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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES Exchange Act of 1934 for the
fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES Exchange Act of 1934 for the
transition period from ________ to ________
Commission file number 0-22019
SPECIALTY CARE NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 62-1623449
incorporation or organization) (I.R.S. Employer Identification No.)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [ ]
As of March 26, 1999, the aggregate market value of the Common stock held by
non-affiliates of the registrant was $11,815,026. Such aggregate market value
was computed by reference to the closing sale price of the Common stock as
reported on the Nasdaq National Market on such date. For purposes of making
this calculation only, the registrant has defined "affiliates" as including all
directors and beneficial owners of more than five percent of the common stock
of the Company.
As of March 26, 1999 there were 16,381,229 shares of the registrant's common
stock outstanding.
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This amendment to the Company's Form 10-K for the fiscal year ended December
31, 1998 amends and modifies the Form 10-K to amend and restate in their
entirety Items 10, 11, 12 and 13 of Part III.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
KERRY R. HICKS, age 39, a founder of Specialty Care Network, has served as our
President and Chief Executive Officer and as a director since our inception in
December 1995. From 1985 to March 1996, Mr. Hicks served as Senior Vice
President of LBA Health Care Management ("LBA"), a developer of health care and
management information services. LBA provided management consulting services
(including orthopaedic projects) to medical centers to support the purchasing,
planning, marketing and delivery of health care. Mr. Hicks was principally
responsible for developing LBA's orthopaedic product line and its information
systems. LBA's orthopaedic product line established quality and cost benchmarks
and developed clinical protocols and patient care algorithms intended to
enhance both the quality and effectiveness of the delivery of orthopaedic care.
PATRICK M. JAECKLE, age 40, a founder of Specialty Care Network, has served as
Executive Vice President Corporate Development since July 1998 and Executive
Vice President - Finance/Development from December 1995 to July 1998, and as a
director since our inception in December 1995. From February 1994 to March
1996, Dr. Jaeckle served as director of health care corporate finance at Morgan
Keegan & Company, Inc., a regional investment banking firm. Prior to February
1994, Dr. Jaeckle was a member of the health care investment banking groups at
both Credit Suisse First Boston Corporation (from June 1992 to February 1994)
and Smith Barney, Inc. (from May 1991 to June 1992). Dr. Jaeckle holds an
M.B.A. degree from Columbia Business School, a D.D.S. degree from Baylor
College of Dentistry and a B.A. degree from The University of Texas at Austin.
PETER H. CHEESBROUGH, age 47, has served as a director of Specialty Care
Network since December 1996. Since June 1993, Mr. Cheesbrough has been the
Senior Vice President-Finance and Chief Finance Officer of Echo Bay Mines Ltd.,
a company engaged in precious metals mining. From April 1988 to June 1993, he
was Echo Bay Mines' Vice President and Controller. Mr. Cheesbrough is a Fellow
of the Institute of Chartered Accountants of England and Wales and also a
chartered accountant in Canada.
RICHARD E. FLEMING, JR., M.D., age 51, has served as a director of Specialty
Care Network since December 1996. Since 1979, Dr. Fleming has been an
orthopaedic surgeon at Princeton Orthopaedic Associates II, P.A. and its
predecessor, Princeton Orthopaedic Associates, P.A. Dr. Fleming received a B.A.
degree from Princeton University and an M.D. degree from Columbia University
College of Physicians and Surgeons.
LESLIE S. MATTHEWS, M.D., age 47, has served as a director of Specialty Care
Network since December 1996. Since October 1994, Dr. Matthews has been an
orthopaedic surgeon at Greater Chesapeake Orthopaedic Associates, LLC, and
since 1990, he has been the Chief of Orthopaedic Surgery at Union Memorial
Hospital. From July 1982 to October 1994, Dr. Matthews was also engaged in
private practice. Dr. Matthews received a B.A. degree from Johns Hopkins
University and an M.D. degree from the Baylor College of Medicine.
MATS WAHLSTROM, age 44, has served as a director of Specialty Care Network
since March 1997. Mr. Wahlstrom has served in various capacities for Gambro AB
and its affiliated companies, which are engaged in the manufacture of equipment
for hemodialysis, cardiovascular surgery and blood component analysis and in
the provision of health care services. He has been President of Gambro
Healthcare, Inc. since 1993, Executive Vice President of Gambro AB since 1990
and President of COBE Laboratories, Inc., a subsidiary of Gambro AB engaged in
the development and manufacture of hemodialysis products and the operation of
dialysis centers, since 1991.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers:
Name Age Position
---- --- --------
Kerry R. Hicks.............................. 39 President, Chief Executive Officer
Patrick M. Jaeckle.......................... 40 Executive Vice President - Corporate Development
Kevin J. Hicks.............................. 39 Executive Vice President - Provider Businesses
D. Paul Davis............................... 41 Chief Financial Officer
David G. Hicks.............................. 40 Vice President - Management Information Systems
Timothy D. O'Hare........................... 46 Vice President - Payor Operations
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KERRY R. HICKS, age 39, a founder of Specialty Care Network, has served as our
President and Chief Executive Officer and as a director since our inception in
December 1995. From 1985 to March 1996, Mr. Hicks served as Senior Vice
President of LBA Health Care Management ("LBA"), a developer of health care and
management information services. LBA provided management consulting services
(including orthopaedic projects) to medical centers to support the purchasing,
planning, marketing and delivery of health care. Mr. Hicks was principally
responsible for developing LBA's orthopaedic product line and its information
systems. LBA's orthopaedic product line established quality and cost benchmarks
and developed clinical protocols and patient care algorithms intended to
enhance both the quality and effectiveness of the delivery of orthopaedic care.
PATRICK M. JAECKLE, age 40, a founder of Specialty Care Network, has served as
Executive Vice President Corporate Development since July 1998 and Executive
Vice President - Finance/Development from December 1995 to July 1998, and as a
director since our inception in December 1995. From February 1994 to March
1996, Dr. Jaeckle served as director of health care corporate finance at Morgan
Keegan & Company, Inc., a regional investment banking firm. Prior to February
1994, Dr. Jaeckle was a member of the health care investment banking groups at
both Credit Suisse First Boston Corporation (from June 1992 to February 1994)
and Smith Barney, Inc. (from May 1991 to June 1992). Dr. Jaeckle holds an
M.B.A. degree from Columbia Business School, a D.D.S. degree from Baylor
College of Dentistry and a B.A. degree from The University of Texas at Austin.
KEVIN J. HICKS has been Executive Vice President - Provider Businesses since
August 1998. Mr. Hicks oversees ongoing consulting projects and manages
HealthCareReportCards.com's client relationships. Mr. Hicks was Chief Operating
Officer of LBA Healthcare Management from 1985 through 1995. He then served as
Senior Vice President of LBA when LBA was sold to Healthvision Inc. and then
subsequently sold to HCIA Inc. Mr. Hicks has provided consulting assistance to
numerous client hospitals, physician practices and integrated networks. Mr.
Hicks received a BS in Finance and an MBA from the University of Colorado at
Boulder.
D. PAUL DAVIS has served as Chief Financial Officer since August 1998, Senior
Vice President - Finance since June 1997 and he served as Vice President of
Finance from March 1996 until June 1997. He also served as our controller from
March 1996 until September 1997. From January 1993 to March 1996, Mr. Davis
served as Vice President of Finance for Surgical Partners of America, Inc. From
April 1987 to January 1993, he served as Chief Financial Officer for Anesthesia
Service Medical Group, Inc. Mr. Davis received a B.S. degree in Accounting from
the University of Utah. He is a certified public accountant and a certified
management accountant.
DAVID G. HICKS has served as Vice President - Management Information Systems
since March 1996. From November 1994 to March 1996, Mr. Hicks worked as Manager
of Information Technology for the Association of Operating Room Nurses,
responsible for information technology maintenance and development. From
February 1993 to November 1994, he served as Manager of Information Systems
Administration for Coors Brewing Company, and from January 1982 to February
1993, Mr. Hicks served as Manager of Internal Systems for Martin Marietta Data
Systems. Mr. Hicks received a B.S. degree in Management Information Systems
from Colorado State University.
TIMOTHY D. O'HARE has been Vice President - Payor Operations since August 1996.
From May 1994 to July 1996, Mr. O'Hare served as Executive Director of Kaiser
Foundation HealthPlan of North Carolina, where his responsibilities included
the negotiation of capitated and incentive contracts with hospitals, physician
hospital organizations and physician group practices. From April 1987 to May
1994, Mr. O'Hare served as Vice President/Executive Director of CIGNA Health
Care of North Carolina. From March 1986 to April 1987, Mr. O'Hare served as
Vice President of Operations for Preferred Health Network. Mr. O'Hare received
a B.S. degree from Virginia Polytechnic Institute and State University and a
M.H.A. degree from Virginia Commonwealth University.
Kerry R. Hicks, Kevin J. Hicks and David G. Hicks are all brothers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors and beneficial owners of more than ten percent of our common stock to
file reports of ownership of our securities and changes in ownership with the
Securities and Exchange Commission. We believe that all filings required to be
made during 1998 were made on a timely basis, except that Dr. Matthews and Dr.
Richard Rothman, a former director, each reported one transaction after the
applicable due date.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information concerning the compensation
paid by us to the Chief Executive Officer and the four other most highly paid
executive officers (collectively, the "Named Executive Officers") during 1998,
1997 and 1996.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
- --------------------------- ---- ------ ----- ------- ---------------
Kerry R. Hicks
President and Chief Executive Officer............... 1998 $248,923 $ -- 500,000 $ 12,997
1997 $214,260 $ -- 172,622 $ 8,226
1996 $138,876 $140,625 75,000 $ --
Patrick M. Jaeckle
Executive Vice President - Corporate Development.... 1998 $250,400 $ -- 500,000 $ 8,800
1997 $214,259 $ -- 172,622 $ 6,572
1996 $147,210 $140,625 75,000 $ --
D. Paul Davis
Chief Financial Officer............................. 1998 $166,442 $ -- 305,310 $ 15,202
1997 $135,519 $ -- 60,217 $ 8,236
1996 $ 89,338 $ 67,500 30,000 $ --
Michael E. West (2)
Senior Vice President - Practice Operations......... 1998 $160,644 $ -- 305,310 $ 12,857
1997 $ 32,473 $ -- 131,604 $ 1,961
Timothy D. O'Hare
Vice President - Payor Operations .................. 1998 $143,402 $ -- 183,659 $ 13,623
1997 $124,717 $ -- 50,181 $ 4,552
1996 $ 39,613 $ 31,290 150,000 $ --
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(1) Includes amounts contributed by us, for the account of the executive
officers, under our Retirement Savings Plan. A portion of the 1998 Retirement
Savings Plan contribution included above is contingent upon approval by our
Board of Directors. The 1997 amounts also include, for each executive officer
except Mr. West, $692 distributed upon termination of medical savings accounts
initially established by us for all employees.
(2) Mr. West joined Specialty Care Network in July, 1997. Effective March 26,
1999, Mr. West resigned.
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STOCK OPTIONS
The following table sets forth certain information regarding stock options
granted during 1998 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- ------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted(1) Fiscal Year Per Share(2) Date Present Value (3)
- ---- ---------- ----------- ------------ ---- -----------------
Kerry R. Hicks............. 100,000 2.8% $12.88 3/18/2008 $407,001
252,291 7.2% $ 9.88 5/28/2008 $787,565
147,709 4.2% $ 6.75 6/11/2008 $315,180
Patrick M. Jaeckle......... 100,000 2.8% $12.88 3/18/2008 $407,001
252,291 7.2% $ 9.88 5/28/2008 $787,565
147,709 4.2% $ 6.75 6/11/2008 $315,180
D. Paul Davis.............. 31,000 0.9% $12.88 3/18/2008 $126,170
130,560 3.7% $ 9.88 5/28/2008 $407,563
143,750 4.1% $ 6.75 6/11/2008 $306,732
Michael E. West.......... 31,000 0.9% $12.88 3/18/2008 $126,170
130,560 3.7% $ 9.88 5/28/2008 $407,563
143,750 4.1% $ 6.75 6/11/2008 $306,732
Timothy D. O'Hare.......... 31,000 0.9% $12.88 3/18/2008 $126,170
72,659 2.1% $ 9.88 5/28/2008 $226,816
80,000 2.3% $ 6.75 6/11/2008 $170,703
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(1) Except for the options expiring on 6/11/2008, the options vest in one-third
increments on each of the first through third anniversaries of the date of
grant. The options expiring on 6/11/2008 will vest on the first date that the
average closing price of the Company's common stock is at least $10.125 for the
immediately preceding 30 trading days.
(2) The options were granted at a price per share equal to the closing price
per share on the Nasdaq National Market on the date of grant.
(3) These amounts represent the estimated fair value of stock options, measured
at the date of grant using the Black-Scholes option pricing model. There are
four underlying assumptions used in developing the grant valuations: an
expected volatility of 0.36; an expected term to exercise of 3 years; risk-free
interest rate over the life of the option of 6.0%; and an expected dividend
yield of zero. The actual value, if any, an officer may realize will depend on
the amount by which the stock price exceeds the exercise price on the date the
option is exercised. Consequently, there is no assurance the value realized by
an officer will be at or near the value estimated above. These amounts should
not be used to predict stock performance.
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The following table sets forth certain information regarding stock options held
as of December 31, 1998 by the Named Executive Officers. The Named Executive
Officers did not exercise any stock options in 1998.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year-End(#) Fiscal Year-End($)(1)
------------------ ---------------------
Name Exerciseable Unexerciseable Exerciseable Unexerciseable
- ---- ------------ -------------- ------------ --------------
Kerry R. Hicks ......... 87,541 660,081 0 0
Patrick M. Jaeckle...... 87,541 660,081 0 0
D. Paul Davis........... 32,072 363,455 0 0
Michael E. West......... 43,868 393,046 0 0
Timothy D. O'Hare....... 106,728 277,112 0 0
- --------------------
(1) Based on $1.25, the closing price of our common stock as reported on the
Nasdaq National Market on December 31, 1998.
EMPLOYMENT AGREEMENTS
We have employment agreements with each of Mr. Hicks and Dr. Jaeckle dated as
of April 1, 1996. Each agreement has an initial term of five years and is
renewable automatically for one year periods unless terminated by one of the
parties. The agreements provide for an annual salary rate to each officer of
$187,500 for 1996, $215,000 for 1997 and $250,000 for 1998, with cost of living
increases for the years following 1998. In addition, the agreements provide for
annual incentive compensation to each officer equal to up to 100% of his base
salary based on performance targets established by the Board of Directors.
We have an employment agreement with Mr. Davis and Mr. O'Hare, dated as of
February 22, 1996 and August 12, 1996, respectively. Each agreement has an
initial term of five years and is renewable automatically for one year periods
unless terminated by one of the parties. The agreements provide for an annual
salary rate to each officer of $108,000 for 1996, $125,000 for 1997 and
$144,000 for 1998, with cost of living increases for the years following the
third year. In addition, the agreements provide for annual incentive
compensation to each officer equal to up to 75% of his base salary based on
performance targets established by the Board of Directors. In connection with
Mr. Davis' appointment as Senior Vice President in 1997, his base salary was
increased to $150,000 per annum on April 1, 1997 and $172,500 per annum
effective on April 1, 1998.
Under all of the employment agreements described above, in the event that the
officer is terminated without cause and there has been no change of control of
Specialty Care Network, we will pay such officer his base salary for the
remaining term of the agreement and any earned but unpaid salary and incentive
compensation. In the event the officer is terminated with cause, regardless of
whether there has been a change of control, we will pay such officer his base
salary for 60 days following such termination. If the officer is terminated
without cause upon a change of control, he is entitled to receive a lump sum
payment upon such termination equal to 300% of his base salary plus 300% of his
annual incentive compensation for the prior year. Each agreement contains
certain confidentiality and non-competition covenants.
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COMPENSATION OF DIRECTORS
At the March 20, 1998 Board of Directors meeting, Leslie S. Matthews, M.D. was
designated as our physician liaison to assist in communications with affiliated
practices and physicians. To compensate Dr. Matthews for the time and effort
that would be involved with this function, the Board of Directors agreed to
eliminate Dr. Matthews' guaranteed base service fee obligation to us. The
elimination of the base service fee obligation reduced the service fees paid to
us by Dr. Matthews in 1998 by $106,485. Additionally, Dr. Matthews was granted
an option to purchase 45,000 shares of common stock at an exercise price of
$12.375 per share (the closing price per share of our common stock on the date
of grant). The option expires on March 19, 2008. The option vests in
substantially equal increments on each of the first three anniversaries of the
date of grant.
On June 12, 1998, each non-employee member of the Board of Directors was
granted an option to purchase shares of common stock at an exercise price of
$6.75 per share (the closing price per share of our common stock on the date of
grant). All directors other than Messrs. Cheesbrough and Wahlstrom were granted
an option to purchase 5,000 shares of common stock and Messrs. Cheesbrough and
Wahlstrom were granted options to purchase 15,000 and 10,000 shares
respectively. The options expire on June 11, 2008. The options vest in
substantially equal increments on each of the first three anniversaries of the
date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of April 1, 1999 by (i) each person
known to us to own beneficially more than five percent of our common stock
(including such person's address), (ii) the chief executive officer and the
four other most highly paid executive officers during 1998, (iii) each director
and (iv) all directors and executive officers as a group.
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned Outstanding Shares(1)
------------------------ ------------------ ---------------------
Kerry R. Hicks (2)................. 775,390 4.7%
Patrick M. Jaeckle (3)............. 749,096 4.5%
Peter H. Cheesbrough (4)........... 14,333 *
Richard E. Fleming, Jr., M.D. (5).. 140,121 *
Leslie S. Matthews, M.D. (6)....... 36,214 *
Mats Wahlstrom (7)................. 6,667 *
D. Paul Davis (8).................. 142,924 *
David G. Hicks (9)................. 140,561 *
Michael West (10).................. 67,541 *
All directors and executive officers
as a group (11 persons) (11)....... 2,358,408 13.7%
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* Less than one percent.
(1) Applicable percentage of ownership is based on 16,381,229 shares of common
stock outstanding on April 1, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
means voting or investment power with respect to securities. Shares of
common stock issuable upon the exercise of stock options exercisable
currently or within 60 days of April 1, 1999 are deemed outstanding and to
be beneficially owned by the person holding such option for
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purposes of computing such person's percentage ownership, but are not
deemed outstanding for the purpose of computing the percentage ownership of
any other person. Except for shares held jointly with a person's spouse or
subject to applicable community property laws, or as indicated in the
footnotes to this table, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by such stockholder.
(2) Includes 60,000 shares of common stock held in the Linda Wratten Trust,
20,000 shares of common stock in each of the Frank Nemick III Trust, the
William Nemick Trust and the Jeanette Baysinger Trust, 10,000 shares of
common stock in each of the Frank Nemick, Jr. Trust, the Julie Nemick Trust
and The David G. Hicks Irrevocable Children's Trust and 204,972 shares
underlying currently exerciseable stock options. Does not include 60,000
shares of common stock held by The Hicks Family Irrevocable Trust, for
which shares Mr. Hicks disclaims beneficial ownership.
(3) Includes 204,972 shares underlying currently exercisable stock options.
Does not include 100,000 shares of common stock held by The Patrick M.
Jaeckle Family Irrevocable Children's Trust, for which shares Mr.
Jaeckle disclaims beneficial ownership.
(4) Includes 13,333 shares underlying currently exercisable stock options.
(5) Includes 70,382 shares of common stock held by the Fleming Charitable
Remainder Unitrust, 5,095 shares of common stock held by the Fleming Family
Foundation and 6,667 shares underlying currently exercisable stock options.
Does not include 2,547 shares of common stock held by each of the
Irrevocable Trust FBO M. Fleming and the Irrevocable Trust FBO A. Fleming,
respectively, for which Dr. Fleming disclaims beneficial ownership.
(6) Includes 21,667 shares underlying currently exercisable stock options.
(7) Includes 6,667 shares underlying currently exercisable stock options.
(8) Includes 85,925 shares underlying currently exercisable stock options.
(9) Includes 63,280 shares underlying currently exercisable stock options. Does
not include 10,000 shares of common stock held by The David G. Hicks
Irrevocable Children's Trust, for which shares Mr. Hicks disclaims
beneficial ownership.
(10) Includes 54,201 shares underlying currently exercisable stock options.
(11) Includes options to purchase 802,965 shares of common stock .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have service agreements with certain medical practices (the"Director
Affiliated Practices") and their respective physician owners, including all of
our physician directors. Under the service agreements, we, among other things,
provide facilities and management, administrative and development services, and
employ most non-medical personnel of the Director Affiliated Practices in return
for management service fees. Such fees are payable monthly and consist of the
following: (i) service fees based on a percentage ranging from 20% to 33% of the
Adjusted Pre-Tax Income of the Director Affiliated Practices (defined generally
as revenue of the Director Affiliated Practices related to professional services
less amounts equal to certain clinic expenses of the Director Affiliated
Practices, not including physician owner compensation or most benefits to
physician owners ("Clinic Expenses," as defined more fully in the service
agreements)) and (ii) amounts equal to Clinic Expenses. For the first three
years following affiliation, however, the portion of the service fees described
under clause (i) is specified to be the greater of the amount payable as
described under clause (i) above or a fixed dollar amount (the "Base Service
Fee"). In addition, with respect to its management of ancillary facilities
services for certain of the Director Affiliated Practices, we receive fees based
on net revenue related to such facilities and services.
As further described in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in December 1998, we entered
into a transaction (collectively, the "Modification Arrangement") with four of
our affiliated practices, including Greater Chesapeake Orthopaedic Associates,
LLC ("GCOA"). Dr. Matthews is a physician owner of GCOA. Under the terms of the
Modification Arrangement, we sold accounts receivable, fixed assets and certain
other assets relating to the practice and replaced the original service
agreement with a new agreement. Under the new agreement with GCOA, which
terminates in November 2001, we provide substantially reduced services to the
practice, and the practice pays significantly reduced service fees. We received
approximately $2,700,000 and 1,176,692 shares of our common stock in return for
the repurchase by GCOA of its practice assets and
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for the execution of a new management service arrangement. This Modification
Arrangement was closed effective December 31, 1998. Additionally, In March
1999, we entered into restructuring agreements with ten affiliated practices,
including Princeton Orthopaedic Associates, II, P.A. ("POA"); (collectively,
the "Restructuring Transaction"). The Restructuring Transaction will provide
for the repurchase by the affiliated practice of practice assets and for a new
management service arrangement in exchange for cash and/or common stock, limit
management services provided to the affiliated practice by us under the
management services arrangement, reduce the term of our management service
arrangements with the affiliated practices; and lower service fees paid to us
by the affiliated practice. Under the new agreement with POA, which terminates
one year from the closing date, we provide substantially reduced services to
the practice, and the practice pays significantly reduced service fees. We
expect to receive approximately $2,200,000 and 897,595 shares of our common
stock in return for the repurchase by POA of its practice assets and for the
execution of a new management service arrangement.
Transactions between SCN and the Director Affiliated Practices are summarized
below:
GCOA, one of whose physician owners is Dr. Leslie S. Matthews, paid service
fees of approximately $5,900,000 (including approximately $4,400,000 in respect
of reimbursed Clinic Expenses) to us in 1998. We lease the facilities utilized
by GCOA from an entity of which Dr. Matthews is a partial owner. We paid
approximately $500,000 under the lease in 1998, which was included in
reimbursed Clinic Expenses as described above.
POA, one of whose physician owners is Dr. Richard E. Fleming, Jr., paid service
fees of approximately $7,700,000 (including approximately $6,200,000 in respect
of reimbursed Clinic Expenses) to us in 1998. We lease the facilities utilized
by POA from an entity of which Dr. Fleming is a partial owner. We paid
approximately $500,000 under the lease in 1998, which was included in
reimbursed Clinic Expenses as described above.
Reconstructive Orthopaedic Associates II, P.C. ("ROA"), whose owners include Dr.
Richard H. Rothman, the Chairman of the Board of Directors of SCN and a Director
of SCN through December 14, 1998, paid service fees of approximately $7,000,000
(including approximately $5,000,000 in respect of reimbursed Clinic Expenses) to
us in 1998.
3B Orthopaedics, Inc. ("3B Orthopaedics"), whose owners include Dr. Robert
Booth, a Director of SCN through October 12, 1998, paid service fees of
approximately $1,000,000 for the ten months ended October 31, 1998. Total
service fees incurred by 3B Orthopaedics for the ten months ended October 31,
1998 were approximately $1,500,000. We are currently involved in legal
proceedings with 3B Orthopaedics. (See further discussion in Item 3, Legal
Proceedings).
TOC Specialists, P.L. ("TOC"), whose owners include Dr. Thomas C. Haney, a
Director of SCN through June 5, 1998, paid service fees of approximately
$3,500,000 (including approximately $2,900,000 in respect of reimbursed Clinic
Expenses) to us for the six months ended June 30, 1998. The Company leases the
facilities utilized by TOC from an entity of which Dr. Haney is a partial owner.
We paid approximately $400,000 under the lease for the six months ended June 30,
1998, which was included in reimbursed Clinic Expenses as described above. We
are currently involved in legal proceedings with TOC. (See Further discussion in
Item 3, Legal Proceedings.)
Vero Orthopaedics II, P.A. ("VO"), whose owners include Dr. James L. Cain, a
Director of SCN through August 31, 1998, paid service fees of approximately
$1,500,000 (including approximately $1,000,000 in respect of reimbursed Clinic
Expenses) to us for the eight months ended August 31, 1998. The Company leases
certain of the facilities utilized by VO from an entity of which Dr. Cain is a
partial owner. We paid approximately $100,000 under the lease for the eight
months ended August 31, 1998, which was included in reimbursed Clinic Expenses
as described above.
In 1997, we purchased 50% of the outstanding membership interests in West
Central Ohio Group, Ltd. ("WCOG"), an Ohio limited liability company that was
formed to construct an ambulatory surgery center in Lima, Ohio, from the
physician owners of a practice affiliated with us (the "Ohio Physician
Owners"). In addition, we agreed to pay an amount equal to 25% of WCOG's first
$6,000,000 of net income as contingent consideration (the "Contingent
Consideration"). Our obligation to pay the Contingent Consideration was to
terminate on September 2002. In March 1998, after the ambulatory surgery center
received a permit to begin operations, we sold our one-half interest in WCOG to
the Ohio Physician Owners for consideration of approximately $875,000 and the
remaining one-half of our interest to Specialty Solutions, Inc. for
consideration of $1,075,000. In connection with the sale, the Ohio Physician
Owners also forgave our obligation to pay the Contingent Consideration. Kevin
J. Hicks, who subsequently became an executive officer of SCN, is an officer
and 50% stockholder of Specialty Solutions, Inc.
During the third quarter of 1998, we acquired Provider Partnerships, Inc.
("PPI") in exchange for 420,000 shares of our common stock. PPI is a recently
formed company that provides consulting services to hospitals to increase their
operating performance, with a specific focus on the cardiac areas. Kevin J.
Hicks, one of the principals of PPI, who was elected to serve as Executive Vice
President-Provider Businesses of SCN, following this transaction.
10
11
During the latter part of 1998, the former stockholders of PPI raised certain
issues relating to the transaction in which we acquired PPI. We have entered
into an agreement in principle with the former PPI stockholders to resolve this
matter. The agreement provides that we will form a new company that will own
the HealthCareReportCards.com web site and other related internet products. (It
is possible that, instead of a new company, our wholly-owned Health Care Report
Cards, Inc. subsidiary will be subject to the following provisions.) With
respect to the new company, the agreement in principle provides, among other
things, for the following:
o The former PPI stockholders will have a 25 percent ownership interest
in the new company. Peter A. Fatianow, an employee of Specialty Care
Network who developed a new product to be included in our healthcare
rating web site, will own a five percent interest in the new company.
The remainder will initially be owned by us.
o The PPI stockholders' 25 percent ownership position will not be diluted
unless certain events occur, including the reduction of our stock
ownership interest below 50.1 percent after completion of an initial
round of financing or below 55 percent following a subsequent round of
financing.
o Until their ownership interest in the new company is reduced below five
percent, the PPI stockholders will have representation on the new
company's Board of Directors proportionate to the amount of stock that
they own. Certain corporate matters will require a supermajority vote
of the board of directors.
o We will facilitate financing to fund the operations of the new company.
If we are unable to facilitate a financing of at least $4 million by
December 31, 1999, we will transfer sufficient shares of the new
company stock that we own so that the PPI stockholders will become the
majority stockholders of the new company.
o The new company will provide specified compensation to the former PPI
stockholders (who will be employees of the new company), including, for
Mr. Kevin Hicks, the greater of $100,000 per annum or an amount equal
to Mr. Fatianow's salary.
o We will guarantee payment of new company expenses until December 31,
1999 or, if sooner, the date the new company receives third party
financing of $1 million.
o The former PPI stockholders will have specified preemptive rights,
tag-along rights and registration rights with respect to their new
company shares.
o We will sell most of the assets of PPI to the former PPI stockholders
for nominal consideration. We will retain revenues from PPI contracts
earned through March 31, 1999, and will fund up to a maximum of
$500,000 of expenses of the PPI business through December 31, 1999.
o The PPI stockholders will return the 420,000 shares of our common stock
that they received in connection with our acquisition of PPI. We have
agreed to reimburse the PPI stockholders for any tax liability they may
incur with regard to the return of the shares.
o The PPI stockholders will return the options to purchase 760,000 shares
of our common stock that they now hold. (The stockholders surrendered
their rights under these options in April 1999.)
o The parties to the agreement will mutually release each other from
claims relating to our acquisition of PPI.
The agreement in principle is subject to the preparation and execution of a
definitive agreement. We are optimistic, but cannot assure, that a definitive
agreement will be signed.
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ITEM 14. EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Restructure Agreement by and Among Specialty Care Network,
Inc., Medical Rehabilitation Specialists II, P.A. and Kirk J.
Mauro, M.D. dated as of December 31, 1998.
2.11 Management Services Agreement by and Among Specialty Care
Network, Inc., Medical Rehabilitation Specialists II, P.A.,
and Kirk J. Mauro, M.D. dated as of January 1, 1999.
2.2 Restructure Agreement by and Among Specialty Care Network,
Inc., Greater Chesapeake Orthopaedic Associates, L.L.C., Paul
L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie S. Matthews,
M.D., Stewart D. Miller, M.D., Mark S. Meyerson, M.D., John
B. O'Donnell, M.D. and Lew C. Schon, M.D., dated as of
December 31, 1998.
2.21 Management Services Agreement by and Among Specialty Care
Network, Inc., Greater Chesapeake Orthopaedic Associates,
L.L.C., Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie
S. Matthews, M.D., Stewart D. Miller, M.D., Mark S. Meyerson,
M.D., John B. O'Donnell, M.D. and Lew C. Schon, M.D., dated
as of January 1, 1999.
2.3 Restructure Agreement by and Among Specialty Care Network,
Inc., Vero Orthopaedics II, P.A., James L. Cain, M.D., David
W. Griffin, M.D., George K. Nichols, M.D. and Peter G.
Wernicki, M.D. dated as of December 31, 1998.
2.31 Management Services Agreement by and Among Specialty Care
Network, Inc., Vero Orthopaedics II, P.A., James L. Cain,
M.D., David W. Griffin, M.D., George K. Nichols, M.D. and
Peter G. Wernicki, M.D. dated as of January 1, 1999.
2.4 Restructure Agreement by and Among Specialty Care Network,
Inc., Orlin & Cohen Orthopedic Associates, LLP, Harvey Orlin,
M.D., Isaac Cohen, M.D., John M. Feder, M.D., Gregory
Lieberman, M.D., Sebastian Lattuga, M.D., Harvey Orlin, M.D.,
P.C. and Rockville Centre Arthroscopic Associates, P.C. dated
as of December 31, 1998.
2.41 Management Services Agreement by and Among Specialty Care
Network, Inc., Orlin & Cohen Orthopedic Associates, LLP,
Harvey Orlin, M.D., Isaac Cohen, M.D., John M. Feder, M.D.,
Gregory Lieberman, M.D., Sebastian Lattuga, M.D., Harvey
Orlin, M.D., P.C. and Rockville Centre Arthroscopic
Associates, P.C. dated as of January 1, 1999.
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-17627))
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (File No. 333-17627))
10.1+ 1996 Equity Compensation Plan, as amended (incorporated by
reference to Exhibit 10 to the Company's June 30, 1998
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.)
10.2 Second Amended and Restated Revolving Loan and Security
Agreement dated as of November 21, 1997 among Specialty Care
Network, Inc., SCN of Princeton, Inc., NationsBank of
Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and NationsBank of Tennessee, N.A., as Agent
(incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
12
13
10.3+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Kerry R. Hicks (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.4+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Patrick M. Jaeckle
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-17627))
10.6+ Employment Agreement dated as of February 22, 1996 by and
between Specialty Care Network, Inc. and Paul Davis
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-17627)).
10.6.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and D. Paul Davis dated December 5, 1997.
(incorporated by reference to Exhibit 10.6.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
10.7+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and David Hicks (incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.7.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and David Hicks, dated December 2, 1997.
(incorporated by reference to Exhibit 10.8.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
* 10.8+ Physician Liaison Agreement dated March 20, 1998 by and
between Specialty Care Network, Inc. and Leslie S. Matthews,
M.D.
21 Subsidiaries of the registrant.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1998.
+ Constitutes management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form. * Filed herewith
13
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
Date: May 5, 1999 By /s/ Kerry R. Hicks
---------------------------
Kerry R. Hicks
President and Chief Executive Officer
14
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Restructure Agreement by and Among Specialty Care Network,
Inc., Medical Rehabilitation Specialists II, P.A. and Kirk J.
Mauro, M.D. dated as of December 31, 1998.
2.11 Management Services Agreement by and Among Specialty Care
Network, Inc., Medical Rehabilitation Specialists II, P.A.,
and Kirk J. Mauro, M.D. dated as of January 1, 1999.
2.2 Restructure Agreement by and Among Specialty Care Network,
Inc., Greater Chesapeake Orthopaedic Associates, L.L.C., Paul
L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie S. Matthews,
M.D., Stewart D. Miller, M.D., Mark S. Meyerson, M.D., John
B. O'Donnell, M.D. and Lew C. Schon, M.D., dated as of
December 31, 1998.
2.21 Management Services Agreement by and Among Specialty Care
Network, Inc., Greater Chesapeake Orthopaedic Associates,
L.L.C., Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie
S. Matthews, M.D., Stewart D. Miller, M.D., Mark S. Meyerson,
M.D., John B. O'Donnell, M.D. and Lew C. Schon, M.D., dated
as of January 1, 1999.
2.3 Restructure Agreement by and Among Specialty Care Network,
Inc., Vero Orthopaedics II, P.A., James L. Cain, M.D., David
W. Griffin, M.D., George K. Nichols, M.D. and Peter G.
Wernicki, M.D. dated as of December 31, 1998.
2.31 Management Services Agreement by and Among Specialty Care
Network, Inc., Vero Orthopaedics II, P.A., James L. Cain,
M.D., David W. Griffin, M.D., George K. Nichols, M.D. and
Peter G. Wernicki, M.D. dated as of January 1, 1999.
2.4 Restructure Agreement by and Among Specialty Care Network,
Inc., Orlin & Cohen Orthopedic Associates, LLP, Harvey Orlin,
M.D., Isaac Cohen, M.D., John M. Feder, M.D., Gregory
Lieberman, M.D., Sebastian Lattuga, M.D., Harvey Orlin, M.D.,
P.C. and Rockville Centre Arthroscopic Associates, P.C. dated
as of December 31, 1998.
2.41 Management Services Agreement by and Among Specialty Care
Network, Inc., Orlin & Cohen Orthopedic Associates, LLP,
Harvey Orlin, M.D., Isaac Cohen, M.D., John M. Feder, M.D.,
Gregory Lieberman, M.D., Sebastian Lattuga, M.D., Harvey
Orlin, M.D., P.C. and Rockville Centre Arthroscopic
Associates, P.C. dated as of January 1, 1999.
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-17627))
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (File No. 333-17627))
10.1+ 1996 Equity Compensation Plan, as amended (incorporated by
reference to Exhibit 10 to the Company's June 30, 1998
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.)
10.2 Second Amended and Restated Revolving Loan and Security
Agreement dated as of November 21, 1997 among Specialty Care
Network, Inc., SCN of Princeton, Inc., NationsBank of
Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and NationsBank of Tennessee, N.A., as Agent
(incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
10.3+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Kerry R. Hicks (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.4+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Patrick M. Jaeckle
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-17627))
10.6+ Employment Agreement dated as of February 22, 1996 by and
between Specialty Care Network, Inc. and Paul Davis
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-17627)).
10.6.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and D. Paul Davis dated December 5, 1997.
(incorporated by reference to Exhibit 10.6.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
10.7+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and David Hicks (incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.7.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and David Hicks, dated December 2, 1997.
(incorporated by reference to Exhibit 10.8.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
* 10.8+ Physician Liaison Agreement dated March 20, 1998 by and
between Specialty Care Network, Inc. and Leslie S. Matthews,
M.D.
21 Subsidiaries of the registrant.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1998.
+ Constitutes management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form.
* Filed herewith