Item 8.01 Other Events.
On May 10, 2019, the Company entered into
a series of agreements (collectively, the “
Transaction Agreements
,” and the transactions contemplated by such
Transaction Agreements, the “
Transactions
”) with two of its affiliates, AP-AMH Medical Corporation, a California
professional medical corporation (“
AP-AMH
”), and Allied Physicians of California, a Professional Medical Corporation,
a California professional medical corporation (“
APC
”).
Relationship of the Parties
AP-AMH is a professional medical corporation and APC
is
an independent practice association that the Company has determined should be consolidated as variable interest entities with the
Company’s financial statements under United States generally accepted accounting principles (U.S. GAAP). Each has, or as
a result of the Transactions will have, a management services agreement with Network Medical Management, Inc., a California corporation
(“
NMM
”), a wholly owned subsidiary of the Company, pursuant to which NMM provides and performs non-medical management
and administrative services.
Transactions Overview and Conditions
The Transactions are interrelated, and
each Transaction Agreement is dependent on the concurrent closing of the other Transaction Agreements described herein. While each
of the Transaction Agreements is subject to different closing conditions, the effect of the closing conditions as a whole is that
the Transactions are subject to, in addition to customary closing conditions, satisfaction or waiver of the conditions as of the
dates indicated below.
Within 60 days of signing the Transaction
Agreements that were signed on May 10, 2019, the Company and APC must have satisfied or waived various conditions, including each
having received a fairness opinion from their respective financial advisors, the Company having obtained a loan to provide funds
in an amount sufficient to allow the Company to fund the loan to AP-AMH, AP-AMH having completed its due diligence of APC, with
results to its reasonable satisfaction, and the Company and its advisors having completed a tax analysis of the Transactions, with
the results of that analysis satisfactory to the Company. The Company has received a preliminary proposal from a lender that would
enable the Company to fund its loan to AP-AMH.
Prior to the closing of each Transaction,
each of the Company, APC and AP-AMH must have satisfied or waived various conditions, including that each must have obtained the
requisite consent of its shareholders to consummate the Transactions, the Company must have received satisfactory legal opinions
from regulatory counsel and tax counsel, and APC must have received a satisfactory legal opinion from its tax counsel.
Transaction Agreements
With the closing of each Transaction Agreement
subject to the satisfaction of the conditions described above, the Company, AP-AMH and APC entered into the following Transaction
Agreements, each of which is provided herewith as an Exhibit as indicated below and is incorporated herein by reference. The following
descriptions are summaries only of certain material terms and are qualified in their entirety by reference to each Transaction
Agreement.
Transactions between
the Company and AP-AMH
(1)
Loan Agreement
.
The Company agreed to lend AP-AMH $545,000,000 pursuant to a Loan Agreement (the “
Loan Agreement,
” which is
attached as Exhibit 10.1) and associated Security Agreement which will be signed at the closing of the Transactions (the “
Security
Agreement,
” which is attached as Exhibit 10.2). The Loan Agreement matures on the tenth anniversary of the date the Company
funds the loan, bears interest at a rate of 10% per annum simple interest (except as indicated below), has no prepayment right
(except in certain limited circumstances with respect to amounts of interest that have not previously been paid when due as permitted
under the Loan Agreement)
,
and requires interest payments quarterly in arrears. To the extent that AP-AMH is unable to make
any interest payment when due because it has received dividends on the Preferred Stock purchased pursuant to the transactions described
in item 5 below (the “
Preferred Stock Dividends
”) with respect to such payment date in an amount insufficient
to pay in full such interest payment, then the outstanding principal amount of the loan will be increased by the amount of any
such accrued but unpaid interest, and any such increased principal amounts will bear interest at the rate of 10.75% per annum simple
interest. The Loan Agreement is secured by a first priority security interest in all of AP-AMH’s assets, including the Preferred
Stock.
(2)
Tradename Agreement
.
The Company agreed to license, for a fee, certain of its owned trademarks to AP-AMH pursuant to a Tradename Licensing Agreement
(the “
Tradename Agreement,
” which is attached as Exhibit 10.3). The Tradename Agreement terminates when AP-AMH
no longer owns any Preferred Stock of APC. The fee is equal to a percentage multiplied by the aggregate gross revenues of AP-AMH,
and is payable out of any Preferred Stock Dividends received by AP-AMH from APC. The fee is subject to annual review and renegotiation
by the parties.
(3)
Administrative
Services Agreement
. NMM, as a wholly owned subsidiary of the Company, agreed to provide certain administrative services to
AP-AMH, for a fee, pursuant to an Administrative Services Agreement (the “
Administrative Services Agreement,
”
which is attached as Exhibit 10.4). The Administrative Services Agreement terminates when AP-AMH no longer owns any Preferred Stock
of APC. The fee is equal to a percentage multiplied by the aggregate gross revenues of AP-AMH, and is payable out of any Preferred
Stock Dividends received by AP-AMH from APC. The fee is subject to annual review and renegotiation by the parties.
(4)
Physician Shareholder
Agreement
. Thomas Lam, M.D., as the sole shareholder of AP-AMH, agreed that pursuant to a Physician Shareholder Agreement (the
“
Physician Shareholder Agreement,
” which is attached as Exhibit 10.5), he would (a) not assign, transfer, gift,
pledge, hypothecate, encumber or otherwise dispose of any or all of his shares of AP-AMH, (b) provide notice to the Company and
NMM of certain material business actions of AP-AMH, and (c) on request by the Company, sell his shares of AP-AMH to a designee
of the Company for $100 or cause AP-AMH to issue to such designee a holding that would represent 51% or more of the ownership of
AP-AMH.
Transactions between AP-AMH
and APC
(5)
Preferred
Stock Purchase Agreement and Certificate of Determination
. AP-AMH agreed to purchase $545,000,000 of Series A Preferred Stock
(the “
Preferred Stock
”) of APC pursuant to a Series A Preferred Stock Purchase Agreement (the “
Preferred
Stock Purchase Agreement,
” which is attached as Exhibit 10.6), which Preferred Stock has those rights set forth in the
Certificate of Determination of Preferences of Series A Preferred Stock of APC (the “
Certificate of Determination,
”
which is included as an exhibit to the Preferred Stock Purchase Agreement).
The Preferred Stock
Purchase Agreement contains, among other terms and conditions, customary representations and warranties by APC for transactions
of this nature, covenants regarding the operation of APC between signing of the Preferred Stock Purchase Agreement and the closing
of the purchase, certain conditions to closing, some of which are described above under “Transactions Overview and Conditions,”
broad mutual indemnification provisions and other miscellaneous provisions.
Under the Certificate of Determination, AP-AMH is entitled to receive Preferred Stock Dividends that are
preferential, cumulative, accrue on a daily basis from the date of purchase of the Preferred Stock and are equal for any determination
period to the sum of (A) APC’s Net Income from Healthcare Services (as defined in the Certificate of Determination), plus
(B) any dividends received by APC in such period from certain affiliated entities, minus (C) any Retained Amounts (as defined in
the Certificate of Determination). The Retained Amounts allow APC to retain 50% of the Net Income from Healthcare Services in excess
of a baseline amount
(which baseline amount is subject
to annual adjustments based on CPI increases, but not decreases), with the other 50% paid to AP-AMH as a part of the Preferred
Stock Dividends. As a result, APC retains 50% of increases after the closing in the amounts of the Net Income from Healthcare Services,
with the remainder paid to AP-AMH. The Retained Amounts do not apply to any APC affiliated entities, including any future-acquired
APC affiliated entities. The Preferred Stock Dividends are paid quarterly and are based on the financial results of APC as of the
quarter prior to the quarter in which any payment is made.
The Preferred Stock
entitles AP-AMH to vote on certain material events that could materially affect the value of the Preferred Stock, such as changes
that modify the rights of the Preferred Stock, increases or decreases in the authorized number of shares of Preferred Stock, liquidation
events and issuances of any stock that has preferential rights to the Preferred Stock.
On a sale of APC
or certain other liquidation events specified in the Certificate of Determination, AP-AMH is entitled to payment of all accrued
but unpaid Preferred Stock Dividends plus $545,000,000.
(6)
Special Purpose Shareholder Agreement
. In connection with the Preferred Stock Purchase Agreement,
AP-AMH and APC agreed to the Special Purpose Shareholder Agreement (the “
Shareholder Agreement,
” which is attached
as Exhibit 10.7). Under the Shareholder Agreement, (a) AP-AMH agreed to fund any losses or deficits related to APC’s Healthcare
Services assets without right of reimbursement or any corresponding payment or increase in shares, and (b) AP-AMH was granted consent
rights with respect to certain material corporate decisions of APC. The Shareholder Agreement is in effect only if and for so long
as there are any shares of Preferred Stock issued and outstanding.
Transactions Between the
Company and APC
(7)
Common Stock Purchase Agreement
. APC agreed to purchase $300,000,000 of the Company’s
common stock (such purchased common stock, the “
Common Stock
”) pursuant to a Common Stock Purchase Agreement
(the “
Common Stock Purchase Agreement,
” which is attached as Exhibit 10.8). The Common Stock Purchase agreement
contains, among other terms and conditions, customary representations and warranties by the Company for transactions of this nature,
covenants regarding the operation of the Company between signing of the Common Stock Purchase Agreement and the closing of the
purchase, certain conditions to closing, some of which are described above under “Transactions Overview and Conditions,”
broad mutual indemnification provisions and other miscellaneous provisions. Under the Common Stock Purchase Agreement, (a) no director,
officer or other affiliate of the Company may vote as a director or shareholder of APC in any decision of APC as to the voting
of any shares of Common Stock held by APC, (b) neither APC nor any director, officer or other affiliate of APC who is a stockholder
of the Company may vote at any stockholder meeting called in connection with any or all of the Transactions, and (c) neither the
Company nor any director, officer or other affiliate of the Company who is a shareholder of APC may vote at any APC shareholder
meeting called in connection with any or all of the Transactions. The Common Stock to be sold under the Common Stock Purchase Agreement
has not been registered under the Securities Act and is being issued and sold in a private placement pursuant to Section 4(a)(2)
thereof.
(8)
Voting and
Registration Rights Agreement
. The Company will grant APC certain registration rights with respect to the Common Stock, and
APC agreed to restrict its voting powers, pursuant to a Voting and Registration Rights Agreement, which will be signed at the closing
of the Transactions (the “
Voting and Registration Rights Agreement,
” which is attached as Exhibit 10.9). Following
the six month anniversary of the execution of the Voting and Registration Rights Agreement, holders of at least 25% of the Common
Stock may require that the Company prepare and file, and take reasonable actions to support the effectiveness of, a registration
statement covering the resale of all of the Common Stock not already covered by an existing and effective registration statement.
Under the Voting and Registration Rights Agreement, APC will agree that to the extent it has voting power in excess of 9.99% of
all voting securities of the Company, APC will not vote any Common Stock or other voting securities of the Company in excess of
9.99%.