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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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[ ] Definitive Proxy Statement
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Specialty Care Network, Inc.
- --------------------------------------------------------------------------------
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SPECIALTY CARE NETWORK, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholder:
It is my pleasure to invite you to attend the 1999 Annual Meeting of
Stockholders of Specialty Care Network, Inc., to be held at __________________,
on November 18, 1999 at 9:00 a.m. ________ Standard Time.
The meeting will be held for the following purposes:
1. To elect five directors for the ensuing year.
2. To vote upon a proposal to amend our Certificate of
Incorporation to change our name to HealthGrades.com, Inc.
3. To act upon such other matters as may properly come before
the meeting.
Holders of record of our common stock at the close of business on
October 12, 1999 are entitled to receive this notice and to vote at the meeting
or any adjournment.
Your vote is important. Whether you plan to attend the meeting or not,
we urge you to complete, sign and return your proxy card as soon as possible in
the envelope provided. This will ensure representation of your shares in the
event you are not able to attend the meeting. You may revoke your proxy and vote
in person at the meeting if you so desire.
Patrick M. Jaeckle
Executive Vice President -
Corporate Development
and Secretary
October __, 1999
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SPECIALTY CARE NETWORK, INC.
44 UNION BOULEVARD
SUITE 600
LAKEWOOD, COLORADO 80228
PROXY STATEMENT
This proxy statement is being furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Specialty Care
Network, Inc. for the 1999 annual meeting of stockholders. We are first mailing
copies of this proxy statement, the attached notice of annual meeting of
stockholders and the enclosed form of proxy on or about October __, 1999.
At the annual meeting, holders of our common stock will vote upon the
election of five directors to serve until the 2000 Annual Meeting of
Stockholders and upon a proposal to amend our certificate of incorporation to
change our name to HealthGrades.com, Inc.
Our Board of Directors has fixed the close of business on October 12,
1999 as the record date for the determination of stockholders entitled to notice
of, and to vote at the annual meeting or any adjournment of the annual meeting.
Accordingly, you may vote at the annual meeting only if you are a holder or
record of common stock at the close of business on the record date. As of the
record date, there were ________ holders of record of our common stock and
12,432,297 shares of common stock were issued and outstanding
If you complete and return your proxy card and we receive it at or
prior to the annual meeting, your shares will be voted in accordance with your
directions. You can specify your choices by marking the appropriate boxes on the
enclosed proxy card. If your proxy card is signed and returned without
directions, the shares will be voted for the persons identified in this proxy
statement as nominees for election to the Board of Directors and for approval of
the proposal to amend our certificate of incorporation to change our name to
HealthGrades.com, Inc. You may revoke your proxy at any time before it is voted
at the meeting by sending a notice of revocation to our secretary, executing a
later-dated proxy or by voting by ballot at the meeting.
The holders of a majority of our common stock entitled to vote, present
in person or represented by proxy, will constitute a quorum for the transaction
of business. Abstentions and broker "non-votes" are counted as present and
entitled to vote for purposes of determining a quorum. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received instructions from the beneficial
owner.
Holders of common stock are entitled to one vote per share on all
matters properly brought before the meeting. Directors are elected by a
plurality of the votes cast. A plurality means that the nominees with the
largest number of votes are elected as directors up to the maximum number of
directors to be chosen at the meeting. The proposal to amend our certificate of
incorporation to change our name to HealthGrades.com, Inc. requires the
affirmative vote of the holders of a majority of our outstanding shares of
common stock. All
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other matters to be acted upon at the meeting will be determined by the
affirmative vote of the holders of the majority of the common stock present in
person or represented by proxy and entitled to vote. An abstention is counted as
a vote against and a broker "non-vote" generally is not counted for purposes of
approving these matters. However, in connection with the proposal to amend our
certificate of incorporation, shares not voted will have the same effect as
shares voted against the proposal.
The Board of Directors is not aware of any matters that will be brought
before the meeting other than those described in this proxy statement. However,
if any other matters properly come before the meeting, the persons named on the
enclosed proxy card will vote in accordance with their best judgment on such
matters.
OWNERSHIP OF OUR COMMON STOCK BY CERTAIN PERSONS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of October 12, 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) our executive officers listed
under "Executive Compensation--Summary of Cash and Certain Other Compensation,"
(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) 1,167,930 8.9
Patrick M. Jaeckle (3) 1,296,636 9.8
Peter H. Cheesbrough (4) 49,345 *
Richard E. Fleming, Jr., M.D. (5) 55,393 *
Leslie S. Matthews, M.D. (6) 68,450 *
Mats Wahlstrom (7) 36,677 *
D. Paul Davis (8) 368,996 2.9
Timothy D. O'Hare (9) 388,007 3.0
Michael E. West (10) 35,830 *
All directors and executive officers as a 3,794,721 25.2
Group (9 persons) (11)
- -----------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 12,432,297 shares of
common stock outstanding on October 12, 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 October 12, 1999 are
deemed outstanding and to be beneficially owned by the person holding
such option for purposes of computing such person's percentage
ownership, but are not deemed outstanding for
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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 10,000 shares of common stock in The David G. Hicks
Irrevocable Children's Trust and 752,512 shares underlying 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 752,512 shares underlying 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 48,345 shares underlying stock options.
(5) Includes 20,382 shares of common stock held by the Fleming Charitable
Remainder Unitrust, 5,095 shares of common stock held by the Fleming
Family Foundation and 21,672 shares underlying 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 53,903 shares underlying stock options.
(7) Includes 36,677 shares underlying stock options.
(8) Includes 311,997 shares underlying stock options.
(9) Includes 388,007 shares underlying stock options.
(10) Mr. West was our Senior Vice President - Practice Operations until his
resignation on March 26, 1999.
(11) Includes 2,651,631 shares underlying stock options.
ELECTION OF DIRECTORS
At the meeting, five directors will be elected to hold office until the
Annual Meeting of Stockholders in 2000 or until their successors have been
elected and qualified. Unless contrary instructions are given, the shares
represented by a properly executed proxy will be voted for the nominees listed
below. All of the nominees are currently members of our Board of Directors.
If, at the time of the meeting, one or more of the nominees have become
unavailable to serve, shares represented by proxies will be voted for the
remaining nominees and for any substitute nominee or nominees designated by the
Board of Directors, unless the size of the Board is reduced. The Board of
Directors knows of no reason why any of the nominees will be unavailable or
unable to serve.
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Information concerning the nominees for election as directors is set
forth below:
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 41, a founder of Specialty Care Network, has
served as Executive Vice President - Corporate Development since July 1998 and
Executive Vice President - Finance/Development and Chief Financial Officer 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 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 August 1999, Mr. Cheesbrough has been
Senior Vice President Finance and Chief Financial Officer of XCare.net, a
company providing internet-based business to business connectivity, information
exchange and electronic commerce applications solutions for healthcare. From
June 1993 to August 1999, Mr. Cheesbrough was 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.
LESLIE S. MATTHEWS, M.D., age 48, 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
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development and manufacture of hemodialysis products and the operation of
dialysis centers, since 1991.
Kerry R. Hicks and Kevin Hicks, our Executive Vice President - Provider
Business, and David G. Hicks, our Senior Vice President - Information
Technology, are brothers.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors seven meetings during 1998. The Board has an Audit
Committee, a Compensation Committee, and a Nominating Committee.
The Audit Committee is authorized to consider the adequacy of internal
controls and the objectivity of financial reporting, to review with the
independent auditors the scope of their activities and findings, and to review
with the appropriate officers our internal controls. The Audit Committee also
recommends the firm of independent auditors for appointment by us. Messrs.
Cheesbrough and Wahlstrom are the current members of the Audit Committee. The
Audit Committee held one meeting during 1998.
The Compensation Committee is authorized to determine the terms and
conditions of the employment of our executive officers and to administer our
1996 Equity Compensation Plan. Messrs. Cheesbrough and Wahlstrom are the current
members of the Compensation Committee. The Compensation Committee held three
meetings during 1998.
The Nominating Committee is authorized to consider and recommend to the
Board of Directors nominees for election as directors, and evaluate current
directors and their contribution to our strategic direction and management.
Messrs. Cheesbrough and Wahlstrom are the current members of the Nominating
Committee. The Committee did not meet formally prior to 1999. The Committee will
consider qualified candidates for election as directors suggested by
stockholders that are submitted in writing to our Secretary in accordance with
procedures set forth in the By-Laws.
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 involved with this function, the Board of Directors agreed to eliminate
Dr. Matthews' guaranteed base service fee obligation to us. The elimination of
the guaranteed 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.
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On June 12, 1998, we granted options to purchase 5,000 shares to each
of Drs. Fleming and Matthews, options to purchase 10,000 shares to Mr. Wahlstrom
and options to purchase 15,000 shares to Mr. Cheesbrough, in each case at an
exercise price of $6.75 per share (the closing price of our common stock on the
date of grant.) The options, which expire on June 11, 2008, vest in
substantially equal increments on the first three anniversaries of the date of
grant.
On May 5, 1999, we granted options to our non-employee directors to
purchase the following numbers of shares: Mr. Cheesbrough, 23,345 shares; Dr.
Fleming, 10,005 shares; Dr. Matthews, 27,236 shares; and Mr. Wahlstrom, 20,010
shares. The options all have an exercise price of $.5313 per share (the closing
price per share of our Common Stock at the date of grant) and terminate on May
4, 2009. The options will be fully vested on November 5, 1999.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is composed of two members of the Board of
Directors who are not current or former employees of the Company. The Committee
is authorized to determine the terms and conditions of the employment of the
Company's executive officers, including compensation, and to administer the
Company's 1996 Equity Compensation Plan. In its administration of the Equity
Compensation Plan, the Committee has the power to grant and determine the terms
and conditions of stock options, other than with respect to stock options
granted to non-employee directors. In carrying out its duties during 1998, the
Committee utilized the assistance of a compensation consulting firm, which
provided to the Committee statistical information concerning the compensation
paid by other companies then engaged in the physician practice management
industry, as well as similar companies in the healthcare industry.
COMPENSATION PHILOSOPHY
The Committee's philosophy is that compensation should provide a
competitive earnings opportunity that motivates and retains talented executives.
Moreover, the Committee believes that the interests of executive officers should
be closely linked with those of the stockholders. Accordingly, the Committee
seeks to provide the executive officers with incentives that will tie long-term
rewards for the executive officers to increases in stockholder value.
The Company's executive compensation generally consists of three
components: (1) base salary; (2) annual incentives in the form of cash bonuses
to executives; and (3) long-term incentives through the provision of stock
options under the Equity Compensation Plan. The basis for determining executive
compensation for the executive officers generally, and specifically for Kerry R.
Hicks, the Company's President and Chief Executive Officer, is described below.
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BASE SALARY
The base salary of our executives generally is governed by the terms of
employment agreements between each of the executives and us. All of the
employment agreements were entered into prior to 1998. With one exception, base
salaries were paid in 1998 in accordance with the terms of the employment
agreements. A salary increase for one executive above the level set forth in his
employment agreement was approved in connection with an increase in the
executive's responsibilities. Mr. Hicks' salary was established in the same
manner as the other executives, and in 1998 his base salary was paid in
accordance with the terms of his employment agreement.
ANNUAL INCENTIVES
Under the employment agreements between the Company and its executives,
the Company provides an incentive bonus opportunity based upon a percentage of
base salary. The maximum percentage is either 75 percent of base salary or 100
percent, with the greater percentage applicable to higher ranking executives. In
the case of Mr. Hicks, the maximum incentive opportunity percentage is 100
percent of base salary. In 1998, the Committee determined that the achievement
of a specified earnings per share level would be the appropriate financial
benchmark for determining the award of incentive bonuses. Because the specified
levels were not met, no bonuses were paid in 1998.
LONG-TERM INCENTIVES
The Committee believes that equity compensation, in the form of stock
options, should be a significant component of each executive officer's
compensation. Stock options are designed to provide incentives for the
enhancement of stockholder value, since the full benefit of stock option grants
is not realized unless there has been appreciation in share values over several
years. Options were granted in 1998 under the Equity Compensation Plan at fair
market value on the date of grant.
In determining the level of stock option grants for 1998, the Committee
considered the analysis of the compensation consulting firm in May 1998. The
analysis concluded that we had one of the more conservative compensation
practices in the physician practice management field despite the fact that our
stock appreciation during 1997 was generally greater than that of comparative
companies. As a result of this analysis, as well as other comparisons of
compensation of our executives with executives of other companies in the
physician practice management field, we determined to issue two separate option
grants. The first set of grants, which was made in May 1998, provided for the
grant of stock options to executives with an aggregate exercise price based on a
multiple of from five to ten times the base salary of the Company's executive
officers. In the case of Mr. Hicks, options were granted based on an aggregate
exercise price equal to ten times base salary. The actual amounts of options
granted were slightly less than would be called for by these multiples in order
to avoid exceeding the number of options then available under the Company's 1996
Equity Compensation Plan. The second set of grants was made to the executive
officers in June 1998. These grants were designed to provide an aggregate
exercise price equal to a multiple of five to ten times base
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salary, assuming an exercise price of $9.00 per share. Since the actual grant
price was $6.75, the number of shares underlying the options was significantly
less than the amount that would have equaled an aggregate exercise price of five
to ten times base salary. Moreover, option grants to Mr. Hicks and one other
executive officer were further reduced to comply with provisions of the 1996
Equity Compensation Plan, which limit the number of shares underlying options
that could be granted to an executive during any calendar year to 500,000. To
ensure that the second set of options could not be exercised before meaningful
appreciation in stockholder value was achieved, the terms relating to the second
set of options provided that they could not vest until the date on which the
average closing share price for the prior 30 trading days is equal to or greater
than 150% of the price on the date of grant.
The grants of stock options described was not subject to any other
specific criteria. However, at the time of the grants, the Committee considered
the success of management at that time in connection with the continued growth
of operations and integration of information systems. The Committee recognized
Mr. Hicks' instrumental role in these accomplishments. Due to the subsequent
decline in the Company stock price, none of the options granted in June 1998
have vested.
Certain provisions of the Internal Revenue Code provide that publicly
held corporations may not deduct compensation for its chief executive officer or
each of certain other executive officers to the extent that such compensation
exceeds $1 million for the executive officer. It is not expected that these
provisions will adversely affect the Company based on its current compensatory
structure. In this regard, base salary and bonus levels are expected to remain
below the $1 million limitation for the foreseeable future. In addition, the
Equity Compensation Plan is designed to preserve the deductibility of income
realized upon the exercise of stock options under the plan regardless of whether
such income, together with salary, bonus and other compensation, exceeds the
limitation.
PETER H. CHEESBROUGH
MATS WAHLSTROM
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EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information concerning the
compensation we paid to our Chief Executive Officer and the four other most
highly paid executive officers during 1998, 1997, and 1996. We refer to these
persons in this proxy statement as the "named executive officers."
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- ------ ----- ----------- ---------------
Kerry R. Hicks.................................. 1998 $248,923 $ - 500,000 $ 4,197
President and Chief Executive Officer 1997 $214,260 $ - 172,622 $ 8,226
1996 $138,876 $140,625 75,000 -
Patrick M. Jaeckle.............................. 1998 $250,400 $ - 500,000 -
Executive Vice President - Finance/Development 1997 $214,259 $ - 172,622 $ 6,572
1996 $147,210 $140,625 75,000 -
D. Paul Davis................................... 1998 $166,442 $ - 305,310 $ 6,402
Senior Vice President of Finance 1997 $135,519 $ - 60,217 $ 8,236
1996 $ 89,338 $ 67,500 30,000 -
Michael E. West (2)............................. 1998 $160,644 $ - 305,310 $ 4,057
Senior Vice President - Practice Operations 1997 $ 32,473 $ - 131,604 $ 1,961
Timothy D. O'Hare............................... 1998 $143,402 $ - 183,659 $ 5,736
Vice President - Payor Operations 1997 $124,717 $ - 50,181 $ 4,552
1996 $ 39,613 $ 31,290 150,000 -
- ---------------
(1) Includes amounts that we contributed for the account of the executive
officers, under our Retirement Savings Plan. The 1997 amount also
includes, for each executive officer, other than Mr. West, $692
distributed upon termination of medical savings accounts that we
initially established for all employees.
(2) Mr. West resigned on March 26, 1999. All of Mr. West's options were
canceled.
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STOCK OPTIONS
The following table sets forth information regarding stock options
granted during 1998 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
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 (4).......... 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
- ---------------
(1) Except for the options expiring on June 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 June 11, 2008 will vest
on the first date that the average closing price of our 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.
(4) All of Mr. West's option subsequently were canceled.
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On April 29, 1999, we granted options to a number of our employees,
including our executive officers. The options each have an exercise price of
$0.5625, which was the closing price per share of our common stock on the date
of grant. The options will fully vest on October 29, 1999 and terminate ten
years from the date of grant. Options were granted to the named executive
officers to purchase the following number of shares: Kerry R. Hicks, 475,000
shares; Patrick M. Jaeckle, 475,000 shares; D. Paul Davis, 200,000 shares;
Timothy D. O'Hare, 200,000 shares.
The following table sets forth certain information regarding stock
options held as of December 31, 1998 by the named executive officers. The named
executive officers did not exercise any stock options in 1998.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(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 (2)............. 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.
(2) All of Mr. West's option subsequently were canceled.
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 employment agreements 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
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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 non-competition covenants relating to the physician practice management
business and confidentiality covenants.
CERTAIN TRANSACTIONS
During 1998, we had service agreements with certain medical practices
(the "Director Affiliated Practices") and their respective physician owners,
including our physician directors. Under the service agreements, we, among other
things, provided facilities and management, administrative and development
services, and employed most non-medical personnel of the Director Affiliated
Practices in return for management service fees. Such fees were payable monthly
and consisted 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. However,
under the service agreements, for the first three years following affiliation
(which included 1998), our service fees were to be equal to the greater of the
amount payable as described under clauses (i) and (ii) above or a specified
fixed dollar amount plus Clinic Expenses. In addition, with respect to our
management of ancillary facilities and services for certain of the Director
Affiliated Practices, we received fees based on net revenue related to such
facilities and services.
In December 1998, we entered into transactions (collectively, the
"Modification Transactions") with four of our affiliated practices, including
Greater Chesapeake Orthopaedic Associates, LLC ("GCOA"). Dr. Leslie S. Matthews,
one of our directors, is a physician owner of GCOA. Under the terms of the
Modification Transaction with GCOA, we sold to GCOA accounts receivable and
other assets relating to the practice and revised the original service agreement
through entry into a new management services agreement. Under the new management
services agreement with GCOA, which, as described below, was terminated in
September 1999, we provided substantially reduced services to the practice, and
the practice paid
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significantly reduced service fees. In addition, the term of the new management
services agreement was shortened to November 2001. We received $2,747,000 and
1,176,692 shares of our common stock in return for the repurchase by GCOA of its
practice assets and for the execution of the new management services agreement.
In addition, GCOA prepaid its service fee obligation with a lump sum payment of
$1,185,271.
Effective June 15, 1999, we restructured our relationship with ten
affiliated practices, including Princeton Orthopaedic Associates, II, P.A.
("POA") (collectively, the "Restructuring Transaction"). The Restructuring
Transaction provided for the repurchase by each of the participating affiliated
practices of accounts receivable and other assets relating to the practice and
revision of the original service agreement with the practice through entry into
a new management service agreement. In return, we received cash and, in most
cases, our common stock. Under the new management services agreement, the
management services provided by us to the practice and the term of the agreement
were substantially reduced. In addition, service fees paid to us by the
practices were also reduced. Under the new management services agreement with
POA, which terminates in June 2000, we provide substantially reduced services to
the practice, and the practice pays significantly reduced service fees. We
received $3,126,000 and 533,131 shares of our common stock from POA in return
for the repurchase by POA of its practice assets and for the entry into the new
management services agreement. In addition, POA prepaid its service fee
obligation with a lump sum payment of $972,155.
During 1998, we funded, through a wholly-owned subsidiary, Ambulatory
Services, Inc. ("ASI"), the purchase of a lease for, and improvements to, a
surgery center in Lutherville, Maryland. The surgery center was the only asset
of a limited liability company (the "LLC") which was owned by ASI. We also
entered into a service agreement with GCOA and its physician owners with respect
to our management of the surgery center. In March 1999, a promissory note was
executed in the amount of $2,120,619 between ASI and the LLC with respect to
advances made by ASI to cover development of the surgery center. This promissory
note bore interest at 8% and was payable in sixty monthly installments beginning
July 1, 1999. GCOA acquired a 68% interest in the LLC in March 1999, for
$360,505. In September 1999, we sold our remaining interest in the LLC to GCOA
for $169,650. In addition, we received $2,212,445, in full payment of the
obligation, including accrued interest, of the LLC to us and $502,633 in full
payment of working capital advances made by ASI to the LLC.
In September 1999, we agreed to terminate the management services
agreement with GCOA. In connection with this termination, we are entitled to
retain any and all fees previously paid to us prior to the effective date of the
termination, which was September 30, 1999. Additionally, we entered into
agreements to lease certain fixed assets to GCOA, commencing on October 1, 1999
and terminating at various dates through August 31, 2003. Under the terms of the
leases, GCOA will pay to us a fixed fee of approximately $5,849 per month and an
additional fee equal to 7.5% of Ancillary Services Revenue, as defined more
fully in the lease agreements.
Other transactions between SCN and the Director Affiliated Practices
are summarized below:
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GCOA paid service fees of approximately $5,900,000 (including
approximately $4,400,000 in respect of reimbursed Clinic Expenses) to us in
1998. Prior to the Modification Transaction with GCOA, we leased the facilities
utilized by GCOA from an entity of which Dr. Matthews is a part owner. We paid
approximately $500,000 under the lease in 1998, which was included in reimbursed
Clinic Expenses.
POA, one of whose physician owners is Dr. Richard E. Fleming, Jr., one
of our directors, paid service fees of approximately $7,700,000 (including
approximately $6,200,000 in respect of reimbursed Clinic Expenses) to us in
1998. Prior to the Restructuring Transaction, we leased 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.
Reconstructive Orthopaedic Associates II, P.C. ("ROA"), whose owners
include Dr. Richard H. Rothman, Chairman of the our Board of Directors until
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, one of our directors until 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 litigation with
3B Orthopaedics regarding its obligations under the service agreement.
TOC Specialists, P.L. ("TOC"), whose owners include Dr. Thomas C.
Haney, one or our directors until 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. We
leased 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.
Vero Orthopaedics II, P.A. ("VO"), whose owners include Dr. James L.
Cain, one of our directors until 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. We
leased 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.
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 of our interest in WCOG to the Ohio
Physician Owners for consideration of approximately $875,000 and the remaining
one-half of our interest to Specialty
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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 one of our executive
officers, is an officer and 50% stockholder of Specialty Solutions, Inc.
In August 1998, we acquired Provider Partnerships, Inc. ("PPI") in
exchange for 420,000 shares of our common stock. PPI was a recently formed
company that provided consulting services to hospitals. In addition, PPI had
begun development of an Internet web site designed to rate hospitals on quality
of care indicators. Kevin J. Hicks, one of the principals of PPI, was elected to
serve as our Executive Vice President-Provider Businesses of SCN, following this
transaction.
During the latter part of 1998, the former stockholders of PPI raised
certain issues relating to the transaction in which we acquired PPI. In June
1999, we entered into agreements with the former PPI stockholders to resolve
this matter. Under the agreements:
o We formed a new company, HealthGrades.com, Inc. ("HGI"), that owns
the HealthGrades.com web site and other related aspects of our
internet business. With respect to HGI, we entered into a
stockholders agreement that provides, among other things, for the
following:
o Venture5 LLC, whose members consist of the former PPI
stockholders and Peter A. Fatianow, an employee of Specialty
Care Network who developed a new product to be included in
HealthGrades.com web site, own a minority interest in the new
company. We own a majority interest.
o Venture5's ownership position will not be diluted below 25
percent 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 its ownership interest in HGI is reduced below five
percent, Venture5 is entitled to representation on HGI's
Board of Directors generally proportionate to the amount of
stock that it owns. Certain corporate matters will require a
supermajority vote of the board of directors.
o We will facilitate financing to fund the operations of HGI.
If we are unable to facilitate a financing of at least $4
million by December 31, 1999, we will transfer sufficient
shares of HGI stock that we own so that the former PPI
stockholders will become the majority stockholders of the new
company.
o Venture5 has specified preemptive rights, tag-along rights
and registration rights with respect to its HGI shares.
o We sold most of the assets of PPI to the former PPI stockholders
for notes receivable totaling $172,000. The notes receivable are
payable on June 22, 2002 including all accrued and unpaid
interest. The notes bear interest at the greater of 4.8% per annum
or the "Applicable Federal Rate" as defined in Section 1274(d) of
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the Internal Revenue Code of 1986. We will fund up to a maximum of
$344,000 of expenses of the PPI business from July 1, 1999 through
December 31, 1999.
o The PPI stockholders waived their options to purchase 760,000
shares of our common stock that they previously held.
o We and the former PPI shareholders mutually released each other
from claims relating to our acquisition of PPI.
In September 1999, we entered into an agreement with Venture5 under
which we have agreed to purchase a number of shares of HGI that will increase
our ownership interest in HGI to 90%. The agreement requires that we pay
Venture5 $4,000,000 by November 1, 1999. If we are unable to make the payment by
that date, we will pay Venture5 $60,000 and the stockholders agreement will
remain in effect. Upon completion of its purchase, the stockholders agreement
relating to HGI will terminate.
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PROPOSAL TO AMEND OUR CERTIFICATE OF
INCORPORATION TO CHANGE OUR NAME TO HEALTHGRADES.COM, INC.
Our Board has adopted, and is recommending to our stockholders for their
approval at the meeting, a resolution to amend Article One of our Amended and
Restated Certificate of Incorporation to read as follows:
1. Corporate Name. The name of the Corporation is HealthGrades.com, Inc.
We believe that this name change more accurately references our
principal business. Our current name, Specialty Care Network, Inc., reflects our
prior emphasis on physician practice management. As a result of a number of
actions over the past year, including the restructuring transaction that was
approved by our stockholders in June 1999, the scale of our physician practice
management business has been reduced substantially. While we will continue to
provide services under existing management services agreements, we have no
intention of entering into any additional management services agreements, and
have terminated and may continue to terminate our arrangements with some of the
practices with whom we maintained a business relationship.
On the other hand, over the past several months, the significant
majority of management time and effort has been devoted to development of our
internet business. We feel the name HealthGrades.com, Inc. better reflects the
main focus of our business, namely the provision of ratings and information with
respect to healthcare providers and health plans. We believe it is appropriate
to name the company HealthGrades.com, Inc. because HealthGrades.com is our
flagship internet site and is the name by which we want the public and potential
advertisers and marketing partners to identify us.
If the proposed name change is adopted, we intend to use the tradename
HealthGrades.com in our communications with stockholders and the investment
community. We will also continue to use the name HealthGrades.com in our
principal internet site.
If the amendment is adopted, you will not be required to exchange your
outstanding stock certificates for new certificates.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE PROPOSAL TO ADOPT THE
AMENDMENT TO OUR CERTIFICATE OF INCORPORATION.
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PERFORMANCE GRAPH
The graph below compares the percentage change in total stockholder
return for us with the CRSP Index for the Nasdaq Stock Market (US companies)
("Nasdaq Stock Market (US)") and the CRSP index for Nasdaq Health Services
Stocks ("Nasdaq Health Services Index").
This graph assumes the investment of $100 in Company Common Stock, the
Nasdaq Stock Market (US) and the Nasdaq Health Services Index on February 7,
1997, when our Common Stock was first traded on the Nasdaq National Market, and
covers the period from February 7, 1997 through December 31, 1998. Dividend
reinvestment has been assumed.
[PERFORMANCE GRAPH]
FEBRUARY 7, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
---------------- ----------------- -----------------
Specialty Care Network, Inc. $100.00 $168.99 $ 15.50
Nasdaq Stock Market (US) $100.00 $116.48 $163.74
Nasdaq Health Services Index $100.00 $101.89 $ 87.37
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INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has selected the firm of Ernst & Young LLP to
serve as our independent auditors for the current fiscal year. Representatives
of Ernst & Young LLP are expected to be present at the meeting and will have the
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
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 Company 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
Mr. Kerry Hicks, Dr. Matthews and Dr. Richard H. Rothman, a former director,
each reported one transaction after the applicable due date.
ADVANCE NOTICE PROCEDURES
Our By-Laws provide that any stockholder wishing to make a nomination
for director or propose business to be considered by the stockholders at the
meeting must give us notice within ten days following the date of the attached
Notice of Annual Meeting, and that the notice must meet certain requirements set
forth in the by-laws.
We currently anticipate that our 2000 Annual Meeting of Stockholders
will be held on or about June 15, 2000. In accordance with our by laws, such
notice relating to the 2000 Annual Meeting of Stockholders must be given no more
than 90 nor less than 60 days prior to the date of such meeting. We will
publicly announce the actual date of the meeting to enable stockholders to
provide sufficient notice under the by-laws. These requirements do not affect
the deadline for submitting stockholder proposals for inclusion in the proxy
statement, nor do they apply to questions a stockholder may wish to ask at the
meeting. Stockholders may request a copy of the By-Law provisions discussed
above from the Secretary, Specialty Care Network, Inc., 44 Union Boulevard,
Suite 600, Lakewood, Colorado 80228.
STOCKHOLDER PROPOSALS
As noted above, we currently anticipate that our 2000 Annual Meeting of
Stockholders will be held on or about June 15, 1999. Proposals of stockholders
intended for inclusion in the proxy statement for our Annual Meeting of
Stockholders in 2000 must be received by us at our its principal office in
Lakewood, Colorado, no later than January 3, 2000 in order to be considered for
inclusion in our proxy statement and form of proxy relating to that meeting.
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SOLICITATION OF PROXIES
We will pay the cost of solicitation of proxies for the annual meeting.
In addition to the mailing of the proxy material, such solicitation may be made
in person or by telephone or telecopy by our directors, officers or regular
employees. We have engaged Corporate Investor Communications, Inc. to assist us
in the distribution and solicitation of proxies. We have agreed to pay Corporate
Investor Communications, Inc. a fee of $6,000 plus expenses for their services.
ANNUAL REPORT ON FORM 10-K
We will provide without charge to each person solicited by this proxy
statement, on the written request of any such person, a copy of the our Annual
Report on Form 10-K (including the financial statements and the schedule thereto
but excluding exhibits) as filed with the Securities and Exchange Commission for
our most recent fiscal year. Such written request should be directed to Delinda
Romero at the address of Specialty Care Network appearing on the first page of
this proxy statement.
The above Notice and Proxy Statement are sent by order of the Board of
Directors.
Patrick M. Jaeckle
Executive Vice President - Corporate
Development
and Secretary
Dated: October __, 1999
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PROXY PROXY
SPECIALTY CARE NETWORK, INC.
ANNUAL MEETING OF STOCKHOLDERS, NOVEMBER 18, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kerry R. Hicks and Patrick M. Jaeckle,
proxy, with full power of substitution, to vote, as designated below and on the
reverse side hereof, all shares of Common Stock which the undersigned is
entitled to vote on the election of directors, the proposals on the reverse side
hereof and on all other matters which may come before the 1999 Annual Meeting of
Stockholders of Specialty Care Network, Inc. or any adjournment thereof.
The shares represented by this Proxy, duly executed, will be voted. If
instructions are given in the spaces below and on the reverse side hereof, the
shares will be voted in accordance therewith; if instructions are not given, the
shares will be voted for the election of the directors named in Proposal 1 below
and in favor of Proposal 2 set forth on the reverse side hereof.
1. ELECTION OF DIRECTORS. FOR all nominees listed |_| WITHHOLD AUTHORITY to vote for |_|
(except as marked to all nominees listed below
the contrary)
(Kerry R. Hicks, Patrick M. Jaeckle, Peter H. Cheesbrough, Leslie S. Matthews, M.D. and Mats Wahlstrom.)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THAT
NOMINEE'S NAME IN THE LIST ABOVE.)
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
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2. PROPOSAL TO RATIFY THE AMENDMENT OF THE CERTIFICATE OF INCORPORATION TO
CHANGE THE COMPANY'S NAME TO HealthGrades.com, Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: ____________________________ , 1999
_______________________________________[SEAL]
Signature
_____________________________________________
Signature if held jointly