<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 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. LYNN E. FOWLER, ESQ.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP KILPATRICK STOCKTON LLP
1735 MARKET STREET, 51ST FLOOR 1100 PEACHTREE STREET, SUITE 2800
PHILADELPHIA, PENNSYLVANIA 19103-7599 ATLANTA, GEORGIA 30309-4530
(215) 665-8500 (404) 815-6500
</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...... 1,338,727 N/A N/A $2,691
=======================================================================================================
</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 common stock of Meridian Medical Group,
Inc., pursuant to the Agreement and Plan of Merger dated as of February 10,
1998 by and among FPA Medical Management, Inc. and Meridian Medical Group,
Inc.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
one-third of the stated value of the common stock of Meridian Medical Group,
Inc. to be exchanged in the merger, computed in accordance with Rule 457(f)
as of February 9, 1998, 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
MERIDIAN MEDICAL GROUP, INC.
1090 NORTHCHASE PARKWAY, SUITE 375
MARIETTA, GEORGIA 30067
, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Meridian Medical Group, Inc. ("Meridian"), which will be held at p.m.,
local time, on , 1998 at Meridian's corporate headquarters, 1090
Northchase Parkway, Suite 375, Marietta, Georgia (the "Meridian Special
Meeting").
At the Meridian Special Meeting, holders of Meridian's voting common stock,
par value $.01 per share ("Meridian 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 February 10, 1998 (the "Merger Agreement") by and between FPA
Medical Management, Inc. ("FPA") and Meridian. 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, Meridian will be merged
with and into FPA (the "Merger"). As a result of the Merger, Meridian will cease
to exist as a separate entity.
Upon consummation of the Merger, outstanding shares of Meridian's voting
and non-voting common stock, par value $.01 per share ("Meridian Common Stock"),
will be converted into the right to receive (A) a number of shares of FPA common
stock equal to the FPA Stock Consideration, (B) cash equal to the FPA Cash
Consideration and (C) cash equal to the Contingent Consideration, if any, all as
set forth in the Merger Agreement and described in the attached Proxy
Statement/Prospectus. Shareholders of Meridian will be able to obtain the
Exchange Ratio beginning at the end of the second business day preceding the
Meridian Special Meeting by calling (800) - (reservation number
).
THE BOARD OF DIRECTORS OF MERIDIAN, AFTER CAREFUL CONSIDERATION, HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, MERIDIAN 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 Meridian Special Meeting and wish to vote in person, you may revoke
your proxy at that time.
Very truly yours,
--------------------------------------
Robert W. Young, M.D.
President
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<TABLE>
<S> <C>
MERIDIAN MEDICAL GROUP, INC. FPA MEDICAL MANAGEMENT, INC.
Proxy Statement Prospectus
1,338,727 Shares
Common Stock
</TABLE>
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to the shareholders of Meridian Medical Group, Inc., a Georgia
professional corporation ("Meridian"), in connection with the solicitation of
proxies by the Board of Directors of Meridian (the "Meridian Board") for use at
a Special Meeting of Meridian shareholders to be held at Meridian's corporate
headquarters, 1090 Northchase Parkway, Suite 375, Marietta, Georgia 30067 on
, 1998, at p.m. local time (the "Meridian Special Meeting"). At
the Meridian Special Meeting, the shareholders of Meridian will be asked to
approve the Agreement and Plan of Merger dated as of February 10, 1998 (the
"Merger Agreement") by and between FPA Medical Management, Inc., a Delaware
corporation ("FPA"), and Meridian, relating to the merger of Meridian with and
into FPA (the "Merger"). As a result of the Merger, Meridian will cease to exist
as a separate entity. See "THE MERGER AGREEMENT -- The Merger." A copy of the
Merger Agreement is included in this Proxy Statement/Prospectus as Appendix A.
In connection with the Merger, all of the shares of Meridian Common
Stock will be converted into the right to receive the Merger Consideration. The
Merger Consideration will consist of (A) the number of shares of FPA common
stock, par value $.002 per share (the "FPA Common Stock") equal to the FPA Stock
Consideration (as defined below), (B) cash equal to the excess of One Million
Five Hundred Thousand Dollars ($1,500,000) over the actual Professional Fee
Liability (as described in Section 6.10 of the Merger Agreement) and the Special
Bonus Liability (as defined in Section 5.01 of the Merger Agreement) (the "FPA
Cash Consideration," and together with the FPA Stock Consideration, the "FPA
Consideration") and (C) cash equal to the Contingent Consideration, if any (as
defined below).
The aggregate number of shares of FPA Common Stock to be issued in the
Merger as FPA Stock Consideration shall be determined based on the average of
the closing prices of FPA Common Stock for the 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
number of shares of FPA Common Stock to be issued as FPA Stock Consideration in
exchange for each share of Meridian Common Stock will be an amount equal to the
Meridian Exchange Ratio (as defined below). (The number of issued and
outstanding shares of Meridian Common Stock as of the Effective Time is referred
to as the "Outstanding Meridian Stock.") The following table sets forth the
calculation of the aggregate number of shares of FPA Common Stock comprising the
FPA Stock Consideration depending on the FPA Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE FPA STOCK CONSIDERATION
- --------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Greater than $21.06 the quotient of (A) $24,532,562 minus the Employee Compensation Liability (as defined
in Section 5.01(b) of the Merger Agreement) divided by (B) the FPA Closing Price
Less than or equal to $21.06 and 1,164,889 shares of FPA Common Stock minus the number of shares of FPA Common Stock
greater than or equal to $14.94 equal to the quotient of (A) the Employee Compensation Liability divided by (B) the
FPA Closing Price
Less than $14.94 the quotient of (A) $17,403,442 minus the Employee Compensation Liability divided by
(B) the FPA Closing Price
</TABLE>
The Meridian Exchange Ratio can be represented by the following formula:
<TABLE>
<S> <C> <C>
Meridian Exchange Ratio = FPA Stock Consideration
-----------------------------------------------------------------------------------
Outstanding Meridian Stock
</TABLE>
The amount of FPA Cash Consideration to be distributed in exchange for
each share of Outstanding Meridian Stock can be represented by the following
formula:
<TABLE>
<S> <C> <C>
FPA Cash Consideration = FPA Cash Consideration
per share of Outstanding -----------------------------------------------------------------------------------
Meridian Stock Outstanding Meridian Stock
</TABLE>
Within 60 days following the end of the twelve month period commencing
at the Effective Time (as defined below), FPA shall deliver to the Meridian
shareholders the Contingent Consideration, if any. For each $1,000,000 during
the twelve month period beginning on the date after the Closing Date that the
revenues, as determined in accordance with generally accepted accounting
principles and FPA's customary practice in assigning medical group revenues (and
excluding any administrative support payments), of the professional corporation
which will employ Meridian shareholder physicians after the Closing Date
("Meridian Revenues") exceed $97,967,185, the Contingent Consideration shall be
$1,000,000, but in no event shall the Contingent Consideration exceed
$5,000,000. The Contingent Consideration shall not be pro rated between each
$1,000,000 of Meridian Revenues attained. The Contingent Consideration shall be
payable in cash. The Contingent Consideration shall be reduced by a contingent
bonus payable upon achievement of the Meridian Revenues to certain Meridian
employees (the "Contingent Employee Compensation"). The Board of Directors of
Meridian has voted to fix the Contingent Employee Compensation at an amount
equal to 50% of the Contingent Consideration. The amount of Contingent
Consideration to be distributed in exchange for each share of Outstanding
Meridian Stock can be represented by the following formula:
<TABLE>
<S> <C> <C>
Contingent Consideration = Contingent Consideration -- Contingent Employee Compensation
per share of Outstanding -----------------------------------------------------------------------------------
Meridian Stock Outstanding Meridian Stock
</TABLE>
The determination of the Merger Consideration and the calculation of the
Meridian Exchange Ratio and the Contingent Consideration are more fully
described in this Proxy Statement/Prospectus. See "THE MERGER -- Merger
Consideration." SHAREHOLDERS OF MERIDIAN COMMON STOCK WILL BE ABLE TO OBTAIN THE
MERIDIAN EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY
PRECEDING THE DAY OF THE MERIDIAN SPECIAL MEETING BY CALLING (800) .
The shares of FPA Common Stock are traded on Nasdaq under the symbol
"FPAM." On February 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 $ , the Professional Fee
Liability was equal to $ , the Special Bonus Liability was equal to
$ , and the Employee Compensation Liability was equal to $ , the FPA
Stock Consideration would consist of shares of FPA Common Stock and the FPA
Cash Consideration would be $ . Assuming shares of Outstanding
Meridian Stock, the Meridian Exchange Ratio would be $ and the FPA Cash
Consideration payable for each share of Meridian Common Stock would be $ .
The amount of Contingent Consideration, if any, that the Meridian shareholders
will receive may range from $500,000 to $2,500,000 and the Contingent
Consideration payable for each share of Outstanding Meridian Stock would range
from $ to $ .
An affirmative vote for the Merger Agreement by a Meridian shareholder
shall constitute agreement by such shareholder to the indemnification provisions
of the Merger Agreement and shall limit the ability of FPA to claim for
indemnification and recover from such shareholder more than the value of the
merger consideration received by such shareholder. See "THE MERGER
AGREEMENT -- Indemnification and Survival."
To the extent that FPA or Meridian waives compliance with material
provisions of or conditions to consummation of the Merger, FPA and Meridian will
amend this Proxy Statement/Prospectus, and Meridian will resolicit shareholder
votes to the extent required by law.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of Meridian 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 Meridian in the
Merger.
SEE "RISK FACTORS" BEGINNING AT PAGE 23 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS IN EVALUATING THE MERGER AND FPA.
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 or Meridian. 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 or Meridian 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 has
been furnished by FPA and all information herein with respect to Meridian has
been furnished by Meridian.
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> 4
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> 5
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 Effective Time of the Merger 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 MERIDIAN SPECIAL MEETING.
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 Meridian. Although FPA and Meridian 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 or Meridian's 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> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
GLOSSARY OF CERTAIN DEFINED TERMS..................................................... 6
SUMMARY............................................................................... 10
FPA MEDICAL MANAGEMENT, INC. ....................................................... 10
MERIDIAN MEDICAL GROUP, INC. ....................................................... 12
THE MERGER.......................................................................... 12
THE MERIDIAN SPECIAL MEETING........................................................ 20
FPA AND MERIDIAN COMPARATIVE PER SHARE DATA......................................... 21
MARKET PRICE AND DIVIDEND DATA...................................................... 22
RISK FACTORS.......................................................................... 23
Risks Relating to FPA............................................................... 23
Risks Relating to Meridian.......................................................... 33
Risks Relating to the Merger........................................................ 35
THE MERIDIAN SPECIAL MEETING.......................................................... 37
Date, Time and Place................................................................ 37
Purpose of the Meridian Special Meeting............................................. 37
Revocation of Proxies............................................................... 37
Quorum.............................................................................. 37
Vote Required....................................................................... 37
Record Date; Shareholders Entitled to Vote.......................................... 37
Voting in Person or by Proxy........................................................ 38
Solicitation of Proxies............................................................. 38
Shareholders' Rights to Dissent..................................................... 38
Security Ownership of Certain Meridian Beneficial Owners and Management............. 38
THE MERGER............................................................................ 40
Effects of the Merger............................................................... 40
Merger Consideration................................................................ 40
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares.... 41
Nasdaq Listing...................................................................... 42
Background of the Merger............................................................ 42
Recommendation of the Meridian Board of Directors and Reasons for the Merger........ 42
Effective Time of the Merger........................................................ 42
Certain Federal Income Tax Consequences............................................. 43
Accounting Treatment................................................................ 45
Resale of FPA Common Stock by Affiliates............................................ 45
Certain Regulatory Matters.......................................................... 46
Rights of Dissenting Shareholders of Meridian....................................... 46
BOARD OF DIRECTORS AND MANAGEMENT OF FPA FOLLOWING THE MERGER......................... 48
Board of Directors of FPA Following the Merger...................................... 48
Executive Officers of FPA Following the Merger...................................... 48
THE MERGER AGREEMENT.................................................................. 49
The Merger.......................................................................... 49
Effective Time...................................................................... 49
Fractional Shares................................................................... 49
Surrender and Payment............................................................... 49
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Treatment of Meridian Options....................................................... 50
Certain Representations and Warranties.............................................. 50
Conduct of Business Pending the Merger.............................................. 50
Certain Additional Agreements....................................................... 52
Conditions to Consummation of the Merger............................................ 55
Termination......................................................................... 56
Effect of Termination............................................................... 57
Indemnification and Survival........................................................ 57
Amendment........................................................................... 57
Waiver.............................................................................. 58
COMPARISON OF RIGHTS OF HOLDERS OF MERIDIAN COMMON STOCK AND FPA COMMON STOCK......... 59
Preferred Stock..................................................................... 59
Board of Directors.................................................................. 59
Bylaws.............................................................................. 60
Stockholder Meetings................................................................ 60
Indemnification..................................................................... 60
Stockholder Voting Requirements..................................................... 61
Action by Consent................................................................... 61
SELECTED HISTORICAL AND PRO FORMA INFORMATION......................................... 62
SELECTED HISTORICAL FINANCIAL DATA -- FPA............................................. 68
SELECTED HISTORICAL FINANCIAL DATA -- MERIDIAN........................................ 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- MERIDIAN.............................................................. 70
BUSINESS OF MERIDIAN.................................................................. 75
LEGAL MATTERS......................................................................... 76
ADDITIONAL INFORMATION................................................................ 76
EXPERTS............................................................................... 76
INDEX TO MERIDIAN MEDICAL GROUP, INC. FINANCIAL STATEMENTS............................ F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER DATED AS OF FEBRUARY 10, 1998 BY AND
BETWEEN FPA AND MERIDIAN............................................................ A-1
APPENDIX B -- GEORGIA BUSINESS CORPORATION ACT CHAPTER 13............................. B-1
</TABLE>
5
<PAGE> 8
GLOSSARY OF CERTAIN DEFINED TERMS
Asset Purchase Agreement... The Asset Purchase Agreement between PruCare and
FPA-Georgia for the purchase of certain assets by
FPA-Georgia from PruCare used in the operations of
the medical clinics occupied by Meridian
physicians.
APB No. 16................. Accounting Principles Board Opinion No. 16, as
amended.
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.
Certificate of Merger...... The Agreement of Merger to be filed with the
Secretary of State of Delaware and the Secretary of
State of Georgia in connection with the Merger.
Closing.................... The closing of the Merger.
Closing Date............... The date on which the Closing occurs.
Code....................... The Internal Revenue Code of 1986, as amended.
Commission................. The Securities and Exchange Commission.
Contingent Consideration... For each One Million Dollars ($1,000,000) during
the twelve month period commencing at the Effective
Time that Meridian Revenues, exceed Ninety-Seven
Million Nine Hundred Sixty-Seven Thousand One
Hundred Eighty-Five Dollars ($97,967,185), the
Contingent Consideration shall be One Million
Dollars ($1,000,000), but in no event shall the
Contingent Consideration exceed Five Million
Dollars ($5,000,000). The Contingent Consideration
shall be reduced by the Contingent Employee
Compensation. The Contingent Consideration shall
not be pro rated between each $1,000,000 of
Meridian Revenues attained.
Contingent Employee
Compensation............. A contingent bonus payable upon achievement of the
Meridian Revenues to certain Meridian employees in
accordance with Section 2.01 of the Merger
Agreement. The Meridian Board has voted to fix the
Contingent Employee Compensation at an amount equal
to 50% of the Contingent Consideration.
Delaware Act............... Delaware General Corporation Law.
Effective Time............. The time at which the Merger will become effective
as provided for in the Agreement of Merger or such
other time as to which FPA and Meridian shall
agree.
Employee Compensation
Liability................ The amount, if any, of such liability determined at
or prior to the Closing Date in accordance with
Section 5.01(b) of the Merger Agreement.
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.
6
<PAGE> 9
FPA Cash Consideration..... Cash equal to the excess of One Million Five
Hundred Thousand Dollars ($1,500,000) over the
actual amount of the Professional Fee Liability and
the Special Bonus Liability.
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 Consideration.......... The FPA Stock Consideration and the FPA Cash
Consideration.
FPA-Georgia................ FPA of Georgia, Inc., a Georgia corporation and
wholly owned subsidiary of FPA.
FPA Network................ Professional Corporations, other providers of
medical services and Payors affiliated with FPA.
FPA Stock Consideration.... In the event the FPA Closing Price is equal to or
greater than $14.94 and equal to or less than
$21.06, then the FPA Stock Consideration shall
consist of One Million One Hundred Sixty-four
Thousand Eight Hundred Eight-Nine (1,164,889)
shares of fully paid and nonassessable shares of
FPA Common Stock, decreased by the number of shares
equal to the quotient of (y) the amount of the
Employee Compensation Liability divided by (z) the
FPA Closing Price. In the event the FPA Closing
Price is greater than $21.06, then the FPA Stock
Consideration shall be determined by dividing
Twenty-Four Million Five Hundred Thirty-Two
Thousand Five Hundred Sixty-Two Dollars
($24,532,562) by the FPA Closing Price, decreased
by the number of shares equal to the quotient of
(y) the amount of the Employee Compensation
Liability divided by (z) the FPA Closing Price. In
the event the FPA Closing Price is less than
$14.94, then the FPA Stock Consideration shall be
determined by dividing Seventeen Million Four
Hundred Three Thousand Four Hundred Forty-Two
Dollars ($17,043,442) by the FPA Closing Price,
decreased by the number of shares equal to the
quotient of (y) the amount of the Employee
Compensation Liability divided by (z) the FPA
Closing Price.
Georgia Code............... Georgia Business Corporation Act.
Global Capitation.......... A capitation arrangement whereby the PPM or
physician group 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.
Medical Services
Agreement.................. The Medical Services Agreement between PruCare and
FPA-Georgia for the provision of medical services
to PruCare enrollees by Meridian physicians on and
after the Effective Time.
Merger Agreement........... The Agreement and Plan of Merger dated as of
February 10, 1998 by and between FPA and Meridian.
Merger Consideration....... The FPA Consideration and the Contingent
Consideration to be issued to Meridian shareholders
in the Merger.
7
<PAGE> 10
Meridian Board............. The Board of Directors of Meridian.
Meridian Common Stock...... Meridian Common Stock, $.01 par value per share,
including both voting and non-voting Common Stock.
Meridian Exchange Ratio.... FPA Stock Consideration divided by the Outstanding
Meridian Stock.
Meridian Record Date....... , 1998.
Meridian Record Holders.... Holders of Meridian Common Stock as of the Meridian
Record Date.
Meridian Revenues.......... The revenues, as determined in accordance with
generally accepted accounting principles and FPA's
customary practice in assigning medical group
revenues (and excluding any administrative support
payments), of the professional corporation which
will employ Meridian shareholder physicians after
the Closing Date.
Meridian Special Meeting... The Special Meeting of Shareholders of Meridian to
be held on , 1998 at p.m.,
local time at 1090 Northchase Parkway, Suite 375,
Marietta, Georgia 30067.
Meridian Voting
Securities................. The outstanding shares of Meridian voting Common
Stock.
Nasdaq..................... The Nasdaq National Market System.
Outstanding Meridian
Stock...................... The total number of issued and outstanding shares
of Meridian Common Stock as of the Effective Time.
Payors..................... HMOs and other prepaid health insurance plans which
provide physician and related health care services
to enrollees.
Physician Employment
Agreements............... Those Physician Employment Agreements between
Meridian and its physician shareholders as amended
and assigned to the professional corporation which
will employ Meridian shareholder physicians after
the Closing Date.
PPM........................ Physician practice management company.
Professional
Corporations............... Professional corporations affiliated with FPA.
Professional Fee
Liability.................. The amount of fees and expenses owed to KPMG Peat
Marwick LLP, Kilpatrick Stockton LLP and Coopers &
Lybrand L.L.P., which were incurred in connection
with the Merger and the transactions contemplated
thereby to the extent that the aggregate of such
fees and expenses do not exceed One Million Five
Hundred Thousand Dollars ($1,500,000).
Proxy
Statement/Prospectus....... This proxy statement/prospectus relating to the
Merger.
PruCare.................... Prudential Health Care Plan of Georgia, Inc.
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.
Special Bonus Liability.... The amount, if any, of such liability determined at
or prior to the Closing Date in accordance with
Section 5.01(b) of the Merger Agreement.
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<PAGE> 11
Subsidiary................. With respect to any 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 party or (ii) which is a professional
corporation owned by at least one physician who (x)
is an officer and director of such party and is
qualified under the laws of such professional
corporation's state of incorporation to hold an
ownership interest therein or (y) has executed a
succession or similar shareholder agreement with
such party.
Surviving Corporation...... FPA after the Merger.
9
<PAGE> 12
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 affiliated professional
corporations (the "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 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 FPA through the ownership
of such Professional Corporations by certain physicians who are employees of
10
<PAGE> 13
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 FPA 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.
FPA's executive offices are located at 3636 Nobel Drive, Suite 200, San
Diego, California 92122 and its telephone number is (619) 453-1000.
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<PAGE> 14
FPA Recent Developments. FPA entered into an Agreement and Plan of Merger
dated January 21, 1998, as amended as of January 28, 1998, among FPA, FPA
Medical Management of California, Inc. ("FPA-CA"), Orange Coast Managed Care
Services, Inc. ("OCMCS") and St. Joseph Medical Corporation ("SJMC") whereby
OCMCS and SJMC will merge with and into FPA-CA. OCMCS is a physician practice
management company providing medical management services, organizational
development and contracting support to SJMC. SJMC operates both an IPA, which
provides care through approximately 580 contracting physicians to approximately
129,000 managed care members, and a medical group, which employs 48 physicians
who serve approximately 54,800 managed care members. FPA anticipates that the
merger will be consummated in the second quarter of 1998 and is subject to OCMCS
and SJMC shareholder approval, regulatory approval and other customary closing
conditions.
For certain financial information regarding FPA and the Merger, see
"Selected Historical and Proforma Information" and "Selected Historical
Financial Data -- FPA."
MERIDIAN MEDICAL GROUP, INC.
Meridian is a primary care medical practice located in the metropolitan
Atlanta, Georgia area. Meridian was the first primary care practice in the
metropolitan Atlanta market to focus on managed care. Meridian currently employs
55 physicians on a full-time equivalency ("FTE") basis, and has nine office
locations providing primary care medical services, plus Meridian's
administrative office. Although Meridian obtains a small percentage of its
income from fee-for-service arrangements and the Medicare and Medicaid programs,
it derives substantially all of its revenues for medical services provided
through capitated arrangements. Meridian typically enters into sub-capitation
agreements with physician specialists in the Atlanta area to provide specialty
medical services to Meridian's patients. Because Meridian typically is obligated
to provide medical services for fixed capitation fees, the costs of which may be
variable, Meridian's profitability may vary based on the ability of Meridian to
control those health care costs.
Meridian anticipates that it will receive approximately 89% of its 1998
revenues pursuant to a contract with PruCare. The most recent contract between
Meridian and PruCare was entered into and effective as of January 1, 1998.
Pursuant to Meridian's agreement with PruCare, Meridian is responsible for
providing in-patient and out-patient medical services to PruCare HMO members
assigned to Meridian. See "RISK FACTORS -- Risks Relating to Meridian -- Risks
Related to Full Risk Capitation."
THE MERGER
Effects of the
Merger................... Pursuant to the Merger, Meridian will merge with
and into FPA. As a result of the Merger, Meridian
will cease to exist as a separate entity (FPA is
sometimes referred to in this Proxy
Statement/Prospectus as the "Surviving
Corporation").
In connection with the Merger, all shares of
Meridian Common Stock shall no longer be
outstanding and shall automatically be cancelled
and retired and cease to exist, and each holder of
a certificate representing such shares shall cease
to have any rights with respect thereto, except the
right to receive for each share of Meridian Common
Stock outstanding as of the Effective Time, (A) the
number of shares of FPA Common Stock equal to the
Meridian Exchange Ratio, (B) cash equal to the FPA
Cash Consideration divided by the Outstanding
Meridian Stock and (C) the Contingent Consideration
divided by the Outstanding Meridian Stock (the FPA
Stock Consideration, the FPA Cash Consideration and
the Contingent Consideration being collectively
referred to herein as the "Merger Consideration").
(The number of issued and outstanding shares of
Meridian Common Stock as of the Effective Time is
referred to
12
<PAGE> 15
as the "Outstanding Meridian Stock.") Each share of
Meridian Common Stock held in Meridian's treasury
and any shares of Meridian Common Stock owned by
FPA or any Subsidiary of FPA will be canceled and
retired and will cease to exist and no
consideration will be delivered in exchange
therefor. If applicable, each outstanding share of
Meridian Common Stock, the holder of which is
eligible for dissenters' rights in accordance with
the Georgia Business Corporation Act ("Georgia
Code") will not be converted into a right to
receive the Merger Consideration, but such holder
will be entitled to only such rights as are granted
under the applicable provisions of the Georgia
Code. See "THE MERGER -- Merger Consideration" and
"-- Rights of Dissenting Shareholders of Meridian".
The aggregate number of shares of FPA Common Stock
to be issued in the Merger as FPA Stock
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 comprising FPA Stock Consideration
depending on the FPA Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE FPA STOCK CONSIDERATION
----------------------------- -----------------------------
<S> <C>
Greater than $21.06 the quotient of (A)
$24,532,562 minus the
Employee Compensation
Liability divided by (B) the
FPA Closing Price
Less than or equal to $21.06 1,164,889 shares of FPA
and greater than or equal to Common Stock minus the number
$14.94 of shares of FPA Common Stock
equal to the quotient of (A)
the Employee Compensation
Liability divided by (B) the
FPA Closing Price
Less than or equal to $14.94 the quotient of (A)
$17,403,442 minus the
Employee Compensation
Liability divided by (B) the
FPA Closing Price
</TABLE>
The Meridian Exchange Ratio can be represented by
the following formula:
<TABLE>
<S> <C>
FPA Stock Consideration
------------------------------------
Meridian Exchange Ratio = Outstanding Meridian Stock
</TABLE>
The amount of FPA Cash Consideration to be
distributed in exchange for each share of
Outstanding Meridian Stock can be represented by
the following formula:
<TABLE>
<S> <C>
FPA Cash Consideration per = FPA Cash Consideration
share of Outstanding Meridian --------------------------------
Stock Outstanding Meridian Stock
</TABLE>
Within 60 days following the end of the twelve
month period commencing at the Effective Time, FPA
shall deliver to the Meridian shareholders the
Contingent Consideration, if any. For each
$1,000,000 during the twelve month period beginning
on the date after the Closing Date that revenues,
as determined in accordance with generally accepted
accounting principles and FPA's customary practice
in assigning medical group
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<PAGE> 16
revenues (and excluding any administrative support
payments), of the professional corporation which
will employ Meridian shareholder physicians after
the Closing Date ("Meridian Revenues"), exceed
$97,967,185, the Contingent Consideration shall be
$1,000,000, but in no event shall the Contingent
Consideration exceed $5,000,000. The Contingent
Consideration shall not be pro rated between each
$1,000,000 of Meridian Revenues attained. The
Contingent Consideration shall be payable in cash.
The Contingent Consideration shall be reduced by a
contingent bonus payable upon achievement of the
Meridian Revenues to certain Meridian employees
(the "Contingent Employee Compensation"). The
Meridian Board has voted to fix the Contingent
Employee Compensation at an amount equal to 50% of
the Contingent Consideration. The amount of
Contingent Consideration to be distributed in
exchange for each share of Outstanding Meridian
Stock can be represented by the following formula:
<TABLE>
<S> <C>
Contingent Consideration -
Contingent Consideration = Contingent Employee
per share of Outstanding Compensation
Meridian Stock -------------------------------
Outstanding Meridian Stock
</TABLE>
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 $ , the
Professional Fee Liability was equal to
$ , the Employee Compensation Liability
was equal to $ , and the Special Bonus
Liability was equal to $ , the FPA
Consideration would consist of shares of FPA Common
Stock and $ . Assuming shares of
Outstanding Meridian Stock, the Meridian Exchange
Ratio would be and the FPA Cash
Consideration payable for each share of Outstanding
Meridian Stock would be $ . The amount of
Contingent Consideration, if any, that the Meridian
shareholders will receive may range from $500,000
to $2,500,000 and the Contingent Consideration
payable for each share of Outstanding Meridian
Stock would range from $ to $ .
The determination of the Merger Consideration and
the calculation of the Meridian Exchange Ratio, the
FPA Cash Consideration and the Contingent
Consideration are more fully described in this
Proxy Statement/Prospectus. See "THE
MERGER -- Merger Consideration." SHAREHOLDERS OF
MERIDIAN COMMON STOCK WILL BE ABLE TO OBTAIN THE
EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND
BUSINESS DAY PRECEDING THE DAY OF THE MERIDIAN
SPECIAL MEETING BY CALLING (800) .
No fractional shares of FPA Common Stock will be
issued in connection with the Merger, and in lieu
of any such fractional share, each holder of
Meridian Common Stock 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> 17
Indemnification............ The Merger Agreement provides that each of the
Meridian shareholders shall jointly and severally
indemnify FPA after the Effective Time and until
one year following the Effective Time from and
against losses incurred arising out of any breach
of the representations and warranties by Meridian
in the Merger Agreement. FPA shall not be able to
recover from the shareholders of Meridian more than
the Merger Consideration and no Meridian
shareholder will be responsible for more than the
Merger Consideration received by such shareholder.
See "THE MERGER AGREEMENT -- Indemnification and
Survival."
Recommendation of
Meridian's
Board of Directors....... The Meridian Board believes that the terms of the
Merger are fair to and in the best interests of the
holders of the Meridian Common Stock and has
unanimously approved the Merger Agreement and the
related transactions. The Meridian Board
unanimously recommends that Meridian shareholders
approve the Merger Agreement. See "THE
MERGER -- Recommendation of the Meridian Board of
Directors and Reasons for the Merger."
The Meridian Board considered a number of material
factors, favorable, neutral and adverse, in its
evaluation of the Merger, each of which is
described at "THE MERGER -- Recommendation of the
Meridian Board of Directors and Reasons for the
Merger." See "RISK FACTORS."
Effective Time of
the Merger............... The Merger will become effective at the time (the
"Effective Time") specified in the Agreement of
Merger (the "Certificate of Merger") to be filed
with the Secretary of State of Delaware and the
Secretary of State of Georgia. The filing will be
made on or as soon as practicable after the closing
of the Merger (the "Closing"). It is anticipated
that the Closing will occur on the date of the
Meridian Special Meeting.
Conditions to the
Merger................... The obligations of FPA and Meridian to consummate
the Merger are subject to certain conditions
including (i) the effectiveness of the Registration
Statement of which this Proxy Statement/Prospectus
is a part, (ii) obtaining the approval of the
shareholders of Meridian, (iii) the absence of any
law or order (whether temporary, preliminary or
permanent) which is then in effect and has the
effect of making illegal or otherwise restricting,
preventing or prohibiting the consummation of the
Merger or the other transactions contemplated by
the Merger Agreement, (iv) the receipt of all
consents, approvals and actions of, filings with
and notices to any governmental or regulatory
authority or any other public or private third
parties required by FPA, Meridian or any of their
Subsidiaries to consummate the Merger and the other
matters contemplated by the Merger Agreement, (v)
the approval for inclusion on Nasdaq of the FPA
Common Stock to be issued in connection with the
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.
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<PAGE> 18
The obligation of FPA to consummate the Merger is
subject to certain additional conditions including
(i) the receipt by Meridian and its Subsidiaries of
all consents (or in lieu thereof waivers) from
parties to each contract disclosed in the Merger
Agreement, (ii) since the date of the Merger
Agreement, there shall not have been either (A) a
decrease of ten percent (10%) or more (plus one) in
the number of physicians (calculated on a FTE
basis) employed by Meridian or (B) a reduction in
the number of PruCare covered lives serviced by
Meridian to less than 67,700, which, taken as a
whole, have had or could be reasonably expected to
have a material adverse effect on Meridian and its
Subsidiaries, (iii) FPA shall have received the
opinions of Kilpatrick Stockton LLP and Morris,
Manning & Martin, counsel to Meridian, dated the
Closing Date, in form reasonably acceptable to FPA,
(iv) FPA and its Subsidiaries shall have received
all consents (or in lieu thereof waivers) from
parties to each contract disclosed in the Merger
Agreement, (v) the Asset Purchase Agreement between
FPA of Georgia, Inc. ("FPA-Georgia") and Prudential
Health Care Plan of Georgia, Inc. ("PruCare") for
the purchase of certain assets by FPA-Georgia from
PruCare used in the operations of the medical
clinics occupied by Meridian physicians (the "Asset
Purchase Agreement") shall be effective, (vi) the
Medical Services Agreement between FPA-Georgia and
PruCare for the provision of medical services to
PruCare enrollees by Meridian physicians on and
after the Effective Time (the "Medical Services
Agreement") shall be effective and (vii) the
Physician Employment Agreements between Meridian
and its physician shareholders as amended and
assigned to an FPA-affiliated professional
corporation as of the Effective Time (the
"Physician Employment Agreements") shall have been
entered into by at least 90% (minus one) of the
Meridian physicians (calculated as of the date of
the Merger Agreement on a FTE basis). Additionally,
the obligation of Meridian to consummate the Merger
is subject to the condition that Meridian shall
have received the opinions of Ballard Spahr Andrews
& Ingersoll, LLP, counsel to FPA, and James A.
Lebovitz, general counsel to FPA, dated the Closing
Date, in form reasonably acceptable to Meridian.
Either FPA or Meridian may extend the time for
performance of any of the obligations of the other
party, may waive any inaccuracies in the
representations and warranties of the other party
or may waive compliance with those obligations. To
the extent material provisions or conditions are
waived, FPA and Meridian will amend this Proxy
Statement/Prospectus, and Meridian will resolicit
shareholder votes to the extent required by
applicable law. See "THE MERGER
AGREEMENT -- Conditions to Consummation of the
Merger."
Termination, Amendment
and Waiver............... The Merger Agreement may be terminated at any time
prior to the Effective Time by the mutual consent
of FPA and Meridian, or, generally, by either of
the parties, if, among other things, (i) the Merger
shall not have been completed by June 30, 1998,
(ii) any required governmental or regulatory
approval is not obtained, (iii) either of the
parties materially breaches any of its
representations, warranties or covenants under the
Merger Agreement which breach has not been cured
within specified time periods, or (iv) the Merger
is prohibited by court order. Either FPA or
Meridian may terminate the Merger Agree-
16
<PAGE> 19
ment 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 Meridian
Shareholders............. Meridian is a Georgia professional corporation and
the rights of its shareholders are governed by the
Georgia Code and Meridian's Articles of
Incorporation and Bylaws as well as by the Second
Amended and Restated Shareholders' Agreement dated
as of January 22, 1996 by and among Meridian
(formerly Southeastern Health Services, Inc.) and
the Meridian shareholders (the "Shareholders'
Agreement"). If the Merger is consummated,
Meridian's shareholders will become stockholders of
FPA, and their rights will be governed by the
Delaware General Corporation Law (the "Delaware
Act"), and the Certificate of Incorporation and
Bylaws of FPA. There are no material differences
between shareholders' rights under Meridian's
Articles of Incorporation, Bylaws and Shareholders'
Agreement and stockholders' rights under the
Delaware Act, and FPA's Certificate of
Incorporation and Bylaws. See "COMPARISON OF RIGHTS
OF HOLDERS OF MERIDIAN COMMON STOCK AND FPA COMMON
STOCK."
Dissenters' Rights......... Any shareholder of record of Meridian Voting
Securities who objects to the Merger and who fully
complies with Section 14-2-1301 et seq. of the
Georgia Code ("Article 13") will be entitled to
demand and receive payment in cash of an amount
equal to the fair value of all, but not less than
all, of his or her shares of Meridian Common Stock
if the Merger is consummated.
Any Meridian shareholder desiring to receive
payment of the fair value of his or her Meridian
Common Stock in accordance with the requirements of
Article 13: (a) must deliver to Meridian prior to
the time the shareholder vote on the Merger
Agreement is taken, a written notice of his or her
intent to demand payment for his or her shares if
such Merger is consummated; (b) must not vote his
or her shares in favor of the Merger Agreement; and
(c) must demand payment and deposit stock
certificates representing Meridian Common Stock in
accordance with the terms of a notice which will be
sent to the Meridian shareholder by the Surviving
Corporation no later than 10 days after such Merger
Agreement is consummated. See "THE MERGER -- Rights
of Dissenting Shareholders of Meridian."
HSR Act Filing............. The Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (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 Federal Trade Commission (the "FTC") and the
Department of Justice (the "DOJ") and certain
waiting periods have expired or been terminated.
FPA and Meridian made their respective filings
under the HSR Act with the FTC on February 12,
1998. 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 and Meridian to
consummate
17
<PAGE> 20
the Merger are conditioned upon all waiting periods
(and any extension thereof) applicable to the
consummation of the Merger under the HSR Act having
expired or been terminated. See "THE MERGER
AGREEMENT -- Conditions to Consummation of the
Merger." Notwithstanding the expiration of the
waiting period of the HSR Act filings, the FTC, DOJ
or others could take action under antitrust laws,
before or after the Effective Time, seeking the
divestiture by FPA of all or any part of the assets
of Meridian acquired in the Merger. There can be no
assurance that a challenge to the Merger on
antitrust grounds will not be made or, if such a
challenge is made, that it would not be successful.
See "THE MERGER -- Certain Regulatory Matters."
Material Federal Income Tax
Consequences............. The 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
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
Meridian Common Stock to the extent they exchange
their Meridian Common Stock for FPA Common Stock,
but cash received will be taxable to the extent of
any gain realized by a holder in the exchange. No
gain or loss will be recognized by FPA or Meridian.
For a further discussion of the federal income tax
consequences of the Merger see "THE
MERGER -- Certain Federal Income Tax Consequences."
Accounting Treatment....... The Merger will be accounted for using the
"purchase" method of accounting. See "THE
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; fluctuations 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
anti-takeover effect of certain provisions. Risks
relating to Meridian include risks related to
financial leverage; difficulty in controlling
health care costs, capitated nature of revenue;
risks related to full risk capitation; reliance on
PruCare, terminability of PruCare payor contract;
possible negative effects of health care reform;
possible negative effects of state insurance
regulations; potential liabilities; possible
negative effects of governmental regulations;
competitive market forces; and fluctuations in
quarterly results. Risks relating to the Merger
include the impact on FPA's
18
<PAGE> 21
financial statements; no assurance of successful
integration of certain operations; exchange ratio
may not fully reflect changes in the FPA stock
price; need for additional capital; possible loss
of business; rights of Meridian shareholders
following the Merger; and federal income tax
consequences.
Surrender of
Certificates............. Promptly after the Effective Time, FPA's exchange
agent will mail a transmittal form and exchange
instructions to each holder of record of Meridian
Common Stock. CERTIFICATES FOR SHARES OF MERIDIAN
COMMON STOCK SHOULD NOT BE SURRENDERED UNTIL SUCH
TRANSMITTAL FORM AND EXCHANGE INSTRUCTIONS ARE
RECEIVED.
Resale Restrictions........ All shares of FPA Common Stock received by Meridian
shareholders will be freely tradeable, 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 Meridian or FPA
at the time of the Special Meeting may be resold by
them only in certain permitted circumstances under
the Securities Act and other applicable securities
laws. See "THE MERGER -- Resale of FPA Common Stock
by Affiliates."
19
<PAGE> 22
THE MERIDIAN SPECIAL MEETING
Special Shareholder
Meeting.................... The special meeting of shareholders of Meridian
(the "Meridian Special Meeting") will be held on
, 1998 at p.m. local time at
Meridian's offices located at 1090 Northchase
Parkway, Suite 375, Marietta, Georgia 30067.
Matter to be Considered at
the Meridian Special
Meeting.................... At the Meridian Special Meeting, shareholders will
be asked to approve and adopt the Merger Agreement.
MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Quorum; Vote Required...... The presence in person or by proxy of the holders
of a majority of the shares of Meridian Common
Stock entitled to vote at the Meridian Special
Meeting (the "Meridian Voting Securities") is
necessary to constitute a quorum at the meeting.
Approval of the Merger Agreement and of the
possible adjournment or postponement of the
Meridian Special Meeting requires the affirmative
vote of a majority of the Meridian Voting
Securities present either in person or by proxy at
the Meridian Special Meeting. See "THE MERIDIAN
SPECIAL MEETING -- Vote Required" and "THE MERGER
AGREEMENT -- Conditions to Consummation of the
Merger."
Meridian Record Date;
Outstanding Meridian
Stock...................... Only shareholders of record of Meridian voting
Common Stock ("Meridian Record Holders") at the
close of business on , 1998 (the
"Meridian Record Date") are entitled to notice of
and to vote at the Meridian Special Meeting. On
that date, there were shares of Meridian
Common Stock outstanding, of which shares
were Meridian Voting Securities and
shares were non-voting Common Stock with each share
of Meridian Voting Securities entitled to one vote
per share, with respect to voting on the Merger
Agreement.
Security Ownership of
Meridian Management........ As of the Meridian Record Date, the directors and
executive officers of Meridian as a group owned
approximately 25.99% of the voting power
represented by the Meridian Voting Securities. See
"THE MERIDIAN SPECIAL MEETING -- Security Ownership
of Certain Meridian Beneficial Owners and
Management."
Reasons for the Merger..... The Board of Directors of Meridian, after careful
consideration, has unanimously approved the Merger
Agreement and the transactions contemplated thereby
and determined that the Merger is fair to, and in
the best interests of, Meridian and its
shareholders and recommends a vote FOR the approval
and adoption of the Merger Agreement. The Meridian
Board believes the Merger offers Meridian an
attractive opportunity to strengthen its
competitive position and enhance its profile with
physicians and Payors. Furthermore, the Merger will
allow Meridian to align with a leading physician
practice management company 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
MERGER -- Recommendation of the Meridian Board of
Directors and Reasons for the Merger."
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<PAGE> 23
FPA AND MERIDIAN COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FPA and
combined per share data of FPA and Meridian on an unaudited pro forma basis,
based on the assumption that the Merger occurred at the beginning of the
earliest period presented. 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 Meridian has not been
presented as Meridian is a nonpublic company. The pro forma comparative per
share data gives effect to the Merger assuming the issuance of 1,164,889 shares
of FPA Common Stock in the Merger.
HISTORICAL EARNINGS (LOSS) PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
FPA.................................. $(0.19) $(0.39) $(2.54) $(0.34)
------ ------ ------
</TABLE>
FPA AND MERIDIAN PRO FORMA COMBINED EARNINGS (LOSS) PER SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma combined per FPA share.................... $ (2.53) $(0.34)
------- ------
Pro forma equivalent per Meridian share............. (11.30) (1.53)
------- ------
</TABLE>
BOOK VALUE PER COMMON SHARE
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- ------------------
<S> <C> <C>
FPA -- Historical................................... $ 4.11 $ 4.06
------- -------
Meridian -- Historical.............................. (3.70) (1.22)
------- -------
Pro forma combined per FPA share.................... 4.46
-------
Pro forma equivalent per Meridian share............. 19.94
-------
</TABLE>
21
<PAGE> 24
MARKET PRICE AND DIVIDEND DATA
FPA Common Stock is listed on Nasdaq under the symbol "FPAM." The Meridian
Common Stock is 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........................................ 13 1/4 8 5/8
Second Quarter....................................... 20 1/8 12 1/8
Third Quarter........................................ 27 1/8 12 1/2
Fourth Quarter....................................... 29 1/2 16 3/8
1997
First Quarter........................................ 28 1/2 18 1/4
Second Quarter....................................... 24 1/2 14 7/8
Third Quarter........................................ 35 1/4 22 7/8
Fourth Quarter....................................... 39 13/16 16 7/8
1998
First Quarter (through February 4, 1998)............. 20 1/4 14 7/8
</TABLE>
The closing price of FPA Common Stock on Nasdaq on December 5, 1997, the
last full trading day prior to the public announcement of the proposed agreement
by FPA and Meridian to enter into a transaction, was $23.50 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 Meridian Record Date, there were holders of record of
Meridian voting Common Stock.
Meridian paid no dividends during 1997. Meridian paid a per-share stock
dividend of 0.1 shares during 1996 and a per-share cash dividend of $0.45 during
1995. Meridian's $8,000,000 Amended and Restated Credit Facility Agreement with
NationsBank, N.A. dated December 3, 1996, as amended (the "Credit Agreement")
limits the ability of Meridian to pay certain dividends. Accordingly, no
assurances can be given that dividends will be declared in the future.
22
<PAGE> 25
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 Meridian 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
23
<PAGE> 26
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
24
<PAGE> 27
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
25
<PAGE> 28
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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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") (an
FPA-affiliated professional corporation) 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
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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.
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
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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 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 Health Care Service Plan Act of 1975, as
amended, 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.
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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.
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. A 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
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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 practice of medicine. The Texas legislature has enacted legislation
effective September 1, 1997 which provides that a health insurance carrier, HMO
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
operations.
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
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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 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.
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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 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 Merger Agreement, except for
the form of promissory note to be issued by FPA to PruCare pursuant to the Asset
Purchase Agreement.
RISKS RELATING TO MERIDIAN
Risks of Financial Leverage. Meridian's indebtedness is significant in
relation to its stockholders' equity. As of September 30, 1997, Meridian had
drawn down $3,300,000 pursuant to its Credit Agreement. While Meridian believes
that it will be able to service its debt, there can be no assurance to that
effect. The degree to which Meridian 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 Meridian's
future business, or the inability to obtain additional financing on terms
acceptable to Meridian, if required, could impair Meridian's ability to meet its
debt service obligations or fund operations, and therefore, could materially
adversely affect Meridian's business, results of operations and future
prospects.
Difficulty in Controlling Health Care Costs; Capitated Nature of
Revenue. Agreements with certain Payors provide for Meridian to receive
capitation payments for the provision of medical services. Meridian's
profitability primarily depends on its ability to control costs and its ability
to incur less in medical, hospital and administrative costs than these
capitation revenues received from Payors. Such profitability is achieved through
effective management of the provision of medical services provided by Meridian's
physicians, including controlling utilization of specialty care physicians and
other ancillary providers, purchasing services from physicians not employed by
Meridian 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 might require that a portion
of any loss in connection with such shared risk arrangements be assumed by
Meridian, thereby reducing Meridian's net income. The amount of non-capitated
medical and hospital costs in any period could be affected by factors beyond
Meridian's control, 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, capitation revenues paid to Meridian by Payors may not be
sufficient to cover the costs that Meridian is obligated to pay. Furthermore,
Meridian currently has no stop loss insurance to shift any of the financial
exposure of the provision of medical services to third parties.
Risks Related to Full Risk Capitation. Under its capitation agreements,
Meridian accepts capitation payments and, as a result, accepts the financial
risk for the provision of health care services, including those not normally
provided and performed by its primary care physicians. Under Meridian's Payor
contract with PruCare for its HMO product, for example, Meridian accepts the
financial risk for the provision of certain specialty medical services,
outpatient medical services and hospital services. The failure to negotiate
favorable prices or rates in contracts with the providers of these services on
behalf of Meridian or to control effectively
33
<PAGE> 36
the utilization of these services could have a material adverse effect on
Meridian's business and results of operations.
Reliance on PruCare; Terminability of PruCare Payor Contract. Pursuant to
its current contract with PruCare, Meridian is responsible for providing
inpatient and outpatient medical services to PruCare members assigned to
Meridian. For the year ended December 31, 1996, revenues from the PruCare
contract accounted for approximately 89% of Meridian's operating revenue.
Meridian's current contract with PruCare, which was effective January 1, 1998,
has a three-month term and is scheduled to expire on March 31, 1998. There can
be no assurance that the term of the PruCare contract will be extended or
renewed pending consummation or termination of the Merger, or that any such
extended or renewed contract will contain favorable terms. There can also be no
assurance that the capitation revenues received from PruCare will be sufficient
to pay for or exceed the expenses payable by Meridian to other providers to
provide medical services to PruCare members. The capitation revenues from
PruCare are also dependent upon the number of assigned PruCare covered member
lives, and there can be no assurance that PruCare's membership will not
decrease, which will have a material adverse effect on Meridian's business and
results of operations.
Possible Negative Effects of Health Care Reform. Various plans have been
proposed and are being considered at the federal, state and local levels to
reduce costs in health care spending. Although Meridian believes that its
management model responds to the concerns addressed by these plans, it is not
possible to assess the likelihood that any of these proposals will be enacted or
to assess the impact that any of these proposals might have on reimbursement.
Lower rates of reimbursement might reduce the amount ultimately received by
Meridian, and, accordingly, the rates might have a material adverse effect on
Meridian's business and results of operations.
Possible Negative Effects of State Insurance Regulations. While Meridian
believes that it is in compliance with Georgia laws regulating insurance
companies, HMOs and other managed care organizations, there can be no assurance
that the Commissioner of the Georgia Department of Insurance would not apply
these laws to require licensure of Meridian's operations as an HMO, an insurer
or other provider network, which would require, among other things, substantial
expenditures for the establishment of capital and other financial reserves,
which might have a material adverse effect on Meridian's business and results of
operations. In the event that Meridian is required to become licensed as an
insurance company, the licensure process itself is lengthy and time consuming,
and there can be no assurance that the Commissioner of Insurance will grant such
a license. Furthermore, assuming that Meridian could continue to operate while
the licensure process is pending, such licensure could require a material
adverse change in Meridian's business. In addition, once licensed, Meridian
would be subject to continuing oversight by and reporting to the Georgia
Department of Insurance.
Potential Liabilities. In recent years, physicians, hospitals and other
participants in the 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. Meridian
and certain of its physicians have been named as a party in certain such
lawsuits and claims and will likely be named as a party in similar suits and
claims in the future. Meridian maintains an errors and omissions policy relating
to its utilization review activities. There can be no assurance that insurance
coverage for lawsuits brought or which may be brought against Meridian will be
sufficient to cover Meridian's expenses or losses and, if insufficient, that
such suits or claims will not have a material adverse effect on Meridian's
financial condition and results of operations.
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
34
<PAGE> 37
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 Meridian's business and its results
of operations.
Possible Negative Effects of Governmental Regulations. The health care
industry is subject to extensive federal and state regulation. Changes in the
regulations or new interpretations of existing regulations may significantly
affect Meridian. Meridian is 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
Georgia, 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. Meridian believes that its operations comply with all
applicable anti-kickback and anti-referral laws. In addition, health care reform
legislation 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 Meridian will be able
to comply with any new laws.
Competitive Market Forces. The health care industry is highly competitive
and is subject to continuing changes in how services are provided and how
providers are selected and paid. 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 health care industry and result in increased competition for
Meridian. In addition, other local physician groups and hospitals are trying to
combine their services into integrated delivery networks. Certain of Meridian's
competitors are significantly larger and better capitalized, provide a wider
variety of services, may have greater experience in providing medical services
and may have longer established relationships with Payors. Accordingly, Meridian
may not be able to increase the number of its physicians, negotiate contracts
with new Payors or renegotiate favorable contracts with current Payors to remain
competitive. The inability of Meridian to increase the number of its physicians
and negotiate favorable contracts with Payors could have a material adverse
effect on Meridian's results of operations.
Fluctuations in Quarterly Results. Meridian's financial statements
(including interim financial statements) contain accruals which are calculated
quarterly for estimates of amounts assigned to Meridian 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, Meridian 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 Meridian 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 Meridian contracts
with additional Payors, the timing of these adjustments may vary; this variation
in timing may cause Meridian's quarterly results not to be directly comparable
to corresponding quarters in other years. Meridian'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 Meridian at the time of calculation,
actual costs may differ from Meridian's estimates of such amounts. If the actual
costs differ significantly from the amounts estimated by Meridian, 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.
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<PAGE> 38
RISKS RELATING TO THE MERGER
Impact on FPA's Financial Statements. FPA expects to incur non-recurring
costs in connection with the Merger aggregating approximately $2.9 million
relating primarily to certain professional fees. In addition, FPA expects to
record goodwill relating to the Merger of approximately $25.5 million. See
"SELECTED HISTORICAL AND PRO FORMA INFORMATION."
No Assurance of Successful Integration of Certain Operations. FPA and
Meridian have entered into the Merger Agreement with the expectation that the
Merger will result in certain benefits for the combined company. Achieving the
anticipated benefits of the Merger will depend in part upon whether the
integration of the two companies' businesses is achieved in an efficient and
effective manner. There can be no assurance that this will occur. The
combination of the two companies will require, among other things, coordination
of the companies' operations and consolidation of Payor and provider contracts.
There can be no assurance that integration will be accomplished on a timely
basis, or at all. The integration of certain operations following the 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. Failure
to effectively accomplish the integration of the two 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 Meridian shareholders vote on the Merger due to, among other factors,
changes in the business, operations and prospects of FPA, market assessments of
the likelihood that the 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 Meridian shareholders in the 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 Meridian shareholders will receive. EACH MERIDIAN
SHAREHOLDER IS URGED TO OBTAIN UPDATED FPA MARKET INFORMATION. MERIDIAN
SHAREHOLDERS WILL BE ABLE TO OBTAIN THE MERIDIAN EXCHANGE RATIO AT THE END OF
THE SECOND BUSINESS DAY PRECEDING THE MERIDIAN SPECIAL MEETING BY CALLING
(800) - (reservation number ). See "THE MERGER -- Merger Consideration."
Need for Additional Capital. Upon consummation of the 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 and Meridian,
current key independent contractor physicians or employees of or enrollees
served by Meridian may not continue to contract with FPA or Meridian following
the Merger. The loss of a material number of independent contractor physicians,
employees or enrollees could adversely affect the operations of FPA and
Meridian. Neither FPA nor Meridian is aware that any of their respective
physicians, employees or enrollees intend to end their relationship with FPA or
Meridian, as the case may be, following the consummation of the Merger.
Rights of Meridian Shareholders Following the Merger. Following the Merger,
holders of Meridian Common Stock will become holders of FPA Common Stock.
Certain differences exist between the rights of the Meridian shareholders under
the Meridian Articles of Incorporation, Bylaws and Shareholders' Agreement and
the Georgia Code and the rights of FPA stockholders under the Delaware Act and
the FPA Certificate of Incorporation and Bylaws. Such differences are not
material. See "COMPARISON OF RIGHTS OF HOLDERS OF MERIDIAN COMMON STOCK AND FPA
COMMON STOCK."
Federal Income Tax Consequences. The Merger is intended to qualify for
federal income tax purposes as a tax- free reorganization under the Code. If for
any reason the Merger does not qualify as a reorganization, then among other
effects, the Meridian shareholders may recognize gain or loss in such
transaction and, prior to closing, FPA and Meridian will amend this Proxy
Statement/Prospectus and Meridian will resolicit
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<PAGE> 39
shareholder 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 Merger. See "THE MERGER -- Certain Federal Income Tax Consequences."
THE MERIDIAN SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the shareholders of
Meridian in connection with the solicitation of proxies by and on behalf of the
Meridian Board of Directors for use at the Meridian Special Meeting.
DATE, TIME AND PLACE
The Meridian Special Meeting will be held on , 1998 at
p.m., local time, at Meridian's offices located at 1090 Northchase Parkway,
Suite 375, Marietta, Georgia 30067.
PURPOSE OF THE MERIDIAN SPECIAL MEETING
At the Meridian Special Meeting, the shareholders of Meridian will be asked
to consider and vote upon the adoption and approval of the Merger Agreement
under which, among other things, Meridian will be merged with and into FPA. As a
result of the Merger, the separate existence of Meridian will cease. Pursuant to
the Merger, outstanding shares of Meridian Common Stock will be exchanged for
the right to receive (A) a number of shares of FPA Common Stock and cash equal
to the FPA Consideration and (B) cash equal to the Contingent Consideration, if
any.
The Meridian Board has unanimously approved the Merger Agreement and
recommends a vote FOR approval and adoption of the Merger Agreement.
REVOCATION OF PROXIES
Any holder of Meridian Voting Securities has the unconditional right to
revoke his or her proxy at any time prior to the voting thereof at the Meridian
Special Meeting by (i) filing a written revocation with the Secretary of
Meridian prior to the voting of such proxy, (ii) giving a duly executed proxy
bearing a later date or (iii) attending the Meridian Special Meeting and voting
in person. Attendance by a shareholder at the Meridian 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
Meridian Voting Securities at the Meridian Special Meeting is necessary to
constitute a quorum at the Meridian 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 Meridian Voting
Securities present, either in person or by proxy, at the Meridian Special
Meeting is required to approve the Merger Agreement and the possible adjournment
or postponement of the Meridian Special Meeting. An affirmative vote for the
Merger Agreement by a Meridian shareholder shall constitute agreement by such
shareholder to the indemnification provisions of the Merger Agreement and shall
limit the ability of FPA to claim for indemnification and recover from such
shareholder more than the merger consideration received by such shareholder. See
"THE MERGER AGREEMENT -- Indemnification and Survival."
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
The Meridian Board has established , 1998 as the Meridian
Record Date. On the Meridian Record Date, there were shares of
Meridian Common Stock outstanding, of which were Meridian Voting
Securities and were Meridian non-voting Common Stock. Each share of
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<PAGE> 40
Meridian Voting Securities is entitled to one vote with respect to voting on the
Merger Agreement. Shareholders of Meridian non-voting Common Stock are not
entitled to vote on the Merger Agreement.
In the event the Merger is not approved and adopted by the shareholders of
Meridian, the Merger Agreement will be terminated in accordance with its terms.
See "THE MERGER AGREEMENT -- Termination."
VOTING IN PERSON OR BY PROXY
At the Meridian Special Meeting, abstentions and non-votes will have the
effect of a vote against adoption of the Merger Agreement. Because abstentions
and non-votes are treated as shares present and entitled to vote at the Meridian
Special Meeting (and are included in determining whether a quorum is present),
they will have the effect of a vote against approval of the possible adjournment
or postponement of the Meridian Special Meeting.
If a holder of Meridian 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.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the Meridian Special Meeting may be made
in person or by mail, telephone, telecopy or telegram. Meridian will conduct the
solicitation of proxies for the Meridian 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 Meridian may
solicit proxies from Meridian shareholders by telephone or telegram or in
person. Such directors, officers and employees will not be compensated for such
solicitation.
SHAREHOLDERS' RIGHTS TO DISSENT
Any shareholder of record of Meridian Voting Securities who objects to the
Merger and who fully complies with Article 13 of the Georgia Code will be
entitled to demand and receive payment in cash of an amount equal to the fair
value of all, but not less than all, of his or her shares of Meridian Common
Stock if the Merger is consummated.
Any Meridian shareholder desiring to receive payment of the fair value of
his or her Meridian Common Stock in accordance with the requirements of Article
13: (a) must deliver to Meridian prior to the time the shareholder vote on the
Merger Agreement is taken, a written notice of his or her intent to demand
payment for his or her shares if such Merger is consummated; (b) must not vote
his or her shares in favor of the Merger Agreement; and (c) must demand payment
and deposit stock certificates representing Meridian Common Stock in accordance
with the terms of a notice which will be sent to the Meridian shareholder by
Meridian no later than 10 days after such Merger Agreement is consummated.
The foregoing does not purport to be a complete statement of the provisions
of Article 13 relating to statutory dissenters' rights. The full text of Article
13 of the Georgia Code is attached hereto as Appendix B, and any holder of
Meridian Voting Securities desiring to exercise dissenters' rights in connection
with the Merger should consult with legal counsel prior to taking any action in
order to ensure that the shareholder complies with the applicable statutory
provision. Failure to take any of the steps required under Article 13 of the
Georgia Code on a timely basis may result in the loss of dissenters' rights. See
"THE MERGER -- Rights of Dissenting Shareholders of Meridian" and Appendix B
hereto.
SECURITY OWNERSHIP OF CERTAIN MERIDIAN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Meridian Common Stock as of December 31, 1997 by: (i) each of
Meridian's directors and executive officers, (ii) all directors and executive
officers of Meridian as a group and (iii) each person known to Meridian to be a
beneficial owner of five percent (5%) or more of any class of Meridian'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
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<PAGE> 41
such person. The address of all directors, executive officers and shareholders
identified in the table is in care of Meridian'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>
5% Holders:
Michael Robinowitz, M.D. Voting Common Stock 14,200(1) 5.63%
Directors and Executive Officers:
Robert W. Young, M.D., MPH Voting Common Stock 9,250(1) 3.67%
Tarek Nessouli, M.D. Voting Common Stock 8,150(1) 3.23%
John O'Shea, M.D. Voting Common Stock 7,050(1) 2.80%
Donald Hanchett, M.D. Voting Common Stock 8,700(1) 3.45%
Stephen Weiss, M.D. Voting Common Stock 8,150(1) 3.23%
Stephen Day, M.D. Voting Common Stock 2,700 1.07%
Gail Smith, M.D. Voting Common Stock 2,700(1) 1.07%
Gregory Miller, M.D. Voting Common Stock 4,850(1) 1.92%
Sylvia Johnson, M.D. Voting Common Stock 5,950(1) 2.36%
Miles Sharpe, M.D. Voting Common Stock 3,200(1) 1.27%
John Gatto, M.D. Voting Common Stock 4,850 1.92%
All Directors and
Executive Officers as a group
(11 persons) Voting Common Stock 65,550 25.99%
</TABLE>
- ---------------
(1) The beneficial ownership listed does not include options to purchase shares
of Meridian non-voting Common Stock granted pursuant to Meridian's Voluntary
Deferred Compensation Plan. As of December 31, 1997, the following holders
have been granted options to purchase the number of shares of Meridian
non-voting Common Stock set forth next to their name: Michael Robinowitz,
2,674; Robert W. Young, 12,112; Tarek Nessouli, 523; John O'Shea, 2,344;
Donald Hanchett, 2,251; Stephen Weiss, 1,950; Gail Smith, 369; Gregory
Miller, 1,625; Sylvia Johnson, 1,822; and Miles Sharpe, 174. These options
will become exercisable in 1998. Pursuant to Section 2.01 of the Merger
Agreement, Meridian will cancel any options that have not otherwise been
exercised prior to the Effective Time.
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<PAGE> 42
THE MERGER
EFFECTS OF THE MERGER
The Merger Agreement provides that the Merger will be consummated following
approval by the holders of Meridian Voting Securities and the satisfaction or
waiver of all other conditions to consummation of the Merger. At the Effective
Time, Meridian will be merged with and into FPA. As a result of the Merger, the
separate existence of Meridian will cease. Shareholders of Meridian 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
In connection with the Merger, all of the shares of Meridian Common Stock
will be converted into the right to receive the Merger Consideration. The Merger
Consideration will consist of (A) the number of shares of FPA Common Stock,
equal to the FPA Stock Consideration, (B) cash equal to the excess of One
Million Five Hundred Thousand Dollars ($1,500,000) over the actual Professional
Fee Liability and the Special Bonus Liability (the "FPA Cash Consideration," and
together with the FPA Stock Consideration, the "FPA Consideration") and (C) cash
equal to the Contingent Consideration, if any.
The aggregate number of shares of FPA Common Stock to be issued in the
Merger as FPA Stock Consideration shall be determined based on the FPA Closing
Price. The number of shares of FPA Common Stock to be issued as FPA Stock
Consideration in exchange for each share of Meridian Common Stock will be an
amount equal to the Meridian Exchange Ratio. The following table sets forth the
calculation of the aggregate number of shares of FPA Common Stock comprising the
FPA Stock Consideration depending on the FPA Closing Price:
<TABLE>
<CAPTION>
FPA CLOSING PRICE FPA STOCK CONSIDERATION
- --------------------------------- ----------------------------------------------------
<S> <C>
Greater than $21.06 the quotient (A) of $24,532,562 minus the Employee
Compensation Liability divided by (B) the FPA
Closing Price
Less than or equal to $21.06 and 1,164,889 shares of FPA Common Stock minus the
greater than or equal to $14.94 number of shares of FPA Common Stock equal to
quotient of (A) the Employee Compensation Liability
divided by (B) the FPA Closing Price
Less than $14.94 the quotient of (A) $17,403,442 minus the Employee
Compensation Liability divided by (B) the FPA
Closing Price
</TABLE>
The Meridian Exchange Ratio can be represented by the following formula:
<TABLE>
<S> <C> <C>
Meridian FPA Stock Consideration
Exchange Ratio = -------------------------------------------------------------------------
Outstanding Meridian Stock
</TABLE>
The amount of FPA Cash Consideration to be distributed in exchange for each
share of Outstanding Meridian Stock can be represented by the following formula:
<TABLE>
<S> <C> <C>
FPA Cash FPA Cash Consideration
Consideration = -------------------------------------------------------------------------
per share of Outstanding Meridian Stock
Outstanding Meridian Stock
</TABLE>
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<PAGE> 43
Within 60 days following the end of the twelve month period commencing at
the Effective Time, FPA shall deliver to the Meridian shareholders the
Contingent Consideration, if any. For each $1,000,000 during the twelve month
period beginning on the date after the Closing Date that Meridian Revenues
exceed $97,967,185, the Contingent Consideration shall be $1,000,000, but in no
event shall the Contingent Consideration exceed $5,000,000. The Contingent
Consideration shall not be pro rated between each $1,000,000 of Meridian
Revenues attained. The Contingent Consideration shall be payable in cash. The
Contingent Consideration shall be reduced by the Contingent Employee
Compensation. The Meridian Board has voted to fix the Contingent Employee
Compensation at an amount equal to 50% of the Contingent Consideration. The
amount of Contingent Consideration to be distributed in exchange for each share
of Outstanding Meridian Stock can be represented by the following formula:
<TABLE>
<S> <C> <C>
Contingent Consideration = Contingent Consideration - Contingent Employee
per share of Outstanding Compensation
Meridian Stock -----------------------------------------------------------------
Outstanding Meridian Stock
</TABLE>
SHAREHOLDERS OF MERIDIAN COMMON STOCK WILL BE ABLE TO OBTAIN THE MERIDIAN
EXCHANGE RATIO BEGINNING AT THE END OF THE SECOND BUSINESS DAY PRECEDING THE DAY
OF THE MERIDIAN 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 $ , the
Professional Fee Liability was equal to $ , the Employee Compensation
Liability was equal to $ , and the Special Bonus Liability was equal to
$ , the FPA Consideration would consist of shares of FPA
Common Stock and $ . Assuming shares of Outstanding Meridian
Stock, the Meridian Exchange Ratio would be and the FPA Cash
Consideration payable for each share of Meridian Common Stock would be
$ . Based on such assumptions, the shares of FPA Common Stock issued to
the Meridian shareholders as FPA Consideration shall represent approximately
% of the shares of FPA Common Stock issued and outstanding after the
Effective Time. The amount of Contingent Consideration, if any, that the
Meridian shareholders will receive will be payable in cash and may range from
$500,000 to $2,500,000 and the Contingent Consideration payable for each share
of Outstanding Meridian Stock would range from $ to $ .
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.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of Meridian Common Stock into the right to receive the
Merger Consideration 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 Meridian, in its capacity as exchange agent (the "Exchange
Agent"), will send a transmittal form to each Meridian shareholder of record as
of the Record Date. The transmittal form will contain instructions with respect
to the surrender of certificates representing Meridian Common Stock to be
exchanged for the FPA Consideration.
MERIDIAN SHAREHOLDERS SHOULD NOT FORWARD MERIDIAN STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. MERIDIAN SHAREHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Until the certificates representing Meridian Common Stock are surrendered
for exchange after the consummation of the Merger, holders of such certificates
will not be paid dividends on the FPA Common
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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 Meridian Common
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 Merger.
All shares of FPA Common Stock issued upon the exchange of shares of
Meridian Common Stock (together with the other Merger Consideration) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Meridian Common Stock.
No fractional shares of FPA Common Stock will be issued to any Meridian
shareholder upon consummation of the 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 Merger that the shares of FPA Common Stock to be
issued in the Merger be authorized for inclusion on Nasdaq.
BACKGROUND OF THE MERGER
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 Merger would enhance FPA by
expanding the scope of its Georgia operations, by increasing its provider and
Payor contracts in Georgia and by adding approximately 76,900 PruCare managed
care lives to its operations.
RECOMMENDATION OF THE MERIDIAN BOARD OF DIRECTORS AND REASONS FOR THE MERGER
Because of the increased risk of entering into a "full-risk" capitation
arrangement with PruCare and other competitive factors affecting Meridian's
business, Meridian has sought since 1996 to align with a PPM to provide Meridian
with sources of capital and managed-care management expertise. After assessing
various proposals, Meridian's Board of Directors voted on November 17, 1997 to
proceed with negotiations with FPA to enter into definitive agreements. As a
result of those negotiations, on February 10, 1998, Meridian and FPA entered
into the Merger Agreement.
At a meeting held on February 4, 1998, Meridian's Board of Directors
unanimously determined that the Merger is in the best interests of Meridian and
its shareholders. The Board of Directors has unanimously approved Meridian's
entering into the Merger Agreement and recommends that the Meridian shareholders
vote in favor of the Merger. The Meridian Board believes the Merger offers
Meridian an attractive opportunity to strengthen its competitive position and
enhance its profile with physicians and Payors. Furthermore, the Merger allows
Meridian to align with a leading physician practice management company in a
consolidating industry while at the same time affording shareholders enhanced
liquidity due to the developed market for FPA's publicly traded shares.
EFFECTIVE TIME OF THE MERGER
Upon the terms and conditions of the Merger Agreement, Meridian will be
merged with and into FPA at the Effective Time. The Merger will become effective
when the Certificate of Merger is filed with the Secretary of State of Delaware
and the Secretary of State of Georgia or at such time thereafter as is provided
in the Certificate of Merger. The filing of the Certificate of Merger will be
made as soon as practicable on or after the Closing.
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The Closing shall take place on the Closing Date, at the offices of
Ballard, Spahr, Andrews & Ingersoll, LLP, 1735 Market Street, 51st Floor,
Philadelphia, Pennsylvania, unless another date or place is agreed to by the
parties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the material federal income tax
consequences of the 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 Meridian Common Stock hold such shares as a capital asset. Further,
the discussion does not address the tax consequences that may be relevant to a
particular shareholder 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, shareholders who acquired shares of
Meridian Common Stock through the exercise of options or otherwise as
compensation or through a tax-qualified retirement plan, and holders of options
granted under Meridian's benefit plans. 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 Merger (whether or not such transactions are in connection with the Merger),
except to the extent, if at all, that such prior or subsequent transactions
would affect the tax treatment of the Merger.
Neither Meridian nor FPA has requested a ruling from the Internal Revenue
Service ("IRS") with regard to any of the federal income tax consequences of the
Merger.
Consequences to Meridian and FPA. As of the date hereof, it is intended
that the 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 or Meridian.
Consequences to Meridian Shareholders. Under the reorganization provisions
of the Code, no gain or loss will be recognized by holders of Meridian Common
Stock to the extent such holders receive shares of FPA Common Stock in exchange
for shares of Meridian Common Stock (but, as discussed below, such holders may
recognize gain to the extent they receive cash as their portion of the Merger
Consideration and may recognize gain or loss to the extent they receive cash in
lieu of fractional shares). The aggregate tax basis of the shares of FPA Common
Stock received in the Merger (including any fractional shares of FPA Common
Stock deemed received) will be the same as the aggregate tax basis of the shares
of Meridian Common Stock surrendered in exchange therefor in the Merger,
decreased by the greater of (i) the amount of FPA Cash Consideration received
and (ii) the excess of such aggregate tax basis over the fair market value of
the shares of FPA Common Stock received, and increased by the amount of gain
recognized. Such basis may be subject to redetermination depending upon the
amount of Contingent Consideration received. 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
Meridian Common Stock surrendered in exchange therefor.
Cash Consideration. Holders of Meridian Common Stock will recognize gain
(but not loss) in the Merger in an amount equal to the lesser of (i) their share
of the FPA Cash Consideration and Contingent Consideration received and (ii) the
amount of gain realized on the exchange of their shares of Meridian Common Stock
(taking into account the fair market value of the shares of FPA Common Stock
received and the maximum amount of Contingent Consideration payable). Any gain
recognized will be taxable as capital gain at the rates described below unless
receipt of cash is determined with respect to a holder to have the effect of a
distribution of a dividend, in which case such gain will be taxable as ordinary
income to the extent of such holder's share of accumulated earnings and profits.
Under present law, it is uncertain whether the accumulated earnings and profits
of Meridian or of both Meridian and FPA are to be taken into account for this
purpose.
Receipt of cash will not be considered to have the effect of a distribution
of a dividend with respect to a holder if a distribution of the same amount of
cash in a hypothetical redemption of shares of FPA Common
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<PAGE> 46
Stock of equivalent fair market value would (taking into account the shares of
FPA Common Stock actually issued in the Merger and all shares of FPA Common
Stock actually or constructively owned) be treated as a sale or exchange under
the principles of Section 302 of the Code. Specifically, the hypothetical
redemption must either result in (i) a "substantially disproportionate"
redemption with respect to such holder or (ii) be "not essentially equivalent to
a dividend" with respect to such holder. In making either determination, it
appears that the hypothetical redemption would be deemed to include a redemption
of shares of FPA Common Stock of fair market value equivalent to the fair market
value (as of the Effective Time) of a holder's share of the Contingent
Consideration, as well as a holder's share of the FPA Cash Consideration.
A "substantially disproportionate" redemption with respect to a holder will
occur if the percentage of the outstanding shares of FPA Common Stock actually
or constructively owned by such holder immediately after the hypothetical
redemption of all former Meridian shareholders is less than 80% of the
percentage of shares of FPA Common Stock owned (actually, constructively or
hypothetically) by such holder immediately before such hypothetical redemption.
If the hypothetical redemption fails to satisfy the "substantially
disproportionate" test, a holder may nonetheless satisfy the "not essentially
equivalent to a dividend" test. A holder who wishes to satisfy the "not
essentially equivalent to a dividend" test is urged to consult such holder's tax
advisor because this test will be met only if a reduction in such holder's
proportionate interest in FPA as a consequence of the hypothetical redemption of
FPA Common Stock would constitute a "meaningful reduction" given such holder's
particular facts and circumstances. In this regard, the IRS has indicated in
published rulings that any reduction in the percentage interest of a shareholder
whose relative stock interest in a publicly held corporation is minimal (an
interest of less than 1% should satisfy this requirement) and who exercises no
control over corporate affairs should constitute such a "meaningful reduction."
Contingent Consideration. The tax treatment of Contingent Consideration
received by any holder of Meridian Common Stock depends upon whether receipt of
such cash is determined to have the effect of a distribution of a dividend or is
taxable as capital gain under the rules described above. If the receipt of cash
is determined to have the effect of a distribution of a dividend, the amount of
ordinary income recognized in the tax year of the holder in which the Merger
occurs will be increased by the fair market value of the Contingent
Consideration as of the Effective Time. If the receipt of cash is taxable as
capital gain and unless a holder of Meridian Common Stock elects otherwise,
recognition of capital gain attributable to the Contingent Consideration will be
deferred under the installment sale method.
The IRS proposed installment sale regulations in 1984 which, if adopted in
their present form, will apply to receipt of Contingent Consideration. Under
these proposed regulations, the amount of deferred capital gain is determined by
allocating the aggregate tax basis of the shares of Meridian Common Stock
surrendered by a holder first to the shares of FPA Common Stock received to the
extent of the fair market value of such shares. Any excess tax basis is then
allocated to the sum of the FPA Cash Consideration and Contingent Consideration
received by such holder (less imputed interest) (the "contract price"), and the
"gross profit" is determined to be the difference between the contract price and
the basis so allocated. The amount of capital gain recognized by a holder with
respect to each cash payment is then calculated by multiplying the amount of
such payment (reduced by imputed interest) by the gross profit ratio (i.e., the
ratio of the gross profit to the contract price). For purposes of these
calculations, the portion of the Contingent Consideration received in excess of
its present value as of the Effective Time (obtained by using a discount rate
equal to the "applicable Federal rate" as of the Effective Time) is treated as
imputed interest income to the holder.
A holder should increase his basis of shares of FPA Common Stock by the
amount of any gain recognized upon receipt of the Contingent Consideration.
Holders that dispose of shares of FPA Common Stock prior to the receipt of the
Contingent Consideration should consult their tax advisors as to the proper
application of the installment sale method to the receipt of the Contingent
Consideration.
If a holder elects not to report capital gain from the receipt of the
Contingent Consideration under the installment method, such holder will
generally recognize additional capital gain in his tax year in which the Merger
occurs in an amount equal to the fair market value of the Contingent
Consideration.
Fractional Shares. If a holder of shares of Meridian Common Stock receives
cash in lieu of a fractional share interest in FPA Common Stock in the Merger,
such fractional share interest will be treated as having
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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 Meridian Common Stock surrendered that is allocable to
the fractional share interest in FPA Common Stock. Under these rules, a
shareholder of Meridian should recognize capital gain or loss on the receipt of
cash in lieu of a fractional share interest in FPA Common Stock.
Taxation of Capital Gains. If a holder of Meridian Common Stock recognizes
capital gain in the Merger under the rules discussed above relating to the
treatment of the FPA Cash Consideration, the Contingent Consideration and the
fractional share interests in FPA Common Stock, such capital gain will be
long-term capital gain if the holding period for the shares of Meridian Common
Stock surrendered exceeds one year as of the Effective Time. Any long-term
capital gain recognized by non-corporate holders (i.e., individuals, estates or
trusts) will be taxable at a maximum rate of 20% if the holding period of such
shares exceeds 18 months and otherwise will be taxable to such holders at a
maximum rate of 28%. However, any short-term capital gain recognized by
non-corporate holders and any long-term or short-term capital gain recognized by
holders that are corporate taxpayers will be taxable at regular income tax
rates.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, MERIDIAN
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE 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 Merger will be accounted for using the "purchase" method of accounting.
FPA expects to record goodwill relating to the Merger of approximately $25.5
million.
RESALE OF FPA COMMON STOCK BY AFFILIATES
The FPA Common Stock to be issued to shareholders of Meridian in connection
with the 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 Meridian shareholders upon consummation of
the Merger will be freely transferable under the Securities Act except for
shares issued to any person who may be deemed an "Affiliate" (as defined below)
of Meridian 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 control with Meridian or FPA at
the time of the Meridian Special Meeting (generally, directors, certain
executive officers and major stockholders). Affiliates of Meridian or FPA may
not sell their shares of FPA Common Stock acquired in connection with the
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 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
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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.
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 and Meridian to consummate the Merger are conditioned upon
all waiting periods (and any extension thereof) applicable to the consummation
of the Merger under the HSR Act having expired or been terminated. FPA and
Meridian made their respective filings with the FTC and the DOJ with respect to
the Merger on February 12, 1998. See "THE MERGER AGREEMENT -- Conditions to
Consummation of the 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 Meridian acquired in the Merger. Certain persons, such as states'
attorneys general and private parties, could challenge the Merger as violative
of antitrust laws and seek to enjoin the consummation of the Merger and, in the
case of private persons, also seek to obtain treble damages. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made
or, if such a challenge is made, that it will not be successful. Should the FTC,
DOJ or others request information or seek to enforce antitrust laws, delay in
consummation of the Merger could occur. Meridian does not intend to seek any
further 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.
RIGHTS OF DISSENTING SHAREHOLDERS OF MERIDIAN
The Meridian Record Holders are entitled to dissenters' rights under
Article 13 of the Georgia Code for such securities. The following discussion
represents a summary of the material provisions of Article 13. For additional
information, reference is made to the full text of Article 13, which is
reprinted in its entirety as Appendix B to this Proxy Statement/Prospectus. A
person having a beneficial interest in Meridian Voting Securities as of the
Meridian 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 Article 13.
Any shareholder of record of Meridian Common Stock who objects to the
Merger and who fully complies with Article 13 will be entitled to demand and
receive payment in cash of an amount equal to the fair value of all, but not
less than all, of his or her shares of Meridian Common Stock if the Merger is
consummated. A shareholder of record may assert dissenters' rights as to fewer
than the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial owner and
notifies Meridian in writing of the name and address of each person on whose
behalf he or she asserts dissenters' rights. For the purpose of determining the
amount to be received in connection with the exercise of statutory dissenters'
rights under Article 13, the fair value of a dissenting shareholder's Meridian
Common Stock equals the value of the shares immediately before the Effective
Time of the Merger, excluding any appreciation or depreciation in anticipation
of the Merger. Shareholders considering the exercise of their dissenters' rights
should be aware that the value of their shares of Meridian Common Stock as
determined under Article 13 could be more than, the same as, or less than the
value of the Merger Consideration they would have received if they did not
exercise their dissenters' rights.
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Any Meridian shareholder desiring to receive payment of the fair value of
his or her Meridian Common Stock in accordance with the requirements of Article
13: (a) must deliver to Meridian prior to the time the shareholder vote on the
Merger Agreement is taken, a written notice of his or her intent to demand
payment for his or her shares if such Merger is consummated; (b) must not vote
his or her shares in favor of the Merger Agreement; and (c) must demand payment
and deposit stock certificates representing Meridian Common Stock in accordance
with the terms of a notice which will be sent to the Meridian shareholder by
Meridian no later than 10 days after such Merger Agreement is consummated. A
filing of the written notice of intent to dissent with respect to either Merger
Agreement should be sent to: Jeremiah Luxemburger, Secretary, Meridian Medical
Group, Inc., Suite 375, 1090 Northchase Parkway, Marietta, Georgia 30067. A vote
AGAINST THE MERGER AGREEMENT ALONE WILL NOT SATISFY THE REQUIREMENTS FOR THE
SEPARATE WRITTEN NOTICE OF INTENT TO DISSENT TO THE MERGER, THE SEPARATE WRITTEN
DEMAND FOR PAYMENT OF THE FAIR VALUE OF SHARES OF MERIDIAN COMMON STOCK AND THE
DEPOSIT OF THE STOCK CERTIFICATES, WHICH ARE REFERRED TO IN CONDITIONS (a) AND
(c) ABOVE. RATHER, A DISSENTING SHAREHOLDER MUST SEPARATELY COMPLY WITH ALL OF
THOSE CONDITIONS.
Within 10 days after the later of the Effective Time or receipt of a
payment demand by a shareholder who deposits his or her stock certificates in
accordance with Meridian's dissenters' notice sent to those shareholders who
notified Meridian of their intent to dissent, described in (c) above, the
Surviving Corporation must offer to pay to each dissenting shareholder the
amount the Surviving Corporation estimates to be the fair value of the
dissenting shareholder's shares, plus accrued interest. Such notice and offer
must be accompanied by: (a) Meridian's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of making an offer, an
income statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements, if any;
(b) an explanation of how the interest was calculated; (c) a statement of the
dissenting shareholder's right to demand payment of a different amount under
Section 14-2-1327 of Article 13; and (d) a copy of the dissenters' rights
provisions of Article 13.
If the dissenting shareholder either accepts the Surviving Corporation's
offer by written notice to the Surviving Corporation within 30 days after the
Surviving Corporation's offer or is deemed to have accepted such offer by reason
of failing to respond to such offer, the Surviving Corporation must make payment
for such dissenter's shares within 60 days after the Surviving Corporation makes
the offer or the Effective Time, whichever is later. Upon payment of the agreed
value, the dissenting shareholder will cease to have any interest in his shares
of Meridian Common Stock.
If within 30 days after the Surviving Corporation offers payment for the
shares of a dissenting shareholder, the dissenting shareholder does not accept
the estimate of fair value of his or her shares and interest due thereon and
demands payment of his or her own estimate of the fair value of the shares and
interest due thereon, then the Surviving Corporation, within 60 days after
receiving the payment demand of a different amount from such dissenting
shareholder, must file an action in a court of competent jurisdiction in Fulton
County, Georgia, requesting that the fair value of such shares be found and
determined. The Surviving Corporation must make all dissenting shareholders
whose demands remain unsettled parties to the proceeding. If the Surviving
Corporation does not commence the proceeding within such 60-day period, it shall
be required to pay each dissenting shareholder whose demand remains unsettled
the amount demanded by such dissenting shareholder.
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BOARD OF DIRECTORS AND MANAGEMENT OF
FPA FOLLOWING THE MERGER
BOARD OF DIRECTORS OF FPA FOLLOWING THE MERGER
Upon consummation of the 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 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 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 MERGER
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by the shareholders of Meridian and the satisfaction or
waiver of other conditions to the Merger, Meridian will be merged with and into
FPA in accordance with the Delaware Act and the Code. As a result of the Merger,
Meridian will cease to exist as a separate entity.
At the Effective Time:
(i) Each issued and outstanding share of Meridian Common Stock, except
as provided for below, will be exchanged for the right to receive (A) a
number of shares of FPA Common Stock and cash equal to the FPA
Consideration and (B) the Contingent Consideration. For a discussion of the
Merger Consideration, see "THE MERGER -- Merger Consideration."
(ii) Each share of Meridian Common Stock held in Meridian's treasury
and each share of Meridian Common Stock owned by FPA or a Subsidiary of FPA
will be canceled and retired and will cease to exist and no consideration
will be delivered in exchange therefor.
(iii) If applicable, each outstanding share of Meridian Common Stock,
the holder of which (a) has not voted in favor of the Merger, (b) has
perfected such holder's dissenters' rights to appraisal in accordance with
the pertinent provisions of the Georgia Code, and (c) has not effectively
withdrawn or lost such rights to dissent, 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 Georgia Code. See "THE MERGER -- Rights of Dissenting Shareholders
of Meridian."
At the Effective Time, holders of Meridian Common 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 the Merger Consideration
and cash in lieu of any fractional shares of FPA Common Stock.
EFFECTIVE TIME
The Merger will become effective on such date as the duly prepared and
executed Certificate of Merger (along with duly executed officers' certificates
for each of FPA and Meridian) is filed with the Secretary of State of Delaware
in accordance with the Delaware Act and the Secretary of State of Georgia in
accordance with the Georgia Code. The filing of the Certificate 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 Merger. In lieu of any such fractional share, each
holder of Meridian Common Stock 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 will be entitled to receive from the Exchange Agent a
cash payment (rounded up 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, the FPA Cash Consideration and
cash to be paid in lieu of fractional shares of FPA Common Stock issuable in
connection with the Merger. Promptly after the Effective Time, the Exchange
Agent shall mail to each holder
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of a certificate or certificates that immediately prior to the Effective Time
represented Meridian Common Stock ("Meridian Certificates") a letter of
transmittal and instructions for surrendering the Meridian Certificates, and
each holder thereof will be entitled to receive, upon surrender to the Exchange
Agent of one or more Meridian Certificates, certificates representing the number
of whole shares of FPA Common Stock into which such shares are converted in the
Merger and cash in consideration of fractional shares of FPA Common Stock, as
described above, as well as any other cash constituting part of the Merger
Consideration to which such holder is entitled.
TREATMENT OF MERIDIAN OPTIONS
On or before the Effective Time, Meridian will cancel any options to
acquire Meridian Common Stock that have not otherwise been exercised prior to
the Effective Time.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of FPA and Meridian (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) subsidiaries; (iii) the authorization,
execution, delivery and enforceability of the Merger Agreement and the
transactions contemplated thereunder; (iv) capitalization; (v) the absence of
any conflict, breach or default of any corporate charter documents or applicable
law in connection with entering into the Merger Agreement; (vi) 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; (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) contracts and commitments; (xii) certain tax matters including
the tax-free status of the transaction under sections 368(a)(1)(A) of the Code;
(xiii) matters concerning employee benefit plans and ERISA; (xiv) title to
assets; (xv) permits of each of Meridian and FPA; (xvi) compliance with laws;
(xvii) fraud and abuse; (xviii) labor controversies; (xix) insurance; (xx)
guaranties; (xxi) the accuracy of the information each party has supplied with
respect to the filings required with the Commission in order to consummate the
Merger and the transactions contemplated by the Merger Agreement; (xxii)
availability of reports and financial statements of FPA filed with the
Commission; and (xxiii) full disclosure.
CONDUCT OF BUSINESS PENDING THE MERGER
At all times from and after the date of the Merger Agreement until the
Effective Time, Meridian covenants and agrees as to itself and its Subsidiaries
(unless expressly provided for in the Merger Agreement or to the extent that FPA
shall otherwise consent in writing) to: (i) conduct its business only in the
ordinary course consistent with past practice; and (ii) use all commercially
reasonable efforts to preserve intact in all material respects its present
business organizations 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 consistent with past practice, and to preserve its relationships with
customers, suppliers and others having business dealings with them.
At all times from and after the date of the Merger Agreement until the
Effective Time, Meridian has agreed that it will not, nor shall it permit any of
its Subsidiaries to (unless expressly provided for in the Merger Agreement, or
to the extent that FPA 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, restructur-
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ing, 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; (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 Meridian
Common Stock upon exercise of previously granted options pursuant to the
Meridian Option Plans in accordance with their present terms, the issuance by a
wholly owned Subsidiary of its capital stock to its parent and the issuance of
stock to existing shareholders as compensation for services rendered by such
shareholders to Meridian), 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 Meridian and its
Subsidiaries, taken as a whole; (viii) other than dispositions of assets which
are not, individually or in the aggregate, material to Meridian and its
Subsidiaries, taken as a whole, 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, (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) incur (which shall not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until borrowings are made
under such arrangements) any indebtedness for borrowed money or guarantee any
such indebtedness other than in the ordinary course of its business consistent
with past practice in an aggregate principal amount exceeding $100,000 (net of
any amounts of any such indebtedness discharged during such period); (xi)
voluntarily purchase, cancel, prepay or otherwise provide for a complete or
partial discharge in advance of a scheduled repayment date with respect to, or
waive any right under, any indebtedness for borrowed money other than in the
ordinary course of its business consistent with past practice in an aggregate
principal amount exceeding $100,000; (xii) enter into, adopt, amend in any
material respect (except as may be required by applicable law) or terminate any
Meridian Employee Benefit Plan or any other agreement or arrangement, plan or
policy between such party or one of its Subsidiaries and one or more of its
directors, officers or employees, 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 Meridian and its Subsidiaries, taken as a whole, 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 (however, Meridian and FPA shall agree on termination of certain
Meridian employee benefit plans prior to the Effective Time, see "-- Certain
Additional Agreements"); (xiii) 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 Meridian or any of its Subsidiaries; (xiv) 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 One Hundred
Thousand Dollars ($100,000); (xv) make any change in the lines of business in
which it participates or is engaged; or (xvi) enter into any contract,
agreement, commitment or arrangement to do or engage in any of the foregoing.
Notwithstanding the foregoing, prior to the Effective Time, Meridian shall
record a liability to the employees listed on Schedule 5.01(b) (the "Employee
Compensation Liability") to the Merger Agreement payable in shares of FPA Common
Stock (see "THE MERGER -- Merger Consideration") and another liability to other
employees listed on Schedule 5.01(b) to the Merger Agreement (the "Special Bonus
Liability"); and provided, further, Meridian intends to adjust its balance sheet
to zero (exclusive of the Employee Compensation Liability, the Special Bonus
Liability and any Professional Fee Liability) as of the Effective Time.
At all times from and after the date of the Merger Agreement until the
Closing Date, FPA covenants and agrees as to itself and its Subsidiaries that
(except as expressly contemplated or permitted by the Merger Agreement, or to
the extent that Meridian shall otherwise consent in writing): (i) FPA shall not
make any material changes to its business or structure which would reasonably be
expected to have an adverse effect on
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the consideration to be received by the Meridian shareholder; (ii) FPA shall use
all reasonable efforts to take all such actions as are necessary to effectuate
the transactions contemplated by the Merger Agreement and to fulfill and cause
to be fulfilled the conditions to closing under the Merger Agreement; and (iii)
FPA 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) of the Code.
Meridian has further agreed that prior to the Effective Time to confer on a
regular and frequent basis with FPA with respect to its business and operations
and other matters relevant to the Merger and shall promptly advise FPA, orally
and in writing, of any change or event, including 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 can be reasonably foreseen to have, a material
adverse effect on Meridian and its Subsidiaries, taken as a whole, or adversely
affect the ability of Meridian to consummate the transactions contemplated by
the Merger Agreement. FPA has agreed to deliver to Meridian promptly upon filing
the Commission all FPA reports required to be filed by the Commission.
CERTAIN ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, FPA and Meridian have made the following
additional agreements.
Access to Information; Confidentiality. Meridian shall, and shall cause
each of its Subsidiaries to, throughout the period commencing on the date of the
Merger Agreement and ending at the Effective Time: (i) provide FPA 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 Meridian and its Subsidiaries 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 Meridian and
its Subsidiaries, and (ii) furnish promptly to such persons (x) a copy of each
report, statement, schedule and other document filed or received by Meridian and
its Subsidiaries, pursuant to the requirements of federal or state securities
laws or filed with any other governmental or regulatory authority, and (y) all
other information and data concerning the business and operations of Meridian
and its Subsidiaries as FPA or any of such other persons reasonably may request.
FPA has agreed to provide Meridian promptly upon filing copies of all reports
filed by FPA with the Commission.
Each of FPA and Meridian 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
and its Subsidiaries 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
have been (x) previously known by Meridian or FPA, as the case may be, or its
Representatives, (y) in the public domain (either prior to or after the
furnishing of such documents or information thereunder) through no fault of
Meridian or FPA, as the case may be, and its Representatives or (z) later
acquired by Meridian or FPA, as the case may be, or its Representatives from
another source if the recipient is not aware that such source is under an
obligation to Meridian or FPA, as the case may be, to keep such documents and
information confidential. In the event that the Merger Agreement is terminated
without the transactions contemplated thereby having been consummated, upon the
request of Meridian or FPA, 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 Meridian or FPA, as the case may be, or its
Representatives to such party and its Representatives in connection with the
Merger Agreement or the transactions contemplated thereby and destroy or cause
to be destroyed all notes, memoranda, summaries, analyses, compilations and
other writings related thereto or based thereon prepared by Meridian or FPA, as
the case may be, or its Representatives.
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Registration Statement and Proxy Statement/Prospectus. FPA agreed to file
with the Commission as soon as is reasonably practicable after the date of the
Merger Agreement the Proxy Statement/Prospectus and to use all reasonable
efforts to have the Registration Statement declared effective by the Commission
as promptly as practicable. FPA also agreed to take any action required to be
taken under applicable state blue sky, securities laws or rules or regulations
of Nasdaq in connection with the issuance of FPA Common Stock pursuant hereto.
Each of FPA and Meridian agreed to 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.
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 Merger in
accordance with the Merger Agreement with the Nasdaq National Market.
Approval of Meridian Shareholders. Meridian shall as promptly as
practicable submit the Merger Agreement to its shareholders at a meeting of
shareholders and use all reasonable efforts to obtain approval of the Merger
Agreement and the transactions contemplated thereby by its shareholders as soon
as reasonably practicable after the date of the Merger Agreement. Such meeting
of shareholders shall be held as soon as practicable following the date upon
which the Registration Statement, of which this Proxy Statement/Prospectus is a
part, becomes effective.
Regulatory and Other Approvals. Subject to the terms and conditions of the
Merger Agreement, each of FPA and Meridian 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, Meridian or any of their Subsidiaries to
consummate the Merger and the other matters contemplated thereby 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.
Expenses. Whether or not the 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.
Notice and Cure. Each of FPA and Meridian agreed to 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 the Merger Agreement that causes or will cause any covenant or agreement of
FPA or Meridian, as the case may be, under the Merger Agreement to be breached
or that renders or will render untrue any representation or warranty of FPA or
Meridian, as the case may be, contained in the Merger Agreement as if the same
were made on or as of the date of such event, transaction or circumstance. Each
of FPA and Meridian also agreed to notify the other 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, if any representation, warranty,
covenant or agreement made by FPA or Meridian, as the case may be, in the Merger
Agreement, whether occurring or arising prior to, on or after the date of the
Merger Agreement.
Fulfillment of Conditions. Subject to the terms and conditions of the
Merger Agreement, each of FPA and Meridian 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 nor Meridian 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 Effective Time, Meridian agreed that (a)
neither it nor any of its Subsidiaries, and it shall use its best efforts to
cause their respective Representatives not to, initiate, solicit or
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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 shareholders) with respect to a merger, consolidation or other business
combination including Meridian or any of its Subsidiaries 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 Meridian and
its Subsidiaries, taken as a whole, (ii) any of the outstanding shares of
Meridian Common Stock, or (iii) any of the outstanding shares of capital stock
of any Subsidiary of Meridian (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;
(b) that it will notify FPA as soon as commercially reasonable 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 an Alternative Proposal, (i) receive a determination
from an independent financial advisor that such Alternative Proposal is more
favorable (from a financial point of view) to the Meridian 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 Meridian shareholders than the transactions contemplated by the
Merger Agreement and (iii) deliver to FPA a definitive agreement of such
Alternative Proposal or a description of the material terms thereof and, except
as would violate a fiduciary or contractual obligation, a copy of any
information provided by such person or group, including the identity of such
person or group, and give FPA at least three (3) days to offer a counterproposal
prior to executing such definitive agreement; provided, however, that nothing
contained in the Merger Agreement shall prohibit the Board of Directors of
Meridian 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 Meridian, based upon the written opinion of outside counsel (a copy
of which shall be provided promptly to FPA), determines in good faith that such
action is required or appropriate for the Board of Directors to comply with its
fiduciary duties to shareholders 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 Alternative Proposal is more favorable to
Meridian's shareholders than the Merger and (C) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or group, Meridian provides written notice to FPA 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 an Alternative Proposal.
Brokers or Finders. Each of FPA and Meridian represents, as to itself and
its affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by the Merger Agreement, other than fees for which the representing
party is solely responsible. Each of FPA, on the one hand, and Meridian, on the
other hand, shall indemnify and hold the other harmless from and against any and
all claims, liabilities or obligations with respect to any such fee or
commission or expenses related thereto asserted by any person on the basis of
any act or statement alleged to have been made by such party of its affiliate.
Notwithstanding the foregoing, FPA shall assume the obligations of Meridian for
the fees and expenses owed to KPMG Peat Marwick LLP, Kilpatrick Stockton LLP,
and Coopers & Lybrand L.L.P. incurred in connection with the Merger and the
transactions contemplated thereby to the extent that such aggregate fees and
expenses do not exceed One Million Five Hundred Thousand Dollars ($1,500,000)
(the "Professional Fee Liability") reduced by the amount of the Special Bonus
Liability.
Employee Benefit Matters. Prior to the Effective Time, FPA and Meridian
shall agree on termination of certain of Meridian employee benefit plans and
Meridian shall use its reasonable best efforts to cause such plans to be
terminated as of the Effective Time. From and after the Effective Time, FPA and
FPA of Georgia, Inc., a Georgia corporation and wholly-owned subsidiary of FPA
("FPA-Georgia"), as the case may be, shall provide each Meridian non-physician
employee who becomes an employee of FPA or FPA-Georgia (and, to the extent
applicable, the employee's respective eligible dependents) (the "Retained
Employees") benefits
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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 Retained Employee full credit for the
service credited to such employee under the applicable Meridian employee benefit
plans and shall waive any applicable waiting periods under the FPA employee
benefit plans. Notwithstanding the foregoing, FPA shall provide the Retained
Employees with credit for, and shall assume Meridian's liability with respect
to, up to a maximum of 160 hours of accrued vacation.
Medical Services Agreement. As of the Effective Time, FPA-Georgia and
PruCare shall enter into the Medical Services Agreement.
Asset Purchase Agreement. As of the Effective Time, FPA-Georgia and PruCare
shall enter into the Asset Purchase Agreement.
Conversion of Meridian to Business Corporation. If required, immediately
prior to the Merger, Meridian agreed to cause its Articles of Incorporation to
be amended (and a Certificate of Amendment to be filed with the Georgia
Secretary of State) whereby Meridian converts from a professional corporation to
a business corporation.
Physician Employment Agreements. As of the Effective Time, at least ninety
percent (90%) (minus one) of the physician employees of Meridian (calculated as
of the date of the Merger Agreement on a FTE basis) shall have agreed to the
amendment and assignment of their current employment agreements with Meridian to
the professional corporation which will employ the Meridian shareholder
physicians after the Effective Time to be owned by an FPA-affiliated physician.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligation of each party to effect the 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 approval of the Meridian shareholders of
the Merger Agreement and the transactions contemplated thereby; (iii) there
shall be no law or order (whether temporary, preliminary or permanent) which is
then in effective and has the effect of making illegal or otherwise restricting,
preventing or prohibiting consummation of the Merger or the other transactions
contemplated by the Merger Agreement; (iv) all consents, approvals and actions
of, filing with and notices to any governmental or regulatory authority or any
other public or private third parties required of FPA, Meridian or any of their
Subsidiaries to consummate the Merger and the other matters contemplated by the
Merger Agreement, the failure of which to be obtained or taken would be
reasonably expected to have a material adverse effect on FPA and its
Subsidiaries taken as a whole, or adversely affect the ability of FPA and
Meridian to consummate the transactions contemplated by the Merger Agreement
shall have been obtained; and (v) the shares of FPA Common Stock issuable to
Meridian shareholders in the Merger shall have been approved for inclusion on
Nasdaq.
The obligation of FPA 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 in its sole
discretion): (i) Meridian shall have performed and complied with, in all
material respects, each agreement, covenant and obligation required by the
Merger Agreement to be performed or complied with by it at or prior to the
Closing Date and the representations and warranties of Meridian in the Merger
Agreement shall be true and correct in all material respects on and as of the
date made and as of the Closing Date as though made on and as of the Closing and
Meridian shall have delivered to FPA a certificate, dated the Closing Date and
executed on behalf of Meridian by its Chairman of the Board, President, or any
Executive or Senior Vice President, to such effect; (ii) FPA 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) the receipt
by Meridian and its Subsidiaries of all consents (or in lieu thereof waivers)
from parties to each contract disclosed in the Merger Agreement, (iv) since the
date of the Merger Agreement, there shall not have been
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either (A) a decrease of ten percent (10%) or more (plus one) in the number of
physicians (calculated on a full-time equivalent basis) employed by Meridian or
(B) a reduction in the number of PruCare covered lives serviced by Meridian to
less than 67,700, which, taken as a whole, have had or could be reasonably
expected to have a material adverse effect on Meridian and its Subsidiaries, (v)
FPA shall have received the opinions of Kilpatrick Stockton LLP and Morris,
Manning & Martin, counsel to Meridian, dated the Closing Date, in form
reasonably acceptable to FPA, (vi) the Asset Purchase Agreement shall be
effective, (vii) the Medical Services Agreement shall be effective, and (viii)
the Physician Employment Agreements shall be effective.
The obligation of Meridian 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 Meridian in its sole
discretion): (i) FPA shall have performed and complied with, in all material
respects, each agreement, covenant and obligation required by the Merger
Agreement to be performed or complied with by it at or prior to the Closing Date
and the representations and warranties of FPA in the Merger Agreement shall be
true and correct in all material respects on and as of the date made and on and
as of the Closing Date as though made on and as of the Closing and FPA shall
have delivered to Meridian a certificate, dated the Closing Date and executed on
behalf of FPA by its Chairman of the Board, President or any Executive or Senior
Vice President to such effect; (ii) Meridian shall have received all
certificates, instruments, agreements, and other documents to be delivered by
FPA required by the Merger Agreement on or before the Closing Date; and (iii)
Meridian shall have received the opinions of Ballard Spahr Andrews & Ingersoll,
LLP, counsel to FPA, and James A. Lebovitz, general counsel to FPA, dated the
Closing Date, in form reasonably acceptable to Meridian.
To the extent that FPA or Meridian waives compliance with any material
provisions of or conditions to the consummation of the Merger, including that
the Merger qualify as a tax-free reorganization, FPA and Meridian will amend
this Proxy Statement/Prospectus, and Meridian will resolicit shareholder 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 and Meridian; (ii) at any time after June 30, 1998 if the
transactions contemplated by the Merger 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; (iii) if any governmental or regulatory authority, the taking of action
by which is a condition to the obligations of either FPA or Meridian, 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, warrant, covenant or agreement on the party 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
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; or (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.
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EFFECT OF TERMINATION
If the Merger Agreement is validly terminated by either Meridian 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 Meridian 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 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 AND SURVIVAL
Each of the Meridian shareholders shall jointly and severally indemnify FPA
after the Effective Time and until one (1) year following the Effective Time
(the "Indemnification Period") from and against any and all damage, loss,
liability and expense (including without limitation reasonable expenses of
investigation and reasonable attorneys' fees and reasonable expenses in
connection with any action, suit or proceeding) incurred or suffered or
reasonably expected to be incurred or suffered by FPA arising out of any breach
of the representations, warranties, covenants or agreements of Meridian set
forth in the Merger Agreement (the "FPA Indemnifiable Damages"). Notwithstanding
the foregoing, (i) FPA shall not be entitled to indemnification hereunder until
FPA Indemnifiable Damages exceed Four Hundred Thousand Dollars ($400,000) and
thereafter shall be entitled to indemnification for all FPA Indemnifiable
Damages subject to the provisions hereof; (ii) FPA shall not be entitled to
recover from the Meridian shareholders more than the Merger Consideration
received by the Meridian shareholders for all FPA Indemnifiable Damages; and
(iii) no Meridian shareholder shall be responsible for FPA Indemnifiable Damages
in an amount in excess of the Merger Consideration received by such Meridian
shareholder. Without limiting their obligations regarding indemnification of FPA
but subject to the maximum liability of each Meridian shareholder for FPA
Indemnifiable Damages, the Meridian shareholders shall fully reimburse FPA and
shall indemnify and hold FPA harmless from, any and all liability arising from
or related to a certain action described in Section 9.02 of the Merger
Agreement. FPA may obtain indemnification for any FPA indemnifiable damages only
if a claim for indemnification is made by FPA within the indemnification period.
FPA agreed to indemnify the Meridian shareholders after the Effective Time
from and against any and all damage, loss, lability and expense (including
without limitation reasonable expenses of investigation and reasonably
attorneys' fees and reasonable expenses in connection with any action, suit or
proceeding) incurred or suffered or reasonably expected to be incurred or
suffered by the shareholders of Meridian arising out of any breach of the
representation and warranty of the FPA contained in the Merger Agreement (the
"Meridian Shareholder Indemnifiable Damages"). Notwithstanding the foregoing,
(i) the Meridian shareholders shall not be entitled to indemnification hereunder
until Meridian Shareholder Indemnifiable Damages exceed Four Hundred Thousand
Dollars ($400,000) and thereafter shall be entitled to indemnification for all
Meridian Shareholder Indemnifiable Damages subject to the provisions hereof; and
(ii) the Meridian shareholders shall not be entitled to recover from FPA more
than the Merger Consideration paid by FPA for all Meridian Shareholder
Indemnifiable Damages. FPA shall reimburse the Meridian shareholders for any
Shareholder Indemnifiable Damages to which Section 9.02(b) of the Merger
Agreement relates only if a claim for indemnification is made by the Meridian
shareholders within the Indemnification Period.
The representations and warranties of Meridian, on the one hand, and FPA,
on the other hand, contained in the Merger Agreement or in any document or
instrument delivered pursuant thereto shall survive the Effective Time and shall
continue in full force and effect until the first anniversary of the Effective
Time, except with respect to payment of taxes, which shall survive until the
expiration of the statute of limitations. Notwithstanding the foregoing, FPA may
bring a claim for fraud at any time before the end of the applicable statute of
limitations thereto.
AMENDMENT
The Merger Agreement may be amended, supplemented or modified by action
taken by or on behalf of the respective Boards of Directors of the parties
thereto at any time prior to the Effective Time. No such
57
<PAGE> 60
amendment, supplemental or modification shall be effective unless set forth in a
written instrument duly executed by or on behalf of each party to the Merger
Agreement.
WAIVER
At any time prior to the Effective Time, either FPA or Meridian, by action
taken by or on behalf of its Board of Directors, may to the extent permitted by
applicable law (i) extend the time for the performance of any of the obligations
or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant to the Merger Agreement or (iii) waive compliance
with any of the covenants, agreements or conditions of the other party to the
Merger Agreement contained in the Merger Agreement. No such extension or waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party extending the time of performance or waiving any such
inaccuracy or non-compliance. No waiver by any party of any term or condition of
the Merger Agreement, in any one or more instances, shall be deemed to be or
construed as a waiver of the same or any other term or condition of the Merger
Agreement on any future occasion.
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<PAGE> 61
COMPARISON OF RIGHTS OF HOLDERS OF MERIDIAN COMMON STOCK
AND FPA COMMON STOCK
Meridian is a Georgia professional corporation and the rights of its
shareholders are governed by the Georgia Code and its Articles of Incorporation
and Bylaws as well as by the Shareholders' Agreement. FPA is a Delaware
corporation and the rights of its stockholders are governed by the Delaware Act
and FPA's Certificate of Incorporation and Bylaws. If the Merger is consummated,
Meridian 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. The following is a brief summary of certain differences between the rights
of Meridian shareholders 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 Georgia Code and Meridian's Articles of
Incorporation, Bylaws and the Shareholders' Agreement.
PREFERRED STOCK
The Board of Directors of FPA is 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. FPA has not authorized or issued any shares of preferred
stock. The Board of Directors of Meridian is not authorized to provide for the
issuance 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 Meridian Bylaws provide that the Board shall have eleven members,
including any ex officio members. The Directors who are not ex officio members
shall be divided into two classes: Department Members and At Large Members.
Meridian's Bylaws also provide that there shall be two Department Members for
each of the following specialty departments; Internal Medicine, Ob/Gyn; Family
Practice; and Pediatrics. Until such time as a Subspecialty Department is
created, subspecialty physicians, currently orthopedists, dermatologist,
hematologists, and oncologists will have the right to nominate one person to the
Board who shall be deemed to be a Department Member. Departments shall be
established by Meridian's Board from time to time and membership in such
departments shall be determined by the Medical Director based upon such criteria
as the Board may specify. All physician employees, except the Medical Director,
shall either be designated as subspecialty physicians or assigned to a
department. Currently, the Board has authorized the following departments:
Internal Medicine, Ob/Gyn, Family Practice, and Pediatrics. Meridian's Bylaws
also provide that there shall be two At-Large Members and at least one of these
At-Large Members must be an associate provider.
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. Meridian's Bylaws provide that any or all directors may
be removed with or without cause at any meeting of shareholders by a majority of
the stock represented and entitled to vote thereat.
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. Meridian's Bylaws provide that a vacancy on the Meridian Board may be
filled by a majority vote of the directors then in office, even if less than a
quorum, unless the shareholders have elected a successor.
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. Meridian's Bylaws provide for a
staggered Board of Directors, with the directors of Meridian divided into three
classes, with two classes of four directors
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<PAGE> 62
and one class of three directors. Each director on the Meridian Board is elected
to serve for a term of three years and until his successor is elected and
qualified.
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. Meridian's Bylaws
provide that the Meridian Board may adopt, alter, amend or repeal Meridian's
Bylaws. Meridian shareholders shall also have the power to adopt, alter, amend
or repeal the Bylaws and may resolve that any bylaw so adopted, altered, amended
or repealed by the shareholders may not be adopted, altered, amended or repealed
by the Board.
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. Meridian's
Bylaws provide that special meetings of shareholders may be called by the Board
of Directors, the Chairman of the Board or the President, and shall be called by
Meridian upon written request of the majority of the shareholders owning at
least twenty-five percent (25%) of the votes entitled to be cast in each issue
proposed to be considered at such 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 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 Georgia Code, a corporation may indemnify any director if such
director acted in a manner he believed in good faith to be in, or not opposed
to, the best interests of the corporation and, in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. Where a
determination that the director or officer met a specified standard of conduct
is required, that determination will be made by a quorum of disinterested
directors if possible, or by a committee of disinterested directors or special
legal counsel. A corporation may not indemnify a director in a derivative action
or in a proceeding by the corporation in which the director is adjudged liable
to the corporation, or in connection with any other proceeding in which he is
adjudged liable on the basis he improperly received a personal benefit. A
corporation may indemnify an officer or employee to the extent consistent with
public policy if authorized by its articles of incorporation, bylaws or board of
directors or by contract. The corporation is required to indemnify a director or
officer to the extent that the director has been successful, on the merits or
otherwise, in the defense of any proceeding to which he was a party because of
his status as a director or officer of the corporation. Before a final
disposition is reached, the Georgia Code permits a corporation to pay or
reimburse a director the reasonable expenses incurred by the director in his
defense if he attests in writing that he acted in good faith or in the best
interest of the corporation and that he will repay the expenses if it is
determined he is not entitled to indemnification.
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<PAGE> 63
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.
Meridian's Bylaws require Meridian to indemnify a director or officer
against reasonable expenses incurred to the extent allowed under the law. As a
condition of such indemnification, Meridian reserves the right to require that
it be permitted to participate in the defense or designate legal counsel for the
defense at its expense. Meridian's Bylaws do not address indemnification of
agents or employees.
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.
Under the Georgia Code, unless otherwise provided for by the Georgia Code
or a Georgia 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. Neither Meridian's Articles of Incorporation nor its Bylaws contains a
provision requiring a greater vote on any matter than required by the Georgia
Code.
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. FPA's Bylaws permit
action by such written consent.
The Georgia 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. Meridian's Bylaws permit action by such
written consent.
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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 year ended December 31, 1996 and the nine months ended
September 30, 1997 give effect, to the extent set forth below, to 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 acquisition of Meridian (the "Acquisition").
The Acquisition is reflected as of September 30, 1997 for the pro forma
condensed consolidated balance sheet. The Acquisition is reflected as of January
1, 1996 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 and the Acquisition
giving effect to 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 and Meridian as of September 30, 1997 and for the nine months then ended,
the audited financial statements of FPA and Meridian as of December 31, 1996 and
for 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, Meridian and FHMS.
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<PAGE> 65
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
FPA MEDICAL
MANAGEMENT,
INC.
AND THE
MERIDIAN ACQUISITION
FPA MEDICAL MEDICAL PRO FORMA PRO FORMA
MANAGEMENT, INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED
---------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 33,449,221 $ 488,309 $(1,500,000)(E) $ 32,437,530
Marketable securities.................... 1,195,990 1,195,990
Accounts receivable -- net............... 205,659,119 4,701,122 210,360,241
Prepaid expenses and other assets........ 6,979,402 805,718 7,785,120
Deferred income tax asset................ 4,658,691 4,658,691
------------ ---------- ----------- ------------
Total current assets.............. 251,942,423 5,995,149 (1,500,000) 256,437,572
Property and equipment -- net.............. 52,360,414 517,221 52,877,635
Restricted cash and deposits............... 500,000 500,000
Goodwill and intangibles -- net............ 371,957,764 25,458,206(E) 397,415,970
Investments in HealthCor (formerly GLHP)... 4,994,900 4,994,900
Deferred income tax asset.................. 3,645,742 3,645,742
Other assets............................... 9,279,005 355,584 9,634,589
------------ ---------- ----------- ------------
Total............................. $694,680,248 $ 6,867,954 $23,958,206 $ 725,506,408
============ ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.... $ 84,866,185 $ 2,277,116 $ 2,900,000(E) $ 90,043,301
Claims payable, including incurred but
not reported claims.................... 121,170,576 121,170,576
Long-term debt -- current portion........ 11,665,970 3,300,000 14,965,970
Current portion of accrued liability for
professional liability claims.......... 1,534,000 625,000 2,159,000
Other liabilities........................ 2,268,000 2,268,000
------------ ---------- ----------- ------------
Total current liabilities......... 221,504,731 6,202,116 2,900,000 230,606,847
------------ ---------- ----------- ------------
Long-term debt -- net of current
portion................................ 278,746,175 278,746,175
Accrued liability for professional
liability claims, net of current
portion................................ 4,270,545 756,042 5,026,587
Other long-term liabilities.............. 30,311,727 30,311,727
Minority interests....................... 693,000 693,000
Stockholders' equity:
Preferred stock........................
Common stock........................... 78,464 2,605 (2,605)(E) 80,794
2,330(E)
Additional paid in capital............. 273,236,223 538,221 (538,221)(E) 294,201,895
20,965,672(E)
Stock payable.......................... 534,600 534,600
Accumulated deficit.................... (114,268,217) (631,030) 631,030(E) (114,268,217)
Less: Due from stockholders............ (427,000) (427,000)
------------ ---------- ----------- ------------
Total stockholders' equity (deficit)... 159,154,070 (90,204) 21,058,206 180,122,072
------------ ---------- ----------- ------------
Total............................. $694,680,248 $ 6,867,954 $23,958,206 $ 725,506,408
============ ========== =========== ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
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<PAGE> 66
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
FPA MEDICAL
MANAGEMENT, INC.
MERIDIAN AND THE ACQUISITION
FPA MEDICAL MEDICAL PRO FORMA PRO FORMA
MANAGEMENT, INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED
---------------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Managed care revenue........... $610,103,454 $43,323,911 $ 653,427,365
Fee-for-service revenue... 211,392,556 4,635,316 216,027,872
Management services
revenue................... 18,183,000 18,183,000
------------ ----------- ------------ ------------
Total operating
revenue............ 839,679,010 47,959,227 887,638,237
------------ ----------- ------------ ------------
Expenses:
Medical services.......... 611,987,779 42,987,959 654,975,738
General and
administrative.......... 192,069,982 4,596,512 $ 763,746(B) 197,430,240
Merger, restructuring and
other unusual charges... 38,004,841 38,004,841
------------ ----------- ------------ ------------
Total expenses....... 842,062,602 47,584,471 763,746 890,410,819
------------ ----------- ------------ ------------
Income (loss) from
operations................ (2,383,592) 374,756 (763,746) (2,772,582)
Other income (expense):
Interest and other
income.................. 6,051,501 253,622 6,305,123
Interest expense.......... (15,061,150) (15,061,150)
Minority interests' share
in net losses........... 122,000 122,000
------------ ----------- ------------ ------------
Total other income
(expense).......... (8,887,649) 253,622 (8,634,027)
------------ ----------- ------------ ------------
Income (loss) before income
taxes..................... (11,271,241) 628,378 (763,746) (11,406,609)
Income tax (expense)
benefit................... (2,625,277) 54,147(D) (2,571,130)
------------ ----------- ------------ ------------
Net income (loss)............ $(13,896,518) $ 628,378 $ (709,599) $ (13,977,739)
============ =========== ============ ============
Net loss per share........... $ (0.34) $ (0.34)
Weighted average shares
outstanding(F)............ 40,472,579 41,637,468
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
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<PAGE> 67
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FPA MEDICAL
MANAGEMENT, INC.
FOUNDATION CONSUMMATED
HEALTH TRANSACTIONS AND
FPA MEDICAL PHYSICIANS MEDICAL MERIDIAN THE ACQUISITION
MANAGEMENT, FIRST, SERVICES AND MEDICAL PRO FORMA PRO FORMA
INC. INC.(A) AFFILIATES GROUP, INC. ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Managed care revenue............ $468,158,760 $14,870,833 $121,214,187 $62,779,263 $ 667,023,043
Fee-for-service revenue......... 180,489,747 4,176,018 19,251,147 4,508,112 208,425,024
Management services revenue..... 28,826,000 28,826,000
------------ ----------- ------------ ----------- ----------- --------------
Total operating revenue..... 677,474,507 19,046,851 140,465,334 67,287,375 904,274,067
------------ ----------- ------------ ----------- ----------- --------------
Expenses:
Medical services.............. 515,126,273 16,128,269 166,950,333 65,015,157 763,220,032
General and administrative.... 188,429,378 2,811,904 44,210,000 3,615,625 $ 7,529,142(B) 246,596,049
Merger, restructuring and
other unusual charges....... 52,571,868 52,571,868
------------ ----------- ------------ ----------- ----------- --------------
Total expenses.............. 756,127,519 18,940,173 211,160,333 68,630,782 7,529,142 1,062,387,949
------------ ----------- ------------ ----------- ----------- --------------
Income (loss) from operations... (78,653,012) 106,678 (70,694,999) (1,343,407) (7,529,142) (158,113,882)
Other income (expense):
Interest and other income..... 2,539,301 83,940 6,168,667 253,191 9,045,099
Interest expense.............. (6,767,664) (15,382) (8,619,667) (2,406,837)(C) (17,809,550)
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) 253,191 (2,406,837) (10,655,451)
------------ ----------- ------------ ----------- ----------- --------------
Income (loss) before income
taxes......................... (82,015,375) 175,236 (75,902,999) (1,090,216) (9,935,979) (168,769,333)
Income tax (expense) benefit.... (1,265,000) (73,922) 16,362,667 (129,647) 18,538,658(D) 33,432,756
------------ ----------- ------------ ----------- ----------- --------------
Net income (loss)............... $(83,280,375) $ 101,314 $(59,540,332) $(1,219,863) $ 8,602,679 $ (135,336,577)
============ =========== ============ =========== =========== ==============
Net loss per share.............. $ (2.54) $ (3.57)
Weighted average shares
outstanding(F)................ 32,744,919 37,952,471
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
65
<PAGE> 68
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 Partners (October 1997) were
accounted for as a pooling 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 Partners for all periods presented.
Additionally, FPA proposes to acquire Meridian by issuing FPA Common Stock and
cash. It is contemplated that 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) 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.
(B) For the purpose of determining the pro forma effects of the
acquisitions of Meridian, 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
---------------------------------------------------
MERIDIAN 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)...................... $(1,018,328) (177,957) (5,599,013) (6,795,298)
Depreciation of additional purchase cost
assigned to property and equipment.......... 118,242 118,242
----------- --------- ----------- -----------
$(1,018,328) $(160,134) $(6,350,680) $(7,529,142)
============ ========== ============ ============
</TABLE>
66
<PAGE> 69
FPA NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------
MERIDIAN TOTAL
--------- ---------
<S> <C> <C>
Amortization over 25 years of cost in excess of net assets
acquired (goodwill)........................................ $(763,746) $(763,746)
--------- ---------
$(763,746) $(763,746)
========== ==========
</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 $227,675,563 related to
Meridian, PFI and FHMS.
(C) 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.
(D) Reflects the estimated income tax effects of the pro forma adjustments
and the estimated tax expense (benefit) for Meridian and FHMS at forty
percent of the net income (loss) before income taxes. No valuation
allowance has been recognized related to the pro forma tax benefits and
the Meridian and 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 $168,769,333 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.
(E) Reflects the effects of the issuance of 1,164,889 shares (assuming a
value of $18.00 per share) of FPA Common Stock, the payment of
$1,500,000 in cash and the estimated transaction costs of $2,900,000
for the acquisition of Meridian which gives rise to goodwill of
$25,458,206. In addition, the merger with Meridian may result in the
issuance of contingent consideration as discussed in "The Merger". The
purchase price allocation is based on management's estimates and may be
subject to change upon completion of the transaction.
(F) The weighted average shares outstanding was calculated based on the
historical weighted average shares outstanding of FPA giving effect to
the assumed 1,164,889 shares of FPA Common Stock to be issued in
connection with the Acquisition and the shares issued in connection
with the acquisitions of PFI and FHMS.
67
<PAGE> 70
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
Sterling, AHI, HealthCap, Axminster and 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) 3,063 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 2,862 40,717 153,313 154,427 159,154
</TABLE>
68
<PAGE> 71
SELECTED HISTORICAL FINANCIAL DATA -- MERIDIAN
The selected historical financial data of Meridian set forth below for the
years ended December 31, 1994, 1995 and 1996 have been derived from Meridian's
audited Financial Statements contained elsewhere in this Proxy
Statement/Prospectus. The selected historical financial data for the years ended
December 31, 1993 and 1992 have been derived from Meridian's audited Financial
Statements which have not been included in this Proxy Statement/Prospectus. The
selected historical financial data for the nine months ended September 30, 1997
and 1996 are unaudited. In the opinion of Meridian's management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of Meridian'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 Meridian's Financial Statements and the
notes thereto contained elsewhere 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............. $29,592,979 $40,771,815 $49,913,080 $58,245,115 $67,376,963 $49,937,293 $47,959,227
Medical services expense...... 27,363,769 38,752,675 46,841,257 54,886,890 65,015,157 47,888,003 42,987,959
General and administrative
expense..................... 1,937,209 2,143,133 2,928,224 3,885,016 3,615,625 2,499,497 4,596,512
------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.................. 292,001 (123,993) 143,599 (526,791) (1,253,819) (450,207) 374,756
======= =========== =========== =========== =========== =========== ===========
Cash dividend per share....... $0.20 $0.20 $0.40 $0.45 -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $2,590,323 $4,182,426 $6,757,914 $7,556,011 $11,261,880 $ 6,867,954
Short-term liabilities....................... -- -- -- -- -- 3,300,000
Long-term liabilities........................ -- -- -- -- 200,000 --
OTHER DATA:
Average Capitation........................... N/A* N/A* N/A* N/A* $ 54.24 $ 54.24
Average Covered Lives........................ 57,990 70,540 77,195 87,150 91,994 82,568
</TABLE>
- ---------------
* During the years 1992 through 1995, Meridian was compensated on a
negotiated budget (Cost Plan Basis).
69
<PAGE> 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- MERIDIAN
GENERAL
Meridian derives substantially all of its operating revenue from (i)
payments made by Payors to Meridian for managed care medical services, and (ii)
payments made by Payors, governments, corporations, and individuals for
fee-for-service medical services.
MANAGED CARE BUSINESS
Meridian has two types of capitation Payor contracts: (i) contracts for
both inpatient and outpatient services ("global capitation" contracts) which
commenced January 1, 1998 and (ii) those limited to defined professional medical
services ("professional capitation" contracts). Meridian currently has entered
into one global capitation contract, which is with PruCare and commenced on
January 1, 1998. Under this global capitation contract, Meridian receives a
fixed monthly payment per enrollee and is responsible for providing each
enrollee with inpatient and outpatient medical services. Under its professional
capitation contracts, Meridian receives a fixed monthly payment per enrollee and
is responsible for providing each enrollee with the professional medical
services covered in the professional capitation contract. These covered services
consist of primary care and certain specialty care. PruCare is the most
significant Payor for professional capitation contracts entered into by
Meridian.
Additionally, under these global and professional capitation contracts,
Meridian may be a party to shared risk arrangements with Payors which generally
reward Meridian for the appropriate utilization of total medical resources.
Under these shared risk arrangements, Meridian's participation is based on
achieving certain goals agreed to by Meridian and the Payor relating to total
medical costs, including inpatient expense. No revenue was derived from global
capitation contracts in 1996 and 1997. It is estimated that the global
capitation contract revenue for 1998 will represent approximately 89% of
Meridian's operating revenue. For the nine months ended September 30, 1996 and
1997, revenue under the contract with PruCare for professional capitation
represented 61.5% and 84.8%, respectively, of Meridian's operating revenue.
Meridian also generates fee-for-service revenue for the performance of
medical services. These revenues are presented net of contractual deductions.
For the nine months ended September 30, 1996 and 1997, these revenues
represented 6.5% and 9.7%, respectively, of Meridian's operating revenue.
In addition to providing primary care and some specialist professional
services, Meridian contracts with various third party healthcare professionals
to provide primary care and specialty medical services to covered enrollees.
Primary care physicians are compensated on either a salary or fee schedule
basis. Specialty care physician services are compensated on either a salary, a
fee schedule or capitation basis. For the nine months ended September 30, 1996
and 1997, medical services expense paid for on a capitation basis (for certain
primary care and specialty care services) or fixed salary basis totaled 95.9%
and 89.5%, respectively, of operating revenues, with the remainder of medical
services expense (for primary care, specialty care, ancillary, inpatient, and
outpatient services, etc.) paid for on a fee schedule basis.
OPERATIONAL DEVELOPMENT
The future growth of Meridian is significantly dependent on consistent
growth in the number of new enrollees in Meridian's network. This growth may
come from (i) affiliations with, or acquisitions of, individual or group
physician practices serving enrollees of Payors with whom Meridian currently
contracts, (ii) increases in the number of enrollees of Payors with which
Meridian currently has contracts choosing Meridian physicians, and (iii)
entering into contracts with additional Payors. Because of increasing
competitive pressures in the marketplace, there can be no assurance that
Meridian will be successful in identifying, acquiring or affiliating with
additional physician groups or hospitals or that Meridian will be able to
contract with new Payors. Meridian'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. There can be no assurance that
Meridian will be able to comply
70
<PAGE> 73
with all legal and regulatory requirements in the jurisdictions in which it
operates or will operate or that it can obtain necessary regulatory approvals,
certificates, and licenses.
The following table sets forth selected financial data and selected
financial data expressed as a percentage of operating revenue for the nine
months ending September 30, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996* 1997*
----------- -----------
<S> <C> <C>
Operating revenue......................................... $49,937,293 $47,959,227
----------- -----------
Medical services expense.................................. 47,888,003 42,987,959
General and administrative expense........................ 2,499,497 4,596,512
----------- -----------
Total Expenses.................................. 50,387,500 47,584,471
----------- -----------
(Loss) income from operations............................. (450,207) 374,756
Other income.............................................. 151,519 253,622
(Loss) income before tax.................................. (298,688) 628,378
----------- -----------
Income tax expense........................................ 35,519 -0-
----------- -----------
Net (loss) income............................... $ (334,207) $ 628,378
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996* 1997*
----- -----
<S> <C> <C>
Operating revenue.................................................. 100.0% 100.0%
Medical services expense........................................... 95.9% 89.6%
General and administrative expense................................. 5.0% 9.6%
----- -----
Total Expenses........................................... 100.9% 99.2%
----- -----
(Loss) income from operations...................................... (0.9)% 0.8%
Other income....................................................... 0.3% 0.5%
(Loss) income before tax........................................... (0.6)% 1.3%
Income tax expense................................................. 0.1% -0-
----- -----
Net (loss) income........................................ (0.7)% 1.3%
===== =====
</TABLE>
- ---------------
* Unaudited
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
OPERATING REVENUE -- Meridian's operating revenue decreased 4.0% to $47.9
million in 1997 from $49.9 million in 1996. The revenue decrease resulted
primarily from a decrease of approximately 11% in average PruCare enrollment
assigned to Meridian from 92,799 in 1996 to 82,568 in 1997. However, mitigating
the effect of decreased enrollment on operating revenue between these periods
was the change in the PruCare reimbursement methodology that occurred in 1996.
During the first three months of 1996, Meridian earned most of its revenue from
PruCare on a negotiated total budget (cost plus basis) for primary care and
specialty services. Effective April 1, 1996, Meridian was responsible for
additional services including emergency room visits and was compensated on a
professional capitation basis for the majority of PruCare members. If Meridian
had not been paid on a cost plus basis for the first three months of 1996,
additional revenues of approximately $3.47 million would have been earned for
the nine months ending September 30, 1996.
MEDICAL SERVICES EXPENSE -- Medical services expense for 1997 was $43.0
million or 89.6% of operating revenue as compared to $47.9 million or 95.9% of
operating revenue in 1996. The decrease from 1996 to 1997 resulted from various
cost controls initiated in 1997. The most significant cost reduction resulted
from a decrease of $5.3 million in discretionary bonuses, profit sharing and
deferred compensation expenses. In addition, there were further reductions in
medical services expenses due a to 14% reduction in staffing levels. However, an
increase of $1.5 million in professional fees for additional services that
Meridian was required to provide beginning April 1, 1996, under the revised
contract with PruCare, increased Meridian's medical services expense.
71
<PAGE> 74
GENERAL AND ADMINISTRATIVE EXPENSE -- General and administrative expense
for 1997 was $4.6 million or 9.6% of operating revenue as compared to $2.5
million or 5.0% of operating revenue in 1996. Approximately $1.1 million of the
increase resulted from Meridian's leasing of its administrative offices and
facilities beginning in 1997. This rental expense had previously been paid by
PruCare. In addition, legal and consulting expenses increased by approximately
$0.3 million due to Meridian pursuing a management agreement with a capital
partner. Interest expense also increased as a result of Meridian borrowings
under the Credit Agreement during 1997.
OTHER INCOME -- Other income primarily represents interest on excess cash
and realized gains from the sale of investments. The 67.3% increase from 1996 to
1997 is due to a $0.1 million increase in realized gains resulting from the
liquidation of Meridian's deferred compensation plans in 1997.
INCOME TAX EXPENSE -- Effective January 1, 1997, Meridian elected to become
a S Corporation for income tax purposes. Therefore, there is no accrual for
income taxes in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Meridian's capital requirements relate primarily to operations. Meridian
generally receives capitation revenue prior to paying costs associated with
services provided under those agreements. However, shared risk arrangements
negatively impact cash flow because settlements in connection with these
arrangements are typically not collected until after the end of the period in
which they were accrued. Fee-for-service revenues also negatively impact cash
flow because payment for services rendered is generally not received until 45 to
120 days after the service is provided.
As of September 30, 1997, Meridian had cash and cash equivalents of $0.5
million and a working capital deficit (current liabilities in excess of current
assets) of ($0.2) million compared to cash and cash equivalents of $2.5 million
and a working capital deficit of ($0.1) million as of September 30, 1996.
Although the net change in working capital from September 30, 1996 to September
30, 1997 was minimal, the components comprising current assets and liabilities
changed significantly. At September 30, 1996, $5.9 million was accrued for
discretionary bonuses, pension and deferred compensation plans compared to $0.1
million at September 30, 1997. However, in 1997 there were draws of $3.3 million
on a line of credit compared to $0 balance at September 30, 1996. In addition,
cash and cash equivalents declined by $2.0 million from 1996 to 1997. This
decrease in cash and cash equivalents resulted primarily from (i) a reduction in
PruCare professional capitation revenue due to the decline in PruCare member
months, and (ii) additional cash outflows for payments for administrative office
and facility leases previously paid by PruCare.
In order to provide liquidity for working capital fluctuations, Meridian
entered into the Credit Agreement with NationsBank, N.A. in February 1996.
Permitted Borrowings, as defined in the Credit Agreement, generally included
working capital and capital expenditures. Borrowings under this agreement bore
interest at the prime rate less .25%. In December 1996, Permitted Borrowings
under the Credit Agreement were increased to $8.0 million with an interest rate
at either LIBOR plus 3.25% or at the prime rate plus .75%, as defined in the
agreement. At September 30, 1997, Meridian had borrowed $3.3 million under the
Credit Agreement. This amount was converted to a 60 month note effective
December 1997 at an interest rate of 9.25%. As of September 30, 1997, Meridian
was not in compliance with the fixed charge ratio required in the Credit
Agreement which resulted in all outstanding debt being reflected as noncurrent
at September 30, 1997.
72
<PAGE> 75
The following table sets forth selected financial data and selected
financial data expressed as a percentage of operating revenues for the years
ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Operating revenue......................................... $58,245,115 $67,376,963
Medical services expense.................................. 54,886,890 65,015,157
General and administrative expense........................ 3,885,016 3,615,625
----------- -----------
Total Expenses.................................. 58,771,906 68,630,782
----------- -----------
Loss from operations...................................... (526,791) (1,253,819)
Other income.............................................. 50,392 163,603
Loss before tax........................................... (476,399) (1,090,216)
Income tax (benefit) expense.............................. (205,415) 129,647
----------- -----------
Net loss........................................ $ (270,984) $(1,219,863)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Operating revenue.................................................... 100.0% 100.0%
Medical services expense............................................. 94.2% 96.5%
General and administrative expense................................... 6.7% 5.4%
------ ------
Total Expenses............................................. 100.9% 101.9%
------ ------
Loss from operations................................................. (0.9)% (1.9)%
Other income......................................................... 0.09% 0.2%
Loss before tax...................................................... (0.8)% (1.6)%
Income tax (benefit) expense......................................... (0.3)% 0.2%
------ ------
Net loss................................................... (0.5)% (1.8)%
====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1996
OPERATING REVENUE -- Meridian's operating revenue increased to $67.3
million in 1996 from $58.2 million in 1995. The revenue increase in 1996
resulted primarily from the change in reimbursement methodology with PruCare
beginning April 1, 1996. Throughout 1995 and for the first three months in 1996,
Meridian's operations were funded by PruCare based on an annually negotiated
budget. Operating revenue earned under this arrangement was essentially the
negotiated operating expenses incurred by Meridian. Beginning on April 1, 1996,
however, an amendment to Meridian's agreement with PruCare expanded the services
to be provided to PruCare enrollees by Meridian and changed the method of
reimbursement to a professional capitation basis for the majority of PruCare HMO
enrollees. During this period, PruCare HMO enrollment assigned to Meridian
increased 5.6% from an average of 87,150 in 1995 to an average of 91,993 in
1996. If Meridian had been reimbursed on a professional capitation basis for all
of 1996 and 1995, operating revenues are expected to have been approximately
$61.1 million in 1995 and $69.8 million in 1996. The additional increase in
operating revenue between these periods was due to a $2.3 million increase in
bonus income earned by Meridian for meeting certain agreed upon targets under
the PruCare contract and an increase in non-PruCare fee-for-service revenue of
approximately $2.5 million resulting from new Payors.
MEDICAL SERVICES EXPENSE -- Medical services expense for 1996 was $65.0
million or 96.6% of operating revenue as compared to $54.9 million or 94.2% of
operating revenue in 1995. The increase from 1995 to 1996 resulted primarily
from a $6.5 million increase in professional capitation expense due to the
additional services Meridian was responsible for providing under the revised
PruCare agreement in 1996. In addition, during 1996, Meridian paid $5.5 million
in discretionary bonuses compared to $1.9 million in 1995. Partially offsetting
these increases in medical services expense in 1996 was a decrease in medical
malpractice costs from 1995 of $1.0 million. This change resulted from (i) a few
large claims for malpractice being reported in 1995 and (ii) a change in the
insurance policy deductible amount which required an increase in the
professional liability accrual. Excluding the bonus payments, the medical
services expense would have been $59.5 or 88.3% of operating revenue compared to
$53.0 million or 91.0%.
73
<PAGE> 76
GENERAL AND ADMINISTRATIVE EXPENSE -- General and administrative expense
for 1996 was $3.6 million or 5.4% of operating revenue as compared to $3.9
million or 6.7% of operating revenue in 1995. The major portion of the decrease
in 1996 relates to the completion of a reengineering project during 1995. In
1995, the reengineering costs were $0.5 million. There were no reengineering
costs in 1996.
OTHER INCOME -- The increase of other income by $0.1 million from 1995 to
1996 was due to revisions under the PruCare contract. Prior to 1996, Meridian
remitted interest earned on excess cash received from PruCare in payment of
services under the negotiated budget methodology. Beginning in 1996, with
reimbursements received on a capitation basis, no interest was owed to PruCare.
INCOME TAX EXPENSE -- Effective January 1, 1997, Meridian elected to become
a S Corporation for income tax purposes. As there would be no realization of the
remaining deferred tax assets under the S Corporation election, deferred tax
asset balances of $0.6 million were written off by December 31, 1996, resulting
in a net provision for income taxes in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, Meridian had cash and cash equivalents of $1.3
million and a working capital deficit (current liabilities in excess of current
assets) of ($0.5) million compared to cash and cash equivalents of $2.2 million
and working capital of $0.5 million as of December 31, 1995.
At December 31, 1996, current assets were $5.3 million greater and current
liabilities were $6.4 million greater than at December 31, 1995. These increases
resulted primarily from undistributed additional compensation due from PruCare
and the related undistributed bonuses on the additional compensation payable to
Meridian employees. In 1995, only $0.9 million was accrued for bonus
distributions to employees as the majority of bonuses were paid prior to
December 31, 1995.
74
<PAGE> 77
BUSINESS OF MERIDIAN
Meridian is a primary care medical practice with offices located in the
metropolitan Atlanta, Georgia area. Meridian currently employs 55 physicians on
a FTE basis. Meridian was founded in 1980 as Southeastern Health Services, Inc.,
to form an exclusive affiliation with PruCare, known then as PruCare HMO.
Meridian was the first primary care practice in the metropolitan Atlanta market
to focus on managed care.
Since its inception, Meridian has experienced a high level of internal
growth. Meridian currently has nine office locations providing primary care
medical services, plus Meridian's administrative office. These offices are
located throughout Atlanta in order to serve Meridian's patient population.
Meridian's administrative office is located at Suite 375, 1090 Northchase
Parkway, Marietta, Georgia 30067. Its telephone number is (770) 933-2700.
Meridian uses a number of patient-focused programs and quality initiatives
to maintain patient satisfaction and to distinguish itself from its competition.
Such programs and initiatives include: board certification for all physicians
within two years of eligibility; collection of patient satisfaction surveys
(which affects physicians and associate provider compensation); centralized
customer service center to answer calls efficiently and at a lower cost; an
in-house 24-hour answering service which provides patients with advice from
registered nurses, serves on-call physicians, and enhances the use of Meridian's
after-hours facility; a collaborative attitude toward medical advances and
non-traditional techniques for improving care and efficiency such as the use of
associate providers; a hospitalist program (where certain hospital-based
Meridian physicians make rounds for all Meridian physicians); registered nurse
case managers to assist the hospitalist physicians; a management information
system that compiles profiles on Meridian providers to track patient
satisfaction, provider productivity, and referral rates; and a pharmacy cost
management program for PruCare.
Meridian has also long recognized the value of a collaborative practice
between physicians and associate providers (nurses, midwives, physicians'
assistants, nurse practitioners and podiatrists). Meridian currently employs 17
Associate Providers (on a FTE basis) in its practice, which exceeds the Medical
Group Management Association median of .18 associate providers per physician.
Although Meridian obtains a small percentage of its income from
fee-for-service arrangements and the Medicare and Medicaid programs, it derives
its revenues for medical services primarily through capitated arrangements from
Payors. Meridian typically enters into sub-capitation agreements with physician
specialists in the Atlanta area to provide specialty medical services to
Meridian's patients. Because Meridian typically is obligated to provide medical
services for fixed capitation fees, the costs of which may be variable,
Meridian's profitability may vary based on the ability of Meridian to control
those health care costs.
Meridian anticipates that it will receive approximately 89% of its 1998
revenues pursuant to a contract with PruCare effective as of January 1, 1998.
Pursuant to Meridian's agreement with PruCare, Meridian is responsible for
providing in-patient and out-patient medical services to PruCare HMO members
assigned to Meridian. See "RISK FACTORS -- Risks Relating to Meridian -- Risks
Related to Full Risk Capitation."
Meridian previously has provided, and plans to continue providing,
professional services pursuant to capitated arrangements with other Payors as
well as PruCare. In 1997, Meridian entered into capitation arrangements with the
following Payors in addition to PruCare: United and Aetna/U.S. Healthcare.
In 1996, the average enrollment of PruCare HMO members assigned to Meridian
was 91,994, and in 1997, the average enrollment was 80,655. The ratio of primary
care physicians to patients is approximately one physician to every 2,100
members. Including hospitalists, the panel size is approximately 1,900 patients
per physician. See "RISK FACTORS -- Risks Related to Meridian -- Reliance on
PruCare; Terminability of PruCare Payor Contracts."
Meridian and its physician-employees are defendants in several lawsuits
alleging medical malpractice. The ultimate outcome of these lawsuits or
potential losses in relation to Meridian's malpractice insurance coverage cannot
presently be determined. Meridian accrues losses for medical malpractice based
upon estimates of the aggregate liability for claims incurred using actuarial
assumptions followed in the insurance
75
<PAGE> 78
industry and Meridian's own experience. There can be no assurance that losses
accrued for insurance coverage for lawsuits brought or which may be brought
against Meridian will be sufficient to cover Meridian's expenses or losses and,
if insufficient, that such suits or claims will not have a material adverse
effect on Meridian's financial condition and results of operations.
Meridian maintains general and professional liability and property
coverage. Additionally, Meridian requires all of its independently contracted
provider physician groups, specialists and other health care providers to
maintain professional liability coverage.
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 Merger will be passed upon for
Meridian by Kilpatrick Stockton LLP, Atlanta, Georgia and Morris, Manning &
Martin, Atlanta, Georgia.
ADDITIONAL INFORMATION
The Meridian Board is not aware of any additional business to be acted upon
at the Meridian Special Meeting other than as described herein. If, however,
other matters are properly brought before the Special Meeting, 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 L.L.P., 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.
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.
76
<PAGE> 79
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 balance sheets of Meridian as of December 31, 1996 and 1995, and the
Meridian statements of (loss) income, stockholders' (deficit) equity, and cash
flows for each of the three years in the period ended December 31, 1996,
included in this Proxy Statement/Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph for emphasis of
a matter, of Coopers & Lybrand, L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
77
<PAGE> 80
MERIDIAN MEDICAL GROUP, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
F-1
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Meridian Medical Group, Inc.
We have audited the accompanying balance sheets of Meridian Medical Group,
Inc. (formerly Southeastern Health Services, Inc.) as of December 31, 1996 and
1995, and the related statements of (loss) income, stockholders' (deficit)
equity, and cash flows for each of the three 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 financial position of Meridian Medical Group, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Notes 2 and 13 to the financial statements, Meridian
Medical Group, Inc. had an exclusive contract with Prudential Health Care Plan,
Inc. ("PruCare") in 1995, and is highly dependent on PruCare for its financial
resources. As of October 1, 1995, Meridian Medical Group, Inc. gave PruCare
notice of termination to be effective January 1, 1997. The existing agreement
has been extended until September 30, 1997.
Atlanta, Georgia
July 31, 1997
F-2
<PAGE> 82
MERIDIAN MEDICAL GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents............................................. $ 1,347,778 $2,225,928
Due from PruCare................................................. 5,389,932 1,761,418
Patient accounts receivable, net of allowance for doubtful
accounts of $196,000.......................................... 967,938
Supply inventories............................................... 253,291 346,317
Prepaid expenses and other assets................................ 709,378 341,834
Current taxes receivable......................................... 1,249,200 46,518
Investments -- deferred compensation plan........................ 799,604
Deferred tax asset............................................... 644,987
----------- ----------
Total current assets..................................... 10,717,121 5,367,002
Restricted cash.................................................... 313,456 303,902
Property and equipment, net........................................ 231,303 34,853
Investments -- deferred compensation plan.......................... 1,469,124
Deferred tax asset................................................. 381,130
----------- ----------
Total assets............................................. $11,261,880 $7,556,011
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 1,383,202 $1,024,033
Accrued payroll.................................................. 1,587,400 1,586,457
Employee bonus................................................... 5,478,219 898,631
Pension.......................................................... 583,016 733,135
Deferred compensation plan....................................... 1,582,674
Current portion of accrued liability for professional liability
claims........................................................ 625,000 612,000
----------- ----------
Total current liabilities................................ 11,239,511 4,854,256
----------- ----------
Deferred compensation plan......................................... 1,894,866
Notes payable...................................................... 200,000
Accrued liability for professional liability claims, net of current
portion.......................................................... 721,000 588,000
----------- ----------
Total liabilities........................................ 12,160,511 7,337,122
----------- ----------
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, voting; $.01 par value; authorized 2,000,000 shares
in 1996 and 1995; issued shares, 243,075 in 1996 and 205,750
in 1995....................................................... 2,431 2,058
Common Stock, nonvoting; $.01 par value; authorized 1,000,000
shares in 1996 and 0 in 1995; issued shares, 0 in 1996 and
1995..........................................................
Capital in excess of par value................................... 476,851 329,777
Notes receivable from stockholders on sale of stock.............. (118,505) (159,036)
(Accumulated deficit) retained earnings.......................... (1,259,408) 46,090
----------- ----------
Total stockholders' (deficit) equity..................... (898,631) 218,889
----------- ----------
Total liabilities and stockholders' equity............... $11,261,880 $7,556,011
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 83
MERIDIAN MEDICAL GROUP, INC.
STATEMENTS OF (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Premium revenue from PruCare...................... $45,634,967
Contract revenue from PruCare..................... 12,373,371 $55,467,342 $46,730,431
Net patient service revenue....................... 4,508,112 238,147
Other revenue..................................... 89,588 138,183 34,003
Additional compensation from PruCare.............. 4,770,925 2,401,443 3,148,646
----------- ----------- -----------
Total revenue............................. 67,376,963 58,245,115 49,913,080
----------- ----------- -----------
Expenses:
Salaries and benefits............................. 38,677,548 36,850,537 32,121,512
General and administrative........................ 3,419,105 3,885,016 2,928,224
Supply expense.................................... 2,918,920 3,167,653 2,863,358
Laboratory expense................................ 1,319,685 1,281,340 1,407,686
Capitated physicians.............................. 13,962,720 11,247,356 8,980,444
Medical and professional fees..................... 6,499,153
Medical malpractice costs......................... 966,649 2,063,589 1,311,081
Provision for bad debts........................... 196,520
Other physician services and temporary
providers...................................... 670,482 276,415 157,176
----------- ----------- -----------
Total expenses............................ 68,630,782 58,771,906 49,769,481
----------- ----------- -----------
Operating (loss) income............................. (1,253,819) (526,791) 143,599
Nonoperating income:
Interest and other income, net.................... 163,603 50,392 238,345
----------- ----------- -----------
(Loss) income before income taxes................... (1,090,216) (476,399) 381,944
Provision (benefit) for income taxes................ 129,647 (205,415) 153,830
----------- ----------- -----------
Net (loss) income................................... $(1,219,863) $ (270,984) $ 228,114
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 84
MERIDIAN MEDICAL GROUP, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------- (ACCUMULATED NOTES
CAPITAL IN DEFICIT) RECEIVABLE
EXCESS OF RETAINED FROM
SHARES AMOUNT PAR EARNINGS STOCKHOLDERS TOTAL
------- -------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993............... 124,000 $1,240 $ 102,960 $ 213,010 $ (16,051) $ 301,159
Net income.................... 228,114 228,114
Cash dividend of $.40 per
share....................... (51,600) (51,600)
Treasury stock purchased and
retired..................... (26,500) (265) (65,415) (65,680)
Issuance of stock............. 53,500 535 114,920 (99,535) 15,920
Repayment of notes receivable
from stockholders........... 28,589 28,589
------- ------ -------- ----------- --------- -----------
December 31, 1994............... 151,000 1,510 152,465 389,524 (86,997) 456,502
Net loss...................... (270,984) (270,984)
Cash dividend of $.45 per
share....................... (72,450) (72,450)
Issuance of stock............. 54,750 548 177,312 (159,080) 18,780
Repayment of notes receivable
from stockholders........... 87,041 87,041
------- ------ -------- ----------- --------- -----------
December 31, 1995............... 205,750 2,058 329,777 46,090 (159,036) 218,889
Net loss...................... (1,219,863) (1,219,863)
Treasury stock purchased and
retired..................... (15,550) (156) (61,423) (61,579)
Stock dividend, 10%........... 21,625 216 85,419 (85,635) 0
Issuance of stock............. 31,250 313 123,078 (112,070) 11,321
Repayment of notes receivable
from stockholders........... 152,601 152,601
------- ------ -------- ----------- --------- -----------
December 31, 1996............... 243,075 $2,431 $ 476,851 $(1,259,408) $ (118,505) $ (898,631)
======= ====== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 85
MERIDIAN MEDICAL GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(1,219,863) $ (270,984) $ 228,114
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation................................... 35,951 19,399 33,109
Provision for doubtful accounts................ 196,520
Deferred taxes................................. (176,565) (501,345) (197,170)
Change in assets and liabilities:
Due from PruCare............................. (3,628,514) 967,629 (950,129)
Patient accounts receivable.................. (1,164,458)
Supply inventories........................... 93,026 82,778 62,111
Prepaid expenses and other assets............ (367,544) 287,238 (270,348)
Accounts payable and accrued expenses........ 359,169 (65,918) (258,431)
Accrued expenses and other................... 4,576,412 1,155,655 2,607,630
----------- ----------- -----------
Total adjustments............................ (76,003) 1,945,436 1,026,772
----------- ----------- -----------
Net cash (used) provided by operating
activities................................ (1,295,866) 1,674,452 1,254,886
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (232,401) (36,375) (6,325)
Decrease (increase) in investments -- deferred
compensation plan.............................. 357,328 (805,677) (248,872)
Increase in restricted cash....................... (9,554) (303,902)
Decrease in investment and receivable
from partnership............................... 135,294
----------- ----------- -----------
Net cash provided (used) in investing
activities................................... 115,373 (1,145,954) (119,903)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock.......................... 11,321 18,780 15,920
Treasury stock purchased and retired.............. (61,579) (65,680)
Dividends paid.................................... (72,450) (51,600)
Repayment on notes receivable from stockholders... 152,601 87,041 28,589
Proceeds from notes payable....................... 200,000
----------- ----------- -----------
Net cash provided (used) by financing
activities................................... 302,343 33,371 (72,771)
----------- ----------- -----------
Net (decrease) increase in cash..................... (878,150) 561,869 1,062,212
Cash and equivalents at beginning of year........... 2,225,928 1,664,059 601,847
----------- ----------- -----------
Cash and equivalents at end of year................. $ 1,347,778 $ 2,225,928 $ 1,664,059
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes........ $ 306,000 $ 343,126 $ 231,150
=========== =========== ===========
Cash paid during the year for interest............ $ 55,276 $ 0 $ 0
=========== =========== ===========
Supplemental disclosure of noncash financing
activities:
Meridian issued a 10% stock dividend for $85,635 in 1996.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 86
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND GENERAL:
Effective May 1, 1996, Southeastern Health Services, Inc. (SHS) restated
and amended its articles of incorporation to change the Company's name to
Meridian Medical Group, Inc. (MMG or the Company). MMG was incorporated under
the laws of the State of Georgia on October 9, 1980, to engage in the practice
of professional medicine. MMG's stockholders are physicians practicing as MMG
employees. MMG operates a central administrative facility and eleven clinics in
the Atlanta metropolitan area. Subsequent to December 31, 1996, two clinics were
consolidated into other existing sites.
2. ECONOMIC DEPENDENCE AND CONTRACTUAL RELATIONSHIP WITH PRUDENTIAL HEALTH CARE
PLAN, INC.:
On December 19, 1990, MMG and Prudential Health Care Plan, Inc. ("PruCare")
signed an exclusive medical services agreement (the "Agreement"), effective as
of January 1, 1989. Under this agreement, MMG was not permitted to render
physician services or engage in any other business activities pursuant to any
other agreement without written consent from PruCare.
The Agreement was renewable on a calendar year basis and could be
terminated by either party with 15 months written notice and by paying the other
party $1 million. As a result of the contractual relationship with PruCare, MMG
has been highly dependent on PruCare for its financial resources and PruCare has
had significant influence on the operating and financial policies of MMG.
Under provisions within the Agreement for 1995 and prior years, MMG's
operations were funded by PruCare based on a budget negotiated annually between
MMG and PruCare management; substantially all revenue earned from sources other
than PruCare members was payable to PruCare and PruCare was responsible for all
noncapitated claims.
In 1996 an amendment to the current Agreement was signed. This amendment
provides for MMG to be paid on a professional capitation basis effective April
1, 1996, for the majority of HMO members. For certain specialty services, there
is a reconciliation between actual expenses and target expense levels at the end
of the fiscal year with any resulting savings or additional expense to be shared
equally between MMG and Prudential. All revenue earned from sources other than
PruCare members is retained by MMG and MMG is responsible for physician
fee-for-service claims and emergency room expense. The 1996 bonus formula is
determined by a combination of HMO premium yield on a per member per month
(PMPM) basis and total medical expenses on a PMPM basis.
For the years ended December 31, 1996, 1995 and 1994, respectively,
additional compensation of $4,770,925, $2,401,443 and $3,148,646 was earned by
MMG for meeting certain agreed-upon targets under the Agreement. Additional
compensation amounts are estimated based on preliminary results and finalized in
the following year with any difference adjusting the current year compensation.
The 1996 compensation included $450,263 that related to 1995 results. In 1996,
an additional amount of $517,941 of premium revenue was earned due to the
reduction of specialty service expenses.
As of October 1, 1995, MMG gave PruCare notice of termination to be
effective January 1, 1997. Subsequent to the end of 1995, MMG and PruCare signed
a separate agreement which released each other from the exclusivity clauses.
Under this agreement, MMG is in the process of pursuing a management agreement
with a new capital partner (see Note 13). In addition, there is also a provision
for a new Management Services Agreement ("MSA") to be signed effective for 1997.
Upon the signing of the new MSA, the $1 million termination penalty will be
waived. Until the new MSA is executed, MMG and PruCare will continue to operate
under the terms of the 1996 Agreement. The new MSA is expected to be finalized
in September 1997 (see Note 13).
PruCare provides certain other significant support to MMG that is not
recorded in the accompanying financial statements including rent for eleven
clinics and the central administrative facility, all furniture and
F-7
<PAGE> 87
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ECONOMIC DEPENDENCE AND CONTRACTUAL RELATIONSHIP
WITH PRUDENTIAL HEALTH CARE PLAN, INC. (CONTINUED):
medical equipment located at the clinics, all vehicles, the mainframe computer
and related systems, and a majority of the furniture and equipment at the
central administrative facility.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents represent highly liquid investments in various money
market funds that may be withdrawn on demand.
RESTRICTED CASH
Restricted cash represents amounts held by trustee as required by certain
insurance policies.
INVENTORIES
Inventories of supplies are stated at cost, as determined under the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over estimated useful lives ranging from 3 to 5 years. Upon
sale or retirement, the cost and related accumulated depreciation are removed
from the accounts and resulting gains or losses are reflected in income.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Equipment...................................................... $326,981 $156,878
Furniture and fixtures......................................... 93,698 32,302
-------- --------
420,679 189,180
Less accumulated depreciation.................................. (189,376) (154,327)
-------- --------
$231,303 $ 34,853
======== ========
</TABLE>
Depreciation expense amounted to $35,951 in 1996, $19,399 in 1995 and
$33,109 in 1994.
INVESTMENTS -- DEFERRED COMPENSATION PLAN
Investments, consisting principally of mutual funds whose underlying
investments are bonds, preferred stocks and common stocks, are classified as
available-for-sale and carried at fair value. (See Note 4) As of December 31,
1996 and 1995, the fair value approximated cost. Proceeds and gross realized
gains on sales of investments during 1996 were approximately $287,000 and
$25,000, respectively. In 1995, proceeds and gross realized gains were
approximately $600,000 and $69,000, respectively. For determining gross realized
gains and losses, the cost of investments sold is based on the average cost
method.
F-8
<PAGE> 88
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED):
INCOME TAXES
MMG applies the balance sheet method of accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the balance sheet method, deferred income tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax laws
and rates that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount that is more likely than not to be realized at the balance
sheet date. Income tax expense is the tax payable or refundable for the period
and the change during the period in the deferred tax assets and liabilities.
PREMIUM REVENUE
MMG has agreements with the PruCare Health Maintenance Organization (HMO)
to provide medical services to subscribing participants. Under this agreement,
MMG receives monthly capitation payments based on the number of HMO
participants, regardless of services actually performed by MMG.
CONTRACT REVENUE
Contract revenue is recognized based on negotiated expense reimbursements
pursuant to the PruCare Agreement.
NET PATIENT SERVICE REVENUE
MMG has agreements with third-party payors that provide for payments at
amounts different from its established rates. Net patient service revenue is
reported at the estimated net realizable amounts from patients, third-party
payors, and others for services rendered.
CAPITATED PHYSICIAN EXPENSE
MMG contracts with various health care providers for the provision of
specialty medical care services to PruCare HMO members. MMG compensates these
providers on a capitation basis.
ESTIMATED MALPRACTICE COSTS
The provision for estimated medical malpractice claims includes estimates
of the ultimate costs for both reported claims and claims incurred but not
reported.
MEDICAL AND PROFESSIONAL FEES
Under the 1996 amended Agreement with PruCare (see Note 2), MMG is
responsible for certain physician fee for service claims and emergency room
expenses which are charged to expense in the period that the claims are
incurred.
FINANCIAL INSTRUMENTS WITH CREDIT RISK
At December 31, 1996 and 1995, MMG had cash and cash equivalent balances in
major financial institutions which exceeded Federal Depository Insurance
Corporation limits. These financial institutions have strong credit ratings and
management believes that credit risk related to these balances is minimal.
MMG routinely invests its surplus operating funds in money market funds.
These funds generally invest in highly liquid U.S. government and agency
obligations. Investments in money market funds are not insured
F-9
<PAGE> 89
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED):
or guaranteed by the U.S. government; however, management believes that credit
risk related to these investments is minimal.
ADVERTISING
Costs related to advertising are expensed when incurred. Total amounts
charged to advertising expense were approximately $23,500, $16,300 and $14,500
in 1996, 1995 and 1994, respectively.
EARNED TIME-OFF
Earned time-off benefits are accrued as earned by employees.
LONG-LIVED ASSETS
In 1996, MMG adopted the provision of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, which requires review of long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes indicate the carrying amount may not be recoverable. Implementing the
requirements of SFAS 121 did not have any impact on the financial position,
results of operations or cash flows of MMG.
STOCK-BASED COMPENSATION
In 1996, MMG adopted the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, which defines a fair value based method of
accounting for stock-based employee compensation plans. In accordance with the
provisions of SFAS No. 123, MMG has chosen to continue to apply the accounting
provisions of Accounting Principles Board (APB) No. 25, Accounting for Stock
Issued to Employees, to its stock-based employee compensation arrangements. The
effects of applying SFAS No. 123 did not have a material effect on the financial
position, results of operations or cash flows of MMG.
RECLASSIFICATIONS
Certain amounts for 1995 and 1994 have been reclassified to conform with
the 1996 presentation.
4. EMPLOYEES' BENEFIT PLANS:
MMG has a defined contribution pension plan for eligible employees. The
plan provides for employer contributions based upon a percentage of the
participant's compensation and provides for vesting of benefits on a graduated
basis from the third to the seventh year of employment. All forfeitures of
nonvested benefits reduce the contribution by MMG. In addition, participants may
contribute on a pretax basis a portion of their annual compensation. MMG matches
50% of each participant's voluntary contributions up to a maximum of 4% of the
participant's compensation. Net employer plan expense for 1996, 1995 and 1994
was approximately $1,678,000, $1,750,000 and $1,344,000, respectively.
In 1992, MMG adopted a nonqualified deferred compensation plan for certain
officers and salaried employees. Employer contributions are determined annually
by MMG and provides for vesting over a ten-year employment period. Deferred
compensation expense was approximately $360,000, $280,000 and $407,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. MMG has recorded the
assets and liability for deferred compensation on the balance sheet since such
assets and liabilities are funded under a Rabbi-Trust arrangement and are,
accordingly, subject to MMG creditors. This plan was terminated in 1997 and all
assets were distributed to plan participants on March 15, 1997.
F-10
<PAGE> 90
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EMPLOYEES' BENEFIT PLANS (CONTINUED):
Effective December 1, 1995, MMG established another nonqualified deferred
compensation plan (the Plan) for certain employees. The Plan, which is not
required to be funded, allows eligible employees to defer portions of their
current compensation and MMG guarantees a return of 13% on the deferred amount
as of each June 30 and December 31 valuation date. Total interest expense for
1996 was approximately $55,000.
As an incentive to encourage participants to voluntarily elect to make
deferrals under the Plan, MMG will grant nonvoting stock options to physician
employees and phantom stock options to non-physician employees who elect not to
receive payment of deferred benefits until 1998 or later. Certain provisions in
the Plan accelerate the exercise date of the options in the event MMG incurs a
change in the control structure, either through purchase or other acquisition.
The number of shares of stock granted under the options is 10 shares of
stock for each $100 deferred. Options granted will be exercisable at a price
equal to 120% of the net book value per share of stock as of December 31, 1995,
or as determined by the Board of Directors. Accordingly, compensation expense in
years subsequent to 1995 will be recognized for any increase in the book value
from grant date to exercise date. At December 31, 1996, there were 50,619
nonvoting stock options outstanding and 14,116 phantom stock units outstanding.
At December 31, 1995 there were 30,096 nonvoting stock options outstanding and
11,897 phantom stock units outstanding. The Plan was terminated in 1997 and
final distribution occurred in March 1997. The stock options remain outstanding
and will become exercisable beginning in 1998.
5. INCOME TAXES:
The components of the (benefit) provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................... $ (754,773) $ 249,155 $ 298,000
State......................................... (141,697) 46,775 53,000
---------- --------- ---------
(896,470) 295,930 351,000
---------- --------- ---------
Deferred:
Federal....................................... 863,929 (419,642) (152,584)
State......................................... 162,188 (81,703) (44,586)
---------- --------- ---------
1,026,117 (501,345) (197,170)
---------- --------- ---------
Total income tax provision
(benefit)........................... $ 129,647 $(205,415) $ 153,830
========== ========= =========
</TABLE>
Deferred income taxes are provided to reflect temporary differences between
financial and income tax reporting. The sources of the temporary differences and
their effect on the net deferred tax asset at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Deferred tax assets:
Professional liability accrual............................ $ 511,480 $ 454,800
Employee benefit plans.................................... 29,428 488,155
Depreciation.............................................. 27,253 58,955
Other..................................................... 25,823 24,207
--------- ----------
593,984 1,026,117
Valuation allowance......................................... (593,984) 0
--------- ----------
Total deferred tax assets......................... $ 0 $1,026,117
========= ==========
</TABLE>
F-11
<PAGE> 91
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED):
At December 31, 1996, MMG has provided a full valuation allowance of
$593,984 for its deferred tax asset since, based on operating results, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
The provision (benefit) for income taxes for the years ended December 31,
1996 and 1995 varies from the amount determined by applying the Federal
statutory rate to pretax income as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Income tax (benefit) expense at federal statutory
rate........................................... $(370,673) $(161,976) $129,861
Change in valuation allowance.................... 593,984 0 (33,611)
State income taxes, net of federal tax (benefit)
provision...................................... (94,508) (23,052) 8,414
Nondeductible tax items.......................... 0 (16,018) 48,111
Other............................................ 844 (4,369) 1,055
--------- --------- --------
Total income tax provision (benefit)........... $ 129,647 $(205,415) $153,830
========= ========= ========
</TABLE>
During 1994, the Internal Revenue Service (IRS) began an examination of
MMG's fiscal years 1991 through 1993. Subsequent to December 31, 1996, the
examination was settled in appeal for approximately $57,000 which is within the
provision that management had recorded in 1995. During 1996, the IRS began an
examination of MMG's fiscal year 1994. At December 31, 1996, the examination was
still proceeding. Subsequent to December 31, 1996, the IRS notified MMG that
fiscal year 1995 had been selected for examination. Management believes adequate
provision has been made for any potential adverse results.
6. STOCKHOLDERS' EQUITY AND STOCK PURCHASE PLAN:
MMG has a nonqualified stock purchase plan (Purchase Plan) which provides
that physicians practicing as employees of MMG and who are invited to become
stockholders of the Company may purchase 2,000 shares of voting common stock at
the greater of $1 per share or the book value per share as of the end of the
preceding fiscal year. In subsequent years, each stockholder is entitled to
purchase an additional 500 shares on and after each anniversary date of becoming
a stockholder. A maximum of 2,000,000 shares of common stock is authorized for
subscription. During 1996, 1995 and 1994, common stock shares totaling 31,250,
54,750 and 53,500, respectively, were issued under the Purchase Plan at average
prices of $3.95, $3.25 and $2.16 per share, respectively. As of December 31,
1996, 2,750 shares of common stock were under option and exercisable at $3.96
per share. These options will expire if not exercised sixty days from the
stockholder anniversary date.
Under the Purchase Plan, no shareholder is permitted to transfer or sell
any shares of capital stock without first offering the shares to MMG at a price
per share equal to the greater of $1 per share or the book value per share.
During 1996 and 1994, common stock shares totaling 15,550 and 26,500,
respectively, were offered to MMG and purchased by MMG at an average price of
$3.96 and $2.48 per share, respectively. No shares were repurchased by MMG in
1995.
On January 24, 1996, a 10% stock dividend was declared by the Board of
Directors for shareholders of record on January 31, 1996.
On January 22, 1996, the shareholders approved the Second Amended and
Restated Articles of Incorporation to authorize the issuance of 1,000,000
nonvoting shares. None of these shares were outstanding at December 31, 1996.
F-12
<PAGE> 92
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
During 1996, six former employees filed Equal Employment Opportunity
Commission (EEOC) charges of discrimination against MMG. MMG denies these
charges and believes it has meritorious defenses against the claims as
terminations were due to reductions in force and performance related issues. MMG
had a total of seven EEOC claims outstanding at December 31, 1996.
Various other claims have been made against MMG and, in some cases, legal
proceedings are in progress. However, in the opinion of management, adequate
provisions have been made for all asserted and unasserted claims.
Subsequent to December 31, 1996, MMG entered into two operating leases for
office space. The leases expire in January 2000 and May 2007. The minimum
obligations over the remainder of the lease terms are:
<TABLE>
<S> <C>
1997................................................... $ 422,722
1998................................................... 631,813
1999................................................... 648,468
2000................................................... 505,287
2001................................................... 503,430
Thereafter............................................. 2,954,910
----------
$5,666,630
==========
</TABLE>
8. MEDICAL MALPRACTICE CLAIMS:
MMG purchases professional liability insurance on a claims-made basis to
cover medical malpractice claims. There are known claims and incidents that may
result in the assertion of additional claims, as well as claims from unknown
incidents that may be asserted arising from services provided to patients.
Losses are accrued based upon the Company's estimates of the aggregate liability
for claims incurred using certain actuarial assumptions followed in the
insurance industry and based on Company experience.
Due to a few large claims being reported during 1995, MMG increased its
estimated reserve for medical malpractice by approximately $1 million. As the
future settlement of medical malpractice claims is not funded by PruCare, the
related additional medical malpractice expense was not offset against contract
revenue.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by MMG in estimating the
fair value of its financial instruments:
- Cash and equivalents -- The carrying amount reported in the balance sheet
for cash and equivalents approximates its fair value.
- Investments -- Fair values, which are the amounts reported in the balance
sheet, are based on quoted market prices.
- Accounts payable and accrued expenses -- The carrying amount reported in
the balance sheet for accounts payable and accrued expenses approximates
its fair value.
- Notes payable -- The carrying value reported in the balance sheet for
notes payable approximates its fair value.
F-13
<PAGE> 93
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The carrying amounts and fair values of MMG's financial instruments at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents.................. $1,347,778 $1,347,778 $2,225,928 $2,225,928
Investments........................... 799,604 799,604 1,469,124 1,469,124
Financial liabilities:
Accounts payable and accrued
expenses........................... 1,383,202 1,383,202 1,024,033 1,024,033
Notes payable........................... 200,000 200,000 0 0
</TABLE>
10. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable pursuant to an $8,000,000 revolving line of credit agreement
(interest accrues at prime plus 75 basis points; MMG's borrowing rate at
December 31, 1996 was 9.0%)............................................. $200,000
========
</TABLE>
In February 1996, MMG obtained a $2,000,000 revolving line of credit (the
"Loan Agreement") from a major financial institution. In December 1996, the Loan
Agreement was amended and restated which increased the line of credit to
$8,000,000. MMG pays a commitment fee of 0.25% per annum on any unused portion
of the Loan Agreement. The Loan Agreement also allows LIBOR loans which bear
interest at the adjusted LIBOR rate plus 325 basis points.
The Loan Agreement prohibits certain distributions on shares of common
stock and restricts or prohibits MMG from extending credit to other than
patients, incurring indebtedness, incurring liens, disposing of assets or making
investments, and requires it to maintain certain financial ratios on an ongoing
basis. The Loan Agreement is collateralized by pledges of receivables, inventory
and property and equipment.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER:
<S> <C>
1998............................................... $ 40,000
1999............................................... 40,000
2000............................................... 40,000
2001............................................... 80,000
--------
$200,000
========
</TABLE>
Subsequent to December 31, 1996, MMG borrowed $3,100,000 on the Loan
Agreement primarily for operations and payment of employee bonuses and deferred
compensation plans (see Note 4).
11. NET PATIENT SERVICE REVENUE:
MMG has agreements with various third-party payors that provide for
payments to MMG at amounts different from its established rates. The difference
between the MMG rates and the estimated payments from third-party payors is
recorded as a contractual allowance. Revenue for patient services and the
related accounts receivable has been adjusted to the estimated amounts that will
be received under third-party payor arrangements.
F-14
<PAGE> 94
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NET PATIENT SERVICE REVENUE (CONTINUED):
A summary of the payment agreements with major third-party payors follows:
PRUCARE PLUS
Patient services rendered to PruCare Plus members are reimbursed based on a
negotiated fee schedule which is revised annually.
OTHER
MMG has also entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations, preferred provider
organizations and employer groups. The basis for payment to MMG under these
agreements is discounts from established charges.
12. CONCENTRATIONS OF CREDIT RISK:
MMG grants credit without collateral to its patients, most of which are
local residents and are insured under third-party payor agreements. The mix of
receivables from patients and third-party payors at December 31, 1996 was as
follows:
<TABLE>
<S> <C>
PruCare Plus................................................... 68%
Other third-party payors....................................... 17
Patients....................................................... 10
Medicare and Medicaid.......................................... 5
----
100%
====
</TABLE>
13. SUBSEQUENT EVENTS:
In December 1996, MMG signed a letter of intent with UniPhy Healthcare,
Inc. for a proposed purchase by a subsidiary, UniPhy of Atlanta I, Inc.
("UniPhy"), of certain assets of MMG and Prudential Health Care Plan of Georgia,
Inc. ("Prudential"). During 1997, a Memorandum of Understanding ("MOU") was
signed which amended the existing Medical Services Agreement between PruCare and
MMG by extending the term of the existing MSA until September 30, 1997. In
addition, the MOU was signed by Uniphy and included proposals for certain
agreements ("Definitive Agreements") between the three parties relating to the
provision of physician and health care services and supplies to participants in
Prudential's insured and managed health care plans for a period of 20 years.
Under these proposals, MMG will receive compensation from Prudential at a
capitation rate which is a percentage of gross premium. Prudential will also pay
to MMG amounts on a PMPM basis for the performance of utilization management
services. MMG will become financially responsible for the provision and delivery
of substantially all covered services currently provided to Prudential's
Commercial HMO members. Prudential will provide claims payment services without
charge to MMG and UniPhy. However, MMG may take over from Prudential the claims
payment function, in which case Prudential would compensate MMG.
If the Definitive Agreements have not been executed by September 30, 1997,
the new MSA (see Note 2) can be rendered void at the option of Prudential or
MMG.
Effective July 1, 1997, Prudential will lease to MMG the Prudential-owned
health centers and will sublease to MMG the Prudential-leased health centers as
well as MMG's administrative space. An amount representing rent on these
facilities, will be deducted from the professional fee capitation compensation
paid to MMG. An agreement will be executed to purchase from Prudential certain
furniture, fixtures and equipment in the health centers.
Effective January 1, 1997, the shareholders of MMG elected to have the
corporation treated as a Subchapter S corporation.
F-15
<PAGE> 95
MERIDIAN MEDICAL GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents.......................................... $ 1,347,778 $ 488,309
Due from PruCare.............................................. 5,389,932 2,132,345
Patient accounts receivable, net of allowance for doubtful
accounts of $275,595 and $196,000.......................... 967,938 1,319,111
Supply inventories............................................ 253,291 190,183
Prepaid expenses and other assets............................. 709,378 532,484
Current taxes receivable...................................... 1,249,200 1,249,200
Investments -- deferred compensation plan..................... 799,604
----------- ----------
Total current assets.................................. 10,717,121 5,911,632
Restricted cash................................................. 313,456 320,584
Property and equipment, net..................................... 231,303 517,221
Other assets.................................................... 35,000
----------- ----------
Total assets.......................................... $11,261,880 $ 6,784,437
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 1,383,202 $ 1,073,705
Accrued payroll............................................... 1,587,400 1,203,411
Employee bonus................................................ 5,478,219
Pension....................................................... 583,016
Deferred compensation plan.................................... 1,582,674
Current maturities of notes payable........................... 3,300,000
Current portion of accrued liability for professional
liability claims........................................... 625,000 625,000
----------- ----------
Total current liabilities............................. 11,239,511 6,202,116
----------- ----------
Notes payable................................................... 200,000
Accrued liability for professional liability claims, net of
current portion............................................... 721,000 756,042
----------- ----------
Total liabilities..................................... 12,160,511 6,958,158
----------- ----------
Commitments and contingencies
Stockholders' deficit:
Common stock, voting; $.01 par value; authorized 2,000,000
shares; issued shares, 260,525 and 243,075................. 2,431 2,605
Common Stock, nonvoting; $.01 par value; authorized 1,000,000
shares; issued shares, 0 and 0.............................
Capital in excess of par value................................ 476,851 538,221
Notes receivable from stockholders on sale of stock........... (118,505) (83,517)
Accumulated deficit........................................... (1,259,408) (631,030)
----------- ----------
Total stockholders' deficit........................... (898,631) (173,721)
----------- ----------
Total liabilities and stockholders' equity............ $11,261,880 $ 6,784,437
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 96
MERIDIAN MEDICAL GROUP, INC.
STATEMENTS OF (LOSS) INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenue:
Premium revenue from PruCare.................................. $30,730,421 $40,889,939
Contract revenue from PruCare................................. 12,373,371
Net patient service revenue................................... 3,223,994 4,635,316
Additional compensation from PruCare.......................... 3,609,507 2,433,972
----------- -----------
Total revenue......................................... 49,937,293 47,959,227
----------- -----------
Expenses:
Salaries and benefits......................................... 29,069,039 22,727,093
General and administrative.................................... 2,354,191 4,251,135
Supply expense................................................ 2,119,726 2,181,276
Laboratory expense............................................ 978,760 840,373
Capitated physicians.......................................... 10,301,958 9,661,602
Medical and professional fees................................. 4,376,506 5,729,378
Medical malpractice costs..................................... 724,987 770,647
Provision for bad debts....................................... 145,306 345,377
Other physician services and temporary providers.............. 317,027 1,077,590
----------- -----------
Total expenses........................................ 50,387,500 47,584,471
----------- -----------
Operating (loss) income......................................... (450,207) 374,756
Nonoperating income:
Interest and other income, net................................ 157,519 253,622
----------- -----------
(Loss) income before income taxes............................... (298,688) 628,378
Provision for income taxes...................................... 35,519
----------- -----------
Net (loss) income............................................... $ (334,207) $ 628,378
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 97
MERIDIAN MEDICAL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIODS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................... $ (334,207) $ 628,378
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation................................................. 13,937 103,504
Provision for doubtful accounts.............................. 145,306 345,377
Deferred taxes............................................... (258,237)
Change in assets and liabilities:
Due from PruCare........................................... (1,512,255) 3,257,587
Patient accounts receivable................................ (554,326) (696,550)
Supply inventories......................................... 156,534 63,108
Prepaid expenses and other assets.......................... (475,621) 176,894
Accounts payable and accrued expenses...................... (414,456) (309,497)
Accrued expenses and other................................. 3,700,682 (6,410,183)
Other assets............................................... 0 (35,000)
----------- -----------
Total adjustments.......................................... 801,564 (3,504,760)
----------- -----------
Net cash (used) provided by operating activities........... 467,357 (2,876,382)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................. (84,912) (389,422)
Decrease (increase) in investments -- deferred compensation
plan......................................................... (219,994) (783,070)
Increase in restricted cash..................................... (7,194) (7,128)
----------- -----------
Net cash used in investing activities........................ (312,100) (1,179,620)
----------- -----------
Cash flows from financing activities:
Treasury stock purchased and retired............................ (24,396) (20,625)
Repayment on notes receivable from stockholders................. 117,163 117,158
Proceeds from notes payable..................................... 3,100,000
----------- -----------
Net cash provided by financing activities.................... 92,767 3,196,533
----------- -----------
Net (decrease) increase in cash................................... 248,024 (859,469)
Cash and equivalents at beginning of year......................... 2,225,928 1,347,778
----------- -----------
Cash and equivalents at end of period............................. $ 2,473,952 $ 488,309
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes...................... $ 306,000 $ 0
=========== ===========
Cash paid during the year for interest.......................... $ 0 $ 140,879
=========== ===========
Supplemental disclosure of noncash financing activities:
Meridian issued a 10% stock dividend for $85,635 in 1996.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 98
MERIDIAN MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
1. In the opinion of management, the accompanying unaudited financial
statements of Meridian Medical Group, Inc. (MMG or the Company) contain all
adjustments necessary to present fairly the financial position at September 30,
1997 and the results of operations and cash flows for the nine month periods
ended September 30, 1996 and 1997. These financial statements should be read in
conjunction with the notes to the financial statements for the year ended
December 31, 1996.
2. Subsequent to September 30, 1997, MMG entered into a letter of intent to
merge into FPA Medical Management, Inc. (FPA), a physician practice management
company. As a result of the merger, Meridian will cease to exist as a separate
entity.
Subsequent to September 30, 1997, MMG signed a new medical services
agreement (MSA) with Prudential Health Care Plan, Inc. ("PruCare") effective
January 1, 1998. This agreement is a global capitation arrangement whereby MMG
receives a fixed monthly payment per enrollee and is responsible for providing
each enrollee with substantially all medical services, including inpatient and
outpatient services. The initial term of this contract is for three months and
is scheduled to expire on March 31, 1998. Upon the closing of the transaction
with FPA and execution of a new MSA, which will be between FPA and PruCare, the
termination penalty of $1 million will be waived.
3. Effective January 1, 1997, MMG elected to become a Subchapter S
corporation for income tax purposes. Accordingly, there is no income tax
provision in 1997.
4. In January 1997 MMG terminated both non-qualified deferred compensation
plans and final distribution to employees occurred in March 1997.
5. During the period ended September 30, 1997, MMG borrowed an additional
$3.1 million on their revolving line of credit. The total balance outstanding at
September 30, 1997 was $3.3 million. Subsequent to September 30, 1997, this
amount was converted to a 60 month note. As of September 30, 1997 Meridian was
not in compliance with certain ratios contained within the covenants which
resulted in all outstanding debt being reflected as current at September 30,
1997.
F-19
<PAGE> 99
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 10, 1998
BY AND BETWEEN
FPA MEDICAL MANAGEMENT, INC.
AND
MERIDIAN MEDICAL GROUP, INC.
<PAGE> 100
This AGREEMENT AND PLAN OF MERGER dated as of February 10, 1998 is made and
entered into by and between FPA Medical Management, Inc., a Delaware corporation
("FPA"), and Meridian Medical Group, Inc., a Georgia professional corporation
(the "Company").
WHEREAS, FPA and the Company 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 the Company would merge
with and into FPA (the "Merger"); and
WHEREAS, FPA and the Company desire to make certain representations,
warranties and agreements in connection with the transactions contemplated by
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
1.01 The Merger. At the Effective Time (as defined in Section 1.02), upon
the terms and subject to the conditions of this Agreement, the Company shall be
merged with and into FPA in accordance with the Delaware Corporations Code (the
"Delaware Code"). FPA shall be the surviving corporation in the Merger (the
"Surviving Corporation"). FPA and the Company 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 converted or
canceled in the manner provided in Article II.
1.02 Effective Time. At the Closing (as defined in Section 1.03), a
certificate of merger (the "Certificate of Merger") shall be duly prepared and
executed by the Surviving Corporation and thereafter delivered to the Secretary
of State of the State of Delaware (the "Secretary of State") for filing, as
provided in Section 252 of the Delaware Code on, or as soon as practicable
after, the Closing Date (as defined in Section 1.03). The Merger shall become
effective at the time provided in the Certificate of Merger (the date and time
being referred to herein as the "Effective Time").
1.03 Closing. The closing of the Merger (the "Closing") will take place at
the offices of Ballard Spahr Andrews & Ingersoll, 1735 Market Street, 51st
Floor, Philadelphia, Pennsylvania, 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., Pacific 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 and the Company the certificates and other documents and
instruments required to be delivered under Article VII.
1.04 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, (i) the Certificate of Incorporation of FPA
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Certificate of Incorporation and (ii) the Bylaws of FPA 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
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
1.05 Directors and Officers of the Surviving Corporation. The directors and
officers of FPA, 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 qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's Certificate of Incorporation and
Bylaws.
1.06 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.
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1.07 Further Assurances. Each party hereto will execute such further
documents and instruments and take such further actions as may reasonably be
requested by the other to consummate the Merger, to vest the Surviving
Corporation with full title to all assets, properties, rights, approvals,
immunities and franchises of either of the Constituent Corporations or to effect
the other purposes of this Agreement.
ARTICLE II
EXCHANGE OF SHARES
2.01 Exchange of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof:
(a) Capital Stock of the Company. Each issued and outstanding share of
the common stock, par value $.01 per share, of the Company ("Company Common
Stock") issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive the Merger Consideration as
described below.
(b) Cancellation of Treasury Stock and Stock Owned by FPA and
Subsidiaries. All shares of Company Common Stock that are owned by the
Company as treasury stock and any shares of Company Common Stock owned by
FPA or any Subsidiary (as hereinafter defined) of FPA shall be canceled and
retired and shall cease to exist and no stock of FPA or other consideration
shall be delivered in exchange therefor. As used in this Agreement,
"Subsidiary" means, with respect to any 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
party or (ii) which is a professional corporation owned by at least one
physician who (x) is an officer and director of such party and is qualified
under the laws of such professional corporation's state of incorporation to
hold an ownership interest therein or (y) has executed a succession or
similar stockholder agreement with such party.
(c) Exchange of Company Common Stock. The Merger Consideration shall
consist of FPA Consideration and the Contingent Consideration.
(i) FPA Consideration 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 $14.94 and equal to or less than $21.06, then
FPA Consideration shall consist of One Million One Hundred Sixty-four
Thousand Eight Hundred Eighty-nine (1,164,889) shares of fully paid and
nonassessable shares of common stock, par value $0.002 per share of FPA
("FPA Common Stock"), decreased by the number of shares equal to the
quotient of (y) the amount of the Employee Compensation Liability (as
defined in Section 5.01(b)) payable at Closing divided by (z) the
Closing Price.
(B) In the event the Closing Price is greater than $21.06, then FPA
Consideration shall be determined by dividing Twenty-four Million Five
Hundred Thirty-two Thousand Five Hundred Sixty-two Dollars ($24,532,562)
by the Closing Price, decreased by the number of shares equal to the
quotient of (y) the amount of the Employee Compensation Liability
payable at Closing divided by (z) the Closing Price.
(C) In the event the Closing Price is less than $14.94, then FPA
Consideration shall be determined by dividing Seventeen Million Four
Hundred Three Thousand Four Hundred Forty-two Dollars ($17,403,442) by
the Closing Price, decreased by the number of shares equal to the
quotient of (y) the amount of the Employee Compensation Liability
payable at Closing divided by (z) the Closing Price.
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FPA Consideration shall also consist of cash equal to the excess of
One Million Five Hundred Thousand Dollars ($1,500,000) over the actual
amount of the Professional Fee Liability (as defined in Section 6.10) and
the Special Bonus Liability (as defined in the last sentence of Section
5.01).
(ii) Within sixty (60) days following the end of the twelve-month
period commencing as of the Effective Time, FPA shall deliver to the
shareholders of the Company (the "Company Shareholders") the Contingent
Consideration, if any. For each One Million Dollars ($1,000,000) during the
twelve-month period beginning on the day after the Closing Date that the
revenues, as determined in accordance with generally accepted accounting
principles and FPA's customary practice in assigning medical group revenues
(and excluding any administrative support payments) of FPA/Meridian Medical
Group, P.C., a to-be-formed Georgia professional corporation ("Medical
Group"), exceed Ninety-seven Million Nine Hundred Sixty-seven Thousand One
Hundred Eighty-five Dollars ($97,967,185), the Contingent Consideration
shall be One Million Dollars ($1,000,000), but in no event shall the
Contingent Consideration exceed Five Million Dollars ($5,000,000). The
Contingent Consideration shall not be pro rated between each One Million
Dollars ($1,000,000) of Medical Group's revenues attained, e.g., if Medical
Group's revenues are One Hundred Million Dollars ($100,000,000), the amount
of the Contingent Consideration would be Two Million Dollars ($2,000,000).
The amount of the Contingent Consideration shall be reduced by a contingent
bonus payable upon the achievement of the Medical Group revenue targets
described in this Section 2.01(c)(ii) to the persons listed on Schedule
2.01 (the "Contingent Employee Compensation"). The Contingent Consideration
shall be payable in cash. The Contingent Employee Consideration shall be
payable in cash at the same time as the Contingent Consideration.
(iii) Notwithstanding the foregoing, fractional shares of FPA Common
Stock that would be issuable to any holder of Company Common Stock shall be
treated in accordance with Section 2.01(d).
(iv) At the Effective Time, by virtue of the Merger and without any
action on the part of the holder thereof, all shares of Company Common
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 for each share of Company Common Stock
outstanding as of the Effective Time, (A) that number of shares of FPA
Common Stock equal to (x) FPA Consideration divided by (y) the aggregate
number of shares of Company Common Stock issued and outstanding as of the
Effective Time, (B) the Contingent Consideration divided by (z) the
aggregate number of shares of Company Common Stock issued and outstanding
as of the Effective Time and (C) any cash in lieu of fractional shares of
FPA Common Stock to be issued or paid in consideration therefor (determined
in accordance with Section 2.02(d)), upon the surrender of such certificate
in accordance with Section 2.02, without interest.
(d) Fractional Shares. No fractional shares of FPA Common Stock shall
be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of
FPA Common Stock (after aggregating all fractional shares of FPA Common
Stock to be received by such holder), shall receive from FPA an amount of
cash (rounded up to the nearest whole cent) equal to the product of (i) the
fraction of a share of FPA Common Stock to which such holder would
otherwise be entitled, times (ii) the Closing Price.
(e) Company Options. On or before the Effective Time, the Company will
cancel any options to acquire Company Common Stock that have not otherwise
been exercised prior to the Effective Time.
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2.02 Exchange of Certificates.
(a) Exchange Agent. On the Closing Date, FPA shall 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 the Company (the
"Exchange Agent"), certificates representing the number of duly authorized whole
shares of FPA Common Stock issuable in connection with the Merger plus (A) an
amount of cash equal to the aggregate amount payable in lieu of fractional
shares in accordance with Section 2.01(d) and (B) the aggregate amount of cash
described in the last sentence of Section 2.01(c)(i), 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, the
Company and FPA before the Effective Time. If for any reason (including losses),
the amount of cash in the Exchange Fund is inadequate to pay the cash amounts to
which holders of shares of Company Common Stock shall be entitled pursuant to
Section 2.01(d), FPA shall make available additional funds for the payment
thereof.
(b) Company Common 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 Company Common
Stock (individually, a "Certificate" and collectively, the "Certificates") whose
shares are to be exchanged pursuant to Section 2.01(c) into the right to receive
FPA Consideration (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, plus (A) cash in lieu of
fractional shares in accordance with Section 2.01(d) and (B) the portion of the
cash amount described in the last sentence of Section 2.01(c)(i). 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 a certificate
representing that number of whole shares of FPA Common Stock, plus (A) the
portion of the amount of cash described in the last sentence of Section
2.01(c)(i) and (B) the cash amount payable in lieu of fractional shares in
accordance with Section 2.01(d), 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 Company Common Stock which is
not registered in the transfer records of the Company, a certificate
representing that number of whole shares of FPA Common Stock, plus (A) the cash
amount payable in lieu of fractional shares in accordance with Section 2.01(d)
and (B) the portion of the amount of cash described in the last sentence of
Section 2.01(c)(i), may be issued to a transferee if the Certificate
representing such Company Common 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 2.02(b), each Certificate shall be
deemed at any time after the Effective Time for all corporate purposes of FPA,
to represent ownership of the number of shares of FPA Common Stock into which
the number of shares of Company Common 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 2.01(d) 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
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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 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 Company Common 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
2.01(d)) shall be deemed to have been issued at the Effective Time in full
satisfaction of all rights pertaining to the shares of Company Common Stock
represented thereby except for the right to receive the Contingent
Consideration, if any. From and after the Effective Time, the stock transfer
books of the Company shall be closed and there shall be no further registration
of transfers on the stock transfer books of FPA of the shares of Company Common
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 THE COMPANY
The Company represents and warrants to FPA that:
3.01 Organization and Qualification. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and has
all requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. Each of the Company and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed or to be in good standing (individually or in the aggregate) would
not have an effect that is materially adverse to the business, condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities (including contingent liabilities), prospects, or results of
operations of the Company or any of its Subsidiaries, taken as a whole (a
"Material Adverse Effect"). The Company has all requisite corporate power and
authority to execute and deliver this Agreement.
3.02 Subsidiaries. Section 3.02 of the letter dated the date hereof and
delivered to FPA by the Company concurrently with the execution and delivery of
this Agreement (the "Company Disclosure Letter") lists each Subsidiary of the
Company, together with its jurisdiction of incorporation or organization. All of
the outstanding shares of capital stock of each such Subsidiary have been
validly issued and are fully paid and nonassessable and, except as set forth on
Schedule 2.2, owned by the Company, by another Subsidiary of the Company, or by
the Company and another such Subsidiary, free and clear of all pledges, claims,
liens, charges, encumbrances, and security interests of any kind or nature
whatsoever (collectively, "Liens"). Except for the capital stock of its
Subsidiaries and except for the ownership interests set forth in Schedule 2.2,
the Company does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture, or other
entity.
3.03 Authority Relative to this Agreement. The Company has full corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of the Company. This Agreement has
been duly and validly executed by the Company and constitutes a valid and
legally binding obligation of the Company, enforceable against it in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
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3.04 Capital Stock of the Company.
(a) The authorized capital stock of the Company consists of 2,000,000
shares of Company voting common stock and 1,000,000 shares of Company non-voting
common stock (collectively, the "Company Common Stock"). As of December 31,
1997, 252,175 shares of Common Stock were issued and outstanding and no shares
of Common Stock are held by the Company in its treasury. As of the Effective
Time, there will be no outstanding options to purchase shares of Company Common
Stock and no shares of capital stock of the Company will be reserved for
issuance upon the exercise of options. All outstanding shares of capital stock
of the Company are duly authorized, validly issued, fully paid, and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes, or other indebtedness of the Company having the right to vote
(or convertible into securities having the right to vote) on any matters on
which shareholders of the Company may vote. Except as set forth above, as of the
date hereof, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements, or undertakings of any kind to which the
Company or any of its Subsidiaries is a party or by which it is bound obligating
the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other voting
securities of the Company or any of its Subsidiaries or obligating the Company
or any of its Subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking (together, "Options"). As of the date hereof, there are no
outstanding contractual obligations of the Company or any Subsidiary to
repurchase, redeem, or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries. The Company has furnished to FPA true and
correct copies of the Company's articles of incorporation and bylaws as in
effect as of the date hereof. The offers and sales of all of the outstanding
shares of capital stock of the Company were at all relevant times either
registered under the Securities Act of 1933, as amended (the "Securities Act")
and applicable state securities laws or exempt from such requirements.
(b) Except as disclosed in Section 3.04(c) of the Company Disclosure
Letter, all of the outstanding shares of capital stock of each Subsidiary of the
Company are duly authorized, validly issued, fully paid and nonassessable and
are owned, beneficially and of record, by the Company or a Subsidiary wholly
owned, directly or indirectly, by the Company, free and clear of any Lien.
Except as disclosed in Section 3.04(c) of the Company Disclosure Letter, there
are no (i) outstanding Options obligating the Company or (ii) voting trusts,
proxies or other commitments, understandings, restrictions or arrangements in
favor of any person other than the Company or any Subsidiary wholly owned,
directly or indirectly by the Company with respect to the voting of or the right
to participate in dividends or other earnings on any capital stock of any
Subsidiary of the Company.
(c) The Company Common Stock set forth on Section 3.04(c) of the Company
Disclosure Letter constitutes all of the shares of Company Common Stock owned by
the shareholders of the Company (the "Company Shareholders"), either directly or
indirectly.
3.05 Non-Contravention; Approvals and Consents.
(a) The execution and delivery of this Agreement by the Company does not,
and, except as provided in Section 3.05(a) of the Company Disclosure Letter, the
performance by the Company of its obligations hereunder and the consummation of
the transactions contemplated hereby will not, conflict with, result in a
violation or breach of, constitute (with or without notice or lapse of time or
both) a default under, result in or give to any person any right of payment or
reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien upon any of the assets or
properties of the Company or any of its Subsidiaries under, any of the terms,
conditions or provisions of (i) the certificates or articles of incorporation or
bylaws (or other comparable charter documents) of the Company or any of its
Subsidiaries, or (ii) (x) any statute, law, rule, regulation or ordinance
(together, "Laws"), or any judgment, decree, order, writ, permit or license
(together, "Orders"), of any court, tribunal, arbitrator, authority, agency,
commission, official or other instrumentality of the United States or any state,
county, city or other political subdivision (a "Governmental or Regulatory
Authority"), applicable to the Company or any of its Subsidiaries or any of
their respective assets or properties, or (y) any note, bond, mortgage, security
agreement, indenture, license, franchise, permit, concession, contract, lease or
other instrument, obligation or
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agreement of any kind (together, "Contracts") to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of their respective assets or properties is bound, excluding from the
foregoing clauses (x) and (y) conflicts, violations, breaches, defaults,
terminations, modifications, accelerations and creations and impositions of
Liens which, individually or in the aggregate, would not be reasonably expected
to have a Material Adverse Effect on the Company and its Subsidiaries taken as a
whole, or adversely affect the ability of the Company to consummate the
transactions contemplated by this Agreement.
(b) Except (i) for filings with any governmental authorities that are
required in connection with the transactions contemplated by this Agreement
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), (ii) for the filing of the Certificate of Merger and other appropriate
merger documents required by the Delaware Code with the Secretary of State and
appropriate documents with the relevant authorities of other states in which the
Constituent Corporations are qualified to do business, (iii) the filing of the
Proxy Statement/Prospectus (as defined in Section 3.22 hereof) with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), and the declaration of
effectiveness thereof by the Commission and filings with various blue sky
authorities and (iv) as disclosed in Section 3.05 of the Company Disclosure
Letter, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority or other public or private third party is
necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental or Regulatory Authority or any contract to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries or any of their respective assets or properties is
bound for the execution and delivery of this Agreement by the Company, the
performance by the Company of its obligations hereunder or the consummation of
the transactions contemplated hereby, other than such consents, approvals,
actions, filings and notices which the failure to make or obtain, as the case
may be, individually or in the aggregate, would not be reasonably expected to
have a Material Adverse Effect on the Company and its Subsidiaries taken as a
whole or adversely affect the ability of the Company to consummate the
transactions contemplated by this Agreement.
3.06 Financial Statements. The Company has delivered to FPA a true and
complete copy of the following financial statements: (i) the audited
consolidated balance sheets of the Company as of December 31, 1995 and 1996 and
the related audited consolidated income statements and statements of cash flows
for each of the fiscal years then; and (ii) the unaudited consolidated balance
sheet of the Company as of September 30, 1997 and the unaudited consolidated
income statements and statements of cash flows for such interim period (the
"Company Financial Statements"). As of their respective dates and for the
respective periods then ended, the audited consolidated financial statements and
unaudited interim consolidated financial statements (including, in each case,
the notes, if any, thereto) included in the Company Financial Statements (A)
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto), (B) 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 the Company and its Subsidiaries taken as a
whole and to the absence of certain footnote disclosures) the consolidated
financial position of the Company and its Subsidiaries as at the respective
dates thereof and the consolidated results of their operations and cash flows
for the respective periods then ended and (C ) 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. Each Subsidiary of
the Company is treated as a consolidated Subsidiary of the Company in the
Company Financial Statements for all periods presented.
3.07 Absence of Changes. Except for matters reflected or reserved against
in the balance sheet for the period ended December 31, 1996 included in the
Company Financial Statements, since December 31, 1996, the Company and its
Subsidiaries have conducted their respective businesses 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 the Company and its Subsidiaries
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taken as a whole, that had or would reasonably be expected to have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
3.08 Absence of Undisclosed Liabilities. Except for matters reflected or
reserved against in the balance sheet for the period ended December 31, 1996
included in the Company Financial Statements, neither the Company nor any of its
Subsidiaries had at such date, or has incurred since that date, any liabilities
or obligations (whether absolute, accrued, contingent, fixed or otherwise, or
whether due or to become due) of any nature that would be required by generally
accepted accounting principles to be reflected on a consolidated balance sheet
of the Company and its consolidated Subsidiaries (including the notes thereto),
except liabilities or obligations (i) which were incurred in the ordinary course
of business consistent with past practice or (ii) which have not been, and could
not be reasonably expected to be, individually or in the aggregate, Materially
Adverse to the Company and its Subsidiaries, taken as a whole.
3.09 Legal Proceedings. Except as disclosed in Section 3.09 of the Company
Disclosure Letter, (i) there are no actions, suits, arbitrations or proceedings
pending or, to the knowledge of the Company, threatened against, relating to or
affecting, nor to the knowledge of the Company and its Subsidiaries are there
any Governmental or Regulatory Authority investigations or audits pending or
threatened against, relating to or affecting, the Company or any of its
Subsidiaries or any of their respective assets and properties which,
individually or in the aggregate, could be reasonably expected to have a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole, or
on the ability of the Company to consummate the transactions contemplated by
this Agreement, (ii) neither neither the Company nor any of its Subsidiaries 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 the Company and its Subsidiaries, taken as a
whole, or adversely affect the ability of the Company 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 the
Company or any of its Subsidiaries.
3.10 Contracts and Commitments. Section 3.10 of the Company Disclosure
Letter contains a true and complete list of each of the following written, or to
the Company's knowledge, oral, contracts (the "Material Contracts") to which the
Company or any of its Subsidiaries is a party: (i) all Contracts (excluding
Company Employee Benefit Plans which can be terminated at will without
subjecting the Company or any of its Subsidiaries 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 the Company or any
of its Subsidiaries to engage in any business activity or compete with any
Person in connection with their respective businesses or prohibiting or limiting
the ability of any Person to compete with the Company or any of its Subsidiaries
in connection with their respective businesses; (iii) all partnership, joint
venture, shareholders' or other similar Contracts with any Person in connection
with the Company's or any of its Subsidiaries' businesses; (iv) all Contracts
between the Company or any of its Subsidiaries 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 the
Company or any of its Subsidiaries, other than dispositions or acquisitions in
the ordinary course of business; (vi) all other Contracts with respect to the
Company and its Subsidiaries that (A) involve the payment or potential payment,
pursuant to the terms of any such Contract, by or to the Company or any of its
Subsidiaries of more than $100,000 annually and (B) cannot be terminated within
sixty (60) days after giving notice of termination without resulting in any
material cost or penalty to the Company or any of its Subsidiaries. There is no
default or event that with notice or lapse or time, or both, would constitute a
material default by the Company or any of its Subsidiaries under any of the
Material Contracts to which it is a party. Neither the Company nor any of its
Subsidiaries has received notice of a default under any Material Contract by any
party thereto. Each of the Material Contracts is enforceable against the Company
or any of its Subsidiaries, as the case may be, in accordance with its terms,
except as such enforceability may be limited by general principles of equity or
by bankruptcy, insolvency or other similar laws relating to rights of creditors.
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Neither the Company nor any of its Subsidiaries has received notice that any
party to any of the Material Contracts intends to cancel or terminate any of the
Material Contracts or to exercise or not exercise any options under any of the
Material Contracts.
3.11 Taxes. The Company and each of its Subsidiaries have filed all tax
returns that are required to have been filed by them in any jurisdiction for all
periods ending on or prior to the Effective Time and such tax returns are true,
correct and complete in all material respects, and the Company and each of its
Subsidiaries have paid all taxes shown to be due and payable on such returns and
all other taxes and assessments payable by them to the extent the same have
become due and payable and before they have become delinquent, except for any
taxes and assessments the amount, applicability or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which the Company has set aside on its books reserves (segregated to
the extent required by generally accepted accounting principles, consistently
applied throughout the specified period and in the immediately comparable
period) deemed by it in its reasonable discretion to be adequate. The Company
has no knowledge of any proposed material tax assessment, obligation or other
claim against the Company or any of its Subsidiaries. There are no material
liens for taxes upon any property or assets of the Company or any Subsidiary
thereof, except for liens for taxes not yet due. Except as disclosed in Section
3.11 of the Company Disclosure Letter, there are no unresolved issues of law or
fact arising out of a notice of deficiency, proposed deficiency or assessment
from the Internal Revenue Service ("IRS") or any other governmental taxing
authority with respect to taxes of the Company or any of its Subsidiaries which,
if decided adversely, singly or in the aggregate, would have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole. Neither the
Company nor any of its Subsidiaries is a party to any agreement providing for
the allocation or sharing of taxes with any entity that is not a Subsidiary of
the Company other than agreements the consequences of which are adequately
reserved for in the Company Financial Statements. Neither the Company nor any of
its Subsidiaries has, with regard to any assets or property held, acquired or to
be acquired by any of them, filed a consent to the application of Section 341(f)
of the Internal Revenue Code of 1986, as amended (the "Code").
3.12 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 3.12 of the Company Disclosure Letter:
(i) to the knowledge of the Company, 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 Company 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 Company Employee Benefit Plan;
(iii) neither the Pension Benefit Guaranty Corporation (the "PBGC"),
the Company nor any of its Subsidiaries has instituted proceedings to
terminate any Company Employee Benefit Plan;
(iv) full payment has been made of all amounts which the Company or
any of its Subsidiaries were required to have paid as a contribution to the
Company Employee Benefit Plans as of the last day of the most recent fiscal
year of each of the Company Employee Benefit Plans ended prior to the date
of this Agreement, and none of the Company 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 Company 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 Company 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 Company Employee Benefit Plan's
actuary with respect to each such Company Employee Benefit Plan, did not,
as of its latest valuation date, exceed the then current value of the
assets of such Company Employee Benefit Plan;
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(vi) each of the Company Employee Benefit Plans which is intended to
be "qualified" within the meaning of Section 401(a) of the Code has been
determined by the IRS to be so qualified and such determination has not
been modified, revoked or limited;
(vii) each of the Company 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
none of the Company nor any of its Subsidiaries has received any claim or
notice that any such Company 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 the Company and its Subsidiaries, there are
no material pending, threatened or anticipated claims involving any of the
Company Employee Benefit Plans other than claims for benefits in the normal
course;
(ix) to the knowledge of the Company and its Subsidiaries, during the
five-year period preceding the date of this Agreement, none of the Company
or any of its Subsidiaries has 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 Company Employee
Benefit Plan;
(x) none of the Company or any of its Subsidiaries is in default in
performing any of its contractual obligations under any of the Company
Employee Benefit Plans or any related trust agreement or insurance
contract;
(xi) there are no material outstanding liabilities of any Company
Employee Benefit Plan other than liabilities for benefits to be paid to
participants in such Company Employee Benefit Plan and their beneficiaries
in accordance with the terms of such Company Employee Benefit Plan; and
(xii) none of the Company or any of its Subsidiaries maintains or is
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 3.12 of the Company Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will accelerate benefits under any Company
Employee Benefit Plan.
(c) As used herein:
(i) "Company Employee Benefit Plan" means any Plan entered into,
established, maintained, contributed to or required to be contributed to by
the Company or any of its Subsidiaries 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, workmen's
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.
3.13 Title to Assets. Each of the Company and its Subsidiaries is in
possession of and has good title to, or has valid leasehold interests in or
valid rights under Contract to use, all of their respective properties and
assets primarily used in their respective businesses and material to the
condition (financial or other) of such businesses taken as a whole, 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
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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 the Company's or any of its
Subsidiaries' business operations (in the manner presently carried on by the
Company and its Subsidiaries) or (iii) as disclosed in the Company Financial
Statements, and except for such matters which, individually or in the aggregate,
would not have a Material Adverse Effect on the Company and its Subsidiaries,
taken as a whole. All leases under which the Company or any of its Subsidiaries
leases any substantial amount of real or personal property have been made
available to FPA 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 or event which with notice or lapse of time or both would
become a default of the Company or any of its Subsidiaries other than defaults
under such leases which in the aggregate would not have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
3.14 Permits, Etc. Each of the Company and its Subsidiaries 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 their respective businesses taken as a whole.
3.15 Compliance with Laws. Neither the Company nor any of its Subsidiaries
is in violation of, or has violated, any applicable provisions of any Laws or
any term of any Order binding against it, except for violations which do not
have and would not have, individually or in the aggregate, a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole. Section 3.15 of
the Company Disclosure Letter sets forth a complete list of the Company's and
its Subsidiaries' licenses, permits and authorizations ("Permits") other than
those not material to the business or operations of Company or its Subsidiaries.
Since 1992, no state or federal governmental entity has revoked or materially
limited any license or certificate of authority of the Company or any of its
Subsidiaries material to their respective businesses, and no investigation or
proceeding is pending or, to the Company's knowledge, threatened, which involves
the revocation or material limitation of any of such licenses or certificates.
The Company 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 the Company and its Subsidiaries as presently conducted will not remain in
full force and effect for the complete duration of their terms. The Company has
made available to FPA 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 all other Permits as
requested by FPA. Each of such filings was in material compliance with all
applicable laws and regulations.
3.16 Fraud and Abuse. Neither the Company, its Subsidiaries, nor its
officers and employees and to the knowledge of the Company, agents, independent
contractors and any of the Company's Providers, have engaged in any activities
which are prohibited under U.S.C. Section 1320a-7b, or the regulations
promulgated thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including but not limited to the following: (i) knowingly and willfully
making or causing to be made a false statement or representation of a material
fact in any application for any benefit or payment; (ii) knowingly and willfully
making or causing to be made any false statement or representation of a material
fact for use in determining rights to any benefit or payment; (iii) failure to
disclose knowledge by a claimant of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or on
behalf of another, with intent to fraudulently secure such benefit or payment;
and (iv) knowingly and willfully soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind or offering to pay or receive such remuneration (A)
in return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part by Medicare or Medicaid, or (B) in return for
purchasing, leasing or ordering or arranging for or recommending purchasing,
leasing or ordering any good, facilities, service or item for which payment may
be made in whole or in part by Medicare or Medicaid.
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3.17 Labor Controversies.
(a) There are no material controversies pending or, to the knowledge of the
Company, threatened between the Company and any representatives of any of the
Company's or any of its Subsidiaries' employees.
(b) There are no material organizational efforts presently being made
involving any of the presently unorganized employees of the Company or any of
its Subsidiaries.
(c) Each of the Company and its Subsidiaries 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 the Company or any of its Subsidiaries 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 (subject to the proviso set
forth in subparagraph (a) above), except for such controversies, organizational
efforts, on-compliance and liabilities which, individually or in the aggregate,
would not be reasonably expected to have a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.
3.18 Insurance. Section 3.18 of the Company Disclosure Letter lists all
policies of fire, liability, life and employee health, environmental, medical
malpractice, errors and omissions, workers' compensation and other forms of
insurance currently held and maintained by the Company and its Subsidiaries (the
"Insurance Policies"). The Company believes that such Insurance Policies are
commercially reasonable in amount and coverage. All of the Insurance Policies
are in full force and effect, all billed premiums with respect thereto covering
all periods up to and including the Closing Date have been paid or will have
been paid on or prior to the Closing Date and no written notice of cancellation
or termination has been received with respect to any such Policy, except for
failures to pay or cancellations or terminations which would not reasonably be
expected to have a Material Adverse Effect on the Company and its Subsidiaries,
taken as a whole.
3.19 Guaranties. Neither the Company nor any of its Subsidiaries has
executed any guaranty or otherwise agreed to be a guarantor of any liability or
obligation (including indebtedness) of any other person.
3.20 Compliance with Laws. Neither the Company nor any of its Subsidiaries
is in violation of, or has violated, any applicable provisions of any Laws or
any term of any Order binding against it, except for violations which do not
have and would not have, individually or in the aggregate, a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
3.21 Full Disclosure. No information furnished by or on behalf of the
Company and its Subsidiaries to FPA and its Subsidiaries pursuant to this
Agreement and any information contained in the Company Disclosure Schedule and
other Schedules to this Agreement, at any time prior to the Closing Date,
contains nor will it contain any untrue statement of a material fact and does
not and will not omit to state any material fact necessary to make any
statement, in light of the circumstances under which such statement is made, not
misleading.
3.22 Registration Statement and Proxy Statement/Prospectus. None of the
information to be supplied by the Company or any of its Subsidiaries for
inclusion in the (i) Registration Statement on Form S-4 to be filed under the
Securities Act with the Commission 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 Company's meeting of its shareholders 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 meeting of the shareholders of the Company 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 shareholders of the
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Company, 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
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations promulgated thereunder, except that no representation is made by
the Company with respect to information supplied by FPA for inclusion therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FPA
FPA represents and warrants to the Company as follows:
4.01 Organization and Qualification. Each of FPA and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has full corporate power and authority
to conduct its business as and to the extent now conducted and to own, use and
lease its assets and properties, except (in the case of any Subsidiary) for such
failures to be so organized, existing and in good standing or to have such power
and authority which, individually or in the aggregate, are not having and could
not be reasonably expected to have a Material Adverse Effect on FPA and its
Subsidiaries taken as a whole. Each of FPA and its Subsidiaries 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.
4.02 Capital Stock. (a) The authorized capital stock of FPA consists solely
of 98,000,000 shares of FPA Common Stock and 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 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 they are issuable
(including pursuant to this Agreement), duly authorized, validly issued, fully
paid and nonassessable. Except pursuant to this Agreement and except as set
forth in Section 4.02 of FPA Disclosure Letter or in FPA SEC Reports (as defined
in Section 4.05), there are no outstanding Options obligating FPA or any of its
Subsidiaries 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.
(b) Except as disclosed in FPA SEC Reports, all of the outstanding shares
of capital stock of each Subsidiary of FPA are duly authorized, validly issued,
fully paid and nonassessable and are owned, beneficially and of record, by FPA
or a Subsidiary wholly owned, directly or indirectly, by FPA, free and clear of
any Liens. There are no (i) outstanding Options obligating FPA or any of its
Subsidiaries to issue or sell any shares of capital stock of any Subsidiary of
FPA or to grant, extend or enter into any such Option or (ii) voting trusts,
proxies or other commitments, understandings, restrictions or arrangements in
favor of any person other than FPA or a Subsidiary wholly owned, directly or
indirectly, by FPA with respect to the voting of or the right to participate in
dividends or other earnings on any capital stock of any Subsidiary of FPA.
(c) There are no outstanding contractual obligations of FPA or any
Subsidiary of FPA to repurchase, redeem or otherwise acquire any shares of FPA
Common Stock or any capital stock of any Subsidiary of FPA
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or to provide funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any Subsidiary of FPA or any other person.
4.03 Authority Relative to this Agreement. FPA has full corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by FPA and the consummation by FPA of the
transactions contemplated hereby have been duly and validly approved by its
Board of Directors, and no other corporate proceedings on the part of FPA are
necessary to authorize the execution, delivery and performance of this Agreement
by FPA and the consummation by FPA of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by FPA and
constitutes a legal, valid and binding obligation of FPA enforceable against FPA
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
4.04 Non-Contravention; Approvals and Consents.
(a) The execution and delivery of this Agreement by FPA does not, and the
performance by FPA of its obligations hereunder and the consummation of the
transactions contemplated hereby will not, conflict with, result in a violation
or breach of, constitute (with or without notice or lapse of time or both) a
default under, result in or give to any person any right of payment or
reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien upon any of the assets or
properties of FPA or any of its Subsidiaries under, any of the terms, conditions
or provisions of (i) the certificates or articles of incorporation or bylaws (or
other comparable charter documents) of FPA or any of its Subsidiaries, or (ii)
(x) any Laws or Orders of any Governmental or Regulatory Authority applicable to
FPA or any of its Subsidiaries or any of their respective assets or properties,
or (y) any contracts to which FPA or any of its Subsidiaries is a party or by
which FPA or any of its Subsidiaries or any of their respective assets or
properties is bound, excluding from the foregoing clauses (x) and (y) conflicts,
violations, breaches, defaults, terminations, modifications, accelerations and
creations and impositions of Liens which, individually or in the aggregate,
would not be reasonably expected to have a Material Adverse Effect on FPA and
its Subsidiaries, taken as a whole or adversely affect the ability of FPA to
consummate the transactions contemplated by this Agreement.
(b) Except (i) for filings with any state securities authorities that are
required in connection with the transactions contemplated by this Agreement,
including the HSR Act, (ii) for the filing of the Certificate of Merger and
other appropriate merger documents required by the Delaware Code with the
Secretary of State and appropriate documents with the relevant authorities of
other states in which the Constituent Corporations are qualified to do business
and (iii) the filing of the Proxy Statement/Prospectus with the Commission
pursuant to the Securities Act and the declaration of effectiveness of the
Registration Statement thereof by the Commission and filings with various state
blue sky authorities, no consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority or other public or private third
party is necessary or required under any of the terms, conditions or provisions
of any Law or Order of any Governmental or Regulatory Authority or any contract
to which FPA or any of its Subsidiaries is a party or by which FPA or any of its
Subsidiaries or any of their respective assets or properties is bound for the
execution and delivery of this Agreement by FPA, the performance by FPA of its
obligations hereunder or the consummation of the transactions contemplated
hereby, other than such consents, approvals, actions, filings and notices which
the failure to make or obtain, as the case may be, individually or in the
aggregate, would not be reasonably expected to have a Material Adverse Effect on
FPA and its Subsidiaries, taken as a whole or adversely affect the ability of
FPA to consummate the transactions contemplated by this Agreement.
4.05 SEC Reports and Financial Statements. FPA has made available to the
Company prior to the execution of this Agreement 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 or any of its Subsidiaries 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
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documents (other than preliminary material) that FPA and its Subsidiaries were
required to file with the SEC since such date. As of their respective dates, 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 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
generally accepted accounting principles 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 have, individually or in the aggregate, a Material Adverse Effect on
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.
4.06 Absence of Certain Changes or Events. Except as disclosed in FPA SEC
Reports filed prior to the date of this Agreement, since September 30, 1997
there has not been any change, event or development having, individually or in
the aggregate, a Material Adverse Effect on FPA and its Subsidiaries, taken as a
whole.
4.07 Absence of Undisclosed Liabilities. Except for matters reflected or
reserved against in the balance sheet for the period ended September 30, 1997
included in FPA Financial Statements, neither FPA nor any of its Subsidiaries
had at such date, or has incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent, fixed or otherwise, or
whether due or to become due) of any nature that would be required by generally
accepted accounting principles to be reflected on a consolidated balance sheet
of FPA and its consolidated Subsidiaries (including the notes thereto), except
liabilities or obligations (i) which were incurred in the ordinary course of
business consistent with past practice or (ii) which have not been, and would
not be reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect on FPA and its Subsidiaries, taken as a whole.
4.08 Legal Proceedings. Except as disclosed in FPA SEC Reports filed prior
to the date of this Agreement, (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of FPA and its Subsidiaries, threatened
against, relating to or affecting, nor to the knowledge of FPA and its
Subsidiaries are there any Governmental or Regulatory Authority investigations
or audits pending or threatened against, relating to or affecting, FPA or any of
its Subsidiaries 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
adversely affect the ability FPA to consummate the transactions contemplated by
this Agreement, (ii) neither FPA nor any of its Subsidiaries 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 adversely affect the
ability of FPA 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 any of its Subsidiaries.
4.09 Taxes. FPA and each its Subsidiaries has filed all tax returns that
are required to have been filed by it in any jurisdiction, for all periods
ending on or prior to the Effective Time (except for any permitted extensions of
time to file) and such tax returns are true, correct and complete in all
material respects, and FPA and each of its Subsidiaries has paid all taxes shown
to be due and payable on such returns and all other taxes and assessments
payable by it to the extent the same have become due and payable and before they
have become delinquent, except for any taxes and assessments the amount,
applicability or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which FPA has set aside on its books
reserves (segregated to the extent required by generally accepted accounting
principles deemed by it in its reasonable discretion to be adequate. FPA has no
knowledge of any proposed material tax
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assessment, obligation or other claim against FPA or any of its Subsidiaries,
and in the opinion of FPA all tax liabilities of FPA and its Subsidiaries are
adequately provided for on the books of FPA. There are no material liens for
taxes upon any property or assets of FPA or any Subsidiary thereof, except for
liens for taxes not yet due. There are no unresolved issues of law or fact
arising out of a notice of deficiency, proposed deficiency or assessment from
the IRS or any other governmental taxing authority with respect to taxes of FPA
or any of its Subsidiaries which, if decided adversely, singly or in the
aggregate, would have a Material Adverse Effect on FPA and its Subsidiaries,
taken as a whole. Neither FPA nor any of its Subsidiaries is a party to any
agreement providing for the allocation or sharing of taxes with any entity that
is not, directly or indirectly, a wholly-owned corporate Subsidiary of FPA other
than agreements the consequences of which are adequately reserved for in FPA
Financial Statements. Neither FPA nor any of its Subsidiaries has, with regard
to any assets or property held, acquired or to be acquired by any of them, filed
a consent to the application of Section 341(f) of the Code.
4.10 Employee Benefit Plans; ERISA.
(a) Except as disclosed in FPA SEC Reports filed prior to the date of this
Agreement:
(i) to the knowledge of FPA and its Subsidiaries, no prohibited
transaction within the meaning of Section 406 or 407 of ERISA, or Section
4975 of the Code with respect to any FPA 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 FPA Employee Benefit Plan;
(iii) neither the PBGC, FPA nor any of its Subsidiaries has instituted
proceedings to terminate any FPA Employee Benefit Plan;
(iv) full payment has been made of all amounts which FPA or any of its
Subsidiaries were required to have paid as a contribution to FPA Employee
Benefit Plans as of the last day of the most recent fiscal year of each of
FPA Employee Benefit Plans ended prior to the date of this Agreement, and
none of FPA 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 FPA Employee Benefit Plan ended prior to the date of this
Agreement;
(v) the value on a termination basis of accrued benefits under each of
FPA 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 FPA Employee Benefit Plan's actuary with
respect to each such FPA Employee Benefit Plan, did not, as of its latest
valuation date, exceed the then current value of the assets of such FPA
Employee Benefit Plan;
(vi) each of FPA Employee Benefit Plans which is intended to be
"qualified" within the meaning of Section 401(a) of the Code has been
determined by the IRS to be so qualified and such determination has not
been modified, revoked or limited;
(vii) each of FPA 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 none of FPA nor
any of its Subsidiaries has received any claim or notice that any such FPA
Employee Benefit Plan is not in compliance with, all applicable laws and
orders and prohibited transaction exemptions, including, without
limitation, the requirements of ERISA except where any non-compliance would
not have a Material Adverse Effect on FPA and its Subsidiaries taken as a
whole;
(viii) to the knowledge of FPA and its Subsidiaries, there are no
material pending, threatened or anticipated claims involving any of FPA
Employee Benefit Plans other than claims for benefits in the normal course;
(ix) to the knowledge of FPA and its Subsidiaries, during the
five-year period preceding the date of this Agreement, none of FPA or any
of its Subsidiaries has 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
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"reportable event" within the meaning of Section 4043 of ERISA has occurred
with respect to any FPA Employee Benefit Plan;
(x) none of FPA or any of its Subsidiaries is in default in performing
any of its contractual obligations under any of FPA Employee Benefit Plans
or any related trust agreement or insurance contract;
(xi) there are no material outstanding liabilities of any FPA Employee
Benefit Plan other than liabilities for benefits to be paid to participants
in such FPA Employee Benefit Plan and their beneficiaries in accordance
with the terms of such FPA Employee Benefit Plan; and
(xii) none of FPA or any of its Subsidiaries maintains or is 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) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby constitutes a change in
control or has or will accelerate benefits under any FPA Employee Benefit Plan.
(c) As used herein "FPA Employee Benefit Plan" means any Plan entered into,
established, maintained, contributed to or required to be contributed to by FPA
or any of its Subsidiaries 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.
4.11 Title to Assets. FPA and its Subsidiaries are in possession of and
have good title to, or have valid leasehold interests in or valid rights under
contract to use, all of their respective properties and assets primarily used in
their respective businesses and material to the condition (financial or other)
of such businesses taken as a whole, 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 FPA's business operations
(in the manner presently carried on by FPA and its Subsidiaries) or (iii) as
disclosed in FPA SEC Reports, and except for such matters which, individually or
in the aggregate, would not have a Material Adverse Effect on FPA and its
Subsidiaries, taken as a whole. All leases under which FPA leases any
substantial amount of real or personal property 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 or event by FPA or its Subsidiaries which,
with notice or lapse of time or both, would become a default other than defaults
under such leases which in the aggregate would not have a Material Adverse
Effect on FPA and its Subsidiaries, taken as a whole.
4.12 Permits, Etc. FPA and its Subsidiaries own or validly hold 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 condition of their
respective businesses taken as a whole, except for such permits the failure to
own or hold would not, individually or in the aggregate, have a Material Adverse
Effect on FPA and its Subsidiaries, taken as a whole.
4.13 Tax-Free Reorganization. FPA has not 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) of the Code.
4.14 Registration Statement and Proxy Statement/Prospectus. None of the
information to be supplied by FPA or any of its Subsidiaries 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 meeting of the shareholders of the
Company to be held in connection with the transactions contemplated by this
Agreement, contain any untrue statement of a material fact or omit to state
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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 shareholders of the Company, 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 the Company or its Subsidiaries for inclusion therein.
ARTICLE V
COVENANTS
5.01 Covenants of the Company. At all times from and after the date hereof
until the Effective Time, the Company covenants and agrees as to itself and its
Subsidiaries that (except as expressly contemplated or permitted by this
Agreement, or to the extent that FPA shall otherwise consent in writing):
(a) The Company and each of its Subsidiaries shall conduct their
respective businesses only in, and none of the Company and such
Subsidiaries shall take any action except in the ordinary course consistent
with past practice.
(b) Without limiting the generality of paragraph (a) of this Section,
(i) the Company and its Subsidiaries shall use all commercially reasonable
efforts to preserve intact in all material respects their present business
organizations and reputation, to keep available the services of their key
officers and employees, to maintain their respective assets and properties
in good working order and condition, ordinary wear and tear excepted, to
maintain insurance on their respectivetheir tangible assets and businesses
in such amounts and against such risks and losses as are currently in
effect, to preserve their respective relationships with customers and
suppliers and others having significant business dealings with them and to
comply in all material respects with all Laws and Orders of all
Governmental or Regulatory Authorities applicable to them, and (ii) neither
the Company shall, nor shall it permit any of its Subsidiaries to:
(A) amend or propose to amend its certificate or articles of
incorporation or bylaws (or other comparable corporate charter
documents);
(B) (w) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, except for the
declaration and payment of dividends by a wholly-owned Subsidiary solely
to its parent corporation, (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;
(C) 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 (x) the issuance of shares of Company Common
Stock upon exercise of previously granted options pursuant to the
Company Option Plans in accordance with their present terms, (y) the
issuance by a wholly owned Subsidiary of its capital stock to its parent
and (z) the issuance of stock to existing shareholders as compensation
for services rendered by such shareholders to the Company), or modify or
amend any right of any holder of outstanding shares of capital stock or
Options with respect thereto;
(D) 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 the Company and its
Subsidiaries, taken as a whole;
(E) other than dispositions of assets which are not, individually
or in the aggregate, material to the Company and its Subsidiaries, taken
as a whole, sell, lease, grant any security interest in or otherwise
dispose of or encumber any of its assets or properties;
(F) except to the extent required by applicable law, (x) permit any
material change in (A) any pricing, marketing, purchasing, investment,
accounting, financial reporting, inventory, 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;
(G) (x) incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until
borrowings are made under such arrangements) any indebtedness for
borrowed money or guarantee any such indebtedness other than in the
ordinary course of its business consistent with past practice in an
aggregate principal amount exceeding $100,000 (net of any amounts of any
such indebtedness discharged during such period), or (y) voluntarily
purchase, cancel, prepay or otherwise provide for a complete or partial
discharge in advance of a scheduled repayment date with respect to, or
waive any right under, any indebtedness for borrowed money other than in
the ordinary course of its business consistent with past practice in an
aggregate principal amount exceeding $100,000;
(H) enter into, adopt, amend in any material respect (except as may
be required by applicable law) or terminate any Company Employee Benefit
Plan or any other agreement or arrangement, plan or policy between such
party or one of its Subsidiaries and one or more of its directors,
officers or employees, 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 the Company and its Subsidiaries, taken as a whole, 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;
(I) enter into any contract or amend or modify any existing
contract, or engage in any new transaction, outside the ordinary course
of business consistent with past practice or not on an arm's length
basis, with any affiliate of the Company or any of its Subsidiaries;
(J) 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 $100,000;
(K) make any change in the lines of business in which it
participates or is engaged; or
(L) enter into any contract, agreement, commitment or arrangement
to do or engage in any of the foregoing.
Notwithstanding the foregoing, prior to the Effective Time, the Company
shall record a liability to the employees listed on Schedule 5.01(b) (the
"Employee Compensation Liability") attached hereto payable in shares of FPA
Common Stock pursuant to Section 2.01(c)(i) and another liability to other
employees listed on Schedule 5.01(b) (the "Special Bonus Liability") payable in
cash pursuant to the last sentence of Section 2.01(c)(ii); and provided,
further, the Company intends to adjust its balance sheet to zero (exclusive of
the Employee Compensation Liability, the Special Bonus Liability and any
Professional Fee Liability) as of the Effective Time.
5.02 Covenants of FPA. At all times from and after the date hereof until
the Effective Time, FPA covenants and agrees as to itself and its Subsidiaries
that (except as expressly contemplated or permitted by this Agreement, or to the
extent that the Company shall otherwise consent in writing): (i) FPA shall not
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make any material changes to its business or structure which could reasonably be
expected to have an adverse effect on the consideration to be received by the
Company Shareholders; (ii) FPA 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) FPA shall not take any action to cause the Merger not to be
treated as a tax-free reorganization within the meaning of Section 368(a)(1)(A)
of the Code.
5.03 Advice of Changes. The Company shall confer on a regular and frequent
basis with FPA with respect to its business and operations and other matters
relevant to the Merger, and shall promptly advise FPA, 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, would have,
a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole
or adversely affect the ability of the Company to consummate the transactions
contemplated hereby. FPA shall deliver to the Company promptly upon filing with
the SEC all FPA SEC Reports.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Access to Information; Confidentiality.
(a) The Company shall, and shall cause each of its Subsidiaries to,
throughout the period from the date hereof to the Effective Time, (i) provide
FPA 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 the Company and its Subsidiaries 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
the Company and its Subsidiaries and (ii) furnish promptly to such persons (x) a
copy of each report, statement, schedule and other document filed or received by
the Company and its Subsidiaries pursuant to the requirements of federal or
state securities laws or filed with any other Governmental or Regulatory
Authority, and (y) all other information and data (including, without
limitation, copies of Contracts, Company Employee Benefit Plans and other books
and records) concerning the business and operations of the Company and its
Subsidiaries as FPA or any of such other persons reasonably may request. FPA
shall deliver promptly to the Company upon filing with the SEC 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 of 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 an 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 and its Subsidiaries 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 have been (x) previously known by the Company or
FPA, as the case may be, or its Representatives, (y) in the public domain
(either prior to or after the furnishing of such documents or information
hereunder) through no fault of the Company or FPA, as the case may be, and its
Representatives or (z) later acquired by the Company or FPA, as the case may be,
or its Representatives from another source if the recipient is not aware that
such source is under an obligation to the Company or FPA, as the case may be, to
keep such documents and information confidential. In the event that this
Agreement is terminated without the transactions contemplated hereby having been
consummated, upon the request of the Company or FPA, 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 the Company or
FPA, 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
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cause to be destroyed all notes, memoranda, summaries, analyses, compilations
and other writings related thereto or based thereon prepared by the Company or
FPA, as the case may be, or its Representatives.
6.02 Registration Statement and Proxy Statement/Prospectus. FPA shall file
with the Commission 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 Commission 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 Nasdaq in
connection with the issuance of FPA Common Stock pursuant hereto. FPA and the
Company 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.
6.03 Inclusion of Shares on Nasdaq. FPA shall file the application for
original listing of the shares of FPA Common Stock to be issued in the Merger in
accordance with this Agreement on or before the Closing Date.
6.04 Approval of Company Shareholders. The Company shall, as promptly as
practicable, submit this Agreement and the transactions contemplated hereby for
approval of the shareholders of the Company at a meeting of shareholders and
shall use all reasonable efforts to obtain shareholder approval and adoption of
this Agreement and the transactions contemplated hereby (the "Company
Shareholders' Approval") as soon as reasonably practicable after the date
hereof. Such meeting of shareholders shall be held as soon as practicable
following the date upon which the Registration Statement becomes effective.
Subject to the exercise of fiduciary obligations under applicable law as advised
by independent counsel, the Company shall recommend, through its Board of
Directors, to the shareholders of the Company that it is in the best interest of
the shareholders to approve this Agreement and the transactions contemplated
hereby, and shall use its best efforts to obtain such approval. Subject to the
foregoing, the Company (i) acknowledges that a breach of its covenant contained
in this Section to convene a meeting of its shareholders and call for a vote
thereat with respect to the approval of this Agreement and the Merger will
result in irreparable harm to FPA which will not be compensable in monetary
damages and (ii) agrees that such covenant shall be specifically enforceable and
that specific performance and injunctive relief shall be a remedy properly
available to FPA for a breach of such covenant.
6.05 Regulatory and Other Approvals. Without limiting the provision of
Sections 6.04, each of the Company and FPA 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 FPA, the Company or any of their Subsidiaries
to consummate the 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.
6.06 Expenses. Whether or not the Merger is consummated, 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.
6.07 Notice and Cure. Each of FPA and the Company 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 FPA or
the Company, as the case may be, under this Agreement to be breached or that
renders or will render untrue any representation or warranty of FPA or the
Company, 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
FPA and the Company also will notify the other 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, warranty,
covenant or agreement made by FPA or
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the Company, as the case may be, in this Agreement, whether occurring or arising
prior to, on or after the date of this Agreement.
6.08 Fulfillment of Conditions. Subject to the terms and conditions of this
Agreement, each of FPA and the Company 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 other's obligations contained in this Agreement and to
consummate and make effective the transactions contemplated by this Agreement,
and neither FPA nor the Company will, nor will it permit any of its Subsidiaries
to, take or fail to take any action that could be reasonably expected to result
in the nonfulfillment of any such condition.
6.09 No Solicitations. Prior to the Effective Time, the Company agrees (a)
that neither it nor any of its Subsidiaries, and it shall use its best efforts
to cause their 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 the Company or any of its Subsidiaries 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 the Company and its Subsidiaries, taken as a whole, (ii) any of the
outstanding shares of Company Common Stock, or (iii) any of the outstanding
shares of capital stock of any Subsidiary of the Company (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 this Agreement), or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that it will notify FPA as soon as commercially reasonable 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 that such Alternative Proposal is more
favorable (from a financial point of view) to the Company's shareholders than
the Merger, (ii) determine in the exercise of its fiduciary obligations under
applicable law as advised by independent counsel that such Alternative Proposal
is more favorable to the Company's shareholders than the Merger, and (iii)
deliver to FPA a definitive agreement of such Alternative Proposal or a
description of the material terms thereof and, except as would violate a
fiduciary or contractual obligation, a copy of any information provided by such
person or group, including the identity of such person or group, and give FPA at
least three (3) days to offer a counterproposal prior to executing such
definitive agreement; provided, however, that nothing contained in this Section
shall prohibit the Board of Directors of the Company 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 the Company, based upon the
written opinion of outside counsel (a copy of which shall be provided promptly
to FPA), determines in good faith that such action is required or appropriate
for the Board of Directors to comply with its fiduciary duties to shareholders
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 Alternative Proposal is more favorable to the Company's shareholders than
the Merger and (C) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or group, the Company provides
written notice to FPA 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 an Alternative Proposal.
6.10 Brokers or Finders. Each of FPA and the Company represents, as to
itself and its affiliates, that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, other than fees for which the
representing party is solely responsible. Each of FPA, on the one hand, and the
Company, on the other hand, shall indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any such
fee or commission or expenses related thereto asserted by any person on the
basis of any act or statement alleged to have been made by such party of
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its affiliate. Notwithstanding the foregoing, FPA shall assume the obligations
of the Company for the fees and expenses owed to KPMG Peat Marwick LLP,
Kilpatrick Stockton LLP, and Coopers & Lybrand LLP incurred in connection with
the Merger and the transactions contemplated hereby to the extent that such
aggregate fees and expenses do not exceed One Million Five Hundred Thousand
Dollars ($1,500,000) (the "Professional Fee Liability") reduced by the amount of
the Special Bonus Liability.
6.11 Employee Benefit Matters. Prior to the Effective Time, FPA and the
Company shall agree on termination of certain of the Company Employee Benefit
Plans and the Company shall use its reasonable best efforts to cause such Plans
to be terminated as of the Effective Time. From and after the Effective Time,
FPA and FPA of Georgia, Inc., a Georgia corporation and wholly-owned subsidiary
of FPA ("FPA-GA"), as the case may be, shall provide each Company non-physician
employee who becomes an employee of FPA or FPA-GA (and, to the extent
applicable, the employee's respective eligible dependents) (the "Retained
Employees") benefits which are substantially similar to those provided under 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 FPA Employee
Stock Purchase Plan), FPA shall give each Retained Employee full credit for the
service credited to such employee under the applicable Company Employee Benefit
Plans and shall waive any applicable waiting periods under FPA Employee Benefit
Plans. Notwithstanding the foregoing, FPA shall provide the Retained Employees
with credit for, and shall assume the Company's liability with respect to, up to
a maximum of 160 hours of accrued vacation.
6.12 Medical Services Agreement. As of the Effective Time, FPA-GA and
Prudential Health Care Plan of Georgia, Inc. ("PruCare Georgia") shall enter
into a medical services agreement (the "Medical Services Agreement")
substantially in the form of the Medical Services Agreement set forth as Exhibit
A attached hereto.
6.13 Asset Purchase and Facilities Agreement between FPA-GA and PruCare
Georgia. As of the Effective Time, FPA-GA and PruCare Georgia shall enter into
an agreement for the sale and assignment of certain assets (the "Asset Purchase
Agreement") substantially in the form of the Asset Purchase Agreement set forth
as Exhibit B attached hereto shall be effective.
6.14 Conversion of the Company to Business Corporation. If required,
immediately prior to the Merger, the Company shall cause its Articles of
Incorporation to be amended (and a Certificate of Amendment to be filed with the
Georgia Secretary of State) whereby the Company converts from a professional
corporation to a business corporation.
6.15 Physician Employment Agreements. The Company will recommend to each
physician employee of the Company, including the Company Shareholders
(collectively, the "Company Physicians") to the amendment and assignment of
their current employment agreements with the Company in substantially the form
attached hereto as Exhibit C (the "Physician Employment Agreements") to Medical
Group.
ARTICLE VII
CONDITIONS
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Registration Statement; State Securities Laws. The Registration
Statement shall have become effective in accordance with the provisions of
the Securities Act and FPA shall have received all state securities or
"Blue Sky" permits and other authorizations, if any, necessary to issue FPA
Common Stock pursuant to this Agreement and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
for that purpose shall have instituted by the Commission or any state
regulatory authorities.
(b) Company Shareholder Approval. The Company's shareholders shall
have approved this Agreement and the transactions contemplated hereby.
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(c) No Injunctions or Restraints. No court of competent jurisdiction
or other competent Governmental or Regulatory Authority shall have enacted,
issued, promulgated, enforced or entered any Law or Order (whether
temporary, preliminary or permanent) which is then in effect and has the
effect of making illegal or otherwise restricting, preventing or
prohibiting consummation of the Merger or the other transactions
contemplated by this Agreement.
(d) Governmental and Regulatory Consents and Approvals. Other than the
filing provided for by Section 1.02, all consents, approvals and actions
of, filings with and notices to any Governmental or Regulatory Authority
or any other public or private third parties required of FPA, the Company
or any of their Subsidiaries to consummate the Merger and the other
matters contemplated hereby, the failure of which to be obtained or taken
would be reasonably expected to have a Material Adverse Effect on FPA and
its Subsidiaries taken as a whole, or adversely affect the ability of FPA
and the Company to consummate the transactions contemplated hereby shall
have been obtained.
(e) Inclusion of Shares on Nasdaq. The shares of FPA Common Stock
issuable to the Company's shareholders in the Merger in accordance with
this Agreement shall have been approved for inclusion on the Nasdaq.
7.02 Conditions to Obligation of FPA to Effect the Merger. The obligation
of FPA to effect the Merger is further subject to the fulfillment, at or prior
to the Closing, of each of the following additional conditions (all or any of
which may be waived in whole or in part by FPA in its sole discretion):
(a) Representations and Warranties. Each of the representations and
warranties made by the Company in this Agreement shall be true and correct
in all material respects as of the Closing Date as though made on and as of
the Closing Date or, in the case of representations and warranties made as
of a specified date earlier than the Closing Date, on and as of such
earlier date, and the Company shall have delivered to FPA a certificate,
dated the Closing Date and executed on behalf of the Company by its
Chairman of the Board, President or any Executive or Senior Vice President,
to such effect.
(b) Performance of Obligations. The Company shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with
by the Company at or prior to the Closing, and the Company shall have
delivered to FPA a certificate, dated the Closing Date and executed on
behalf of the Company by its Chairman of the Board, President or any
Executive or Senior Vice President, to such effect.
(c) Orders and Laws. There shall not have been issued, enacted,
promulgated or deemed applicable to the Company, the Surviving Corporation,
any of their respective Subsidiaries or the transactions contemplated by
this Agreement any Order or Law of any Governmental or Regulatory Authority
which is then in effect and which could be reasonably expected to result in
a material diminution of the benefits of the Merger to FPA, and there shall
not be pending or threatened on the Closing Date any action, suit or
proceeding in, before or by any Governmental or Regulatory Authority which
could be reasonably expected to result in any such issuance, enactment,
promulgation or deemed applicability of any such Order or Law or of any
Order or Law referred to in Section 7.01(d).
(d) Contractual Consents. The Company and its Subsidiaries shall have
received all consents (or in lieu thereof waivers) from parties to each
Contract disclosed pursuant to Section 3.05(b).
(e) No Material Adverse Change. Since the date of this Agreement,
there shall not have been either (i) a decrease of ten percent (10%) or
more [plus one] in the number of physicians (calculated on a full-time
equivalent basis) employed by the Company or (ii) a reduction in the number
of PruCare covered lives serviced by the Company to less than 67,700
(76,932 times 88%) of such covered lives, which, taken as a whole, have had
or could be reasonably expected to have, a Material Adverse Effect on the
Company and its Subsidiaries.
(f) Proceedings. All proceedings to be taken on the part of the
Company in connection with the transactions contemplated by this Agreement
and all documents incident thereto shall be reasonably satisfactory in form
and substance to FPA, and FPA shall have received copies of all such
documents and
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other evidences as FPA may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
(g) Opinion of Counsel. FPA shall have received the opinions of
Kilpatrick Stockton LLP and Morris, Manning & Martin, counsel to the
Company, dated the Closing Date, in form reasonably acceptable to FPA.
(h) Contractual Consents. FPA and its Subsidiaries shall have received
all consents (or in lieu thereof waivers) from parties to each Contract
disclosed pursuant to Section 3.10.
(i) Asset Purchase Agreement. The Asset Purchase Agreement shall be
effective.
(j) Medical Services Agreement. The Medical Services Agreement shall
be effective.
(k) Physician Employment Agreements. The Company Physicians
representing at least ninety percent (90%) of the Company Physicians as of
the date of this Agreement [minus one] (calculated on a full-time
equivalent basis) shall have entered into the Physician Employment
Agreements with the Medical Group.
7.03 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by the Company
in its sole discretion):
(a) Representations and Warranties. Each of the representations and
warranties made by FPA in this Agreement shall be true and correct in all
material respects as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier
date, and FPA shall each have delivered to the Company a certificate, dated
the Closing Date and executed on behalf of FPA by its Chairman of the
Board, President or any Executive or Senior Vice President.
(b) Performance of Obligations. FPA shall have performed and complied
with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by FPA at or
prior to the Closing, and FPA shall have delivered to the Company a
certificate, dated the Closing Date and executed on behalf of FPA by its
Chairman of the Board, President or any Executive or Senior Vice President.
(c) Orders and Laws. There shall not have been issued, enacted,
promulgated or deemed applicable to FPA, its Subsidiaries or the
transactions contemplated by this Agreement any Order or Law of any
Governmental or Regulatory Authority which is then in effect and which
could be reasonably expected to result in a material diminution of the
benefits of the Merger to the Company, and there shall not be pending or
threatened on the Closing Date any action, suit or proceeding in, before or
by any Governmental or Regulatory Authority which could be reasonably
expected to result in any such issuance, enactment, promulgation or deemed
applicability of any such Order or Law or of any Order or Law referred to
in Section 7.01(d).
(d) Proceedings. All proceedings to be taken on the part of FPA in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Company, and the Company shall have received copies of all
such documents and other evidences as the Company may reasonably request in
order to establish the consummation of such transactions and the taking of
all proceedings in connection therewith.
(e) Opinion of Counsel. The Company shall have received the opinions
of Ballard Spahr Andrews & Ingersoll, counsel to FPA, and James A.
Lebovitz, General Counsel of FPA, dated the Closing Date, in form
reasonably acceptable to the Company.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time:
(a) by mutual written agreement of the parties hereto duly authorized
by action taken by or on behalf of their respective Boards of Directors;
(b) by either the Company or FPA upon notification to the
non-terminating party by the terminating party:
(i) at any time after June 30, 1998 if the Merger shall not have
been consummated on or prior to such date and such failure to consummate
the Merger is not caused by a breach of this Agreement by the
terminating party;
(ii) if any Governmental or Regulatory Authority, the taking of
action by which is a condition to the obligations of either the Company
or FPA 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;
(iii) 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 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; or
(iv) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an Order making
illegal or otherwise restricting, preventing or prohibiting the Merger
and such Order shall have become final and nonappealable.
8.02 Effect of Termination. If this Agreement is validly terminated by
either the Company or FPA pursuant to Section 8.01, this Agreement will
forthwith become null and void and there will be no liability or obligation on
the part of either the Company or FPA (or any of their respective
Representatives or affiliates), except (i) that the provisions of Sections
6.01(b) and 6.06 will continue to apply following any such termination and (ii)
that nothing contained herein shall relieve any party hereto from liability for
willful breach of its representations, warranties, covenants or agreements
contained in this Agreement.
8.03 Amendment. This Agreement may be amended, supplemented or modified by
action taken by or on behalf of the respective Boards of Directors of the
parties hereto at any time prior to the Effective Time. No such amendment,
supplement or modification shall be effective unless set forth in a written
instrument duly executed by or on behalf of each party hereto.
8.04 Waiver. At any time prior to the Effective Time any party hereto, by
action taken by or on behalf of its Board of Directors, may to the extent
permitted by applicable law (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties hereto
contained herein or in any document delivered pursuant hereto or (iii) waive
compliance with any of the covenants, agreements or conditions of the other
parties hereto contained herein. No such extension or waiver shall be effective
unless set forth in a written instrument duly executed by or on behalf of the
party extending the time of performance or waiving any such inaccuracy or
non-compliance. No waiver by any party of any term or condition of this
Agreement, in any one or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this Agreement on any
future occasion.
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ARTICLE IX
GENERAL PROVISIONS
9.01 Survival of Representations, Warranties, Covenants and Agreements. The
representations, warranties, covenants and agreements contained in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time and shall continue in full force and effect for a
period of one (1) year following the Effective Time except that Section 3.11
(Taxes) shall survive until the expiration of the applicable statute of
limitations. The waiver of any condition based on the accuracy of any
representation or warranty, or the performance or compliance of any covenant or
obligation, will not affect the right to indemnification set forth in this
Article IX. Notwithstanding the foregoing, FPA may bring a claim for fraud at
any time before the end of the applicable statute of limitations.
9.02 Indemnification.
(a) Indemnification of FPA. Subject to the provisions of this Article
IX, the Company Shareholders shall jointly and severally indemnify FPA
after the Effective Time and until one (1) year following the Effective
Time (the "Indemnification Period") from and against any and all damage,
loss, liability and expense (including without limitation reasonable
expenses of investigation and reasonable attorneys' fees and reasonable
expenses in connection with any action, suit or proceeding) incurred or
suffered or reasonably expected to be incurred or suffered by FPA arising
out of any breach of the representations, warranties, covenants or
agreements of the Company set forth herein (the "FPA Indemnifiable
Damages"). Notwithstanding the foregoing, (i) FPA shall not be entitled to
indemnification hereunder until FPA Indemnifiable Damages exceed Four
Hundred Thousand Dollars ($400,000) and thereafter shall be entitled to
indemnification for all FPA Indemnifiable Damages subject to the provisions
hereof; (ii) FPA shall not be entitled to recover from the Company
Shareholders more than the Merger Consideration received by the Company
Shareholders for all FPA Indemnifiable Damages; and (iii) no Company
Shareholder shall be responsible for FPA Indemnifiable Damages in an amount
in excess of the Merger Consideration received by such Company Shareholder.
FPA may obtain indemnification for any FPA Indemnifiable Damages to which
this Section 9.02 (a) relates only if a claim for indemnification is made
by FPA within the Indemnification Period.
(b) Indemnification by FPA. Subject to the provisions of this Article
IX, FPA agrees to indemnify the Company Shareholders after the Effective
Time from and against any and all damage, loss, liability and expense
(including without limitation reasonable expenses of investigation and
reasonable attorneys' fees and reasonable expenses in connection with any
action, suit or proceeding) incurred or suffered or reasonably expected to
be incurred or suffered by the shareholders of the Company arising out of
any breach of the representation and warranty of FPA contained in Section
5.02 hereof (the "Company Shareholders Indemnifiable Damages").
Notwithstanding the foregoing, (i) the Company Shareholders shall not be
entitled to indemnification hereunder until Company Shareholders
Indemnifiable Damages exceed Four Hundred Thousand Dollars ($400,000) and
thereafter shall be entitled to indemnification for all Company
Shareholders Indemnifiable Damages subject to the provisions hereof; and
(ii) the Company Shareholders shall not be entitled to recover from FPA
more than the Merger Consideration paid by FPA for all Company Shareholders
Indemnifiable Damages. FPA shall reimburse the Company Shareholders for any
Company Shareholders Indemnifiable Damages to which this Section 9.02 (b)
relates only if a claim for indemnification is made by the Company
Shareholders within the Indemnification Period. Without limiting their
obligations under this Article IX but subject to the maximum liability of
each Company Shareholder for FPA Indemnifiable Damages, the Company
Shareholders shall fully reimburse FPA and shall indemnify and hold FPA
harmless from, any and all liability arising from or related to the case
entitled ValueMark-Brawner Behavioral Health System-North, Inc. vs.
Prudential Insurance Company of America and Southeastern Health Services,
Inc., Civil Action No. 97110124-18 and claims related thereto.
(d) Indemnification Procedures. A party seeking indemnification (the
"Indemnitee") shall use its commercially reasonable efforts to minimize any
liabilities, damages, deficiencies, claims, judgments, assessments, costs
and expenses in respect of which indemnity may be sought under this
Agreement. The
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Indemnitee shall give prompt written notice to the party from whom
indemnification is sought (the "Indemnitor") of the assertion of a claim
for indemnification, but in no event longer than thirty (30) days after
service of process in the event litigation is commenced against the
Indemnitee by a third party, or sixty (60) days after the assertion of such
claim, or (c) one (1) year after the Effective Time, whichever shall first
occur. No such notice of assertion of a claim shall satisfy the
requirements of this Section 9.02(d) unless it describes in reasonable
detail and in good faith the facts and circumstances upon which the
asserted claim for indemnification is based. If any action or proceeding
shall be brought in connection with any liability or claim to be
indemnified hereunder, the Indemnitee shall provide the Indemnitor twenty
(20) calendar days to decide whether to defend such liability or claim.
During such period, the Indemnitee shall take all necessary steps to
protect the interests of itself and the Indemnitor, including the filing of
any necessary responsive pleadings, the seeking of emergency relief or
other action necessary to maintain the status quo, subject to reimbursement
from the Indemnitor of its expenses in doing so. The Indemnitor shall
(with, if necessary, reservation of rights) defend such action or
proceeding at its expense, using counsel selected by the insurance company
insuring against any such claim and undertaking to defend such claim, or by
other counsel selected by it and approved by the Indemnitee, which approval
shall not be unreasonably withheld or delayed. The Indemnitor shall keep
the Indemnitee fully apprised at all times of the status of the defense and
shall consult with the Indemnitee prior to the settlement of any
indemnified matter. The Indemnitee agrees to use reasonable efforts to
cooperate with the Indemnitor in connection with its defense of
indemnifiable claims. In the event the Indemnitee has a claim or claims
against any third party arising out of or connected with the indemnified
matter, then upon receipt of indemnification, the Indemnitee shall fully
assign to the Indemnitor the entire claim or claims to the extent of the
indemnification actually paid by the Indemnitor and the Indemnitor shall
thereupon be subrogated with respect to such claim or claims of the
Indemnitee.
9.03 Knowledge. With respect to any representations or warranties contained
herein which are made to the knowledge of the Company or FPA or any of their
respective Subsidiaries, as the case may be, the knowledge of the officers,
directors and employees of the Company or FPA, as the case may be, its
respective Subsidiaries, shall be imputed to the Company or FPA, as the case may
be, and such Subsidiaries.
9.04 Notices. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:
If to FPA, to:
FPA Medical Management, Inc.
3636 Nobel Drive, Suite 200
San Diego, California 92122
Attn: James A. Lebovitz, Esq.
Facsimile No.: (619) 453-1941
with a copy to:
Ballard Spahr Andrews & Ingersoll
1735 Market Street 51st floor
Philadelphia, PA 19103-7599
Attn: Justin Klein, Esq.
Facsimile No.: (215) 864-8999
If to the Company, to:
Meridian Medical Group, Inc.
1090 Northchase Parkway, Suite 375
Marietta, Georgia 30067
Attn: President
Facsimile No.:
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with a copy to:
Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 280
Atlanta, Georgia
Attn: Lynn E. Fowler, Esq.
Jane E. Jordan, Esq.
Facsimile No.: (404) 815-6555
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by mail in the manner described above to the address as provided in this
Section, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other person to whom a
copy of such notice, request or other communication is to be delivered pursuant
to this Section). Any party from time to time may change its address, facsimile
number or other information for the purpose of notices to that party by giving
notice specifying such change to the other parties hereto.
9.05 Entire Agreement. This Agreement supersedes all prior discussions and
agreements among the parties hereto with respect to the subject matter hereof
and contains the sole and entire agreement among the parties hereto with respect
to the subject matter hereof.
9.06 Public Announcements. Except as otherwise required by law or the rules
of The Nasdaq National Market, so long as this Agreement is in effect, FPA and
the Company will not, and will not permit any of their respective
Representatives to, issue or cause the publication of any press release or make
any other public announcement with respect to the transactions contemplated by
this Agreement without the consent of the other party, which consent shall not
be unreasonably withheld. FPA and the Company will cooperate with each other in
the development and distribution of all press releases and other public
announcements with respect to this Agreement and the transactions contemplated
hereby, and will furnish the other with drafts of any such releases and
announcements as far in advance as practicable.
9.07 No Third Party Beneficiary. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and their respective
successors or permitted assigns, and except as provided in Sections 2.01 and
2.02 (which are intended to be for the benefit of the persons entitled to
therein, and may be enforced by any of such persons), it is not the intention of
the parties to confer third-party beneficiary rights upon any other person.
9.08 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any party hereto without the
prior written consent of the other parties hereto and any attempt to do so will
be void. Subject to the preceding sentence, this Agreement is binding upon,
inures to the benefit of and is enforceable by the parties hereto and their
respective successors and assigns.
9.09 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
9.10 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
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9.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to a contract
executed and performed in such State, without giving effect to the conflicts of
laws principles thereof.
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
signed by its officer thereunto duly authorized as of the date first above
written.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
------------------------------------
Name: James A. Lebovitz
Title: Senior Vice President
MERIDIAN MEDICAL GROUP, INC.
By: /s/ ROBERT YOUNG, M.D.
------------------------------------
Name: Robert Young, M.D.
Title: President
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APPENDIX B
GEORGIA DISSENTERS' RIGHTS STATUTES
14-2-1301. DEFINITIONS.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right when
and in the manner required by Code Sections 14-2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances.
(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder. (Code 1981, sec. 14-2-1301, enacted by Ga. L. 1988, p. 1070,
sec. 1; Ga. L. 1993, p. 1231, sec. 16.)
14-2-1302. RIGHT TO DISSENT.
(a) A record shareholder of the corporation is entitled to dissent from,
and obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If approval of the shareholders of the corporation is required
for the merger by Code Section 14-2-1103 or the articles of
incorporation and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under Code Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially all of
the property of the corporation if a shareholder vote is required on the
sale or exchange pursuant to Code Section 14-2-1202, but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of sale;
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(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights;
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under Code Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of
the class; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent that Article 9 of this chapter, the articles of incorporation,
bylaws, or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of
shares of the class or series are required under the plan of merger or
share exchange to accept for their shares anything except shares of the
surviving corporation or another publicly held corporation which at the
effective date of the merger or share exchange are either listed on a
national securities exchange or held of record by more than 2,000
shareholders, except for scrip or cash payments in lieu of fractional
shares; or
(2) The articles of incorporation or a resolution of the board of
directors approving the transaction provides otherwise. (Code 1981,
sec. 14-2-1302, enacted by Ga. L. 1988, p. 1070, sec. 1; Ga. L. 1989, p.
946, sec. 58.)
14-2-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this Code
section are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders. (Code 1981,
sec. 14-2-1303, enacted by Ga. L. 1988, p. 1070, sec. 1.)
14-2-1320. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
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(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322 no later than ten days after the corporate action was taken. (Code
1981, sec. 14-2-1320, enacted by Ga. L. 1988, p. 1070, sec. 1; Ga. L. 1993, p.
1231, sec. 17.)
14-2-1321. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his shares
under this article. (Code 1981, sec. 14-2-1321, enacted by Ga. L. 1988, p. 1070,
sec. 1.)
14-2-1322. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the notice required in subsection (a) of this Code section is
delivered; and
(4) Be accompanied by a copy of this article. (Code 1981,
sec. 14-2-1322, enacted by Ga. L. 1988, p. 1070, sec. 1.)
14-2-1323. DUTY TO DEMAND PAYMENT.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his certificates in accordance
with the terms of the notice.
(b) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article. (Code 1981,
sec. 14-2-1323, enacted by Ga. L. 1988, p. 1070, sec. 1.)
14-2-1324. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(Code 1981, sec. 14-2-1324, enacted by Ga. L. 1988, p. 1070, sec. 1.)
14-2-1325. OFFER OF PAYMENT.
(a) Except as provided in Code Section 14-2-1327, within ten days of the
later of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall by notice to each dissenter who complied with Code
Section 14-2-1323 offer to pay to such dissenter the amount the corporation
estimates to be the fair value of his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code
Section 14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer or is deemed to
have accepted such offer by failure to respond within said 30 days, payment for
his or her shares shall be made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later. (Code 1981,
sec. 14-2-1325, enacted by Ga. L. 1988, p. 1070, sec. 1; Ga. L. 1989, p. 946,
sec. 59; Ga. L. 1993, p. 1231, sec. 18.)
14-2-1326. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure. (Code 1981, sec. 14-2-1326, enacted by Ga. L. 1988, p. 1070, sec. 1;
Ga. L. 1990, p. 257, sec. 20.)
14-2-1327. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his shares or that the interest
due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
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(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under
subsection (b) of Code Section 14-2-1325, and the corporation shall provide
the information to the shareholder within ten days after receipt of a
written demand for the information; and
(2) The shareholder may at any time, subject to the limitations period
of Code Section 14-2-1332, notify the corporation of his own estimate of
the fair value of his shares and the amount of interest due and demand
payment of his estimate of the fair value of his shares and interest due.
(Code 1981, sec. 14-2-1327, enacted by Ga. L. 1988, p. 1070, sec. 1; Ga. L.
1989, p. 946, sec. 60; Ga. L. 1990, p. 257, sec. 21; Ga. L. 1993, p. 1231,
sec. 19.)
14-2-1330. COURT ACTION.
(a) If a demand for payment under Code Section 14-2-1327 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by publication,
or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of Title 9, known as the "Georgia Civil
Practice Act," applies to any proceeding with respect to dissenters' rights
under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment. (Code 1981, sec. 14-2-1330, enacted by Ga. L.
1988, p. 1070, sec. 1; Ga. L. 1989, p. 946, sec. 61; Ga. L. 1993, p. 1231, sec.
20.)
14-2-1331. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
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(b) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable;
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Code Sections 14-2-1320 through 14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited. (Code 1981, sec. 14-2-1331, enacted
by Ga. L. 1988, p. 1070, sec. 1.)
14-2-1332. LIMITATION OF ACTIONS.
No action by any dissenter to enforce dissenters' rights shall be brought
more than three years after the corporate action was taken, regardless of
whether notice of the corporate action and of the right to dissent was given by
the corporation in compliance with the provisions of Code Section 14-2-1320 and
Code Section 14-2-1322. (Code 1981, sec. 14-2-1332, enacted by Ga. L. 1988, p.
1070, sec. 1.)
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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.
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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. 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, 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.
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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 February 10, 1998 by and between the
Registrant and Meridian Medical Group, Inc. (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
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
23.5 Consent of Deloitte & Touche LLP, Sacramento
23.6 Consent of Stevenson, Jones, Imig, Holmaas & Kleinhans, P.C.
23.7 Consent of Coopers & Lybrand L.L.P.
23.8 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5).
24 Power of Attorney (included in Part II of Registration Statement).
99 Form of Meridian 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.
** Schedules and attachments omitted from this exhibit will be provided to the
Commission supplementally upon request, pursuant to Item 601(b) 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 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
II-4
<PAGE> 140
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> 141
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 11, 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
- ----------------------------------------------- --------------------------- ------------------
<S> <C> <C>
/s/ SOL LIZERBRAM Director and Chairman of February 11, 1998
- ----------------------------------------------- the Board of Directors
Sol Lizerbram
/s/ SETH FLAM President, Chief Executive February 11, 1998
- ----------------------------------------------- Officer and Director
Seth Flam (Principal Executive
Officer)
/s/ STEPHEN J. DRESNICK Director and Vice Chairman February 11, 1998
- ----------------------------------------------- of the Board of Directors
Stephen J. Dresnick
/s/ STEVEN M. LASH Executive Vice President, February 11, 1998
- ----------------------------------------------- Chief Financial Officer and
Steven M. Lash Treasurer (Principal
Financial Officer)
/s/ M. P. MORRIS Vice President-Finance February 11, 1998
- ----------------------------------------------- (Principal Accounting
Michael Morris Officer)
/s/ HOWARD HASSMAN Director February 11, 1998
- -----------------------------------------------
Howard Hassman
/s/ KEVIN ELLIS Director February 11, 1998
- -----------------------------------------------
Kevin Ellis
/s/ SHELDON DEREZIN Director February 11, 1998
- -----------------------------------------------
Sheldon Derezin
Director , 1998
- -----------------------------------------------
Herbert A. Wertheim
</TABLE>
II-6
<PAGE> 142
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ------------------------------------------------------------------------- ------------
<S> <C> <C>
2 Agreement and Plan of Merger dated as of February 10, 1998 by and between
the Registrant and Meridian Medical Group, Inc. (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 Coopers & Lybrand L.L.P.......................................
23.8 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit
5).......................................................................
24 Power of Attorney (included in Part II of Registration Statement)........
99 Form of Meridian 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.
** Schedules and attachments omitted from this exhibit will be provided to the
Commission supplementally upon request, pursuant to Item 601(b) of Regulation
S-K.
<PAGE> 1
EXHIBIT 5
[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, 1,338,727 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 February 10, 1998, between
the Company and Meridian Medical Group, Inc. (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
<PAGE> 1
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
<PAGE> 1
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
<PAGE> 1
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 this
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
<PAGE> 1
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
<PAGE> 1
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.
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
<PAGE> 1
Exhibit 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report, which includes an explanatory paragraph for emphasis of a matter,
dated July 31, 1997, on our audits of the financial statements of Meridian
Medical Group, Inc. We also consent to the reference to our firm under the
caption of "Experts."
Atlanta, Georgia
February 11, 1998
<PAGE> 1
EXHIBIT 99
MERIDIAN MEDICAL GROUP, INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
The undersigned shareholder(s) of MERIDIAN MEDICAL GROUP, INC., a Georgia
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 p.m., local time, at
and at any adjournment or postponement thereof, and to
vote all shares of voting common stock, par value $.01 per share (the "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 February 10, 1998 (the "Merger Agreement"), between
the Corporation and FPA Medical Management, Inc. ("FPA") 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 to claim
indemnification from and recover from such undersigned shareholder more than the
value of the merger consideration received by such undersigned shareholder, 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 MERIDIAN MEDICAL
GROUP, 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.
