION....... The aggregate number of shares of FPA Common Stock
to be issued to SJMC shareholders and OCMCS
stockholders in the Combined Merger.
NASDAQ..................... The Nasdaq National Market System.
OCMCS BOARD................ The Board of Directors of OCMCS.
OCMCS COMMON STOCK......... OCMCS Common Stock, $.001 par value per share.
OCMCS EXCHANGE RATIO....... The number of shares of FPA Common Stock issuable
in exchange for each share of OCMCS Stock in
connection with the OCMCS Merger.
OCMCS MERGER............... The merger of OCMCS with and into FPA California.
OCMCS MERGER
CONSIDERATION............ That portion of the Merger Consideration allocated
to the OCMCS Merger.
OCMCS OPTIONS.............. Options to purchase shares of OCMCS Common Stock.
OCMCS OPTION PLAN.......... OCMCS' 1996 Stock Option Plan.
OCMCS PERCENTAGE........... That percentage of the Merger Consideration
allocated to the holders of OCMCS Stock.
OCMCS PREFERRED STOCK...... OCMCS Series A Preferred Stock, $.001 par value per
share, and OCMCS Series B Preferred Stock, $.001
par value per share.
OCMCS RECORD DATE.......... , 1998.
OCMCS RECORD HOLDERS....... Holders of OCMCS Stock as of the OCMCS Record Date.
OCMCS SPECIAL MEETING...... The Special Meeting of Stockholders of OCMCS to be
held on at a.m., local
time at , as the same may be
adjourned or postponed.
OCMCS STOCK................ The total number of outstanding shares of OCMCS
Common Stock and the shares of OCMCS Common Stock
underlying OCMCS Series B Preferred Stock and OCMCS
Options.
OCMCS VOTING SECURITIES.... The outstanding shares of OCMCS Common Stock and
OCMCS Preferred Stock as of the Effective Time.
PAYORS..................... HMOs and other prepaid health insurance plans which
provide physician and related health care services
to enrollees.
PPM........................ Physician practice management company.
PROFESSIONAL
CORPORATIONS............... Professional corporations affiliated with FPA.
PROXY
STATEMENT/PROSPECTUS....... This proxy statement/prospectus relating to the
Combined Merger.
REGISTRATION STATEMENT..... The registration statement filed under the
Securities Act of which this Proxy
Statement/Prospectus forms a part.
RULE 144................... Rule 144 promulgated under the Securities Act.
RULE 145................... Rule 145 promulgated under the Securities Act.
SECURITIES ACT............. Securities Act of 1933, as amended.
SJMC BOARD................. The Board of Directors of SJMC.
7
<PAGE> 12
SJMC COMMON STOCK.......... The outstanding SJMC Class A Voting Common Stock,
$.001 par value per share, and Class B Non-Voting
Common Stock, $.001 par value per share.
SJMC EXCHANGE RATIO........ The number of shares of FPA Common Stock issuable
in exchange for each share of SJMC Common Stock in
connection with the SJMC Merger.
SJMC MERGER................ The merger of SJMC with and into FPA California.
SJMC MERGER
CONSIDERATION.............. That portion of the Merger Consideration allocated
to the SJMC Merger.
SJMC PERCENTAGE............ That percentage of the Merger Consideration
allocated to the holders of SJMC Common Stock.
SJMC RECORD DATE........... , 1998.
SJMC RECORD HOLDERS........ Holders of SJMC Common Stock as of the SJMC Record
Date.
SJMC SPECIAL MEETING....... The Special Meeting of stockholders of SJMC to be
held on at a.m. local time
at , as the same may be
adjourned or postponed.
SJMC VOTING SECURITIES..... The outstanding shares of SJMC Common Stock as of
the Effective Time.
SURVIVING CORPORATION...... FPA California after the Combined Merger.
8
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Proxy Statement/Prospectus. The information
contained in this summary is qualified in its entirety by, and should be read in
conjunction with, the detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Proxy Statement/Prospectus and
the documents incorporated herein by reference.
FPA MEDICAL MANAGEMENT, INC.
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. FPA
provides primary and specialty care services to prepaid managed care enrollees
and fee-for-service patients through a network of independent practice
association physicians and owned primary care physician groups. FPA manages all
covered primary and specialty medical care for each enrollee in exchange for
monthly capitation payments pursuant to Payor contracts. Under certain Payor
contracts, certain of FPA's subsidiaries and Professional Corporations also
accept the financial risk for hospital services. FPA is affiliated with
approximately primary care physicians (including emergency room
physicians), who provide services to approximately enrollees of
health maintenance organizations ("HMOs") or other prepaid health insurance
plans (collectively, "Payors") in states. FPA, through its subsidiary
Sterling Healthcare Group, Inc. ("Sterling"), provides management services
pursuant to approximately contracts to hospital emergency departments,
urgent care, radiology and correctional facilities.
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 healthcare is
growing. FPA believes new Payor and provider relationships are possible because
of its ability to manage the cost of health care without sacrificing quality.
FPA seeks to control the two "gatekeeping" points of entry into the managed
health care delivery system -- the primary care physician's office and the
emergency room -- thereby giving FPA a platform for coordinating all aspects of
patient care under global capitation Payor contracts. FPA is also pursuing
national and multi-state Payor contracts, which facilitate more rapid
development of provider networks in new markets and thus should enable FPA to
increase enrollment in an accelerated manner. FPA or certain of its subsidiaries
have recently entered into multi-state Payor contracts with NYLCare Health
Plans, Oxford Health Plans, WellPoint Health Network, Inc., PacifiCare Health
Systems, Inc., Aetna U.S. Healthcare and Foundation Health Systems, Inc. whereby
the FPA Network will be accessible to certain members of each of the Payors in
agreed upon geographic areas.
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 operations by assuming administrative functions
necessary in a managed care environment. These functions include claims
adjudication, utilization management of medical services, Payor contract
negotiations, credentialing, financial reporting and the operation of management
information systems. Under these arrangements, FPA, on behalf of the
Professional Corporations, is responsible for the payment of the cost of medical
services, including professional, ancillary and medical management services, and
is entitled to amounts received from Payors in excess of such costs. FPA
believes that its 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.
Except where otherwise permitted by law or regulation, FPA does not engage
in the practice of medicine. Due to the constraints of the corporate practice of
medicine doctrine, FPA cannot own the majority of shares of the voting stock of
the Professional Corporations in most states. FPA has direct or indirect
unilateral and perpetual control over the assets and operations of the
Professional Corporations which are consolidated with
9
<PAGE> 14
FPA through the ownership of such Professional Corporations by certain
physicians who are employees of FPA or one of its subsidiaries. Each
stockholder/director of such Professional Corporations has entered into a
succession agreement with FPA which requires such stockholder/director to sell
to a designee of FPA such stockholder/director's shares of stock in the relevant
Professional Corporation for a nominal amount if such stockholder/director is
terminated from employment with FPA.
Agreements with Payors and providers are entered into with, and approved
by, either a subsidiary of FPA or one of the Professional Corporations,
depending on applicable state law. In the states where the corporate practice of
medicine doctrine prohibits the ownership of professional corporations other
than by physicians or physician-owned professional corporations, in most cases
the capitation payments are received by the Professional Corporations and are
generally assigned to FPA pursuant to administrative services agreements. Where
subsidiaries of FPA contract directly with Payors, such subsidiaries receive the
capitation payments.
The FPA Network manages all covered primary and specialty medical care for
each enrollee in exchange for monthly capitation payments pursuant to Payor
contracts. Specialty care physician services, inpatient hospitalization and
certain other services managed by primary care physicians are subject to
pre-authorization guidelines and are provided through contracts negotiated by
FPA for the Professional Corporations 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. Under
certain Payor contracts, certain of FPA's subsidiaries and Professional
Corporations also accept the financial risk for hospital services. Because the
Professional Corporations and certain of FPA's subsidiaries are obligated to
provide medical services, some of the costs of which are variable, for fixed
capitation fees, FPA's profitability may vary based on the ability of FPA and
its affiliated providers to control such health care costs.
FPA recruits physicians and contracts for their services to provide
staffing of emergency departments. FPA also assists its hospital clients in such
areas as physician scheduling, operations support, quality assurance and
departmental accreditation as well as billing and record keeping. In addition,
FPA has expanded its hospital-based services to include the management of
anesthesiology departments and rural health care clinics.
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA Network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA Network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations or
subsidiaries of FPA have contracts and whose members are patients of physicians
in the FPA Network or (iii) agreements with Payors, physicians and hospitals in
other geographic markets. The process of identifying and consummating suitable
acquisitions of, or affiliations with, physician groups can be lengthy and
complex. The environment for such acquisitions and affiliations is subject to
increasing competitive pressures. There can be no assurance that FPA will be
successful in identifying, acquiring or affiliating with additional physician
groups or hospitals or that the Professional Corporations or subsidiaries of FPA
will be able to contract with new Payors. In addition, there can be no assurance
that FPA's acquisitions will be successfully integrated on a timely basis or
that the anticipated benefits of these acquisitions will be realized; failure to
effectively accomplish the integration of acquired entities may have a material
adverse effect on FPA's results of operations and financial condition. FPA's
ability to expand is also dependent upon its ability to comply with legal and
regulatory requirements in the jurisdictions in which it operates or will
operate and to obtain necessary regulatory approvals, certificates and licenses.
FPA 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 acquire any additional businesses.
The health care industry is subject to extensive federal and state
legislation and regulation. Changes in the regulations or interpretations of
existing regulations could significantly affect the business of FPA.
10
<PAGE> 15
FPA's executive offices are located at 3636 Nobel Drive, Suite 200, San
Diego, California 92122 and its telephone number is (619) 453-1000.
FPA Recent Developments. FPA entered into an Agreement and Plan of Merger
dated February 10, 1998 between FPA and Meridian Medical Group, Inc., a Georgia
professional corporation ("Meridian"), whereby Meridian will merge with and into
FPA. Meridian is a primary care medical group which employs approximately 55
physicians who provide healthcare services to approximately 67,900 managed care
members at nine clinics in the Atlanta, Georgia area. FPA anticipates that the
merger will be consummated in the second quarter of 1998 and is subject to
Meridian shareholder approval, regulatory approval and other customary closing
conditions.
For more information regarding FPA and the Combined Merger, see "SELECTED
HISTORICAL AND PRO FORMA INFORMATION" and "SELECTED HISTORICAL FINANCIAL DATA --
FPA."
11
<PAGE> 16
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
Orange Coast Managed Care Services, Inc. ("OCMCS") is a physician practice
management company headquartered in Orange County, California. OCMCS provides a
wide range of medical management services, organizational development and
contracting support to St. Joseph Medical Corporation, a California professional
corporation ("SJMC"), including administrative support to St. Joseph IPA, an
independent practice association ("SJIPA"), and St. Joseph Medical Group, a
primary care medical group ("SJMG"), in the areas of network development,
provider contracting, claims processing, financial management, management
information systems, quality management, utilization management and grievance
resolution, billing and collections and medical office support services. SJMC
operates two divisions: SJIPA and SJMG. A third division, the occupational
medicine division, was sold effective as of September 30, 1997 to U.S.
Healthworks of California, Inc., an affiliate of U.S. Healthworks, Inc. SJMC
owns approximately 70% of the OCMCS Voting Securities.
SJMC was formed in 1992 as the result of a merger between St. Joseph
Multi-Specialty Group, Inc. and Saint Joseph Hospital Medical Group. OCMCS was
formed as a Delaware corporation on November 9, 1995. In December 1995, OCMCS
and SJMC restructured their operations and entered into a 50 year management
services agreement (the "MSA"), whereby OCMCS provides the management and
administrative services, as described above, to SJIPA and SJMG. SJMC retains
exclusive control over the medical aspects of its operations.
SJIPA operates a physician network in Orange County, California, which
provides health care services to members of various Payors, including preferred
provider organizations. As of December 1997, SJIPA had contracts with Payors to
provide medical care to approximately 129,000 members (120,200 commercial/point
of service members and 8,800 Medicare members). SJIPA's network of providers
includes more than 580 physicians, of whom approximately 190 are primary care
physicians.
SJMG delivers primary medical care through nine clinics located in central
Orange County. SJMG employs approximately 48 primary care physicians to provide
services to approximately 54,800 managed care members as of December 31, 1997.
SJMG is SJIPA's largest primary care provider. SJMG currently provides medical
services to approximately 50,100 of SJIPA's 129,000 HMO members, as well as a
comparable number of fee-for-service patients. SJMG also provides primary
medical care services to nearly 4,700 IPA members who are not affiliated with
SJIPA. SJMG was formed in late 1994 and is the result of a combination of the
practices of approximately 40 primary care physicians representing a wide range
of primary care disciplines (pediatrics, family practice and internal medicine)
and located in central Orange County, California.
The executive offices of OCMCS and SJMC are located at 505 South Main
Street, Suite 200, Orange, California 92868, and their telephone number is (714)
560-5000.
12
<PAGE> 17
THE COMBINED MERGER
Effects of the
Combined Merger.......... Pursuant to the Merger Agreement, SJMC will merge
with and into FPA California (the "SJMC Merger")
and immediately thereafter OCMCS will merge with
and into FPA California (the "OCMCS Merger")
(collectively, the "Combined Merger"). As a result
of the Combined Merger, SJMC and OCMCS will cease
to exist as separate entities (FPA California is
sometimes referred to in this Proxy
Statement/Prospectus as the "Surviving
Corporation"). The aggregate number of shares of
FPA Common Stock, par value $.002 per share ("FPA
Common Stock") to be issued in the Combined Merger
(the "Merger Consideration") shall be determined
based on the average of the closing prices of FPA
Common Stock for the twenty-one (21) consecutive
trading days ending on the second trading day prior
to Closing (as defined below) as reported on the
Nasdaq National Market System ("Nasdaq") (the "FPA
Closing Price"). The following table sets forth the
calculation of the aggregate number of shares of
FPA Common Stock to be issued as the Merger
Consideration depending on the FPA Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE MERGER CONSIDERATION
------------------------- -------------------------
<S> <C> <C>
Greater than $24.00 2,500,000
Less than or equal to the quotient equal to
$24.00 and greater than $60,000,000 divided by
or equal to $20.6897 FPA Closing Price
Less than $20.6897 and 2,900,000
greater than $17.24
Less than or equal to the quotient equal to
$17.24 $50,000,000 divided by
FPA Closing Price
</TABLE>
If the FPA Closing Price is less than $15.00, FPA
may terminate the Merger Agreement. See "THE MERGER
AGREEMENT -- Termination."
In connection with the Combined Merger: (i) each
outstanding share of SJMC Class A Voting Common
Stock, par value $.001 per share ("SJMC Class A
Common Stock"), and each outstanding share of SJMC
Class B Non-Voting Common Stock, par value $.001
per share ("SJMC Class B Common Stock")
(collectively, the "SJMC Common Stock"), will be
exchanged for the right to receive a number of
shares of FPA Common Stock equal to the SJMC
Exchange Ratio (as defined below) and (ii) each
outstanding share of OCMCS Common Stock, par value
$.001 per share (the "OCMCS Common Stock"),
including for such purpose the shares of OCMCS
Common Stock underlying (A) each outstanding share
of OCMCS Series B Preferred Stock, par value $.001
per share (the "OCMCS Series B Preferred Stock")
and (B) each option to purchase shares of OCMCS
Common Stock (the "OCMCS Options") (taking into
account accelerated vesting of such OCMCS Options
as a result of the OCMCS Merger), will be exchanged
for the right to receive a number of shares of FPA
Common Stock equal to the OCMCS Exchange Ratio (as
defined below)(collectively, the "Exchange
Ratios"). The outstanding shares of OCMCS Common
Stock, the shares of OCMCS Common Stock underlying
the OCMCS
13
<PAGE> 18
Series B Preferred Stock and the shares of OCMCS
Common Stock underlying OCMCS Options are
collectively referred to herein as the "OCMCS
Stock." The outstanding shares of OCMCS Series A
Preferred Stock, $.001 par value per share (the
"OCMCS Series A Preferred Stock"), all of which are
held by SJMC, will be cancelled without
consideration in connection with the OCMCS Merger.
Each share of OCMCS Common Stock and OCMCS
Preferred Stock held in OCMCS' treasury will be
canceled and extinguished and will cease to exist
and no consideration will be delivered with respect
thereto. If applicable, each outstanding share of
SJMC Common Stock, OCMCS Common Stock or OCMCS
Preferred Stock, the holder of which is eligible
for dissenters' rights to appraisal in accordance
with the Delaware General Corporation Law
("Delaware Act") or the California General
Corporation Law ("California Code") will not be
converted into a right to receive shares of FPA
Common Stock, but such holder will be entitled to
only such rights as are granted under applicable
provisions of the Delaware Act or the California
Code. See "THE COMBINED MERGER -- Rights of
Dissenting Shareholders and Stockholders." The
portion of the Merger Consideration to be allocated
to the SJMC shareholders is expressed by the
fraction, the numerator of which shall be the
number of shares of OCMCS Common Stock into which
the shares of OCMCS Series A Preferred Stock held
by SJMC are convertible, and the denominator of
which shall be the sum of (i) the shares of OCMCS
Stock and (ii) the number of shares of OCMCS Common
Stock into which the shares of the OCMCS Series A
Preferred Stock held by SJMC are convertible (the
fraction is hereinafter referred to as the "SJMC
Percentage"), both as of the Effective Time (as
defined below) of the Merger Agreement. The
percentage of the Merger Consideration to be
allocated to the OCMCS stockholders is equal to
100% minus the SJMC Percentage (the "OCMCS
Percentage"). The Exchange Ratios can be
represented by the following formulas:
<TABLE>
<S> <C> <C>
SJMC Merger Consideration X SJMC Percentage
Exchange Ratio = Number of shares of SJMC Common Stock
OCMCS Merger Consideration X OCMCS Percentage
Exchange Ratio = Number of shares of OCMCS Stock
</TABLE>
The determination of the Merger Consideration and
the calculation of the SJMC Exchange Ratio and the
OCMCS Exchange Ratio are more fully described in
this Proxy Statement/Prospectus. See "THE COMBINED
MERGER -- Merger Consideration." SHAREHOLDERS OF
SJMC COMMON STOCK, STOCKHOLDERS OF OCMCS COMMON
STOCK AND OCMCS SERIES B PREFERRED STOCK AND
HOLDERS OF OCMCS OPTIONS WILL BE ABLE TO OBTAIN THE
SJMC EXCHANGE RATIO AND THE OCMCS EXCHANGE RATIO
BEGINNING AT THE END OF THE SECOND BUSINESS DAY
PRECEDING THE DAY OF THE SJMC SPECIAL MEETING AND
THE OCMCS SPECIAL MEETING BY CALLING (800)
- .
The shares of FPA Common Stock are traded on Nasdaq
under the symbol "FPAM." On , 1998, the
last trading day prior to the date of this Proxy
Statement/Prospectus, the closing price of FPA
Common Stock was $ . Assuming the FPA
Closing Price was equal to $ , and based
on the number of shares of OCMCS Stock and SJMC
Common Stock outstanding on the date of the Merger
14
<PAGE> 19
Agreement, the Merger Consideration would consist
of shares of FPA Common Stock;
of such shares would be allocated to the SJMC
Merger (the "SJMC Merger Consideration") and
of such shares would be allocated to the
OCMCS Merger (the "OCMCS Merger Consideration").
The SJMC Exchange Ratio would be and the
OCMCS Exchange Ratio would be .
The following table sets forth the SJMC Exchange
Ratio and the OCMCS Exchange Ratio depending on the
FPA Closing Price:
<TABLE>
<CAPTION>
SJMC OCMCS
FPA CLOSING PRICE EXCHANGE RATIO EXCHANGE RATIO
----------------- -------------- --------------
<S> <C> <C>
.....$.......
.....$.......
.....$.......
.....$.......
.....$.......
</TABLE>
The actual market price of the FPA Common Stock may
vary, which may cause a change in the Exchange
Ratios and the Merger Consideration. Each SJMC
shareholder and OCMCS stockholder and OCMCS
optionholder is urged to obtain updated FPA market
information.
During the period from October 1, 1997 through
February 4, 1998, the market price of FPA Common
Stock ranged from a low of $14 7/8 to a high of
$39 13/16 per share. FPA's stock price may be
affected by a number of factors, including
announcements of new legislative proposals or
legislation affecting the managed care industry,
the performance of, and investor expectations for,
FPA, analysts' comments regarding the managed care
industry generally and FPA in particular,
announcements by FPA of pending transactions and
general economic and market conditions. Because one
factor in determining the Exchange Ratios is the
FPA Closing Price, a risk to the SJMC shareholders
and OCMCS stockholders of such FPA stock price
volatility is that a significant change in the
price of FPA Common Stock could occur between the
date of the OCMCS and SJMC Special Meetings
(hereinafter referred to collectively as the
"Special Meetings") and the Closing Date. FPA,
OCMCS and SJMC anticipate that the Special Meetings
will occur on the Closing Date and that the SJMC
shareholders and OCMCS stockholders will be able to
obtain the Exchange Ratios two days preceding the
date of such Special Meetings.
Since the Exchange Ratios cannot be calculated
until the second business day immediately preceding
the Closing Date, the number of shares of FPA
Common Stock to be issued to the holders of SJMC
Common Stock, OCMCS Stock and holders of OCMCS
Options, may differ from the estimates provided in
this Proxy Statement/Prospectus.
No fractional shares of FPA Common Stock will be
issued in connection with the Combined Merger, and
in lieu of any such fractional share, each holder
of SJMC Common Stock, OCMCS Stock and OCMCS Options
who would otherwise have been entitled to a
fraction of a share of FPA Common Stock will be
entitled to receive a cash payment equal to such
fraction multiplied by the FPA Closing Price.
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<PAGE> 20
Indemnification............ The Merger Agreement provides that each of the
OCMCS stockholders and the SJMC shareholders shall
jointly and severally indemnify, defend and hold
harmless each of FPA and FPA California and their
respective directors, shareholders, officers,
employees, agents, affiliates, successors and
assigns from and against any and all claims,
liabilities, obligations, losses, actual costs,
expenses (including, without limitation, reasonable
attorneys' fees and costs), fines and damages
(individually a "Loss" and collectively "Losses"),
arising out of: (a) a breach or violation by OCMCS
or SJMC of any covenant made by either OCMCS or
SJMC in the Merger Agreement or in any agreement,
certificate or similar document delivered pursuant
thereto; or (b) a breach of, or any inaccuracy in,
any of the representations or warranties made by
OCMCS or SJMC in the Merger Agreement or in any
schedule, exhibit, agreement, instrument,
certificate or similar document required to be
delivered pursuant to the terms thereof. FPA shall
not be able to claim indemnification and recover
from the OCMCS stockholders and the SJMC
shareholders more than the Merger Consideration and
no OCMCS stockholder or SJMC shareholder will be
responsible for more than the value of the merger
consideration received by such stockholder or
shareholder. The Merger Agreement provides that the
Boards of Directors of OCMCS and SJMC shall each
appoint two shareholder representatives to
represent their respective shareholders and
stockholders in the event a claim for indemnity is
made against the OCMCS stockholders or SJMC
shareholders under the Merger Agreement. By
tendering their shares of OCMCS Voting Securities
or SJMC Voting Securities in connection with the
Combined Merger, shareholders of SJMC and
stockholders of OCMCS will be deemed to have
consented to be bound by the decisions and actions
of the shareholder representatives representing the
OCMCS stockholders and SJMC shareholders. See "THE
MERGER AGREEMENT -- Indemnification."
Resale Restrictions........ The shares of FPA Common Stock to be received in
exchange for the OCMCS Common Stock, the OCMCS
Preferred Stock and the OCMCS Options shall be
contractually restricted from sale, transfer or
other disposition for a period of 90 days
commencing as of the Effective Time; provided,
however, that the holders of OCMCS Options may
sell, transfer or otherwise dispose of that number
of shares of FPA Common Stock received upon
exercise of such OCMCS Options whose value equals
the sum of the exercise price payable with respect
to such OCMCS Option and the minimum statutory
federal and state withholding taxes immediately due
and payable upon such exercise. All shares of FPA
Common Stock subject to such transfer restriction
shall contain a legend to such effect which shall
be removed effective upon the 91st day after the
Effective Time. See "THE MERGER AGREEMENT --
Certain Additional Agreements."
All shares of FPA Common Stock received by SJMC
shareholders and OCMCS stockholders will be freely
tradeable, except for the 90 day period described
in the immediately preceding paragraph and except
that shares of FPA Common Stock received by persons
who are deemed to be "affiliates" (as such term is
defined in the Securities Act) of SJMC, OCMCS or
FPA at the time of the Special Meetings may be
resold by them only in certain permitted
circumstances under the Securities Act, other
applicable securities laws and rules related to
"pooling of interests"
16
<PAGE> 21
accounting treatment. See "THE COMBINED
MERGER -- Resale of FPA Common Stock by
Affiliates."
Recommendation of SJMC's
Board of Directors....... The SJMC Board believes that the terms of the SJMC
Merger are fair to and in the best interests of the
holders of the SJMC Common Stock and has approved
the Merger Agreement and the related transactions.
The SJMC Board recommends that SJMC shareholders
approve the Merger Agreement. See "THE COMBINED
MERGER -- Recommendation of the SJMC Board of
Directors and Reasons for the SJMC Merger."
The SJMC Board considered a number of material
factors, favorable, neutral and adverse, in its
evaluation of the SJMC Merger, each of which is
described at "THE COMBINED MERGER -- Recommendation
of the SJMC Board of Directors and Reasons for the
SJMC Merger." See "RISK FACTORS."
Recommendation of OCMCS'
Board of Directors....... The OCMCS Board believes that the terms of the
OCMCS Merger are fair to and in the best interests
of the holders of the OCMCS Common Stock and OCMCS
Preferred Stock together, the "OCMCS Voting
Securities" and has approved the Merger Agreement
and the related transactions. The OCMCS Board
recommends that OCMCS stockholders approve the
Merger Agreement. See "THE COMBINED
MERGER -- Recommendation of the OCMCS Board of
Directors and Reasons for the OCMCS Merger."
The OCMCS Board considered a number of material
factors, favorable, neutral and adverse, in its
evaluation of the OCMCS Merger, each of which is
described at "THE COMBINED MERGER -- Recommendation
of the OCMCS Board of Directors and Reasons for the
OCMCS Merger." See "RISK FACTORS."
Opinion of OCMCS' Financial
Advisor.................. Cowen has acted as financial advisor to OCMCS in
connection with the OCMCS Merger and has delivered
to the OCMCS Board a written opinion dated February
5, 1998 to the effect that, as of the date of such
opinion and based upon and subject to certain
matters stated therein, the Merger Consideration in
the aggregate is fair from a financial point of
view. The full text of the written opinion of Cowen
dated February 5, 1998, which sets forth the
assumptions made, matters considered and
limitations on the review undertaken with respect
to the OCMCS Merger, is attached as Appendix B to
this Proxy Statement/Prospectus and should be read
carefully in its entirety. The opinion of Cowen is
directed to the OCMCS Board and relates only to the
fairness of the Merger Consideration in the
aggregate from a financial point of view, does not
address any other aspect of the OCMCS Merger or
related transactions and does not constitute a
recommendation to any stockholder as to how such
stockholder should vote at the OCMCS Special
Meeting. See "THE COMBINED MERGER -- Opinion of
OCMCS' Financial Advisor."
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<PAGE> 22
Effective Time of the
Combined Merger............ The Combined Merger will become effective at the
time (the "Effective Time") specified in the
Agreement of Merger (the "Agreement of Merger") to
be filed with the Secretary of State of Delaware
and the Secretary of State of California. The
filing will be made on or as soon as practicable
after the closing of the Combined Merger (the
"Closing"). It is anticipated that the Closing will
occur on the date of the Special Meetings. See "THE
MERGER AGREEMENT -- Effective Time."
Conditions to the Combined
Merger................... The obligations of FPA, FPA California, SJMC and
OCMCS to consummate the Combined Merger are subject
to certain conditions including (i) obtaining the
approval of the shareholders of SJMC and the
stockholders of OCMCS of the Merger Agreement, (ii)
the approval for inclusion on Nasdaq of the FPA
Common Stock to be issued in connection with the
Combined Merger, (iii) the expiration or
termination of the relevant waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (iv) the
approval, without any conditions having or which
would be reasonably expected to have a material
adverse effect on FPA California, of the California
Department of Corporations (the "Department") of
the material modification application of FPA
California pursuant to Section 1352 of the
Knox-Keene Health Care Service Plan Act of 1975, as
amended (the "Knox-Keene Act"), (v) the absence of
any injunction or restraining order that prevents
the consummation of the Combined Merger, (vi) the
receipt by each party of various certificates,
consents, instruments and agreements required by
the Merger Agreement, and (vii) the accuracy in all
material respects of the representations and
warranties of each party and performance in all
material respects of all agreements, covenants and
obligations by each party. Additionally, the
obligation of FPA and FPA California to consummate
the Combined Merger is subject to the condition
that FPA shall have received a letter from Deloitte
& Touche LLP to the effect that the SJMC Merger
qualifies as a "pooling of interests" for financial
and accounting purposes and from Ernst & Young LLP
to the effect that SJMC meets the conditions that
must be met to be a party to a business combination
accounted for as a "pooling of interests."
Either FPA, FPA California, SJMC or OCMCS may
extend the time for performance of any of the
obligations of the other parties or may waive
compliance with those obligations. To the extent
material provisions or conditions are waived,
including, among others, the condition that the
SJMC Merger be treated as a "pooling of interests"
for accounting and financial reporting purposes,
FPA, FPA California, SJMC and OCMCS will amend this
Proxy Statement/Prospectus, and SJMC and OCMCS will
resolicit shareholder and stockholder votes,
respectively, to the extent required by applicable
law. In the event the FPA Closing Price is less
than $15.00, FPA may terminate the Merger
Agreement. See "THE MERGER AGREEMENT -- Conditions
to Consummation of the Combined Merger," and
"-- Termination."
Termination, Amendment and
Waiver................... The Merger Agreement may be terminated at any time
prior to the Effective Time by mutual consent of
FPA, FPA California, SJMC and
18
<PAGE> 23
OCMCS, or, generally, by any of the parties, if,
among other things, (i) the Combined Merger shall
not have been completed by May 1, 1998, except that
such termination date shall be extended
automatically for consecutive 30 day periods if the
only conditions to close which shall not have been
satisfied are effectiveness of the Registration
Statement or the approval of the Department and the
parties are using their best efforts to obtain such
approvals; provided if such approvals are not
obtained by August 1, 1998, any of the parties may
terminate the Agreement, (ii) any required
governmental or regulatory approval is not
obtained, (iii) any of the parties materially
breaches any of its representations, warranties or
covenants under the Merger Agreement, (iv) the
Combined Merger is prohibited by court order or (v)
by OCMCS or SJMC if their respective Boards of
Directors in good faith believe such termination is
necessary or appropriate for such Boards to act in
accordance with their fiduciary obligations. In the
event that the FPA Closing Price is below $15.00,
FPA may terminate the Merger Agreement. Each of
FPA, FPA California, SJMC and OCMCS may terminate
the Merger Agreement if the respective conditions
to each such party's obligations have not been
satisfied or waived on or prior to the Closing
Date. See "THE MERGER AGREEMENT -- Termination,"
"-- Amendment" and "-- Waiver."
Rights of SJMC
Shareholders............... SJMC is a California professional corporation and
the rights of its shareholders are governed by the
California Code, the California Business and
Professions Code and SJMC's Articles of
Incorporation and Bylaws. If the SJMC Merger is
consummated, SJMC's shareholders will become
stockholders of FPA, and their rights will be
governed by the Delaware Act and the Certificate of
Incorporation and Bylaws of FPA. There are certain
material differences between shareholders' rights
under SJMC's Articles of Incorporation and Bylaws
and stockholders' rights under FPA's Certificate of
Incorporation and Bylaws. The material differences
include the procedures for (i) nominating, electing
and removing each corporation's directors; (ii)
amending each corporation's bylaws, (iii) calling
special meetings of each corporation's shareholders
and stockholders; and (iv) voting by each
corporation's shareholders and stockholders. In
addition, the corporations are governed by
different state statutory codes. See "COMPARISON OF
RIGHTS OF HOLDERS OF SJMC VOTING SECURITIES, OCMCS
VOTING SECURITIES AND FPA COMMON STOCK."
Rights of OCMCS
Stockholders............. Both FPA and OCMCS are Delaware corporations and
the rights of their respective stockholders are
governed by the Delaware Act and their respective
Certificates of Incorporation and Bylaws. If the
OCMCS Merger is consummated, OCMCS' stockholders
will become stockholders of FPA, and their rights
will be governed by the Certificate of
Incorporation and Bylaws of FPA. There are certain
material differences between stockholders' rights
under OCMCS' Certificate of Incorporation and
Bylaws and FPA's Certificate of Incorporation and
Bylaws. The material differences include the
procedures for (i) nominating, electing and
removing each corporation's directors; (ii)
amending each corporation's bylaws; and (iii)
voting by each corporation's stockholders. See
"COMPARISON OF RIGHTS OF HOLDERS OF SJMC VOTING
19
<PAGE> 24
SECURITIES, OCMCS VOTING SECURITIES AND FPA COMMON
STOCK."
Treatment of Stock
Options.................... OCMCS has granted options to purchase 2,004,354
shares of OCMCS Common Stock of which options to
purchase 1,840,000 shares are held by officers and
directors of OCMCS and options to purchase 164,354
shares are held by current or former employees of
or independent contractors to OCMCS. Pursuant to
the Merger Agreement, each OCMCS Option, if
exercised, will be exchanged for the right to
receive (subject to payment of the applicable OCMCS
Option exercise price and applicable federal and
state withholding taxes) a number of shares of FPA
Common Stock equal to the OCMCS Exchange Ratio. See
"THE MERGER AGREEMENT -- Treatment of OCMCS
Options."
Dissenters' Rights......... Holders of SJMC Common Stock who exercise
dissenter's rights with respect to the Combined
Merger in accordance with the procedures prescribed
in Chapter 13 of the California Code will be
entitled to receive cash for their SJMC Common
Stock if such shareholders (i) have not voted in
favor of the SJMC Merger, (ii) have demanded that
the corporation purchase the holders' shares at
their fair market value, and (iii) have submitted
their certificates endorsed with a statement that
such shares are dissenting shares. If the
corporation denies that the shares are dissenting
shares, the holder must, within sixty (60) days of
receiving notice of the approval of the
transaction, file a complaint in the superior court
of the proper county, demanding that the court
determine whether the shares are dissenting shares,
or the fair market value of the shares or both.
Failure to take any of the steps required under
Chapter 13 of the California Code on a timely basis
may result in the loss of dissenter's rights. A
copy of Chapter 13 of the California Code relating
to dissenter's rights is attached to this Proxy
Statement/Prospectus as Appendix C. See "THE
COMBINED MERGER -- Rights of Dissenting
Shareholders and Stockholders." Holders of OCMCS
Common Stock and OCMCS Preferred Stock who exercise
dissenter's rights with respect to the OCMCS Merger
in accordance with the procedures prescribed in
Section 262 of the Delaware Act will be entitled to
receive cash for their OCMCS Stock if such
stockholders (i) deliver to OCMCS' Secretary before
the vote on the Merger Agreement at the OCMCS
Special Meeting a written demand for appraisal,
(ii) continuously hold their shares from the date
the appraisal demand is made through the Effective
Time, (iii) neither vote in favor of the OCMCS
Merger nor consent thereto in writing and (iv) file
a petition in the Delaware Court of Chancery within
120 days of the Effective Time demanding a
determination of the "fair value" of their shares.
Failure to take any of the steps required under
Section 262 of the Delaware Act on a timely basis
may result in the loss of appraisal rights. A copy
of Section 262 of the Delaware Act relating to
dissenters' rights is attached to this Proxy
Statement/Prospectus as Appendix D. See "THE
COMBINED MERGER -- Rights of Dissenting
Shareholders and Stockholders."
Regulatory Filings......... Consummation of the Combined Merger is subject to
certain regulatory approvals. The HSR Act prohibits
completion of the Combined Merger until
notifications have been given and certain
information provided to the Federal Trade
Commission (the "FTC") and the Department of
20
<PAGE> 25
Justice (the "DOJ") and the specified waiting
period requirements of the HSR Act have been
satisfied. FPA and OCMCS and SJMC made their
respective filings with the FTC and the DOJ with
respect to the Combined Merger on February 2, 1998.
The Combined Merger is also subject to review and
approval by the Department under the Knox-Keene Act
with respect to the operations of FPA California.
FPA California filed on February 2, 1998, notice of
material modification for approval of the Combined
Merger with the Department. See "THE COMBINED
MERGER -- Certain Regulatory Matters."
Interest of Certain Persons
in the Combined Merger..... In considering the recommendation of the OCMCS
Board of Directors, OCMCS stockholders should be
aware that certain members of management of OCMCS
and certain members of the OCMCS Board of Directors
may have interests in the Combined Merger that are
different from, or in addition to, the interests of
OCMCS stockholders generally. See "THE COMBINED
MERGER -- Interests of Certain Persons in the
Combined Merger."
Material Federal Income Tax
Consequences............. The Combined Merger is intended to qualify for
federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the
"Code"). Assuming the Combined Merger so qualifies
as a reorganization within the meaning of Section
368(a) of the Code, in general, no gain or loss
will be recognized by holders of SJMC Common Stock
and OCMCS Stock with respect thereto on the
surrender of their SJMC Common Stock and OCMCS
Stock in exchange for FPA Common Stock, except with
respect to cash received in lieu of fractional
shares, and no gain or loss will be recognized by
FPA, FPA California, SJMC or OCMCS. For a further
discussion of the federal income tax consequences
of the Combined Merger, see "THE COMBINED
MERGER -- Certain Federal Income Tax Consequences."
Accounting Treatment....... The SJMC Merger will be treated as a "pooling of
interests" for accounting and financial reporting
purposes if such treatment is available. The OCMCS
Merger will be accounted for using the "purchase"
method of accounting. See "THE COMBINED MERGER --
Accounting Treatment."
Risk Factors............... Certain factors to be considered in connection with
an investment in FPA Common Stock and approval of
the Merger Agreement are set forth under "RISK
FACTORS." Risks relating to FPA include no
assurance of successful integration of
acquisitions, expanded service offering; risks of
financial leverage; growth strategy; difficulty in
maintaining growth; risks related to intangible
assets; difficulty in controlling health care
costs, 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;
antitrust regulation; competitive market forces;
potential liabilities; fluc-
21
<PAGE> 26
tuations in quarterly results; possible volatility
of stock price; dependence upon key personnel,
employment contracts; risk of dilution and
additional capital needs; shares eligible for
future sale; and antitakeover effect of certain
provisions. Risks relating to SJMC and OCMCS
include similar risks as those stated for FPA with
respect to the operation of a healthcare business
and certain other risks relating to OCMCS' and
SJMC's contracts and operations, including risks
related to dependence on certain payors; dependence
on hospital relationships; dependence on
independent contractors; control of health care
costs; potential exposure to professional
liability; availability of insurance; and
Knox-Keene Act compliance. Risks relating to the
Combined Merger include the impact on FPA's
financial statements; no assurance of successful
integration of certain operations; exchange ratio
may not fully reflect changes in the price of FPA
Common Stock; need for additional capital; possible
loss of business; rights of SJMC shareholders and
OCMCS stockholders following the Combined Merger;
and federal income tax consequences.
Surrender of
Certificates............... Promptly after the Effective Date, FPA's exchange
agent will mail a transmittal form and exchange
instructions to each holder of record of SJMC
Common Stock, OCMCS Stock and OCMCS Options (in the
case of OCMCS Optionholders, notice shall be mailed
to the optionholder within five (5) business days
of the Effective Time). CERTIFICATES FOR SHARES OF
SJMC COMMON STOCK AND OCMCS STOCK SHOULD NOT BE
SURRENDERED UNTIL SUCH TRANSMITTAL FORM AND
EXCHANGE INSTRUCTIONS ARE RECEIVED. See "THE MERGER
AGREEMENT -- Surrender and Payment" and
"-- Treatment of OCMCS Options."
22
<PAGE> 27
THE SJMC SPECIAL MEETING
Special Shareholder
Meeting.................... The special meeting of shareholders of SJMC (the
"SJMC Special Meeting") will be held on
, 1998 at a.m. local time at
.
Matter to be Considered at
the SJMC Special Meeting... At the SJMC Special Meeting, shareholders will be
asked to approve and adopt the Merger Agreement.
SJMC'S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE MERGER AGREEMENT.
Quorum; Vote Required...... The presence in person or by proxy of holders of a
majority of the issued and outstanding shares of
SJMC Class A Voting Common Stock and the SJMC Class
B Non-Voting Common Stock (collectively, the "SJMC
Voting Securities") is necessary to constitute a
quorum at the SJMC Special Meeting. Notwithstanding
the designation as non-voting of the SJMC Class B
Non-Voting Common Stock, the holders of SJMC Class
B Non-Voting Common Stock are entitled to vote in
the event of a merger transaction. Under California
law, two classes of common shares differing only as
to voting rights are considered as a single class
of shares for purposes of determining the approval
required in a merger context. Therefore, while
California law requires a merger be approved by the
outstanding shares of each class of each
corporation whose Board of Directors must approve
the transaction, the affirmative vote of a majority
of the SJMC Voting Securities is required with
respect to the SJMC Merger. Approval of the
possible adjournment or postponement of the SJMC
Special Meeting requires the affirmative vote of a
majority of the SJMC Voting Securities present
either in person or by proxy at the SJMC Special
Meeting. See "THE SJMC SPECIAL MEETING -- Vote
Required" and "THE MERGER AGREEMENT -- Conditions
to Consummation of the Combined Merger." An
affirmative vote for the Merger Agreement by an
SJMC shareholder shall constitute agreement by such
shareholder to the indemnification provisions of
the Merger Agreement and shall limit the ability of
FPA and FPA California to claim indemnification and
recover from such shareholder more than the value
of the merger consideration received by such SJMC
shareholder. See "THE MERGER
AGREEMENT -- Indemnification."
SJMC Record Date;
Outstanding SJMC Stock..... Only shareholders of record of SJMC Common Stock
("SJMC Record Holders") at the close of business on
, 1998 (the "SJMC Record Date") are
entitled to notice of and to vote at the SJMC
Special Meeting. On that date, there were
shares of SJMC Common Stock
outstanding, of which shares were SJMC
Class A Common Stock and were SJMC Class
B Common Stock with each share of SJMC Common Class
A Voting Common Stock and Class B Non-Voting Common
Stock entitled to one vote per share, with respect
to voting on the Merger Agreement.
Security Ownership of SJMC
Management............... As of the SJMC Record Date, the directors and
officers of SJMC as a group owned
approximately % of the voting power
represented by the SJMC Voting Securities. See "THE
COMBINED MERGER -- Interests of Certain Persons in
the Combined Merger"
23
<PAGE> 28
and "THE SJMC SPECIAL MEETING -- Security Ownership
of Certain SJMC Beneficial Owners and Management."
Reasons for the SJMC
Merger..................... The Board of Directors of SJMC, after careful
consideration, has approved the Merger Agreement
and the transactions contemplated thereby and
determined that the SJMC Merger is fair to, and in
the best interests of, SJMC and its shareholders
and recommends a vote FOR the approval and adoption
of the Merger Agreement. The SJMC Board believes
the SJMC Merger offers SJMC an attractive
opportunity to strengthen its competitive position
and enhance its profile with physicians and Payors.
Furthermore, the SJMC Merger will allow SJMC to
align with a leading PPM in a consolidating
industry while at the same time affording
shareholders enhanced liquidity due to the
developed market for FPA's publicly traded shares.
Disadvantages include the possibility that FPA will
not be able to integrate successfully recent
acquisitions, the possibility that FPA will not be
able to sustain its growth strategy and FPA's
leveraged balance sheet. See "THE COMBINED
MERGER -- Recommendation of the SJMC Board of
Directors and Reasons for the SJMC Merger."
24
<PAGE> 29
THE OCMCS SPECIAL MEETING
Special Stockholder
Meeting.................... The special meeting of stockholders of OCMCS (the
"OCMCS Special Meeting") will be held on
, 1998 at a.m. local time at
.
Matter to be Considered at
the OCMCS Special
Meeting.................. At the OCMCS Special Meeting, stockholders will be
asked to approve and adopt the Merger Agreement.
OCMCS' BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE MERGER AGREEMENT.
Quorum; Vote Required...... The presence in person or by proxy of the holders
of a majority of the issued and outstanding shares
of OCMCS Common Stock, Series A Preferred Stock and
OCMCS Series B Preferred Stock (collectively, the
"OCMCS Voting Securities") is necessary to
constitute a quorum at the OCMCS Special Meeting.
For purposes of constituting a quorum and for all
matters to be voted upon at the OCMCS Special
Meeting, both the OCMCS Series A Preferred Stock
and the OCMCS Series B Preferred Stock shall be
treated on an as-converted basis. Approval of the
Merger Agreement requires the affirmative vote of a
majority of the OCMCS Voting Securities, voting
together as a class, a majority of the OCMCS Common
Stock, and a majority of each of the OCMCS Series A
Preferred Stock and the OCMCS Series B Preferred
Stock, with each of the OCMCS Common Stock, OCMCS
Series A Preferred Stock and OCMCS Series B
Preferred Stock voting as a separate class.
Approval of the possible adjournment or
postponement of the OCMCS Special Meeting requires
the affirmative vote of a majority of the OCMCS
Voting Securities present either in person or by
proxy at the OCMCS Special Meeting. See "THE OCMCS
SPECIAL MEETING -- Voting Required" and "THE MERGER
AGREEMENT -- Conditions to Consummation of the
Combined Merger." An affirmative vote for the
Merger Agreement by an OCMCS stockholder shall
constitute agreement by such stockholder to the
indemnification provisions of the Merger Agreement
and shall limit the ability of FPA and FPA
California to claim indemnification and recover
from such stockholder more than the value of the
merger consideration received by such OCMCS
stockholder. See "THE MERGER AGREEMENT --
Indemnification."
OCMCS Record Date;
Outstanding OCMCS
Stock.................... Only stockholders of record of OCMCS Common Stock
and OCMCS Preferred Stock ("OCMCS Record Holders")
at the close of business on , 1998
(the "OCMCS Record Date") are entitled to notice of
and to vote at the OCMCS Special Meeting. On that
date, there were shares of OCMCS Common
Stock outstanding, shares of OCMCS Series A
Preferred Stock outstanding, convertible into
shares of OCMCS Common Stock, and
shares of OCMCS Series B Preferred Stock
outstanding, convertible into shares of
OCMCS Common Stock, with each share of OCMCS Common
Stock entitled to one vote per share. Each share of
OCMCS Series A Preferred Stock and OCMCS Series B
Preferred Stock is entitled to that number of votes
that is equal to the number of shares of OCMCS
Common Stock into which such OCMCS Preferred
25
<PAGE> 30
Stock is convertible, with respect to all matters
to be considered at the OCMCS Special Meeting.
Security Ownership of OCMCS
Management and SJMC...... As of the OCMCS Record Date, the directors and
officers of OCMCS and their affiliates as a group
owned approximately % of the voting power
represented by the OCMCS Voting Securities. As of
the OCMCS Record Date, SJMC owned approximately %
of the voting power represented by the OCMCS Voting
Securities. See "THE COMBINED MERGER -- Interests
of Certain Persons in the Combined Merger" and "THE
OCMCS SPECIAL MEETING -- Security Ownership of
Certain OCMCS Beneficial Owners and Management."
Reasons for the Combined
Merger................... The Board of Directors of OCMCS, after careful
consideration, has approved the Merger Agreement
and the transactions contemplated thereby and
determined that the OCMCS Merger is fair to, and in
the best interests of, OCMCS and its stockholders
and recommends a vote FOR the approval and adoption
of the Merger Agreement. The OCMCS Board believes
the OCMCS Merger offers OCMCS an attractive
opportunity to strengthen its competitive position
and enhance its profile with physicians and Payors.
Furthermore, the OCMCS Merger will allow OCMCS to
align with a leading PPM in a consolidating
industry while at the same time affording
stockholders enhanced liquidity due to the
developed market for FPA's publicly traded shares.
Disadvantages include the possibility that FPA will
not be able to integrate successfully recent
acquisitions, the possibility that FPA will not be
able to sustain its growth strategy and FPA's
leveraged balance sheet. See "THE COMBINED
MERGER -- Recommendation of the OCMCS Board of
Directors and Reasons for the OCMCS Merger."
26
<PAGE> 31
FPA, SJMC AND OCMCS COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FPA and
combined per share data of FPA, SJMC and OCMCS on an unaudited pro forma basis,
based on the assumption that the Combined Merger occurred at the beginning of
the earliest period presented and that the merger of SJMC with and into FPA
California was accounted for as a pooling of interests. Historical financial
data of FPA has been restated to include the effects of the October 1996 merger
with Sterling, the March 1997 merger with AHI Healthcare Systems, Inc. ("AHI"),
the June 1997 Merger with HealthCap, Inc. ("HealthCap"), the September 1997
merger with Axminster Medical Group, Inc. ("Axminster"), and the October 1997
merger with Health Partners, Inc. ("Health Partners"), all of which were
accounted for as "poolings of interests." Historical net earnings per common
share of SJMC and OCMCS have not been presented as SJMC and OCMCS are nonpublic
companies. The pro forma comparative per share data gives effect to the Combined
Merger assuming the issuance of 2,900,000 shares of FPA Common Stock in the
Combined Merger.
HISTORICAL EARNINGS (LOSS) PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
FPA.......................................... $(0.19) $(0.39) $(2.54) $ (0.34)
</TABLE>
FPA, SJMC AND OCMCS PRO FORMA COMBINED EARNINGS (LOSS) PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -----------------
<S> <C> <C> <C>
Pro forma combined per FPA share....................... $(0.30) $(2.64) $ (0.27)
Pro forma equivalent per SJMC share.................... (0.70) (6.09) (0.62)
Pro form equivalent per OCMCS share.................... (0.30) (0.03)
</TABLE>
BOOK VALUE PER COMMON SHARE
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
FPA -- Historical................................................ $ 4.11 $ 4.06
SJMC -- Historical............................................... (8.31) (5.07)
OCMCS -- Historical.............................................. 0.93 0.91
Pro forma combined per FPA share................................. 4.05
Pro forma equivalent per SJMC share.............................. 9.36
Pro forma equivalent per OCMCS share............................. 0.47
</TABLE>
- ---------------
(1) Assumes the conversion of OCMCS Preferred Stock into OCMCS Common Stock as
of September 30, 1997.
27
<PAGE> 32
MARKET PRICE AND DIVIDEND DATA
FPA Common Stock is listed on Nasdaq under the symbol "FPAM." The SJMC
Series A and Series B Common Stock and the OCMCS Common Stock and OCMCS
Preferred Stock are not traded on any securities market or exchange.
The range of high and low bid prices, as reported on Nasdaq, for FPA Common
Stock for the periods indicated, is as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter................................................ 131/4 8 5/8
Second Quarter............................................... 201/8 12 1/8
Third Quarter................................................ 271/8 12 1/2
Fourth Quarter............................................... 291/2 16 3/8
1997
First Quarter................................................ 281/2 18 1/4
Second Quarter............................................... 241/2 14 7/8
Third Quarter................................................ 351/4 22 7/8
Fourth Quarter............................................... 3913/16 16 7/8
1998
First Quarter (through February 4, 1998)..................... 201/4 14 7/8
</TABLE>
The closing price of FPA Common Stock on Nasdaq on January 21, 1998, the
last full trading day prior to the public announcement of the Merger Agreement,
was $18.063 and on , 1998 was $ .
FPA declared no cash dividends during 1995, 1996 or 1997 and has no plans
to declare cash dividends in the foreseeable future. FPA's Credit Agreement with
BankBoston, N.A. and the lenders parties thereto and FPA's 6 1/2% Convertible
Subordinated Debentures limit the ability of FPA to pay cash dividends.
As of the SJMC Record Date, there were holders of record of SJMC
Class A Common Stock and holders of record of SJMC Class B Common
Stock.
As of the OCMCS Record Date, there were holders of record of
OCMCS Common Stock, holders of record of OCMCS Series A Preferred
Stock and holders of record of OCMCS Series B Preferred Stock.
OCMCS has not paid or declared any cash dividends on the OCMCS Common
Stock, OCMCS Series A Preferred Stock or OCMCS Series B Preferred Stock.
Similarly, SJMC has not paid or declared any cash dividends on either its Class
A Voting Common Stock or its Class B Non-Voting Common Stock.
28
<PAGE> 33
RISK FACTORS
In addition to other information in this Proxy Statement/Prospectus, the
following factors should be considered carefully in evaluating the proposals to
be voted on at the SJMC Special Meeting and the OCMCS Special Meeting. All
information contained herein includes the financial results of AHI, HealthCap,
Axminster and Health Partners, for all periods from the effective dates of their
respective mergers with FPA, all of which were accounted for as poolings of
interests.
RISKS RELATING TO FPA
No Assurance of Successful Integration of Acquisitions; Expanded Service
Offering. Since 1994, FPA has pursued an aggressive growth strategy. FPA's
growth has been achieved primarily through acquisitions, several of which have
been completed during the last twelve months. Several of these acquisitions are
large transactions which involve significant risks and uncertainties for FPA.
FPA intends to continue to pursue growth through acquisitions. See
"SUMMARY -- FPA MEDICAL MANAGEMENT, INC. -- FPA Recent Developments." The
success of past and future acquisitions is largely dependent on the ability of
FPA to integrate the operations of the acquired companies into FPA's operations
in an efficient and effective manner. The process of integrating management
services, which includes management information systems, claims administration
and billing services, utilization management of medical services, care
coordination and case management, quality and cost monitoring and physician
recruitment, as well as administrative functions, facilities and other aspects
of operations, while managing a larger and geographically expanded entity,
presents a significant challenge to FPA's management. In addition, integration
must be carried out so that FPA is able to control medical and administrative
costs. The ability to control such costs is key to the successful future
operations of FPA. There can be no assurance that FPA's acquisitions will be
successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions, including cost savings, will be realized. Furthermore, there
can be no assurance that any cost savings which are realized will not be offset
by increases in other expenses or operating losses. FPA will encounter similar
uncertainties and risks with respect to any future acquisitions it may make.
Failure to effectively accomplish the integration of acquired companies could
have a material adverse effect on FPA's results of operations and financial
condition.
Certain of the companies recently acquired by FPA have recently or
historically operated at a loss. Other acquired companies have experienced
fluctuations in quarter-to-quarter operating results. See "Fluctuations in
Quarterly Results." FPA has commenced the institution of certain measures
intended to reduce these losses and quarterly fluctuations and to operate the
acquired businesses profitably. However, there can be no assurance that FPA will
reverse these trends or operate these entities profitably. If there are
continuing operating losses at the acquired companies, FPA may need additional
capital to fund its business, and there can be no assurance that such additional
capital can be obtained or, if obtained, it will be on terms acceptable to FPA.
FPA 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. No assurance can be given as to
FPA's ability to compete successfully at favorable prices for available
acquisition candidates or to complete future acquisitions, or as to the
financial effect on FPA of any acquired business. Future acquisitions by FPA may
involve the issuance of additional shares of common stock, which could have a
dilutive effect on earnings per share, or could involve significant cash
expenditures and may result in increased indebtedness and interest and
amortization expenses or decreased operating income, which could have an adverse
impact on FPA's future operating results.
The integration of acquired entities also requires the dedication of
management resources, which may distract the attention of management from the
day-to-day business of the combined companies. Furthermore, new acquisitions may
expose the FPA Network to new Payors and providers with which it has had no
previous business experience. FPA cannot predict whether it will be able to
enroll into the FPA Network all members currently served by physicians
affiliated with newly acquired entities. Also, there can be no assurance that
there will not be substantial unanticipated costs or other material adverse
effects associated with acquisition
29
<PAGE> 34
and integration activities, any of which could result in significant one-time
charges to earnings or otherwise adversely affect FPA's operating results.
In addition, through Sterling, FPA manages and supports hospital-based
emergency departments. These services present certain risks and uncertainties
due to FPA's relative unfamiliarity with these types of services and the market
for such services. There can be no assurance that FPA will be successful in
developing and integrating Sterling's operations and services.
Risks of Financial Leverage. FPA's indebtedness is significant in relation
to its total capitalization. Giving effect to amounts drawn down pursuant to
FPA's $315 Million Credit Agreement (including the term loan) with BankBoston,
N.A., as Administrative Agent for the Lenders parties thereto, dated June 30,
1997, as amended (the "Credit Agreement"), and the issuance of FPA's 6 1/2%
Convertible Subordinated Debentures due 2001 (the "Debentures") in December
1996, FPA's indebtedness accounts for approximately 169% of FPA's total
capitalization as of September 30, 1997. While FPA believes it will be able to
service its debt, there can be no assurance to that effect. The degree to which
FPA is leveraged could affect its ability to service its indebtedness, make
capital expenditures, respond to market conditions and extraordinary capital
needs, take advantage of certain business opportunities or obtain additional
financing. Unexpected declines in FPA's future business, or the inability to
obtain additional financing on terms acceptable to FPA, if required, could
impair FPA's ability to meet its debt service obligations or fund acquisitions
and, therefore, could materially adversely affect FPA's business and future
prospects.
Growth Strategy; Difficulty in Maintaining Growth. The future growth of FPA
is largely dependent on a continued increase in the number of new enrollees in
the FPA Network. This growth may come from (i) affiliations with, or
acquisitions of, individual or group physician practices serving enrollees of
Payors in the FPA Network or of new Payors, (ii) increased membership in plans
of Payors with which the Professional Corporations and certain FPA subsidiaries
have contracts and whose members are patients of physicians in the FPA Network
or (iii) agreements with Payors, physicians and hospitals in other geographic
markets. The process of identifying and consummating suitable acquisitions of,
or affiliations with, physician groups can be lengthy and complex. The
marketplace for such acquisitions and affiliations is subject to increasing
competitive pressures. There can be no assurance that FPA will be successful in
identifying, acquiring or affiliating with additional physician groups or
hospitals or that the subsidiaries and Professional Corporations will be able to
contract with new Payors. In addition, there can be no assurance that FPA's
acquisitions will be successfully integrated on a timely basis or that the
anticipated benefits of these acquisitions will be realized; failure to
effectively accomplish the integration of acquired entities may have a material
adverse effect on FPA's results of operations and financial condition. FPA's
ability to expand is also dependent upon its ability to comply with legal and
regulatory requirements in the jurisdictions in which it operates or will
operate and to obtain necessary regulatory approvals, certificates and licenses.
Risks Related to Intangible Assets. As a result of FPA's various
acquisition transactions, intangible assets of approximately $408 million have
been recorded as of September 30, 1997 on FPA's balance sheet. Such intangible
assets totaled approximately 256% of FPA's stockholders' equity as of September
30, 1997. Using amortization periods ranging from four to 30 years (with an
average amortization period of approximately 29 years), amortization expense
relating to such intangible assets will be approximately $14.7 million per year.
Further acquisitions that result in the recognition of additional intangible
assets would cause amortization expense to further increase. A portion of the
amortization generated by these intangible assets is not deductible for tax
purposes.
At the time of or following each acquisition, FPA evaluates each
acquisition and establishes an appropriate amortization period based on the
specific underlying facts and circumstances of each such acquisition. Subsequent
to such initial evaluation, FPA periodically reevaluates such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the amortization period continues to be appropriate. As the
underlying facts and circumstances subsequent to the date of acquisition can
change, there can be no assurance that the value of such intangible assets will
be realized by FPA. In the past, FPA has recorded charges for impairment of
goodwill, including (i) in 1995, $434,000 related to the sale and closing of
primary care centers and (ii) in 1996, $4.1 million relating to a 1995
acquisition in Arizona (as a
30
<PAGE> 35
result of continuing losses in the acquired entity), $14.8 million related to
certain emergency room department contracts (which were terminated after
acquisition of the contracting entity) and $14.6 million related to certain
acquisitions made by former AHI entities in 1994 and 1995 which recognized
significant losses in 1996 which gave rise to the determination that the
goodwill balances were impaired. Although at September 30, 1997 the net
unamortized balance of intangible assets acquired was not considered to be
impaired, any future determination, based on reevaluation of the underlying
facts and circumstances, that a significant impairment has occurred would
require the write-off of the impaired portion of unamortized intangible assets,
which could have a material adverse effect on FPA's business and results of
operations.
Difficulty in Controlling Health Care Costs; Capitated Nature of
Revenue. Agreements with Payors typically provide for the Professional
Corporations and certain FPA subsidiaries to receive prepaid monthly fees per
enrollee known as "capitation" payments. FPA's profitability primarily depends
upon its ability to control costs and the ability of the subsidiaries and
Professional Corporations to incur less in medical, hospital and administrative
costs than the capitation revenue received from Payors. Such profitability is
achieved through effective management of the provision of medical services by
physicians in the FPA Network, including controlling utilization of specialty
care physicians and other ancillary providers, purchasing services from
physicians outside the FPA Network at competitive prices and negotiating
favorable rates with hospitals. Agreements with Payors may also contain shared
risk arrangements under which additional compensation can be earned based on the
provision of high quality, cost-effective health care to enrollees but which may
require that a portion of any loss in connection with such shared risk
arrangements be assumed by FPA, thereby reducing FPA's net income. The amount of
non-capitated medical and hospital costs in any period could be affected by
factors beyond the control of the FPA Network, such as changes in treatment
protocols, epidemics, disasters, new technologies and inflation. To the extent
that specialty care physicians' fees or hospital costs have not been capitated
and enrollees require more specialty care than anticipated or have higher than
anticipated hospital utilization rates, revenue paid to the FPA Network by
Payors may not be sufficient to cover the costs the FPA Network is obligated to
pay. FPA purchases stoploss insurance protection which provides thresholds or
"attachment points," generally $100,000 for inpatient services per year, at
which substantially all financial exposure for inpatient services 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 FPA. In
California only, stoploss insurance protection thresholds are $125,000 for
inpatient services. There can be no assurance that FPA will be able to negotiate
favorable stoploss attachment points in the future. The failure of FPA to
negotiate favorable attachment points in the future could have a material
adverse effect on FPA's financial condition, results of operations and/or
liquidity.
Risks Related to Full Risk Capitation. Under capitation contracts
generally, Professional Corporations and certain of FPA's subsidiaries accept
capitation payments and, as a result, accept the financial risk for the
provision of health care services, including those not normally performed and
provided by professional corporations comprised of primary care physicians under
payor contracts (e.g., specialty care physician services). Under substantially
all Payor contracts, the subsidiaries and Professional Corporations accept the
financial risk for the provision of outpatient medical services. Under certain
Payor contracts, certain of FPA's subsidiaries and Professional Corporations
also accept the financial risk for hospital services. Approximately 16.2% and
16.3% of FPA's total operating revenue for the year ended December 31, 1996 and
the nine months ended September 30, 1997, respectively, was generated from
contracts in which the subsidiaries and Professional Corporation accepted the
financial risk for outpatient medical and hospital services. The failure to
negotiate favorable prices or rates in contracts with providers of these
services on behalf of the subsidiaries and Professional Corporations or to
control effectively the utilization of these services, could have a material
adverse effect on FPA's business and results of operations.
Risks Related to Fee-for-Service Contracts. Sterling provides physician
practice management services to hospitals under fee-for-service contracts and
flat-rate contracts. In general, under fee-for-service contracts, Sterling's
revenues are derived from amounts billed to patients and collected for the
account of Sterling. In contrast, under flat-rate contracts Sterling's revenue
is derived from payments of negotiated amounts paid by the hospital. Under
fee-for-service contracts, Sterling accepts responsibility for billing and
collection, and consequently assumes the financial risks related to changes in
patient volume, payor mix and third party
31
<PAGE> 36
reimbursement rates. Any change in reimbursement policies and practices, payor
mix, patient volume or covered services could materially adversely affect the
operations of FPA, particularly under fee-for-service contracts. Sterling's
fee-for-service contractual arrangements also involve a credit risk related to
uncollectibility of accounts. In addition, fee-for-service contracts have less
favorable cash flow characteristics than flat-rate contracts due to longer
collection periods. Failure to manage adequately the collection risks and
working capital demands associated with fee-for-service contracts could have a
material adverse effect on FPA's business and results of operations.
Dependence on Government and Other Third Party Payors. Primarily as a
result of the Sterling business, a significant portion of FPA's operating
revenue is derived from payments made by government-sponsored health care
programs as well as from other Payors. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, approximately 39% and 32%,
respectively, of FPA's revenue was derived from government Payors. The Medicare
and Medicaid programs are subject to substantial regulation by the federal and
state governments, which are continually revising and reviewing the programs and
their regulations. In addition, funds received under these programs are subject
to audit with respect to the proper billing for physician services and,
accordingly, retroactive adjustments of revenue from these programs may occur.
While FPA seeks to comply with applicable Medicare and Medicaid reimbursement
regulations, there can be no assurance that FPA would be found to be in
compliance with such regulations should it be subject to audit. Continuing
budgetary constraints at both the federal and state level and the rapidly
escalating costs of health care and reimbursement programs have led, and may
continue to lead, to significant reductions in government and other third party
reimbursements for certain medical charges and to the negotiation of reduced
contract rates or capitated or other financial risk-shifting payment systems by
third party payors with service providers. Both the federal government and
various states are considering imposing limitations on the amount of funding
available for various health care services. In recent years, the U.S. Congress
has considered various budget proposals intended to reduce the rate of increase
in Medicare and Medicaid expenditures through cost savings and other measures.
The Balanced Budget Act of 1997, which became effective October 1, 1997,
includes, among other matters, Medicare and Medicaid reform legislation. The
Medicare legislation will, among other things, (i) reduce Medicare payments to
managed care plans and alter the payment structure; (ii) require managed care
plans to make medically necessary care available 24 hours a day; (iii) prohibit
plans from restricting provider advice about medical care or treatment ("gag
clauses"); (iv) eliminate the 50/50 enrollment rule and replace it with enhanced
quality and outcome measures; (v) authorize provider-sponsored organizations to
contract directly with Medicare; and (vi) establish a medical savings account
demonstration project. The Medicaid legislation will, among other things, (i)
enable states to require Medicaid beneficiaries to enroll in managed care plans
without receiving federal waivers; (ii) repeal the 75/25 enrollment rule and
replace it with quality assurance standards; (iii) ban "gag clauses"; and (iv)
provide states with greater discretion to set reimbursement rates. FPA cannot
predict the effect that this legislation or current and future proposals
regarding government funded programs would have on its operations. Additionally,
Resource Based Relative Value Scale ("RBRVS"), a system of reimbursement
designed to reallocate medical reimbursement among medical specialties, took
effect on January 1, 1992 and has been phased in over a four-year period. Under
the regulations relating to the RBRVS fee structure, the aggregate fee payments
from Medicare for certain emergency department procedures may be reduced in some
circumstances. There can be no assurance that the payments under governmental
and private third party payor programs will remain at levels comparable to
present levels or will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs. Furthermore, changes in
reimbursement regulations, policies, practices, interpretations or statutes that
place material limitations on reimbursement amounts or practices could have a
material adverse effect on FPA's business and results of operations.
Reliance on Certain Payors. For the year ended December 31, 1994,
CareAmerica of Southern California, Inc. ("CareAmerica") accounted for 9.7% of
FPA's operating revenue. For the year ended December 31, 1995, Foundation Health
Systems, Inc. ("Foundation") accounted for 21.8% of FPA's operating revenue. For
the year ended December 31, 1996, Foundation and PCA Qualicare accounted for
13.3% and 9.3%, respectively, of FPA's operating revenue. For the nine months
ended September 30, 1997, Foundation and PCA Qualicare accounted for 17.1% and
15.1%, respectively, of FPA's operating revenue.
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<PAGE> 37
Terminability of Payor Contracts. 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
negotiation 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. 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 services
agreements have been terminated as a result of nonrenewal, termination by the
hospital, termination by Sterling or hospital closure. Future consolidation in
the health care industry may result in future hospital services agreements being
terminated. The loss of any Payor or hospital contract and the failure to regain
or retain such Payor's members or the related revenues without entering into new
Payor relationships or hospital contracts could have a material adverse effect
on FPA's results of operations.
As of September 30, 1997, approximately 34% of FPA's membership is pursuant
to Payor agreements with Foundation. The terms of these Payor agreements are
thirty years with automatic five-year renewal periods. These agreements commit
certain Professional Corporations and FPA subsidiaries to, among other things,
contract with Foundation for all benefit programs and to maintain sufficient
medical personnel to provide reasonable and adequate access to professional
services for all benefit programs offered by Foundation, keep care centers open
given specified levels of patients and agree to certain pricing and contracting
parameters with Foundation. The agreements may be terminated in a number of
circumstances, including the event of a material breach or a violation of
applicable laws, rules or regulations. A significant modification to or
termination of such agreements would have a material adverse effect on FPA's
results of operations.
Dependence on Primary Care Physicians and Emergency Medicine
Physicians. Primary care physicians are an integral part of the FPA Network, as
they provide and manage medical services offered to enrollees. FPA's growth
depends, in part, on its ability to retain existing and attract additional
primary care physicians to the FPA Network. There can be no assurance that
physicians presently in the FPA Network will not leave the FPA Network, that FPA
will be able to attract additional primary care physicians into the FPA Network
or that the amount of capitation or fee-for-service payments to physicians will
not have to be increased. To the extent that primary care physicians leave the
FPA Network or capitation or fee-for-service payments to physicians are
increased, FPA's results of operations may be materially adversely affected. In
order to provide management services to hospital emergency departments, FPA must
recruit and retain sufficient numbers of qualified physicians. There is a
substantial shortage of board certified emergency medicine physicians, and FPA
competes with many types of health care providers, as well as teaching, research
and governmental institutions, for the services of such physicians. An inability
to recruit and retain emergency medicine physicians could adversely affect FPA's
ability to add new and retain existing hospital clients.
On December 5, 1996, the Thomas-Davis Medical Centers, P.C. ("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 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.
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<PAGE> 38
Risks Related to Classification of Physicians as Independent
Contractors. FPA's subsidiary, Sterling, generally contracts with emergency room
physicians as independent contractors to provide services to its hospital
clients. These independent contractor physicians are paid on an hourly basis.
Pursuant to such compensation arrangements, independent contractor physicians do
not share in the profit derived by FPA from FPA's operations. Because FPA
regards its contracted physicians as independent contractors and not as
employees, FPA does not withhold federal or state income taxes, make federal or
state unemployment tax payments or provide workers' compensation insurance for
such physicians. There can be no assurance that federal or state taxing
authorities or other parties will not challenge the classification of such
independent contractor physicians and determine that such physicians should be
classified as employees. In the event that the physicians under contract with
FPA are determined to be employees, FPA's results of operations will be
materially and adversely affected and FPA may be subject to retroactive taxes
and penalties.
State Laws Regarding Prohibition of Corporate Practice of Medicine. 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. The corporate practice of medicine doctrine
refers to the rendering directly, or through employment, of medical services by
a general business corporation. As stated in the Notes to FPA's Consolidated
Financial Statements incorporated by reference herein, FPA believes that it has
perpetual and unilateral control over the assets and operations of the various
affiliated Professional Corporations whose operations FPA consolidates. There
can be no assurance that regulatory authorities will not take the position that
such control conflicts with state laws regarding the corporate practice of
medicine or other federal or state restrictions. Although FPA believes its
operations as currently conducted are in material compliance with existing
applicable laws, there can be no assurance that the existing organization of FPA
and its contractual arrangements with affiliated physicians will not be
successfully challenged in such states 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. In the event of
action by any regulatory authority limiting or prohibiting FPA from carrying on
its business or from expanding the operations of FPA to certain jurisdictions,
structural and organization modifications of such organization or arrangements
may be required, which could have an adverse effect on FPA's business and
results of operations.
Because certain state laws prohibit general business corporations from
controlling professional corporations contractually or otherwise, FPA has
structured its contracts with the Professional Corporations so that such
corporations retain the right to enter into contracts for the provision of
medical services or make other financial commitments. Such contracts allow the
Professional Corporations to make commitments which could be on terms which may
not be advantageous to FPA. For example, a Professional Corporation could
decline to enter into Payor contracts which are negotiated for it by FPA or,
alternatively, could decide to enter into Payor contracts which FPA does not
believe are financially advantageous. Physicians who contract with these
corporations may also have the legal right to decline to use other physicians in
the FPA Network or specialists having a pre-existing, subcapitated or fixed fee
relationship with the FPA Network. These decisions, if made by a Professional
Corporation or a physician, could have a material adverse effect on FPA's
business and results of operations.
Possible Negative Effects of Prospective Health Care Reform. Various plans
have been proposed and are being considered on federal, state and local levels
to reduce costs in health care spending. Although FPA believes its management
model responds to the concerns addressed by such plans, it is not possible to
assess the likelihood that any of these proposals will be enacted or to assess
the impact any of these proposals may have on reimbursement to health care
providers. Any plan to control health care costs, however, could result in lower
rates of reimbursement. Lower rates of reimbursement may reduce the amount
ultimately received by FPA and, accordingly, may have a material adverse effect
on FPA's business and results of operations.
In recent years, legislation has been proposed in Congress to implement an
"any willing provider" law on a national level. These laws, which are in effect
in some states, require managed care organizations, such as HMOs, to contract
with any physician who is appropriately licensed and who meets applicable
membership criteria. Such laws could limit the flexibility of managed care
organizations, such as FPA, to achieve efficiency by controlling the size of
their primary care provider networks and the number of specialty care providers
to
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whom enrollees are referred. At present, no state in which FPA Network
physicians practice has such a law although "any willing provider" laws have
been proposed in states in which FPA operates. FPA cannot predict what effect
such laws would have on its operations.
Possible Negative Effects of Governmental Regulations. The health care
industry is subject to extensive federal and state regulation. Changes in the
regulations or reinterpretations of existing regulations may significantly
affect the FPA Network. FPA and the Professional Corporations are subject to
federal legislation that prohibits activities and arrangements that provide
kickbacks or other economic inducements for the referral of business under the
Medicare and Medicaid programs. Noncompliance with the federal anti-kickback
legislation can result in exclusion from the Medicare and Medicaid programs and
civil and criminal penalties. The federal government has promulgated "safe
harbor" regulations that identify certain business and payment practices which
are deemed not to violate the federal anti-kickback statute. In addition,
federal legislation currently restricts the ability of physicians to refer
Medicare or Medicaid patients to certain entities in which they have an
ownership interest or compensation arrangement for health care services,
including clinical laboratory services. With respect to the self-referral
prohibitions, the entity and the referring physician are prohibited from
receiving Medicare or Medicaid reimbursement for services rendered and civil
penalties may be assessed. Many states, including states in which FPA does
business, have similar anti-kickback and anti-referral laws. Penalties similar
to those imposed by federal law are provided for violation of state
anti-kickback and anti-referral laws. FPA believes that its operations comply
with all applicable anti-kickback and anti-referral laws. In addition, health
care reforms may expand existing anti-kickback and anti-referral laws to apply
to all health care payors, not just Medicare and Medicaid. It is unclear how any
reform legislation would affect health care provider networks or other types of
managed care arrangements. There can be no assurance that FPA will be able to
comply with any new laws.
Furthermore, a number of states prohibit sharing professional fees (or fee
splitting) with anyone other than a member of the same profession. There can be
no assurance that such laws will ultimately be interpreted in a manner
consistent with the practices of FPA.
Federal and state laws regulate insurance companies, HMOs and other managed
care organizations. Many states also regulate the establishment and operation of
networks of health care providers. Generally, these laws do not apply to the
hiring and contracting of physicians by other health care providers. There can
be no assurance that regulators of the states in which FPA operates would not
apply these laws to require licensure of FPA's operations as an HMO, an insurer
or a provider network. FPA believes that it is in compliance with these laws in
the states in which it does business, but there can be no assurance that
interpretations of these laws by the regulatory authorities in these states or
in the states in which FPA may expand will not require licensure or a
restructuring of some or all of FPA's operations. In the event that FPA is
required to become licensed under these laws, the licensure process can be
lengthy and time consuming and, unless the regulatory authority permits FPA to
continue to operate while the licensure process is progressing, FPA could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which FPA may not be able to meet. Further,
once licensed, FPA would be subject to continuing oversight by and reporting to
the respective regulatory agency.
Although under the laws of most states the business of insurance generally
is defined to include the acceptance of financial risk and has not extended to
physician networks, the Knox-Keene Act, a California statute that applies to
managed care health service plans, requires all health care service plans to be
licensed by the Department. The Department has determined that physician
management companies like FPA must apply for and operate under a restricted
Knox-Keene license. FPA's restricted license application was approved by the
Department in December 1996. The loss or revocation of such license would have a
material adverse effect on FPA's business and results of operations.
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 or that future interpretations of insurance laws and health care
network laws by the regulatory authorities in these states or other states will
not require licensure or a restructuring of some or all of the operations of
FPA.
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The National Association of Insurance Commissioners ("NAIC") recently
adopted the Managed Care Plan Network Adequacy Model Act (the "Model Act") which
is intended to establish standards for the creation and maintenance of networks
by health carriers and establish requirements for written agreements among
health carriers offering managed care plans, participating providers and
intermediaries, like FPA, which negotiate provider contracts, regarding the
standards, terms and provisions under which a participating provider will
provide services to covered persons. An NAIC model insurance act does not carry
the force of law unless it is adopted by applicable state legislatures. FPA does
not know which states, if any, will adopt the Model Act. There can be no
assurance that FPA will be able to comply with the Model Act if it is adopted in
any state in which FPA does business or the effects such compliance could have
on FPA's operations.
Antitrust Regulation. FPA's affiliated IPAs and Professional Corporations
are separate legal entities due to legal and regulatory requirements; if they
are deemed to be competitors in specified markets, they may be subject to
various laws which prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and division of market. Alternatively, if FPA's
affiliated IPAs and Professional Corporations, although separate entities, are
deemed to be part of a single entity or system, they may be subject to laws that
prohibit anti-competitive combinations or activities if the number of affiliated
physicians in specified markets exceeds certain thresholds. FPA believes that it
is in compliance with the antitrust laws, but there can be no assurance that
FPA's interpretation is consistent with that of federal or state authorities or
courts or that such circumstances will remain as FPA grows and matures and as
further regulations are promulgated and interpretations thereof issued.
Competitive Market Forces. The managed care industry is highly competitive
and is subject to continuing changes in how services are provided and how
providers are selected and paid. Increased enrollment in prepaid health care
plans because of health care reform or for other reasons, increased
participation by physicians in group practices and other factors may attract
entrants into the physician practice management services segment of the managed
care industry and result in increased competition for FPA. In addition, local
physician groups and hospitals are also trying to combine their services into
integrated delivery networks. Certain of FPA's competitors are significantly
larger and better capitalized, provide a wider variety of services, may have
greater experience in providing physician practice management services and may
have longer established relationships with Payors. Accordingly, FPA may not be
able to continue to increase the number of providers in the FPA Network,
negotiate contracts with new Payors on behalf of the Professional Corporations
or renegotiate favorable contracts with current Payors. The inability of FPA to
increase the number of providers in the FPA Network and negotiate favorable
contracts with Payors could have a material adverse effect on FPA.
In addition, as a result of consolidations among Payors, certain Payors are
able to negotiate or are in the process of negotiating significant reductions in
the capitation payments to providers. Further, certain Payors have deleted
shared risk arrangements from their contracts with providers thereby decreasing
the amount of compensation such Payors are paying providers. To date, none of
the Payors has deleted shared risk arrangements from its contract with any
Professional Corporations. If Payors negotiate cost reductions with such
Professional Corporations or eliminate shared risk arrangements in which the
Professional Corporations are currently participating, such actions could have a
material adverse effect on FPA's results of operations.
Potential Liabilities. 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 as well as 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. FPA and certain of its subsidiaries have been named as parties in certain
such lawsuits and claims and will likely be named as a party in similar suits
and claims in the future. FPA maintains an errors and omissions policy relating
to its utilization review activities and is included as a named or additional
insured on the policies of the Professional Corporations. There can be no
assurance that insurance coverage for lawsuits brought or which may be brought
against FPA will be sufficient to cover FPA's expenses or losses. There can be
no assurance that insurance coverage will be sufficient and, if insufficient,
that such suits or claims will not have a material adverse effect on FPA's
financial condition and results of operations. Furthermore, FPA could be held
liable for the negligence of a contracted health care professional if such
health care professional were regarded as an employee or agent of FPA in the
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practice of medicine. The Texas legislature has enacted legislation effective
September 1, 1997 which provides that a health insurance carrier, health
maintenance organization or managed care entity has the duty to exercise
ordinary care when making health care treatment decisions and is liable for
damages for harm to an insured or enrollee proximately caused by its failure to
exercise such ordinary care or proximately caused by treatment decisions made by
its employees, agents, ostensible agents or representatives acting on its behalf
and over whom it exercises influence or control. Given the recent enactment of
this legislation and the lack of judicial interpretation thereof, FPA cannot
assess the impact this legislation may have on its operations in Texas; however,
if the legislation is utilized by patients to bring successful malpractice
actions against managed care entities such as FPA, the cost of providing health
care as well as the cost of insurance coverage against such actions could
increase, which could have an adverse impact on FPA's results of operations. In
addition to any potential tort liability of FPA, FPA's emergency department
contracts with hospitals generally contain provisions under which FPA agrees to
indemnify the hospital for losses resulting from the malpractice of contracted
physicians.
An increasing number of health care providers and other entities are
parties to lawsuits alleging fraudulent billing practices under the federal
Civil False Claims Act. The Civil False Claims Act permits a person (generally
an employee or former employee of the health care provider or other entity) to
assert the rights of the government by initiating a qui tam action against a
health care provider or other entity if such person has or purports to have
information that the health care provider or other entity falsely and
fraudulently submitted a claim to the government for payment. Upon filing, the
government has the opportunity to intervene and assume control of the case.
Penalties of up to $10,000 for each false or fraudulent claim presented to the
government for payment may be awarded as well as treble damages. Defendants also
may be excluded permanently or for a period of time from participation in the
Medicare and Medicaid programs. Because of penalties and treble damages, many of
these lawsuits involve large monetary claims and substantial defense costs. If a
qui tam action is successfully prosecuted, no assurance can be made that such
event would not have a material adverse effect on FPA and its operations.
AHI is a defendant in a 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 on December 20, 1995 against AHI, certain of its
officers and directors, and all of the underwriters of AHI's common stock in
AHI's initial public offering. 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 (i)
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 (ii) 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 FPA's results of
operation.
Fluctuations in Quarterly Results. FPA's financial statements (including
interim financial statements) contain accruals which are calculated quarterly
for estimates of amounts assigned by certain FPA subsidiaries and the
Professional Corporations to FPA and paid by Payors based upon hospital
utilization ("shared risk revenues"). Quarterly results have in the past and may
in the future be affected by adjustments to such estimates for actual costs
incurred. Historically, these FPA subsidiaries and the Professional Corporations
and Payors generally reconcile differences between actual and estimated amounts
receivable or payable relating to Payor shared risk arrangements in the second
or third quarter of each year. In the event that these subsidiaries,
Professional Corporations and Payors are unable to reconcile such differences,
extensive negotiation, arbitration or litigation relating to the final
settlement of these amounts may occur. To the extent that the FPA Network
expands to include additional Payors, the timing of these adjustments may vary;
this variation in timing may cause FPA's quarterly results not to be directly
comparable to corresponding quarters in other
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years. FPA's financial statements also include estimates of costs for covered
medical benefits incurred by enrollees, which costs have not yet been reported
by the providers. While these estimates are based on information available to
FPA at the time of calculation, actual costs may differ from FPA's estimates of
such amounts. If the actual costs differ significantly from the amounts
estimated by FPA, adjustments will be required and quarterly results may be
affected. Quarterly results may also be affected by movements of Payor members
from one Payor to another, particularly during periods of open enrollment for
HMOs. Fluctuations in FPA's quarterly operating results could result in
significant volatility in, and otherwise adversely affect, the market price of
FPA Common Stock.
Possible Volatility of Stock Price. Recently, there has been significant
volatility in the market prices of securities of companies in the health care
industry, including the price of FPA Common Stock. Many factors, including
announcements of new legislative proposals or laws relating to health care
reform, the performance of, and investor expectations for, FPA, analysts'
comments, the trading volume in FPA Common Stock and general economic and market
conditions, may influence the market price of FPA Common Stock. Accordingly,
there can be no assurance as to the price at which FPA Common Stock will trade
in the future.
Dependence Upon Key Personnel; Employment Contracts. FPA depends on the
active participation of its executive officers and directors, particularly Dr.
Sol Lizerbram, Chairman of the Board, Dr. Seth Flam, President and Chief
Executive Officer, and Dr. Stephen Dresnick, President of Sterling. The loss of
the services of Drs. Lizerbram, Flam or Dresnick could have a material adverse
effect upon FPA's future operations. FPA has an employment contract with each of
Drs. Lizerbram, Flam and Dresnick. FPA has not purchased key-man life insurance
on any of its key personnel.
Risk of Dilution and Additional Capital Needs. FPA's expansion strategy
includes acquisitions of, and affiliations with, individual and group physician
practices as well as organizations that provide management services to such
practices. Such acquisitions or affiliations may be consummated using newly
issued shares of FPA Common Stock, or securities convertible into or exercisable
for the purchase of FPA Common Stock, as consideration. The issuance of
additional shares of FPA Common Stock may have a dilutive effect on the net
tangible book value or earnings per share of FPA following such issuance.
FPA's expansion strategy also requires substantial capital investments.
Capital is needed not only for the acquisition of the assets of physician
practices, but also for their effective integration, operation and expansion and
for the addition of medical equipment and technology. In the event that FPA
Common Stock does not maintain sufficient valuation, or potential acquisition
candidates are unwilling to accept FPA Common Stock as part of the consideration
for the sale of the assets of their businesses, FPA may be required to utilize
more of its cash resources. There can be no assurance that FPA will have
sufficient cash resources or will be able to obtain additional financing or
that, if available, such financing will be on terms acceptable to FPA.
Furthermore, an inability to obtain additional capital through subsequent debt
or equity financings may negatively affect FPA's existing operations and its
future growth.
Shares Eligible for Future Sale. Sales of substantial amounts of FPA Common
Stock in the public market after conversion of the Debentures, or otherwise, or
the perception that such sales could occur, may adversely affect prevailing
market prices of the FPA Common Stock. As of January 31, 1998, 43,114,644 shares
of FPA Common Stock were issued and outstanding and FPA had outstanding options
or warrants to purchase 7,965,533 shares of FPA Common Stock. In addition,
3,107,900 shares of FPA Common Stock are issuable upon conversion of the
Debentures. FPA has granted registration rights to certain former AHI
stockholders in the event that such stockholders are unable to sell a specified
number of shares in accordance with the provisions of Rule 144, although FPA
does not believe a registration statement regarding such shares will need to be
filed. FPA has also granted registration rights covering 299,165 shares of FPA
Common Stock. All remaining FPA shares are freely tradeable, without restriction
under the Securities Act.
Anti-Takeover Effect of Certain Provisions. FPA's Certificate of
Incorporation and Bylaws contain certain provisions that could have the effect
of making it more difficult for a person to acquire, or of discouraging a third
party from attempting to acquire, control of FPA. FPA's Certificate of
Incorporation authorizes the FPA Board of Directors without the approval of the
stockholders to issue preferred stock. The rights of the holders of FPA Common
Stock will be subject to, and may be adversely affected by, the rights of
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the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of discouraging a person from acquiring a majority of the outstanding FPA Common
Stock. There are no shares of preferred stock presently outstanding and FPA has
no present plans to issue any shares of preferred stock.
Under FPA's Credit Agreement, FPA may not enter into any merger or
consolidation arrangement or purchase any securities of or any assets
constituting a business unit of another person except, among other things, for
Permitted Acquisitions (as defined in the Credit Agreement). These provisions
could serve to impede or prevent a change of control of FPA or have a depressive
effect on FPA's stock price. The approval of the Lenders under the Credit
Agreement is not required for consummation of the Combined Merger.
RISKS RELATING TO SJMC AND OCMCS
OCMCS, SJMC and FPA are engaged in similar businesses, and thus each of
OCMCS and SJMC are subject to many of the risks applicable to health care
companies, such as FPA, including but not limited to those described herein for
FPA under the headings "Risks Relating to FPA -- Difficulty in Controlling
Health Care Costs; 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," "-- Terminability of Payor Contracts,"
"-- Dependence on Primary Care Physicians and Emergency Medicine Physicians"
(except that SJMC employs both primary care and specialist physicians, but
generally does not employ or primarily contract with 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," "-- Antitrust
Regulation," "-- Competitive Market Forces" and "-- Potential Liabilities." In
addition, OCMCS and SJMC are subject to the following risks:
Dependence on Certain Payors. OCMCS derives revenue from its management
agreement with SJMC which, in turn, derives its revenue from contracts between
its physician networks and payors, which contracts generally are for terms of
one to three years, may be terminated earlier upon notice and are subject to
annual negotiation of capitation rates, shared risk pools, covered benefits
and/or other terms and conditions. Certain Payors represent a substantial
percentage of these contracts, although such Payors generally enter into
separate contracts (with various termination dates) with each physician network.
For the year ended December 31, 1997, SecureHorizons (senior plan) and
PacifiCare (commercial plan) accounted for 18% and 17%, respectively, of
operating revenue.
Although OCMCS considers its relationships with Payors to be generally
good, there can be no assurance that Payors will not exercise their early
termination rights or elect not to renew their contracts with OCMCS' affiliated
physician network. In the event that Payors elect to terminate or fail to renew
their contracts with OCMCS' affiliated physician network, OCMCS will experience
revenue reductions which, if significant, could affect OCMCS' results of
operations and liquidity. In addition, the loss of one or more Payor contracts
could impact OCMCS' ability to reach or maintain critical mass and economies of
scale, further impacting OCMCS' results of operations. In addition, there can be
no assurance that Payors will not attempt to renegotiate financial and other
terms less advantageous to OCMCS, or that OCMCS' administrative costs will not
rise without corresponding revenue increases as Payors delegate additional
services to OCMCS or as the standards, such as those imposed by the National
Committee on Quality Assurance, governing the performance of services OCMCS or
SJMC already performs become more stringent. Further, there can be no assurance
that enrollment under certain contracts currently in place will not decline.
Dependence on Hospital Relationships. SJMC currently utilizes one hospital,
St. Joseph Hospital of Orange ("SJHO"), as its primary hospital. While SJMC and
its physicians could obtain similar hospital services for its patients and
enrollees at other hospitals within Orange County, California, there can be no
assurance that, should the relationship with SJHO be altered or impaired, it
would not have a material adverse effect on the operations, business conditions
or profitability of SJMC and OCMCS. A number of contractual arrangements between
OCMCS and SJMC, on the one hand, and SJHO, on the other hand, exist, which by
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their terms can be altered or terminated upon consummation of the Combined
Merger. Although the consent of certain of the providers (including SJHO) and
the Payors which contract with OCMCS and SJMC must be obtained as a condition to
consummation of the Combined Merger (see "THE MERGER AGREEMENT -- Conditions to
Consummation of the Combined Merger"), which conditions may be waived by FPA,
OCMCS and SJMC, there can be no assurance that a satisfactory resolution of any
or all matters relating to such arrangements can or will occur prior to
consummation of the Combined Merger. Although SJHO is a significant minority
stockholder of OCMCS and currently has (and has exercised) the right to place
one representative on the OCMCS Board of Directors, an affiliate of SJHO is a
direct competitor of SJMC in the provision of medical services.
Dependence on Independent Contractors. SJMC's business and, in turn, OCMCS'
business depend to a significant degree on their ability to recruit and retain
on a contractual basis a sufficient number of qualified physicians to serve
their patients. There can be no assurance that physicians presently contracted
by SJMC will not leave SJMC, that SJMC will be able to attract additional
primary care or specialty physicians or that the amount of capitation or other
payments to physicians will not have to be increased to retain such physicians.
To the extent that primary care physicians leave SJMC or capitation or other
payments to physicians are increased, SJMC's results of operations and,
following the Combined Merger, FPA's results of operations with respect to the
OCMCS and SJMC businesses may be materially adversely affected.
Control of Health Care Costs. The success of OCMCS and SJMC will depend in
large part on the effective management of health care costs. Changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and numerous other factors affecting the delivery and cost of health care are
beyond the control of management and may adversely affect the operating results
of OCMCS and SJMC. Additionally, effective management of health care costs
relies in large part upon the obtaining and evaluation of data from physicians,
hospitals and other health care providers that is reliable and available in a
timely fashion. OCMCS and SJMC, as independent entities, have and, in the
absence of the Combined Merger, would continue to have to make significant
investments in both their information systems and their utilization and quality
management systems.
Potential Exposure to Professional Liability; Availability of
Insurance. Physicians, medical groups, hospitals, management companies and other
participants in the health care industry have become subject in recent years to
an increasing number of lawsuits alleging medical malpractice and related legal
theories. These lawsuits can involve large claims and substantial defense costs.
OCMCS does not engage in the practice of medicine or provide medical services,
nor does it control the practice of medicine by physicians within its physician
networks or the compliance with regulatory requirements directly applicable to
such physicians and the physician network entities with whom they contract.
However, OCMCS is subject to, and from time to time may be involved in,
litigation related to certain of its nonmedical, administrative functions such
as utilization review and physician credentialing, or may be named as a
defendant in a medical malpractice action. OCMCS maintains professional
liability and general liability insurance in amounts deemed appropriate by
management based on the nature and risks of OCMCS' business. In addition, each
independent contractor physician, as well as SJMC, is required to maintain
professional liability insurance coverage, and OCMCS is indemnified under the
management agreement with SJMC for liabilities resulting from the performance of
medical services by SJMC, its employees and agents. Although OCMCS currently is
not a party to any material litigation relating to the practice of medicine,
there can be no assurance that OCMCS will not become involved in such litigation
in the future, that any claim or claims arising from such litigation will not
exceed OCMCS' insurance coverage or that such coverage will continue to be
available on a commercially reasonable basis. SJMC has been named in a number of
lawsuits which, for the most part, relate to claims of medical malpractice. SJMC
does not believe that these lawsuits, individually or in the aggregate, would
have a material adverse effect on the results of operations or financial
condition of SJMC's business.
Knox-Keene Act Compliance. Laws in all states regulate the business of
insurance and the operation of HMOs. Generally, the business of insurance is
defined to include the acceptance of financial risk and has not extended to
physician networks. Under the Department's current interpretation of the
Knox-Keene Act, the Department could take the view that OCMCS' operations, as
currently conducted, are subject to the provisions of the Knox-Keene Act. In
July 1997, OCMCS caused an application to be filed for the issuance of
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a limited Knox-Keene health care service plan license for its California
operations. The limited license, if granted, would allow for the receipt of
capitation payments from HMOs by the OCMCS plan for both hospital and medical
professional services, but would not allow the OCMCS plan to market directly to
employers and subscribers. OCMCS has received comments from the Department on
its application, but has not completed the licensure process as of this date. In
the course of its regulatory oversight, there can be no assurance the Department
will not impose requirements adverse to OCMCS' business and, following the
Combined Merger, FPA's business.
RISKS RELATING TO THE COMBINED MERGER
Impact on FPA's Financial Statements. FPA expects to incur non-recurring
costs in connection with the Combined Merger aggregating approximately $9.5
million relating primarily to certain employee termination costs, financial
advisory fees, professional fees and restructuring costs. Costs of approximately
$7.4 million relating to the SJMC Merger will be expensed in the quarter in
which the Closing occurs. In addition, FPA expects to record goodwill relating
to the OCMCS Merger of approximately $14.7 million. See "SELECTED HISTORICAL AND
PRO FORMA INFORMATION."
No Assurance of Successful Integration of Certain Operations. FPA, FPA
California, SJMC and OCMCS have entered into the Merger Agreement with the
expectation that the Combined Merger will result in certain benefits for the
combined company. Achieving the anticipated benefits of the Combined Merger will
depend in part upon whether the integration of the companies' businesses is
achieved in an efficient and effective manner. There can be no assurance that
this will occur. The combination of the companies will require, among other
things, coordination of the companies' operations and consolidation of Payor and
provider contracts. The successful integration of the operations of OCMCS, SJMC,
FPA California and FPA will depend in large part upon the successful integration
of information systems and data, utilization and quality management systems.
There can be no assurance that integration will be accomplished on a timely
basis, or at all. The integration of certain operations following the Combined
Merger will require the dedication of management resources which may distract
attention from the day-to-day business of the combined company. In particular,
the management services provided by FPA to physicians, hospitals and Payors in
the FPA Network, which include management information systems, claims
administration and billing services, utilization management of medical services,
care, coordination and case management, quality and cost monitoring and
physician recruitment, will have to be extended to new members of the FPA
Network as a result of the Combined Merger. Failure to effectively accomplish
the integration of the companies' operations could have a material adverse
effect on FPA's results of operations and financial condition.
Exchange Ratio May Not Fully Reflect Changes in FPA Stock Price. The FPA
Closing Price at the Effective Time may vary significantly from the FPA closing
price as of the date of the Merger Agreement, the date hereof or the date on
which the SJMC shareholders and the OCMCS stockholders vote on the Combined
Merger due to, among other factors, changes in the business, operations and
prospects of FPA, market assessments of the likelihood that the Combined Merger
will be consummated and the timing thereof and general market and economic
conditions. Since the actual number of shares of FPA Common Stock issuable to
SJMC shareholders and OCMCS shareholders in the Combined Merger depends on the
FPA Closing Price, there is no guarantee as to the number of shares or value of
the FPA Common Stock that SJMC shareholders and OCMCS stockholders will receive.
Each SJMC shareholder and OCMCS stockholder is urged to obtain updated FPA
market information. SJMC SHAREHOLDERS AND OCMCS STOCKHOLDERS WILL BE ABLE TO
OBTAIN THE EXCHANGE RATIOS AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE
SJMC AND OCMCS SPECIAL MEETINGS BY CALLING (800) - (RESERVATION
NUMBER ). SEE "THE COMBINED MERGER -- MERGER CONSIDERATION."
Need for Additional Capital. Upon consummation of the Combined Merger, FPA
will be a larger company and may therefore require additional capital in order
to continue to expand its operations. Failure to secure additional capital could
have an adverse effect on FPA's results of operations.
Possible Loss of Business. Despite the efforts of each of FPA, FPA
California, SJMC and OCMCS, current key independent contractor physicians,
Payors, employees or clients of SJMC and OCMCS may not
41
<PAGE> 46
continue to contract with FPA or FPA California following the Combined Merger.
The loss of a material number of independent contractor physicians, employees or
clients could adversely affect the operations of FPA and FPA California. Neither
FPA, SJMC nor OCMCS is aware that any of their respective physicians, employees
or clients intend to end their relationship with FPA California as the Surviving
Corporation following the consummation of the Combined Merger. The consent of
certain of the providers and Payors which contract with OCMCS and SJMC to the
Combined Merger under their respective Payor or provider agreements is required
as a condition to Closing. There can be no assurance that such consents, if
obtained, will be on terms substantially similar to the terms of the existing
contractual arrangements or that the parties will not agree to waive certain
required consents. See "THE MERGER AGREEMENT -- Conditions to Consummation of
the Combined Merger."
Rights of SJMC Shareholders and OCMCS Stockholders Following the Combined
Merger. Following the Combined Merger, holders of SJMC Common Stock, OCMCS
Common Stock and OCMCS Preferred Stock will become holders of FPA Common Stock.
Certain differences exist between the rights of the SJMC shareholders under the
SJMC Articles of Incorporation and Bylaws, the California Code and the
California Business and Professions Code, the rights of the OCMCS stockholders
under the OCMCS Certificate of Incorporation and Bylaws, and the rights of FPA
stockholders under the FPA Certificate of Incorporation and Bylaws. Among other
things, the differences include a classified board of directors in the case of
FPA, different requirements and procedures for calling special meetings of
stockholders, different requirements and procedures for nomination and removal
of directors, and supermajority vote requirements for certain provisions in the
case of SJMC.
Federal Income Tax Consequences. The Combined Merger is intended to qualify
for federal income tax purposes as a tax-free reorganization under the Code. If
for any reason the Combined Merger does not qualify as a reorganization, then
among other effects, the SJMC shareholders and the OCMCS stockholders may
recognize gain or loss in such transaction and, prior to closing, FPA, SJMC and
OCMCS will amend this Proxy Statement/Prospectus and SJMC and OCMCS will
resolicit stockholder votes to the extent required by law. No ruling from the
Internal Revenue Service has been requested regarding the federal income tax
consequences of the Combined Merger. See "THE COMBINED MERGER -- Certain Federal
Income Tax Consequences."
42
<PAGE> 47
THE SJMC SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the shareholders of
SJMC in connection with the solicitation of proxies by and on behalf of the SJMC
Board of Directors for use at the SJMC Special Meeting.
DATE, TIME AND PLACE
The SJMC Special Meeting will be held on , 1998 at a.m.,
local time, at .
PURPOSE OF THE SJMC SPECIAL MEETING
At the SJMC Special Meeting, the shareholders of SJMC will be asked to
consider and vote upon the adoption and approval of the Merger Agreement under
which, among other things, SJMC will be merged with and into FPA California and
immediately thereafter OCMCS will be merged with and into FPA California. As a
result of the Combined Merger, the separate existences of SJMC and OCMCS will
cease. Pursuant to the Combined Merger, each outstanding share of SJMC Common
Stock will be exchanged for the right to receive a number of shares of FPA
Common Stock equal to the SJMC Exchange Ratio. The SJMC Exchange Ratio will vary
based on the FPA Closing Price. Assuming an FPA Closing Price equal to
$ , which was the closing price of FPA Common Stock on ,
1998, and based on shares of OCMCS Stock and shares of SJMC
Common Stock, the SJMC Exchange Ratio would be . Based upon such
assumptions, the SJMC Merger Consideration would consist of approximately
shares of FPA Common Stock, representing approximately % of the
total issued and outstanding shares of FPA Common Stock after the Combined
Merger. See "THE COMBINED MERGER -- Merger Consideration."
The SJMC Board has approved the Merger Agreement and recommends a vote FOR
approval and adoption of the Merger Agreement and the transactions contemplated
thereby.
Pursuant to the Merger Agreement, the Board of Directors of SJMC will
appoint a number of shareholder representatives to represent the SJMC
shareholders in the event a claim for indemnity is made against the shareholders
of SJMC under the indemnification provisions set forth in the Merger Agreement.
If the SJMC shareholders vote for the adoption and approval of the Merger
Agreement, such approval shall also constitute approval of the SJMC shareholder
representatives. See "THE MERGER AGREEMENT -- Indemnification."
REVOCATION OF PROXIES
Any holder of SJMC Voting Securities has the unconditional right to revoke
his or her proxy at any time prior to the voting thereof at the SJMC Special
Meeting by (i) filing a written revocation with the Secretary of SJMC prior to
the voting of such proxy, (ii) giving a duly executed proxy bearing a later date
or (iii) attending the SJMC Special Meeting and voting in person. Attendance by
a shareholder at the SJMC Special Meeting will not in and of itself revoke his
or her proxy.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
SJMC Voting Securities at the SJMC Special Meeting is necessary to constitute a
quorum at the SJMC Special Meeting. Abstentions and non-votes will be included
in determining the presence of a quorum.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the SJMC Voting
Securities present, either in person or by proxy, at the SJMC Special Meeting is
required to approve the Merger Agreement and the possible adjournment or
postponement of the SJMC Special Meeting. An affirmative vote for the Merger
Agreement by an SJMC shareholder shall constitute agreement by such shareholder
to the indemnification provisions of the Merger Agreement and shall limit the
ability of FPA and FPA California to claim indemnification and
43
<PAGE> 48
recover from such shareholder more than the value of the merger consideration
received by such shareholder. See "THE MERGER AGREEMENT -- Indemnification."
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
The SJMC Board has established , 1998 as the SJMC Record Date.
On the SJMC Record Date, there were shares of SJMC Common Stock
outstanding, of which, were SJMC Class A Common Stock and
were SJMC Class B Common Stock. Each share of SJMC Common Stock is
entitled to one vote, with respect to voting on the Merger Agreement.
In the event the SJMC Merger is not approved and adopted by the
shareholders of SJMC or the OCMCS Merger is not approved and adopted by the
stockholders of OCMCS, the Merger Agreement may be terminated in accordance with
its terms. Both the SJMC Merger and the OCMCS Merger must be approved for the
Combined Merger to be consummated. See "THE MERGER AGREEMENT -- Termination."
VOTING OF PROXIES
At the SJMC Special Meeting, abstentions and non-votes will have the effect
of a vote against adoption of the Merger Agreement. Because abstentions are
treated as shares present and entitled to vote at the SJMC Special Meeting, they
will have the effect of a vote against approval of the possible adjournment or
postponement of the SJMC Special Meeting. Non-votes are not allowed to vote at
the SJMC Special Meeting and will have no effect on the outcome of a proposal to
approve the possible adjournment or postponement of the SJMC Special Meeting.
If a holder of SJMC Voting Securities does not return a signed proxy card
and does not attend the meeting and vote in person, his or her shares will not
be voted. Shares not voted will have the effect of a vote against the Merger
Agreement at the SJMC Special Meeting.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the SJMC Special Meeting may be made in
person or by mail, telephone, telecopy or telegram. SJMC will conduct the
solicitation of proxies for the SJMC Special Meeting and will bear the cost of
the solicitation of such proxies from its shareholders. In addition to
solicitation by mail, the directors, officers and employees of SJMC may solicit
proxies from SJMC shareholders by telephone or telegram or in person. Such
directors, officers and employees will not be compensated for such solicitation.
DISSENTER'S RIGHTS
Holders of SJMC Voting Securities are entitled to dissenter's rights under
Chapter 13 of the California Code for such securities. The Merger Agreement
provides that any SJMC Voting Securities outstanding immediately before the
Effective Time and held by a shareholder who has not voted in favor of or
consented to the Merger in writing and who complies with all the provisions of
Chapter 13 of the California Code concerning the right of holders of shares of
capital stock to dissent from the Merger and require appraisal of their shares
("Dissenting Shares") will not be converted into the right to receive the SJMC
Merger Consideration as described above, but instead will be converted, at the
Effective Time, by virtue of the Combined Merger and without any further action,
into the right to receive any consideration that may be determined to be due to
the dissenting shareholder pursuant to the California Code; provided, that SJMC
Voting Securities outstanding immediately before the Effective Time and held by
a dissenting shareholder who, after the Effective Time, fails to perfect or
withdraws or loses his or her right to appraisal, in either case pursuant to the
California Code, will be deemed to be converted as of the Effective Time into
the right to receive that number of shares of FPA Common Stock determined by the
SJMC Exchange Ratio, without interest or dividends thereon.
The full text of Section 1300 of the California Code is attached hereto as
Appendix C, and any holder of SJMC Voting Securities desiring to exercise
dissenter's rights in connection with the SJMC Merger should consult with legal
counsel prior to taking any action in order to ensure that the shareholder
complies with the
44
<PAGE> 49
applicable statutory provision. Failure to take any of the steps required under
Section 1300 of the California Code on a timely basis may result in the loss of
dissenter's rights. See "THE COMBINED MERGER -- Rights of Dissenting
Shareholders and Stockholders" and Appendix C hereto.
SECURITY OWNERSHIP OF CERTAIN SJMC BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of SJMC's securities as of December 31, 1997 by: (i) each of SJMC's
directors and officers, (ii) all directors and officers of SJMC as a group and
(iii) each person known to SJMC to be a beneficial owner of five percent (5%) or
more of any class of SJMC's Voting Securities. Except as otherwise indicated,
each shareholder listed below has sole voting and investment power with respect
to the shares beneficially owned by such person. The address of all directors,
executive officers and shareholders identified in the table is in care of SJMC's
principal executive offices.
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF
BENEFICIAL
OWNERSHIP PERCENTAGE
NAME OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS
- --------------------------------------- -------------------------- ----------- ----------
<S> <C> <C> <C>
Directors and Officers:
R. William Buster, M.D. Class A Voting Common 23,508(1) 5.8%
Class B Non-Voting Common 21,283 7.0%
Marshall Rowen, M.D. Class A Voting Common 5,977(2) 1.5%
Class B Non-Voting Common 1,940 *
Shashidhar Acharya, M.D. Class A Voting Common 12,889 3.2%
Class B Non-Voting Common 9,301 3.0%
Bharat Bhimani, M.D. Class A Voting Common 4,202(3) 1.0%
Class B Non-Voting Common 3,880 1.3%
Richard Bond, D.O. Class A Voting Common 1,455 *
Class B Non-Voting Common 2,545 *
William Collins, M.D. Class A Voting Common 2,747
Class B Non-Voting Common 2,095 *
William McMaster, M.D. Class A Voting Common 646 *
Class B Non-Voting Common 2,751 *
Maria Minon, M.D. Class A Voting Common 11,755 2.9%
Class B Non-Voting Common 8,527 2.8%
Richard Pitts, D.O. Class A Voting Common 21,065(1) 5.2%
Class B Non-Voting Common 14,373 4.8%
Norman Rosen, M.D. Class A Voting Common 10,122 2.7%
Class B Non-Voting Common 8,012 2.6%
Laurence Wellikson, M.D. Class A Voting Common 13,236 3.3%
Class B Non-Voting Common 9,031 3.0%
All Directors and Officers Class A Voting Common 107,602 26.7%
as a Group (12 persons) Class B Non-Voting Common 83,738 27.7%
</TABLE>
- ---------------
* Indicates beneficial ownership of less than one percent (1%).
(1) By virtue of their shareholdings, these individuals are also beneficial
owners of five percent (5%) or more of a class of SJMC Voting Securities.
For purposes of this table, their respective shareholdings are reflected
only once.
(2) These shares are held by the Rowen Family Trust established by Dr. Rowen and
his wife, of which Dr. and Mrs. Rowen are the trustees.
(3) These shares are held by the Bhimani Family Trust under trust agreement
dated August 24, 1982, of which Dr. Bhimani and his wife are the trustees.
45
<PAGE> 50
THE OCMCS SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the stockholders of
OCMCS in connection with the solicitation of proxies by and on behalf of the
Board of Directors for use at the OCMCS Special Meeting. This Proxy
Statement/Prospectus and the related form of proxy for OCMCS are first being
mailed to OCMCS stockholders on or about , 1998.
DATE, TIME AND PLACE
The OCMCS Special Meeting will be held on , 1998 at
a.m., local time, at .
PURPOSE OF THE OCMCS SPECIAL MEETING
At the OCMCS Special Meeting, the stockholders of OCMCS will be asked to
consider and vote upon the adoption and approval of the Merger Agreement under
which, among other things, SJMC will be merged with and into FPA California and
immediately thereafter OCMCS will be merged with and into FPA California. As a
result of the Combined Merger, the separate existences of SJMC and OCMCS will
cease. Pursuant to the OCMCS Merger, each outstanding share of OCMCS Stock and
each OCMCS Option (if exercised) will be exchanged for the right to receive a
number of shares of FPA Common Stock equal to the OCMCS Exchange Ratio. The
outstanding shares of OCMCS Series A Preferred Stock, all of which are held by
SJMC, will be cancelled without consideration in connection with the OCMCS
Merger. In addition, each share of OCMCS Common Stock and OCMCS Preferred Stock
held in OCMCS' treasury will be cancelled and extinguished and will cease to
exist, and no consideration will be delivered with respect thereto. The exercise
of OCMCS Options requires the holder thereof to make payment of the exercise
price in order to receive shares of FPA Common Stock. The OCMCS Exchange Ratio
will vary based on the FPA Closing Price. Assuming an FPA Closing Price equal to
$ , which was the closing price of FPA Common Stock on ,
1998, based on shares of OCMCS Stock and shares of SJMC
Common Stock, the OCMCS Exchange Ratio would be . Based upon such
assumptions, the OCMCS Merger Consideration would consist of approximately
shares of FPA Common Stock, representing approximately % of the
total issued and outstanding shares of FPA Common Stock after the Combined
Merger. See "THE COMBINED MERGER -- Merger Consideration."
The OCMCS Board has approved the Merger Agreement and recommends a vote FOR
approval and adoption of the Merger Agreement and the transaction contemplated
thereby.
Pursuant to the Merger Agreement, the Board of Directors of OCMCS will
appoint a number of stockholder representatives to represent the OCMCS
stockholders in the event a claim for indemnity is made against the OCMCS
stockholders under the indemnification provisions set forth in the Merger
Agreement. If the OCMCS stockholders vote for the adoption and approval of the
Merger Agreement, such approval shall also constitute approval of the OCMCS
stockholder representatives. See "THE MERGER AGREEMENT -- Indemnification."
REVOCATION OF PROXIES
Any holder of OCMCS Voting Securities has the unconditional right to revoke
his or her proxy at any time prior to the voting thereof at the OCMCS Special
Meeting by (i) filing a written revocation with the Secretary of OCMCS prior to
the voting of such proxy, (ii) giving a duly executed proxy bearing a later date
or (iii) attending the OCMCS Special Meeting and voting in person. Attendance by
a stockholder at the OCMCS Special Meeting will not in and of itself revoke his
or her proxy.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
OCMCS Voting Securities (with the OCMCS Preferred Stock weighted on an
as-converted basis) at the OCMCS Special Meeting is
46
<PAGE> 51
necessary to constitute a quorum at the OCMCS Special Meeting. Abstentions and
non-votes will be included in determining the presence of a quorum.
VOTE REQUIRED
For purposes of voting at the OCMCS Special Meeting, the shares of OCMCS
Preferred Stock will be voted on an as-converted basis. The affirmative vote of
the holders of a majority of the OCMCS Voting Securities, voting together as a
class, either in person or by proxy, at the OCMCS Special Meeting is required to
approve the Merger Agreement, as well as the affirmative vote of the holders of
a majority of the OCMCS Common Stock, the OCMCS Series A Preferred Stock, and
the OCMCS Series B Preferred Stock, each voting separately as a class. The
affirmative vote of the holders of a majority of the OCMCS Voting Securities
present, either in person or by proxy, at the OCMCS Special Meeting is required
to approve the possible adjournment or postponement of the OCMCS Special
Meeting. An affirmative vote for the Merger Agreement by an OCMCS stockholder
shall constitute agreement by such stockholder to the indemnification provisions
of the Merger Agreement and shall limit the ability of FPA and FPA California to
claim indemnification and recover from such stockholder more than the value of
the merger consideration received by such OCMCS stockholder. See "THE MERGER
AGREEMENT -- Indemnification."
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
The OCMCS Board has established , 1998 as the OCMCS Record
Date. On the OCMCS Record Date, there were shares of OCMCS Common
Stock outstanding, shares of OCMCS Series A Preferred Stock
outstanding, convertible into shares of OCMCS Common Stock, and
shares of OCMCS Series B Preferred Stock outstanding, convertible into
shares of OCMCS Common Stock. Each share of OCMCS Common Stock is
entitled to one vote with respect to all matters to be voted upon at the OCMCS
Special Meeting. Each share of OCMCS Series A Preferred Stock and each share of
OCMCS Series B Preferred Stock is entitled to that number of votes that is equal
to the number of shares of OCMCS Common Stock into which such OCMCS Preferred
Stock is convertible, with respect to all matters to be voted upon at the OCMCS
Special Meeting.
In the event the OCMCS Merger is not approved and adopted by the
stockholders of OCMCS or the SJMC Merger is not approved and adopted by the
shareholders of SJMC, the Merger Agreement may be terminated in accordance with
its terms. Both the OCMCS Merger and the SJMC Merger must be approved for the
Combined Merger to be consummated. See "THE MERGER AGREEMENT -- Termination."
VOTING OF PROXIES
At the OCMCS Special Meeting, abstentions and non-votes will have the
effect of a vote against adoption of the Merger Agreement. Because abstentions
are treated as shares present and entitled to vote at the OCMCS Special Meeting,
they will have the effect of a vote against approval of the possible adjournment
or postponement of the OCMCS Special Meeting. Non-votes are not allowed to vote
at the OCMCS Special Meeting and will have no effect on the outcome of a
proposal to approve the possible adjournment or postponement of the OCMCS
Special Meeting.
If a holder of OCMCS Voting Securities does not return a signed proxy card
and does not attend the meeting and vote in person, his or her shares will not
be voted. Shares not voted will have the effect of a vote against the Merger
Agreement at the OCMCS Special Meeting.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the OCMCS Special Meeting may be made in
person or by mail, telephone, telecopy or telegram. OCMCS will conduct the
solicitation of proxies for the OCMCS Special Meeting and will bear the cost of
the solicitation of such proxies from its stockholders. In addition to
solicitation by mail, the directors, officers and employees of OCMCS may solicit
proxies from OCMCS stockholders by telephone or telegram or in person. Such
directors, officers and employees will not be compensated for such solicitation.
47
<PAGE> 52
STOCKHOLDERS' RIGHTS OF APPRAISAL
Holders of OCMCS Voting Securities as of the OCMCS Record Date have the
right to demand judicial appraisal of, and obtain a cash payment for, the "fair
value" of their shares (exclusive of any element of value arising from the
accomplishment or expectation of the OCMCS Merger) pursuant to Section 262 of
the Delaware Act. In order to exercise such rights, such holders of OCMCS Voting
Securities must perfect their right to exercise the right of appraisal. To
perfect this right, OCMCS stockholders must (i) deliver to OCMCS' Secretary
before the vote on the Merger Agreement at the OCMCS Special Meeting a written
demand for appraisal, (ii) continuously hold their shares from the date the
appraisal demand is made through the Effective Time, (iii) neither vote in favor
of the OCMCS Merger nor consent thereto in writing and (iv) file a petition in
the Delaware Court of Chancery within 120 days of the Effective Time demanding a
determination of the "fair value" of their shares of OCMCS Common Stock. The
full text of Section 262 of the Delaware Act is attached hereto as Appendix D,
and any holder of OCMCS Voting Securities desiring to exercise dissenters'
rights of appraisal in connection with the OCMCS Merger should consult with
legal counsel prior to taking any action in order to ensure that the stockholder
complies with the applicable statutory provision. Failure to take any of the
steps required under Section 262 of the Delaware Act on a timely basis may
result in the loss of appraisal rights. See "THE COMBINED MERGER -- Rights of
Dissenting Shareholders and Stockholders" and Appendix D hereto.
SECURITY OWNERSHIP OF CERTAIN OCMCS BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of OCMCS' securities as of December 31, 1997 by: (i) each of OCMCS'
directors and officers, (ii) all directors and officers of OCMCS as a group and
(iii) each person known to OCMCS to be a beneficial owner of five percent (5%)
or more of any class of OCMCS Voting Securities. Except as otherwise indicated,
each stockholder listed below has sole voting and investment power with respect
to the shares beneficially owned by such person. The address of all directors,
executive officers and stockholders identified in the table is in care of OCMCS'
principal executive offices.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER TITLE OF CLASS SHARES CLASS
------------------------------------ ------------------- ------------------ -------------
<S> <C> <C> <C>
Directors and Officers:
Charles T. Madden Common 231,250(1) 15.1%
Marshall Rowen, M.D. Common 180,000(2) 11.7%
Christopher Ohman Common 192,708(3) 12.6%
R. William Buster, M.D. Common 236,250(4) 15.4%
R. Judd Jessup Common 12,500(5) *
William McMaster, M.D. Common 6,250(6) *
Maria Minon, M.D. Common 6,250(7) *
Ronald Moreland Common 42,083(8) 2.7%
James Tananbaum, M.D. Common 33,750(9) 2.2%
Paul Viviano Common 6,250(10) *
Laurence Wellikson, M.D. Common 47,917(11) 3.1%
All Directors and Officers Common 995,208(12) 64.9%
as a Group (11 persons)
St. Joseph Medical Corporation Series A Preferred 7,181,150 100.0%
Sierra Ventures V, L.P. Series B Preferred 2,000,000 64.4%
St. Joseph Hospital of Orange Series B Preferred 1,007,742 32.4%
</TABLE>
- ---------------
* Indicates beneficial ownership of less than one percent (1%).
48
<PAGE> 53
(1) Includes 31,250 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997. This number does
not include 200,000 shares held by the Charles and Katherine Madden
Charitable Remainder Unitrust for the benefit of the Madden family, of
which Thomas G. Donovan is the trustee and has sole voting and investment
power with respect to such shares.
(2) Includes 100,000 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997 and 80,000 shares
issued to the Rowen Family Trust, of which Dr. and Mrs. Rowen are the
trustees. Each of Dr. Rowen's adult children, Eric Murrow Rowen, Scott
Jeffrey Rowen and Mark Steven Rowen, own 50,000 shares of OCMCS Common
Stock. Dr. Rowen disclaims beneficial ownership with respect to such shares
and has no voting or investment power with respect to such shares.
(3) Includes 192,708 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997.
(4) Includes 156,250 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997.
(5) Includes 12,500 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997. Mr. Jessup also
owns 10,000 shares of Series B Preferred Stock which represents less than
1% of the Series B Preferred Stock.
(6) Includes 6,250 shares of OCMCS Common Stock subject to options which may be
exercised within sixty (60) days of December 31, 1997.
(7) Includes 6,250 shares of OCMCS Common Stock subject to options which may be
exercised within sixty (60) days of December 31, 1997.
(8) Includes 42,083 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997.
(9) Includes 33,750 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997.
(10) Includes 6,250 shares of OCMCS Common Stock subject to options which may be
exercised within sixty (60) days of December 31, 1997.
(11) Includes 32,917 shares of OCMCS Common Stock subject to options which may
be exercised within sixty (60) days of December 31, 1997, 4,000 shares
issued to Dr. Wellikson's son, Brian Wellikson, 8,000 shares issued to Dr.
Wellikson's son, Noah Wellikson, and 3,000 shares issued to Dr. Wellikson's
son, Joshua Wellikson. This number does not include 150,000 shares issued
to the Laurence and Sharon Wellikson Charitable Remainder Unitrust, of
which Paul Fives is the trustee and has sole voting and investment power
with respect to such shares.
(12) Includes 642,250 shares of Common Stock subject to options which have
vested but have not yet been exercised.
49
<PAGE> 54
THE COMBINED MERGER
EFFECTS OF THE COMBINED MERGER
The Merger Agreement provides that the Combined Merger will be consummated
following approval by the holders of SJMC Voting Securities and OCMCS Voting
Securities and the satisfaction or waiver of all other conditions to
consummation of the Combined Merger. At the Effective Time, SJMC will be merged
with and into FPA California and immediately thereafter OCMCS will be merged
with and into FPA California. As a result of the Combined Merger, the separate
existence of SJMC and OCMCS will cease. Shareholders of SJMC and stockholders of
OCMCS will become stockholders of FPA and their rights will be governed by the
Certificate of Incorporation and Bylaws of FPA and by the Delaware Act.
MERGER CONSIDERATION
The Merger Consideration shall be determined based on the FPA Closing
Price. The following table sets forth the calculation of the aggregate number of
shares of FPA Common Stock to be issued as the Merger Consideration depending on
the FPA Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE MERGER CONSIDERATION
- ---------------------------------------- ----------------------------------------
<S> <C>
Greater than $24.00 2,500,000
Less than or equal to $24.00 and greater the quotient equal to $60,000,000
than or equal to $20.6897 divided by FPA Closing Price
Less than $20.6897 and greater than 2,900,000
$17.24
Less than or equal to $17.24 the quotient equal to $50,000,000
divided by FPA Closing Price
</TABLE>
IF THE FPA CLOSING PRICE IS LESS THAN $15.00, FPA MAY TERMINATE THE MERGER
AGREEMENT. See "THE MERGER AGREEMENT -- Termination."
In connection with the Combined Merger: (i) each outstanding share of SJMC
Common Stock will be exchanged for the right to receive a number of shares of
FPA Common Stock equal to the SJMC Exchange Ratio and (ii) each outstanding
share of OCMCS Common Stock including for such purpose the shares of OCMCS
Common Stock underlying (A) each outstanding share of OCMCS Series B Preferred
Stock and (B) each OCMCS Option (taking into account accelerated vesting of such
OCMCS Options as a result of the OCMCS Merger) will be exchanged for the right
to receive a number of shares of FPA Common Stock equal to the OCMCS Exchange
Ratio. The outstanding shares of OCMCS Series A Preferred Stock, all of which
are held by SJMC, will be cancelled without consideration in connection with the
OCMCS Merger. The Exchange Ratios can be represented by the following formulas:
<TABLE>
<S> <C> <C>
SJMC = Merger Consideration X SJMC Percentage
Exchange Ratio Number of shares of SJMC Stock
OCMCS = Merger Consideration X OCMCS Percentage
Exchange Ratio Number of shares of OCMCS Stock
</TABLE>
SHAREHOLDERS OF SJMC COMMON STOCK, STOCKHOLDERS OF OCMCS COMMON STOCK AND
OCMCS SERIES B PREFERRED STOCK AND HOLDERS OF OCMCS OPTIONS WILL BE ABLE TO
OBTAIN THE SJMC EXCHANGE RATIO AND THE OCMCS EXCHANGE RATIO BEGINNING AT THE END
OF THE SECOND BUSINESS DAY PRECEDING THE DAY OF THE SJMC SPECIAL MEETING AND THE
OCMCS SPECIAL MEETING BY CALLING (800) .
The shares of FPA Common Stock are traded on Nasdaq under the symbol
"FPAM." On , 1998, the last trading day prior to the date of this
Proxy Statement/Prospectus, the closing price of FPA Common Stock was
$ . Assuming the FPA Closing Price was equal to $ , and based
on the number of shares of OCMCS Stock and SJMC Common Stock outstanding on the
date of the Merger Agreement, the Merger Consideration would consist of
shares of FPA Common Stock; of such shares would be
allocated to the SJMC Merger Consideration representing approximately %
of the shares of FPA Common Stock to be issued and outstanding after the
Combined Merger, and of such shares would be allocated to the OCMCS
Merger Consideration representing approxi-
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<PAGE> 55
mately % of the shares of FPA Common Stock to be issued and outstanding
after the Combined Merger. The SJMC Exchange Ratio would be and the
OCMCS Exchange Ratio would be .
During the period from October 1, 1997 through February 4, 1998, the market
price of FPA Common Stock has ranged from a low of $14 7/8 to a high of
$39 13/16 per share. FPA's stock price may be affected by a number of factors,
including announcements of new legislative proposals or legislation affecting
the managed care industry, the performance of, and investor expectations for,
FPA, analysts' comments regarding the managed care industry generally and FPA in
particular, announcements by FPA of pending transactions and general economic
and market conditions.
Since the Exchange Ratios cannot be calculated until the second business
day immediately preceding the Closing Date, the number of shares of FPA Common
Stock to be issued to the holders of SJMC Voting Securities, OCMCS Voting
Securities and holders of OCMCS Options, may differ from the estimates provided
in this Proxy Statement/Prospectus.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of SJMC Common Stock, OCMCS Stock and OCMCS Options (upon
payment of the exercise price and applicable withholding taxes) into the right
to receive FPA Common Stock will occur automatically at the Effective Time.
As soon as practicable after the Effective Time, American Stock Transfer &
Trust Company or another bank or trust company designated by FPA and reasonably
acceptable to SJMC and OCMCS, in its capacity as exchange agent (the "Exchange
Agent"), will send a transmittal form to each SJMC shareholder and OCMCS
stockholder of record. The transmittal form will contain instructions with
respect to the surrender of certificates representing SJMC Common Stock and
OCMCS Stock to be exchanged for FPA Common Stock.
SJMC SHAREHOLDERS AND OCMCS STOCKHOLDERS SHOULD NOT FORWARD SJMC AND OCMCS
STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL
FORMS. SJMC SHAREHOLDERS AND OCMCS STOCKHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
Until the certificates representing SJMC Common Stock and OCMCS Stock are
surrendered for exchange after the consummation of the Combined Merger, holders
of such certificates will not be paid dividends on the FPA Common Stock into
which such shares will be exchanged. When such certificates are surrendered, any
unpaid dividends will be paid without interest. For all other purposes, however,
each certificate which represents shares of SJMC Common Stock and OCMCS Stock at
the Effective Time will be deemed to evidence ownership of the shares of FPA
Common Stock into which those shares are entitled to be exchanged by virtue of
the Combined Merger.
Within five (5) business days after the Effective Time, FPA shall mail, or
cause to be mailed by the Exchange Agent, to each holder of record of an
agreement which immediately prior to the Effective Time represented an
outstanding OCMCS Option (collectively, the "OCMCS Option Agreements")
notification of the number of shares of FPA Common Stock with respect to which
such OCMCS Option is exercisable as a result of the OCMCS Merger as described in
the Merger Agreement. Upon surrender of an OCMCS Option Agreement in accordance
with its terms for cancellation to FPA and payment of the exercise price
specified in such OCMCS Option Agreement and applicable federal and state
withholding taxes, the holder of such OCMCS Option shall be entitled to receive
in exchange therefor (i) a certificate representing that number of whole shares
of FPA Common Stock to which such holder of OCMCS Options shall become entitled
based on the OCMCS Exchange Ratio, and (ii) if applicable, a check representing
the amount of cash in lieu of fractional shares of FPA Common Stock.
All shares of FPA Common Stock issued upon the exchange of shares of SJMC
Common Stock and OCMCS Stock shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of SJMC Common Stock and
OCMCS Stock.
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<PAGE> 56
No fractional shares of FPA Common Stock will be issued to any SJMC
shareholder or OCMCS stockholder upon consummation of the Combined Merger. For
each fractional share that would otherwise be issued, the Exchange Agent will
pay by check an amount equal to such fraction multiplied by the FPA Closing
Price.
NASDAQ LISTING
It is a condition to the Combined Merger that the shares of FPA Common
Stock to be issued in the Combined Merger be authorized for inclusion on Nasdaq.
BACKGROUND OF THE COMBINED MERGER
FPA
FPA's strategy for enhancing long-term value for its stockholders has been
to increase the number of enrollees and primary care physicians in the FPA
Network and to negotiate favorable contracts with Payors to provide physician
and related health care services to enrollees who select FPA primary care
physicians. The FPA Board believes that by doing so, FPA can enhance revenues
and earnings. FPA has grown significantly as a result of acquisitions. The FPA
Board periodically reviews various strategic opportunities to enhance
profitability and increase stockholder value. In this regard, the FPA Board
continually evaluates the acquisition of other entities and medical practices
and has considered longer term acquisition opportunities and other strategic
alternatives. The FPA Board determined that the Combined Merger would enhance
FPA by expanding the geographic scope of its California operations into Orange
County, by increasing its provider and Payor contracts in California and by
adding approximately 129,000 additional managed care lives to its operations.
SJMC and OCMCS
During 1996 and early 1997, OCMCS and SJMC were exploring opportunities for
enhancing their operations in Orange County, California and expanding operations
elsewhere through possible acquisitions, joint ventures, contractual
arrangements and other arrangements. In the course of considering these various
alternatives, OCMCS and SJMC management was made aware of strong informal
interest by several entities as to the possible purchase of OCMCS and SJMC.
While the stated business plan of OCMCS and SJMC at such time was to remain
independent and to continue to grow their respective businesses, OCMCS and SJMC
had been unsuccessful in the prior year in consummating a large potential
acquisition and had not been able to meet certain of the material objectives of
their business plan by the late Spring of 1997. It further had become clear by
such time from the various preliminary joint venture discussions undertaken by
OCMCS that OCMCS would not likely be able to enter into a significant joint
venture transaction without limiting its autonomy and/or limiting in some manner
further appreciation of stockholder value. OCMCS and SJMC also witnessed during
the preceding two years the acquisition of competitive medical groups by a
medical foundation affiliated with SJHO, SJMC's primary hospital and a
stockholder of OCMCS, the consolidation of competitive provider groups by
MedPartners, Inc. within the Orange County area, the consolidation of previously
competitive hospitals by certain of the large hospital companies, and the
continuing consolidation of HMOs in California.
In July 1997, the OCMCS Board of Directors met to consider the business
plan of OCMCS in light of the foregoing and conducted a detailed review of its
competition and current market conditions, financial performance and condition,
strategic relationships, access to capital and the needs of its stockholders,
contracting physicians and patients served by its physicians. Following such
review, the OCMCS Board of Directors determined to assess the opportunities
available for a strategic affiliation or sale of OCMCS and, to that end, created
a special committee (the "Special Committee"). The Special Committee consists of
all OCMCS directors without conflicts of interest. In addition, four of the
OCMCS directors on the Special Committee also serve on the SJMC Board of
Directors.
Pursuant to the MSO Purchase Agreement dated December 13, 1995, among
OCMCS, SJMC and SJHO and other related agreements, SJHO had a "right of first
offer" arrangement with OCMCS and SJMC
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<PAGE> 57
with respect to certain corporate transactions (such as a sale or strategic
affiliation). Pursuant to such agreements, prior to soliciting offers, OCMCS and
SJMC were required to notify SJHO in writing of their intent to enter into one
of the specified corporate transactions. As a result, on July 8, 1997, the
Special Committee provided SJHO with the notice required under the MSO
Agreement. Under the terms of the MSO Agreement, OCMCS was required to negotiate
exclusively with SJHO in good faith as to such a transaction for a period of 60
days. On July 24, 1997, the Chief Executive Officer of OCMCS sent a follow-up
letter to the Chief Executive Officer of SJHO noting the absence of any
communication, proposal or inquiry from SJHO and affirming the readiness of
OCMCS to enter into negotiations with SJHO.
On August 1, 1997, OCMCS received a written response from SJHO requesting
that the exclusivity period be extended for an additional 90 days. The letter
did not, however, contain any specific proposal. On August 4, 1997, OCMCS sent a
letter to SJHO rejecting SJHO's request for an additional 90-day exclusivity
period and requesting a specific and complete offer from SJHO. In addition,
OCMCS identified to SJHO that a Special Committee of the Board of OCMCS had been
formed for purposes of conducting negotiations with SJHO and other parties,
should agreement not be reached with SJHO regarding a transaction before
expiration of the 60-day exclusivity period.
On August 11, 1997, SJHO requested due diligence information from OCMCS and
SJMC and requested a meeting with representatives of OCMCS. SJHO failed to
provide specific terms regarding a transaction in SJHO's letter. On August 13,
1997, SJHO signed a confidentiality and non-disclosure agreement for the benefit
of OCMCS and SJMC. In response to the request for information and in reliance
upon the confidentiality agreement, OCMCS transmitted selected due diligence
materials on August 14, 1997. On August 19, 1997, SJHO submitted a request to
OCMCS for additional due diligence material. The 60-day exclusivity period
expired on September 6, 1997, without OCMCS having received any proposal from
SJHO or having reached any agreement with SJHO regarding a possible transaction.
The Special Committee, after interviewing five investment banking firms to
assist it with its consideration of strategic alternatives, in early August 1997
retained Cowen & Company ("Cowen") to act as financial advisor to OCMCS in order
to assist the Special Committee. At the direction of the Special Committee,
Cowen initially contacted ten potential buyers and/or strategic partners for the
OCMCS and SJMC business. Each of such potential buyers entered into a
confidentiality agreement and received a confidential memorandum dated September
1997 prepared by Cowen concerning OCMCS and SJMC. On October 14, 1997, seven of
the ten potential buyers submitted an initial indication of interest. After a
review of all the indications of interest, the Special Committee invited four of
the potential buyers to conduct a due diligence examination of OCMCS and SJMC.
Throughout October 1997, the four potential buyers continued to have discussions
with management and completed their preliminary due diligence. In November 1997,
OCMCS and SJMC management made presentations to the prospective buyers. The
presentations were held on November 4, 5, 10 and 20, 1997. All four potential
buyers submitted offers, and senior management of OCMCS, with its legal and
financial advisors, and SJMC and its legal advisors, negotiated with the
potential buyers to reach mutually acceptable terms for a transaction. During
that time, senior management of OCMCS conducted numerous meetings and held
discussions about potential transactions with representatives of OCMCS'
institutional investors, members of the Special Committee, the legal advisors of
OCMCS and SJMC, the financial advisor of OCMCS and members of the OCMCS and SJMC
Boards. The Special Committee requested that revised bids be submitted by all
four of the potential buyers by November 25, 1997. Of the four potential buyers
that the Special Committee was still considering, three potential bidders
(including SJHO as well as FPA) submitted revised bids, with FPA submitting the
highest bid and being the only bidder who provided comments to a proposed
acquisition agreement which had been circulated to the bidders. The Special
Committee determined, however, that each of the bids needed further revision or
clarification because of certain ambiguities in the bids with respect to the
value of the consideration offered for the SJMC and OCMCS businesses. Cowen
conducted informal discussions with all three remaining bidders to determine
their level of interest in consummating an acquisition or merger. At the
instruction of the Special Committee, Cowen communicated a December 8, 1997,
deadline for "final" bids. On December 3, 1997, FPA responded to the request for
final bids with a "pre-emptive bid," requiring exclusivity on the part of OCMCS
and SJMC for a period of thirty (30) days immediately following receipt of the
FPA bid. A meeting of the Special Committee was held on December 5, 1997 to
review and discuss the pre-emptive bid from FPA and the status
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<PAGE> 58
of the other bidders. It was noted that the FPA bid was significantly greater in
value than any of the prior bids, offered immediate liquidity if desired by the
stockholders of OCMCS and the shareholders of SJMC, subject to certain time
restrictions on sale of shares due to pooling and contractual requirements, and
had the greatest likelihood of timely completion. In addition, the Special
Committee noted that throughout the bid process, FPA had consistently recognized
and been sensitive to issues regarding physician management and policies and
procedures at OCMCS and SJMC.
The Special Committee determined that OCMCS stockholders and SJMC
shareholders would receive greater value from a transaction with FPA due to its
strategic fit, its complementary business plan, the proximity of FPA to OCMCS in
terms of integration of operations and the market capitalization and liquidity
of the FPA Common Stock. Additionally, the negotiated period of exclusivity
(which expired on January 15, 1998) was determined not to materially impair the
marketability and value of OCMCS and SJMC if a transaction with FPA did not
occur. Accordingly, the two other potential buyers were notified of the
pre-emptive bid.
On December 5, 1997, representatives of FPA and OCMCS and SJMC, together
with their respective legal advisors and the financial advisors to FPA and
OCMCS, conducted discussions concerning the ability to treat the transaction, or
a portion thereof, as a pooling of interests for accounting purposes. On
December 8, 1997, the Special Committee met and reviewed the terms of the FPA
bid. Following lengthy discussions, the Special Committee resolved to recommend
to the full Boards of OCMCS and SJMC that their respective companies enter into
exclusive negotiations with FPA.
On December 9, 1997, the OCMCS Board held a meeting at which the Special
Committee presented its reasons for recommending entering into a period of
exclusive negotiations with FPA. The OCMCS Board determined that it was in
OCMCS's best interests to enter into exclusive negotiations with FPA. The OCMCS
Board further determined that final approval for a transaction with FPA would be
contingent upon satisfactory resolution of two conditions: (1) that SJIPA's and
SJMG's physician compensation programs remain in place for an extended period
beyond the closing and (2) that the ultimate transaction structure optimize
accounting, tax and securities constraints for the benefit of the OCMCS
stockholders and the SJMC shareholders, including but not limited to pooling of
interests accounting treatment.
On December 11, 1997, the SJMC Board met to consider the FPA proposal.
Representatives of the Special Committee delivered a presentation concerning the
FPA bid and, following such presentation, the Board of SJMC voted to approve the
entry by SJMC into an exclusive period of negotiation with FPA through January
15, 1998. In the last two weeks of December 1997 and early January 1998, OCMCS
and SJMC representatives negotiated the Merger Agreement and conducted due
diligence with respect to FPA.
On January 13, 1998, both the OCMCS Board and the SJMC Board met separately
to consider approval of the Merger Agreement and the transactions contemplated
thereby. The OCMCS Board and the SJMC Board concluded at their respective
meetings that the transaction was fair and in the best interests of OCMCS
stockholders and SJMC shareholders and approved the transaction. Negotiations
were completed and the Merger Agreement was signed on January 21, 1998.
RECOMMENDATION OF THE SJMC BOARD OF DIRECTORS AND REASONS FOR THE SJMC MERGER
On January 13, 1998, the SJMC Board determined that the proposed SJMC
Merger and the terms and conditions of the Merger Agreement and the transactions
contemplated thereby are fair to, and in the best interests of, SJMC and its
shareholders and resolved to recommend that the shareholders of SJMC vote FOR
approval and adoption of the Merger Agreement. In reaching its decision to enter
into and recommend the Merger Agreement, the SJMC Board consulted with
management, as well as its accounting and legal advisors, and considered a
number of factors, including without limitation and without assigning relative
weights thereto, the following factors:
(i) the attractive opportunity to strengthen SJMC's competitive
position and enhance its profile among physicians and Payors;
54
<PAGE> 59
(ii) the increasing competitive pressures within the managed care
sector of the health care industry, including the trend toward
consolidation among Payors, providers and physician practice management
companies;
(iii) the belief that there were strategic benefits which could be
attained by combining FPA and SJMC's operations including, but not limited
to, forming one of the largest physician practice management companies in
California and in the nation and thereby providing the combined company
with the opportunity to operate more effectively and profitably in an
increasingly competitive environment as a result of the size, geographic
scope and expertise of the combined company (especially in light of a
shared operational approach between the two entities, with both companies
having focused significantly on IPA management);
(iv) the belief that certain synergies could be attained by spreading
the costs of infrastructure over a greater membership base (particularly in
light of FPA's presence in the neighboring counties of San Diego and Los
Angeles) and by combining operations and development activities, thereby
reducing general and administrative expenses and contributing to the
ability of the combined company to compete effectively in the future;
(v) the terms and conditions of the Merger Agreement and related
agreements and the likelihood that the conditions to the SJMC Merger would
be satisfied, as well as the prospects of OCMCS as an independent entity
and as an affiliated entity with FPA;
(vi) the willingness of management to support the SJMC Merger;
(vii) the liquidity desire of the SJMC shareholders and the trading
volume of FPA Common Stock and its effect on such liquidity, as well as the
general financial condition and results of operations of FPA; and
(viii) the willingness of FPA to commit to maintaining existing
physician compensation and governance programs.
In addition to the foregoing factors, the SJMC Board also considered
several negative factors or outcomes that could result from the SJMC Merger,
including, but not limited to:
(i) the risk that the SJMC Merger would not be consummated;
(ii) the ability of FPA to integrate and continue successfully SJMC's
operations after the SJMC Merger;
(iii) the ability of FPA to sustain its growth strategy; and
(iv) the amount of FPA's indebtedness in relation to its total
capitalization.
The SJMC Board reviewed all of these factors, without focusing on any one
individual factor, and concluded that on balance, the risks relating to the SJMC
Merger are outweighed by the potential benefits to be achieved through the SJMC
Merger.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive, but it does include the material factors considered
by the SJMC Board in its evaluation of the SJMC Merger. The SJMC Board
determined that the SJMC Merger was fair to and in the best interest of the SJMC
shareholders and that SJMC should proceed with the SJMC Merger.
ACCORDINGLY, THE SJMC BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
OF SJMC VOTE "FOR" APPROVAL OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.
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<PAGE> 60
RECOMMENDATION OF THE OCMCS BOARD OF DIRECTORS AND REASONS FOR THE OCMCS MERGER
On January 13, 1998, the OCMCS Board determined that the proposed Merger
and the terms and conditions of the Merger Agreement and the transactions
contemplated thereby are fair to, and in the best interests of, OCMCS and its
stockholders and resolved to recommend that the stockholders of OCMCS vote FOR
approval and adoption of the Merger Agreement. In reaching its decision to enter
into and recommend the Merger Agreement, the OCMCS Board consulted with
management, as well as its financial, accounting and legal advisors, and
considered a number of factors, including, without limitation and without
assigning relative weights thereto, the following factors:
(i) the attractive opportunity to strengthen OCMCS's competitive
position and enhance its profile among physicians and Payors;
(ii) the increasing competitive pressures within the managed care
sector of the health care industry, including the trend toward
consolidation among Payors, providers and physician practice management
companies;
(iii) the belief that there were strategic benefits which could be
attained by combining FPA and OCMCS' operations including, but not limited
to, forming one of the largest physician practice management companies in
California and in the nation and thereby providing the combined company
with the opportunity to operate more effectively and profitably in an
increasingly competitive environment as a result of the size, geographic
scope and expertise of the combined company (especially in light of a
shared operational approach between the two entities, with both companies
having focused significantly on IPA management);
(iv) the belief that certain synergies could be attained by spreading
the costs of infrastructure over a greater membership base (particularly in
light of FPA's presence in the neighboring counties of San Diego and Los
Angeles) and by combining operations and development activities, thereby
reducing general and administrative expenses and contributing to the
ability of the combined company to compete effectively in the future;
(v) the advice of Cowen rendered to the OCMCS Board and the delivery
of a written opinion letter dated February 5, 1998 to the effect that, as
of the date of such opinion and based upon and subject to certain matters
stated therein, the Merger Consideration in the aggregate is fair from a
financial point of view (see "-- Opinion of OCMCS' Financial Advisor");
(vi) the terms and conditions of the Merger Agreement and the
likelihood that the conditions to the OCMCS Merger would be satisfied, as
well as the prospects of OCMCS as an independent entity and as an
affiliated entity with FPA;
(vii) the willingness of management to support the OCMCS Merger;
(viii) the liquidity desire of the OCMCS stockholders and the trading
volume of FPA Common Stock and its effect on such liquidity, as well as the
general financial condition and results of operations of FPA; and
(ix) the willingness of FPA to commit to maintaining existing
physician compensation and governance programs.
If the OCMCS Merger is consummated, the Board of Directors of OCMCS
believes that OCMCS will have access to additional capital, management resources
and clinical information systems which could enhance the competitiveness and
profitability of OCMCS. Finally, the Board believes that the OCMCS Merger will
provide OCMCS stockholders, through their ownership of FPA Common Stock, with
enhanced liquidity due to the market capitalization of FPA, as well as the
opportunity to realize additional appreciation in the value of their investment
to the extent the foregoing potential benefits of the OCMCS Merger are realized.
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<PAGE> 61
In addition to the foregoing factors, the OCMCS Board also considered
several negative factors or outcomes that could result from the OCMCS Merger,
including, but not limited to:
(i) the risk that the OCMCS Merger would not be consummated;
(ii) the ability of FPA to integrate and continue successfully OCMCS's
operations after the OCMCS Merger;
(iii) the ability of FPA to sustain its growth strategy; and
(iv) the amount of FPA's indebtedness in relation to its total
capitalization.
The OCMCS Board reviewed all of these factors, without focusing on any one
individual factor, and concluded that on balance, the risks relating to the
combined company were outweighed by the potential benefits to be achieved
through the OCMCS Merger.
The foregoing discussion of the information and factors considered by the
OCMCS Board is not intended to be exhaustive, but it does include the material
factors considered by the OCMCS Board in its evaluation of the OCMCS Merger. The
OCMCS Board determined that the OCMCS Merger was fair to and in the best
interest of the OCMCS stockholders and that OCMCS should proceed with the OCMCS
Merger.
ACCORDINGLY, THE OCMCS BOARD RECOMMENDS THAT THE STOCKHOLDERS OF OCMCS VOTE
"FOR" APPROVAL OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.
OPINION OF OCMCS' FINANCIAL ADVISOR
Pursuant to an engagement letter dated August 6, 1997 (the "Cowen
Engagement Letter"), the Board of Directors of OCMCS engaged Cowen to serve as
its financial advisor. Cowen was selected by OCMCS as its financial advisor, and
to render an opinion to OCMCS, because Cowen is a nationally recognized
investment banking firm and because certain principals of Cowen have substantial
experience in transactions similar to the Combined Merger and are familiar with
OCMCS and its businesses. As part of its investment banking business, Cowen is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for corporate and other
purposes. In addition, a limited partner of Cowen owns less than 0.5% of the
outstanding shares of OCMCS Series B Preferred Stock.
The full text of the written opinion of Cowen, dated February 5, 1998, is
attached hereto as Appendix B and is incorporated by reference. Holders of OCMCS
Voting Securities are urged to read the opinion in its entirety for the
assumptions made, procedures followed, other matters considered and limits of
the review by Cowen. This summary of the written opinion of Cowen is qualified
in its entirety by reference to the full text of such opinion. Cowen's analyses
and opinion were prepared for and addressed to OCMCS and are directed only to
the fairness, from a financial point of view, of the aggregate consideration to
be paid in the Combined Merger and do not constitute an opinion as to the merits
of the Combined Merger or a recommendation to any holders of OCMCS Voting
Securities as to how to vote on the OCMCS Merger.
In arriving at its opinion, Cowen (a) reviewed the combined financial
statements of OCMCS and SJMC for the fiscal year ended December 31, 1996, and
the seven months ended July 31, 1997 and certain other relevant financial and
operating data of OCMCS and SJMC provided to Cowen by management of OCMCS; (b)
reviewed FPA's publicly available combined consolidated financial statements for
the fiscal year ended December 31, 1996 and the nine month periods ended
September 30, 1996 and September 30, 1997, certain publicly available filings
with the Commission and certain other relevant financial and operating data of
FPA provided to Cowen by management of FPA; (c) reviewed the Merger Agreement;
(d) held meetings and discussions with management and senior personnel of OCMCS
to discuss the business, operations, historical financial results and future
prospects of OCMCS and SJMC; (e) reviewed financial projections furnished by the
management of OCMCS including, among other things, the capital structure,
revenue, net income, cash flow, capital requirements and other data of OCMCS and
SJMC; (f) reviewed the combined valuation of
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OCMCS and SJMC in comparison to certain publicly traded companies; (g) compared
the Combined Merger with the acquisition of other companies through certain
other transactions; (h) analyzed the potential pro forma financial effects of
the Combined Merger; (i) held a meeting with senior management of FPA to discuss
FPA's historical financial results and financial projections furnished by the
management of FPA, as well as the future prospects of FPA; and (j) conducted
such other studies, analyses, inquiries and investigations as Cowen deemed
appropriate. At the request of OCMCS, Cowen also solicited third party
indications of interest in acquiring OCMCS and SJMC.
Upon the advice of OCMCS' management and with the consent of OCMCS, Cowen
relied upon the accuracy and completeness of the financial and other information
that was available to it from public sources, that was provided to it by OCMCS
or FPA or that was otherwise reviewed by it. Cowen did not assume any
responsibility for independent verification of such information, including
financial information. In addition, Cowen assumed the attainability of the
financial results in the financial forecasts, projections and estimates of
operating efficiencies and potential synergies provided by OCMCS' and FPA's
respective managements as to the expected future financial performance of their
respective companies, and management of OCMCS confirmed that such forecasts,
projections and estimates provided a reasonable basis for Cowen's opinion.
Because such forecasts, projections and estimates are inherently subject to
uncertainty, none of OCMCS, FPA, Cowen or any other person assumes
responsibility for their accuracy. Further, Cowen did not make an independent
evaluation or appraisal of any of the properties or assets of the Company, SJMC
or FPA, nor was Cowen furnished with any such evaluation or appraisal.
For the purposes of rendering its opinion, Cowen assumed that the
representations and warranties of each party contained in the Merger Agreement
are true and correct, that each party will perform all of the covenants and
agreements required to be performed by it under the Merger Agreement and that
all conditions to the consummation of the Combined Merger will be satisfied
without waiver thereof. Cowen also assumed that all governmental, regulatory and
other consents and approvals contemplated by the Merger Agreement will be
obtained and that in the course of obtaining those consents no restrictions will
be imposed or waivers made that would have an adverse effect on the contemplated
benefits of the Combined Merger. Cowen further assumed that there have been no
material changes in the assets, financial condition, results of operations,
business or prospects of OCMCS, SJMC or FPA since the date of the last financial
statements received by Cowen. Cowen did not express any opinion as to the likely
trading range for FPA Common Stock following consummation of the Combined Merger
or otherwise. Cowen's opinion was necessarily based on general economic, market,
financial and other conditions as they existed on, and could be evaluated as of,
February 5, 1998, as well as on the information made available to it as of
February 5, 1998. It should be understood that, although developments subsequent
to February 5, 1998 may affect its opinion, Cowen does not have any obligation
to update, revise or reaffirm its opinion.
For purposes of this opinion, Cowen analyzed as a whole the consideration
to be paid by FPA and to be received by all holders of OCMCS Voting Securities,
OCMCS Options and SJMC Common Stock. Cowen is not expressing any opinion as to
the allocation of such consideration between OCMCS and SJMC or amongst such
shares of OCMCS Voting Securities and OCMCS Options.
The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each of
the financial analyses described below, and reviewed with the management of
OCMCS the assumptions on which such analyses were based and other factors,
including the historical and projected financial results of OCMCS, SJMC and FPA.
No limitations were imposed by OCMCS with respect to the investigations made or
procedures followed by Cowen in rendering its opinion.
Analysis of Certain Combined Mergers. Cowen reviewed the financial terms,
to the extent publicly available, of 13 selected mergers (collectively, the
"Selected Mergers") involving the acquisition of companies in the physician
practice management industry, which were announced or completed since November
1993 with total consideration of $20 million or more. Cowen reviewed the market
capitalization of common stock plus total debt less cash and equivalents
("Enterprise Value") paid in the Selected Mergers as a multiple of
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latest reported twelve month ("LTM") revenues, and earnings before interest
expense, income, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT").
Such analyses indicated that, on the basis of the Enterprise Value paid,
the Selected Mergers had a median valuation of (i) 0.92 times LTM revenues, (ii)
14.5 times LTM EBITDA, and (iii) 17.1 times LTM EBIT. The corresponding
multiples of OCMCS and SJMC, collectively, implied by FPA's offer, before
synergies, are as follows: (i) 0.58 times LTM revenues, (ii) 29.9 times LTM
EBITDA, and (iii) 74.0 times LTM EBIT.
Although the Selected Mergers were used for comparison purposes, none of
such Mergers is directly comparable to the Combined Merger, and none of the
companies acquired in such Selected Mergers is directly comparable to OCMCS and
SJMC, collectively. Accordingly, an analysis of the results of such a comparison
is not purely mathematical but instead involves complex considerations and
judgments concerning differences in historical and projected financial and
operating characteristics of the companies involved and other factors that could
affect the acquisition value of such companies or the company to which they are
being compared.
Analysis of Certain Publicly Traded Companies. To provide contextual data
and comparative market information, Cowen compared selected historical operating
and financial ratios for OCMCS and SJMC to the corresponding data and ratios of
certain other companies (the "Selected Companies") which Cowen deemed comparable
to OCMCS and SJMC. These companies were MedPartners, PhyCor, FPA, PhyMatrix
Corp., Advanced Health Corporation and ProMedCo. Such data and ratios include
the Enterprise Value of such Selected Companies as multiples of revenues, EBITDA
and EBIT for the LTM period. Cowen also examined the ratios of the current stock
prices of the Selected Companies to the LTM earnings per share ("EPS") and
estimated 1998 calendar year EPS (as estimated by Institutional Brokers
Estimating System and First Call).
Such analysis indicated that, for the Selected Companies, (i) the median
value of Enterprise Value as a multiple of LTM revenues was 1.37 times, (ii) the
median value of Enterprise Value as a multiple of LTM EBITDA was 10.9 times,
(iii) the median value of Enterprise Value as a multiple of LTM EBIT was 14.3
times, and (iv) the median value of price per share as a multiple of estimated
EPS for the 1998 calendar year was 15.1 times.
The corresponding multiples of OCMCS and SJMC, collectively, implied by
FPA's offer, before synergies, are as follows: (i) LTM revenues, 0.58 times,
(ii) LTM EBITDA, 29.9 times, (iii) LTM EBIT, 74.0 times and (iv) estimated EPS
for the 1998 calendar year, 25.7 times.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to OCMCS and SJMC, collectively.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the Selected Companies and other factors that could affect
the public trading value of the Selected Companies or the companies to which
they are being compared.
Pro Forma Earnings Analysis. Cowen analyzed the potential effect of the
Combined Merger on the projected combined income statement of FPA for the second
half of the fiscal year ending 1998. This analysis was based on projections for
OCMCS and SJMC, collectively, and FPA provided by OCMCS' and FPA's management.
This analysis concluded that the Combined Merger would be slightly accretive to
FPA's projected EPS for the second half of the fiscal year ending 1998,
including the possible effect of cost savings and synergies of $1.4 million in
the Combined Merger. Without these potential cost savings and synergies, the
Combined Merger would decrease FPA's projected EPS for the second half of the
year ending 1998 by approximately $0.03 per share.
Stock Trading History. Cowen reviewed the historical market prices and
trading volumes of FPA Common Stock from January 30, 1997 to January 30, 1998
and found that only 15.9% of the total traded volume has been below $18.00.
Cowen also compared FPA's closing stock price with an index of the Selected
Companies. This information was presented solely to provide OCMCS with
background information regarding the stock prices of FPA over
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the period indicated. Cowen noted that over the indicated periods the high and
low prices for shares of FPA Common Stock were $40.00 and $16.875, respectively.
The summary set forth above does not purport to be a complete description
of the analyses performed by Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Cowen did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, notwithstanding the separate factors summarized above, Cowen
believes, and has advised OCMCS, that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the process underlying its opinion. In performing its analyses, Cowen made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of OCMCS,
SJMC and FPA. These analyses performed by Cowen are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses or securities may actually be sold. Accordingly, such analyses
and estimates are inherently subject to substantial uncertainty and none of
OCMCS, SJMC, FPA, Cowen or any other person assumes responsibility for their
accuracy. As mentioned above, OCMCS took into account several factors in making
its determination to recommend that OCMCS enter into the Merger Agreement. The
analyses of Cowen and its opinion should not be considered as determinative of
the decision of OCMCS to enter into the Merger Agreement.
Pursuant to the Cowen Engagement Letter, OCMCS has agreed to pay certain
fees to Cowen for its financial advisory services provided in connection with
the Combined Merger. If the Combined Merger is consummated, Cowen will be
entitled to receive an aggregate Combined Merger fee in an amount equal to 1% of
the value of the consideration received in the Combined Merger. If the Combined
Merger is not consummated, Cowen will receive only the retainer fee of $50,000
that was paid to Cowen by OCMCS on or about August 6, 1997. Additionally, OCMCS
has agreed to reimburse Cowen for its out-of-pocket expenses (including the
reasonable fees and expenses of its counsel) incurred or accrued during the
period of, and in connection with Cowen's engagement. OCMCS has also agreed to
indemnify Cowen against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of services performed by
Cowen as financial advisor to OCMCS in connection with the Combined Merger,
unless it is finally judicially determined that such liabilities arose out of
Cowen's gross negligence or willful misconduct. The terms of the fee arrangement
with Cowen, which are customary in mergers of this nature, were negotiated at
arm's length between OCMCS and Cowen, and OCMCS was aware of such arrangement,
including the fact that a significant portion of the aggregate fee payable to
Cowen is contingent upon consummation of the Combined Merger.
EFFECTIVE TIME OF THE COMBINED MERGER
Upon the terms and subject to the conditions of the Merger Agreement, SJMC
will be merged with and into FPA California and immediately thereafter OCMCS
will be merged with and into FPA California. The Combined Merger will become
effective when the Agreement of Merger is filed with the Secretary of State of
Delaware and the Secretary of State of California or at such time thereafter as
is provided in the Agreement of Merger. The filing of the Agreement of Merger
will be made as soon as practicable on or after the Closing.
The Closing shall take place on the Closing Date, at the offices of FPA,
3636 Nobel Drive, Suite 200, San Diego, California, unless another date or place
is agreed to by the parties. See "THE MERGER AGREEMENT -- Conditions to
Consummation of the Combined Merger."
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INTEREST OF CERTAIN PERSONS IN THE COMBINED MERGER
No officer, director or person holding more than 5% of the voting power of
either OCMCS or SJMC or their associates will have a material interest in the
Combined Merger except as described below and the interest arising from the
ownership of securities of OCMCS or SJMC by such persons, which interests are
shared pro rata by all holders of the same class of security.
Pursuant to the terms of their employment agreements with OCMCS, Drs.
Rowen, Wellikson and Mills and Messrs. Madden, Moreland and Ohman are entitled
to receive certain payments following the termination of their employment with
OCMCS without cause or for "Good Reason." "Good Reason" is defined in the OCMCS
employment agreements for executive officers as a reduction in such employee's
employment responsibilities in any significant manner or the assignment of such
employee to a primary office located outside of Orange County, California.
Dr. Rowen's employment agreement provides that, if Dr. Rowen's employment
is terminated without cause or by Dr. Rowen for Good Reason, Dr. Rowen shall be
entitled to receive for three months following such termination a monthly
payment equal to his then current monthly base salary, plus the pro rata portion
of the average annual bonus paid to him for the two years prior to his
termination date. In addition, he shall be entitled to health insurance for six
months following the date of termination. Dr. Wellikson's employment agreement
provides that, if Dr. Wellikson's employment is terminated without cause or for
Good Reason, Dr. Wellikson will be entitled to receive for nine months following
such termination a monthly amount equal to his then current monthly base salary
plus the pro rata portion of the average annual bonus paid to him for the two
years prior to his termination date. If Dr. Mills' employment is terminated
without cause or for Good Reason as a result of a merger or acquisition, Dr.
Mills shall be entitled to receive for nine months following such termination a
monthly amount equal to his then current monthly base compensation. In addition,
Dr. Mills shall be provided with health insurance until the earlier of nine
months from the date of termination or the date on which he secures comparable
employment.
Pursuant to the terms of Mr. Madden's employment agreement, upon the
termination of Mr. Madden's employment without cause or for Good Reason, Mr.
Madden will be entitled to receive for nine months following such termination
monthly payments equal to his then current monthly base compensation, plus the
pro rata portion of the average annual bonus paid to him for the two years prior
to his termination date, car allowance and life insurance premiums, as well as
health insurance from the date of termination through the earlier to occur of
nine months from the date of termination or until Mr. Madden secures comparable
employment.
Mr. Ohman's employment agreement provides that, upon a termination of Mr.
Ohman's employment without cause or for Good Reason, Mr. Ohman shall be entitled
to receive for nine months following such termination monthly payments equal to
his then current monthly base compensation plus his pro rata share of the
average annual bonus paid to him for the two years prior to the date of
termination. In addition, Mr. Ohman shall receive health insurance from the date
of termination through the earlier to occur of nine months from the date of
termination or until he secures comparable employment.
Mr. Moreland's employment agreement provides that, upon a termination of
Mr. Moreland's employment without cause or for Good Reason, Mr. Moreland shall
be entitled to receive for six months following such termination monthly
payments equal to his then current monthly base compensation plus his pro rata
share of the average annual bonus paid to him for the two years (or one year if
Mr. Moreland has less than two years of service) prior to the date of
termination. In addition, Mr. Moreland shall receive health insurance from the
date of termination through the earlier to occur of six months from the date of
termination or until he secures comparable employment.
In addition, pursuant to the terms of their stock option agreements with
OCMCS, upon a change in control of OCMCS, all of the unvested options held by
the persons named above shall become immediately vested. As of the OCMCS Record
Date, Dr. Rowen has unvested options to purchase 60,000 shares of OCMCS Common
Stock, Dr. Wellikson has unvested options to purchase 180,000 shares of OCMCS
Common Stock and Messrs. Madden, Moreland and Ohman have unvested options to
purchase 75,000,
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121,250 and 62,500 shares of OCMCS Common Stock, respectively. Dr. Maria Minon
and Dr. William McMaster, each a member of the Board of Directors of both OCMCS
and SJMC, Dr. William Buster, an SJMC officer and member of the Board of
Directors of both OCMCS and SJMC, Dr. James Tananbaum, an OCMCS officer and
member of the Board of Directors of OCMCS, Dr. Richard Bond, a member of the
Board of Directors of SJMC, R. Judd Jessup, a member of the Board of Directors
of OCMCS, and Paul Viviano, a member of the Board of Directors of OCMCS, have
options to purchase 14,167, 14,167, 150,000, 27,500, 10,000, 14,167 and 14,167
shares of OCMCS Common Stock, respectively.
The Merger Agreement also provides that FPA will maintain in effect
following the Closing the rights to indemnification of OCMCS and SJMC directors
and officers permitted in their respective charters. See "THE MERGER
AGREEMENT -- Certain Additional Agreements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the material federal income tax
consequences of the Combined Merger. The summary is based upon the Code,
applicable Treasury Regulations thereunder and administrative rulings and
judicial authority as of the date hereof. All of the foregoing are subject to
change, possibly with retroactive effect, and any such change could affect the
continuing validity of the discussion. The discussion assumes that holders of
shares of SJMC Common Stock and OCMCS Stock hold such shares as a capital asset.
Further, the discussion does not address the tax consequences that may be
relevant to a particular stockholder subject to special treatment under certain
federal income tax laws, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, non-United States persons, stockholders who
acquired shares of SJMC Common Stock or OCMCS Stock through the exercise of
options or otherwise as compensation or through a tax-qualified retirement plan,
and holders of options granted under OCMCS' stock option plan (the "OCMCS Option
Plan"). This discussion does not address any consequences arising under the laws
of any state, locality or foreign jurisdiction or the tax consequences of
transactions effected prior to or after the Combined Merger (whether or not such
transactions are in connection with the Combined Merger), except to the extent,
if at all, that such prior or subsequent transactions would affect the tax
treatment of the Combined Merger.
Neither SJMC, OCMCS nor FPA has requested a ruling from the Internal
Revenue Service ("IRS") with regard to any of the federal income tax
consequences of the Combined Merger.
Consequences to SJMC, OCMCS, FPA and FPA California. As of the date hereof,
it is intended that the Combined Merger will constitute a reorganization
pursuant to Section 368(a) of the Code and that for federal income tax purposes
no gain or loss will be recognized by FPA, SJMC, OCMCS or FPA California.
Consequences to SJMC Shareholders and OCMCS Stockholders. Under the
reorganization provisions of Section 368(a) of the Code, if applicable to the
Combined Merger, (i) no gain or loss will be recognized by holders of SJMC
Common Stock or OCMCS Stock with respect thereto as a result of the surrender of
their shares of SJMC Common Stock and OCMCS Stock in exchange for shares of FPA
Common Stock pursuant to the Combined Merger (except as discussed below with
respect to cash received in lieu of fractional shares), and (ii) the aggregate
tax basis of the shares of FPA Common Stock received in the Combined Merger
(including any fractional shares of FPA Common Stock deemed received) will be
the same as the aggregate tax basis of the shares of SJMC Common Stock and OCMCS
Stock surrendered in exchange therefor in the Combined Merger. The holding
period of the shares of FPA Common Stock received (including the holding period
of fractional shares of FPA Common Stock deemed received) will include the
holding period of shares of SJMC Common Stock and OCMCS Stock surrendered in
exchange therefor.
Fractional Shares. If a holder of shares of SJMC Common Stock or OCMCS
Stock receives cash in lieu of a fractional share interest in FPA Common Stock
in the Combined Merger, such fractional share interest will be treated as having
been distributed to the holder, and such cash amount will be treated as received
in redemption of, the fractional share interest. Under Section 302 of the Code,
if such redemption is "not essentially equivalent to a dividend" after giving
effect to the constructive ownership rules of the Code, the holder will
generally recognize capital gain or loss equal to the cash amount received for
the fractional share of FPA Common Stock reduced by the portion of the holder's
tax basis in shares of SJMC Common
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Stock or OCMCS Stock surrendered that is allocable to the fractional share
interest in FPA Common Stock. Under these rules, a shareholder of SJMC or
stockholder of OCMCS should recognize capital gain or loss on the receipt of
cash in lieu of a fractional share interest in FPA Common Stock. For
non-corporate holders of SJMC Common Stock or OCMCS Stock, such capital gain
will be taxed at ordinary income tax rates if the holder's holding period in the
fractional share interest is 12 months or less, at a maximum federal income tax
rate of 28% if the holder's holding period in the fractional share interest is
more than 12 months and not more than 18 months, and at a maximum federal income
tax rate of 20% if the holder's holding period in such fractional share interest
is more than 18 months. The above discussion relates to tax consequences in
connection with the receipt by SJMC shareholders and OCMCS stockholders, of FPA
Common Stock pursuant to the Merger Agreement. SJMC shareholders and OCMCS
stockholders may incur certain other tax consequences in connection with any
resale of such FPA Common Stock.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE COMBINED MERGER. THUS,
SJMC SHAREHOLDERS, OCMCS STOCKHOLDERS AND HOLDERS OF OCMCS OPTIONS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE COMBINED MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX LAWS
AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The SJMC Merger will be accounted for using the "pooling of interests"
method of accounting pursuant to Accounting Principles Board Opinion No. 16, as
amended ("APB No. 16"), if such treatment is available. The "pooling of
interests" method of accounting assumes that the combining companies have been
merged from inception, and the historical financial statements for periods prior
to consummation of the SJMC Merger are restated as though FPA and SJMC had been
combined from inception. The restated financial statements are adjusted to
conform the accounting policies of the separate companies. See "SELECTED
HISTORICAL AND PRO FORMA INFORMATION -- PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF FPA MEDICAL MANAGEMENT, INC. AND
SUBSIDIARIES." It is a condition to the Combined Merger that FPA receive a
letter from its independent auditors, Deloitte & Touche LLP, to the effect that
the SJMC Merger qualifies as a "pooling of interests" for financial and
accounting purposes and from SJMC's independent auditors, Ernst & Young LLP, to
the effect that SJMC meets the conditions that must be met to be a party to a
business combination accounted for as a pooling of interests. The OCMCS Merger
will be accounted for using the "purchase" method of accounting. Assuming an FPA
Closing Price of $ and OCMCS Merger Consideration valued at
approximately $ , FPA expects to record goodwill relating to the OCMCS
Merger of approximately $ .
RESALE OF FPA COMMON STOCK BY AFFILIATES
The FPA Common Stock to be issued to shareholders of SJMC and stockholders
of OCMCS in connection with the Combined Merger has been registered under the
Securities Act pursuant to the Registration Statement of which this Proxy
Statement/Prospectus forms a part. The FPA Common Stock received by the
shareholders of SJMC and stockholders of OCMCS upon consummation of the Combined
Merger will be freely transferable under the Securities Act, except (i) for
shares of FPA Common Stock to be received in exchange for OCMCS Stock and OCMCS
Options, which shall be restricted from sale, transfer or other dispositions for
a period of 90 days commencing as of the Effective Time; provided that holders
of OCMCS Options may sell, transfer or otherwise dispose of that member of
shares of FPA Common Stock to pay the exercise price and the minimum federal and
state withholding taxes, if any due and payable upon such exercise; and (ii) for
shares issued to any person who may be deemed an "Affiliate" (as defined below)
of SJMC, OCMCS or FPA within the meaning of Rule 145 promulgated under the
Securities Act ("Rule 145"). Affiliates are generally defined as persons who
control, are controlled by, or are under common
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control with SJMC, OCMCS or FPA at the time of the SJMC and OCMCS Special
Meetings (generally, directors, certain executive officers and major
stockholders). Affiliates of SJMC, OCMCS or FPA may not sell their shares of FPA
Common Stock acquired in connection with the Combined Merger, except pursuant to
an effective registration statement under the Securities Act covering such
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. In general, under Rule 145, for
one year following the Effective Time, an Affiliate (together with certain
related persons) would be entitled to sell shares of FPA Common Stock acquired
in connection with the Combined Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144 promulgated under the Securities Act ("Rule 144").
Additionally, the number of shares to be sold by an Affiliate (together with
certain related persons and certain persons acting in concert) during such
one-year period within any three-month period for purposes of Rule 145 may not
exceed the greater of 1% of the outstanding shares of FPA Common Stock or the
average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would remain available to Affiliates only if FPA
remained current with its information filings with the Commission under the
Exchange Act. One year after the Effective Time, an Affiliate would be able to
sell such FPA Common Stock without such manner of sale or volume limitations,
provided that FPA was current with its Exchange Act information filings and such
Affiliate was not then an Affiliate of FPA. Two years after the Effective Time,
an Affiliate would be able to sell such shares of FPA Common Stock without any
restrictions, provided that such Affiliate has not been an Affiliate of FPA for
at least three months prior thereto. In addition, under rules relating to
"pooling of interests" accounting, shares of FPA Common Stock issued to
affiliates of SJMC may not be resold by them until combined results of
operations of FPA and SJMC covering at least thirty days of operations are
published.
CERTAIN REGULATORY MATTERS
The HSR Act and the rules and regulations thereunder provide that certain
transactions may not be consummated until required information and materials
have been furnished to the FTC and the DOJ and certain waiting periods have
expired or been terminated. The required waiting period under the HSR Act will
expire at 11:59 p.m. on the thirtieth (30th) day following the date of filing
the properly completed notification and report forms, unless extended by a
request from the FTC for additional information or documentary material or
unless early termination of the waiting period is granted. The respective
obligations of FPA, FPA California, SJMC and OCMCS to consummate the Combined
Merger are conditioned upon all waiting periods (and any extension thereof)
applicable to the consummation of the Combined Merger under the HSR Act having
expired or been terminated. FPA, SJMC and OCMCS made their respective filings
with the FTC and the DOJ with respect to the Combined Merger on February 2,
1998. See "THE MERGER AGREEMENT -- Conditions to Consummation of the Combined
Merger."
Notwithstanding the expiration of the waiting period of the HSR filings,
the FTC, DOJ or others could take action under the antitrust laws, before or
after the Effective Time, seeking the divestiture by FPA of all or any part of
the assets of SJMC and OCMCS acquired in the Combined Merger. Certain persons,
such as states' attorneys general and private parties, could challenge the
Combined Merger as violative of antitrust laws and seek to enjoin the
consummation of the Combined Merger and, in the case of private persons, also
seek to obtain treble damages. There can be no assurance that a challenge to the
Combined Merger on antitrust grounds will not be made or, if such a challenge is
made, that it would not be successful. Should the FTC, DOJ or others request
information or seek to enforce antitrust laws, delay in consummation of the
Combined Merger could occur. Neither SJMC nor OCMCS intends to seek any further
stockholder or shareholder approval or authorization of the Merger Agreement as
a result of any action that it may take relating to any FTC, DOJ or other
actions, inquiries or objections, unless required to do so by applicable law.
The Combined Merger is subject to review and approval by the Department
which has regulated FPA California and its managed care activities since
December 1996. FPA and OCMCS and SJMC believe that the notice of material
modification was filed with the Department pertaining to the Combined Merger in
accordance with the legal requirements.
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RIGHTS OF DISSENTING SHAREHOLDERS AND STOCKHOLDERS
SJMC
Holders of SJMC Voting Securities as of the SJMC Record Date ("SJMC Record
Holders") are entitled to dissenter's rights under Chapter 13 of the California
Code for such securities. The following discussion represents a summary of the
material provisions of Chapter 13 of the California Code. For additional
information, reference is made to the full text of Chapter 13 of the California
Code, which is reprinted in its entirety as Appendix C to this Proxy Statement/
Prospectus. A person having a beneficial interest in SJMC Voting Securities as
of the SJMC Record Date held of record in the name of another person, such as a
nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect his or her
dissenter's rights under Chapter 13 of the California Code.
The Merger Agreement provides that any SJMC Voting Securities outstanding
immediately before the Effective Time and held by a shareholder who has not
voted in favor of or consented to the SJMC Merger in writing and who complies
with all the provisions of Chapter 13 of the California Code concerning the
right of holders of shares of capital stock to dissent from the SJMC Merger and
require appraisal of their shares ("Dissenting Shares") will not be converted
into the right to receive the SJMC Merger Consideration as described above, but
instead will be converted, at the Effective Time, by virtue of the SJMC Merger
and without any further action, into the right to receive any consideration that
may be determined to be due to the dissenting shareholder pursuant to the
California Code; provided, that SJMC Voting Securities outstanding immediately
before the Effective Time and held by a dissenting shareholder who, after the
Effective Time, fails to perfect or withdraws or loses his or her right to
dissent, in either case pursuant to the California Code, will be deemed to be
converted as of the Effective Time into the right to receive that number of
shares of FPA Common Stock determined by the SJMC Exchange Ratio, without
interest or dividends thereon. A copy of Chapter 13 of the California Code is
attached as Appendix C to this Proxy Statement. SJMC SHAREHOLDERS ARE URGED TO
READ CAREFULLY THIS ATTACHMENT WHICH DESCRIBES THE SPECIFIC PROCEDURES THAT MUST
BE FOLLOWED UNDER THE CALIFORNIA CODE FOR A SHAREHOLDER TO PERFECT HIS OR HER
RIGHTS AS A DISSENTING SHAREHOLDER.
Under Section 1300 of the California Code, if the approval of the
outstanding shares of a corporation is required for a merger or reorganization
(as defined in Section 181 of the California Code), each shareholder of the
corporation may require the corporation to purchase for cash at their fair
market value the shares owned by such shareholder which are dissenting shares.
If any SJMC shareholders hold dissenting shares (shares which are
outstanding on the date of the SJMC Merger and were not voted in favor of the
SJMC Merger), SJMC is required under Section 1301 of the California Code to mail
to each such shareholder a notice of the approval of the reorganization by the
outstanding shares of SJMC within ten (10) days after the date of such
shareholder approval. Such notice must include (1) a statement of price
determined by SJMC to represent the fair market value of the outstanding shares
and (2) a brief description of the procedure to be followed if the shareholder
desires to exercise the shareholder's rights under such sections. The fair
market value shall be determined as of the day before the first announcement of
the terms of the proposed reorganization and shall exclude any appreciation or
depreciation in consequence of the proposed merger or reorganization. The notice
to shareholders delivered under Section 1301 must also be accompanied by a copy
of Sections 1300 through 1304 of the California Code (Appendix C hereto).
Any shareholder who has the right to require the Surviving Corporation to
purchase such shareholder's shares for cash pursuant to Chapter 13 of the
California Code must make a written demand on the corporation for the purchase
of such shareholder's shares for cash. A demand is not effective unless it is
received by the Surviving Corporation or its transfer agent within 30 days after
the date the notice of approval referenced above was mailed to the shareholder.
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The shareholder's demand shall state the number and class of shares held of
record by the shareholder which the shareholder demands that the Surviving
Corporation purchase as well as a statement of the shareholder's determination
of the fair market value. The shareholder must submit to the Surviving
Corporation the certificate(s) representing the shares for which the shareholder
has made demand, endorsed with a statement that such shares (or a portion
thereof) are dissenting shares. The Surviving Corporation and the shareholder
agree that the shares are dissenting shares and agree upon the price for such
shares. Payment shall be made within 30 days after the amount has been agreed or
within 30 days after any statutory or contractual conditions to the
reorganization are satisfied.
If the Surviving Corporation denies that the shares are dissenting shares,
or the Surviving Corporation and the shareholder fail to agree upon the fair
market value of the shares, then such shareholder, within six months after the
date on which the notice of approval by the outstanding shares was mailed to
shareholders, may file a complaint in the superior court of the proper county,
asking the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares, or both. If the fair market value of
the shares is in issue, the court shall appoint one or more impartial appraisers
to determine the fair market value of the subject shares. The costs of the
action, including reasonable compensation to be paid to the appraisers, shall be
assessed or apportioned as the court considers equitable. If, however, the
appraisal exceeds the price offered by the Surviving Corporation for the
dissenting shares, the Surviving Corporation shall pay the costs. Except as
expressly limited by Chapter 13, holders of dissenting shares continue to have
all the rights and privileges incident to their shares, until the fair market
value of such shares is agreed or determined. Shareholders considering the
exercise of their dissenter's rights should be aware that the "fair market
value" of their SJMC Voting Securities as determined under Chapter 13 could be
more than, the same as, or less than the value of the SJMC Merger Consideration
they would have received if they did not exercise their dissenter's rights.
No shareholder who has rights as a dissenting shareholder shall have any
right, legal or equitable, to the validity of the merger/reorganization or to
have it set aside, except in an action to test whether the number of shares
required to approve the merger/reorganization were legally obtained.
OCMCS
Holders of OCMCS Voting Securities as of the OCMCS Record Date (the "OCMCS
Record Holders") are entitled to appraisal rights under Section 262 of the
Delaware Act ("Section 262") for such securities. The following discussion
represents a summary of the material provisions of Section 262. For additional
information, reference is made to the full text of Section 262, which is
reprinted in its entirety as Appendix D to this Proxy Statement/Prospectus. A
person having a beneficial interest in OCMCS Voting Securities as of the OCMCS
Record Date held of record in the name of another person, such as a nominee,
must act promptly to cause the record holder to follow the steps summarized
below properly and in a timely manner to perfect the appraisal rights provided
under Section 262.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the OCMCS Special Meeting, not less
than 20 days prior to the meeting, a constituent corporation must notify each of
the holders of its stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of Section
262. THIS PROXY STATEMENT/PROSPECTUS SHALL CONSTITUTE SUCH NOTICE TO THE RECORD
HOLDERS OF OCMCS COMMON STOCK AND OCMCS PREFERRED STOCK. ANY SUCH STOCKHOLDER
WHO WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING
DISCUSSION AND APPENDIX D CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY
COMPLY WITH THE PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS
UNDER THE DELAWARE ACT.
Under the Delaware Act, an OCMCS Record Holder who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, who otherwise complies with
the statutory requirements set forth in Section 262 and who neither votes in
favor of approval of the Merger Agreement and the OCMCS Merger nor consents
thereto in writing will be entitled to
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have his or her OCMCS Voting Securities appraised by the Delaware Court of
Chancery and to receive payment of the "fair value" of such shares as described
below. Such holders are, in such circumstances, entitled to appraisal rights
because they hold shares of a constituent corporation to the OCMCS Merger and
may be required by the Merger Agreement to accept the Merger Consideration.
An OCMCS Record Holder wishing to exercise his or her appraisal rights must
deliver to the Secretary of OCMCS, before the vote on the Merger Agreement at
the OCMCS Special Meeting, a written demand for appraisal of his or her OCMCS
Voting Securities. Merely voting or delivering a proxy directing a vote against
approval of the Merger Agreement and the OCMCS Merger will not constitute a
demand for appraisal. A written demand is required by law. Such written demand
must reasonably inform OCMCS of the identity of the OCMCS Record Holder and that
such holder intends thereby to demand appraisal of the holder's shares. All
written demands for appraisal of OCMCS Voting Securities should be sent or
delivered to OCMCS at 505 South Main Street, Suite 200, Orange, California
92868, Attention: Corporate Secretary. In addition, an OCMCS Record Holder
wishing to exercise his or her appraisal rights must hold such shares of record
on the date the written demand for appraisal is made and must hold such shares
continuously through the Effective Time. Stockholders who hold their OCMCS
Voting Securities in nominee form and who wish to exercise appraisal rights must
take all necessary steps in order that a demand for appraisal is made by the
record holder of such shares and are urged to consult with their nominee to
determine the appropriate procedures for the making of a demand for appraisal by
the record holder.
Within ten days after the Effective Time of the OCMCS Merger, FPA
California, as the surviving corporation in the OCMCS Merger, must send a notice
as to the effectiveness of the OCMCS Merger to each person who has satisfied the
appropriate provisions of Section 262 and who is entitled to appraisal rights
under Section 262. Within 120 days after the Effective Time, any OCMCS Record
Holder who has complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from the Surviving
Corporation a statement setting forth (i) the aggregate number of shares of
OCMCS Common Stock and OCMCS Preferred Stock not voted in favor of the Merger
Agreement and with respect to which demands for appraisal have been received and
(ii) the aggregate number of holders of such shares. Any such statement must be
mailed within ten days after a written request therefor has been received by the
Surviving Corporation.
Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any OCMCS Record Holder who has complied with the foregoing
procedures and who is entitled to appraisal rights under Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the
"fair value" of such shares. The Surviving Corporation is not under any
obligation to file a petition with respect to the appraisal of the "fair value"
of the OCMCS Voting Securities and neither FPA nor OCMCS presently intends that
the Surviving Corporation file such a petition. Accordingly, it is the
obligation of the stockholders to initiate all necessary action to perfect their
appraisal rights within the time prescribed in Section 262. An OCMCS Record
Holder of OCMCS Voting Securities will fail to perfect, or effectively lose, his
or her right to appraisal if no petition for appraisal of shares of OCMCS Voting
Securities is filed within 120 days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of OCMCS
Voting Securities entitled to appraisal rights and will appraise the "fair
value" of the OCMCS Voting Securities, exclusive of any element of value arising
from the accomplishment or expectation of the Merger. Stockholders considering
seeking appraisal should be aware that the "fair value" of their OCMCS Voting
Securities as determined under Section 262 could be more than, the same as, or
less than the value of the OCMCS Merger Consideration they would have received
if they did not seek appraisal. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenter's exclusive remedy.
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The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose OCMCS Voting
Securities have been appraised. The costs of the action may be determined by
such court and taxed upon the parties as the court deems equitable. The Delaware
Court of Chancery may also order that all or a portion of the expenses incurred
by any holder of OCMCS Voting Securities in connection with an appraisal,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all of the OCMCS Voting Securities entitled to appraisal.
If any OCMCS Record Holder who demands appraisal of his or her shares under
Section 262 fails to perfect, or effectively withdraws or loses, his or her
right to appraisal, as provided in the Delaware Act, the OCMCS Voting Securities
of such stockholder will be deemed to receive OCMCS Merger Consideration in
accordance with the Merger Agreement. A holder may withdraw his or her demand
for appraisal by delivering to the Surviving Corporation a written withdrawal of
his or her demand for appraisal and acceptance of the OCMCS Merger, except that
any such attempt to withdraw made more than 60 days after the Effective Time
will require the written approval of the Surviving Corporation. Failure to
follow the steps required by Section 262 of the Delaware Act for perfecting
appraisal rights may result in the loss of such rights.
Any OCMCS Record Holder who has duly demanded an appraisal in compliance
with Section 262 will not, after the Effective Time, be entitled to vote the
OCMCS Voting Securities subject to such demand for any purpose or be entitled to
the payment of dividends or other distributions on those shares (except
dividends or other distributions payable to OCMCS Record Holders as of a date
prior to the Effective Time).
BOARD OF DIRECTORS AND MANAGEMENT OF
FPA FOLLOWING THE COMBINED MERGER
BOARD OF DIRECTORS OF FPA FOLLOWING THE MERGER
Upon consummation of the Combined Merger, Seth Flam, Sol Lizerbram, Sheldon
Derezin, Stephen J. Dresnick, Kevin Ellis, Howard Hassman and Herbert A.
Wertheim, each of whom is currently a director of FPA, will continue to serve as
directors of FPA.
EXECUTIVE OFFICERS OF FPA FOLLOWING THE COMBINED MERGER
The following table sets forth certain information, including age and
positions, of each person who will continue to serve as an executive officer of
FPA upon consummation of the Combined Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ---------------------------------------------
<S> <C> <C>
Dr. Sol Lizerbram........... 49 Chairman of the Board of Directors
Dr. Seth Flam............... 39 President, Chief Executive Officer and
Director
Dr. Stephen J. Dresnick..... 46 Vice Chairman of the Board of Directors and
President, Sterling Healthcare Group, Inc.
Steven M. Lash.............. 43 Executive Vice President, Chief Financial
Officer and Treasurer
James A. Lebovitz........... 40 Senior Vice President, General Counsel and
Secretary
Dr. Howard Hassman.......... 41 Executive Vice President -- Corporate
Development and Director
Dr. Kevin Ellis............. 41 Executive Vice President and Chief Medical
Officer and Director
</TABLE>
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement not summarized elsewhere in this Proxy Statement/Prospectus. A copy of
the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement.
THE COMBINED MERGER
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by the shareholders of SJMC and stockholders of OCMCS and
the satisfaction or waiver of other conditions to the Combined Merger, SJMC will
be merged with and into FPA California and immediately thereafter OCMCS will be
merged with and into FPA California in accordance with the Delaware Act and the
California Code. As a result of the Combined Merger, the separate existence of
SJMC and OCMCS will cease.
At the Effective Time:
(i) Each issued and outstanding share of SJMC Common Stock, OCMCS
Stock and each OCMCS Option (if exercised), except as provided for below,
will be exchanged for the right to receive a number of shares of FPA Common
Stock based on the applicable Exchange Ratios. For a discussion of the
Exchange Ratios, see "THE COMBINED MERGER -- Merger Consideration."
(ii) The outstanding shares of OCMCS Series A Preferred Stock will be
cancelled without consideration in connection with the OCMCS Merger.
(iii) Each share of OCMCS Common Stock and OCMCS Preferred Stock held
in OCMCS' treasury will be cancelled and extinguished and will cease to
exist, and no consideration will be delivered with respect thereto.
(iv) If applicable, each outstanding share of SJMC Common Stock and
OCMCS Stock, the holder of which (a) has not voted in favor of the Combined
Merger, (b) has perfected such holder's dissenters' rights to appraisal in
accordance with the pertinent provisions of the Delaware Act or the
California Code, whichever is applicable, and (c) has not effectively
withdrawn or lost such rights to appraisal, will not be converted into a
right to receive shares of FPA Common Stock, but such holder shall be
entitled only to such rights as are granted under the applicable provisions
of the Delaware Act or the California Code, whichever is applicable. See
"THE COMBINED MERGER -- Rights of Dissenting Shareholders and
Stockholders."
At the Effective Time, holders of SJMC Common Stock and OCMCS Stock will
cease to have any rights as holders of such shares, other than, if applicable,
dissenters' rights to appraisal, but will have the right to receive shares of
FPA Common Stock and cash in lieu of any fractional shares of FPA Common Stock.
DESIGNATION OF SHAREHOLDER REPRESENTATIVES
The Merger Agreement provides that the Board of Directors of each of OCMCS
and SJMC shall appoint shareholder representatives to represent the stockholders
and shareholders of OCMCS and SJMC, respectively, in connection with any claim
for indemnity made by FPA or FPA California against such shareholders or
stockholders pursuant to the Merger Agreement. The parties to the Merger
Agreement determined that in the event of a claim for indemnity, in light of the
large number of shareholders and stockholders of SJMC and OCMCS, respectively,
the designation of shareholder representatives was a necessary mechanism to
ensure a prompt response to and disposition of any claim which may be made for
indemnity pursuant to the Merger Agreement. See " -- Indemnification."
EFFECTIVE TIME
The Combined Merger will become effective on such date as the duly prepared
and executed Agreement of Merger (along with duly executed officers'
certificates for each of FPA California, SJMC and OCMCS) is
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filed with the Secretary of State of Delaware in accordance with the Delaware
Act and the Secretary of State of California in accordance with the California
Code. The filing of the Agreement of Merger will be made simultaneously with or
as soon as practicable after the Closing Date.
FRACTIONAL SHARES
No certificates or scrip for fractional shares of FPA Common Stock will be
issued in connection with the Combined Merger. In lieu of any such fractional
share, each holder of SJMC Common Stock, OCMCS Stock or OCMCS Options who would
otherwise have been entitled to a fraction of a share of FPA Common Stock upon
surrender of the holder's stock certificates for exchange or OCMCS Option
Agreement for cancellation, as the case may be, will be entitled to receive from
the Exchange Agent a cash payment (rounded down to the nearest whole cent) equal
to such fraction multiplied by the FPA Closing Price.
SURRENDER AND PAYMENT
From and after the Effective Time, as required by the Merger Agreement, FPA
will make available to the Exchange Agent certificates representing the
appropriate number of shares of FPA Common Stock and cash to be paid in lieu of
fractional shares of FPA Common Stock issuable in connection with the Combined
Merger. Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of a certificate or certificates that immediately prior to the Effective
Time represented SJMC Common Stock ("SJMC Certificates"), OCMCS Common Stock and
OCMCS Series B Preferred ("OCMCS Certificates") a letter of transmittal and
instructions for surrendering the SJMC Certificates and the OCMCS Certificates,
and each holder thereof will be entitled to receive, upon surrender to the
Exchange Agent of one or more SJMC Certificates or OCMCS Certificates,
certificates representing the number of whole shares of FPA Common Stock into
which such shares are converted in the Combined Merger and cash in consideration
of fractional shares of FPA Common Stock, as described above.
TREATMENT OF OCMCS OPTIONS
As of , 1998, there were outstanding OCMCS Options to purchase
shares of OCMCS Common Stock. Within five business days after the
Effective Time, FPA shall mail, or cause to be mailed by the Exchange Agent, to
each holder of record of OCMCS Options granted under the OCMCS Option Plan,
notification of the number of shares of FPA Common Stock, with respect to which
such OCMCS Options are exercisable as a result of the Merger. Upon surrender of
an OCMCS Option Agreement in accordance with its terms for cancellation to FPA
and payment of the exercise price and applicable federal and state withholding
taxes, the holders of such OCMCS Options shall be entitled to (i) a certificate
representing that number of shares of FPA Common Stock to which such holder is
entitled in the Combined Merger based on the OCMCS Exchange Ratio and (ii) cash
in lieu of fractional shares of FPA Common Stock, as described above.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of FPA, FPA California, SJMC and OCMCS (which are subject, in certain
cases, to specified exceptions, and which shall continue until the first
anniversary of the Closing Date, except for representations related to taxes,
which shall survive until expiration of the applicable statute of limitations,
and claims related to fraud, which shall survive until expiration of the
applicable statute of limitations) relating to, among other things, the
following: (i) organization and qualification to do business; (ii)
capitalization; (iii) subsidiaries; (iv) the authorization, execution, delivery
and enforceability of the Merger Agreement and the transactions contemplated
thereunder; (v) the absence of any governmental or regulatory consent or
approval required to enter into the Merger Agreement and to consummate the
transactions contemplated thereby, except as so disclosed; (vi) the absence of
any conflict, breach or default of any corporate charter documents or applicable
law in connection with entering into the Merger Agreement; (vii) the accuracy of
the financial information contained therein; (viii) the absence of certain
changes or events; (ix) the absence of undisclosed liabilities; (x) the absence
of pending or threatened legal proceedings; (xi) the accuracy of the information
each party has supplied with
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respect to the filings required with the Commission in order to consummate the
Combined Merger and the transactions contemplated by the Merger Agreement; (xii)
certain tax matters including the tax-free status of the transaction under
sections 368(a)(1)(A) and 368(a)(2)(D) of the Code; (xiii) matters concerning
employee benefit plans and ERISA; (xiv) title to assets; (xv) permits of each of
SJMC and OCMCS; (xvi) agreements; (xvii) insurance; (xviii) compliance with
laws; and (xix) accounting matters. Such representations and warranties are
limited to the extent that any event or occurrence that has or, if it occurred
reasonably would be expected to have, an adverse effect in each case in excess
of Five Hundred Thousand Dollars ($500,000) for SJMC and OCMCS and Fifty Million
Dollars ($50,000,000) for FPA and its subsidiaries taken as a whole, on the
business, condition (financial or otherwise), results of operations, prospects,
assets (including intangible assets), properties or liabilities (including
contingent liabilities) of SJMC, OCMCS and FPA, respectively.
CONDUCT OF BUSINESS PENDING THE COMBINED MERGER
At all times from and after the date of the Merger Agreement until the
Effective Time, each of SJMC and OCMCS covenant and agree (unless expressly
provided for in the Merger Agreement or to the extent that the other party shall
otherwise consent in writing) to: (i) conduct its business only in the ordinary
course consistent with past practice; (ii) use all commercially reasonable
efforts to preserve intact in all material respects its present business
organization and reputation, to maintain its assets in good working order and
condition; keep available the services of its key officers and employees; (iii)
maintain insurance on its tangible assets and businesses in such amounts and
against such risks and losses consistent with past practice; and (iv) preserve
its relationships with customers and others having business dealings with them.
At all times from and after the date of the Merger Agreement until the
Effective Time, each of SJMC and OCMCS has agreed that it will not (unless
expressly provided for in the Merger Agreement, or to the extent that the other
party shall otherwise consent in writing): (i) amend or propose to amend its
certificate or articles of incorporation or bylaws; (ii) declare, set aside or
pay any dividends on or make other distributions in respect of any of its
capital stock; (iii) split, combine, reclassify or take similar action with
respect to any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock; (iv) adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization; (v) directly or indirectly redeem, repurchase or otherwise
acquire any shares of its capital stock or any options with respect thereto
except for such repurchases of shares required by contract, the SJMC Bylaws or
applicable law; (vi) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or any options
with respect thereto (other than the issuance of shares of OCMCS Common Stock
upon exercise of previously granted options pursuant to the OCMCS Option Plan in
accordance with their present terms), or modify or amend any right of any holder
of outstanding shares of capital stock or Options with respect thereto; (vii)
acquire (by merging or consolidating with, or by purchasing a substantial equity
interest in or a substantial portion of the assets of, or by any other manner)
any business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire or agree to acquire any
assets which are Material, individually or in the aggregate, to SJMC or OCMCS;
(viii) other than dispositions of assets which are not, individually or in the
aggregate, Material to SJMC or OCMCS, sell, lease, grant any security interest
in or otherwise dispose of or encumber any of its assets or properties; (ix)
except to the extent required by applicable law or as necessary or appropriate
to comply with GAAP, (A) permit any material change in (y) any pricing,
marketing, purchasing, investment, accounting, financial reporting, inventory,
credit, allowance or tax practice or policy or (z) any method of calculating any
bad debt, contingency or other reserve for accounting, financial reporting or
tax purposes or (B) make any material tax election or settle or compromise any
material income tax liability with any governmental or regulatory authority; (x)
enter into, adopt, amend in any material respect (except as may be required by
applicable law) or terminate any SJMC Employee Benefit Plan or OCMCS Employee
Benefit Plan or, except for normal increases in the ordinary course of business
consistent with past practice that, in the aggregate, do not result in a
material increase in benefits or compensation expense to SJMC or OCMCS, increase
in any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan or arrangement in effect as
of the date hereof; provided, however, that SJMC or OCMCS may pay
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normal and customary bonuses so long as the aggregate payments made do not
exceed Three Million Dollars ($3,000,000) and, provided, further, that SJMC or
OCMCS may hire and terminate employees in the ordinary course of business after
discussion with FPA and FPA California; (xi) enter into any contract or amend or
modify any existing contract, or engage in any new transaction, outside the
ordinary course of business or not consistent with past practice or not on an
arm's length basis, with any affiliate of SJMC or OCMCS; (xii) make any capital
expenditures or commitments for additions to plant, property or equipment
constituting capital assets except in the ordinary course of business consistent
with past practice in an aggregate amount exceeding Two Hundred Fifty Thousand
Dollars ($250,000) (excluding for purposes of this limitation the capital
expenditures required for the Santa Ana primary care facility improvements);
(xiii) make any change in the material lines of business in which it
participates or is engaged; (xiv) take any action to cause the transactions
contemplated by the Merger Agreement not to be treated as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(D) of the Code; or (xv) enter into any contract, agreement, commitment
or arrangement to do or engage in any of the foregoing.
From the date of the Merger Agreement until the Closing Date, at the end of
each month during such period, OCMCS and SJMC on a combined basis shall have
cash and marketable securities equal to certain agreed upon amounts.
At all times from and after the date of the Merger Agreement until the
Closing Date, each of FPA and FPA California covenants and agrees that (except
as expressly contemplated or permitted by the Merger Agreement, or to the extent
that SJMC and OCMCS shall otherwise consent in writing): (i) it shall not make
any material changes to its business or structure which would reasonably be
expected to have an adverse effect on the consideration to be received by the
SJMC shareholders and the OCMCS stockholders; (ii) it shall use all reasonable
efforts to take all such actions as are necessary to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under the Merger Agreement; and (iii) it shall not take any action to
cause the transactions contemplated by the Merger Agreement not to be treated as
a tax-free reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(D) of the Code.
Each of FPA, FPA California, SJMC and OCMCS has further agreed prior to the
Effective Time to confer on a regular and frequent basis with the other with
respect to its business and operations and other matters relevant to the
Combined Merger and shall promptly advise the other of any change or event,
including any complaint, investigation or hearing by any governmental or
regulatory authority on the constitution or threat of litigation, having or
which can be reasonably foreseen to have, a material adverse effect on OCMCS,
SJMC, FPA or FPA California, as the case may be, or on the ability of any of the
parties to consummate the transactions contemplated by the Merger Agreement.
CERTAIN ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, FPA, FPA California, SJMC and OCMCS have
made the following additional agreements.
Access to Information. Each of SJMC and OCMCS shall, throughout the period
commencing on the date of the Merger Agreement and ending at the Effective Time,
to: (i) provide FPA and FPA California and their directors, officers, employees,
legal, investment banking and financial advisors, accountants and any other
agents and representatives (collectively, "Representatives") with full access,
upon reasonable prior notice and during normal business hours, to their
respective assets, properties, books and records, but only to the extent that
such access does not unreasonably interfere with the business and operations of
such party, and (ii) furnish promptly to such persons (x) a copy of each report,
statement, schedule and other document filed or received by SJMC or OCMCS,
pursuant to the requirements of federal or state securities laws or filed with
any other governmental or regulatory authority as it relates to the Merger
Agreement and the transactions contemplated thereby, and (y) all other
information and data concerning the business and operations of SJMC or OCMCS as
FPA and FPA California or any of such other persons reasonably may request so
long as such information relates to the Merger Agreement and the transactions
contemplated thereby. FPA has
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agreed to provide OCMCS and SJMC promptly upon filing copies of all reports
filed by FPA with the Commission.
Confidentiality. Each of FPA, FPA California, SJMC and OCMCS will hold, and
will use its best efforts to cause its Representatives to hold, in strict
confidence, unless (i) compelled to disclose by judicial or administrative
process or by other requirements of applicable laws or governmental or
regulatory authorities (including, without limitation, in connection with
obtaining the necessary approvals of the Merger Agreement or the transactions
contemplated thereby of governmental or regulatory authorities), or (ii)
disclosed in any action or proceeding brought by a party to the Merger Agreement
in pursuit of its rights or in the exercise of its remedies thereunder, all
documents and information concerning the other party furnished to it by such
other party or its Representatives in connection with the Merger Agreement or
the transactions contemplated thereby, except to the extent that such documents
or information can be shown to (x) have been previously known by OCMCS, SJMC,
FPA or FPA California, as the case may be, or its Representatives, (y) have been
in the public domain (either prior to or after the furnishing of such documents
or information thereunder) through no fault of OCMCS, SJMC, FPA or FPA
California, as the case may be, and its Representatives or (z) be or have become
available to OCMCS, SJMC, FPA or FPA California, as the case may be, on a
nonconfidential basis from a source which, to the best of the receiving party's
knowledge after due inquiry, is not prohibited from disclosing such information
to OCMCS, SJMC, FPA or FPA California, as the case may be, by a legal,
contractual or fiduciary obligation to the other parties. In the event that the
Merger Agreement is terminated without the transactions contemplated thereby
having been consummated, upon the request of OCMCS, SJMC, FPA or FPA California,
as the case may be, the other party will, and will cause its Representatives to,
promptly (and in no event later than five (5) days after such request) redeliver
or cause to be redelivered all copies of documents and information furnished by
OCMCS, SJMC, FPA or FPA California, as the case may be, or its representatives
to such party and its Representatives in connection with the Merger Agreement or
the transactions contemplated hereby and destroy or cause to be destroyed all
notes, memoranda, summaries, analyses, compilations and other writings related
thereto or based thereon prepared by OCMCS, SJMC, FPA or FPA California, as the
case may be, or its Representatives.
Inclusion of Shares on Nasdaq. FPA agreed to file the application for
original listing of the shares of FPA Common Stock to be issued in the Combined
Merger in accordance with the Merger Agreement with the Nasdaq National Market.
Regulatory and Other Approvals. Subject to the terms and conditions of the
Merger Agreement, each of FPA, FPA California, SJMC and OCMCS agreed to proceed
diligently and in good faith and to use all commercially reasonable efforts to
do, or cause to be done, all things necessary, proper or advisable to, as
promptly as practicable, (i) obtain all consents, approvals or actions of, make
all filings with and give all notices to governmental or regulatory authorities
or any other public or private third parties required of FPA, FPA California,
SJMC or OCMCS to consummate the Combined Merger and the other matters
contemplated hereby and (ii) provide such other information and communications
to such governmental or regulatory authorities or other public or private third
parties as the other party or such governmental or regulatory authorities or
other public or private third parties may reasonably request in connection
therewith. Each party agreed promptly to file a notification and report in
accordance with the HSR Act and to use its best efforts to complete the Federal
Government's antitrust review of the transactions contemplated herein under the
HSR Act which includes promptly furnishing any additional information requested
of it under the HSR Act. Each party shall bear the cost of its respective HSR
Act filing. FPA California agreed promptly to file a notice of material
modification with the Department in accordance with the Knox-Keene Act, subject
to review by SJMC and OCMCS prior to such filing, and shall use its best efforts
to (i) cause the Department's review of the transactions contemplated herein
under the Knox-Keene Act to be completed as promptly as practicable, which
includes promptly furnishing any additional information requested of it under
the Knox-Keene Act, and (ii) obtain approval of such notice of material
modification from the Department. FPA and FPA California shall bear the cost of
the Knox-Keene Act notice of material modification filing and obtaining the
Department's approval.
Employee Benefit Plans. In the Merger Agreement, FPA agreed that FPA shall,
or shall cause FPA California to, provide employee benefits for the benefit of
SJMC and OCMCS employees who become FPA
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or FPA California employees, which, in the aggregate, are substantially similar
to those provided under the FPA Employee Benefit Plans applicable to similarly
situated employees of FPA or its affiliates. Other than with respect to the FPA
Employee Stock Purchase Plan, FPA shall give each SJMC and OCMCS employee full
credit for the service credited to such employee under the respective SJMC or
OCMCS Employee Benefit Plans and FPA shall waive any applicable waiting periods
under the FPA Employee Benefit Plans, subject to applicable law.
FPA agreed to honor, and agreed to cause the Surviving Corporation to
honor, in accordance with their terms, all existing employment, severance,
consulting and salary continuation agreements between SJMC and OCMCS and any
current or former officer, director, employee or consultant to SJMC or OCMCS.
Directors' and Officers' Indemnification and Insurance. FPA agreed to
indemnify all past or present directors, officers, employees, agents and
stockholders who are officers or directors of SJMC or OCMCS against any
liability or losses (including attorney's fees for counsel who are reasonably
acceptable to FPA) any of them may incur because of any claim brought against
them prior to or within five years from the Effective Time as officers,
directors, employees, agents or stockholders of SJMC or OCMCS, and in connection
therewith, agreed to advance attorney's fees to them to defend any such claim;
provided that any such indemnification by FPA and FPA California shall be in
excess of any available insurance coverage; and provided, further, that FPA
shall not be obligated pursuant to the Merger Agreement to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any single
action, except to the extent that, in the opinion of counsel for the Indemnified
Parties, two or more of such Indemnified Parties have conflicting interests in
the outcome of such action. FPA may obtain directors' and officers' liability
insurance to cover these obligations.
Malpractice Protection. As of the Effective Time, FPA California shall
procure and maintain professional liability insurance for the benefit of the
SJMC shareholders with commercially reasonably limits of coverage, but no less
than $1,000,000 per claim and $3,000,000 in the aggregate covering professional
services rendered by such shareholders after the Effective Time. FPA California
shall also procure and maintain business and medical malpractice coverage
similar in type and amount to that maintained by SJMC immediately prior to the
Closing to protect the SJMC shareholders after the Closing.
Provider Relations and Compensation Programs. As of the Effective Time, FPA
California shall establish an Orange County Quality Improvement Committee
substantially as currently in existence for its California operations. The
initial membership of the Committee shall be selected by FPA California and the
Board of Directors of SJMC prior to the Effective Time. FPA California shall
also establish two Leadership Councils (the St. Joseph IPA Leadership Council
and the St. Joseph Medical Group Leadership Council) with designated members.
The Leadership Councils shall be advisory councils providing, respectively,
advice on the operations of the IPA and medical group operations. FPA California
will maintain for two years after the Effective Time the SJMC compensation
program for the SJMC IPA physicians and the SJMG Medical Group physicians as in
effect as of the date of the Merger Agreement, unless there is an adverse change
in the California healthcare market place in which event FPA California may
reassess and modify the IPA and medical group compensation programs to meet such
changed conditions. After the Effective Time, FPA California may re-negotiate
contracts for services provided on a fee-for-service basis.
Expenses. Whether or not the Combined Merger is consummated, all costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such cost or expense,
except as otherwise provided therein.
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Brokers or Finders. Each of FPA, SJMC and OCMCS represented that no broker,
finder or investment banker is entitled to any broker's, finder's or other fee
or commission in connection with any of the transactions contemplated by the
Merger Agreement, except Cowen, and Volpe, Brown, Whelan & Company, LLC. Cowen's
fees and expenses will be paid by OCMCS and Volpe, Brown, Whelan & Company's
fees and expenses will be paid by FPA.
Fulfillment of Conditions. Subject to the terms and conditions of the
Merger Agreement, each of FPA, FPA California, SJMC and OCMCS agreed to take or
cause to be taken all steps necessary or desirable and proceed diligently and in
good faith to satisfy each condition to the other's obligations contained in the
Merger Agreement and to consummate and make effective the transactions
contemplated by the Merger Agreement, and further agreed that neither FPA, FPA
California, SJMC nor OCMCS will take or fail to take any action that could be
reasonably expected to result in the nonfulfillment of any such condition.
No Solicitations. Prior to the Closing Date, each of SJMC and OCMCS agreed
that (a) it shall not, and it shall use its best efforts to cause its respective
Representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) with
respect to a merger, consolidation or other business combination including SJMC
or OCMCS or any acquisition or similar transaction (including, without
limitation, a tender or exchange offer) involving the purchase of (i) all or any
portion of the assets of SJMC or OCMCS, or (ii) any of the outstanding shares of
SJMC Common Stock or OCMCS Stock (any such proposal or offer being hereinafter
referred to as an "Alternative Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person or group relating to an Alternative Proposal
(excluding the transactions contemplated by the Merger Agreement), or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal
and (b) it will notify FPA and FPA California immediately if any such inquiries,
proposals or offers are received by, any such information is requested from, or
any such negotiations or discussions are sought to be initiated or continued
with, it or any such person or group; and (c) it will, prior to accepting an
Alternative Proposal, (i) receive a determination from an independent financial
advisor that such Alternative Proposal is more favorable to the OCMCS
Stockholders or the SJMC Shareholders than the transactions contemplated by the
Merger Agreement, (ii) determine in the exercise of its fiduciary obligations
that such Alternative Proposal is more favorable to the OCMCS Stockholders or
SJMC Shareholders than the transactions contemplated by the Merger Agreement and
give FPA and FPA California at least three days to offer a counterproposal prior
to executing a definitive agreement.
FPA, SJMC and OCMCS Affiliates. Within five business days after the date of
the Merger Agreement (i) SJMC and OCMCS will deliver a letter to FPA and FPA
California identifying all persons who may be deemed affiliates of SJMC and
OCMCS under Rule 145, including, without limitation, all directors and executive
officers of SJMC and OCMCS and (ii) SJMC and OCMCS shall advise the persons
identified in such letter of the resale restrictions imposed by applicable
securities laws and (iii) SJMC shall advise the affiliates of SJMC of Accounting
Series Release Number 135 ("ASR 135"). Each of FPA, FPA California and SJMC
shall use its reasonable best efforts to obtain as soon as practicable after the
date of the Merger Agreement from affiliates of FPA, FPA California and SJMC, as
the case may be, an agreement that such persons will comply with the provision
of ASR 135.
Resale Restrictions. The shares of FPA Common Stock to be received in
exchange for the OCMCS Common Stock, the OCMCS Preferred Stock and the OCMCS
Options shall be restricted from sale, transfer or other disposition for a
period of 90 days commencing as of the Effective Time; provided, however, that
the holders of OCMCS Options may sell, transfer or otherwise dispose of that
number of shares of FPA Common Stock received upon exercise of such OCMCS
Options whose value equals the sum of the exercise price payable with respect to
such OCMCS Option and the minimum statutory federal and state withholding taxes
immediately due and payable upon such exercise. All shares of FPA Common Stock
subject to such transfer restriction shall contain a legend to such effect which
shall be removed effective upon the 91st day after the Effective Time.
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CONDITIONS TO CONSUMMATION OF THE COMBINED MERGER
In addition to the approval and adoption of the Merger Agreement by the
stockholders of SJMC and OCMCS, the obligation of each party to effect the
Combined Merger is subject to the fulfillment, at or prior to the Closing, or
where legally permissible, the waiver, of various conditions, including: (i) the
effectiveness of the Registration Statement in accordance with the provisions of
the Securities Act and any applicable state blue sky laws and the absence of any
stop order suspending such effectiveness; (ii) the shares of FPA Common Stock
issuable to SJMC's and OCMCS' stockholders in the Combined Merger shall have
been approved for inclusion on Nasdaq; (iii) the expiration or termination of
any waiting period (and any extension thereof) under the HSR Act; (iv) no
injunction or restraining order shall be in effect nor shall any suit, action or
proceeding be pending or threatened to prohibit, nullify or otherwise materially
adversely affect the consummation of the Combined Merger; (vi) there shall have
been no law, statute, rule or order, enacted or promulgated which would make
consummation of the transactions contemplated by the Merger Agreement Illegal;
(vii) FPA California shall have filed the notice with the Department pursuant to
Section 1352 of the Knox-Keene Act and the Department shall have approved of
such material modification without any conditions to such approval having or
which would be reasonably expected to have a material adverse effect on FPA
California; (viii) the receipt of all consents, approvals and notices from
governmental or regulatory authorities or any other public or private third
parties required to consummate the Combined Merger; and (ix) the approval of the
OCMCS stockholders and SJMC shareholders shall have been obtained.
The obligations of FPA and FPA California to effect the Merger is further
subject to the fulfillment, at or prior to the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by FPA or FPA
California in their sole discretion): (i) SJMC and OCMCS shall have performed in
all Material respects each Material agreement, covenant and obligation required
by the Merger Agreement to be performed or complied with by it on or prior to
the Closing Date and the representations and warranties of SJMC and OCMCS in the
Merger Agreement shall be true and correct in all Material respects (except for
such representations and warranties that are qualified by their terms by a
reference to materiality, which representations and warranties as so qualified
shall be true in all respects) on and as of the date made and as of the Closing
Date as though made on and as of the Closing and SJMC and OCMCS shall have
delivered to FPA a certificate, dated the Closing Date and executed on behalf of
SJMC and OCMCS by their respective Chairman, Presidents, or any Executive or
Senior Vice Presidents, to such effect; (ii) FPA and FPA California shall have
received all certificates, instruments, agreements, and other documents required
by the Merger Agreement to be obtained on or before the Closing Date; (iii) FPA
and FPA California shall have received copies of resolutions of each of SJMC and
OCMCS certified by a Secretary, Assistant Secretary of other appropriate officer
of such company, authorizing the execution, delivery and performance of the
Merger Agreement and the transactions contemplated by the Merger Agreement; (iv)
FPA shall have received a letter from Deloitte & Touche LLP dated not more than
two business days prior to the Effective Time, to the effect that the SJMC
Merger as contemplated by the Merger Agreement qualifies for "pooling of
interests" accounting treatment if consummated in accordance with the Merger
Agreement and if the operations of FPA and the Surviving Corporation are
conducted in a manner that do not violate "pooling of interests" accounting
treatment; and (v) FPA shall have received a letter from Ernst & Young LLP,
dated not more than two days prior to the Effective Time, to the effect that
SJMC meets the conditions that must be met to be a party to a business
combination accounted for as a "pooling of interests" in accordance with APB.
Opinion No. 16 and related interpretations of the American Institute of
Certified Public Accountants, consensuses of the FASB's Emerging Issues Task
Force and the rules and regulations of the SEC.
The obligation of SJMC and OCMCS to effect the Combined Merger is further
subject to the fulfillment, at or prior to the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by SJMC or
OCMCS in its sole discretion): (i) FPA and FPA California shall have performed
in all Material respects each Material agreement, covenant and obligation
required by the Merger Agreement to be performed or complied with by them on or
prior to the Closing Date and the representations and warranties of FPA and FPA
California in the Merger Agreement shall be true and correct in all Material
respects (except for such representations and warranties that are qualified by
their terms by a referral to materiality, which representations and warranties
as so qualified shall be true in all respects) on and as of the
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date made and on and as of the Closing Date as though made on and as of the
Closing and each of FPA and FPA California shall have delivered to SJMC and
OCMCS certificates, dated the Closing Date and executed on behalf of FPA and FPA
California by its Chairman of the Board, President or any Executive or Senior
Vice President to such effect; (ii) SJMC and OCMCS shall have received all
certificates, instruments, agreements, and other documents to be delivered by
FPA or FPA California required by the Merger Agreement on or before the Closing
Date; and (iii) SJMC and OCMCS shall have received copies of resolutions of each
of FPA and FPA California certified by a Secretary, Assistant Secretary or other
appropriate officer of such company, authorizing the execution, delivery and
performance of the Merger Agreement and the Merger Agreement and any documents
related thereto.
To the extent that FPA, SJMC or OCMCS waives compliance with any material
provisions of or conditions to the consummation of the Combined Merger,
including the condition that the SJMC Merger be treated as a "pooling of
interests" for accounting and financial reporting purposes and that the Combined
Merger qualify as a tax-free reorganization, FPA, SJMC and OCMCS will amend this
Proxy Statement/Prospectus and SJMC and OCMCS will resolicit shareholder and
stockholder votes, to the extent required by applicable law.
TERMINATION
The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned at any time prior to the Closing: (i) by mutual written
consent of FPA, FPA California, SJMC and OCMCS; (ii) at any time after May 1,
1998 if the transactions contemplated by the Merger Agreement shall not have
been consummated on or prior to such date and such failure to consummate the
transaction is not caused by a breach of the Merger Agreement by the terminating
party, except that the termination date shall be extended automatically for
consecutive 30 day periods if the only condition to close which shall not have
been satisfied are the effectiveness of the Registration Statement or the
obtaining of the approval of the Department of the notice of material
modification and the parties are using their best efforts to obtain such
effectiveness and approval; provided, however, that if such effectiveness and
approval are not obtained by August 1, 1998, any of the parties may terminate
the Merger Agreement; (iii) if any governmental or regulatory authority, the
taking of action by which is a condition to the obligations of either FPA, FPA
California, SJMC or OCMCS, to consummate the transactions contemplated by the
Merger Agreement, shall have determined not to take such action and all appeals
of such determination shall have been taken and have been unsuccessful; (iv) if
there has been a Material breach of any representation, warranty, covenant or
agreement on the part of the non-terminating party set forth in the Merger
Agreement which breach has not been cured within fifteen (15) business days
following receipt by the nonterminating party of notice of such breach from the
terminating party or assurance of such cure reasonably satisfactory to the
terminating party shall not have been given by or on behalf of the
non-terminating party within such fifteen (15) business day period; (v) if any
court of competent jurisdiction or other competent governmental or regulatory
authority shall have issued any order making illegal or otherwise restricting,
preventing or prohibiting the transactions contemplated by the Merger Agreement
and such order shall have become final and non-appealable; or (vi) by SJMC and
OCMCS if the Boards of Directors of SJMC and OCMCS conclude in good faith on the
basis of advice from independent counsel (which may include Klein & Martin) that
such action is necessary or appropriate in order for such Boards of Directors to
act in a manner which is consistent with their fiduciary obligations under
applicable law and the Boards of Directors have followed the Alternative
Proposal procedures set forth in the Merger Agreement.
As described above, FPA may terminate the Merger Agreement if the FPA
Closing Price is less than $15.00.
EFFECT OF TERMINATION
If the Merger Agreement is validly terminated by either SJMC, OCMCS or FPA
pursuant to the Merger Agreement, the Merger Agreement shall become void and
there will be no further obligation on the part of either SJMC, OCMCS or FPA (or
any of their respective Representatives or affiliates), except (i) that certain
provisions of the Merger Agreement will continue to apply following any such
termination and (ii) that
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nothing contained therein shall relieve any party thereto from liability for
willful breach by such party of its representations, warranties, covenants or
agreements contained in the Merger Agreement.
INDEMNIFICATION
Each of the OCMCS stockholders and the SJMC shareholders shall jointly and
severally indemnify, defend and hold harmless each of FPA and FPA California and
their respective directors, shareholders, officers, employees, agents,
affiliates, successors and assigns from and against any and all claims,
liabilities, obligations, losses, actual costs, expenses (including, without
limitation, reasonable attorneys' fees and costs), fines and damages
(individually a "Loss" and collectively "Losses"), arising out of: (a) a breach
or violation by OCMCS or SJMC of any covenant made by either OCMCS or SJMC in
the Merger Agreement or in any agreement, certificate or similar document
delivered pursuant thereto; or (b) a breach of, or any inaccuracy in, any of the
representations or warranties made by OCMCS or SJMC in the Merger Agreement or
in any schedule, exhibit, agreement, instrument, certificate or similar document
required to be delivered pursuant to the terms thereof.
The Merger Agreement provides that the Boards of Directors of OCMCS and
SJMC shall each appoint two shareholder representatives to represent their
respective shareholders and stockholders in the event a claim for indemnity is
made against the OCMCS stockholders or SJMC shareholders under the Merger
Agreement. By tendering their shares of OCMCS Voting Securities or SJMC Voting
Securities in connection with the Combined Merger, shareholders of SJMC and
stockholders of OCMCS will be deemed to have consented to be bound by the
decisions and actions of the shareholder representatives representing the OCMCS
stockholders and SJMC shareholders. The shareholder representatives shall have
the authority to bill and collect from the OCMCS stockholders and SJMC
shareholders all amounts incurred by them on behalf of the OCMCS stockholders
and SJMC shareholders. The OCMCS stockholders shall be jointly and severally
liable for all amounts incurred by the shareholder representatives designated by
the OCMCS Board of Directors and the SJMC shareholders shall be jointly and
severally liable for all amounts incurred by the shareholder representatives
designated by the SJMC Board of Directors. The OCMCS stockholders shall have a
right of contribution against any non-paying OCMCS stockholder. Similarly, SJMC
shareholders shall have a right of contribution against any non-paying SJMC
shareholder.
FPA and FPA California shall jointly and severally indemnify, defend and
hold harmless OCMCS' and SJMC's directors, shareholders, officers, employees,
agents, affiliates, successors and assigns from and against any and all Losses
arising out of or in connection with: (a) a breach or violation by FPA and FPA
California of any covenant made by either FPA or FPA California in the Merger
Agreement or in any agreement, certificate or similar document delivered
pursuant thereto; or (b) a breach of, or any inaccuracy in, any of the
representations or warranties made by FPA and FPA California in the Merger
Agreement, or in any schedule, exhibit, agreement, instrument, certificate or
similar document required to be delivered pursuant to the terms hereof.
The representations and warranties of OCMCS and SJMC, on the one hand, and
FPA and FPA California, on the other hand, contained in the Merger Agreement or
in any document or instrument delivered pursuant thereto shall survive the
Closing Date and shall continue in full force and effect until the first
anniversary of the Closing Date, except with respect to payment of taxes and
fraud, which shall survive until the expiration of the applicable statute of
limitations thereto.
FPA and FPA California shall not assert any claim against the OCMCS
stockholders and the SJMC shareholders, nor shall the OCMCS stockholders and the
SJMC shareholders assert any claim against FPA and FPA California for
indemnification thereunder unless and until the amount of such claim or claims
shall exceed $500,000 calculated on a cumulative basis, and thereafter shall be
entitled to indemnification for all indemnifiable damages thereunder.
Additionally, neither FPA and FPA California nor OCMCS and SJMC shall be
entitled to claim for or recover from the other more than the value of the
Merger Consideration with respect to all claims for indemnity hereunder.
Further, neither FPA nor FPA California shall be entitled to
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claim for or recover from any OCMCS stockholder or SJMC shareholder more than
the value of the Merger Consideration received by such stockholder or
shareholder.
AMENDMENT
The Merger Agreement may be amended only by written agreement duly executed
by Representatives of all the parties to the Merger Agreement.
WAIVER
Any waiver of rights hereunder must be set forth in writing. A waiver of
any breach or failure to enforce any of the terms or conditions of the Merger
Agreement shall not in any way affect, limit or waive any party's rights at any
time to enforce strict compliance thereafter with every term or condition of the
Merger Agreement.
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COMPARISON OF RIGHTS OF HOLDERS OF SJMC VOTING SECURITIES,
OCMCS VOTING SECURITIES AND FPA COMMON STOCK
SJMC is a California professional corporation and the rights of its
shareholders are governed by the California Code and its Articles of
Incorporation and Bylaws. Both FPA and OCMCS are Delaware corporations and the
rights of their respective stockholders are governed by the Delaware Act and
their respective Certificates of Incorporation and Bylaws. If the Combined
Merger is consummated, SJMC and OCMCS stockholders will become stockholders of
FPA, and their rights will be governed by the Delaware Act and the Certificate
of Incorporation and Bylaws of FPA. The following is a brief summary of certain
differences between the rights of SJMC and OCMCS stockholders and FPA
stockholders and is qualified in its entirety by reference to the relevant
provisions of the Delaware Act, FPA's Certificate of Incorporation and Bylaws,
the California Code, SJMC's Articles of Incorporation and Bylaws, OCMCS'
Certificate of Incorporation and Bylaws.
PREFERRED STOCK
The Boards of Directors of FPA and OCMCS are authorized to provide for the
issuance of shares of preferred stock, in one or more series, and to fix for
each such series such voting powers, designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions, as are stated in the resolution adopted by the
Board of Directors providing for the issuance of such series and as permitted by
the Delaware Act. FPA currently has authorized 2,000,000 shares of preferred
stock, $.001 par value; OCMCS currently has authorized 7,181,150 shares of
Series A Preferred Stock, $.001 par value and 3,607,742 shares of Series B
Preferred Stock, $.001 par value. FPA has not authorized or issued any shares of
preferred stock. OCMCS has issued and outstanding shares of Series A
Preferred Stock and shares of Series B Preferred Stock. As a result of
these transactions, the current holders of OCMCS Series A Preferred Stock and
OCMCS Series B Preferred Stock will no longer enjoy the special dividend, voting
and liquidation preferences and rights set forth in the OCMCS Certificate of
Incorporation, and the OCMCS Series A Preferred Stock will be cancelled without
consideration or payment therefor upon consummation of the Merger. The Board of
Directors of SJMC is authorized to provide for the issuance of one or more
classes or series of shares or both, with full, limited or no voting rights and
with such other rights, preferences, privileges and restrictions as are stated
or authorized in its Articles of Incorporation. The Board of Directors of SJMC
may also include a provision requiring a vote of a specified percentage or
proportion of the outstanding shares of the class or series that is less than a
majority of the class or series to approve any corporate action, except where
the vote of a majority or greater proportion of the class or series is required
by the California Code, regardless of restrictions or limitations on the voting
rights thereof. SJMC currently has no authorized shares of preferred stock.
BOARD OF DIRECTORS
FPA's Certificate of Incorporation provides that the FPA Board shall have
not less than three nor more than twelve members, as determined from time to
time by resolution of the board. Currently, the FPA Board consists of seven
members. The OCMCS Bylaws provide that the Board shall have not less than five
nor more than ten members, the exact number to be set by the Board, provided
that increasing the size of the Board to more than six members, or decreasing
the size of the Board requires approval by 75% of the Board. Currently, the
OCMCS Board consists of nine members. SJMC's Articles of Incorporation provide
that the SJMC Board shall have not less than seven nor more than eleven members,
as determined from time to time by resolution adopted by no fewer than all but
one of the authorized number of directors. Currently, the SJMC Board consists of
eleven members.
FPA's Bylaws provide that any or all directors may be removed with or
without cause by the holders of a majority of shares then entitled to vote at an
election of directors. OCMCS' Bylaws provide that any or all directors may be
removed with or without cause at any meeting of stockholders by a majority of
the stock represented and entitled to vote thereat. SJMC's Bylaws provide that a
director may be removed only upon the unanimous vote of all of the then
authorized number of directors, and that directors may not be removed by the
stockholders.
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FPA's Certificate of Incorporation provides that a vacancy on the FPA Board
shall be filled solely by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum, or by a sole remaining
director. OCMCS' Bylaws provide that a vacancy on the OCMCS Board may be filled
solely by a majority vote of the directors then in office, even if less than a
quorum, or by a sole remaining director. SJMC's Bylaws provide that a vacancy on
the SJMC Board shall be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director. Vacancies of specialty
physician directorships shall be filled by such directors.
FPA's Bylaws provide for a staggered Board of Directors, with the directors
of FPA divided into three classes, as nearly equal in number as possible. Each
director on the FPA Board is elected to serve a term of three years and until
his successor is duly elected and qualified. OCMCS' Certificate of Incorporation
provides that its Series A and Series B Preferred Stock shall have the same
right to vote as and together with the OCMCS Common Stock holders. OCMCS' Bylaws
provide that each director elected shall hold office until his successor is
elected and qualified. SJMC's Bylaws provide that five of the directors shall be
elected at meeting of the stockholders, and the remaining two directors shall be
selected by SJMC's Medical Executive Committee. SJMC's Bylaws provide that the
SJMC Board shall have three classes of directors serving staggered three year
terms, and a fourth class to be selected by action of SJMC's Medical Executive
Committee (as described in SJMC's Bylaws).
BYLAWS
FPA's Certificate of Incorporation grants the FPA Board the power to
repeal, alter, amend or rescind FPA's Bylaws. FPA's Bylaws permit FPA's
stockholders to alter, amend, repeal or adopt the same. OCMCS' Bylaws provide
that the OCMCS Board may adopt, amend or repeal OCMCS' Bylaws, without the
approval of the stockholders, provided, however, that amending the number of
directors on the Board, or the number of members constituting a quorum requires
the approval of 75% of the Board. OCMCS stockholders shall also have the power
to adopt, amend or repeal the Bylaws. SJMC's Bylaws provide that the Board may
adopt, amend or repeal Bylaws. SJMC's Bylaws also grant its stockholders the
right to adopt, amend or repeal Bylaws, provided, however, that a supermajority
of 75% of the outstanding shares of SJMC Class A Common Stock plus the approval
of no fewer than all but one of the authorized number of directors shall be
required to amend, alter, change or repeal certain Bylaws (as specified in
Article VIII, Section 3 of SJMC's Bylaws).
STOCKHOLDER MEETINGS
FPA's Bylaws provide that special meetings of stockholders may be called by
the President. Furthermore, FPA's Bylaws provide that such special meeting shall
be called by the President or Secretary at the request in writing of a majority
of the FPA Board or stockholders owning a majority in amount of the entire
capital stock of FPA issued and outstanding and entitled to vote. OCMCS' Bylaws
provide that special meetings of stockholders may be called by the President,
and shall be called by the President or the Secretary upon written request of
the majority of the Board or stockholders owning a majority of the issued and
outstanding capital stock of OCMCS, and entitled to vote. SJMC's Bylaws provide
that a special meeting of shareholders may be called by the Board, the Chairman
of the Board, the President, or one or more shareholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at that meeting.
INDEMNIFICATION
Under the Delaware Act, a corporation may generally indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement of any proceedings (other than
derivative actions), if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard is applicable in
derivative actions, except that indemnification may be made only for (i)
expenses (including attorneys' fees) and certain amounts paid in settlement and
(ii) in the event the person seeking indemnification has been adjudicated
liable, amounts deemed proper, fair and reasonable by the appropriate court upon
application thereto. The Delaware Act provides that to the extent that such
persons have been successful in defense of any
81
<PAGE> 86
proceeding, they must be indemnified by the corporation against expenses
actually and reasonably incurred in connection therewith. Further, the Delaware
Act allows a corporation to advance funds to a director or officer in
anticipation of expenses (including legal fees) upon receipt of an undertaking
by such director or officer to repay such amount advanced should it ultimately
be determined that such director or officer is not entitled to be indemnified by
the corporation.
Under the California Code, a corporation may generally indemnify its
officers, directors, employees and agents against expenses (including attorneys'
fees), judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceedings (other than derivative actions), if
they acted in good faith and in a manner they reasonably believed to be in the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in derivative actions, except that
indemnification may be made only for expenses (including attorneys' fees). No
indemnification shall be made in the event the person seeking indemnification
has been adjudicated liable, except for expenses to which the person is deemed
fairly and reasonably entitled by the appropriate court upon application
thereto. The California Code provides that to the extent that such persons have
been successful in defense of any proceeding, they must be indemnified by the
corporation against expenses actually and reasonably incurred in connection
therewith. Further, the California Code provides that expenses incurred in
defending any proceeding may be advanced by the corporation prior to the final
disposition of the proceeding upon receipt of an undertaking by or on behalf of
the agent to repay that amount if it shall be determined ultimately that the
agent is not entitled to be indemnified by the corporation pursuant to the
California Code.
FPA's Certificate of Incorporation requires indemnification for directors
and officers, their legal representatives, and persons serving at the request of
FPA as a director, officer, employee or agent of another corporation,
partnership or other entity ("Indemnitees") for actions undertaken in an
official capacity or any other capacity. FPA's Certificate of Incorporation
provides for the continuation of indemnification for Indemnitees no longer
employed by the respective company (where the conduct at issue occurred while
the Indemnitee was employed by such company). FPA's Certificate of Incorporation
also provides for the benefits of indemnification to inure to the heirs,
executors and administrators of the Indemnitee. Furthermore, FPA's Certificate
of Incorporation requires, as a prerequisite to indemnification in connection
with a suit initiated by the Indemnitee, that the Indemnitee receive
authorization from the Board prior to initiating the suit. FPA's Certificate of
Incorporation grants Indemnitees the right to receive an advance of funds from
their respective company to pay for anticipated legal costs in defending a
lawsuit for which indemnification is sought. However, to the extent required by
the Delaware Act, an Indemnitee may be required to deliver an undertaking to his
respective company to the effect that the Indemnitee will repay all amounts
advanced should the Indemnitee ultimately be determined not to be entitled to
indemnification. FPA's Certificate of Incorporation provides that if an
Indemnitee is not advanced funds for anticipated costs in defending a lawsuit
within thirty days of FPA receiving a written request for such funds, the
Indemnitee may sue FPA for the unpaid amount. If the Indemnitee has delivered to
FPA an undertaking to repay such advance, FPA may not offer as a defense to such
claim for indemnity that the claimant has not met the standard of conduct for
indemnification under the Delaware Act. However, if no such undertaking has been
delivered to FPA, FPA may offer such failure to meet the standard of conduct for
indemnification as a defense. FPA may not offer as a defense to the advancement
of funds that it has not yet determined whether the Indemnitee has met the
appropriate standard of conduct.
OCMCS' Bylaws adopt substantially the indemnification provisions of the
Delaware Act (Section 145).
SJMC's Bylaws adopt substantially the indemnification provisions of the
California Code (Section 317).
STOCKHOLDER VOTING REQUIREMENTS
Under the Delaware Act, unless otherwise provided for by the Delaware Act
or a Delaware corporation's certificate of incorporation or bylaws, if a quorum
exists, action on a matter is approved by the affirmative vote of a majority of
the shares represented at a meeting and entitled to vote on the matter.
82
<PAGE> 87
Under the California Code, unless otherwise provided for by the California
Code or a California corporation's Articles of Incorporation, if a quorum
exists, action on a matter is approved by the affirmative vote of a majority of
the shares represented and voting at a duly held meeting.
Neither FPA's Certificate of Incorporation nor its Bylaws contains a
provision requiring a greater vote on any matter than required by the Delaware
Act. OCMCS' Bylaws require that adoption, amendment or repeal of any provision
of the Bylaws be approved by the affirmative vote of at least 66 2/3% of the
outstanding shares of stock of OCMCS. The OCMCS Certificate of Incorporation
requires that OCMCS obtain approval of the OCMCS Series B Preferred Stock
holders prior to engaging in a merger. SJMC's Bylaws require a supermajority of
75% of the outstanding shares of SJMC Class A Common Stock plus the approval of
no fewer than all but one of the authorized number of directors to amend, alter,
change or repeal certain Bylaws (as specified in Article VIII, Section 3 of
SJMC's Bylaws).
ACTION BY CONSENT
The Delaware Act provides that, unless otherwise provided in the
Certificate of Incorporation, any action required or permitted to be taken at
any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, by written consent of the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting. Both FPA's and OCMCS'
Bylaws permit action by such written consent.
The California Code provides that, unless otherwise provided in the
Articles of Incorporation, any action which may be taken at any annual or
special meeting of shareholders may be taken without a meeting and without prior
notice, by written consent of the holders of outstanding stock, setting forth
the action so taken, having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Directors may not be elected by
written consent except by unanimous written consent of all shares entitled to
vote thereon. SJMC's Bylaws permit action by such written consent.
83
<PAGE> 88
SELECTED HISTORICAL AND PRO FORMA INFORMATION
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
The following pro forma condensed consolidated balance sheet of FPA as of
September 30, 1997 and the pro forma condensed consolidated statements of
operations for the two years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 give effect, to the extent set forth below, the
following consummated and probable transactions.
Consummated Transactions:
(1) The acquisition of Physicians First, Inc. ("PFI") (effective June
1, 1996).
(2) The acquisition of Foundation Health Medical Services and
Affiliates ("FHMS") (effective November 29, 1996).
Probable Transaction:
(1) The proposed merger of FPA and SJMC (the "Merger").
(2) The proposed acquisition of OCMCS (the "Acquisition")
The Merger and the Acquisition are reflected as of September 30, 1997 for
the pro forma condensed consolidated balance sheet. The Consummated Transactions
and the Acquisition are reflected as of January 1, 1996 in the pro forma
condensed consolidated statements of operations. The Merger is reflected as of
January 1, 1995 in the pro forma condensed consolidated statements of
operations. The pro forma information is based on the respective historical
financial statements of the companies involved in the Consummated Transactions,
the Merger, and the Acquisition giving effect to the Merger under the pooling of
interests method of accounting and the Consummated Transactions and the
Acquisition under the purchase method of accounting, and the assumptions and
adjustments described in the accompanying notes to the pro forma condensed
consolidated financial statements.
The pro forma condensed consolidated financial statements have been
prepared by the management of FPA based upon the unaudited financial statements
of FPA, SJMC, and OCMCS as of September 30, 1997 and for the nine months then
ended, the audited financial statements of FPA and unaudited financial
statements of SJMC as of December 31, 1996 and for each of the two years in the
period then ended, the unaudited financial statements of OCMCS as of December
31, 1996 and the year then ended, and the unaudited results of operations for
PFI and FHMS up to their respective acquisition dates.
Management of FPA does not believe that the pro forma condensed
consolidated financial statements are indicative of the results that actually
would have occurred if the combinations had been in effect on the dates
indicated or which may be obtained in the future. The pro forma condensed
consolidated financial statements should be read in conjunction with the
separate historical consolidated financial statements and accompanying notes of
FPA, SJMC, OCMCS and FHMS.
84
<PAGE> 89
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
FPA MEDICAL
ORANGE COAST MANAGEMENT, INC.
MANAGED CARE AND THE ACQUISITION ST. JOSEPH
FPA MEDICAL SERVICES, PRO FORMA PRO FORMA MEDICAL
MANAGEMENT, INC. INC. ADJUSTMENTS CONSOLIDATED CORPORATION
---------------- ------------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 33,449,221 $ 3,491,281 $ 36,940,502 $ 4,149,003
Marketable securities..... 1,195,990 1,086,948 2,282,938
Accounts receivable net... 205,659,119 12,286,661 217,945,780 1,151,091
Prepaid expenses and other
assets.................. 6,979,402 479,297 7,458,699 103,956
Deferred income tax
asset................... 4,658,691 4,658,691 1,172,687
------------ ----------- ------------- -----------
Total current assets.... 251,942,423 17,344,187 269,286,610 6,576,737
Property and
equipment -- net.......... 52,360,414 2,909,076 55,269,490
Restricted cash and
deposits.................. 500,000 500,000
Goodwill and
intangibles -- net........ 371,957,764 $ 14,686,124(F) $ 386,643,888 1,762,324
Investments in HealthCor
(formerly GLHP)........... 4,994,900 4,994,900
Deferred income tax
asset..................... 3,645,742 3,645,742
Other assets............... 9,279,005 51,422 9,330,427 2,082,855
------------ ----------- ------------ ------------- -----------
Total................... $694,680,248 $20,304,685 $ 14,686,124 $ 729,671,057 $10,421,916
============ =========== ============ ============= ===========
Current liabilities:
Accounts payable and
accrued expenses........ $ 84,866,185 $ 3,729,811 $ 2,107,000(F) $ 90,702,996 $ 1,033,941
Claims payable, including
incurred but not
reported claims......... 121,170,576 121,170,576 9,689,646
Long-term debt -- current
portion................. 11,665,970 207,998 11,873,968 1,238,140
Current portion of accrued
liability for
professional liability
claims.................. 1,534,000 1,534,000
Other liabilities......... 2,268,000 2,268,000
------------ ----------- ------------ ------------- -----------
Total current
liabilities........... 221,504,731 3,937,809 2,107,000 227,549,540 11,961,727
------------ ----------- ------------ ------------- -----------
Long-term debt -- net of
current portion......... 278,746,175 6,500,000 285,246,175
Accrued liability for
professional liability
claims, net of current
portion................. 4,270,545 4,270,545
Other long-term
liabilities............. 30,311,727 30,311,727
Minority interests........ 693,000 693,000
Stockholders' equity:
Preferred stock.........
Common stock............ 78,464 2,494(F) 80,958
Additional paid in
capital............... 273,236,223 11,727,493 (11,727,493)(F) 295,679,729 5,432,107
22,443,506(F)
Stock payable........... 534,600 534,600
Accumulated deficit..... (114,268,217) (1,860,617) 1,860,617(F) (114,268,217) (6,971,918)
Less: Due from
stockholders.......... (427,000) (427,000)
------------ ----------- ------------ ------------- -----------
Total stockholders'
equity (deficit)...... 159,154,070 9,866,876 12,579,124 181,600,070 (1,539,811)
------------ ----------- ------------ ------------- -----------
Total................. $694,680,248 $20,304,685 $ 14,686,124 $ 729,671,057 $10,421,916
============ =========== ============ ============= ===========
<CAPTION>
FPA MEDICAL
MANAGEMENT, INC.
POOLING OF INTEREST PRO FORMA
ADJUSTMENTS CONSOLIDATED
-------------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 41,089,505
Marketable securities..... 2,282,938
Accounts receivable net... 219,096,871
Prepaid expenses and other
assets.................. 7,562,655
Deferred income tax
asset................... 5,831,378
--------------
Total current assets.... 275,863,347
Property and
equipment -- net.......... 55,269,490
Restricted cash and
deposits.................. 500,000
Goodwill and
intangibles -- net........ 388,406,212
Investments in HealthCor
(formerly GLHP)........... 4,994,900
Deferred income tax
asset..................... 3,645,742
Other assets............... $ (2,082,855)(I) 9,330,427
------------ --------------
Total................... $ (2,082,855) $ 738,010,118
============ ==============
Current liabilities:
Accounts payable and
accrued expenses........ $ 7,393,000(A) $ 99,129,937
Claims payable, including
incurred but not
reported claims......... 130,860,222
Long-term debt -- current
portion................. 13,112,108
Current portion of accrued
liability for
professional liability
claims.................. 1,534,000
Other liabilities......... 2,268,000
------------ --------------
Total current
liabilities........... 7,393,000 246,904,267
------------ --------------
Long-term debt -- net of
current portion......... 285,246,175
Accrued liability for
professional liability
claims, net of current
portion................. 4,270,545
Other long-term
liabilities............. 30,311,727
Minority interests........ 693,000
Stockholders' equity:
Preferred stock.........
Common stock............ 3,306(F) 84,264
Additional paid in
capital............... (5,432,107)(F) 298,901,149
5,428,801(F)
(2,207,381)(I)
Stock payable........... 534,600
Accumulated deficit..... (7,393,000)(A) (128,508,609)
124,526(I)
Less: Due from
stockholders.......... (427,000)
------------ --------------
Total stockholders'
equity (deficit)...... (9,475,855) 170,584,404
------------ --------------
Total................. $ (2,082,855) $ 738,010,118
============ ==============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
85
<PAGE> 90
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
FPA MEDICAL
ORANGE COAST MANAGEMENT, INC.
MANAGED CARE AND THE ACQUISITION
FPA MEDICAL SERVICES, PRO FORMA PRO FORMA
MANAGEMENT, INC. INC. ADJUSTMENTS CONSOLIDATED
---------------- ------------ ----------- --------------------
<S> <C> <C> <C> <C>
Managed care revenue.......... $610,103,454 $ 1,013,016 $611,116,470
Fee-for-service revenue....... 211,392,556 211,392,556
Management services revenue... 18,183,000 17,817,476 36,000,476
------------ ---------- --------- ------------
Total operating revenue... 839,679,010 18,830,492 858,509,502
------------ ---------- --------- ------------
Expenses:
Medical services............ 611,987,779 10,972,485 622,960,264
General and
administrative............ 192,069,982 7,986,265 $ 440,584(C) 200,496,831
Merger, restructuring and
other unusual charges..... 38,004,841 38,004,841
------------ ---------- --------- ------------
Total expenses............ 842,062,602 18,958,750 440,584 861,461,936
------------ ---------- --------- ------------
Loss from operations.......... (2,383,592) (128,258) (440,584) (2,952,434)
Other income (expense):
Interest and other income... 6,051,501 424,822 6,476,323
Interest expense............ (15,061,150) (344,275) (15,405,425)
Minority interests' share in
net losses................ 122,000 122,000
------------ ---------- --------- ------------
Total other income
(expense)............... (8,887,649) 80,547 (8,807,102)
------------ ---------- --------- ------------
Income (loss) before income
taxes....................... (11,271,241) (47,711) (440,584) (11,759,536)
Income tax (expense)
benefit..................... (2,625,277) 19,084 (E) 176,234(E) (2,429,959)
------------ ---------- --------- ------------
Net income (loss)............. $(13,896,518) $ (28,627) $(264,350) $(14,189,495)
============ ========== ========= ============
Net loss per share............ $ (0.34) $ (0.34)
Weighted average shares
outstanding(G).............. 40,472,579 41,719,579
<CAPTION>
FPA MEDICAL
ST. JOSEPH MANAGEMENT, INC.
MEDICAL POOLING OF INTERESTS PRO FORMA
CORPORATION ADJUSTMENTS CONSOLIDATED
------------ -------------------- ----------------
<S> <<C> <C> <C>
Managed care revenue..........$ 57,321,496 $668,437,966
Fee-for-service revenue....... 11,803,356 223,195,912
Management services revenue... (17,817,476)(I) 18,183,000
----------- ---------- ------------
Total operating revenue... 69,124,852 (17,817,476) 909,816,878
----------- ---------- ------------
Expenses:
Medical services............ 49,743,265 672,703,529
General and
administrative............ 19,510,054 (17,817,476)(I) 202,189,409
Merger, restructuring and
other unusual charges..... 38,004,841
----------- ---------- ------------
Total expenses............ 69,253,319 (17,817,476) 912,897,779
----------- ---------- ------------
Loss from operations.......... (128,467) (3,080,901)
Other income (expense):
Interest and other income... 2,854,195 9,330,518
Interest expense............ (82,124) (15,487,549)
Minority interests' share in
net losses................ 122,000
----------- ---------- ------------
Total other income
(expense)............... 2,772,071 -- (6,035,031)
----------- ---------- ------------
Income (loss) before income
taxes....................... 2,643,604 (9,115,932)
Income tax (expense)
benefit..................... (2,429,959)
----------- ---------- ------------
Net income (loss).............$ 2,643,604 $ $(11,545,891)
=========== ========== ============
Net loss per share............ $ (0.27)
Weighted average shares
outstanding(G).............. 43,372,579
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
86
<PAGE> 91
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FPA MEDICAL
FOUNDATION MANAGEMENT, INC.
HEALTH CONSUMMATED
MEDICAL ORANGE COAST TRANSACTIONS AND
FPA MEDICAL PHYSICIANS SERVICES MANAGED CARE THE ACQUISITION
MANAGEMENT FIRST, AND SERVICES, PRO FORMA PRO FORMA
INC. INC.(B) AFFILIATES INC. ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Managed care revenue............. $468,158,760 $14,870,833 $121,214,187 $ 2,623,269 $ 606,867,049
Fee-for-service revenue.......... 180,489,747 4,176,018 19,251,147 203,916,912
Management services revenue...... 28,826,000 23,307,536 52,133,536
------------ ----------- ------------ ----------- ----------- -------------
Total operating revenue...... 677,474,507 19,046,851 140,465,334 25,930,805 862,917,497
------------ ----------- ------------ ----------- ----------- -------------
Expenses:
Medical services............... 515,126,273 16,128,269 166,950,333 16,184,835 714,389,710
General and administrative..... 188,429,378 2,811,904 44,210,000 9,784,802 $ 7,098,259(C) 252,334,343
Merger, restructuring and other
unusual charges.............. 52,571,868 461,500 53,033,368
------------ ----------- ------------ ----------- ----------- -------------
Total expenses............... 756,127,519 18,940,173 211,160,333 26,431,137 7,098,259 1,019,757,421
------------ ----------- ------------ ----------- ----------- -------------
Income (loss) from operations.... (78,653,012) 106,678 (70,694,999) (500,332) (7,098,259) (156,839,924)
Other income (expense):
Interest and other income...... 2,539,301 83,940 6,168,667 179,547 8,971,456
Interest expense............... (6,767,664) (15,382) (8,619,667) (609,589) (2,406,837)(D) (18,419,140)
Other expense.................. (2,757,000) (2,757,000)
Minority interests' share in
net losses................... 866,000 866,000
------------ ----------- ------------ ----------- ----------- -------------
Total other income
(expense).................. (3,362,363) 68,558 (5,208,000) (430,042) (2,406,837) (11,338,684)
------------ ----------- ------------ ----------- ----------- -------------
Income (loss) before income
taxes.......................... (82,015,375) 175,236 (75,902,999) (930,374) (9,505,096) (168,178,608)
Income tax (expense) benefit..... (1,265,000) (73,922) 16,362,667 372,150 (E) 17,800,571(E) 33,196,466
------------ ----------- ------------ ----------- ----------- -------------
Net income (loss)................ $(83,280,375) $ 101,314 $(59,540,332) $ (558,224) $ 8,295,475 $ (134,982,142)
============ =========== ============ =========== =========== =============
Net loss per share............... $ (2.54) $ (3.55)
Weighted average shares
outstanding(G)................. 32,744,919 38,034,582
<CAPTION>
FPA MEDICAL
ST. JOSEPH POOLING OF MANAGEMENT, INC.
MEDICAL INTERESTS PRO FORMA
CORPORATION ADJUSTMENTS CONSOLIDATED
------------ ----------- ----------------
<S> <C<C> <C> <C>
Managed care revenue............. $ 71,708,294 $ 678,575,343
Fee-for-service revenue.......... 17,119,772 221,036,684
Management services revenue...... (23,307,536)(I) 28,826,000
------------ ----------- -------------
Total operating revenue...... 88,828,066 (23,307,536) 928,438,027
------------ ----------- -------------
Expenses:
Medical services............... 64,384,934 778,774,644
General and administrative..... 24,388,747 (23,307,536)(I) 253,415,554
Merger, restructuring and other
unusual charges.............. 53,033,368
------------ ----------- -------------
Total expenses............... 88,773,681 (23,307,536) 1,085,223,566
------------ ----------- -------------
Income (loss) from operations.... 54,385 (156,785,539)
Other income (expense):
Interest and other income...... 222,816 9,194,272
Interest expense............... (277,201) (18,696,341)
Other expense.................. (10,701,678) (13,458,678)
Minority interests' share in
net losses................... 866,000
------------ ----------- -------------
Total other income
(expense).................. (10,756,063) -- (22,094,747)
------------ ----------- -------------
Income (loss) before income
taxes.......................... (10,701,678) (178,880,286)
Income tax (expense) benefit..... 33,196,466
------------ ----------- -------------
Net income (loss)................ $(10,701,678) $ $ (145,683,820)
============ =========== =============
Net loss per share............... $ (3.67)
Weighted average shares
outstanding(G)................. 39,687,582
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
87
<PAGE> 92
FPA MEDICAL MANAGEMENT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FPA MEDICAL
FPA MEDICAL ST. JOSEPH POOLING OF MANAGEMENT, INC.
MANAGEMENT, MEDICAL INTERESTS PRO FORMA
INC. CORPORATION ADJUSTMENTS CONSOLIDATED
---------------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Managed care revenue............... $200,210,370 $62,807,510 $263,017,880
Fee-for-service revenue............ 124,774,866 6,585,660 131,360,526
Management services revenue........ 15,636,000 15,636,000
------------ ----------- ----------- ------------
Total operating revenue....... 340,621,236 69,393,170 410,014,406
------------ ----------- ----------- ------------
Expenses:
Medical services................. 235,889,380 61,447,138 297,336,518
General and administrative....... 108,980,699 7,127,850 116,108,549
Merger, restructuring and other
unusual charges............... 1,589,908 1,589,908
------------ ----------- ----------- ------------
Total expenses................ 346,459,987 68,574,988 415,034,975
------------ ----------- ----------- ------------
Income (loss) from operations...... (5,838,751) 818,182 (5,020,569)
Other income (expense):
Interest and other income........ 1,445,316 503,856 1,949,172
Interest expense................. (2,918,106) (2,918,106)
Minority interests' share in net
losses........................ 683,000 683,000
------------ ----------- ----------- ------------
Total other income
(expense)................... (789,790) 503,856 -- (285,934)
------------ ----------- ----------- ------------
Income (loss) before income
taxes............................ (6,628,541) 1,322,038 (5,306,503)
Income tax expense................. (1,679,320) (331,000) (2,010,320)
------------ ----------- ----------- ------------
Net income (loss).................. $ (8,307,861) $ 991,038 $ $ (7,316,823)
============ =========== =========== ============
Pro forma
Adjustment to income tax
expense(H).................... (262,000)
------------
Net income (loss).................. $ (8,569,861)
============
Pro forma net income (loss) per
share............................ $ (0.39) $ (0.31)
Weighted average shares
outstanding(G)................... 22,245,898 23,898,898
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
88
<PAGE> 93
FPA NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
FPA consummated the purchase of PFI effective June 1, 1996 for $21,591,541
consisting of cash, FPA Common Stock and debt, and FHMS effective November 29,
1996 for $111,000,000 consisting of cash, FPA Common Stock and debt. These
completed acquisitions by FPA were accounted for under the purchase method. The
mergers of FPA with Sterling (October 1996), AHI (March 1997), HealthCap (June
1997), Axminster (September 30, 1997) and Health Partner (October 1997) were
accounted for as poolings of interests and FPA's financial statements have been
restated to take into account financial information and data of Sterling, AHI,
HealthCap, Axminster and Health Partner for all periods presented. Additionally,
FPA proposes to merge with SJMC by issuing FPA Common Stock in exchange for all
of the outstanding SJMC Common Stock and acquire OCMCS for FPA Common Stock and
cash. It is contemplated that the Merger will be accounted for as poolings of
interests and the Acquisition will be accounted for as a purchase. The following
adjustments are necessary to reflect the pro forma effects of the FPA
consummated and probable transactions.
Certain of the entities included in the pro forma condensed consolidated
financial statements are professional corporations in which FPA is unable to own
a majority interest due to certain state laws which prohibit the corporate
practice of medicine. Such entities are included in the pro forma condensed
consolidated financial statements due to the fact FPA consolidates these
professional corporations in the consolidated financial statements of FPA. These
professional corporations are consolidated by FPA because FPA has direct or
indirect unilateral and perpetual control over the assets and operations of the
professional corporations, other than by means of owning the majority of the
voting stock of the professional corporations. The shareholder/director of each
of these professional corporations which are affiliated with FPA 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 if such
shareholder/director is terminated from FPA. This ensures unilateral and
perpetual control over these professional corporations by FPA. As such, due to
the parent-subsidiary relationship under generally accepted accounting
principles, FPA consolidates the financial statements of these professional
corporations. FPA believes that consolidation of the financial statements of
these professional corporations is necessary to present fairly the financial
position and results of operations of FPA.
(A) Nonrecurring costs estimated to be $7,400,000 will be recorded in
connection with the Merger. These costs consist primarily of certain
employee termination costs, financial advisory fees, professional fees
and restructuring costs. Because such costs are nonrecurring, they have
not been recorded in the accompanying unaudited pro forma condensed
consolidated statements of operations. However, such costs will be
expensed in the period the Merger is consummated.
(B) As a result of FPA's acquisition, PFI receives fully delegated
capitation revenue from Physicians Corporation of America, the seller,
based on the acquisition agreement with FPA, rather than only primary
care capitation as is reflected in this historical statement of
operations of PFI. The incremental revenue which PFI would have
received under this fully delegated contract, which is not included in
the pro forma condensed consolidated statement of operations, was
approximately $31,000,000 for the five months ended May 31, 1996 (date
of acquisition). Additionally, there would have been a corresponding
increase in medical services expense and general and administrative
expense for the provision of hospital and specialty care services under
this fully delegated contract, which is not included in the pro forma
condensed consolidated statement of operations.
89
<PAGE> 94
FPA NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(C) For the purpose of determining the pro forma effects of the
acquisitions of OCMCS, PFI and FHMS on FPA's statement of operations,
the following adjustments to increase (decrease) income have been
made:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
OCMCS PFI FHMS TOTAL
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Amortization over 4 - 15 years of intangible
assets(1)(2).................................... $(100,419) $ (751,667) $ (852,086)
Amortization over 25 - 30 years of cost in excess
of net assets acquired (goodwill) and value
assigned to managed care contract in FHMS
acquisition(2).................................. (587,445) (177,957) (5,599,013) (6,364,415)
Depreciation of additional purchase cost assigned
to property and equipment....................... 118,242 118,242
--------- --------- ----------- -----------
$(587,445) $(160,134) $(6,350,680) $(7,098,259)
========== ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------
OCMCS TOTAL
--------- ---------
<S> <C> <C>
Amortization over 25 years of cost in excess of net assets acquired
(goodwill)............................................................... $(440,584) $(440,584)
--------- ---------
$(440,584) $(440,584)
========== ==========
</TABLE>
- ---------------
(1) The amortization period of the identifiable intangible assets is based on
the period of estimated future economic benefit as determined by FPA in
conjunction with independent valuation analyses.
(2) The total balance of the goodwill and intangibles at January 1, 1996 would
have been approximately $210,739,462 and $6,164,019, respectively, related
to OCMCS, PFI, and FHMS.
(D) Reflects the increase in interest expense as a result of the notes
issued in connection with the acquisitions of PFI and FHMS. The debt
in the amount of approximately $116,000,000 that was issued or assumed
in connection with the FHMS acquisition bears interest at LIBOR plus
.45%. A one-eighth percent change in the interest rate would have had
an impact to interest expense of approximately $145,000 for the year
ended December 31, 1996.
(E) Reflects the estimated income tax effects of the pro forma adjustments
and the estimated tax benefit for OCMCS and FHMS at an assumed forty
percent of the net loss before income taxes. No valuation allowance
has been recognized related to the pro forma tax benefits and the FHMS
benefit based on FPA management's belief that it is more likely than
not, based on the assessment of future taxable income and available
tax planning strategies, that such benefit would be realized in future
periods. If FPA had incurred the losses before income taxes of
$168,178,608 for the year ended December 31, 1996 included in the pro
forma condensed consolidated statement of operations, FPA would need
to generate a comparable amount of future taxable income over the next
15 years (the net operating loss carryforward period) in order to
fully realize the benefit of these net operating losses.
(F) Reflects the effects of the issuance of 2,900,000 shares (assuming a
value of $18.00 per share) of FPA Common Stock in exchange for 100% of
the shares of outstanding SJMC Common Stock, and the acquisition of
OCMCS which gives rise to goodwill of $14,686,124. Based on the
outstanding shares and options of OCMCS and SJMC shareholders, OCMCS
and SJMC shareholders would receive 1,247,000 and 1,653,000 shares,
respectively. Goodwill is computed as $18 per share times 1,247,000
shares provided to OCMCS stockholders or $22,446,000 of proceeds less
book value of $9,866,876 plus estimated transaction costs of
$2,107,000.
(G) The weighted average shares outstanding was calculated based on the
historical weighted average shares outstanding of FPA giving effect to
the assumed 2,900,000 shares of FPA Common Stock to
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<PAGE> 95
FPA NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
be issued in connection with the Merger and the Acquisition and the
shares issued in connection with the acquisitions of PFI and FHMS.
(H) The pro forma net income (loss) and net income (loss) per share
information in the 1995 pro forma condensed consolidated statement of
operations reflect the effect on historical results as if FPA had been
a C Corporation rather than an S Corporation for income tax purposes,
and no tax benefit arose as a result of the change in tax status.
(I) Reflects the elimination of intercompany transactions between SJMC and
OCMCS and the elimination of SJMC's investment in OCMCS.
91
<PAGE> 96
SELECTED HISTORICAL FINANCIAL DATA -- FPA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of FPA set forth below for the years
ended December 31, 1994, 1995 and 1996 which give effect to the mergers with
AHI, Healthcap, Axminster, Health Partners, accounted for as poolings of
interests, have been derived from FPA's audited Consolidated Financial
Statements incorporated by reference in this Proxy Statement/Prospectus. The
selected historical financial data for the years ended December 31, 1993 and
1992 and the nine months ended September 30, 1997 and 1996 are unaudited. In the
opinion of FPA's management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of FPA's financial position and
results of operations for such unaudited periods, have been included. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for any other interim period or
for the year. The data set forth below should be read in conjunction with FPA's
Consolidated Financial Statements and the notes thereto incorporated by
reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1996 1996 1997
------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF
OPERATIONS:
Operating revenue....... $39,960 $ 59,766 $ 136,434 $ 340,621 $ 677,474 $ 461,346 $ 839,679
Medical services
expense............... 28,477 41,791 92,543 235,889 515,126 347,995 611,988
------- ----------- ----------- ----------- ----------- ----------- -----------
11,483 17,975 43,890 104,732 162,348 113,351 227,691
General and
administrative
expense............... 12,385 16,063 45,547 108,981 188,429 121,176 192,070
Merger, restructuring
and other unusual
charges............... 1,590 52,572 1,707 38,005
------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............ (902) 1,912 (1,657) (5,839) (78,653) (9,532) (2,384)
Other income (expense),
net................... 197 125 394 (1,473) (4,228) (1,330) (9,010)
------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
minority interests and
income taxes.......... (705) 2,037 1,263 (7,312) (82,881) (10,862) (11,393)
Minority interests...... 367 683 866 515 122
Income tax (expense)
benefit............... (10) (85) (1,707) (1,679) (1,265) (5,228) (2,625)
------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (715) $ 1,952 $ (2,603) $ (8,308) $ (83,280) $ (15,575) $ (13,896)
------- ----------- ----------- ----------- ----------- ----------- -----------
PRO FORMA PER SHARE
DATA:
Net income (loss) per
share................. $ 0.18 $ (0.19) $ (0.39) $ (2.54) $ (0.46) $ (0.34)
Weighted average shares
outstanding........... 10,883,701 14,258,120 22,245,898 32,744,919 33,505,926 40,472,579
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ---------------
1992 1993 1994 1995 1996 1997
------ ------- ------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash and marketable securities..................... $3,546 $ 7,621 $19,493 $ 49,781 $ 64,128 $ 34,645
Working capital surplus (deficit).................. (972) 3063 22,290 39,780 (47,337) 30,437
Total assets....................................... 7,726 17,930 88,555 264,505 632,607 694,680
Long-term liabilities.............................. 112 371 12,989 28,640 199,701 313,328
Stockholders' equity............................... 139 2862 40,717 153,313 154,427 159,154
</TABLE>
92
<PAGE> 97
ORANGE COAST MANAGED CARE SERVICES, INC.
AND
ST. JOSEPH MEDICAL CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
DECEMBER SEPTEMBER SEPTEMBER
31, DECEMBER 31, 30, 30,
1995 1996 1996 1997
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue.................. $70,715,799 $ 91,451,336 $68,458,676 $70,137,868
Cost of medical services........... 62,202,197 80,569,770 59,601,587 62,267,646
----------- ------------ ----------- -----------
Gross margin....................... 8,513,602 10,881,566 8,857,089 7,870,222
Operating expenses................. 8,329,784 10,866,013 8,129,527 8,126,947
Provision for write-down of
intangible assets................ -- 10,701,678 -- --
Abandoned merger-related
expenses......................... -- 461,500 -- --
Other (loss) income, net........... 687,447 59,969 310,845 (85,077)
----------- ------------ ----------- -----------
Operating income................... 871,265 (11,087,656) 727,562 (341,802)
Other income
Investment income................ 192,307 342,395 168,620 320,980
Interest expense................. (375,016) (886,790) (688,781) (426,398)
Gain on sale of division......... -- -- -- 3,043,113
----------- ------------ ----------- -----------
Total other income (expense),
net.............................. (182,709) (544,395) (209,316) 2,937,695
Income (loss) before income
taxes............................ 688,556 (11,632,051) 518,246 2,595,893
Income tax provision (benefit)..... 331,000 -- 266,752 --
----------- ------------ ----------- -----------
Net income (loss).................. $ 357,556 $(11,632,051) $ 251,494 $ 2,595,893
=========== ============ =========== ===========
</TABLE>
ORANGE COAST MANAGED CARE SERVICES, INC.
AND
ST. JOSEPH MEDICAL CORPORATION
CONDENSED COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- ---------------------------
1995 1996 1996 1997
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents*......... $ 7,014,795 $ 4,848,210 $ 4,209,136 $ 8,727,232
Working capital.................... 5,953,530 3,103,199 3,859,649 7,716,399
Total assets....................... 33,243,853 21,153,967 32,342,061 28,643,746
Long-term debt..................... 9,710,457 6,285,096 8,826,021 6,187,500
Stockholder's equity............... 12,602,581 3,831,243 13,006,621 6,251,721
</TABLE>
- ---------------
* includes marketable securities
93
<PAGE> 98
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- SJMC AND OCMCS
The discussion and analysis set forth below is qualified in its entirety,
and should be read in conjunction with OCMCS and SJMC Combined Financial
Statements and notes thereto and the other financial and business information
related to OCMCS and SJMC included elsewhere in this Proxy Statement/Prospectus.
OVERVIEW
OCMCS was incorporated and commenced operations in November 1993. SJMC was
incorporated in November 1992 in connection with the merger of Saint Joseph
Hospital Medical Group and St. Joseph Multi-Specialty Group, Inc. OCMCS manages
the operations of SJMC under a 50-year management services agreement. OCMCS and
SJMC are hereunder collectively referred to as "OCMCS/SJMC".
SJMC operates two divisions: 1) SJIPA and 2) SJMG. As of January 1998,
SJIPA contracts with approximately 580 physicians, consisting of approximately
190 primary care physicians and approximately 390 specialist physicians to
provide healthcare services through contracts with 11 health maintenance
organizations in the Orange County, California area. As of December 1997, the
SJIPA membership was comprised of approximately 120,200 members in commercial
and point-of-service health plans and approximately 8,800 members in Medicare
risk healthplans.
SJIPA receives capitation from Payors and is responsible for all
professional services provided to its members when the services are provided in
the SJIPA network. SJIPA participates in institutional risk pools in which SJIPA
is rewarded for the efficient and appropriate use of health care in-patient and
out-patient facilities by the SJIPA membership. To the extent an institutional
risk pool generates a deficit, SJIPA is contractually obligated to pay its
portion of the deficit.
SJIPA pays its contracted physicians largely on a capitated basis. For the
nine months ended September 30, 1997, approximately 74.9% of the cost of medical
services for SJIPA consisted of capitated payments to primary care and specialty
care physicians.
SJMG delivers primary care through nine medical offices located in central
Orange County, California. For the nine months ended September 30, 1997
approximately 58.3% of the SJMG revenue is from managed care patients, and
approximately 39.7% of the SJMG revenue is from fee-for-service patients. SJMG
employs 48 primary care physicians to provide services to 54,800 managed care
members as of December 31, 1997. Approximately 50,100, or 91.4%, of the managed
care members assigned to SJMG are members of SJIPA.
SJMG was formed in October 1994 through the combination of the practices of
approximately 40 primary care physicians located in central Orange County,
California.
Discontinued Division. OCMCS and SJMC sold the assets of St. Joseph
Occupational Healthcare ("SJOH") effective as of September 30, 1997. SJOH
provided medical care for workplace-related injuries in four clinics in Orange
County, California.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1997
For the nine months ended September 30, 1997, operating revenue increased
$1.6 million, or 2.3%, to $70.1 million from $68.5 million for the nine months
ended September 30, 1996. Capitation revenue increased 5.3%, from $49.4 million
through September 30, 1996 to $52.0 million through September 30, 1997. This was
partially offset by a decrease in PPO/indemnity fee-for-service revenue of $0.7
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. The decrease in PPO/ indemnity revenue resulted from
the closure or sale of unprofitable operations in SJMG.
For the nine months ended September 30, 1997, the medical loss ratio was
88.8% compared to 87.1% for the nine months ended September 30, 1996. This
increase is attributable to an increase in capitation expense of $2.6 million
and an increase in pharmacy expense of $0.6 million, partially offset by a
reduction in medical office expense of $1.1 million.
94
<PAGE> 99
For the nine months ended September 30, 1997, operating expenses as a
percent of revenue were 11.6% compared to 11.9% for the nine months ended
September 30, 1996. Decreases in professional services, insurance and supplies
account for the decrease in operating expenses.
For the nine months ended September 30, 1997, other income (expense) was
$2.9 million compared to ($.2 million) for the nine months ended September 30,
1996. The difference primarily is the result of the $3.0 million gain on the
sale of OCMCS/SJMC's occupational medicine division effective as of September
30, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For 1996, operating revenue increased $20.8 million, or 29.4%, to $91.5
million from $70.7 million for 1995. 1995 only includes revenue from SJMG for
the period from September 7, 1995 through December 31, 1995, because the
predecessor to SJMG merged into SJMC on September 7, 1995. SJMG revenue in 1995
was $6.4 million compared to $19.2 million in 1996. In addition, increased
membership and per member per month capitation rates for SJIPA account for $8.5
million of the increase in OCMCS/SJMC's revenue from 1995 to 1996.
For 1996, the medical loss ratio was 88.1% compared to 88.0% in 1995. For
1996, operating expenses as a percent of revenue were 11.9% compared to 11.8% in
1995.
In December 1996, OCMCS/SJMC determined that $10.7 million of goodwill
associated with the merger of the predecessor of SJMG into SJMC was not
recoverable and reduced the carrying value of goodwill resulting in a charge of
$10.7 million to expense. In addition, OCMCS/SJMC wrote off $0.5 million of
merger-related expenses from a transaction which was abandoned.
For 1996, other income/(expense) increased to ($0.5 million) compared to
($0.2 million) for 1995. The increase results largely from the interest expense
associated with the additional debt assumed in September 1995 in the merger with
the predecessor to SJMG.
LIQUIDITY AND CAPITAL RESOURCES
OCMCS/SJMC requires capital primarily to acquire physician practices,
improve the infrastructure of existing OCMCS/SJMC owned physician practices,
develop new IPA affiliates, and expand existing OCMCS/SJMC owned IPA operations
and infrastructure. OCMCS/SJMC's capitation agreements with Payors generally
positively impact OCMCS/SJMC's cash flow because capitation revenue is generally
received prior to paying expenses associated with the agreements.
OCMCS/SJMC's risk pool arrangements generally have a negative impact on
cash flow because net revenue from the agreements is generally received after
expenses are incurred related to the agreements. Fee-for-service revenue
negatively impacts cash flow because payment for services rendered is generally
not collected until 90 to 120 days after the service is provided.
As of September 30, 1997, OCMCS/SJMC had cash, cash equivalents and
marketable securities of $8.7 million. OCMCS/SJMC had a working capital (current
assets less current liabilities) surplus of $7.7 million. As of December 31,
1996, OCMCS/SJMC had cash, cash equivalent and marketable securities of $4.8
million, and a working capital surplus of $3.1 million. The increase in working
capital resulted largely from the sale of SJOH which generated approximately
$5.8 million of net cash for OCMCS/SJMC.
During the nine months ended September 30, 1997, non-operating sources of
cash included advances on the Loan Agreement (as described below) and other debt
of approximately $3.6 million. Non-operating uses of cash included the purchase
of property and equipment for approximately $0.5 million, and payments under the
Loan Agreement and other debt of $2.3 million.
On March 15, 1995, a predecessor to OCMCS/SJMC executed a Loan Agreement
with Mellon Bank, N.A. ("Loan Agreement") for $5.0 million. Subsequently, on
December 14, 1995, OCMCS became the borrower, and on August 6, 1996, the
commitment under the Loan Agreement was increased to $15.6 million. The Loan
Agreement includes a revolving credit period which expires on March 31, 1998,
and a term loan
95
<PAGE> 100
period which expires on April 1, 2000. The outstanding loan balance on March 31,
1998 amortizes in equal amounts each quarter beginning June 30, 1998, and ending
on April 1, 2000. The borrowings bear interest based on the prime rate or the
Euro-Rate plus 75 basis points. The Loan Agreement is guaranteed by St. Joseph
Hospital of Orange. The Loan Agreement and the guarantee are secured by
substantially all of the assets of OCMCS and SJMC.
The Loan Agreement contains customary terms, events of default, financial
and non-financial covenants, which among other things, limit payment of cash
dividends, certain acquisitions or mergers, and the occurrence of additional
debt. OCMCS expects to pay off in full and terminate the Loan Agreement
immediately prior to the consummation of the Combined Merger. OCMCS/SJMC
believes that its cash on hand, combined with anticipated cash flows from its
operations will be sufficient to meet OCMCS/SJMC's operating capital needs
through 1998, including the payment of all outstanding debt under the Loan
Agreement.
96
<PAGE> 101
BUSINESS OF SJMC AND OCMCS
BACKGROUND
OCMCS and SJMC. OCMCS is a physician practice management company which
provides a wide range of medical management services, organizational development
and contracting support to SJMC. OCMCS currently provides administrative support
in the areas of network development, provider contracting, claims processing,
financial management, management information systems, quality management,
utilization management, grievance resolution, billing and collections, and
medical office support services.
SJMC operates two divisions, SJMG and SJIPA. SJMC delivers primary medical
care through nine clinics located in Orange County. SJMC employs 48 primary care
physicians to provide services to approximately 54,800 managed care members as
of December 1997. The medical group of SJMC, SJMG, is the largest primary care
provider in the SJMC network, SJIPA. Of SJIPA's 129,800 HMO members, SJMG
currently provides medical services to approximately 50,100 members, as well as
a comparable number of fee-for-service patients. SJMC also provides primary
medical care services to nearly 4,700 IPA members who are not affiliated with
SJIPA.
The predecessors of OCMCS and SJMC commenced operations in Orange County,
California in May 1980 when Saint Joseph Hospital Medical Group was incorporated
by some of the physicians at SJHO. In 1992, Saint Joseph Hospital Medical Group
merged with Saint Joseph Multi-Specialty Group, Inc. to form SJMC. At the time
of the merger, SJMC was Orange County's largest IPA. SJMG is the result of a
combination of the practices of approximately 40 primary care physicians
representing a wide range of primary care disciplines (pediatrics, family
practice and internal medicine) which are located throughout Orange County,
California. In November 1992, OCMCS' predecessor, Orange Coast Managed Care
Services, Inc. California (the "Predecessor"), was formed as an equal joint
venture between SJHO and SJMC to provide administrative and management functions
to SJMC.
OCMCS, as currently structured, was formed in 1995 through the
restructuring of the relationship between the Predecessor, SJHO and SJMC. SJMC
acquired SJHO's 50% interest in the Predecessor and, as a result of the merger
of the Predecessor with and into OCMCS, all outstanding shares of the
Predecessor (which were held by SJMC) were converted into shares of OCMCS'
Series A Preferred Stock. Immediately thereafter, SJHO and a venture capital
investor acquired shares of OCMCS' Series B Preferred Stock. As a result, while
both SJHO and SJMC became stockholders of OCMCS as the successor entity to the
Predecessor, their respective rights and preferences had changed by virtue of
the fact that SJHO held Series B Preferred Stock and SJMC held all of the issued
and outstanding shares of the OCMCS Series A Preferred Stock. At the time of the
merger, SJMC and OCMCS signed a 50 year management services agreement.
DYNAMICS OF THE HEALTH CARE MARKET
Consolidation of the Health Care Industry. Fully capitated managed health
care has become a prominent form of health care reimbursement and this trend may
continue in the future. As a result, many health care providers have been
motivated to affiliate with other health care providers, offer global capitation
arrangements and services and otherwise implement integrated delivery systems.
Hospitals, individual physicians, medical groups and other health care
providers are forming integrated partnerships to achieve more efficient methods
to deliver health care services. The health care market in California is
becoming increasingly competitive. A number of hospitals have recently
established integrated networks, or are buying physician practices, or merging
or affiliating with other hospitals. Most hospitals are attempting to increase
their market presence in an effort to attract large employer groups and managed
care plans.
The increasing influence of managed health care organizations has
encouraged the growth of physician practice management companies. A number of
HMOs and other Payors have encouraged physicians to combine into larger groups.
Many physicians in turn are attracted to joining larger practice groups as a
vehicle to participate in and benefit from the changes occurring in the health
care industry. Without affiliating with a
97
<PAGE> 102
physician practice management company, many individual medical groups are poorly
equipped to cope with increasing administrative burden resulting from the
numerous requirements promulgated by managed care companies and regulatory
agencies and the capital resources necessary to grow and compete in this
environment. Physician groups and physician practice management companies are
purchasing or are affiliating with other provider groups, in an effort to
establish market leverage and economies of scale.
There has been significant consolidation within the physician practice
management industry itself and OCMCS and SJMC expect similar transactions to be
announced and consummated in the future.
Primary Care. Primary care services include general practice, internal
medicine, obstetrics/gynecology, pediatrics, emergency medicine and basic
orthopedic and general surgical services. Most medical care begins at the
primary care level and many entities that pay for health care services have
designated primary care physicians as "gatekeepers." The role of such
"gatekeepers" is to monitor and minimize the quantity and range of services
provided and the resources consumed during the treatment of patients. As Payors
in California continue to move toward capitation systems, the role of primary
care physicians may become more prominent. A majority of the professional
medical services delivered at hospital emergency departments is primary,
nonacute care. SJIPA's physicians are members of the medical staffs of either or
both SJHO and Children's Hospital of Orange County, and such hospitals, together
with the nine clinics at which the SJMG physicians practice, provide a platform
for SJMC to deliver a comprehensive range of medical care in Orange County,
California.
Governmental Regulation. The health care industry is highly regulated and
there can be no assurance that the regulatory environment in which OCMCS and
SJMC operate will not change significantly. Various legislative proposals
affecting federal and state regulation of the health care industry, including
limitations on Medicare and Medicaid reimbursement, have been introduced in the
past, including various plans to restructure dramatically the financing and
delivery of health care services in the United States. There can be no assurance
that significant health care reforms will not be approved in the future,
resulting in substantial changes to the health care industry. OCMCS has filed an
application for a limited license as a health care service plan under the
Knox-Keene Act. Such a license, if granted, would permit OCMCS to receive
capitation payments from HMOs for both hospital and medical professional
services.
OCMCS and SJMC are unable to predict whether any additional laws and
regulations affecting their business may be enacted in the future or the
potential effect of such laws and regulations on them. The failure of OCMCS and
SJMC or any other party with whom they conduct business to comply with
applicable laws or regulations could have a material adverse effect on their
respective businesses.
Federal law and the laws of the State of California generally specify who
may practice medicine and limit the scope of relationships between medical
practitioners and other parties. Under such laws, OCMCS is prohibited from
practicing medicine or exercising control over the provision of medical
services. In order to comply with such laws, the relationship between OCMCS,
SJMC and the payors and hospitals with which they are affiliated is organized so
that all physician employment agreements and all contracts with third party
payors are between SJMC and such parties. Under the management services
agreement between OCMCS and SJMC, SJMC delegates to OCMCS the performance of
administrative, management and support functions, while SJMC retains control
over the provision of medical services.
Litigation. OCMCS and SJMC and its physician-employees are defendants in
several lawsuits alleging medical malpractice. The ultimate outcome of these
lawsuits or potential losses in relation to SJMC's and OCMCS' professional
liability insurance coverage cannot presently be determined; however, SJMC and
OCMCS do not believe that these lawsuits, individually or in the aggregate,
would have a material adverse effect on the results of operations or financial
condition of SJMC's and OCMCS' businesses, respectively.
Risk Management; Malpractice Insurance. OCMCS and SJMC maintain general and
professional liability, property and fidelity coverage. Additionally, SJMC
requires all of its independently contracted provider physician groups,
specialists and other health care providers to maintain professional liability
coverage.
98
<PAGE> 103
Governance Issues. SJMC management, reporting and contracting operations
have been structured to provide for the separation of medical services from the
fiscal and administrative management services provided by OCMCS in order to
ensure that medical determinations and decisions will be made by medical, rather
than administrative, personnel.
OCMCS is governed by a nine member board of directors elected by its
stockholders. SJMC is governed by an eleven member board of directors elected by
its physician shareholders. The SJMC board of directors and the SJIPA medical
director have primary responsibility for SJMC medical policy and decision
making.
Assets and Properties. Neither SJMC nor OCMCS owns any real property. OCMCS
holds all of the leases for the facilities operated by OCMCS and SJMC.
No Public Market for OCMCS Stock or SJMC Shares. There is no established
public trading market for the capital stock of OCMCS or SJMC. As of December 31,
1997, OCMCS had 16 stockholders of record and SJMC had 184 shareholders of
record. Additionally, ownership of SJMC is governed by certain provisions of the
California Code relating to ownership of professional corporations.
LEGAL MATTERS
The validity of the FPA Common Stock offered hereby will be passed upon for
FPA by Ballard Spahr Andrews & Ingersoll, LLP Philadelphia, Pennsylvania.
Certain legal matters in connection with the Combined Merger will be passed upon
for SJMC and OCMCS by Klein & Martin, Los Angeles, California.
ADDITIONAL INFORMATION
Neither the SJMC Board nor the OCMCS Board is aware of any additional
business to be acted upon at the SJMC and OCMCS Special Meetings other than as
described herein. If, however, other matters are properly brought before the
Special Meetings, or any adjournment or postponement thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment and applicable rules of the Commission.
EXPERTS
The consolidated financial statements of FPA incorporated in this Proxy
Statement/Prospectus by reference from FPA's Annual Report on Form 10-K, as
amended by Form 10-K/A, for the year ended December 31, 1996 have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report which
is incorporated by reference herein, and have been incorporated by reference in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated balance sheet as of December 31, 1995 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1995 and the period June 1, 1994 to December 31, 1994 of Sterling,
have been incorporated herein by reference, in reliance on the report of by
Coopers & Lybrand LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
The Consolidated Financial Statements of FPA incorporated in this Proxy
Statement/Prospectus by reference from FPA's Current Report on Form 8-K dated
July 31, 1997 as amended by Form 8-K/A have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report which is incorporated
herein by reference, and have been incorporated herein by reference in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The Supplemental Consolidated Financial Statements of FPA incorporated in
this Proxy Statement/ Prospectus by reference from FPA's Current Report on Form
8-K dated December 9, 1997, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been incorporated herein by reference in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
99
<PAGE> 104
The Consolidated Financial Statements of AHI Healthcare Systems, Inc. as of
December 31, 1996 and the year then ended incorporated in this Proxy
Statement/Prospectus by reference from FPA's Current Report on Form 8-K dated
March 17, 1997, as amended by Form 8-K/A, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report which is incorporated
herein by reference, and have been incorporated herein by reference in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The Consolidated Financial Statements of AHI Healthcare Systems, Inc. as of
December 31, 1995 and for each of the two years in the period ended December 31,
1995, included in the consolidated financial statements of FPA for such periods,
which statements appear in the Current Reports on Form 8-K filed on December 10,
1997, July 31, 1997 and May 30, 1997, and incorporated herein by reference, have
been audited by Ernst & Young LLP, independent auditors, as stated in their
reports therein and incorporated herein by reference, and have been incorporated
herein by reference in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The Consolidated Financial Statements of Health Partners, Inc. and
subsidiaries as of December 31, 1994, 1995 and 1996, and for each of the years
in the three-year period ended December 31, 1996, have been incorporated herein
by reference and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent auditors, incorporated herein by reference,
and upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of Foundation Health Medical Services (a
wholly-owned subsidiary of Foundation Health Corporation) and Affiliates as of
June 30, 1995 and 1996 and for each of the three years in the period ended June
30, 1996, incorporated in this Proxy Statement/Prospectus by reference from
FPA's Registration Statement on Form S-4, filed on February 13, 1997 have been
audited by Deloitte & Touche LLP (except for the December 31, 1993 financial
statements of Thomas-Davis Medical Centers, P.C.) as stated in their report
which is incorporated herein by reference (such report expresses an unqualified
opinion and includes an explanatory paragraph referring to significant related
party transactions), and have been incorporated herein by reference in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing. The financial statements of Thomas-Davis Medical Centers, P.C. for
the year ended December 31, 1993 have been audited by Stevenson, Jones, Imig,
Holmaas & Kleinhans, P.C., as stated in their report incorporated herein by
reference.
The Combined Financial Statements of SJMC and OCMCS as of September 30,
1997 and December 31, 1996 and for the nine months ended September 30, 1997 and
for each of the two years in the period ended December 31, 1995, included in the
Proxy Statement of SJMC and OCMCS, which is referred to and made a part of this
Proxy Statement/Prospectus, have been audited by Ernst & Young LLP, independent
auditors, as stated in their reports appearing elsewhere herein, and have been
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
100
<PAGE> 105
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
AUDITED COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Combined Financial Statements
Combined Balance Sheets............................................................... F-3
Combined Statements of Operations..................................................... F-4
Combined Statements of Equity......................................................... F-5
Combined Statements of Cash Flows..................................................... F-6
Notes to Combined Financial Statements................................................ F-7
</TABLE>
F-1
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
Boards of Directors
St. Joseph Medical Corporation and
Orange Coast Managed Care Services, Inc.
We have audited the accompanying combined balance sheets of St. Joseph
Medical Corporation and Orange Coast Managed Care Services, Inc. as of September
30, 1997 and December 31, 1996, and the related combined statements of
operations, equity, and cash flows for the nine months ended September 30, 1997
and for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of St. Joseph Medical
Corporation and Orange Coast Managed Care Services, Inc. at September 30, 1997
and December 31, 1996, and the combined results of their operations and their
cash flows for the nine months ended September 30, 1997 and for each of the two
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 27, 1998
F-2
<PAGE> 107
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 7,640,284 $ 3,773,780
Marketable securities available-for-sale, net............... 1,086,948 1,074,430
Due from U.S. Healthworks................................... 7,401,378 --
Accounts receivable, net of allowance for doubtful accounts
of $550,478 for 1997 and $1,187,832 for 1996............. 6,036,374 7,533,498
Deferred income taxes....................................... 1,172,687 1,172,687
Prepaid expenses and other current assets................... 583,253 586,432
----------- -----------
Total current assets................................ 23,920,924 14,140,827
Equipment, furniture and leasehold improvements, net.......... 2,909,076 3,706,910
Investment in management company.............................. -- 1,206,906
Deposits and other assets..................................... 51,422 279,324
Intangible assets, net........................................ 1,762,324 1,820,000
----------- -----------
Total assets........................................ $28,643,746 $21,153,967
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses....................... $ 4,756,241 $ 3,154,178
Accrued medical claims...................................... 9,689,646 7,505,396
Current maturities of long-term debt........................ 1,758,638 378,054
----------- -----------
Total current liabilities........................... 16,204,525 11,037,628
Long-term debt, less current maturities....................... 6,187,500 6,285,096
----------- -----------
Total liabilities................................... 22,392,025 17,322,724
----------- -----------
Equity:
Paid-in capital............................................. 14,952,219 15,135,144
Unrealized gain (loss) on marketable securities, net of
taxes.................................................... 2,606 (4,904)
Accumulated deficit......................................... (8,703,104) (11,298,997)
----------- -----------
Total equity.................................................. 6,251,721 3,831,243
----------- -----------
Total liabilities and equity........................ $28,643,746 $21,153,967
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 108
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, ----------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Total operating revenue............................ $70,137,868 $ 91,451,336 $70,715,799
Cost of medical services........................... 62,267,646 80,569,770 62,202,197
----------- ------------ -----------
Gross margin....................................... 7,870,222 10,881,566 8,513,602
Operating expenses................................. 8,126,947 10,866,013 8,329,784
Provision for write-down of intangible assets...... -- 10,701,678 --
Abandoned merger-related expenses.................. -- 461,500 --
Other (loss) income, net........................... (85,077) 59,969 687,447
----------- ------------ -----------
Operating income (loss)............................ (341,802) (11,087,656) 871,265
Other income (expense):
Investment income................................ 320,980 342,395 192,307
Interest expense................................. (426,398) (886,790) (375,016)
Gain on sale of division......................... 3,043,113 -- --
----------- ------------ -----------
Total other income (expense), net.................. 2,937,695 (544,395) (182,709)
----------- ------------ -----------
Income (loss) before income taxes.................. 2,595,893 (11,632,051) 688,556
Income tax provision............................... -- -- 331,000
----------- ------------ -----------
Net income (loss).................................. $ 2,595,893 $(11,632,051) $ 357,556
=========== ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 109
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON RETAINED-
PAID-IN MARKETABLE EARNINGS
CAPITAL SECURITIES (DEFICIT) TOTAL
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995......... $ 462,919 $ (214,934) $ (24,502) $ 223,483
Common stock issued for
compensation.................. 79,200 -- -- 79,200
Issuance of preferred stock for
cash.......................... 4,440,000 -- -- 4,440,000
Issuance of preferred stock in
exchange for cancellation of
notes payable................. 2,237,187 -- -- 2,237,187
Increase in value of marketable
securities, net............... -- 209,962 -- 209,962
Issuance of shares in
acquisition................... 8,672,744 -- -- 8,672,744
Repurchases of common stock in
exchange for notes payable.... (3,249,020) -- -- (3,249,020)
Repurchase of stock for cash..... (368,531) -- -- (368,531)
Net income....................... -- -- 357,556 357,556
----------- --------- ------------ ------------
Balance at December 31, 1995....... 12,274,499 (4,972) 333,054 12,602,581
Issuance of common stock for
cash.......................... 1,014,080 -- -- 1,014,080
Issuance of preferred stock for
cash.......................... 222,000 -- -- 222,000
Capital contribution in exchange
for first offer rights........ 2,497,725 -- -- 2,497,725
Increase in value of marketable
securities, net............... -- 68 -- 68
Repurchase of stock for cash..... (873,160) -- (873,160)
Net loss......................... -- -- (11,632,051) (11,632,051)
----------- --------- ------------ ------------
Balance at December 31, 1996....... 15,135,144 (4,904) (11,298,997) 3,831,243
Issuance of common stock for
cash.......................... 79,460 -- -- 79,460
Repurchase of stock for cash..... (262,385) -- -- (262,385)
Change in value of marketable
securities, net............... -- 7,510 -- 7,510
Net income....................... -- -- 2,595,893 2,595,893
----------- --------- ------------ ------------
Balance at September 30, 1997...... $14,952,219 $ 2,606 $ (8,703,104) $ 6,251,721
=========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 110
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995
-------------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................................ $ 2,595,893 $(11,632,051) $ 357,556
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for write-down of intangible assets.................................. -- 10,701,678 --
Depreciation and amortization.................................................. 869,914 1,508,488 572,897
Equity in earnings from investment in management company....................... 76,101 (26,506) --
Gain on sale of division....................................................... (3,043,113) -- --
Compensation awarded in common stock........................................... -- -- 79,200
Loss on sale of investments.................................................... -- -- 6,972
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable.......................................................... (75,177) 1,113,024 (2,607,074)
Prepaid expenses and other current assets.................................... (85,355) (469,765) 82,014
Deposits and other assets.................................................... 205,052 59,810 (281,431)
Deferred income taxes........................................................ -- (66,326) 200,000
Accounts payable and accrued expenses........................................ 494,337 (1,798,979) (1,087,587)
Accrued medical claims....................................................... 2,184,250 2,612,541 1,301,722
Income taxes payable......................................................... -- (124,500) 124,500
----------- ------------ -----------
Net cash provided by (used in) operating activities.............................. 3,221,902 1,877,414 (1,251,231)
----------- ------------ -----------
INVESTING ACTIVITIES
Purchase of equipment, furniture and leasehold improvements...................... (450,453) (1,505,635) (659,760)
Sales of marketable securities................................................... (5,008) 781,766 938,622
Acquisitions, net of cash acquired............................................... -- (500,000) 498,744
Purchases of marketable securities............................................... -- -- (945,593)
----------- ------------ -----------
Net cash used in investing activities............................................ (455,461) (1,223,869) (167,987)
----------- ------------ -----------
FINANCING ACTIVITIES
Net proceeds from issuance of stock for forgiveness of debt...................... -- -- 160,644
Additional borrowings on long-term debt.......................................... 3,563,835 1,000,000 900,000
Principal payments on long-term debt............................................. (2,280,847) (5,903,981) (500,210)
Issuance of stock for cash....................................................... 79,460 1,236,080 4,440,000
Capital contribution in exchange for first offer rights.......................... -- 2,497,725 --
Repurchase of stock for cash..................................................... (262,385) (873,160) (368,531)
----------- ------------ -----------
Net cash provided by (used in) financing activities.............................. 1,100,063 (2,043,336) 4,631,903
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents............................. 3,866,504 (1,389,791) 3,212,685
Cash and cash equivalents at beginning of year................................... 3,773,780 5,163,571 1,950,886
----------- ------------ -----------
Cash and cash equivalents at end of year......................................... $ 7,640,284 $ 3,773,780 $ 5,163,571
=========== ============ ===========
Supplemental schedule of noncash investing and financing activities:
Issuance of preferred stock in exchange for debt cancellation:
Preferred stock issued....................................................... $ -- $ -- $ 2,237,187
Cancellation of debt......................................................... -- -- (2,397,831)
----------- ------------ -----------
Net cash received................................................................ $ -- $ -- $ 160,644
=========== ============ ===========
Details of purchase business transactions:
Cash (paid) acquired........................................................... $ -- $ (500,000) $ 498,744
Other assets acquired.......................................................... -- 1,180,400 21,008,204
----------- ------------ -----------
Fair value of assets acquired.................................................. -- 680,400 21,506,948
Less:
Issuance of notes payable.................................................... -- 680,400 371,119
Other liabilities assumed.................................................... -- -- 12,462,985
----------- ------------ -----------
Total liabilities assumed and notes issued................................... $ -- $ 680,400 $12,834,104
=========== ============ ===========
Common stock issued............................................................ $ -- $ -- $ 8,672,844
=========== ============ ===========
Details of unrealized gain on marketable securities:
Marketable securities.......................................................... $ 12,518 $ 114 $ 206,647
Deferred income taxes.......................................................... (5,008) (46) 3,315
----------- ------------ -----------
Increase in shareholders' equity............................................... $ 7,510 $ 68 $ 209,962
=========== ============ ===========
Compensation awarded in common stock............................................. $ -- $ -- $ 79,200
=========== ============ ===========
Leases capitalized............................................................... $ -- $ -- $ 32,578
=========== ============ ===========
Retirement of SJMC common stock in exchange for notes payable.................... $ -- $ -- $ 3,249,020
=========== ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 111
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Background and Organization
Orange Coast Managed Care Services, Inc. (OCMCS), a Delaware corporation
incorporated in December 1995, is a physician practice management organization
which provides comprehensive medical management services, organizational
development and contracting support to St. Joseph Medical Corporation, a
California professional corporation (SJMC) under a Management Services Agreement
(the Agreement). OCMCS and SJMC are hereafter collectively referred to as the
"Company." OCMCS is the surviving corporation resulting from a December 14,
1995, merger between Orange Coast Managed Care Services, Inc. California (the
Predecessor) and OCMCS. The Predecessor was formed on November 13, 1993, and
commenced operations on February 1, 1994. It contracted to provide management
and consulting services to SJMC under a management services agreement. The
agreement was modified in connection with the merger and reorganization and is
discussed below. The Predecessor was owned 50% by each of St. Joseph Hospital of
Orange (SJHO) and SJMC; however, on December 14, 1995, SJHO's 50% interest was
purchased by SJMC. Concurrent with the December 14, 1995, merger and
reorganization, all outstanding shares of the Predecessor were converted to
OCMCS Series A preferred stock and OCMCS exchanged 1,007,742 shares of Series B
preferred stock for cancellation of $2,237,187 in notes payable to SJHO. At the
same time, all of the OCMCS common stock was issued to an executive officer and
two member physicians. The OCMCS Series B preferred stock is owned by a venture
capital fund and SJHO.
The Company is comprised of a medical group division (Medical Group),
occupational medicine division (Occupational Medicine Division) (sold on October
20, 1997, effective September 30, 1997) and an IPA division (IPA). The Medical
Group provides services to patients at primary care clinical sites in Orange
County. The Occupational Medicine Division provides services to patients at
workers' compensation clinical sites in Orange County. The IPA contracts on
behalf of SJMC with various health maintenance organizations (HMOs), and, at
September 30, 1997 and December 31, 1996, provided coverage to approximately
125,000 and 122,000 members, respectively. SJMC has entered into provider
contracts with primary care and specialist physicians who provide services from
their own offices. In addition, the Medical Group provides primary care services
for approximately 49,000 and 50,000 of the IPA's members at September 30, 1997
and December 31, 1996, respectively. The SJMC common stock is owned by
physicians practicing in its network.
Basis of Presentation
The combined financial statements include the accounts of OCMCS (including
the results of operations of the Predecessor through December 14, 1995), and
SJMC. SJMC owns a majority voting interest in OCMCS; however, due to certain
participatory rights of the minority shareholders, SJMC is not deemed to have a
controlling financial interest in OCMCS. Such accounts have been combined since
OCMCS and SJMC are under common management for all periods presented and these
financial statements represent the results of a single business enterprise. All
significant intercompany transactions and balances have been eliminated in
combination. The Company accounts for its 49% interest in the East Edinger
Management Company under the equity method of accounting.
Management Services Agreement
The Agreement has a term of 50 years, which renews automatically and
perpetually for additional one-year terms, unless either party notifies the
other of its intention to terminate at least 90 days prior to renewal date.
Either party may terminate the Agreement if there is a material breach of
contract that is not timely corrected. SJMC is solely responsible for the
practice of medicine and delivery of medical services, including but not limited
to diagnosis, treatment, referrals, surgery and therapy.
F-7
<PAGE> 112
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under the Agreement, OCMCS has agreed to provide administrative and
operational services such as contract management, network development, provider
and member services, marketing, financial reporting, utilization review, case
management, claims processing and payment, and quality assurance for a fee,
based upon a contractual formula.
Revenue Recognition
Operating revenue consists primarily of fees for medical services provided
by SJMC under capitated contracts with various managed care payors including
HMOs or under fee-for-service type arrangements. Capitation payments from
third-party payors are paid monthly and are recognized as capitation revenue in
the month received. Contracts with third-party payors are generally renewable on
an annual basis and are subject to cancellation upon 30 to 180 days notice by
either party. Revenue for fee-for-service arrangements is recognized as the
services are rendered.
As a cost control incentive, certain third-party payors have established
shared-risk pools through which SJMC shares in any surplus (deficit) of budgeted
amounts over (under) actual hospital utilization costs. The budgets are agreed
to at the commencement of each contract year. Under the Agreement, SJMC assigns
any surplus received (deficit payable) to OCMCS. Estimates of shared-risk funds
to be received or paid by the Company are recorded based on management's
estimates of hospital utilization. Differences between actual settlements and
amounts estimated as receivable (payable) relating to third-party payors' shared
risk pool arrangements are recorded at the time of final settlement. Included in
accounts receivable as of September 30, 1997 and December 31, 1996, is
$1,581,762 and $1,938,508, respectively, of estimated net amounts due under
these arrangements.
The following third-party payors represent more than 10% of operating
revenue for the nine months ended September 30, 1997 and the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PacifiCare Secure Horizons plan....................... 18% 16% 23%
PacifiCare commercial plans........................... 17% 11% 18%
</TABLE>
Medical Services Expense Recognition
The IPA division arranges for the provision of physician services to
enrollees principally through capitation, a fixed monthly amount payable without
regard to the frequency, extent, or nature of the physician services actually
furnished by the physicians. Benefits are provided to enrollees by the Medical
Group primary care physicians, and through contracts between the IPA and
independent primary care physicians and specialists. Specialists are paid on a
capitated or fee-for-service basis. The IPA is also responsible for certain
ancillary services. Specialists and referral physicians and ancillary costs are
included in medical services. The cost of physician services is accrued in the
period it is provided to enrollees based in part on estimates, including an
estimate for medical costs which have been incurred but not yet reported to the
Company. Salaries paid to physicians in the Medical Group are expensed when
incurred.
The IPA division has stop-loss insurance to cover unusually high costs of
physician care incurred beyond a predetermined annual amount per enrollee.
Stop-loss insurance recoveries are reported as a reduction of the cost of
medical services. Estimates of stop-loss insurance recoveries are included in
accounts receivable which, as of September 30, 1997 and December 31, 1996,
totaled $1,034,922 and $1,369,793, respectively.
F-8
<PAGE> 113
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
consist of money market funds.
Marketable Securities
Management determines the appropriate classification of marketable
securities at the time of purchase. At September 30, 1997 and December 31, 1996,
all marketable securities are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of equity. Fair
value is determined based on quoted market prices from published sources.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to seven years. The costs of
major remodeling and leasehold improvements are capitalized and amortized over
the shorter of the remaining term of the lease or the life of the asset. Capital
lease obligations are amortized over the life of the lease. Lease amortization
is included in depreciation expense.
Intangible Assets
Goodwill totaling $12,997,305 arose as the result of the September 7, 1995,
acquisition of the Company's Medical Group division (see Note 2) which had been
operating as Primary Care Doctors of California (PCDOC). The amount represents
the excess of the consideration paid and liabilities assumed over the fair value
of the assets acquired. At each reporting period, the Company reviews the
carrying value of goodwill to determine if facts and circumstances exist which
would suggest that goodwill may be impaired or that the amortization period
needs to be modified. Among the factors considered by the Company in making the
evaluation are changes in the Company's payor or physician contracts, local
market developments, changes in regulations, national health care trends,
changes in third party payment patterns and other factors. Using these factors,
if indicators are present which may indicate impairment is probable, the Company
will prepare a projection of the undiscounted cash flows of the acquired
enterprise and determine if goodwill is recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment will be made. As of
December 31, 1996, the Company determined, based on a projection of future cash
flows of the Medical Group division, which comprises all of the cash flows of
operations acquired from PCDOC, that $10,701,678 of the unamortized balance of
$12,521,678 is not recoverable through future operations. Therefore, the Company
reduced the carrying value of its investment in PCDOC with a corresponding
charge to expense of $10,701,678 as of December 31, 1996. The Company has
concluded that it will be able to realize its investment in the remaining
long-lived assets of PCDOC through future operations.
Goodwill has been recorded at cost after giving consideration to the
reduction in carrying value described above and is amortized on the
straight-line method over 25 years. Accumulated amortization is $744,370 and
$686,694 at September 30, 1997 and December 31, 1996, respectively.
Medical Malpractice Liability Insurance
SJMC maintains claims-made basis professional liability insurance coverage
for medical malpractice of $5,000,000 per claim and $8,000,000 in the aggregate
on an annual basis. In addition, SJMC and OCMCS maintain claims-made basis
professional liability insurance for errors and omissions coverage of $1,000,000
per
F-9
<PAGE> 114
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
incident and $10,000,000 in the aggregate on an annual basis. Claims-made
coverage covers only those claims reported during the policy period. An estimate
of losses, if any, for incurred but unreported claims is recorded based upon
historical experience. During January 1998, the Company renewed its existing
policies and expects to be able to continue to obtain coverage in future years.
Further, it has been the experience of the Company that substantially all claims
are reported within a year of the incident date.
The individual physicians who contract with SJMC carry their own medical
malpractice insurance.
Income Taxes
Taxes based upon income are recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method
for deferred income taxes.
Fair Value of Financial Instruments
The Company's balance sheet includes the following financial instruments:
cash and cash equivalents, marketable securities, accounts receivable, accounts
payable and accrued expenses, accrued medical claims and long-term obligations.
The Company considers the carrying amounts of current assets and liabilities in
the balance sheet to approximate the fair value of these financial instruments
because of the relatively short period of time between origination of the
instruments and their expected realization. The Company believes that the
carrying value of the long-term obligations approximates the fair value of such
obligations due to the current availability of credit at similar terms at the
balance sheet date.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable,
shared-risk and reinsurance receivables. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of payors
comprising the Company's customer base. Concentrations of credit risk with
respect to shared-risk and reinsurance receivables are limited since amounts are
generally due from large HMOs or insurance companies with significant financial
resources.
Risks and Uncertainties
The preparation of the combined 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. For example, estimates are used when accounting for
allowance for uncollectible accounts receivable and accrued medical claims.
Actual results could differ from those estimates.
Regulatory Matters
Laws and regulations governing the Medicare program are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
F-10
<PAGE> 115
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
Effective September 7, 1995, SJMC acquired PCDOC for consideration totaling
$9,043,966, consisting of a promissory notes payable of $371,119, bearing
interest at 8% payable on January 1, 1998, and the issuance of 257,744 shares of
Class A Common Stock and 175,858 shares of Class B Common Stock. This
acquisition resulted in goodwill of $12,997,305. This transaction has been
accounted for as a purchase and the operating results of PCDOC are included in
the Company's financial statements from the date of purchase.
In January 1996, the Company purchased a 49 percent interest in East
Edinger Management Company LLC (Edinger) for $1,180,400. Acquisition
consideration consisted of $500,000 in cash, a note payable of $680,400 and the
contribution of the assets of Advantage Care Medical Clinic, a wholly owned
medical clinic. The carrying value of the contributed assets was insignificant.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Equipment and leasehold improvements.............. $ 4,203,436 $ 4,326,907
Furniture and fixtures............................ 865,926 951,171
----------- -----------
5,069,362 5,278,078
Less accumulated depreciation and amortization.... (2,160,286) (1,571,168)
----------- -----------
$ 2,909,076 $ 3,706,910
=========== ===========
</TABLE>
4. INCOME TAXES
For income tax reporting purposes, OCMCS and SJMC are separate entities
that do not file a consolidated tax return. Therefore, the income tax provisions
are calculated separately for each Company and then combined for financial
reporting purposes.
The components of the provision (benefit) for income taxes for the nine
months ended September 30, 1997 and years ended December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................. $ 20,000 $ 51,326 $ 60,000
State.................................... 9,000 15,000 71,000
-------- -------- --------
29,000 66,326 131,000
Deferred:
Federal.................................. (20,000) (51,326) 150,000
State.................................... (9,000) (15,000) 50,000
-------- -------- --------
(29,000) (66,326) 200,000
Total:
Federal.................................. -- -- 210,000
State.................................... -- -- 121,000
-------- -------- --------
$ -- $ -- $331,000
======== ======== ========
</TABLE>
F-11
<PAGE> 116
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Temporary differences and carryforwards that result in deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization.................... $ 449,000 $ 283,000
Net operating loss carryforward.................. 899,000 1,402,000
Bad debt reserve................................. 220,000 705,000
Accrued expenses................................. 167,000 559,000
Alternative minimum tax credits.................. 140,000 120,000
Capital loss carryforward........................ 63,000 45,000
State taxes, net of federal benefit.............. -- 4,000
Other............................................ 78,000 76,000
--------- ---------
Total deferred tax assets.......................... $ 2,016,000 $3,194,000
========= =========
Deferred tax liabilities:
Prepaid expenses................................. $ (42,000) $ (32,000)
--------- ---------
Cash to accrual adjustment....................... -- --
--------- ---------
Total deferred tax liabilities........... (42,000) (32,000)
--------- ---------
1,974,000 3,162,000
Less valuation allowance........................... 801,303 1,989,313
--------- ---------
Net deferred tax assets............................ $ 1,172,687 $1,172,687
========= =========
</TABLE>
The combined net operating loss carryforwards for federal of $2,363,000 and
state of $1,602,000 will begin to expire in 2009.
The differences between the statutory federal income tax rate and the
effective income tax rate reported in the statement of operations for the nine
months ended September 30, 1997 and the years ended December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................... 34% (34)% 35%
State income taxes, net of federal tax benefit........ -- (3) 6
Write-off of intangible assets, amortization, and
other............................................... 2 39 7
Increase in valuation allowance....................... (36) (2) --
---- ---- ----
Effective income tax rate............................. --% --% 48%
==== ==== ====
</TABLE>
F-12
<PAGE> 117
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. MARKETABLE SECURITIES
Marketable securities consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
agencies............................ $1,048,321 $ 798 $ -- $1,049,119
Preferred stocks....................... 34,283 3,546 -- 37,829
---------- ------ ------ ----------
$1,082,604 $4,344 $ -- $1,086,948
========== ====== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
agencies............................ $1,048,321 $ -- $(10,391) $1,037,930
Preferred stocks....................... 34,283 2,217 -- 36,500
---------- ------ ------ ----------
$1,082,604 $2,217 $(10,391) $1,074,430
========== ====== ====== ==========
</TABLE>
The contractual maturities of marketable securities available-for-sale are
as follows at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less................... $ -- $ -- $ -- $ --
Due after one year through five years..... 974,942 949,871 974,942 945,609
Due after five years through ten years.... -- -- -- --
Due after ten years....................... 73,379 99,248 73,379 92,321
Preferred stocks.......................... 34,283 37,829 34,283 36,500
---------- ------ ------ ----------
$1,082,604 $1,086,948 $1,082,604 $1,074,430
========== ====== ====== ==========
</TABLE>
Realized gains and losses for securities sold in 1997, 1996 and 1995 were
insignificant.
F-13
<PAGE> 118
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Secured revolving credit note, varying interest rate,
payable quarterly with principal due in full in April
2000.................................................. $ 6,500,000 $ 4,000,000
Notes payable to former shareholders, interest at 8.0%
payable quarterly with principal due in full in
January 1998.......................................... 1,238,140 2,029,579
Note payable to individual, due in monthly installments
of $22,680 plus interest at prime plus 1.5% through
July 1, 1998.......................................... 204,120 408,240
Notes payable to banks, due in varying monthly
installments at various rates from 10.50% to 13.82%
through September 1999................................ -- 12,556
Notes payable to SJHO, principal due in monthly
installments of $1,322 plus interest at 8.0% through
February 1999......................................... -- 33,742
Unsecured non-interest bearing notes payable to
shareholders, due in varying quarterly installments
through August 1996................................... -- --
Capital lease obligations............................... 3,878 179,033
---------- ----------
7,946,138 6,663,150
Less current maturities................................. 1,758,638 378,054
---------- ----------
$ 6,187,500 $ 6,285,096
========== ==========
</TABLE>
At January 1, 1996, the Company had a revolving credit agreement with a
bank for $5,600,000 with interest at the bank's prime rate (8.5% at January 1,
1996), payable quarterly. In August 1996, the Company entered into an amendment
to this credit agreement. Under this amendment, the credit available was
increased to $15,600,000, the method of computing interest was modified, and the
final maturity date was changed to April 1, 1999. Under this amended agreement,
interest charges are to be based on two options: the prime interest rate (8.5%
as of September 30, 1997), or the Euro-rate plus .75% (Euro-rate 5.66% as of
September 30, 1997). Interest is payable quarterly, with the revolving credit
agreement expiring on March 31, 1997. At March 31, 1997, the outstanding balance
under the revolving credit agreement converted to a term loan agreement. Under
the term agreement, quarterly principal payments are due through the final
maturity date when all unpaid principal and interest is due. The amounts
outstanding under the revolving credit agreement totaled $6,500,000 at September
30, 1997 and $4,000,000 at December 31, 1996, and have been classified as
long-term. The revolving credit agreement is guaranteed by SJHO. The revolving
credit agreement is secured by equipment and accounts receivable and is subject
to financial covenants, including maintenance of tangible net worth and net
income (loss) within certain limits.
On March 31, 1997, the Company entered into an amendment to the revolving
credit agreement. Under this amendment, the revolving credit agreement was
extended until March 31, 1998, and the final maturity date was changed to April
1, 2000. The quarterly principal payments due under the term loan from June 30,
1998 until April 1, 2000, are the same as the principal payments that were due
under the July 1996 amendment.
Interest paid for the nine months ended September 30, 1997 and the years
ended December 31, 1996 and 1995, totaled $339,708, $813,565 and $151,815,
respectively.
F-14
<PAGE> 119
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt and capital lease obligations at September 30,
1997, are summarized as follows:
<TABLE>
<S> <C>
1998................................................... $1,758,638
1999................................................... 625,000
2000................................................... 5,562,500
----------
$7,946,138
==========
</TABLE>
7. PAID-IN CAPITAL
Following is a summary of the components of paid-in capital, shares
authorized, issued and outstanding for the companies comprising the combined
Company as of December 31:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Orange Coast Managed Care Services, Inc.:
Common stock, $.001 par value; 14,000,000 shares
authorized; 560,000 and 360,000 shares issued and
outstanding as of September 30, 1997 and December 31,
1996, respectively................................... $ 560 $ 360
Series A preferred stock, $.001 par value; 7,181,150
shares authorized, issued and outstanding at
September 30, 1997 and December 31, 1996............. 7,181 7,181
Series B preferred stock, $.001 par value; 3,607,742
shares authorized; 3,107,742 and 3,107,742 shares
issued and outstanding as of September 30, 1997 and
December 31, 1996, respectively...................... 3,108 3,108
Additional paid-in capital.............................. 11,716,644 11,672,844
St. Joseph Medical Corporation:
Class A voting common stock, no par value, 1,000,000
shares authorized; 408,674 and 418,044 shares issued
and outstanding as of September 30, 1997 and December
31, 1996, respectively............................... 2,951,644 3,126,802
Class B non-voting common stock, no par value, 500,000
shares authorized; 306,377 and 308,484 issued and
outstanding as of September 30, 1997 and December 31,
1996, respectively................................... 2,480,464 2,532,231
----------- -----------
17,159,601 17,342,526
Elimination of SJMC's investment in OCMCS................. (2,207,382) (2,207,382)
----------- -----------
Total paid-in capital..................................... $ 14,952,219 $ 15,135,144
=========== ===========
</TABLE>
OCMCS's authorized capital stock consists of 24,788,892 shares comprised of
10,788,892 shares of preferred stock, par value $0.001 per share and 14 million
shares of common stock, par value $0.001 per share. The preferred stock is
divided into 7,181,150 shares of Series A preferred stock (wholly owned by SJMC)
and 3,607,742 shares of Series B preferred stock. OCMCS has reserved 7,181,150
and 3,607,742 shares of common stock for issuance upon conversion of the Series
A and Series B preferred stock, respectively. The preferred stock is convertible
into common stock with liquidation preferences of $0.09 per share plus declared
but unpaid dividends on such share for Series A preferred stock and $2.22 per
share plus declared but unpaid dividends on such share for Series B preferred
stock as of September 30, 1997. The holders of the Series B preferred stock are
entitled to receive payment prior to the holders of the Series A preferred
stock.
F-15
<PAGE> 120
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PAID-IN CAPITAL (CONTINUED)
The conversion ratio of Series A and Series B stock into common stock is
one to one, subject to certain adjustments for dilutive issuances, stock splits
and combinations. Series A and Series B stock will automatically be converted
into common stock upon the earlier of (i) the corporation's sale of its common
stock in a firm commitment underwritten public offering at an offering price of
not less than $8.00 per share and $15,000,000 in the aggregate or (ii) the date
specified by written consent or agreement of the holders of a majority of the
then outstanding shares of each of the Series A and Series B stock.
Holders of the Series A and Series B stock are entitled to receive
dividends in an amount equal to that paid on the outstanding common stock as
determined on an as-if-converted basis. Holders of the common stock shall
receive such dividends as may be declared from time to time subject to the prior
rights of holder of all classes of stock.
During 1996, OCMCS established an incentive stock option plan (the Plan)
under which the Company granted stock options to certain executives and key
employees. Under the Plan, a maximum of 1,910,000 options to purchase shares of
common stock may be granted at prices not less than 100% of the then fair market
value at the date of grant. In April 1997, the Plan was amended to provide a
maximum of 2,200,000 options to purchase shares. As of September 30, 1997, total
options granted and outstanding in the plan are 1,804,354 with an exercise price
of $0.22. Under the individual option agreements issued pursuant to the Plan,
shares vest over periods ranging from 30 to 48 months.
Following is a summary of stock option activity:
<TABLE>
<S> <C>
January 1, 1996................................................... --
Granted........................................................... 2,235,500
Exercised......................................................... --
Canceled.......................................................... (340,417)
---------
Outstanding at December 31, 1996.................................. 1,895,083
Granted........................................................... 220,000
Exercised......................................................... (200,000)
Canceled.......................................................... (110,729)
---------
Outstanding at September 30, 1997................................. 1,804,354
=========
</TABLE>
The weighted average fair value of the stock options granted during 1997
was $.25 per share. The fair value of each stock option grant is estimated on
the date of grant using the minimum value option pricing model with the
following weighted average assumptions used for grants in 1997: risk-free
interest rate of 6.2% expected dividend yield of 0% and expected life of 6.5
years.
The outstanding stock options at September 30, 1997, have a weighted
average remaining contractual life of 3 years. Stock options exercisable at
September 30, 1997 and December 31, 1996, were 834,815 and 307,750,
respectively, and have a weighted average exercise price of $.22 per share.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards because the stock options were granted at
fair market value at the date of grant. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net income (loss) would
have been $2,584,200 and $(11,648,900) for the nine months ended September 30,
1997, and the year ended December 31, 1996, respectively.
F-16
<PAGE> 121
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PAID-IN CAPITAL (CONTINUED)
Following is a summary of outstanding stock options at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
STOCK OPTIONS AVERAGE WEIGHTED STOCK OPTIONS WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICE 1997 LIFE (YEARS) PRICE 1997 PRICE
- -------- --------------- ------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$.22 1,804,354 9 $ .22 834,815 $ .22
</TABLE>
During 1996, SJHO and OCMCS amended the December 14, 1995, merger and
reorganization agreement. Under this amendment, SJHO has purchased a first offer
right to purchase OCMCS. SJHO contributed $2,497,725 to OCMCS in 1996 in
connection with this agreement. The first offer right extends indefinitely, or
until such time there is an initial public offering of the shares of OCMCS.
Under the first offer right, if the OCMCS board of directors intends to
sell more than half of its assets, issue more than half of its shares to a
potential buyer or enter into a management agreement by which another party
agrees to manage the OCMCS business on a turnkey basis, OCMCS shall notify SJHO
in writing as to such intent. OCMCS shall, from the date of the notice,
exclusively negotiate in good faith with SJHO for a period of 60 days from the
date of notice.
Further, the first offer right states that in the event OCMCS receives a
bona-fide offer from any party to purchase more than half of its assets or issue
more than half of its shares to a potential buyer, or enter into a management
agreement by which another party agrees to manage the OCMCS business on a
turnkey basis, OCMCS board of directors, prior to accepting such offer, shall
notify SJHO in writing of such intent. OCMCS shall, from the date of the notice,
exclusively negotiate in good faith as to such sale with SJHO for a period of 30
days from the date of notice.
8. LEASES
The Company leases office space, medical practice space and equipment under
noncancelable operating leases. Future minimum lease payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of September 30, 1997, are as follows:
<TABLE>
<S> <C>
1998..................................................... $1,540,780
1999..................................................... 1,361,923
2000..................................................... 1,191,359
2001..................................................... 1,135,289
2002..................................................... 562,505
Thereafter............................................... 2,779,546
----------
$8,571,402
==========
</TABLE>
Net operating lease expense for the nine months ended September 30, 1997
and the years ended December 31, 1996 and 1995, totaled $1,759,085, $2,618,495
and $1,199,790, respectively.
9. RELATED PARTY TRANSACTIONS
As of September 30, 1997, the Company has outstanding sublease agreements
for medical and administrative office space with SJHO aggregating to $39,471 per
month. During 1997, 1996 and 1995, the Company incurred $355,239; $557,664 and
$346,647 of lease expense related to these leases. The Company also has sublease
agreements with physician shareholders aggregating to $7,000 per month as of
F-17
<PAGE> 122
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
September 30, 1997. During 1997, 1996 and 1995, the Company incurred $63,000,
$275,412 and $78,750 of lease expense under these sublease agreements.
The Company is liable for a loan made in connection with a split dollar
life insurance policy on the life of one of the Company's shareholders. The
amount of the loan at September 30, 1997, is $427,047 with interest paid
annually at 9.55% by the Company. All unpaid principal and interest is due at
the maturity date of the loan of February 24, 2004. The loan is secured by the
cash surrender value of the life insurance policy, which, at November 11, 1997,
is approximately $581,244. The cash surrender value of the policy may not fall
below the carrying amount of the loan, and the loan is fully secured by the cash
surrender value. After repayment of the loan, any residual amount in the cash
surrender value is the property of the shareholder.
10. PROFIT SHARING PLAN
In 1995, OCMCS had a 401(k) employee savings plan (OCMCS Plan) covering
substantially all of its employees. Participants deferred up to statutory limits
under the OCMCS Plan and OCMCS made discretionary contributions. PCDOC had a
profit sharing 401(k) plan covering substantially all of its nonphysician
employees and a profit sharing 401(k) plan covering substantially all of its
physician employees (collectively referred to as the PCDOC Plans). The PCDOC
Plans allowed employees to contribute up to statutory limits or to limits
established by the Company. Such employee contributions were matched by the
Company, as provided for in the PCDOC Plans. In addition, the PCDOC Plans
allowed for discretionary contributions by the Company. Amounts charged to
expense applicable to the three plans totaled $317,784 for the year ended
December 31, 1995.
Effective January 1, 1996, SJMC adopted and amended one of the PCDOC Plans
to provide a 401(k) plan for substantially all of the Company's employees. The
plan allows employees to contribute up to statutory limits or to limits
established by the Company. SJMC has established 1996 employee contribution
limits of nine percent of compensation, as defined. Such employee contributions
are matched by the Company as provided for in the plan. In addition, the plan
allows for discretionary contributions by the Company. The amount charged to
expenses applicable to the plan was $175,042 and $283,298 for the nine months
ended September 30, 1997 and the year ended December 31, 1996.
11. GAIN ON SALE OF A DIVISION AND OTHER
During the nine months ended September 30, 1997, the Company sold its
Occupational Medicine Division to U.S. Healthworks and discontinued its
laboratory operations. The Occupational Medicine Division was sold effective
September 30, 1997 for $7,100,000 plus certain reimbursed expenses resulting in
a gain of $3,043,113. The proceeds of the sale were received in October 1997.
The laboratory operations were discontinued effective June 1997. The Company
incurred expenses of $234,679, related to the cancellation of operating leases
associated with the laboratory operations.
In September 1995, SJMC and Monarch HealthCare, Inc. (Monarch) signed a
non-binding letter of intent to combine the businesses of these two
organizations. During 1996, SJMC and Monarch abandoned the merger plans. In
connection with this planned merger, $461,500 in merger-related expenses were
incurred by SJMC. At the time that the planned merger was abandoned, these costs
were expensed and are included as merger-related expenses in the combined
statements of operations.
12. SUBSEQUENT EVENT
On January 21, 1998, OCMCS and SJMC agreed to merge with FPA Medical
Management, Inc. and FPA Medical Management of California, Inc. in exchange for
common stock of FPA Medical Management,
F-18
<PAGE> 123
ST. JOSEPH MEDICAL CORPORATION AND
ORANGE COAST MANAGED CARE SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENT (CONTINUED)
Inc. valued at a floor of $50,000,000 depending on the price of the FPA common
stock for a period of 21 trading days ending two days prior to the closing.
The Company has capitalized cost incurred in the nine months ended
September 30, 1997 in the amount of $291,000 primarily related to its
application for a Limited Knox-Keene license that the Company continues to
pursue. At the closing of the merger discussed above, these costs will be
expensed.
F-19
<PAGE> 124
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 21, 1998
BY AND AMONG
FPA MEDICAL MANAGEMENT, INC.,
FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC.,
ORANGE COAST MANAGED CARE SERVICES, INC.
AND
ST. JOSEPH MEDICAL CORPORATION
<PAGE> 125
TABLE OF CONTENTS
ARTICLE I
THE MERGER
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1.1 The Merger..................................................................... A-1
1.2 Effective Time................................................................. A-1
1.3 Closing........................................................................ A-1
1.4 Articles of Incorporation and Bylaws of the Surviving Corporation.............. A-1
1.5 Directors and Officers of the Surviving Corporation............................ A-1
1.6 Effects of the Merger.......................................................... A- 2
1.7 Further Assurances............................................................. A- 2
1.8 Tax Treatment.................................................................. A- 2
1.9 Pooling Treatment.............................................................. A- 2
ARTICLE II
EXCHANGE OF SHARES
2.1 Exchange of Shares............................................................. A-2
(a) Capital Stock of OCMCS and SJMC........................................... A-2
(b) Cancellation of OCMCS/SJMC Stock.......................................... A-3
(c) Fractional Shares......................................................... A-3
(d) Dissenting Shares......................................................... A-4
(e) OCMCS Options Procedure................................................... A-4
(f) Cancellation of Treasury Stock............................................ A-4
2.2 Exchange of Certificates....................................................... A-5
(a) Exchange Agent............................................................ A-5
(b) FPA Stock Exchange Procedures............................................. A-5
(c) Distributions with Respect to Unexchanged Shares.......................... A-5
(d) No Further Ownership Rights in OCMCS Stock or SJMC Stock.................. A-6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF OCMCS
3.1 Organization and Qualification................................................. A-6
3.2 Capital Structure.............................................................. A-6
3.3 No Subsidiaries................................................................ A-7
3.4 Authority...................................................................... A-7
3.5 Consents and Approvals......................................................... A-7
3.6 No Breach...................................................................... A-7
3.7 Certificate of Incorporation; Bylaws........................................... A-7
3.8 OCMCS and SJMC Financial Statements............................................ A-7
3.9 Absence of Changes............................................................. A-8
3.10 Absence of Undisclosed Liabilities............................................. A-8
3.11 Title to Assets................................................................ A-8
3.12 Agreements..................................................................... A-9
3.13 Insurance...................................................................... A-9
3.14 Taxes.......................................................................... A-9
3.15 Litigation..................................................................... A-10
3.16 Compliance with Laws, Etc...................................................... A-10
</TABLE>
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3.17 Brokers........................................................................ A-10
3.18 Employees...................................................................... A-10
3.19 Employee Benefit Plans; ERISA.................................................. A-10
3.20 Permits, Etc................................................................... A-12
3.21 Labor Controversies............................................................ A-12
3.22 Tax-Free Reorganization........................................................ A-12
3.23 Registration Statement and Proxy Statement/Prospectus.......................... A-12
3.24 Disclosure..................................................................... A-12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SJMC
4.1 Organization and Qualification................................................. A-13
4.2 Capital Structure.............................................................. A-13
4.3 No Subsidiaries................................................................ A-13
4.4 Authority...................................................................... A-13
4.5 Consents and Approvals......................................................... A-14
4.6 No Breach...................................................................... A-14
4.7 Articles of Incorporation, Bylaws.............................................. A-14
4.8 OCMCS and SJMC Financial Statements............................................ A-14
4.9 Absence of Changes............................................................. A-14
4.10 Absence of Undisclosed Liabilities............................................. A-15
4.11 Title to Assets................................................................ A-15
4.12 Agreements..................................................................... A-15
4.13 Insurance...................................................................... A-16
4.14 Taxes.......................................................................... A-16
4.15 Litigation..................................................................... A-16
4.16 Compliance with Laws, Etc...................................................... A-16
4.17 Brokers........................................................................ A-16
4.18 Employees...................................................................... A-16
4.19 Employee Benefit Plans; ERISA.................................................. A-17
4.20 Permits, Etc................................................................... A-18
4.21 Labor Controversies............................................................ A-18
4.22 Accounting Matters............................................................. A-18
4.23 Tax-Free Reorganization........................................................ A-18
4.24 Registration Statement and Proxy Statement/Prospectus.......................... A-18
4.25 Disclosure..................................................................... A-19
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FPA AND SUB
5.1 Organization and Qualification................................................. A-19
(a) FPA....................................................................... A-19
(b) Sub....................................................................... A-19
5.2 Capital Structure.............................................................. A-19
(a) FPA....................................................................... A-19
(b) Sub....................................................................... A-20
5.3 Authority...................................................................... A-21
5.4 Consents and Approvals......................................................... A-21
5.5 No Breach...................................................................... A-21
</TABLE>
ii
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<TABLE>
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5.6 Charter Documents.............................................................. A-21
5.7 SEC Reports and FPA Financial Statements....................................... A-21
5.8 Absence of Changes............................................................. A-21
5.9 Absence of Undisclosed Liabilities............................................. A-21
5.10 Taxes.......................................................................... A-21
5.11 Litigation..................................................................... A-21
5.12 Compliance with Laws, Etc...................................................... A-22
5.13 Brokers........................................................................ A-22
5.14 Permits, Etc................................................................... A-22
5.15 Accounting Matters............................................................. A-22
5.16 Tax-Free Reorganization........................................................ A-22
5.17 Registration Statement and Proxy Statement..................................... A-23
5.18 Multi-State Payor Contracts.................................................... A-23
5.19 Disclosure..................................................................... A-23
ARTICLE VI
PRE-CLOSING COVENANTS
6.1 Conduct of Business............................................................ A-23
6.2 Covenants of FPA and Sub....................................................... A-24
6.3 Advice of Changes.............................................................. A-25
6.4 Access to Information; Confidentiality......................................... A-25
6.5 Registration Statement and Proxy Statement..................................... A-26
6.6 Inclusion of Shares on Nasdaq.................................................. A-26
6.7 Approval of the OCMCS Stockholders and the SJMC Shareholders................... A-26
6.8 Regulatory and Other Approvals................................................. A-26
6.9 Expenses....................................................................... A-26
6.10 Notice and Cure................................................................ A-26
6.11 Fulfillment of Conditions...................................................... A-27
6.12 No Solicitations............................................................... A-27
6.13 Pooling of Interests........................................................... A-27
6.14 Affiliate Letters.............................................................. A-27
6.15 Public Announcements........................................................... A-28
6.16 Third Party Consents........................................................... A-28
(a) HSR Act................................................................... A-28
(b) Knox-Keene Act............................................................ A-28
(c) Other Consents............................................................ A-28
6.17 Updated OCMCS and SJMC Financial Statements.................................... A-28
ARTICLE VII
CONDITIONS TO CLOSING
7.1 Conditions to the Obligations of the Parties................................... A-28
7.2 Conditions to the Obligations of FPA and Sub................................... A-29
7.3 Conditions to the Obligations of OCMCS and SJMC................................ A-30
ARTICLE VIII
TERMINATION AND SURVIVAL
8.1 Termination.................................................................... A-30
8.2 Effect of Termination.......................................................... A-31
</TABLE>
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<TABLE>
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ARTICLE IX
POST CLOSING OBLIGATIONS
9.1 Further Assurances............................................................. A-31
9.2 Cooperation in Litigation...................................................... A-31
9.3 Retention of Books and Records................................................. A-31
9.4 Malpractice Protection......................................................... A-31
9.5 Provider Relations............................................................. A-32
9.6 Employees...................................................................... A-33
9.7 Directors' and Officers' Indemnification and Insurance......................... A-34
ARTICLE X
INDEMNIFICATION
10.1 Indemnification by the OCMCS Stockholders and the SJMC Shareholders............ A-35
10.2 Indemnification by FPA and Sub................................................. A-35
10.3 Indemnification Procedure...................................................... A-35
10.4 Survival and Limitations....................................................... A-36
10.5 Reduction for Insurance and Taxes.............................................. A-36
ARTICLE XI
MISCELLANEOUS
11.1 Expenses....................................................................... A-36
11.2 Notices........................................................................ A-37
11.3 Counterparts................................................................... A-37
11.4 Entire Agreement............................................................... A-37
11.5 Construction................................................................... A-37
11.6 Assignment..................................................................... A-37
11.7 Amendment...................................................................... A-37
11.8 Applicable Law................................................................. A-37
11.9 No Third Party Rights.......................................................... A-38
11.10 Waivers........................................................................ A-38
11.11 Severability................................................................... A-38
</TABLE>
iv
<PAGE> 129
This AGREEMENT AND PLAN OF MERGER dated as of January 21, 1998 (the
"Signing Date") is made and entered into by and among FPA Medical Management,
Inc., a Delaware corporation ("FPA"), FPA Medical Management of California,
Inc., a California corporation and wholly-owned subsidiary of FPA ("Sub"),
Orange Coast Managed Care Services, Inc., a Delaware corporation ("OCMCS"), and
St. Joseph Medical Corporation, a California professional corporation ("SJMC").
WHEREAS, FPA, Sub, OCMCS and SJMC have each determined that it is advisable
and in their best interests to consummate, and have approved, the business
combination transaction provided for herein in which OCMCS and SJMC would merge
with and into Sub (the "Merger"); and
WHEREAS, FPA, Sub, OCMCS and SJMC desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2), upon
the terms and subject to the conditions of this Agreement, SJMC shall be merged
with and into Sub in accordance with the California Corporations Code (the
"California Code") and immediately thereafter OCMCS shall be merged with and
into Sub in accordance with the Delaware General Corporation Law (the "Delaware
Code") and the California Code. Sub shall be the surviving corporation in the
Merger (the "Surviving Corporation"). OCMCS, SJMC and Sub are sometimes referred
to herein as the "Constituent Corporations." As a result of the Merger, the
outstanding shares of capital stock of the Constituent Corporations shall be
exchanged or canceled in the manner provided in Article II.
1.2 Effective Time. At the Closing (as defined in Section 1.3), an
agreement of merger (the "Agreement of Merger") shall be duly prepared and
executed by the Surviving Corporation and an officers' certificate for each
Constituent Corporation shall be duly prepared and executed by the appropriate
officers of each such Constituent Corporation and thereafter delivered to the
Secretary of State of the States of Delaware and California (the "Secretary of
State") for filing, as provided in Section 252 of the Delaware Code and Section
1103 of the California Code, on, or as soon as practicable after, the Closing
Date (as defined in Section 1.3). The Merger shall become effective at the time
of filing of the Agreement of Merger (such date and time being referred to
herein as the "Effective Time").
1.3 Closing. The closing of the Merger (the "Closing") will take place at
the offices of FPA, 3636 Nobel Drive, Suite 200, San Diego, California 92122, or
at such other place as the parties hereto mutually agree, on a date and at a
time to be specified by the parties, which shall in no event be later than 10:00
a.m., local time, on the day the conditions set forth in Article VII have been
satisfied or, if permissible, waived in accordance with this Agreement, or on
such other date as the parties hereto mutually agree (the "Closing Date"). At
the Closing there shall be delivered to FPA, OCMCS, SJMC and Sub the
certificates and other documents and instruments required to be delivered under
Article VII.
1.4 Articles of Incorporation and Bylaws of the Surviving Corporation. At
the Effective Time, (i) the Articles of Incorporation of Sub as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation until thereafter amended as provided by law and
such Articles of Incorporation and (ii) the Bylaws of Sub as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by law, the Articles of
Incorporation of the Surviving Corporation and such Bylaws.
1.5 Directors and Officers of the Surviving Corporation. The directors and
officers of Sub, respectively, immediately prior to the Effective Time shall,
from and after the Effective Time, be the directors and officers, respectively,
of the Surviving Corporation until their successors shall have been duly elected
or appointed and
A-1
<PAGE> 130
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Articles of Incorporation and Bylaws.
1.6 Effects of the Merger. Subject to the foregoing, the effects of the
Merger shall be as provided in the applicable provisions of the Delaware Code
and the California Code.
1.7 Further Assurances. Each party hereto will execute such further
documents and instruments and take such further actions as may reasonably be
requested by one or more of the others to consummate the Merger, to vest the
Surviving Corporation with full title to all assets, properties, rights,
approvals, immunities and franchises of all of the Constituent Corporations or
to effect the other purposes of this Agreement.
1.8 Tax Treatment. The parties intend that the Merger be treated as a
reorganization described in Sections 368(a)(1)(A) and 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended (the "Code").
1.9 Pooling Treatment. The parties intend that the acquisition of the SJMC
Shares (as hereinafter defined) as contemplated by this Agreement be accounted
for as a pooling of interests for financial and accounting purposes.
ARTICLE II
EXCHANGE OF SHARES
2.1 Exchange of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof, the number of shares of
fully paid and nonassessable shares of common stock, par value $.002 per share
of FPA (the "FPA Common Stock"), issuable at the Effective Time shall be
determined as follows:
(a) Capital Stock of OCMCS and SJMC. The number of shares of FPA
Common Stock, issuable at the Effective Time (the "Aggregate FPA Shares")
to holders of all the issued and outstanding shares of OCMCS Common Stock,
$.001 par value per share ("OCMCS Common"), Series A Preferred Stock of
OCMCS, $.001 par value per share ("OCMCS Series A Preferred"), Series B
Preferred Stock of OCMCS, $.001 par value per share ("OCMCS Series B
Preferred") (the OCMCS Series A Preferred and the OCMCS Series B Preferred
are collectively referred to as the "OCMCS Preferred"), SJMC Class A Common
Stock of SJMC, $.001 par value per share ("SJMC Class A Common") and SJMC
Class B Common Stock of SJMC, $.001 par value per share ("SJMC Class B
Common") (the SJMC Class A Common and the SJMC Class B Common are
collectively referred to as the "SJMC Common"), and all outstanding
warrants or options to purchase OCMCS Common shall be determined as
follows:
(i) First, the Aggregate FPA Shares shall be determined as follows:
A. In the event the average of the closing prices of FPA Common
Stock for the twenty-one (21) consecutive trading days ending on the
second trading day prior to Closing (as defined below) as reported on
the Nasdaq National Market System ("Nasdaq") (the "Closing Price") is
equal to or greater than $20.6897 and equal to or less than $24.00
the Aggregate FPA Shares shall be determined by dividing Sixty
Million Dollars ($60,000,000) by the Closing Price;
B. In the event that the Closing Price is greater than $17.24
and less than $20.6897, then the Aggregate FPA Shares shall equal Two
Million Nine Hundred Thousand (2,900,000); and
C. Subject to Section 2.1(a)(i)(E), in the event that the
Closing Price is equal to or less than $17.24, then the Aggregate FPA
Shares shall be determined by dividing Fifty Million Dollars
($50,000,000) by the Closing Price; and
D. In the event that the Closing Price is greater than $24.00,
then the Aggregate FPA Shares shall equal Two Million Five Hundred
Thousand (2,500,000); and
A-2
<PAGE> 131
E. In the event that the Closing Price is less than $15.00, then
FPA may terminate this Agreement and the transactions contemplated
hereby.
(ii) Second, the Aggregate FPA Shares shall be allocated between
OCMCS and SJMC as follows:
A. SJMC shall receive that portion of the Aggregate FPA Shares
multiplied by the fraction, the numerator of which shall be the
number of shares of OCMCS Common into which the shares of Series A
Preferred held by SJMC are convertible and the denominator of which
shall be the sum of (a) outstanding shares of OCMCS Common, (b) the
shares underlying options for OCMCS Common which are vested and
exercisable (taking into account accelerated vesting as a result of
the Merger) ("OCMCS Options"), (c) the number of shares of OCMCS
Common into which the issued and outstanding shares of Series B
Preferred are convertible and (d) the number of shares of OCMCS
Common into which the outstanding shares of Series A Preferred are
convertible, all as of the Effective Time (the "SJMC Aggregate
Consideration"). SJMC shall, in turn, distribute the SJMC Aggregate
Consideration to its shareholders in accordance with their respective
ownership interest in SJMC. The shares of Series A Preferred shall be
canceled as a result of the Merger without consideration or payment
therefor.
B. OCMCS shall receive that portion of the Aggregate FPA Shares
equal to the amount obtained by subtracting the SJMC Aggregate
Consideration from the Aggregate FPA Shares (the "OCMCS Aggregate
Consideration").
Each share of OCMCS Common, each OCMCS Option and each share of
Series B Preferred (on an as-converted basis) shall be converted into
and receive that number of FPA Shares equal to the OCMCS Conversion
Amount. The OCMCS Conversion Amount shall be determined by dividing
the OCMCS Aggregate Consideration by the sum of (a) the number of
issued and outstanding shares of OCMCS Common immediately prior to
the Effective Time, (b) the number of shares of OCMCS Common
underlying all fully vested, outstanding and unexercised options and
warrants to purchase OCMCS Common (taking into account accelerated
vesting as a result of the Merger) immediately prior to the Effective
Time, and (c) the number of Shares of OCMCS Common into which the
outstanding shares of Series B Preferred are convertible as to the
Effective Time.
(iii) Notwithstanding the foregoing, Dissenting Shares shall be
treated in accordance with Section 2.1(d) and fractional shares of FPA
Common Stock that would be issuable to any holder of Preferred Stock,
OCMCS Common or SJMC Common shall be treated in accordance with Section
2.1(c).
(iv) Each OCMCS Option shall be treated as the right to receive, in
consideration for payment of the exercise price set forth in such OCMCS
Option, that number of shares of FPA Common Stock per share of OCMCS
Common underlying each fully vested OCMCS Option equal to the OCMCS
Common Conversion Amount.
(b) Cancellation of OCMCS/SJMC Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof, all
shares of OCMCS Common, OCMCS Preferred and SJMC Common (collectively, the
"OCMCS Stock and SJMC Stock") shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have
any rights with respect thereto, except the right to receive the shares of
FPA Common Stock and any cash in lieu of fractional shares of FPA Common
Stock to be issued or paid in consideration therefor (determined in
accordance with Section 2.1(c)), upon the surrender of such certificate in
accordance with Section 2.2, without interest.
(c) Fractional Shares. No fractional shares of FPA Common Stock shall
be issued, but in lieu thereof each holder of shares of OCMCS Stock and
SJMC Stock who would otherwise be entitled to receive a fraction of a share
of FPA Common Stock (after aggregating all fractional shares of FPA
A-3
<PAGE> 132
Common Stock to be received by such holder), shall receive from FPA an
amount of cash (rounded down to the nearest whole cent) equal to the
product of the fraction of a share of FPA Common Stock to which such holder
would otherwise be entitled, times the Closing Price.
(d) Dissenting Shares.
(i) If applicable, notwithstanding any provision of this Agreement
to the contrary, each outstanding share of OCMCS Stock and SJMC Stock,
the holder of which has not voted in favor of the Merger, has perfected
such holder's right to an appraisal of such holder's shares in
accordance with the applicable provisions of the Delaware Code or the
California Code, as the case may be, and has not effectively withdrawn
or lost such right to appraisal (a "Dissenting Share"), shall not be
converted into a right to receive shares of FPA Common Stock pursuant to
Section 2.1(a), but the holder thereof shall be entitled only to such
rights as are granted by the applicable provisions of the Delaware Code
or the California Code, as the case may be; provided, however, that any
Dissenting Share held by a person at the Effective Time who shall, after
the Effective Time, withdraw the demand for appraisal or lose the right
of appraisal, in either case pursuant to the Delaware Code or the
California Code, as the case may be, shall be deemed to be converted
into, as of the Effective Time, the right to receive shares of FPA
Common Stock pursuant to Section 2.1(a).
(ii) OCMCS and SJMC shall give FPA and Sub (x) prompt notice of any
written demands for appraisal, withdrawals of demands for appraisal and
any other instruments served pursuant to the applicable provision of the
Delaware Code or the California Code, as the case may be, relating to
the appraisal process received by OCMCS or SJMC and (y) the opportunity
to direct all negotiations and proceedings with respect to demands for
appraisal under the Delaware Code or the California Code, as the case
may be. OCMCS and SJMC will not voluntarily make any payment with
respect to any demands for appraisal and will not, except with the prior
written consent of FPA and Sub, settle or offer to settle any such
demands.
(e) OCMCS Options Procedure. Within five (5) business days after the
Effective Time, FPA shall mail, or cause to be mailed by the Exchange
Agent, to each holder of record of an agreement which immediately prior to
the Effective Time represented an outstanding OCMCS Option (collectively,
the "OCMCS Option Agreements") notification of the number of shares of FPA
Common Stock with respect to which such OCMCS Option is exercisable as a
result of the Merger as described in Section 2.1 above. Upon surrender of
an OCMCS Option Agreement in accordance with its terms for cancellation to
FPA (an affidavit of lost OCMCS Option Agreement shall be sufficient if the
OCMCS Option is reflected in Exhibit 3.2), and payment of the exercise
price specified in such OCMCS Option Agreement and applicable federal and
state withholding taxes, the holder of such OCMCS Option shall be entitled
to receive in exchange therefor (i) a certificate representing that number
of whole shares of FPA Common Stock to which such holder of OCMCS Options
shall become entitled pursuant to Section 2.1 above, and (ii) if
applicable, a check representing the amount of cash in lieu of fractional
shares of FPA Common Stock.
(f) Cancellation of Treasury Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof, all
shares of capital stock owned by OCMCS as treasury stock shall be canceled
and retired and shall cease to exist and no stock of FPA or other
consideration shall be delivered in exchange therefor.
(g) FPA Common Stock Transfer Restrictions. Notwithstanding anything
contained in this Agreement to the contrary, the shares of FPA Common Stock
to be received in exchange for the OCMCS Common Stock, the OCMCS Preferred
Stock and the OCMCS Options shall be restricted from sale, transfer or
other disposition for a period of 90 days commencing as of the Effective
Time; provided, however, that the holders of OCMCS Options may sell,
transfer or otherwise dispose of that number of shares of FPA Common Stock
received upon exercise of such OCMCS Options whose value equals the sum of
the exercise price payable with respect to such OCMCS Option and the
minimum statutory federal and state withholding taxes immediately due and
payable upon such exercise. All shares of FPA
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Common Stock subject to such transfer restriction shall contain a legend to
such effect which shall be removed effective upon the 91st day after the
Effective Time.
2.2 Exchange of Certificates.
(a) Exchange Agent. On the Closing Date, FPA shall make available for
deposit with American Stock Transfer & Trust Company, or any other bank or
trust company designated before the Effective Time by FPA and reasonably
acceptable to OCMCS and SJMC (the "Exchange Agent"), certificates
representing the number of duly authorized whole shares of FPA Common Stock
issuable in connection with the Merger plus an amount of cash equal to the
aggregate amount payable in lieu of fractional shares in accordance with
Section 2.1(c) to be held for the benefit of and distributed to such
holders in accordance with this Section. The Exchange Agent shall agree to
hold such shares of FPA Common Stock and funds (such shares of FPA Common
Stock and funds, together with earnings thereon, being referred to herein
as the "Exchange Fund") for delivery as contemplated by this Section and
upon such additional terms as may be agreed upon by the Exchange Agent,
FPA, Sub, OCMCS and SJMC before the Effective Time.
(b) FPA Stock Exchange Procedures. As soon as reasonably practicable
after the Effective Time, FPA shall cause the Exchange Agent to mail to
each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of OCMCS Stock
and SJMC Stock (individually, a "Certificate" and collectively, the
"Certificates"), whose shares are to be exchanged pursuant to Section
2.1(a) into the right to receive FPA Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as FPA may reasonably specify) and (ii) instructions for
use in effecting the surrender of Certificates in exchange for certificates
representing shares of FPA Common Stock and cash in lieu of fractional
shares. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal duly executed and completed
in accordance with its terms, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that
number of whole shares of FPA Common Stock, plus the cash amount payable in
lieu of fractional shares in accordance with Section 2.1(c), which such
holder has the right to receive pursuant to the provisions of this Article
II, and the Certificate so surrendered shall forthwith be canceled. In no
event shall the holder of any Certificate be entitled to receive interest
on any funds to be received in the Merger. In the event of a transfer of
ownership of OCMCS Stock or SJMC Stock which is not registered in the
transfer records of OCMCS or SJMC, as the case may be, a certificate
representing that number of whole shares of FPA Common Stock, plus the cash
amount payable in lieu of fractional shares in accordance with Section
2.1(c), may be paid and issued to a transferee if the Certificate
representing such OCMCS Stock or SJMC Stock is presented to the Exchange
Agent accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.2(b), each
Certificate shall be deemed at any time after the Effective Time for all
corporate purposes of FPA, except as limited by paragraph (c) below, to
represent ownership of the number of shares of FPA Common Stock into which
the number of shares of OCMCS Stock or SJMC Stock shown thereon have been
converted as contemplated by this Article II.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to FPA Common Stock with a record date on or after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with respect to the
shares of FPA Common Stock represented thereby and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to Section
2.1(c) until the holder of record of such Certificate shall surrender such
Certificate in accordance with this Section. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall
be paid to the record holder of the certificates representing whole shares
of FPA Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of dividends or other distributions,
if any, with a record date on or after the Effective Time which theretofore
became payable, but which were not paid by reason of the immediately
preceding sentence, with respect to such whole shares of FPA Common Stock,
and (ii) at
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the appropriate payment date, the amount of dividends or other
distributions with a record date on or after the Effective Time but prior
to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of FPA Common Stock.
(d) No Further Ownership Rights in OCMCS Stock or SJMC Stock. All
shares of FPA Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms hereof (including any cash paid
pursuant to Section 2.1(c)) shall be deemed to have been issued at the
Effective Time in full satisfaction of all rights pertaining to the shares
of OCMCS Stock or SJMC Stock represented thereby. From and after the
Effective Time, the stock transfer books of OCMCS and SJMC shall be closed
and there shall be no further registration of transfers on the stock
transfer books of FPA of the shares of OCMCS Stock and SJMC Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to FPA for any reason, they
shall be canceled and exchanged as provided in this Section.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF OCMCS
OCMCS represents and warrants to FPA and Sub that the statements contained
in this Article III are true, correct and complete as of the Signing Date and
will be true, correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the Signing Date throughout
this Article), except as set forth in the Exhibits to this Agreement.
For purposes of the representations and warranties provided in this Article
the term "Knowledge of OCMCS" shall be defined as the actual knowledge of any
person who is at the signing or Closing, as applicable, an officer or director
of OCMCS. For purposes of this Article III, the phrase "Material Adverse Effect"
or the word "Material" shall mean any event or occurrence that has or, if it
occurred reasonably would be expected to have, an adverse effect in each case in
excess of Five Hundred Thousand Dollars ($500,000) on the business, condition
(financial or otherwise), results of operations, prospects, assets (including
intangible assets), properties or liabilities (including contingent liabilities)
of OCMCS.
3.1 Organization and Qualification. OCMCS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to carry on its business as
currently conducted and to own or lease and operate its properties. OCMCS is
duly qualified, licensed or admitted to do business and is in good standing in
each jurisdiction in which the ownership, use or leasing of its assets and
properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary, except for such failure to be so qualified,
licensed or admitted and in good standing which, individually or in the
aggregate, are not having and would not be reasonably expected to have a
Material Adverse Effect on OCMCS.
3.2 Capital Structure. The authorized capital stock of OCMCS consists of
(i) Fourteen Million (14,000,000) shares of OCMCS Common, of which Eight Hundred
Seventy-Five Thousand (875,000) shares (the "OCMCS Common Shares) are issued and
outstanding; and (ii) Seven Million One Hundred Eighty-One Thousand One Hundred
Fifty (7,181,150) shares of OCMCS Series A Preferred, of which Seven Million One
Hundred Eighty-One Thousand One Hundred Fifty (7,181,150) shares (the "OCMCS
Series A Preferred Shares") are issued and outstanding; and (iii) Three Million
Six Hundred Seven Thousand Seven Hundred Forty-Two (3,607,742) shares of OCMCS
Series B Preferred, of which Three Million One Hundred Seven Thousand Seven
Hundred Forty-Two (3,107,742) shares (the "OCMCS Series B Preferred Shares") are
issued and outstanding. The OCMCS Common Shares, the OCMCS Series A Preferred
Shares and the OCMCS Series B Preferred Shares are collectively referred to
herein as the "OCMCS Shares." All the OCMCS Shares are validly issued, fully
paid, and nonassessable, and have been so issued in compliance with all federal
and state securities laws. There are no outstanding subscriptions, options,
rights, warrants, convertible securities, or other agreements or commitments
obligating OCMCS to issue or to transfer from treasury any additional shares of
its capital stock of any class other than as set forth in Exhibit 3.2.
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3.3 No Subsidiaries. OCMCS does not own, directly or indirectly, any
interest or investment (whether equity or debt) in any corporation, partnership,
business, trust, or other entity. As used in this Agreement, "Subsidiary" means,
with respect to any party hereto (a "Subject Party"), any corporation or other
organization, whether incorporated or unincorporated, (i) of which more than
fifty percent (50%) of either the equity interests in, or the voting control of,
such corporation or other organization is, directly or indirectly through
subsidiaries or otherwise, beneficially owned by such Subject Party or (ii)
which is a professional corporation as to which such Subject Party or a
subsidiary thereof has executed a succession or similar stockholder agreement.
3.4 Authority. OCMCS has the requisite power to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Board of Directors of OCMCS, and no other proceedings on
the part of OCMCS are necessary to authorize the execution, delivery and
performance of this Agreement by OCMCS and the consummation by OCMCS of the
transactions contemplated hereby except for authorization by the holders of the
outstanding shares of OCMCS (the "OCMCS Stockholders"). This Agreement has been
duly and validly executed by OCMCS and constitutes a valid and binding
obligation of OCMCS enforceable in accordance with its terms except (i) as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and (ii) by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
3.5 Consents and Approvals. Other than in connection with or in compliance
with the provisions of Delaware and California law, applicable federal and state
securities laws, the Knox-Keene Health Care Service Plan Act of 1975 (California
Health & Safety Code Section 1340 et seq.) (the "Knox-Keene Act") and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), or as
otherwise set forth on Exhibit 3.5, no consent, approval or authorization of, or
declaration, filing or registration with, any third party, including any
government or regulatory authority, is required in connection with the execution
and delivery of this Agreement by OCMCS and the consummation by OCMCS of the
transactions contemplated hereby.
3.6 No Breach. Except as provided in Exhibit 3.6, neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) conflict with, result in a breach of or constitute
a default under any of the terms, conditions or provisions of the Certificate of
Incorporation or Bylaws of OCMCS, (ii) violate any law, order, judgment or
decree to which any of OCMCS's properties or assets or its shares are bound;
(iii) violate or constitute a Material default under (whether after the giving
of notice, passage of time or both), or permit the termination of, or impair any
rights or increase any obligations of OCMCS under, any Material agreement or
instrument to which OCMCS is a party or by which any part of OCMCS's properties
or assets is bound or (iv) result in the acceleration of the maturity of any
Material debt or obligation of OCMCS or in the creation or imposition of any
Material lien, charge or encumbrance upon any of the properties or assets of
OCMCS.
3.7 Certificate of Incorporation; Bylaws. The copies of the Certificate of
Incorporation and the Bylaws of OCMCS which have been heretofore provided to FPA
and Sub are true and complete copies of such instruments as amended to date, and
such instruments are in full force and effect on the date hereof.
3.8 OCMCS and SJMC Financial Statements. Exhibit 3.8(a) sets forth true
and complete copies of the combined balance sheets of OCMCS and SJMC as of
December 31, 1996 and December 31, 1995, and the related statements of income
and retained earnings for the two years ending on those dates, audited by Ernst
& Young, LLP, OCMCS's and SJMC's independent public accountants, whose opinions
with respect to those financial statements are included in that Exhibit. Exhibit
3.8(b) sets forth unaudited combined balance sheets of OCMCS and SJMC as of
September 30, 1997, together with related unaudited statements of income and
retained earnings for the nine-month period ending on September 30, 1997,
certified by the chief financial officer of each of OCMCS and SJMC as accurately
reflecting the financial condition of OCMCS and SJMC for those periods and
accurately reflecting all information normally reported to OCMCS's and SJMC's
independent public accountants for the preparation of OCMCS's and SJMC's'
financial statements. The
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financial statements in Exhibits 3.8(a) and 3.8(b) are referred to as the "OCMCS
and SJMC Financial Statements." The OCMCS and SJMC Financial Statements (i)
present fairly the financial position of OCMCS and SJMC at their respective
dates and the results of operations and cash flows for the respective periods
then ended; (ii) have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently followed by OCMCS and SJMC
throughout the periods indicated; and (iii) do not contain any 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. For purposes of this
paragraph, the term "material" shall be defined pursuant to GAAP and not using
any materiality standards applicable elsewhere in this Agreement.
3.9 Absence of Changes. Since September 30, 1997 and except as set forth
on Exhibit 3.9, OCMCS has conducted its business only in the ordinary course
consistent with past practice and there has been no change and no development in
the business, properties, operations, condition (financial or otherwise), or
results of operations of OCMCS, that had or would be reasonably expected to have
a Material Adverse Effect on OCMCS, and there has not been any:
(a) Capital expenditure by OCMCS exceeding Two Hundred Fifty Thousand
Dollars ($250,000) (excluding for purposes of this limitation the capital
expenditures required for the Santa Ana primary care facility
improvements);
(b) Change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates)
by OCMCS;
(c) Revaluation by OCMCS of any of its Material assets;
(d) Declaration, setting aside, or payment of a dividend or other
distribution in respect to the capital stock of OCMCS, or any direct or
indirect redemption, purchase, or other acquisition by OCMCS of any of its
shares of capital stock;
(e) Increase in the salary or other compensation payable or to become
payable by OCMCS to any of its officers, directors, or employees, or the
declaration, payment, or commitment or obligation of any kind for the
payment, by OCMCS, of a bonus or other additional salary or compensation to
any such person other than in the ordinary course of business and other
than certain severance agreements entered into with members of management;
(f) Sale or transfer of any Material asset of OCMCS, except in the
ordinary course of business or other than the sale of its occupational
medicine division; or
(g) Agreement by OCMCS to do any of the things described in the
preceding clauses 3.9(a) through 3.9(f).
3.10 Absence of Undisclosed Liabilities. OCMCS does not have any debts,
liabilities or obligations of any nature (whether absolute, accrued,
unliquidated, contingent or otherwise, whether known or unknown, and whether due
or to become due) that would be required by GAAP to be on a balance sheet of
OCMCS, other than those which (a) are set forth in the OCMCS and SJMC Financial
Statements, (b) have been specifically disclosed elsewhere herein, (c) are
exempt from disclosure pursuant to this Agreement or GAAP, or (d) have been
incurred since the date of the most recent OCMCS and SJMC Financial Statements
in the ordinary course of business in amounts and on terms consistent,
individually and in the aggregate, with OCMCS's past practice.
3.11 Title to Assets. OCMCS is in possession of and has good title to, or
has valid leasehold interests in or valid rights under any OCMCS Contract (as
defined in Section 3.12) to use, all of its properties and assets primarily used
in its business and Material to the condition (financial or other) of such
business, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (i) the lien for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not Materially detract from the value of or interfere with the
present use of the property subject thereto or affected thereby, or otherwise
Materially impair OCMCS's business operations (in the manner presently carried
on by OCMCS) or (iii) as
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disclosed in the OCMCS and SJMC Financial Statements, and except for such
matters which, individually or in the aggregate, would not have a Material
Adverse Effect on OCMCS. All leases under which OCMCS leases any Material amount
of real or personal property have been made available to FPA and Sub and are in
good standing, valid and effective in accordance with their respective terms,
and there is not, under any of such leases, any existing default by OCMCS or
event which with notice or lapse of time or both would become a default by OCMCS
other than defaults under such leases which in the aggregate would not have a
Material Adverse Effect on OCMCS.
3.12 Agreements. Exhibit 3.12 sets forth a complete and accurate list of
(i) all contracts, agreements, leases, licenses and other documents
("Contracts") to which OCMCS is a party or by which it or any of its assets is
bound as of the date of this Agreement (excluding OCMCS Employee Benefit Plans
which can be terminated at will without subjecting OCMCS to cost or penalty)
providing for a commitment for employment or consultation services for a
specified or unspecified term to, or otherwise relating to employment or the
termination of employment of, any employee; (ii) all Contracts with any Person
containing any provision or covenant prohibiting or limiting the ability of
OCMCS to engage in any business activity or compete with any Person in
connection with its business or prohibiting or limiting the ability of any
Person to compete with OCMCS in connection with its business; (iii) all
partnership, joint venture, shareholders' or other similar Contracts with any
Person in connection with OCMCS's business; (iv) all Contracts relating to the
future disposition or acquisition of assets of OCMCS, other than dispositions or
acquisitions in the ordinary course of business; (v) all other Contracts with
respect to OCMCS that (A) involve the payment or potential payment, pursuant to
the terms of any such Contract, by or to OCMCS of more than $200,000 annually
and (B) cannot be terminated within sixty (60) days after giving notice of
termination without resulting in any Material cost or penalty to OCMCS
(collectively, the "OCMCS Contracts"). Each of the OCMCS Contracts is as to
OCMCS, and to the Knowledge of OCMCS is as to the other parties to the OCMCS
Contracts, in full force and effect and enforceable in all Material respects in
accordance with its terms except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought. Except as set forth in Exhibit 3.12, to
the Knowledge of OCMCS, OCMCS has not received written notice of cancellation of
or intent to cancel any of the OCMCS Contracts and there exists no event of
default or occurrence, condition or act on the part of OCMCS or, to the
Knowledge of OCMCS, on the part of the other party(ies) to such OCMCS Contracts
which constitutes or would constitute (whether after the giving of notice,
passage of time or both) a Material breach or would cause or permit acceleration
of any Material obligation of OCMCS.
3.13 Insurance. Exhibit 3.13 is an accurate description of all insurance
policies held by OCMCS concerning its business and properties. OCMCS is not in
default with respect to payment of premiums on any such policy. OCMCS believes
that such insurance policies are commercially reasonable in amount and coverage.
Except as set forth in Exhibit 3.13 or Exhibit 3.15, no claim is pending under
any such policy.
3.14 Taxes. OCMCS has timely filed or caused to be timely filed all
federal, state, local and foreign income and other Material Tax returns required
under applicable law to be filed on or before the Closing Date (or obtained
extensions to file) (including the period from January 1, 1998 to and including
the Closing Date) and to the Knowledge of OCMCS all such returns are true and
correct in all Material respects. OCMCS has paid or made provision for all
Material Taxes and other charges which have or may become due for the periods
covered by such returns (including the period from January 1, 1998 to and
including the Closing Date). There have been no Material adverse adjustments as
a result of any examination or investigation of any period for which any such
return was or should have been filed or any Tax matter relating thereto, and
none of the tax returns or reports of OCMCS is currently under investigation or
examination. There are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any Tax return for any period.
There are no Material liens for Taxes upon any property or assets of OCMCS,
except for liens for taxes not yet due. All Taxes owed by OCMCS or which OCMCS
is obligated to withhold from amounts owing to any employee, creditor or third
party have been paid or reserved for payment. For purposes of this Agreement the
term "Taxes" means all federal, state, and local income, gross receipts, sales,
use, transfer, franchise, profits,
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social security, withholding, payroll, excise, property, or other taxes together
with any interest and any penalties with respect thereto, and the term "Tax"
means any one of the foregoing Taxes.
3.15 Litigation. Except as set forth in Exhibit 3.15, (i) there are no
actions, suits, arbitrations or proceedings to the Knowledge of OCMCS pending or
threatened against, relating to or affecting, nor to the Knowledge of OCMCS are
there any governmental or regulatory authority investigations or audits pending
or threatened against, relating to or affecting, OCMCS or any of its assets and
properties which, individually or in the aggregate, would be reasonably expected
to have a Material Adverse Effect on OCMCS or on the ability of OCMCS to
consummate the transactions contemplated by this Agreement, (ii) OCMCS is not
subject to any order of any governmental or regulatory authority which,
individually or in the aggregate, is having or would be reasonably expected to
have a Material Adverse Effect on OCMCS or on the ability of OCMCS to consummate
the transactions contemplated by this Agreement and (iii) there are no Material
Medicare, Medicaid or other managed care recoupment or recoupments of any
third-party payor being sought, threatened, requested or claimed against OCMCS.
3.16 Compliance with Laws, Etc. OCMCS is in compliance with the following,
except as set forth on Exhibit 3.16 and/or except where such noncompliance would
not have a Material Adverse Effect on OCMCS and SJMC taken as a whole: (a) all
judgments, orders, rulings, injunctions, decrees and settlements issued by or
with any court, administrative agency or other governmental authority or agency,
(b) all permits, licenses, franchises and other governmental authorizations and
(c) all federal and state laws applicable to OCMCS, including, without
limitation the handling and disposition of medical wastes and hazardous or toxic
substances. Since 1994, no state or federal governmental entity has revoked or
Materially limited any license of OCMCS Material to its business, and no
investigation or proceeding is to OCMCS's Knowledge pending or threatened, which
involves the revocation or Material limitation of any of such licenses or
certificates. To OCMCS's Knowledge, OCMCS is not in possession of any
information which would lead such party to believe that any licenses or permits
necessary to the conduct of the business of OCMCS as presently conducted will
not remain in full force and effect for the complete duration of their terms.
OCMCS has made available to FPA and Sub all Material filings made to, and all
inspection or compliance reports or correspondence received from, governmental
entities for the last three years and will make available to FPA and Sub all
other permits as requested by FPA and Sub.
3.17 Brokers. No broker, finder or investment banker has acted directly or
indirectly for OCMCS in connection with this Agreement or the transactions
contemplated hereby other than Cowen & Company. OCMCS shall have paid any and
all fees or other amounts due to Cowen & Company on or before the Closing.
3.18 Employees. Exhibit 3.18 is a list of the names of all employees of
OCMCS, stating the rates of compensation payable to each.
3.19 Employee Benefit Plans; ERISA.
(a) Except as set forth in Exhibit 3.19:
(i) to the Knowledge of OCMCS, no prohibited transaction within the
meaning of Section 406 or 407 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code with
respect to any OCMCS Employee Benefit Plan (as defined below) has
occurred during the five-year period preceding the date of this
Agreement;
(ii) there is no outstanding liability (except for premiums due)
under Title IV of ERISA with respect to any OCMCS Employee Benefit Plan;
(iii) neither the Pension Benefit Guaranty Corporation (the "PBGC")
nor OCMCS has instituted proceedings to terminate any OCMCS Employee
Benefit Plan;
(iv) full payment has been made of all amounts which OCMCS was
required to have paid as a contribution to the OCMCS Employee Benefit
Plans as of the last day of the most recent fiscal year of each of the
OCMCS Employee Benefit Plans ended prior to the date of this Agreement,
and none of the OCMCS Employee Benefit Plans has incurred any
"accumulated funding deficiency" (as
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defined in Section 302 of ERISA and Section 412 of the Code), whether or
not waived, as of the last day of the most recent fiscal year of each
such OCMCS Employee Benefit Plan ended prior to the date of this
Agreement;
(v) the value on a termination basis of accrued benefits under each
of the OCMCS Employee Benefit Plans which is subject to Title IV of
ERISA, based upon the actuarial assumptions used for funding purposes in
the most recent actuarial report prepared by such OCMCS Employee Benefit
Plan's actuary with respect to each such OCMCS Employee Benefit Plan,
did not, as of its latest valuation date, exceed the then current value
of the assets of such OCMCS Employee Benefit Plan;
(vi) except for the Section 401(k) plans maintained by Primary Care
Doctors of California, each of the OCMCS Employee Benefit Plans which is
intended to be "qualified" within the meaning of Section 401(a) of the
Code has either applied for a determination, or has been determined by
the IRS, to be so qualified and such determination has not been
modified, revoked or limited;
(vii) each of the OCMCS Employee Benefit Plans is, and its
administration is and has been during the five-year period preceding the
date of this Agreement in all Material respects in compliance with, and
OCMCS has not received any claim or notice that any such OCMCS Employee
Benefit Plan is not in compliance with, all applicable laws and orders
and prohibited transaction exemptions, including, without limitation,
the requirements of ERISA;
(viii) to the Knowledge of OCMCS, there are no Material pending,
threatened or anticipated claims involving any of the OCMCS Employee
Benefit Plans other than claims for benefits in the normal course;
(ix) to the Knowledge of OCMCS, during the five-year period
preceding the date of this Agreement, OCMCS has not entered into any
transaction which could subject such entity to liability under Section
302(c)(ii), 4062, 4063, 4064, or 4069 of ERISA and no "reportable event"
within the meaning of Section 4043 of ERISA has occurred with respect to
any OCMCS Employee Benefit Plan;
(x) OCMCS is not in default in performing any of its contractual
obligations under any of the OCMCS Employee Benefit Plans or any related
trust agreement or insurance contract;
(xi) there are no Material outstanding liabilities of any OCMCS
Employee Benefit Plan other than liabilities for benefits to be paid to
participants in such OCMCS Employee Benefit Plan and their beneficiaries
in accordance with the terms of such OCMCS Employee Benefit Plan; and
(xii) OCMCS does not maintain and is not obligated to provide
benefits under any life, medical or health plan which provides benefits
to retirees or other terminated employees other than benefit
continuation rights under the Consolidated Omnibus Reconciliation Act of
1985, as amended.
(b) Except as set forth in Section 3.19, neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will accelerate benefits under any OCMCS Employee
Benefit Plan.
(c) As used herein:
(i) "OCMCS Employee Benefit Plan" means any Plan entered into,
established, maintained, contributed to or required to be contributed to
by OCMCS and existing on the date of this Agreement or at any time
subsequent thereto and on or prior to the Effective Time and, in the
case of a Plan which is subject to Part 3 of Title I of ERISA, Section
412 of the Code or Title IV of ERISA, at any time during the five-year
period preceding the date of this Agreement; and
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock
purchase, stock option, stock ownership, stock appreciation rights,
phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, medical, accident,
disability, workers' compensation or other insurance,
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severance, separation, termination, change of control or other benefit
plan, agreement, practice, policy or arrangement of any kind, whether
written or oral, including, but not limited to any "employee benefit
plan" within the meaning of Section 3(3) of ERISA.
3.20 Permits, Etc. OCMCS owns or validly holds all licenses, permits,
certificates of authority, registrations, franchises and similar consents
granted or issued by any applicable governmental or regulatory authority, used
or held for use which are required to conduct and Material to the condition of
its business.
3.21 Labor Controversies.
(a) There are no controversies pending or, to the Knowledge of OCMCS,
threatened between OCMCS and any representatives of any of OCMCS's
employees which would have a Material Advance Effect on OCMCS.
(b) To the Knowledge of OCMCS, there are no organizational efforts
presently being made involving any of the presently unorganized employees
of OCMCS.
(c) OCMCS has complied in all Material respects with all laws relating
to the employment of labor, including without limitation, any provisions
thereof relating to wages, hours, collective bargaining, and the payment of
social security and similar taxes.
(d) No person has asserted that OCMCS is liable in any material amount
for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing, except for such controversies, organizational
efforts, non-compliance and liabilities which, individually or in the
aggregate, would not be reasonably expected to have a Material Adverse
Effect on OCMCS.
3.22 Tax-Free Reorganization. OCMCS has not taken and has not agreed to
take any action that would interfere with the ability of FPA and Sub to treat
the transactions contemplated by this Agreement as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Code.
3.23 Registration Statement and Proxy Statement/Prospectus. None of the
information to be supplied by OCMCS for inclusion in the (i) Registration
Statement on Form S-4 to be filed under the Securities Act of 1933, as amended
(the "Securities Act"), with the Securities and Exchange Commission ("SEC") by
FPA in connection with the Merger for the purpose of registering the shares of
FPA Common Stock to be issued in the Merger (the "Registration Statement") or
(ii) the proxy statement/prospectus to be distributed in connection with the
OCMCS meeting of its stockholders to vote upon this Agreement and the
transactions contemplated hereby (the "Proxy Statement" and together with the
prospectus included in the Registration Statement, the "Proxy
Statement/Prospectus") will, in the case of the Proxy Statement/Prospectus or
any amendments or supplements thereto, at the time of the mailing of the Proxy
Statement/Prospectus and any amendments or supplements thereto, and at the time
of the meeting of the stockholders of OCMCS to be held in connection with the
transactions contemplated by this Agreement, 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 are made, not misleading, or, in the case of the
Registration Statement, as amended or supplemented, at the time it becomes
effective and at the time of such meeting of the stockholders of OCMCS, 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.
3.24 Disclosure. No representation or warranty by OCMCS in this Agreement
or in any other certificate or document required by this Agreement to be
delivered to FPA and Sub contains any untrue statement of a Material fact or
omits to state any Material fact necessary to make the statements herein or
therein, in the light of the circumstances under which they were made, not
misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SJMC
SJMC represents and warrants to FPA and Sub that the statements contained
in this Article IV are true, correct and complete as of the Signing Date and
will be true, correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the Signing Date throughout
this Article), except as set forth in the Exhibits to this Agreement.
For purposes of the representations and warranties provided in this Article
the term "Knowledge of SJMC" shall be defined as the actual knowledge of any
person who is at the signing or Closing, as applicable, an officer or director
of SJMC. For purposes of this Article IV, the phrase "Material Adverse Effect"
or the word "Material" shall mean any event or occurrence that has or, if it
occurred reasonably would be expected to have, an adverse effect in each case in
excess of Five Hundred Thousand Dollars ($500,000) on the business, condition
(financial or otherwise), results of operations, prospects, assets (including
intangible assets), properties or liabilities (including contingent liabilities)
of SJMC.
4.1 Organization and Qualification. SJMC is a professional medical
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its business as currently conducted and to own or lease and operate
its properties. SJMC is not, nor is it required to be, qualified to do business
as a foreign corporation in any other jurisdiction.
4.2 Capital Structure. The authorized capital stock of SJMC consists of
(i) One Million (1,000,000) shares of SJMC Class A Common, of which Four Hundred
Eight Thousand Six Hundred Seventy-Four (408,674) shares (the "SJMC Class A
Shares") are issued and outstanding; and (ii) Five Hundred Thousand (500,000)
shares of SJMC Class B Common, of which Three Hundred Six Thousand Three Hundred
Seventy-Seven (306,377) shares (the "SJMC Class B Shares") are issued and
outstanding. The SJMC Class A Shares and the SJMC Class B Shares are
collectively referred to herein as the "SJMC Shares." Other than as set forth in
Exhibit 4.2, all the SJMC Shares are validly issued, fully paid, and
nonassessable, and have been so issued in compliance with all federal and state
securities laws. There are no outstanding subscriptions, options, rights,
warrants, convertible securities, or other agreements or commitments obligating
SJMC to issue any additional shares of its capital stock of any class other than
as set forth in Exhibit 4.2.
4.3 No Subsidiaries. Other than OCMCS, SJMC does not own, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, or other entity.
4.4 Authority. SJMC has the requisite power to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Board of Directors of SJMC, and no other proceedings on
the part of SJMC are necessary to authorize the execution, delivery and
performance of this Agreement by SJMC and the consummation by SJMC of the
transactions contemplated hereby except for the authorization by the holders of
the outstanding shares of SJMC (the "SJMC Shareholders"). This Agreement has
been duly and validly executed by SJMC and constitutes a valid and binding
obligation of SJMC enforceable in accordance with its terms except (i) as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and (ii) by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.5 Consents and Approvals. Other than in connection with or in compliance
with the provisions of California law, applicable federal and state securities
laws, the Knox-Keene Act and the HSR Act, or as otherwise set forth on Exhibit
4.5, no consent, approval or authorization of, or declaration, filing or
registration with, any third party, including any government or regulatory
authority, is required in connection with the execution and delivery of this
Agreement by SJMC and the consummation by SJMC of the transactions contemplated
hereby.
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4.6 No Breach. Except as provided in Exhibit 4.6, neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) conflict with, result in a breach of or constitute
a default under any of the terms, conditions or provisions of the Articles of
Incorporation or Bylaws of SJMC, (ii) violate any law, order, judgment or decree
to which any of SJMC's properties or assets or its shares are bound; (iii)
violate or constitute a Material default under (whether after the giving of
notice, passage of time or both), or permit the termination of, or impair any
rights or increase any obligations of SJMC under, any Material agreement or
instrument to which SJMC is a party or by which any part of SJMC's properties or
assets is bound or (iv) result in the acceleration of the maturity of any
Material debt or obligation of SJMC or in the creation or imposition of any
Material lien, charge or encumbrance upon any of the properties or assets of
SJMC.
4.7 Articles of Incorporation, Bylaws. The copies of the Articles of
Incorporation and the Bylaws of SJMC which have been heretofore provided to FPA
and Sub are true and complete copies of such instruments as amended to date, and
such instruments are in full force and effect on the date hereof.
4.8 OCMCS and SJMC Financial Statements. Exhibits 4.8(a) and 4.8(b) sets
forth true and complete copies of the OCMCS and SJMC Financial Statements. The
OCMCS and SJMC Financial Statements (i) present fairly the financial position of
OCMCS and SJMC at their respective dates and the results of operations and cash
flows for the respective periods then ended; (ii) have been prepared in
accordance with GAAP consistently followed by OCMCS and SJMC throughout the
periods indicated; and (iii) did not contain any 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. For purposes of this paragraph, the term
"material" shall be defined pursuant to GAAP and not using any materiality
standards applicable elsewhere in this Agreement.
4.9 Absence of Changes. Since September 30, 1997 and except as set forth
on Exhibit 4.9, SJMC has conducted its business only in the ordinary course
consistent with past practice and there has been no change and no development in
the business, properties, operations, condition (financial or otherwise), or
results of operations of SJMC, that had or would be reasonably expected to have
a Material Adverse Effect, and there has not been any:
(a) Capital expenditure by SJMC exceeding Two Hundred Fifty Thousand
Dollars ($250,000) (excluding for purposes of this limitation the capital
expenditures required for the Santa Ana primary care facility
improvements);
(b) Change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates)
by SJMC;
(c) Revaluation by SJMC of any of its Material assets;
(d) Declaration, setting aside, or payment of a dividend or other
distribution in respect to the capital stock of SJMC, or any direct or
indirect redemption, purchase, or other acquisition by SJMC of any of its
shares of capital stock except for such repurchases of shares required by
contract, the SJMC Bylaws or applicable law;
(e) Increase in the salary or other compensation payable or to become
payable by SJMC to any of its officers, directors, or employees (other than
with respect to the rendering of medical services), or the declaration,
payment, or commitment or obligation of any kind for the payment, by SJMC,
of a bonus or other additional salary or compensation to any such person
other than in the ordinary course of business and other than certain
severance agreements entered into with members of management;
(f) Sale or transfer of any Material asset of SJMC, except in the
ordinary course of business or other than the sale of its occupational
medicine division; or
(g) Agreement by SJMC to do any of the things described in the
preceding clauses 4.9(a) through 4.9(f).
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4.10 Absence of Undisclosed Liabilities. SJMC does not have any debts,
liabilities or obligations of any nature (whether absolute, accrued,
unliquidated, contingent or otherwise, whether known or unknown, and whether due
or to become due) that would be required by GAAP to be reflected on a balance
sheet of SJMC, other than those which (a) are set forth in the SJMC Financial
Statements, (b) have been specifically disclosed elsewhere herein, (c) are
exempt from disclosure pursuant to this Agreement or GAAP, or (d) have been
incurred since the date of the most recent OCMCS and SJMC Financial Statements
in the ordinary course of business in amounts and on terms consistent,
individually and in the aggregate, with SJMC's past practice.
4.11 Title to Assets. SJMC is in possession of and has good title to, or
has valid leasehold interests in or valid rights under any SJMC Contract (as
defined in Section 4.12) to use, all of its properties and assets primarily used
in its business and Material to the condition (financial or other) of such
business, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (i) the lien for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not Materially detract from the value of or interfere with the
present use of the property subject thereto or affected thereby, or otherwise
Materially impair SJMC's business operations (in the manner presently carried on
by SJMC) or (iii) as disclosed in the SJMC Financial Statements, and except for
such matters which, individually or in the aggregate, would not have a Material
Adverse Effect on SJMC. All leases under which SJMC leases any Material amount
of real or personal property have been made available to FPA and Sub and are in
good standing, valid and effective in accordance with their respective terms,
and there is not, under any of such leases, any existing default by SJMC or
event which with notice or lapse of time or both would become a default by SJMC
other than defaults under such leases which in the aggregate would not have a
Material Adverse Effect on SJMC.
4.12 Agreements. Exhibit 4.12(a) sets forth a complete and accurate list
of (i) all Contracts to which SJMC is a party or by which it or any of its
assets is bound as of the date of this Agreement (excluding SJMC Employee
Benefit Plans which can be terminated at will without subjecting SJMC to cost or
penalty) providing for a commitment for employment or consultation services for
a specified or unspecified term to, or otherwise relating to employment or the
termination of employment of, any employee; (ii) all Contracts with any Person
containing any provision or covenant prohibiting or limiting the ability of SJMC
to engage in any business activity or compete with any Person in connection with
its business or prohibiting or limiting the ability of any Person to compete
with SJMC in connection with its business; (iii) all partnership, joint venture,
shareholders' or other similar Contracts with any Person in connection with
SJMC's business; (iv) all Contracts between SJMC and all hospitals, hospital
systems, physician groups, pharmacies, laboratories, home health care agencies,
nursing facilities, mental health providers, therapists and other allied health
care professionals and institutions (collectively "Providers"); (v) all
Contracts relating to the future disposition or acquisition of assets of SJMC,
other than dispositions or acquisitions in the ordinary course of business; (vi)
all other Contracts with respect to SJMC that (A) involve the payment or
potential payment, pursuant to the terms of any such Contract, by or to SJMC or
any of its Subsidiaries of more than $200,000 annually and (B) cannot be
terminated within sixty (60) days after giving notice of termination without
resulting in any Material cost or penalty to SJMC (collectively, the "SJMC
Contracts"). Each of the SJMC Contracts is as to SJMC, and to the Knowledge of
SJMC is as to the other parties to the SJMC Contracts, in full force and effect
and enforceable in all Material respects in accordance with its terms except
that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. Except as set forth in Exhibit 4.12(a), to
the Knowledge of SJMC, SJMC has not received written notice of cancellation of
or intent to cancel any of the SJMC Contracts and there exists no event of
default or occurrence, condition or act on the part of SJMC or, to the Knowledge
of SJMC, on the part of the other party to such SJMC Contracts which constitutes
or would constitute (with notice or lapse of time or both) a Material breach or
would cause or permit acceleration of any Material obligation of SJMC. All SJMC
Contracts between SJMC and providers of primary, specialty
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and ancillary medical services are in the forms of agreement(s) attached as
Exhibit 4.12(b) except as provided in Exhibit 4.12.(b).
4.13 Insurance. Exhibit 4.13 is an accurate description of all insurance
policies held by SJMC concerning its business and properties. SJMC is not in
default with respect to payment of premiums on any such policy. SJMC believes
that such insurance policies are commercially reasonable in amount and coverage.
Except as set forth in Exhibit 4.13 or Exhibit 4.15, no claim is pending under
any such policy.
4.14 Taxes. Except as set forth in Exhibit 4.14, SJMC has timely filed or
caused to be timely filed all federal, state, local and foreign income and other
Material Tax returns required under applicable law to be filed on or before the
Closing Date (or obtained extensions to file) and to the Knowledge of SJMC all
such returns are true and correct in all Material respects. SJMC has paid or
made provision for all Material Taxes and other charges which have or may become
due for the periods covered by such returns. There have been no Material adverse
adjustments as a result of any examination or investigation of any period for
which any such return was or should have been filed or any Tax matter relating
thereto, and none of the tax returns or reports of SJMC is currently under
investigation or examination. There are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any Tax return for
any period. There are no Material liens for Taxes upon any property or assets of
SJMC, except for liens for taxes not yet due. All Taxes owed by SJMC or which
SJMC is obligated to withhold from amounts owing to any employee, creditor or
third party have been paid or reserved for payment.
4.15 Litigation. Except as set forth in Exhibit 4.15, (i) there are no
actions, suits, arbitrations or proceedings to the Knowledge of SJMC pending or
threatened against, relating to or affecting, nor to the Knowledge of SJMC are
there any governmental or regulatory authority investigations or audits pending
or threatened against, relating to or affecting, SJMC or any of its assets and
properties which, individually or in the aggregate, would be reasonably expected
to have a Material Adverse Effect on SJMC or on the ability of SJMC to
consummate the transactions contemplated by this Agreement, (ii) SJMC is not
subject to any order of any governmental or regulatory authority which,
individually or in the aggregate, is having or would be reasonably expected to
have a Material Adverse Effect on SJMC or on the ability of SJMC to consummate
the transactions contemplated by this Agreement and (iii) there are no Material
Medicare, Medicaid or other managed care recoupment or recoupments of any
third-party payor being sought, threatened, requested or claimed against SJMC.
4.16 Compliance with Laws, Etc. SJMC is in compliance with the following,
except as set forth on Exhibit 4.16 and/or except where such noncompliance would
not have a Material Adverse Effect on SJMC and OCMCS taken as a whole: (a) all
judgments, orders, rulings, injunctions, decrees and settlements issued by or
with any court, administrative agency or other governmental authority or agency,
(b) all permits, licenses, franchises and other governmental authorizations and
(c) all federal and state laws applicable to SJMC, including, without limitation
the handling and disposition of medical wastes and hazardous or toxic
substances. Since 1994, no state or federal governmental entity has revoked or
Materially limited any license of SJMC Material to its business, and no
investigation or proceeding is to SJMC's Knowledge pending or threatened, which
involves the revocation or Material limitation of any of such licenses or
certificates. To the Knowledge of SJMC, SJMC is not in possession of any
information which would lead such party to believe that any licenses or permits
necessary to the conduct of the business of SJMC as presently conducted will not
remain in full force and effect for the complete duration of their terms. SJMC
has made available to FPA and Sub all Material filings made to, and all
inspection or compliance reports or correspondence received from, governmental
entities for the last three years and will make available to FPA and Sub all
other permits as requested by FPA and Sub.
4.17 Brokers. No broker, finder or investment banker has acted directly or
indirectly for SJMC in connection with this Agreement or the transaction
contemplated thereby other than Cowen & Company. SJMC shall have paid any and
all fees or other amounts due to Cowen & Company on or before the Closing.
4.18 Employees. Exhibit 4.18 is a list of the names of all employees of
SJMC, stating the rates of compensation payable to each.
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4.19 Employee Benefit Plans; ERISA.
(a) Except as set forth in Exhibit 4.19:
(i) to the Knowledge of SJMC, no prohibited transaction within the
meaning of Section 406 or 407 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code with
respect to any SJMC Employee Benefit Plan (as defined below) has
occurred during the five-year period preceding the date of this
Agreement;
(ii) there is no outstanding liability (except for premiums due)
under Title IV of ERISA with respect to any SJMC Employee Benefit Plan;
(iii) neither the Pension Benefit Guaranty Corporation (the "PBGC")
nor SJMC has instituted proceedings to terminate any SJMC Employee
Benefit Plan;
(iv) full payment has been made of all amounts which SJMC was
required to have paid as a contribution to the SJMC Employee Benefit
Plans as of the last day of the most recent fiscal year of each of the
SJMC Employee Benefit Plans ended prior to the date of this Agreement,
and none of the SJMC Employee Benefit Plans has incurred any
"accumulated funding deficiency" (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of each such SJMC Employee Benefit Plan
ended prior to the date of this Agreement;
(v) the value on a termination basis of accrued benefits under each
of the SJMC Employee Benefit Plans which is subject to Title IV of
ERISA, based upon the actuarial assumptions used for funding purposes in
the most recent actuarial report prepared by such SJMC Employee Benefit
Plan's actuary with respect to each such SJMC Employee Benefit Plan, did
not, as of its latest valuation date, exceed the then current value of
the assets of such SJMC Employee Benefit Plan;
(vi) except for the Section 401(k) plans maintained by Primary Care
Doctors of California, each of the SJMC Employee Benefit Plans which is
intended to be "qualified" within the meaning of Section 401(a) of the
Code has either applied for a determination, or has been determined by
the IRS, to be so qualified and such determination has not been
modified, revoked or limited;
(vii) each of the SJMC Employee Benefit Plans is, and its
administration is and has been during the five-year period preceding the
date of this Agreement in all Material respects in compliance with, and
SJMC has not received any claim or notice that any such SJMC Employee
Benefit Plan is not in compliance with, all applicable laws and orders
and prohibited transaction exemptions, including, without limitation,
the requirements of ERISA;
(viii) to the Knowledge of SJMC, there are no Material pending,
threatened or anticipated claims involving any of the SJMC Employee
Benefit Plans other than claims for benefits in the normal course;
(ix) to the Knowledge of SJMC, during the five-year period
preceding the date of this Agreement, SJMC has not entered into any
transaction which could subject such entity to liability under Section
302(c)(ii), 4062, 4063, 4064, or 4069 of ERISA and no "reportable event"
within the meaning of Section 4043 of ERISA has occurred with respect to
any SJMC Employee Benefit Plan;
(x) SJMC is not in default in performing any of its contractual
obligations under any of the SJMC Employee Benefit Plans or any related
trust agreement or insurance contract;
(xi) there are no Material outstanding liabilities of any SJMC
Employee Benefit Plan other than liabilities for benefits to be paid to
participants in such SJMC Employee Benefit Plan and their beneficiaries
in accordance with the terms of such SJMC Employee Benefit Plan; and
(xii) SJMC does not maintain and is not obligated to provide
benefits under any life, medical or health plan which provides benefits
to retirees or other terminated employees other than benefit
continuation rights under the Consolidated Omnibus Reconciliation Act of
1985, as amended.
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(b) Except as set forth in Exhibit 4.19, neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will accelerate benefits under any SJMC Employee
Benefit Plan.
(c) As used herein:
(i) "SJMC Employee Benefit Plan" means any Plan entered into,
established, maintained, contributed to or required to be contributed to
by SJMC and existing on the date of this Agreement or at any time
subsequent thereto and on or prior to the Effective Time and, in the
case of a Plan which is subject to Part 3 of Title I of ERISA, Section
412 of the Code or Title IV of ERISA, at any time during the five-year
period preceding the date of this Agreement; and
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock
purchase, stock option, stock ownership, stock appreciation rights,
phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, medical, accident,
disability, workers' compensation or other insurance, severance,
separation, termination, change of control or other benefit plan,
agreement, practice, policy or arrangement of any kind, whether written
or oral, including, but not limited to any "employee benefit plan"
within the meaning of Section 3(3) of ERISA.
4.20 Permits, Etc. SJMC owns or validly holds all licenses, permits,
certificates of authority, registrations, franchises and similar consents
granted or issued by any applicable governmental or regulatory authority, used
or held for use which are required to conduct and Material to the condition of
its business.
4.21 Labor Controversies.
(a) There are no controversies pending or, to the Knowledge of SJMC,
threatened between SJMC and any representatives of any of SJMC's employees
which would have a Material Adverse Effect on SJMC.
(b) To SJMC's Knowledge, there are no organizational efforts presently
being made involving any of the presently unorganized employees of SJMC.
(c) SJMC has complied in all Material respects with all laws relating
to the employment of labor, including without limitation, any provisions
thereof relating to wages, hours, collective bargaining, and the payment of
social security and similar taxes.
(d) No person has asserted that SJMC is liable in any Material amount
for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing, except for such controversies, organizational
efforts, non-compliance and liabilities which, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse
Effect on SJMC.
4.22 Accounting Matters. To the Knowledge of SJMC, neither SJMC nor any of
its affiliates has taken or agreed to take any action that (without giving
effect to any action taken or agreed to be taken by FPA and Sub or any of its
affiliates) would cause SJMC not to meet the conditions that must be met to be a
party to a business combination accounted for as a pooling of interests.
4.23 Tax-Free Reorganization. SJMC has not taken and has not agreed to
take any action that would interfere with the ability of FPA and Sub to treat
the transactions contemplated by this Agreement as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Code.
4.24 Registration Statement and Proxy Statement/Prospectus. None of the
information to be supplied by SJMC for inclusion in the (i) Registration
Statement or (ii) the Proxy Statement/Prospectus, will, in the case of the Proxy
Statement/Prospectus or any amendments or supplements thereto, at the time of
the mailing of the Proxy Statement/Prospectus and any amendments or supplements
thereto, and at the time of the meeting of the shareholders of SJMC to be held
in connection with the transactions contemplated by this Agreement, 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 are made, not misleading, or, in the
case of the Registration Statement, as amended or supplemented, at
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the time it becomes effective and at the time of such meeting of the
shareholders of SJMC, 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.
4.25 Disclosure. No representation or warranty by SJMC in this Agreement
or in any other certificate or document required by this Agreement to be
delivered to FPA and Sub contains any untrue statement of a fact or omits to
state any Material fact necessary to make the statements herein or therein, in
the light of the circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FPA AND SUB
Each of FPA and Sub represents and warrants to OCMCS and SJMC that the
statements contained in this Article V are true, correct and complete as of the
Signing Date and will be true, correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the Signing
Date throughout this Article), except as set forth in the Exhibits to this
Agreement.
For purposes of the representations and warranties provided in this Article
V, the term "Knowledge of FPA and Sub" shall be defined as the actual knowledge
of any person who is at the signing or Closing, as applicable, an officer or
director of FPA or Sub, as the case may be. For purposes of this Article V, the
phrase "Material Adverse Effect" or the word "Material" shall mean any event or
occurrence that has or, if it occurred reasonably would be expected to have, ran
adverse effect in each case in excess of Fifty Million Dollars ($50,000,000) on
the business, condition (financial or otherwise), results of operations,
prospects, assets (including intangible assets), properties or liabilities
(including contingent liabilities) of FPA and its Subsidiaries, taken as a
whole.
5.1 Organization and Qualification.
(a) FPA. FPA is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to carry on its business as currently
conducted and to own or lease and operate its properties. FPA is duly
qualified, licensed or admitted to do business and is in good standing in
each jurisdiction in which the ownership, use or leasing of its assets and
properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for such failures
to be so qualified, licensed or admitted and in good standing which,
individually or in the aggregate, are not having and would not be
reasonably expected to have a Material Adverse Effect on FPA and its
Subsidiaries taken as a whole.
(b) Sub. Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all
requisite corporate power and authority to carry on its business as
currently conducted and to own or lease and operate its properties. Sub is
not, nor is it required to be, qualified to do business as a foreign
corporation in any other jurisdiction.
5.2 Capital Structure.
(a) FPA. The authorized capital stock of FPA consists solely of
Ninety-Eight Million (98,000,000) shares of FPA Common Stock and Two
Million (2,000,000) shares of preferred stock, par value $0.002 per share
("FPA Preferred Stock"). As of December 31, 1997, 42,799,488 shares of FPA
Common Stock were issued and outstanding, no shares were held in the
treasury of FPA, options to purchase 7,992,797 shares of FPA Common Stock
were outstanding under FPA Option Plans and 532,163 shares were reserved
for issuance pursuant to the exercise of outstanding warrants ("FPA
Warrants"). There has been no change in the number of issued and
outstanding shares of FPA Common Stock or shares of FPA Common Stock held
in treasury or reserved for issuance since such date other than as a result
of the exercise of Options pursuant to the FPA Option Plans or the exercise
of FPA Warrants. As of the date hereof, no shares of FPA Preferred Stock
are issued and outstanding. All of the issued and outstanding shares of FPA
Common Stock are, and all shares reserved for issuance will be, upon
issuance in accordance with the terms specified in the instruments or
agreements pursuant to which
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they are issuable, duly authorized, validly issued, fully paid and
nonassessable. Except pursuant to this Agreement and except as set forth in
Exhibit 5.2(a) or in the FPA SEC Reports (as defined in Section 5.7), there
are no outstanding Options obligating FPA to issue or sell any shares of
capital stock of FPA or to grant, extend or enter into any Option with
respect thereto, and there are no rights to register any of FPA's
securities under the Securities Act. The Aggregate FPA Shares, when issued
and delivered at the Closing in accordance with this Agreement, will be
duly authorized, validly issued and fully paid and nonassessable. The
Aggregate FPA Shares will have been offered and sold in compliance with all
applicable federal securities laws pursuant to the S-4 Registration
Statement which, as of or prior to the Closing, will be effective in
accordance with the provisions of the Securities Act and any state "blue
sky" or securities laws approvals, consents or filings necessary for the
offer and sale of the Aggregate FPA Shares to the OCMCS Stockholders and
the SJMC Shareholders shall have been obtained or made, as applicable, with
no stop-orders having been issued with respect to such offers or sales by
the SEC or any state authorities. FPA shall convey good and marketable
title to the Aggregate FPA Shares to the OCMCS Stockholders and SJMC
Shareholders at the Effective Time. The certificates representing the
Aggregate FPA Shares, when issued in accordance with this Agreement, will
be in due and proper form as authorized by the FPA Board of Directors and
will be duly and validly executed by representatives of FPA authorized by
the FPA Board of Directors to execute such certificates.
(b) Sub. The authorized capital stock of Sub consists solely of 100
shares of common stock, no par value per share ("Sub Common Stock"). As of
January 8, 1998, 10 shares of Sub Common Stock were issued and outstanding
and no shares are held in treasury. There has been no change in the number
of issued and outstanding shares of Sub Common Stock since such date. All
of the issued and outstanding shares of Sub Common Stock are duly
authorized, validly issued, fully paid and nonassessable. There are no
outstanding Options obligating Sub to issue or sell any shares of capital
stock of Sub or to grant, extend or enter into any Option with respect
thereto, and there are no rights to register any of Sub's securities under
the Securities Act.
5.3 Authority. Each of FPA and Sub has the requisite power to enter into
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by the Boards of Directors of FPA and Sub, and
by FPA as the sole shareholder of Sub, and no other proceedings on the part of
FPA or Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement is a valid and binding obligation of FPA and
Sub enforceable in accordance with its terms except (i) as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (ii) by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
5.4 Consents and Approvals. Other than in connection with or in compliance
with the provisions of Delaware and California law, applicable federal and state
securities laws, the Knox-Keene Act and the HSR Act, or as otherwise set forth
on Exhibit 5.4, no consent, approval or authorization of, or declaration, filing
or registration with, any third party, including any government or regulatory
authority, is required in connection with the execution and delivery of this
Agreement by FPA and Sub and the consummation by FPA and Sub of the transactions
contemplated hereby.
5.5 No Breach. Except as provided in Exhibit 5.5, neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) conflict with, result in a breach of or constitute
a default under any of the terms, conditions or provisions of the Certificate of
Incorporation or Bylaws of FPA or the Articles of Incorporation or Bylaws of
Sub, (ii) violate any law, order, judgment or decree to which any of FPA's or
Sub's properties or assets or its shares are bound; (iii) violate or constitute
a Material default under (whether after the giving of notice, passage of time or
both), or permit the termination of, or impair any rights or increase any
obligations of FPA or Sub under, any Material agreement or instrument to which
FPA or Sub is a party or by which any part of FPA's or Sub's properties or
assets is bound or (iv) result in the acceleration of the maturity of any
Material debt or obligation of FPA or Sub or in the creation or imposition of
any Material lien, charge or encumbrance upon any of the properties or assets of
FPA or Sub.
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5.6 Charter Documents. The copies of the Certificate of Incorporation and
the Bylaws of FPA and the Articles of Incorporation and the Bylaws of Sub which
have been heretofore provided to OCMCS and SJMC are true and complete copies of
such instruments as amended to date, and such instruments are in full force and
effect on the date hereof.
5.7 SEC Reports and FPA Financial Statements. FPA has made available to
OCMCS and SJMC a true and complete copy of each form, report, schedule,
registration statement, definitive proxy statement and other document (together
with all amendments thereof and supplements thereto) filed by FPA with the SEC
since January 1, 1997 (as such documents have since the time of their filing
been amended or supplemented, the "FPA SEC Reports"), which are all the
documents (other than preliminary material) that FPA was required to file with
the SEC since such date. As of their respective dates, the FPA SEC Reports (i)
complied as to form in all Material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not contain
any 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. The audited consolidated financial statements and unaudited interim
consolidated financial statements (including, in each case, the notes, if any,
thereto) included in the FPA SEC Reports (the "FPA Financial Statements")
complied as to form in all Material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto and except with respect to unaudited
statements as permitted by Form 10-Q of the SEC) and fairly present (subject, in
the case of the unaudited interim financial statements, to normal, recurring
year-end audit adjustments which are not expected to be, individually or in the
aggregate, Materially Adverse to FPA and its Subsidiaries taken as a whole) the
consolidated financial position of FPA and its consolidated Subsidiaries as at
the respective dates thereof and the consolidated results of their operations
and cash flows for the respective periods then ended.
5.8 Absence of Changes. Since September 30, 1997, there has not been any
Material Adverse Change to FPA and its Subsidiaries taken as a whole.
5.9 Absence of Undisclosed Liabilities. FPA and Sub do not have any debts,
liabilities or obligations of any nature (whether absolute, accrued,
unliquidated, contingent or otherwise, whether known or unknown, and whether due
or to become due) which are likely to have a Material Adverse Effect on FPA and
its Subsidiaries taken as a whole, other than those which (a) are set forth in
the FPA Financial Statements, (b) have been specifically disclosed elsewhere
herein, (c) are exempt from disclosure pursuant to this Agreement, or (d) have
been incurred since the date of the most recent FPA Financial Statements in the
ordinary course of business in amounts and on terms consistent, individually and
in the aggregate, with FPA's past practice.
5.10 Taxes. FPA and Sub have each timely filed or caused to be timely
filed all federal, state, local and foreign income and other Material Tax
returns required under applicable law to be filed on or before the Closing Date
(or obtained extensions to file) and to the Knowledge of FPA and Sub, all such
returns are true and correct in all Material respects. FPA and Sub have each
paid or made provision for all Material Taxes and other charges which have or
may become due for the periods covered by such returns. There have been no
Material adverse adjustments as a result of any examination or investigation of
any period for which any such return was or should have been filed or any Tax
matter relating thereto, and none of the tax returns or reports of FPA or Sub is
currently under investigation or examination. There are no outstanding
agreements or waivers extending the statutory period of limitations applicable
to any Tax return for any period. There are no Material liens for Taxes upon any
property or assets of FPA or Sub, except for liens for taxes not yet due. All
Taxes owed by FPA or Sub or which FPA or Sub is obligated to withhold from
amounts owing to any employee, creditor or third party have been paid or
reserved for payment.
5.11 Litigation. Except as disclosed in the FPA SEC Reports filed prior to
the date of this Agreement, (i) there are no actions, suits, arbitrations or
proceedings or, to the Knowledge of FPA and Sub, pending or threatened against,
relating to or affecting, nor to the Knowledge of FPA and Sub are there any
governmental or regulatory authority investigations or audits pending or
threatened against, relating to or affecting, FPA or
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Sub or any of their respective assets and properties which, individually or in
the aggregate, would be reasonably expected to have a Material Adverse Effect on
FPA and its Subsidiaries taken as a whole or on the ability of FPA or Sub to
consummate the transactions contemplated by this Agreement, (ii) neither FPA nor
Sub is subject to any order of any governmental or regulatory authority which,
individually or in the aggregate, is having or would be reasonably expected to
have a Material Adverse Effect on FPA and its Subsidiaries taken as a whole or
on the ability of FPA or Sub to consummate the transactions contemplated by this
Agreement and (iii) there are no Material Medicare, Medicaid or other managed
care recoupment or recoupments of any third-party payor being sought,
threatened, requested or claimed against FPA or Sub.
5.12 Compliance with Laws, Etc. Each of FPA and Sub is in compliance with
the following, except where such noncompliance would not have a Material Adverse
Effect on FPA and its Subsidiaries taken as a whole: (a) all judgments, orders,
rulings, injunctions, decrees and settlements issued by or with any court,
administrative agency or other governmental authority or agency, (b) all
permits, licenses, franchises and other governmental authorizations and (c) all
federal and state laws applicable to it, including, without limitation the
Employee Retirement Income Security Act and the handling and disposition of
medical wastes and hazardous or toxic substances. Sub is in compliance with all
laws, regulations and orders related to the Knox-Keene Act and applicable to
limited Knox-Keene licensees, including but not limited to compliance with
tangible net equity requirements of the Knox-Keene Act, except where the failure
to comply would not have a material adverse effect on Sub. As of the date
hereof, there are no administrative or enforcement actions against Sub by the
California Department of Corporations and, to the Knowledge of Sub, there are no
threatened administrative or enforcement actions against Sub.
5.13 Brokers. No broker, finder or investment banker has acted directly or
indirectly for FPA or Sub in connection with this Agreement or the transaction
contemplated thereby other than Volpe, Brown, Whelan & Company, LLC. FPA shall
pay any and all fees or other amounts due to Volpe, Brown, Whelan & Company,
LLC.
5.14 Permits, Etc. Each of FPA and Sub owns or validly holds all licenses,
permits, certificates of authority, registrations, franchises and similar
consents granted or issued by any applicable governmental or regulatory
authority, used or held for use and Material to the conduct of their respective
businesses.
5.15 Accounting Matters. To the Knowledge of FPA and Sub, neither FPA nor
any of its Subsidiaries has taken or agreed to take any action that (without
giving effect to any action taken or agreed to be taken by OCMCS, SJMC or any of
their affiliates) would prevent FPA from accounting for the acquisition of the
SJMC Shares as contemplated by this Agreement as a pooling of interests.
5.16 Tax-Free Reorganization. Neither FPA nor Sub has taken or agreed to
take any action that would interfere with the ability of FPA to treat the Merger
as a tax-free reorganization within the meaning of Section 368(a)(1)(A) and
Section 368(a)2)(D) of the Code. Neither FPA nor Sub has any current intention
or plan to sell or otherwise dispose of the assets of OCMCS and/or SJMC after
the Closing, other than such sales or dispositions of assets occurring in the
ordinary course of business.
5.17 Registration Statement and Proxy Statement. None of the information
to be supplied by FPA for inclusion in the Registration Statement or the Proxy
Statement/Prospectus will, in the case of the Proxy Statement/Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement/Prospectus and any amendments or supplements thereto, and at the
time of the meeting of the stockholders of OCMCS and the shareholders of SJMC,
contain any 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 are made, not
misleading, or, in the case of the Registration Statement, as amended or
supplemented, at the time it becomes effective and at the time of such meeting,
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. The Proxy Statement/Prospectus, as of its effective
time, will comply as to form in all Material respects with all applicable laws,
including the provisions of the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder, except that no representation is
made by FPA with respect to information supplied by OCMCS or SJMC for inclusion
therein.
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5.18 Multi-State Payor Contracts. Exhibit 5.18 sets forth a complete and
accurate list of the payor contracts to which FPA or any of its Subsidiaries is
a party (the "Multi-state Contracts"). Each of the Multi-state Contracts is as
to FPA or such Subsidiaries, and to the Knowledge of FPA and Sub is as to the
other parties to the Multistate Contracts, in full force and effect and
enforceable in all Material respects in accordance with its terms except that
(i) such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
5.19 Disclosure. No representation or warranty by FPA or Sub in this
Agreement or in any other certificate or document distributed to OCMCS and SJMC
contains any untrue statement of a Material fact or omits to state any Material
fact necessary to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
ARTICLE VI
PRE-CLOSING COVENANTS
6.1 Conduct of Business. During the period from the date hereof through
the Closing Date or earlier termination of this Agreement, and except as
otherwise provided in this Agreement, OCMCS and SJMC covenant and agree that
(except as expressly contemplated or permitted by this Agreement, or to the
extent that FPA and Sub shall otherwise consent in writing):
(a) Each of OCMCS and SJMC shall conduct its business only in, and
each of OCMCS and SJMC shall not take any action except in, the ordinary
course consistent with past practice.
(b) Without limiting the generality of paragraph (a) of this Section,
and except as set forth in this Section 6.1(b), (i) each of OCMCS and SJMC
shall use all commercially reasonable efforts to preserve intact in all
Material respects its present business organization and reputation, to keep
available the services of its key officers and employees, to maintain its
assets and properties in good working order and condition, ordinary wear
and tear excepted, to maintain insurance on its tangible assets and
businesses in such amounts and against such risks and losses as are
currently in effect, to preserve its relationships with customers and
suppliers and others having significant business dealings with it and to
comply in all Material respects with all laws and orders of all
governmental or regulatory authorities applicable to it, and (ii) each of
OCMCS and SJMC shall not:
(i) amend or propose to amend its certificate or articles of
incorporation or bylaws (or other comparable corporate charter
documents), except as otherwise contemplated by this Agreement;
(ii) (w) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, (x) split,
combine, reclassify or take similar action with respect to any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of
its capital stock, (y) adopt a plan of complete or partial liquidation
or resolutions providing for or authorizing such liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization or (z) directly or indirectly redeem, repurchase or
otherwise acquire any shares of its capital stock or any option with
respect thereto except for such repurchases of shares required by
contract, the SJMC Bylaws or applicable law;
(iii) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any option with
respect thereto (other than the issuance of shares of OCMCS Stock upon
exercise of previously granted options pursuant to the OCMCS Option
Plans in accordance with their present terms), or modify or amend any
right of any holder of outstanding shares of capital stock or Options
with respect thereto;
(iv) acquire (by merging or consolidating with, or by purchasing a
substantial equity interest in or a substantial portion of the assets
of, or by any other manner) any business or any corporation,
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partnership, association or other business organization or division
thereof or otherwise acquire or agree to acquire any assets which are
Material, individually or in the aggregate, to OCMCS or SJMC;
(v) other than dispositions of assets which are not, individually
or in the aggregate, Material to OCMCS or SJMC, sell, lease, grant any
security interest in or otherwise dispose of or encumber any of its
assets or properties;
(vi) except to the extent required by applicable law or as
necessary or appropriate to comply with GAAP, (x) permit any Material
change in (A) any pricing, marketing, purchasing, investment,
accounting, financial reporting, inventor, credit, allowance or tax
practice or policy or (B) any method of calculating any bad debt,
contingency or other reserve for accounting, financial reporting or tax
purposes or (y) make any Material tax election or settle or compromise
any Material income tax liability with any governmental or regulatory
authority;
(vii) enter into, adopt, amend in any Material respect (except as
may be required by applicable law) or terminate any OCMCS Employee
Benefit Plan or SJMC Employee Benefit Plan or, except for normal
increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a Material increase in
benefits or compensation expense to OCMCS or SJMC, increase in any
manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan or arrangement in
effect as of the date hereof; provided, however, that OCMCS or SJMC may
pay normal and customary bonuses so long as the aggregate payments made
do not exceed Three Million Dollars ($3,000,000) in the aggregate and,
provided, further, that OCMCS or SJMC may hire and terminate employees
in the ordinary course of business after discussion with FPA and Sub;
(viii) enter into any contract or amend or modify any existing
contract, or engage in any new transaction, outside the ordinary course
of business or not consistent with past practice or not on an arm's
length basis, with any affiliate of OCMCS or SJMC;
(ix) make any capital expenditures or commitments for additions to
plant, property or equipment constituting capital assets except in the
ordinary course of business consistent with past practice in an
aggregate amount exceeding Two Hundred Fifty Thousand Dollars $250,000
(excluding for purposes of this limitation the capital expenditures
required for the Santa Ana primary care facility improvements);
(x) make any change in the Material lines of business in which it
participates or is engaged;
(xi) take any action to cause the transactions contemplated by this
Agreement not to be treated as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) and Section 368(a)2)(D) of the Code; or
(xii) enter into any contract, agreement, commitment or arrangement
to do or engage in any of the foregoing.
OCMCS and SJMC on a combined basis shall have cash and marketable
securities at the end of each month prior to the Closing Date equal to the
amounts listed on Exhibit 6.1 for each such month; provided, however, if OCMCS
and SJMC fail to meet the amounts listed for any given month, FPA and Sub may
waive the requirement for that month, and such waiver shall not be unreasonably
withheld.
6.2 Covenants of FPA and Sub. At all times from and after the date hereof
until the Closing Date, each of FPA and Sub covenants and agrees that (except as
expressly contemplated or permitted by this Agreement, or to the extent that
OCMCS and SJMC shall otherwise consent in writing): (i) each of FPA and Sub
shall not make any Material changes to its business or structure which would
reasonably be expected to have an adverse effect on the consideration to be
received by the OCMCS Stockholders and the SJMC Shareholders; (ii) each of FPA
and Sub shall use all reasonable efforts to take all such actions as are
necessary to effectuate the transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to closing under this Agreement; and (iii)
each of FPA and Sub shall not take any action to cause
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the transactions contemplated by this Agreement not to be treated as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)2)(D) of the Code.
6.3 Advice of Changes. Each party shall confer on a regular and frequent
basis with the others with respect to its business and operations and other
matters relevant to the Agreement and the transactions contemplated hereby, and
shall promptly advise the others, orally and in writing, of any change or event,
including, without limitation, any complaint, investigation or hearing by any
governmental or regulatory authority (or communication indicating the same may
be contemplated) or the institution or threat of litigation, having, or which,
insofar as can be reasonably foreseen, could have, a Material Adverse Effect on
OCMCS, SJMC, FPA or Sub, as the case may be, or on the ability of OCMCS, SJMC,
FPA or Sub, as the case may be, to consummate the transactions contemplated
hereby.
6.4 Access to Information; Confidentiality.
(a) OCMCS and SJMC shall, throughout the period from the date hereof
to the Closing Date, (i) provide to FPA and Sub and its directors,
officers, employees, legal, investment banking and financial advisors,
accountants and any other agents and representatives (collectively,
"Representatives") with full access, upon reasonable prior notice, and
during normal business hours, to OCMCS and SJMC, and their respective
assets, properties, books and records, but only to the extent that such
access does not unreasonably interfere with the business and operations of
such party, and (ii) furnish promptly to such persons (x) a copy of each
report, statement, schedule and other document filed or received by OCMCS
or SJMC, pursuant to the requirements of federal or state securities laws
or filed with any other governmental or regulatory authority as it relates
to this Agreement and the transactions contemplated hereby, and (y) all
other information and data (including, without limitation, copies of OCMCS
Contracts, OCMCS Employee Benefit Plans, SJMC Contracts, SJMC Employee
Benefit Plans, and other books and records) concerning the business and
operations of OCMCS or SJMC, as FPA or Sub or any of such other persons
reasonably may request so long as such information relates to this
Agreement and the transactions contemplated hereby. No investigation
pursuant to this paragraph or otherwise shall affect any representation or
warrant contained in this Agreement or any condition to the obligations of
the parties hereto. FPA shall provide to OCMCS and SJMC promptly upon
filing copies of all FPA SEC Reports.
(b) Each party will hold, and will use its best efforts to cause its
Representatives to hold, in strict confidence, unless (i) compelled to
disclose by judicial or administrative process or by other requirements of
applicable laws or governmental or regulatory authorities (including,
without limitation, in connection with obtaining the necessary approvals of
this Agreement or the transactions contemplated hereby of governmental or
regulatory authorities), or (ii) disclosed in any action or proceeding
brought by a party hereto in pursuit of its rights or in the exercise of
its remedies hereunder, all documents and information concerning the other
party furnished to it by such other party or its Representatives in
connection with this Agreement or the transactions contemplated hereby,
except to the extent that such documents or information can be shown to (x)
have been previously known by OCMCS, SJMC, FPA or Sub, as the case may be,
or its Representatives, (y) have been in the public domain (either prior to
or after the furnishing of such documents or information hereunder) through
no fault of OCMCS, SJMC, FPA or Sub, as the case may be, and its
Representatives or (z) be or have become available to OCMCS, SJMC, FPA or
Sub, as the case may be, on a nonconfidential basis from a source which, to
the best of the receiving party's knowledge after due inquiry, is not
prohibited from disclosing such information to OCMCS, SJMC, FPA or Sub, as
the case may be, by a legal, contractual or fiduciary obligation to the
other parties. In the event that this Agreement is terminated without the
transactions contemplated hereby having been consummated, upon the request
of OCMCS, SJMC, FPA or Sub, as the case may be, the other party will, and
will cause its Representatives to, promptly (and in no event later than
five (5) days after such request) redeliver or cause to be redelivered all
copies of documents and information furnished by OCMCS, SJMC, FPA or Sub,
as the case may be, or its Representatives to such party and its
Representatives in connection with this Agreement or the transactions
contemplated hereby and destroy or cause to be destroyed all notes,
memoranda, summaries, analyses, compilations and other
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writings related thereto or based thereon prepared by OCMCS, SJMC, FPA or
Sub, as the case may be, or its Representatives.
6.5 Registration Statement and Proxy Statement. FPA will file with the SEC
as soon as is reasonably practicable after the date hereof the Proxy
Statement/Prospectus and shall use all reasonable efforts to have the
Registration Statement declared effective by the SEC as promptly as practicable.
FPA shall also take any action required to be taken under applicable state blue
sky, securities laws or rules or regulations of any national securities exchange
or Nasdaq in connection with the issuance of FPA Common Stock pursuant hereto.
FPA, Sub, OCMCS and SJMC shall promptly furnish to each other all information,
and take such other actions, as may reasonably be requested in connection with
any action by any of them in connection with the preceding two sentences.
6.6 Inclusion of Shares on Nasdaq. FPA shall file the application for
original listing of the shares of FPA Common Stock on the Nasdaq National Market
to be issued in accordance with this Agreement on or before the Closing Date.
6.7 Approval of the OCMCS Stockholders and the SJMC Shareholders. Each of
OCMCS and SJMC shall use all reasonable efforts to obtain approval of this
Agreement by its stockholders and shareholders (the "OCMCS/SJMC Shareholders'
Approval") as soon as reasonably practicable after the date hereof. Subject to
the exercise of fiduciary obligations under applicable law as advised by
independent counsel, each of OCMCS and SJMC shall recommend, through its Board
of Directors, to the OCMCS Stockholders and the SJMC Shareholders, as the case
may be, that it is in the best interest of the stockholders of OCMCS and the
shareholders of SJMC, as the case may be, to approve this Agreement and the
transactions contemplated hereby, and each shall use its best efforts to obtain
such approval.
6.8 Regulatory and Other Approvals. Subject to the terms and conditions of
this Agreement, each of OCMCS, SJMC, FPA and Sub will proceed diligently and in
good faith and will use all commercially reasonable efforts to do, or cause to
be done, all things necessary, proper or advisable to, as promptly as
practicable, (i) obtain all consents, approvals or actions of, make all filings
with and give all notices to governmental or regulatory authorities or any other
public or private third parties required of OCMCS, SJMC, FPA or Sub to
consummate the transactions contemplated by this Agreement and the other matters
contemplated hereby, and (ii) provide such other information and communications
to such governmental or regulatory authorities or other public or private third
parties as the other party or such governmental or regulatory authorities or
other public or private third parties may reasonably request in connection
therewith.
6.9 Expenses. Whether or not the transactions contemplated by this
Agreement are consummated, and except as expressly provided herein, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such cost or expense.
6.10 Notice and Cure. Each of OCMCS and SJMC, on the one hand, and FPA and
Sub, on the other hand, will notify the other in writing of, and
contemporaneously will provide the other with, true and complete copies of any
and all information or documents relating to, and will use best efforts to cure
before the Closing, any event, transaction or circumstance, as soon as practical
after it becomes known to such party, occurring after the date of this Agreement
that causes or will cause any covenant or agreement of OCMCS, SJMC, FPA or Sub,
as the case may be, under this Agreement to be breached or that renders or will
render untrue any representation or warrant of OCMCS, SJMC, FPA or Sub, as the
case may be, contained in this Agreement as if the same were made on or as of
the date of such event, transaction or circumstance. Each of OCMCS, SJMC, FPA or
Sub, as the case may be, also will notify the others in writing of, and will use
best efforts to cure, before the Closing, any violation or breach, as soon as
practical after it becomes known to such party, of any representation, warrant,
covenant or agreement made by OCMCS, SJMC, FPA or Sub, as the case may be, in
this Agreement, whether occurring or arising prior to, on or after the date of
this Agreement. No notice given pursuant to this Section shall have any effect
on the representations, warranties, covenants or agreements contained in this
Agreement for purposes of determining satisfaction of any condition contained
herein.
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6.11 Fulfillment of Conditions. Subject to the terms and conditions of
this Agreement, each of OCMCS, SJMC, FPA or Sub will take or cause to be taken
all steps necessary or desirable and proceed diligently and in good faith to
satisfy each condition to the others' obligations contained in this Agreement
and to consummate and make effective the transactions contemplated by this
Agreement, and neither OCMCS, SJMC, FPA nor Sub will take or fail to take any
action that could be reasonably expected to result in the nonfulfillment of any
such condition.
6.12 No Solicitations. Prior to the Closing Date, each of OCMCS and SJMC
agrees (a) that it shall not, and it shall use its best efforts to cause its
Representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) with
respect to a merger, consolidation or other business combination including OCMCS
or SJMC or any acquisition or similar transaction (including, without
limitation, a tender or exchange offer) involving the purchase of (i) all or any
significant portion of the assets of OCMCS or SJMC, or (ii) any of the
outstanding shares of OCMCS Stock or SJMC Stock or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person or group relating to any Alternative Proposal
(excluding the transactions contemplated by this Agreement), or otherwise
facilitate any effort or attempt to make or implement any Alternative Proposal;
(b) that it will notify FPA and Sub promptly if any such inquiries, proposals or
offers are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it or
any such person or group; and (c) that it will, prior to accepting any
Alternative Proposal, (i) receive a determination from an independent financial
advisor (which could include the current financial advisors to OCMCS and SJMC)
that such Alternative Proposal is more favorable (from a financial point of
view) to the OCMCS Stockholders or the SJMC Shareholders, as the case may be,
than the transactions contemplated by this Agreement and (ii) determine in the
exercise of its fiduciary obligations under applicable law as advised by
independent counsel (which could include the law firm of Klein & Martin) that
such Alternative Proposal is more favorable to the OCMCS Stockholders or the
SJMC Shareholders, as the case may be, than the transactions contemplated by
this Agreement, and give FPA and Sub at least three (3) days to offer a
counterproposal prior to executing such definitive agreement; provided, however,
that nothing contained in this Section 6.12 shall prohibit the Board of
Directors of OCMCS or SJMC, as the case may be, from (1) furnishing information
to or entering into discussions or negotiations with any person or group that
makes an unsolicited bona fide Alternative Proposal, if, and only to the extent
that, (A) the Board of Directors of OCMCS or SJMC, as the case may be,
determines in good faith that such action is required or appropriate for the
Board of Directors to comply with its fiduciary duties to stockholders imposed
by law, (B) the Board of Directors has reasonably concluded in good faith that
the person or group making such Alternative Proposal will have adequate sources
of financing to consummate such Alternative Proposal and that such Acquisition
Proposal is more favorable to the OCMCS Stockholders or the SJMC Shareholders,
as the case may be, than the transactions contemplated by this Agreement and (C)
prior to furnishing such information to, or entering into discussions or
negotiations with, such person or group, each of OCMCS and SJMC provides written
notice to FPA and Sub to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or group; and (2) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to any Alternative Proposal.
6.13 Pooling of Interests. From and after the date hereof and until the
Closing Date, neither OCMCS, SJMC, FPA nor Sub, nor affiliates of any such
party, shall knowingly take any action, or knowingly fail to take any action,
that would jeopardize the treatment of Sub's acquisition of SJMC as a "pooling
of interests" for financial and accounting purposes. Following the Closing Date,
each of FPA and Sub shall use its best efforts to conduct the business of SJMC
in a manner that would not jeopardize the characterization of the acquisition of
the SJMC Shares as contemplated by this Agreement as a "pooling of interests"
for financial and accounting purposes.
6.14 Affiliate Letters. Within five (5) business days after the date of
this Agreement, (i) OCMCS and SJMC shall deliver to FPA and Sub a letter
identifying all persons who may be deemed affiliates of OCMCS or SJMC under Rule
145 promulgated under the Securities Act ("Rule 145"), including, without
limitation, all directors and executive officers of OCMCS and SJMC, (ii) OCMCS
and SJMC shall advise the persons
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identified in such letter of the resale restrictions imposed by applicable
securities laws, and (iii) SJMC shall advise the affiliates of SJMC of
Accounting Series Release Number 135 ("ASR 135"). Each of SJMC, FPA and Sub
shall use its reasonable best efforts to obtain as soon as practicable after the
date hereof from affiliates of SJMC, FPA and Sub, as the case may be, an
agreement that such persons will comply with the provisions of ASR 135.
6.15 Public Announcements. On and after the date hereof and through the
Closing Date or earlier termination of this Agreement, none of the parties shall
issue any press release or make any public statement prior to obtaining the
other parties' written approval, which approval shall not be unreasonably
withheld, except that no such approval shall be necessary to the extent that in
the opinion of counsel to the party proposing to make such disclosure, immediate
disclosure is required by law or any listing agreement of either party hereto
and the disclosing party is unable to contact the other party after using
commercially reasonable efforts. Such opinion of counsel shall be confirmed in
writing and promptly delivered to the other party. The parties may disclose
information with respect to the transactions contemplated hereby to their
employees, agents and consultants only to the extent such persons have a need to
know and agree to be bound by the terms hereof relative to the disclosure of
such information.
6.16 Third Party Consents.
(a) HSR Act. Each party agrees promptly to file a notification and
report in accordance with the HSR Act and shall use its best efforts to
complete the Federal Government's antitrust review of the transactions
contemplated herein under the HSR Act which includes promptly furnishing
any additional information requested of it under the HSR Act. Each party
shall bear the cost of its respective HSR Act filing.
(b) Knox-Keene Act. Sub agrees promptly to file a notification and
report of material modification in accordance with the Knox-Keene Act,
subject to review by OCMCS and SJMC prior to such filing, and shall use its
best efforts to (i) cause the California Department of Corporations' review
of the transactions contemplated herein under the Knox-Keene Act to be
completed as promptly as practicable, which includes promptly furnishing
any additional information requested of it under the Knox-Keene Act, and
(ii) obtain approval of such material modification from the California
Department of Corporations. FPA and Sub shall bear the cost of the
Knox-Keene Act material modification filing and obtaining the California
Department of Corporations' approval.
(c) Other Consents. OCMCS, SJMC, FPA and Sub shall use reasonable
efforts to obtain any other required third party consents and any required
governmental permits or licenses, prior to Closing. The Consents listed on
Exhibit 6.16(c) will be required as a condition to FPA's and Sub's
obligation to effect the Closing. Each party shall be responsible for any
and all costs and expenses of obtaining such consents as are required to be
obtained by such party.
6.17 Updated OCMCS and SJMC Financial Statements. As soon as available,
but in no event later than March 15, 1998, OCMCS and SJMC shall deliver to FPA
and Sub the audited OCMCS and SJMC Financial Statements for the year ended
December 31, 1997 (after consultation with FPA) and, in the event the
transactions contemplated by this Agreement have not been consummated by March
31, 1998, as soon as available, but in no event later than May 15, 1998, the
unaudited interim OCMCS and SJMC Financial Statements at and for the three
months ended March 31, 1998.
ARTICLE VII
CONDITIONS TO CLOSING
7.1 Conditions to the Obligations of the Parties. The respective
obligations of each party to effect the transactions contemplated under this
Agreement are subject to the fulfillment prior to or at the Closing of each of
the following conditions, any one or more of which may be waived by written
agreement of all parties:
(a) No injunction or restraining order shall be in effect to forbid or
enjoin, and no suit, action or proceeding shall be pending or threatened to
prohibit, nullify or otherwise Materially adversely affect the
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consummation of the transactions contemplated by this Agreement or the
consideration to be received hereunder.
(b) The OCMCS/SJMC Shareholders' Approval shall have been obtained.
(c) The parties and any other person (as defined in the HSR Act and
the rules and regulations thereunder) required in connection with the
acquisition or the other transactions contemplated by this Agreement to
file a Notification and Report Form for Certain Mergers and Acquisitions
with the Department of Justice and Federal Trade Commission pursuant to
Title 11 of the HSR Act shall have made such filing and the applicable
waiting period with respect to each such filing (including any extension
thereof by reason of a request for additional information) shall have
expired or been terminated.
(d) Sub shall have filed the notice with the California Department of
Corporations pursuant to Section 1352 of the Knox-Keene Act and the
California Department of Corporations shall have approved of such material
modification without any conditions to such approval having or which would
be reasonably expected to have a Material Adverse Effect on Sub.
(e) OCMCS, SJMC, FPA and Sub, as the case may be, shall have obtained
and delivered to the other party the written consents (or in lieu thereof
waivers) listed in Exhibit 6.16(c).
(f) There shall have been no law, statute, rule or order, enacted or
promulgated which would make the consummation of the transactions
contemplated hereby illegal.
(g) The shares of FPA Common Stock issuable to the OCMCS Stockholders
and the SJMC Shareholders in the Merger in accordance with this Agreement
shall have been approved for inclusion on the Nasdaq.
(h) The S-4 Registration Statement shall have become effective in
accordance with the provisions of the Securities Act and any applicable
state blue sky laws and no stop order shall have been issued by the SEC or
such state authorities with respect to the S-4 Registration Statement.
7.2 Conditions to the Obligations of FPA and Sub. The obligations of FPA
and Sub under this Agreement are subject to the fulfillment prior to or at the
Closing of each of the following conditions, any one or more of which may be
waived by FPA and Sub in their sole discretion:
(a) The representations and warranties of OCMCS and SJMC contained in
this Agreement or in any certificate or document delivered to FPA and Sub
pursuant hereto shall be complete, true and correct in all Material
respects on the Closing Date (except for such representations and
warranties which are qualified by a materiality standard, in which case
such representations and warranties shall be true and correct in all
respects), with the same force and effect as though such representations
and warranties had been made on and as of the Closing Date and each of
OCMCS and SJMC shall have delivered to FPA a certificate, dated the Closing
Date and executed on behalf of each of OCMCS and SJMC by its Chairman of
the Board, President or any Executive or Senior Vice President, to such
effect.
(b) OCMCS and SJMC shall have performed in all Material respects all
of their Material covenants, obligations and agreements contained in this
Agreement to be performed and complied with by them prior to the Closing
Date and each of OCMCS and SJMC shall have delivered to FPA a certificate,
dated the Closing Date and executed on behalf of each of OCMCS and SJMC by
its Chairman of the Board, President or any Executive or Senior Vice
President, to such effect.
(c) FPA and Sub shall have received all certificates, instruments,
agreements, and other documents required by this Agreement to be obtained
on or before the Closing Date.
(d) FPA and Sub shall have received copies of resolutions of each of
OCMCS and SJMC certified by a Secretary, Assistant Secretary or other
appropriate officer of such company, authorizing the execution, delivery
and performance of this Agreement and the transactions contemplated hereby;
and (ii) incumbency certificates for each signatory to this Agreement and
any documents related thereto.
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(e) FPA shall have received a letter from Deloitte & Touche LLP dated
not more than two (2) business days prior to the Effective Time, to the
effect that the acquisition of the SJMC Shares as contemplated by this
Agreement qualifies for "pooling of interests" accounting treatment if
consummated in accordance with this Agreement and if the operations of FPA
and the Surviving Corporation are conducted in a manner that do not violate
"pooling of interests" accounting treatment. FPA shall have received a
letter from Ernst & Young LLP, dated not more than two (2) days prior to
the Effective Time, to the effect that SJMC meets the conditions that must
be met to be a party to a business combination accounted for as a pooling
of interests in accordance with APB. Opinion No. 16 and related
interpretations of the American Institute of Certified Public Accountants,
consensuses of the FASB's Emerging Issues Task Force and the rules and
regulations of the SEC.
7.3 Conditions to the Obligations of OCMCS and SJMC. The obligations of
OCMCS and SJMC under this Agreement are subject to the fulfillment, prior to the
Closing, of each of the following conditions, any one or more of which may be
waived by OCMCS and SJMC in their sole discretion:
(a) The representations and warranties of FPA and Sub contained in
this Agreement or in any certificates or documents delivered to OCMCS and
SJMC pursuant hereto shall in all Material respects be complete, true and
correct on the Closing Date (except for such representations and warranties
which are qualified by a materiality standard, in which case such
representations and warranties shall be true and correct in all respects),
with the same force and effect as though such representations and
warranties had been made on and as of the Closing Date and each of FPA and
Sub shall have delivered to OCMCS and SJMC a certificate, dated the Closing
Date and executed on behalf of each of FPA and Sub by its Chairman of the
Board, President or any Executive or Senior Vice President, to such effect.
(b) FPA and Sub shall have performed all of their covenants,
obligations and agreements contained in this Agreement to be performed and
complied with by them prior to the Closing Date and each of FPA and Sub
shall have delivered to OCMCS and SJMC a certificate, dated the Closing
Date and executed on behalf of each of FPA and Sub by its Chairman of the
Board, President or any Executive or Senior Vice President, to such effect.
(c) OCMCS and SJMC shall have received all certificates, instruments,
agreements, and other documents to be delivered by FPA or Sub required by
this Agreement on or before the Closing Date.
(d) OCMCS and SJMC shall have received copies of resolutions of each
of FPA and Sub certified by a Secretary, Assistant Secretary or other
appropriate officer of such company, authorizing the execution, delivery
and performance of this Agreement and the transactions contemplated hereby;
and (ii) incumbency certificates for each signatory to this Agreement and
any documents related thereto.
ARTICLE VIII
TERMINATION AND SURVIVAL
8.1 Termination. The parties hereto shall use reasonable efforts to
bring about the satisfaction of the conditions hereunder prior to and at
Closing. Notwithstanding anything to the contrary set forth herein, this
Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing:
(a) by mutual written consent of FPA, Sub, OCMCS and SJMC;
(b) at any time after May 1, 1998 if the transactions contemplated by
this Agreement shall not have been consummated on or prior to such date and
such failure to consummate the transactions is not caused by a breach of
this Agreement by the terminating party, except that the termination date
shall be extended automatically for consecutive 30 day periods if the only
conditions to close which shall not have been satisfied are the
effectiveness of the Registration Statement or the obtaining of the
approval of the Department of Corporations of the material modification
application and the parties are using their best efforts to obtain such
effectiveness and approval; provided, however, that if such effectiveness
and approval are not obtained by August 1, 1998, any of the parties hereto
may terminate this Agreement.
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(c) if any governmental or regulatory authority, the taking of action
by which is a condition to the obligations of either OCMCS, SJMC, FPA or
Sub to consummate the transactions contemplated hereby, shall have
determined not to take such action and all appeals of such determination
shall have been taken and have been unsuccessful;
(d) if there has been a Material breach of any representation,
warranty, covenant or agreement on the party of the non-terminating party
set forth in this Agreement which breach has not been cured within fifteen
(15) business days following receipt by the non-terminating party of notice
of such breach from the terminating party or assurance of such cure
reasonably satisfactory to the terminating party shall not have been given
by or on behalf of the non-terminating party within such fifteen (15)
business day period;
(e) if any court of competent jurisdiction or other competent
governmental or regulatory authority shall have issued any order making
illegal or otherwise restricting, preventing or prohibiting the
transactions contemplated by this Agreement and such order shall have
become final and non-appealable; or
(f) by OCMCS and SJMC if the Boards of Directors of OCMCS and SJMC
conclude in good faith on the basis of advice from independent counsel
(which may include Klein & Martin) that such action is necessary or
appropriate in order for such Boards of Directors to act in a manner which
is consistent with their fiduciary obligations under applicable law and the
Boards of Directors have followed the Alternative Proposal procedures set
forth in Section 6.12 hereof.
8.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, this Agreement shall become void and of no further force and
effect, except for the provisions of Section 6.4(b), and none of the parties
hereto (nor their respective affiliates, directors, shareholders, officers,
employees, agents, consultants, attorneys-in-fact or other representatives)
shall have any liability in respect of such termination; provided, however,
nothing contained herein shall relieve any party from liability for willful
breach of its representations, warranties, covenants or agreements contained in
this Agreement.
ARTICLE IX
POST CLOSING OBLIGATIONS
9.1 Further Assurances. From time to time after the Closing, without
further consideration, the parties shall cooperate with one another and shall
execute and deliver instruments of transfer or assignment, or such other
documents to the other parties as such other parties reasonably may request to
carry out the transactions contemplated by this Agreement.
9.2 Cooperation in Litigation. The parties shall reasonably cooperate with
one another at the requesting party's expense in the prosecution or defense of
any litigation or other proceeding arising from their respective operations of
the businesses and assets to be transferred hereunder.
9.3 Retention of Books and Records. For a minimum period of six (6) years
after the Closing Date, Sub shall retain and preserve all books and records with
respect to OCMCS and SJMC and the operation of their businesses. For purposes
reasonably related to each of the OCMCS Stockholders' and the SJMC Shareholders'
respective ownership of OCMCS and SJMC prior to the Closing Date or with respect
to this Agreement, such books and records shall, upon any
Stockholder's/Shareholder's prior written request therefor be made available for
inspection by such Stockholder/Shareholder, his or her authorized representative
or agent, during Sub's normal business hours, and the Stockholder/Shareholder
shall be entitled to copy, at his or her expense, all or any portion of the
contents of such books and records.
9.4 Malpractice Protection. At all times from and after the Closing Date,
Sub shall procure and maintain professional liability insurance for the benefit
of the SJMC Shareholders with commercially reasonable limits of coverage, but
not less than One Million Dollars ($1,000,000) per claim and Three Million
Dollars ($3,000,000) in the aggregate, covering professional services rendered
by, the SJMC Shareholders for and on behalf of SJMC prior to the Closing Date.
Sub shall be responsible for the payment of all premiums
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with respect to such coverage. After the Closing Date, Sub shall procure and
maintain business and medical malpractice insurance coverages similar in type
and amount maintained by SJMC immediately prior to the Closing Date which will
otherwise protect the SJMC Shareholders while employed by Sub after the Closing
Date.
9.5 Provider Relations.
(a) Immediately after the Effective Time, Sub shall establish an Orange
County Quality Improvement Committee (the "Committee") substantially as
currently in existence for Sub (as described on Exhibit 9.5(a)) for its
California regional operations. The initial membership of the Committee shall be
mutually selected by Sub and the Board of Directors of SJMC prior to the Closing
Date. The operation of the Committee shall be in accordance with the operations
of Sub's current Regional Quality Improvement Committees.
Immediately after the Effective Time, Sub shall establish two Leadership
Councils, the St. Joseph IPA Leadership Council (the "SJIPA Council") and the
St. Joseph Medical Group Leadership Council (the "SJMG Council") (collectively,
the "Councils"). The initial membership of the SJIPA Council shall consist of
the physicians listed in Exhibit 9.5(b); and the initial membership of the SJMG
Council shall consist of the physicians listed in Exhibit 9.5(c). A member of
the Councils shall serve a one-year term starting with the Effective Date. The
Councils shall be self-perpetuating, with new terms for a new or existing
Council member subject to the approval of FPA and Sub.
(b) Sub will maintain for two years after the Closing Date, the SJMC
compensation program for the St. Joseph IPA physicians (the "St. Joseph IPA
Compensation Program") and the SJMC compensation program for the St. Joseph
Medical Group Physicians (the "St. Joseph Medical Group Compensation Program").
The components of the St. Joseph IPA Compensation Program and the St. Joseph
Medical Group Compensation Program are hereinafter described. In the event of a
material adverse change in the California healthcare services market, Sub may
reassess and modify the St. Joseph IPA Compensation Program and the St. Joseph
Medical Group Compensation Program to meet such changed conditions. At any time
after the Effective Date, Sub may re-negotiate contracts for services provided
on a fee-for-service basis.
Sub management will present monthly financial reports to the SJIPA Council,
including quarterly reports on the St. Joseph IPA Bonus Program (as hereinafter
defined). The SJIPA Council will be an advisory committee providing advice and
counsel to FPA and Sub for operational issues which affect St. Joseph IPA, and
for the St. Joseph IPA Bonus Program.
The SJMG Council will be an advisory subcommittee providing oversight for
medical office operations. Sub management will present monthly financial reports
to the SJMG Council.
St. Joseph IPA Compensation Program
The St. Joseph IPA Compensation Program consists of two components:
Capitation payments and bonus payments as determined by the St. Joseph IPA Bonus
Program. Capitation payments are set contractually with physicians per the
contracts listed in Exhibit 4.12(a). After the Closing Date, the St. Joseph IPA
shall be defined as the physicians, and the members associated with those
physicians, contracted with SJMC as of the Closing Date, plus physicians
approved after the Closing Date by Sub or its designee committee (after
considering the recommendation of the Committee), to provide service in the
service area covered by St. Joseph IPA as of the Closing Date.
The St. Joseph IPA Bonus Program consists of a Bonus Pool which is funded
from two sources of revenues: first, all surplus or deficit revenue from health
plans for facility risk pools, pharmacy risk pools, point-of-service risk pools,
administrative revenue, contract signing fees and quality incentive revenues
(the "Periodic Revenue"); and second, all earnings in excess of three percent
(3%) of the Monthly Margin. The Monthly Margin consists of capitation revenue
received by the IPA from the health plans less expenses incurred by the IPA
including capitation payments to providers, fee-for-service claim payments to
providers, and administrative expenses (direct expenses and indirect expenses
including corporate overhead expenses).
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Capitation payments to providers may be increased or deceased based on changes
in capitation revenue received from health plans.
The Bonus Pool will be reduced or eliminated to the extent that the Monthly
Margin is less than three percent (3%) for the commercial/POS product line or
the senior product line. The Bonus Pool is then split between the commercial/POS
product line and the senior product line, according to the revenue and costs
associated with each product line.
The Bonus Pool is split (50%) to Sub and 50% to a physician bonus pool. The
physician bonus pool is then split 60% to specialists and 40% to primary care
physicians. In turn, the individual primary care physician or physician group
bonus is determined by (1) the number of commercial/POS or senior members
associated with the physician or physician group, (2) factors such as referral
rates to specialists, and (3) citizenship factors such as committee
participation. The individual specialty care physician or physician group bonus
is determined by (1) the relative share of the capitation received by the
specialty, (2) the relative impact a specialty may have on facility usage, and
(3) other criteria such as the relative productivity of an individual specialist
compared to other specialists within a given specialty.
The Bonus Pool is an annual (calendar year) pool and is settled annually.
On a quarterly basis, financial reports on the Bonus Pool are distributed to the
SJIPA Council, and quarterly bonus payments (subject to an appropriate IBNR
estimate) are made to physicians.
Separate and apart from the Bonus Pool, there is an Emergency Room bonus
pool (the "ER Bonus Pool") for primary care physicians only. The ER Bonus Pool
is funded at $1.27pmpm for commercial/POS members and $3.58pmpm for senior
members. The ER Bonus Pool is charged with all emergency room expenses for which
St. Joseph IPA is financially responsible. The surplus is distributed to the
primary care physicians based on member months for each primary care physician.
Any deficit in the ER Bonus Pool is funded by the primary care portion of the
Bonus Pool. The ER Bonus Pool is settled annually.
St. Joseph Medical Group Compensation Program
The St. Joseph Medical Group Compensation Program consists of base
compensation and bonus compensation. Base compensation is determined by RVU
volume and productivity for each physician and compared to market standards.
Bonus compensation is determined on an annual basis by calculating the
financial performance of each physician and subtracting the physician's base
compensation. The financial performance of each St. Joseph Medical Group
physician is determined as follows:
Revenue: Capitation and other revenue per office/FTE physician in
office plus net collected FFS revenue generated by the physician, less
Office expenses: (Variable costs of office/total patient visits in
office) times number of patient visits by the physician, less
Group and central expenses: (Group and central overhead costs of
medical group/total patient visits in all medical group offices) times
number of patient visits by the physician.
The bonus compensation may be reallocated by the Board of Directors of Sub
among existing factors such as care management initiatives, citizenship, and
patient satisfaction.
Bonus compensation will not be paid to the physicians in a given office to
the extent the office fails to breakeven after April 1, 1998.
9.6 Employees.
(a) From and after the Effective Time, FPA and Sub, and their
respective affiliates, will honor in accordance with their terms all
existing employment, severance, consulting and salary continuation
agreements between OCMCS and SJMC and any current or former officer,
director, employee or consultant to OCMCS or SJMC.
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(b) From and after the Effective Time, FPA or Sub, as the case may be,
shall provide each OCMCS and SJMC employee who becomes an FPA or Sub
employee (and, to the extent applicable, the employee's respective eligible
dependents) benefits which are substantially similar to those provided
under the FPA Employee Benefit Plans applicable to similarly situated
employees of FPA or its affiliates. For purposes of determining eligibility
to participate, vesting and benefit eligibility in any FPA Employee Benefit
Plan (other than the FPA Employee Stock Purchase Plan), FPA shall give each
OCMCS and SJMC employee full credit for the service credited to such
employee under the respective OCMCS or SJMC Employee Benefit Plans and FPA
shall waive any applicable waiting periods under the FPA Employee Benefit
Plans. Notwithstanding the foregoing, FPA shall provide the OCMCS and SJMC
employees with credit of, and shall assume OCMCS's and SJMC's liability
with respect to, up to a maximum of 160 hours of accrued vacation.
9.7 Directors' and Officers' Indemnification and Insurance.
(a) Except to the extent required by law, until the fifth anniversary
of the Effective Time, neither FPA nor Sub will take any action so as to
amend, modify or repeal the provisions for indemnification of directors,
officers, stockholders, employees or agents contained in the articles of
incorporation or bylaws of Sub in such a manner as would materially and
adversely affect the rights of any individual who shall have served as a
director, officer, stockholder, employee or agent of OCMCS or SJMC prior to
the Effective Time (each an "Indemnified Party") to be indemnified by such
corporations in respect of their serving in such capacities prior to the
Effective Time. FPA and Sub shall, to the fullest extent authorized by the
California Code or any other applicable law as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits Sub to provide broader indemnification
rights than said law permitted Sub to provide prior to such amendment),
indemnify all directors, officers, employees, agents and stockholders who
are officers or directors of OCMCS or SJMC against any liability or losses
(including reasonable attorneys' fees for counsel who are reasonably
acceptable to FPA and Sub) any of them may incur in connection with any
action, proceeding or investigation with which they become involved prior
to or within five (5) years from the Effective Time as officers, directors,
employees, agents or stockholders of OCMCS and SJMC; provided, however,
that any such indemnification by FPA and Sub shall be in excess of any
available insurance coverage to an Indemnified Party. The right to
indemnification conferred in this Section shall be a contract right and
shall include the right to be paid by FPA and Sub any expenses incurred in
defending any such proceeding in advance of its final disposition;
provided, however, that, if so required by FPA and Sub, such advance shall
be made only upon delivery to FPA and Sub of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not
entitled to be indemnified under this Section or otherwise. FPA and Sub
shall not be liable for any settlement effected without their written
consent (which consent shall not be unreasonably withheld). FPA and Sub
shall not be obligated pursuant to this Section to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any
single action, except to the extent that, in the opinion of counsel for the
Indemnified Parties, two or more of such Indemnified Parties have
conflicting interests in the outcome of such action, or one or more of such
Indemnified Parties and FPA and Sub have conflicting interests in the
outcome of such action. FPA and Sub may obtain directors' and officers'
liability insurance covering its obligations under this Section.
(b) The provisions of this Section are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her
heirs and legal representatives, and shall be in addition to any other
rights an Indemnified Party may have under the Articles of Incorporation or
Bylaws of Sub, under the California Code or otherwise.
(c) Prior to the Effective Time, OCMCS and SJMC shall purchase and
maintain directors' and officers' liability insurance ("tail coverage") for
a period of three (3) years following the Effective Time, covering each
person who was a director or officer of OCMCS and SJMC prior to the
Effective Time with respect to claims arising from facts or events that
occurred on or prior to the Effective Time and providing substantially the
same coverage and amounts and terms as were in effect for such directors or
officers prior to the Effective Time.
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ARTICLE X
INDEMNIFICATION
10.1 Indemnification by the OCMCS Stockholders and the SJMC
Shareholders. Each of the OCMCS Stockholders and the SJMC Shareholders shall
jointly and severally indemnify, defend and hold harmless each of FPA and Sub
and their respective directors, shareholders, officers, employees, agents,
affiliates, successors and assigns from and against any and all claims,
liabilities, obligations, losses, actual costs, expenses (including, without
limitation, reasonable attorneys' fees and costs), fines and damages
(individually a "Loss" and collectively "Losses"), arising out of:
(a) a breach or violation by OCMCS or SJMC of any covenant made by
either OCMCS or SJMC herein or in any agreement, certificate or similar
document delivered pursuant hereto; or
(b) a breach of, or any inaccuracy in, any of the representations or
warranties made by OCMCS or SJMC in this Agreement or in any schedule,
Exhibit, agreement, instrument, certificate or similar document required to
be delivered pursuant to the terms hereof.
10.2 Indemnification by FPA and Sub. FPA and Sub shall jointly and
severally indemnify, defend and hold harmless OCMCS's and SJMC's directors,
shareholders, officers, employees, agents, affiliates, successors and assigns
from and against any and all Losses arising out of or in connection with:
(a) a breach or violation by FPA and Sub of any covenant made by
either FPA or Sub herein or in any agreement, certificate or similar
document delivered pursuant hereto; or
(b) a breach of, or any inaccuracy in, any of the representations or
warranties made by FPA and Sub in this Agreement, or in any schedule,
Exhibit, agreement, instrument, certificate or similar document required to
be delivered pursuant to the terms hereof.
10.3 Indemnification Procedure.
(a) Any party seeking indemnification hereunder (the "Indemnitee")
shall notify the party liable for such indemnification (the "Indemnitor")
in writing of any event, omission or occurrence which the Indemnitee has
determined has given or could give rise to Losses which are indemnifiable
hereunder (such written notice being hereinafter referred to as a "Notice
of Claim"). Any Notice of Claim shall be given promptly after the
Indemnitee becomes aware of such third party claim; provided, that the
failure of any Indemnitee to give notice as provided in this Section 10.3
shall not relieve the Indemnitor of its obligations under this Section
10.3, except to the extent that the Indemnitor is actually prejudiced by
such failure to give notice. A Notice of Claim shall specify in reasonable
detail the nature and any particulars of the event, omission or occurrence
giving rise to a right of indemnification. The Indemnitor shall satisfy its
obligations hereunder within thirty (30) days of its receipt of a Notice of
Claim; provided, however, that so long as the Indemnitor is in good faith
defending a claim pursuant to Section 10.3(b) below, its obligation to
indemnify the Indemnitee with respect thereto shall be suspended.
(b) Except as provided in Section 10.4 below, with respect to any
third party claim, demand, suit, action or proceeding which is the subject
of a Notice of Claim, the Indemnitor shall, in good faith and at its own
expense, defend, contest or otherwise protect against any such claim,
demand, suit, action or proceeding with legal counsel of its own selection.
The Indemnitee shall have the right, but not the obligation, to
participate, at its own expense, in the defense thereof through counsel of
its own choice and shall have the right, but not the obligation, to assert
any and all crossclaims or counterclaims it may have. So long as the
Indemnitor is defending in good faith any such third party claim, demand,
suit, action or proceeding, the Indemnitee shall at all times cooperate, at
its own expense, in all reasonable was with, make its relevant files and
records available for inspection and copying by, and make its employees
available or otherwise render reasonable assistance to, the Indemnitor. In
the event that the Indemnitor fails to timely defend, contest or otherwise
protect against any such third party claim, demand, suit, action or
proceeding, the Indemnitee shall have the right, but not the obligation, to
defend, contest, assert crossclaims or counterclaims, or otherwise protect
against, the same and may make any compromise or settlement thereof and be
entitled to all amounts paid as a result of such third party claim, demand,
suit
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or action or any compromise or settlement thereof. Any compromise or
settlement of asserted liability by the Indemnitor shall require the prior
written consent of the party seeking indemnification, which consent shall
not be unreasonably withheld.
(c) This indemnity is conditioned on and subject to the Indemnitee
giving its full cooperation in complying with any applicable foreign,
federal, state or local laws, rules or regulations or any discover or
testimony necessary to effectively carry out the Indemnitor's obligations
hereunder. Such cooperation shall be without charge to the Indemnitor.
10.4 Survival and Limitations.
(a) The representations and warranties of OCMCS and SJMC, on the one
hand, and FPA and Sub, on the other hand, contained in this Agreement or in
any document or instrument delivered pursuant hereto shall survive the
Closing Date and shall continue in full force and effect until the first
anniversary of the Closing Date, except for Sections 3.14 (Taxes) and 4.14
(Taxes) and fraud, which shall survive until the expiration of the
applicable statute of limitations thereto.
(b) Anything to the contrary contained herein notwithstanding, (i) FPA
and Sub shall not assert any claim against the OCMCS Stockholders and the
SJMC Shareholders for indemnification hereunder unless and until the amount
of such claim or claims shall exceed Five Hundred Thousand Dollars
($500,000) calculated on a cumulative basis and not a per item basis, and
thereafter shall be entitled to indemnification for all indemnifiable
damages hereunder; and (ii) FPA and Sub shall not be entitled to claim for
or recover from the OCMCS Stockholders and the SJMC Shareholders more than
the value of the Aggregate FPA Shares with respect to all claims for
indemnity hereunder. Notwithstanding the foregoing FPA and Sub shall not be
entitled to claim for or recover from any OCMCS Stockholder or SJMC
Shareholder, the value of the merger consideration received by such
stockholder or shareholder.
(c) Anything to the contrary contained herein notwithstanding, (i) the
OCMCS Stockholders and the SJMC Shareholders shall not assert any claim
against FPA and Sub for indemnification hereunder unless and until the
amount of such claim or claims shall exceed Five Hundred Thousand Dollars
($500,000) calculated on a cumulative basis and not a per item basis, and
thereafter shall be entitled to indemnification for all indemnifiable
damages hereunder; (ii) the OCMCS Stockholders and the SJMC Shareholders
shall not be entitled to recover from FPA and Sub more than the value of
the Aggregate FPA Shares with respect to all claims for indemnity hereunder
and (iii) claims for payment of any or all of the Aggregate FPA Shares
shall not be subject to a minimum dollar amount.
10.5 Reduction for Insurance and Taxes. The amount (an "Indemnity
Payment") which any Indemnitor is required to pay on behalf of any other party
("Indemnitee") pursuant to this Article 10 shall be reduced by the amount of any
insurance proceeds theretofore or thereafter actually received by or on behalf
of the Indemnitee in reduction of the related indemnifiable loss. An Indemnitee
shall pay to the Indemnitor the amount of such insurance proceeds or, if lesser,
the amount of the Indemnity Payment. Where any tax benefit is available to the
Indemnitee with respect to an indemnifiable event, the Indemnity Payment shall
be reduced dollar for dollar by the amount of such tax benefit.
ARTICLE XI
MISCELLANEOUS
11.1 Expenses. Except as specifically set forth elsewhere herein and
except that a party not in breach of this Agreement shall be entitled to recover
from a breaching party all expenses and costs incurred by the non-breaching
party by reason of such breach (including, without limitation all legal expenses
and costs), each of the parties hereto shall pay its own expenses and costs
incurred or to be incurred by it in negotiating, closing and carrying out this
Agreement.
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11.2 Notices. Any notice or communication given pursuant to this
Agreement by a party hereto to the other parties shall be in writing and
hand delivered, or mailed by registered or certified mail, postage prepaid,
return receipt requested (notices so mailed shall be deemed given when
mailed), or sent via facsimile, with an original mailed as follows:
<TABLE>
<S> <C>
If to OCMCS: Orange Coast Managed Care Services, Inc.
505 South Main Street, Suite 200
Orange, California 92868
Attention: Chief Executive Officer
Facsimile: 714-560-4315
If to SJMC: St. Joseph Medical Corporation
505 South Main Street, Suite 200
Orange, California 92868
Attention: President
Facsimile: 714-560-4315
With copies of
notices to OCMCS
or SJMC to: Klein & Martin
2029 Century Park East, Suite 2550
Los Angeles, California 90067
Attention: Eric A. Klein, Esq.
Facsimile: (310) 201-0108
If to FPA or Sub: FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: James A. Lebovitz, Esq.
Facsimile: (619) 453-1941
</TABLE>
11.3 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.4 Entire Agreement. This Agreement, together with its exhibits and
schedules, is the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior communications,
representations, agreements and understandings between the parties hereto,
whether oral or written, including, without limitation, any financial or other
projections or predictions regarding OCMCS and SJMC.
11.5 Construction. When the context so requires, references herein to the
singular number include the plural and vice versa and pronouns in the masculine
or neuter gender include the feminine. The headings contained in this Agreement
and the tables of contents, exhibits and schedules are for reference purposes
only and shall not affect the meaning or interpretation of this Agreement.
11.6 Assignment. This Agreement may not be assigned without the prior
written consent of the other parties hereto, which consent shall not
unreasonably be withheld.
11.7 Amendment. This Agreement may be amended only by written agreement
duly executed by representatives of all the parties hereto.
11.8 Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of California, disregarding its conflicts of laws
principles which may require the application of the laws of another
jurisdiction.
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11.9 No Third Party Rights. This Agreement is not intended and shall not
be construed to create any rights in any parties other than OCMCS, SJMC, FPA and
Sub and no other person shall assert any rights as a third party beneficiary
hereunder other than the OCMCS Stockholders and the SJMC Shareholders, but only
with respect to the consideration to be received hereunder.
11.10 Waivers. Any waiver of rights hereunder must be set forth in
writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Agreement shall not in any way affect, limit or waive any
party's rights at any time to enforce strict compliance thereafter with ever
term or condition of this Agreement.
11.11 Severability. If and to the extent that any court of competent
jurisdiction holds any provisions (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.
IN WITNESS WHEREOF, OCMCS and SJMC and FPA and Sub have duly executed and
delivered this Agreement as of the day and year first above written.
"OCMCS" ORANGE COAST MANAGED CARE
SERVICES, INC., a Delaware corporation
By: /s/ CHARLES MADDEN
------------------------------------
Its: President and CEO
------------------------------------
"SJMC" ST. JOSEPH MEDICAL CORPORATION,
a California professional medical
corporation
By: /s/ R. WILLIAM BUSTER, M.D.
------------------------------------
Its: President
------------------------------------
"FPA" FPA MEDICAL MANAGEMENT, INC.
a Delaware corporation
By: /s/ STEVEN M. LASH
------------------------------------
Its: Executive Vice President and
CFO
------------------------------------
"Sub" FPA MEDICAL MANAGEMENT OF
CALIFORNIA, INC., a California
corporation
By: /s/ STEVEN M. LASH
------------------------------------
Its: Executive Vice President and
CFO
------------------------------------
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EXHIBIT 9.5(b)
ST. JOSEPH MEDICAL GROUP LEADERSHIP COUNCIL
<TABLE>
<S> <C>
Maria Minon, M.D. David Sodaro, M.D.
Nancy Brownell, M.D. Dawn Bruner, M.D.
Shashidar Acharya, M.D. Tom Hryniewicki, M.D.
Gary Jenkins, M.D. Lisa Gorab, M.D.
Keith Gladstein, M.D. James Strebig, M.D.
</TABLE>
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EXHIBIT 9.5(c)
ST. JOSEPH IPA LEADERSHIP COUNCIL
<TABLE>
<S> <C>
R. William Buster, M.D. Richard Bond, D.O.
Shashidar Acharya, M.D. William McMaster, M.D.
William Collins, M.D. Marshall Rowen, M.D.
Richard Pitts, D.O. Bharat Bhimani, M.D.
Laurence Wellikson, M.D. Maria Minon, M.D.
Norman Rosen, M.D.
</TABLE>
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AMENDMENT NUMBER ONE TO AGREEMENT AND PLAN OF MERGER
This Amendment Number One (this "Amendment") to the Agreement and Plan of
Merger dated as of January 21, 1998 (the "Merger Agreement") by and among FPA
Medical Management, Inc., FPA Medical Management of California, Inc., Orange
Coast Managed Care Services, Inc. and St. Joseph Medical Corporation is entered
into as of January 28, 1998. Unless otherwise defined herein, each term used
herein that is defined in the Merger Agreement shall have the meaning assigned
to such term in the Merger Agreement.
WHEREAS, the Merger Agreement omitted certain terms which the parties agree
should have been contained therein; and
WHEREAS, the parties wish to correct such omissions as mutually agreed;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and for other good and valuable consideration, the adequacy of which is hereby
acknowledged, the parties hereto agree to amend the Merger Agreement and the
Merger Agreement is hereby amended as follows:
1. Section 6.13 is hereby deleted in its entirety.
2. Section 7.3(b) is hereby amended in its entirety to read as follows:
(b) FPA and Sub shall have performed in all Material respects all of
their Material covenants, obligations and agreements contained in this
Agreement to be performed and complied with by them prior to the Closing
Date and each of FPA and Sub shall have delivered to OCMCS and SJMC a
certificate, dated the Closing Date and executed on behalf of each of FPA
and Sub by its Chairman of the Board, President or any Executive Vice
President or Senior Vice President, to such effect.
3. Section 10.1 is hereby deleted in its entirety and amended to read as
follows:
10.1 Indemnification by the OCMCS Stockholders and the SJMC Shareholders.
(a) Each of the OCMCS Stockholders and the SJMC Shareholders shall
jointly and severally indemnify, defend and hold harmless each of FPA and
Sub and their respective directors, shareholders, officers, employees,
agents, affiliates, successors and assigns from and against any and all
claims, liabilities, obligations, losses, actual costs, expenses
(including, without limitation, reasonable attorneys' fees and costs),
fines and damages (individually a "Loss" and collectively "Losses"),
arising out of:
(i) a breach or violation by OCMCS or SJMC of any covenant made by
either OCMCS or SJMC herein or in any agreement, certificate or similar
document delivered pursuant hereto; or
(ii) a breach of, or any inaccuracy in, any of the representations
or warranties made by OCMCS or SJMC in this Agreement or in any
Schedule, agreement, instrument, certificate or similar document
required to be delivered pursuant to the terms hereof.
(b) The OCMCS Board of Directors shall appoint two (2) OCMCS
Stockholder Representatives and the SJMC Board of Directors shall appoint
two (2) SJMC Shareholder Representatives. Such OCMCS Stockholder
Representatives and SJMC Shareholder Representatives shall represent the
stockholders of OCMCS and the shareholders of SJMC, respectively, in the
event the OCMCS Stockholders or the SJMC Shareholders are required to
perform under this Section 10.1. By tendering shares of OCMCS Common Stock
or OCMCS Preferred Stock and/or SJMC Common Stock in exchange for FPA
Shares, each tendering Shareholder of SJMC and each tendering Stockholder
of OCMCS shall be deemed to have consented to be bound by the decisions and
actions of his, her or its Shareholder Representative.
(c) Each SJMC Shareholder Representative and each OCMCS Stockholder
Representative shall serve in such capacity for a term of four (4) years,
until a Vacancy (as defined below) occurs or until such Shareholder
Representative is removed as set forth below, whichever occurs first. The
SJMC Shareholder Representatives and OCMCS Stockholder Representatives are
sometimes referred to collectively herein as the "Shareholder
Representatives." If a Vacancy occurs, the remaining Shareholder
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Representatives shall elect a replacement SJMC Shareholder Representative
or OCMCS Stockholder Representative, as the case may be, and such
replacement SJMC Shareholder Representative or OCMCS Stockholder
Representative shall serve as a Shareholder Representative for the
remainder of the four (4) year term, unless a Vacancy occurs earlier. If
any claim made against the OCMCS stockholders or SJMC shareholders under
this Article X is pending at the expiration of the four (4) year term of
the Shareholder Representatives, the terms of such Shareholder
Representatives shall be automatically renewed without any action by the
OCMCS stockholders or SJMC shareholders for additional one (1) year terms
until such time as no claim has been presented or is pending at the
expiration of such term.
(d) All meetings of the Shareholder Representatives shall be held at
such place as may be designated from time to time by the Shareholder
Representatives. Any such meetings may be held by conference telephone or
similar communication equipment so long as all Shareholder Representatives
participating in the meeting can hear one another, and all such Shareholder
Representatives shall be deemed to be present in person at the meeting.
Meetings of the Shareholder Representatives may be called at any time by
two (2) Shareholder Representatives. Notice of such meetings, stating the
time, date, place and purpose thereof shall be sent by first-class mail not
less than four (4) days before the date of the meeting, telegraphed,
personally delivered, or telephoned not less than forty-eight (48) hours
before the date of the meeting. No defect in the call or notice of a
meeting shall affect the validity of any action taken at the meeting if
each Shareholder Representative not present at the meeting signs a written
waiver of notice, or consents to the holding of the meeting, or an approval
of the minutes, if any, either before or after the meeting.
(e) Every act or decision done or made by a majority of the
Shareholder Representatives in a duly held meeting shall be regarded as the
act of the Shareholder Representatives. Any action required or permitted to
be taken by the Shareholder Representatives may be taken without a meeting
if all of the Shareholder Representatives shall individually or
collectively consent in writing to the action.
(f) Each Shareholder Representative shall perform his, her or its
duties in good faith, in the manner such Shareholder Representative
believes to be in the best interests of the shareholders or stockholders
whom he or she represents. The Shareholder Representatives shall exercise
all powers and authority in the performance of the obligations of the OCMCS
Stockholders and SJMC Shareholders set forth in this Article X, including
but not limited to:
(i) the strategic determination of contesting or accepting a claim
of indemnification;
(ii) the selection of counsel and professional advisors to
represent the OCMCS Stockholders and SJMC Shareholders and, if the
Shareholder Representatives determine that it is necessary, independent
counsel for the OCMCS Stockholders as a group and the SJMC Shareholders
as a group;
(iii) the participation in the defense of a claim, suit, demand,
action or proceeding; and
(iv) the settlement or compromise of any asserted liability.
The OCMCS Stockholder Representatives and the SJMC Shareholder
Representatives shall give prior notice to their respective stockholders
and shareholders of any action to (i) contest or accept a claim of
indemnification, (ii) participate in the defense of a claim, suit, demand,
action or proceeding or (iii) settle or compromise any asserted liability.
(g) The Shareholder Representatives shall have the authority to bill
and collect from the OCMCS stockholders and the SJMC shareholders, as the
case may be, for any expenses incurred by the Shareholder Representatives
in such capacity. The Shareholder Representatives shall bill each OCMCS
stockholder and SJMC shareholder in accordance with such OCMCS
stockholder's or SJMC shareholder's percentage interest in OCMCS and SJMC,
respectively, at the Effective Time. Such invoices or statements from the
Shareholder Representatives shall be the personal obligation of each OCMCS
stockholder and SJMC shareholder. Upon non-payment by any OCMCS stockholder
or SJMC
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shareholder of any amount due from such OCMCS stockholder or SJMC
shareholder as a result of a demand for payment by a Shareholder
Representative, the OCMCS stockholders shall have a right of contribution
against such non-paying OCMCS stockholder and the SJMC shareholders shall
have a right of contribution against such non-paying SJMC shareholder for
the amounts demanded by the Shareholder Representative from such SJMC
shareholder or OCMCS stockholder, as the case may be, together with all
costs incurred in connection with the collection of such amounts. If a
payment is required to be made to a Shareholder Representative and the
OCMCS stockholder responsible for making such payment shall fail to make
such payment, the other OCMCS stockholders shall make the entire required
payment pro rata as if such other stockholders owned 100% of the OCMCS
voting securities as of the Effective Time. Such payment by such other
OCMCS stockholders shall not be deemed to relieve the non-paying OCMCS
stockholder of his, her or its obligations with respect to the Shareholder
Representatives. If a payment is required to be made to a Shareholder
Representative and the SJMC shareholder responsible for making such payment
shall fail to make such payment, the other SJMC shareholders shall make the
entire required payment pro rata as if such other shareholders owned 100%
of the SJMC voting securities as of the Effective Time. Such payment by
such other SJMC shareholders shall not be deemed to relieve the non-paying
SJMC shareholder of his, her or its obligations with respect to the
Shareholder Representatives.
(h) For the purposes of this Article X, any one or more of the
following events or conditions shall be deemed to be a Vacancy:
(i) the filing of a petition in bankruptcy by or against the
Shareholder Representative;
(ii) an adjudication that the Shareholder Representative is an
insane or incompetent person;
(iii) any general assignment by the Shareholder Representative for
the benefit of his, her or its creditors;
(iv) any transfer, award or confirmation of any or all shares of
the Shareholder Representative to the Shareholder Representative's
spouse pursuant to a decree of divorce, dissolution or separate
maintenance, or pursuant to a property settlement or separation
agreement;
(v) the "disability" (as defined below) of any Shareholder
Representative. For purposes of this Article X, a Shareholder
Representative shall be deemed to be "disabled" if, and on such date
that, (1) the Shareholder Representative suffers from bodily infirmities
or disorders, diseases, injuries (including self-inflicted injuries),
addiction to substances hazardous to health (including addiction to
narcotics and alcoholism), or mental illness, and (2) one of the
following conditions is satisfied:
(A) Under terms of a bona fide disability income insurance
policy which insures such Shareholder Representative, the insurance
company that underwrites such insurance policy determines that the
Shareholder Representative is totally disabled for purposes of such
insurance policy;
(B) A physician licensed to practice medicine in the State of
California, who has been selected by the Shareholder Representative
(or the conservator of the Shareholder Representative's estate) and
approved by the majority of the Shareholder Representatives certifies
that the Shareholder Representative is partially or totally disabled
so that the Shareholder Representative will be unable to serve in his
or her capacity as a Shareholder Representative for a six (6) month
period. The costs and expenses of such physician shall be borne by
the shareholders or stockholders whom such Shareholder Representative
represents;
(C) The Shareholder Representatives determine that the
Shareholder Representative is partially or totally disabled so that
the Shareholder Representative will be unable to serve in his or her
capacity as a Shareholder Representative for a six (6) month period;
(D) the death of the Shareholder Representative;
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(E) the uncured breach by the Shareholder Representative of any
term of this Section 10.1 after written notice from the Shareholders
as specified herein, or if not specified, within thirty (30) days
after written notice from the shareholders or stockholders whom such
Shareholder Representative represents; or
(F) the indictment or conviction of the Shareholder
Representative for any felony.
(i) Any or all of the Shareholder Representatives may be removed upon
the approval of a majority of the shareholders or stockholders who such
Shareholder Representative represents.
(j) No Shareholder Representative shall be compensated for services
rendered in his, her or its capacity as a Shareholder Representative;
provided, however, Shareholder Representatives shall be reimbursed for
their expenses related to the performance of their duties hereunder. In
addition, OCMCS Stockholder Representatives shall be indemnified after the
Closing in their capacity as OCMCS Stockholder Representatives by OCMCS
stockholders. Similarly, SJMC Shareholder Representatives shall be
indemnified after the Closing in their capacity as SJMC Shareholder
Representatives by SJMC shareholders.
4. The last sentence of Section 10.4(b) is amended to read as follows:
"Notwithstanding the foregoing, FPA and Sub shall not be entitled to
claim for or recover from any OCMCS Stockholder or SJMC Shareholder more
than the value of the merger consideration received by such stockholder
or shareholder."
5. Except as set forth herein, the Merger Agreement remains in full force
and effect, and, as so amended, the Merger Agreement is hereby in all respects
ratified and confirmed.
6. This Amendment shall be governed by and construed in accordance with the
laws of the State of California.
7. This Amendment may be executed in multiple counterparts each of which
shall be an original and all of which together shall constitute one instrument.
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IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
the parties hereto as of the date first written above.
FPA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By:
-----------------------------------------------------------
Title:
----------------------------------------------------------
FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC.,
a Delaware corporation
By:
-----------------------------------------------------------
Title:
----------------------------------------------------------
ORANGE COAST MANAGED CARE SERVICES, INC.,
a Delaware corporation
By:
-----------------------------------------------------------
Title:
----------------------------------------------------------
ST. JOSEPH MEDICAL CORPORATION,
a California professional corporation
By:
-----------------------------------------------------------
Title:
----------------------------------------------------------
A-45
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APPENDIX B
February 5, 1998
Orange Coast Managed Care Services, Inc.
505 South Main Street, Suite 200
Orange, CA 92868
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, of the aggregate consideration to be paid in the
Transaction (as hereinafter defined). For the purposes of this opinion, the
"Transaction" means the transaction described below pursuant to that certain
Agreement and Plan of Merger among Orange Coast Managed Care Services, Inc. (the
"Company"), St. Joseph Medical Corporation ("SJMC"), FPA Medical Management,
Inc. ("FPA") and FPA Medical Management of California, Inc. ("Sub") dated
January 21, 1998, as amended by that certain Amendment Number One to Agreement
and Plan of Merger entered into as of January 28, 1998 (the "Agreement") .
As more specifically set forth in the Agreement, and subject to certain
terms and conditions thereof, the Company and SJMC have agreed to be acquired by
FPA through mergers of the Company and SJMC with and into Sub (collectively, the
"Merger"). In the Merger, each then outstanding share of the Company's capital
stock (other than Series A Preferred Stock of the Company), each then
outstanding option to purchase shares of the Company's capital stock and each
then outstanding share of SJMC capital stock will be converted into the number
of shares of Common Stock, $.001 par value, of FPA ("FPA Common Stock") as set
forth in Section 2.1 of the Agreement.
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the combined financial statements of the Company and SJMC
for the fiscal year ended December 31, 1996, and the seven months ended
July 31, 1997 and certain other relevant financial and operating data of
the Company and SJMC provided to us by management of the Company;
(2) reviewed FPA's publicly available consolidated financial
statements for the fiscal year ended December 31, 1996 and the nine month
periods ended September 30, 1996 and September 30, 1997, certain publicly
available filings with the Securities and Exchange Commission and certain
other relevant financial and operating data of FPA provided to us by
management of FPA;
(3) reviewed the Agreement;
(4) held meetings and discussions with management and senior personnel
of the Company to discuss the business, operations, historical financial
results and future prospects of the Company and SJMC;
(5) reviewed financial projections furnished to us by the management
of the Company, including, among other things, the capital structure,
revenue, net income, cash flow, capital requirements and other data of the
Company and SJMC;
(6) reviewed the combined valuation of the Company and SJMC in
comparison to certain publicly traded companies;
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Orange Coast Managed Care Services, Inc.
February 5, 1998
Page 2
(7) compared the Transaction with the acquisition of other companies
through certain other transactions;
(8) analyzed the potential pro forma financial effects of the
Transaction;
(9) held a meeting with senior management of FPA to discuss FPA's
historical financial results and financial projections furnished by the
management of FPA, as well as the future prospects of FPA; and
(10) conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
At the request of the Company, Cowen solicited third party indications of
interest in acquiring the Company and SJMC.
For purposes of this opinion, Cowen analyzed as a whole the consideration
to be paid by FPA and to be received by all holders of the capital stock or
options to purchase the capital stock of the Company or SJMC. Cowen is not
expressing any opinion as to the allocation of such consideration between the
Company and SJMC or amongst such shares of capital stock and options.
In rendering our opinion, upon the advice of management and with your
consent, we relied upon the accuracy and completeness of the financial and other
information furnished to or reviewed by us as described above. We assumed the
attainability of the financial results in the financial forecasts, projections
and estimates of operating efficiencies and potential synergies provided by the
Company's and FPA's respective managements, and that such forecasts, projections
and estimates reflected the best currently available estimates and judgments of
the Company's management and FPA's management as to the expected future
financial performance of their respective entities. We have not assumed any
responsibility for independent verification of such information, including
financial information, nor have we made or received an independent evaluation or
appraisal of any of the properties or assets of the Company, SJMC or FPA. We
further assumed that there have been no material changes in the assets,
financial condition, results of operations, business or prospects of the
Company, SJMC or FPA since the date of the last financial statements reviewed by
us.
Our opinion is necessarily based on general economic, market, financial and
other conditions as they exist on, and can be evaluated as of, the date hereof,
as well as the information currently available to us. It should be understood
that, although subsequent developments may affect our opinion, we do not have
any obligation to update, revise or reaffirm our opinion. Our opinion does not
constitute a recommendation to any stockholder as how to such stockholder should
vote on the proposed Transaction. Our opinion does not imply any conclusion as
to the likely trading range for FPA Common Stock following consummation of the
Transaction or otherwise, which may vary depending on numerous factors that
generally influence the price of securities. Our opinion is limited to the
fairness, from a financial point of view, of the aggregate consideration to be
paid in the Transaction. We express no opinion with respect to any other
reasons, legal, business or otherwise, that may support the decision of the
Special Committee to recommend, or the Company's decision to consummate, the
Transaction.
For purposes of rendering our opinion we have assumed in all respects
material to our analysis, that the representations and warranties of each party
contained in the Agreement are true and correct, that each party will perform
all of the covenants and agreements required to be performed by it under the
Agreement and that all conditions to the consummation of the Transaction will be
satisfied without waiver thereof. We have also assumed that all governmental,
regulatory and other consents and approvals contemplated by the Agreement will
be obtained and that in the course of obtaining any of those consents no
restrictions will be imposed or waivers made that would have an adverse effect
on the contemplated benefits of the Transaction.
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Orange Coast Managed Care Services, Inc.
February 5, 1998
Page 3
We have acted as financial advisor to the Company in connection with the
Transaction and will receive a fee for our services, which is contingent upon
the consummation of the Transaction. Furthermore, a limited partner of Cowen
owns less than 0.5% of the outstanding shares of Company's Class B Preferred
Stock.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the aggregate
consideration to be paid in the Transaction is fair, from a financial point of
view.
This opinion is only for the use of the Board of Directors of the Company.
No other party may rely on this opinion without the express written consent of
Cowen.
Very truly yours,
COWEN & COMPANY
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APPENDIX C
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
1300. SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER -- (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF
SHARES -- (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivisions (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivisions
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares describe in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. DISSENTING SHARES, STAMPING OR ENDORSING -- Within 30 days after the
date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT -- (a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS -- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
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issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS
OF ACTION -- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market vale of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
undercertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Section 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF
FAIRMARKET VALUE. -- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. DISSENTING SHARES, DISPOSITION OF DIVIDENDS. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. DISSENTING SHARES, RIGHTS AND PRIVILEGES. -- Except as expressly
limited in this chapter, holders of dissenting shares continue to have all the
rights and privileges incident to their shares, until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
1309. DISSENTING SHARES, LOSS OF STATUS. -- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
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(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivisions (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING. -- If
litigation is instituted to test the sufficiency of regularity of the votes of
the shareholder in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES. -- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312. VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF. -- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right or law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX D
DELAWARE GENERAL CORPORATION
LAW SECTION 262
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
subsection (g) of sec. 251), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the
D-2
<PAGE> 183
date the notice is given; provided that, if the notice is given on or after
the effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
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<PAGE> 184
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-4
<PAGE> 185
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify its officers, directors, employees and
agents (or persons who have served, at the corporation's request, as officers,
directors, employees or agents of another corporation) against the expenses,
including attorneys' fees, actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors, officers, employees or agents, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceedings, had no reason to believe his conduct was unlawful, except that if
such action shall be in the right of the corporation, no such indemnification
shall be provided as to any claim, issue or matter as to which such person shall
have been adjudged to have been liable to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware, or any other court
in which the suit was brought, shall determine upon application that, in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
FPA's Certificate of Incorporation, as amended, has the following
indemnification provisions:
"SEVENTH"
A. Each person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgements, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that, except
as provided in Paragraph B hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Article SEVENTH shall be a contract right
and shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation
Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be
made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not
entitled to be indemnified under this Article SEVENTH or otherwise. The
Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and
officers.
II-1
<PAGE> 186
B. If a claim under Paragraph A of this Article SEVENTH is not paid in
full by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and,
if successful in whole or in part, the claimant shall be entitled to be
paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than a action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation
Law for the Corporation to indemnify the claimant for the amount claimed,
but the burden of providing such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the claimant has not met such applicable standard of conduct, shall be
a defense to the action or create a presumption that the claimant has not
met the applicable standard of conduct.
C. The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in
this Article SEVENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, employee or agent
of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any such
expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
FPA's By-laws similarly provide that FPA shall indemnify its officers and
directors to the fullest extent permitted by the Delaware Law.
In addition, FPA has entered into individual indemnification agreements
(the "Indemnification Agreements") with each of the directors. The general
effect on directors' liabilities is set forth in the provisions of the
Indemnification Agreements summarized below:
Proceedings Other Than Proceedings by or in the Right of FPA. director
shall be entitled to the rights of indemnification if, by reason of his position
with FPA, he is, or is threatened to be made, a party to any threatened,
pending, or completed proceeding, other than a proceeding by or in the right of
FPA. In such case, such director shall be indemnified against all expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such proceeding
or any claim, issue or matter therein, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of FPA and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
Proceedings by or in the Right of Company. Generally, a director shall be
entitled to the rights of indemnification if, by reason of his position with
FPA, he is, or is threatened to be made, a party to any threatened, pending or
completed proceeding brought by or in the right of FPA to procure a judgment in
its favor. In such case, the director shall be indemnified against all expenses
actually and reasonably incurred by him or on his behalf in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of FPA; provided, however, that if
applicable law so provides, no indemnification against such expenses shall be
made in respect of any claim, issue or matter in such proceeding as to which the
director shall have been adjudged to be liable to FPA unless and to the extent
that the Court of Chancery of the State of Delaware, or the court in which such
proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
II-2
<PAGE> 187
Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of the Indemnification
Agreements, to the extent that the director is, by reason of his position with
FPA, a party to and is successful, on the merits or otherwise, in any
proceeding, he shall be indemnified against all expenses actually and reasonably
incurred by him or on his behalf in connection therewith. If the director is not
wholly successful in such proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
proceeding, FPA shall indemnify the director against all expenses actually and
reasonably incurred by him or on his behalf in connection with each successfully
resolved claim, issue or matter.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger dated as of January 21, 1998, as amended as
of January 28, 1998, by and among the Registrant, FPA Medical Management
of California, Inc., Orange Coast Managed Care Services, Inc. and St.
Joseph Medical Corporation (included as Appendix A).**
4.2 Form of Warrant.*
4.3 Indenture dated as of December 18, 1996, by and between the Registrant and
the Trustee for the 6 1/2% Convertible Subordinated Debentures
(incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 18, 1996).
4.4 Registration Rights Agreement dated December 13, 1996 by and among the
Registrant and the Initial Purchasers of the 6 1/2% Convertible
Subordinated Debentures (incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 18, 1996).
4.5 Form of Rule 144A Restricted Global Debenture (incorporated by reference
to the Registrant's Current Report on Form 8-K dated December 18, 1996).
4.6 Form of Regulation S Global Debenture (incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 18, 1996).
4.7 Registration Rights Agreement dated June 30, 1997 by and among the
Registrant 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 the Registrant 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 the
Registrant 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 the
Registrant 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 the
Company and Avanti Corporate Health Systems, Inc. (incorporated by
reference to Registration Statement No. 333-41989 at Exhibit No. 4.11)
5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
23.1 Consent of Deloitte & Touche LLP, San Diego
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP
</TABLE>
II-3
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
23.4 Consent of Ernst & Young LLP
23.5 Consent of Deloitte & Touche LLP, Sacramento
23.6 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C.
23.7 Consent of Ernst & Young LLP
23.8 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5).
23.9 Consent of Cowen & Company
24 Power of Attorney (included in Part II of Registration Statement).
99.1 Form of SJMC Proxy.
99.2 Form of OCMCS Proxy.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S-1, Reg. No. 333-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Exhibits and schedules omitted from this Exhibit will be provided to the
Commission supplementally upon request, pursuant to Item 601(b)(2) of
Regulation S-K.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
person who may be deemed underwriters, in addition to the information called for
by the other Items of the applicable form.
The Registrant hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933, as amended
(the "Securities Act"), and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-4
<PAGE> 189
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final application of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 190
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on February 10, 1998.
FPA MEDICAL MANAGEMENT INC.
By: /s/ SETH FLAM
------------------------------------
Seth Flam
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below in so signing also makes, constitutes and appoints Seth Flam, Steven M.
Lash 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 (including pre-effective and post-effective amendments) to this
Registration Statement, with exhibits thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents 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 DATE
- ----------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ SOL LIZERBRAM Director and Chairman of February 10, 1998
- ----------------------------------------------- the Board of Directors
Sol Lizerbram
/s/ SETH FLAM President, Chief Executive- February 10, 1998
- ----------------------------------------------- Officer and Director
Seth Flam (Principal Executive
Officer)
Director and Vice Chairman , 1998
- ----------------------------------------------- of the Board of Directors
Stephen J. Dresnick
/s/ STEVEN M. LASH Executive Vice President, February 10, 1998
- ----------------------------------------------- Chief Financial Officer and
Steven M. Lash Treasurer (Principal
Financial Officer)
/s/ MICHAEL MORRIS Vice President-Finance February 10, 1998
- ----------------------------------------------- (Principal Accounting
Michael Morris Officer)
/s/ HOWARD HASSMAN Director February 10, 1998
- -----------------------------------------------
Howard Hassman
/s/ KEVIN ELLIS Director February 10, 1998
- -----------------------------------------------
Kevin Ellis
/s/ SHELDON DEREZIN Director February 10, 1998
- -----------------------------------------------
Sheldon Derezin
Director ,1998
- -----------------------------------------------
Herbert A. Wertheim
</TABLE>
II-6
<PAGE> 191
\
II-7
<PAGE> 192
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<S> <C> <C>
2 Agreement and Plan of Merger dated as of January 21, 1998, as amended as
of January 28, 1998, by and among the Registrant, FPA Medical Management
of California, Inc., Orange Coast Managed Care Services, Inc. and St.
Joseph Medical Corporation (included as Appendix A)**...................
4.1 Specimen of Common Stock Certificate*...................................
4.2 Form of Warrant*........................................................
4.3 Indenture dated as of December 18, 1996, by and between the Registrant
and the Trustee for the 6 1/2% Convertible Subordinated Debentures
(incorporated by reference to the Registrant's Current Report on Form
8-K dated December 18, 1996)............................................
4.4 Registration Rights Agreement dated December 13, 1996 by and among the
Registrant and the Initial Purchasers of the 6 1/2% Convertible
Subordinated Debentures (incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 18, 1996).....................
4.5 Form of Rule 144A Restricted Global Debenture (incorporated by reference
to the Registrant's Current Report on Form 8-K dated December 18,
1996)...................................................................
4.6 Form of Regulation S Global Debenture (incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 18, 1996)........
4.7 Registration Rights Agreement dated June 30, 1997 by and among the
Registrant 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 the Registrant 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 the
Registrant 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 the
Registrant 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 the
Company and Avanti Corporate Health Systems, Inc. (incorporated by
reference to Registration Statement No. 333-41989 at Exhibit No. 4.11...
5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.......................
23.1 Consent of Deloitte & Touche LLP, San Diego.............................
23.2 Consent of Coopers & Lybrand L.L.P......................................
23.3 Consent of KPMG Peat Marwick LLP........................................
23.4 Consent of Ernst & Young LLP............................................
23.5 Consent of Deloitte & Touche LLP, Sacramento............................
23.6 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C.............
23.7 Consent of Ernst & Young LLP............................................
</TABLE>
<PAGE> 193
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<S> <C> <C>
23.8 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit
5)......................................................................
23.9 Consent of Cowen & Company..............................................
24 Power of Attorney (included in Part II of Registration Statement).......
99.1 Form of SJMC Proxy......................................................
99.2 Form of OCMCS Proxy.....................................................
</TABLE>
- ---------------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S1, Reg. No. 333-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Exhibits and schedules omitted from this Exhibit will be provided to the
Commission supplementally upon request, pursuant to Item 601(b)(2) of
Regulation S-K.
<PAGE> 1
EXHIBIT 5.1
[BALLARD SPAHR ANDREWS & INGERSOLL, LLP LETTERHEAD]
February 11, 1998
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Re: FPA Medical Management, Inc. -
Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to FPA Medical Management, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement filed on Form S-4 (the "Registration
Statement") on the date hereof with the Securities and Exchange Commission
(the "Commission"), pursuant to which the Company is registering under the
Securities Act of 1933, as amended, 3,846,154 shares of its common stock, $.002
par value per share (the "Common Stock"), to be issued by the Company pursuant
to the Agreement and Plan of Merger, dated as of January 21, 1998, as amended
by Amendment Number One to the Agreement and Plan of Merger dated as of January
28, 1998, among the Company, FPA Medical Management of California, Inc., Orange
Coast Managed Care Services, Inc. and St. Joseph Medical Corporation (the
"Merger Agreement").
We are familiar with the proceedings taken and proposed to be taken by
the Company in connection with the proposed authorization, issuance and sale of
the Common Stock. In this connection, we have examined and relied upon such
corporate records and other documents, instruments and certificates and have
made such other investigation as we deemed appropriate as the basis for the
opinion set forth below. In our examination, we have assumed legal capacity of
all natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
The opinion expressed below is based on the assumption that the
Registration Statement will become effective.
<PAGE> 2
FPA Medical Management, Inc.
February 11, 1998
Page 2
Based upon the foregoing, we are of the opinion that the shares of Common
Stock to be issued by the Company have been duly authorized and, when issued
pursuant to the Merger Agreement as described in the Company's Registration
Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Proxy Statement/Prospectus forming a part thereof.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
FPA Medical Management, Inc. on Form S-4 of our report dated March 21, 1997,
appearing in the Annual Report on Form 10-K/A of FPA Medical Management, Inc.
for the year ended December 31, 1996, our report dated May 2, 1997, appearing in
the Current Report on Form 8-K/A of FPA Medical Management, Inc. dated March 17,
1997, our report dated May 2, 1997, appearing in the Current Report on Form
8-K/A of FPA Medical Management, Inc. dated July 31, 1997, and our report dated
May 2, 1997 (except for the 1997 poolings of interests as described in
paragraphs 5 through 7 of note 1, for which the date is December 8, 1997),
appearing in the Current Report on Form 8-K of FPA Medical Management, Inc.
dated December 9, 1997.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of the Registration Statement.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 9, 1998
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
FPA Medical Management, Inc. on Form S-4 of our report dated March 15, 1996, on
our audits of the consolidated financial statements of Sterling Healthcare
Group, Inc. as of December 31, 1995, and for the year ended December 31, 1995
and for the period from June 1, 1994 to December 31, 1994, which is included in
the Annual Report on Form 10-K/A and the Current Report on Form 8-K dated
December 9, 1997. We also consent to the reference to our Firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Miami, Florida
February 9, 1998
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EXHIBIT 23.3
Independent Auditors' Consent
We consent to the incorporation by reference in the registration statement on
Form S-4 of FPA Medical Management, Inc. of our report dated February 28, 1997,
with respect to the consolidated statements of financial position of Health
Partners, Inc. and Subsidiaries as of December 31, 1994, 1995 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996, which report appears in the Form 8-K of FPA Medical Management, Inc.
dated December 9, 1997.
We also consent to the reference to our firm under the heading "Experts" in the
Form S-4 of FPA Medical Management, Inc.
/s/ KPMG Peat Marwick LLP
White Plains, New York
February 9, 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 Statement (No. 333- ) on Form S-4 of FPA Medical Management,
Inc. and in the related Prospectus and to the incorporation by reference of our
report dated February 22, 1996, with respect to the 1995 and 1994 consolidated
financial statements of AHI Healthcare Systems, Inc. included in the Current
Reports on Form 8-K of FPA Medical Management, Inc. filed on December 10, 1997,
July 31, 1997 and May 30, 1997, with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Los Angeles, California
February 9, 1998
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EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
FPA Medical Management, Inc. on Form S-4 of our report dated September 30,
1996, on the combined financial statements of Foundation Health Medical
Services (a wholly-owned subsidiary of Foundation Health Corporation) and
Affiliates as of June 30, 1995 and 1996 and for each of the three years in the
period ended June 30, 1996 (such report expresses an unqualified opinion and
includes an explanatory paragraph referring to significant related party
transactions), appearing in Form S-4 of FPA Medical Management, Inc. dated
February 13, 1997.
We also consent to the reference to us under the heading "Experts" in the
Proxy Statement/Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Sacramento, California
February 9, 1998
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EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
FPA Medical Management, Inc. on Form S-4 of the report of Stevenson, Jones,
Imig, Holmaas & Kleinhans, P.C. dated April 27, 1994 on the financial
statements of Thomas-Davis Medical Centers, P.C. as of December 31, 1993 and
for the year then ended, appearing in Form S-4 of FPA Medical Management, Inc.
dated February 13, 1997, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Proxy Statement/Prospectus, which is a part of this Registration Statement.
STEVENSON, JONES & HOLMAAS, P.C.
Tucson, Arizona
February 9, 1998
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EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 27, 1998, with respect to the combined
financial statements of St. Joseph Medical Corporation and Orange Coast Managed
Care Services, Inc. included in the Registration Statement (Form S-4 No.
33-00000) and related Prospectus of FPA Medical Management, Inc. for the
registration of 3,846,154 shares of its common stock.
ERNST & YOUNG LLP
Los Angeles, California
February 9, 1998
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EXHIBIT 23.9
CONSENT OF COWEN & COMPANY
We hereby consent to the inclusion of our opinion, dated February 5, 1998, in
the proxy statement of Orange Coast Managed Care Services, Inc., which is part
of this Registration Statement on Form S-4, File No. 333-___. In executing this
consent, we do not admit or acknowledge that Cowen & Company is within the
class of persons whose consent is required by Section 7 of Securities Act of
1933, as amended, or the rules and regulations promulgated thereunder.
Date: February 10, 1998
COWEN & COMPANY
By:
-----------------------
Thomas L. Elzner
Vice President
<PAGE> 1
EXHIBIT 99.1
ST. JOSEPH MEDICAL CORPORATION
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
The undersigned shareholder(s) of ST. JOSEPH MEDICAL CORPORATION, a
California professional corporation (the "Corporation"), revoking all previous
proxies, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders dated , 1998, and the Proxy Statement/Prospectus dated
, 1998, and hereby appoints [ ] and [ ] and each
of them true and lawful agents and proxies of the undersigned, with full power
to each of substitution, on behalf, and in the name of, the undersigned, to
represent the undersigned at the Special Meeting of Shareholders of the
Corporation to be held on , 1998, at a.m./p.m., local
time, at and at any adjournment or postponement
thereof, and to vote all shares of Class A Voting Common Stock and Class B
Non-Voting Common Stock which the undersigned would be entitled to vote if
present in person, on the matters set forth below as indicated:
1. APPROVAL OF AGREEMENT AND PLAN OF MERGER: To approve the Agreement and
Plan of Merger, dated as of January 21, 1998, as amended (the "Merger
Agreement"), between the Corporation and Orange Coast Managed Care Services,
Inc., FPA Medical Management, Inc. and FPA Medical Management of California,
Inc. ("Merger Sub"), with a vote for the Merger Agreement binding the
undersigned shareholder to the indemnification provisions of the Merger
Agreement and limiting the ability of FPA and Merger Sub to claim
indemnification and recover from any shareholder more than the value of the
merger consideration received by such shareholder during the indemnification
period specified in the Merger Agreement, all as more fully disclosed in the
Proxy Statement/Prospectus dated February , 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. OTHER BUSINESS: To vote on such other business as may properly come
before the Special Meeting and any and all adjournments or postponements
thereof.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS INDICATED, SHARES WILL BE VOTED "FOR" THE APPROVAL OF THE AGREEMENT
AND PLAN OF MERGER REFERENCED ABOVE WHICH IS MORE FULLY DESCRIBED IN THE PROXY
STATEMENT/PROSPECTUS DATED FEBRUARY , 1998, OF WHICH THE UNDERSIGNED
SHAREHOLDER ACKNOWLEDGES RECEIPT. THIS PROXY ALSO DELEGATES DISCRETIONARY
AUTHORITY TO VOTE WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY PROPERLY COME
BEFORE THE SPECIAL MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF ST. JOSEPH
MEDICAL CORPORATION.
Either of such proxyholders or substitutes shall have and may exercise all
of the powers of said attorneys-in-fact hereunder.
Dated:
- ------------------------------, 1998 --------------------------------------
Signature
--------------------------------------
Name Printed
This proxy should be dated, signed by the shareholder(s) exactly as his or
her name appears on his or her stock certificate(s) and returned promptly in the
enclosed envelope. When signing as attorney-in-fact, executor, administrator,
trustee or guardian, please add your title as such. Proxies executed in the name
of a corporation should be signed on behalf of the corporation by a duly
authorized officer. Where shares are owned in the name of two or more persons,
all such persons should sign this proxy.
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EXHIBIT 99.2
ORANGE COAST MANAGED CARE SERVICES, INC.
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
The undersigned stockholder(s) of ORANGE COAST MANAGED CARE SERVICES, INC.,
a Delaware corporation (the "Corporation"), revoking all previous proxies,
hereby acknowledges receipt of the Notice of Special Meeting of Stockholders
dated , 1998, and the Proxy Statement/Prospectus dated ,
1998, and hereby appoints [ ] and [ ] and each of them true
and lawful agents and proxies of the undersigned, with full power to each of
substitution, on behalf, and in the name of, the undersigned, to represent the
undersigned at the Special Meeting of Stockholders of the Corporation to be held
on , 1998, at a.m./p.m., local time, at
and at any adjournment or postponement thereof, and to
vote all shares of Common Stock, Series A Preferred Stock and Series B Preferred
Stock which the undersigned would be entitled to vote if present in person, on
the matters set forth below as indicated:
1. APPROVAL OF AGREEMENT AND PLAN OF MERGER: To approve the Agreement and
Plan of Merger, dated as of January 21, 1998, as amended (the "Merger
Agreement"), between the Corporation and St. Joseph Medical Corporation, FPA
Medical Management, Inc. and FPA Medical Management of California, Inc. ("Merger
Sub"), with a vote for the Merger Agreement binding the undersigned stockholder
to the indemnification provisions of the Merger Agreement and limiting the
ability of FPA and Merger Sub to claim indemnification and recover from any
stockholder more than the value of the merger consideration received by such
stockholder during the indemnification period specified in the Merger Agreement,
all as more fully disclosed in the Proxy Statement/Prospectus dated February ,
1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. OTHER BUSINESS: To vote on such other business as may properly come
before the Special Meeting and any and all adjournments or postponements
thereof.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS INDICATED, SHARES WILL BE VOTED "FOR" THE APPROVAL OF THE AGREEMENT
AND PLAN OF MERGER REFERENCED ABOVE WHICH IS MORE FULLY DESCRIBED IN THE PROXY
STATEMENT/PROSPECTUS DATED FEBRUARY , 1998, OF WHICH THE UNDERSIGNED
STOCKHOLDER ACKNOWLEDGES RECEIPT. THIS PROXY ALSO DELEGATES DISCRETIONARY
AUTHORITY TO VOTE WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY PROPERLY COME
BEFORE THE SPECIAL MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF ORANGE COAST
MANAGED CARE SERVICES, INC.
Either of such proxyholders or substitutes shall have and may exercise all
of the powers of said attorneys-in-fact hereunder.
Dated:
- ------------------------------, 1998 --------------------------------------
Signature
--------------------------------------
Name Printed
This proxy should be dated, signed by the shareholder(s) exactly as his or
her name appears on his or her stock certificate(s) and returned promptly in the
enclosed envelope. When signing as attorney-in-fact, executor, administrator,
trustee or guardian, please add your title as such. Proxies executed in the name
of a corporation should be signed on behalf of the corporation by a duly
authorized officer. Where shares are owned in the name of two or more persons,
all such persons should sign this proxy.
