SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant /_/
Check the appropriate box:
/_/ Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SPECIALTY CARE NETWORK, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/_/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
/_/ $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(1)(3).
/_/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
/X/ No Fee Required.
1) Title of each class of securities to which transaction applies:
_____________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_____________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
_____________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
_____________________________________________________________________________
/_/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
1) Amount previously paid: _________________________________________________
2) Form, Schedule or Registration No. ______________________________________
3) Filing party: ___________________________________________________________
4) Date filed: _____________________________________________________________
___________
*Set forth the amount on which the filing fee is calculated and state how it was
determined.
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholder:
It is my pleasure to invite you to attend the 1998 Annual Meeting of
Stockholders of Specialty Care Network, Inc., to be held at the Hyatt Regency
Denver, 1750 Welton Street, Denver, Colorado, on June 5, 1998 at 9:00 a.m.
Mountain Daylight Time. The meeting will be held for the following purposes:
1. To elect nine directors for the ensuing year.
2. To vote upon a proposal to amend the Company's 1996 Equity
Compensation Plan by increasing the number of shares that may be
issued under the plan from 4,000,000 to 6,000,000.
3. To act upon such other matters that may properly come before the
meeting.
Holders of the Company's Common Stock of record at the close of
business on April 15, 1998 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 -
Finance/Development
and Secretary
April 27, 1998
<PAGE>
SPECIALTY CARE NETWORK, INC.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
PROXY STATEMENT
This Proxy Statement and the accompanying proxy card are being mailed
on or about April 27, 1998 to stockholders in connection with the solicitation
of proxies on behalf of the Board of Directors of Specialty Care Network, Inc.
("SCN" or the "Company") for the 1998 Annual Meeting of Stockholders. Proxies
are solicited to give all stockholders of record on April 15, 1998 an
opportunity to vote on the matters that come before the meeting. Shares can be
voted at the meeting only if the stockholder is present or represented by proxy.
When your proxy card is returned properly signed, the shares
represented 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 Company's 1996 Equity
Compensation Plan, as amended. 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 in the enclosed proxy will vote in accordance with
their best judgment on such matters. You may revoke your proxy at any time
before it is voted at the meeting by executing a later-dated proxy or by voting
by ballot at the meeting.
On April 15, 1998, 17,736,393 shares of SCN Common Stock were
outstanding. The holders of a majority of 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. All 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" is not counted for purposes of approving these matters.
1
<PAGE>
Ownership of Company Common Stock by Certain Persons
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of April 15, 1998 by (i)
each person known to the Company to own beneficially more than five percent of
the Company's Common Stock (including such person's address), (ii) the Company's
executive officers listed under "Executive Compensation--Summary of Cash and
Certain Other Compensation," (iii) each director of the Company and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned Outstanding Shares(1)
- ------------------------ ------------------ ---------------------
<S> <C> <C>
Richard H. Rothman, M.D., Ph.D. (2)(3)............... 452,436 2.6%
Kerry R. Hicks (4)................................... 670,418 3.8%
Patrick M. Jaeckle (5)............................... 559,124 3.1%
Robert E. Booth, Jr., M.D (3)........................ 552,634 3.1%
James L. Cain, M.D. (6).............................. 109,650 *
Peter H. Cheesbrough (7)............................. 6,667 *
Richard E. Fleming, Jr., M.D. (3)(8)................. 161,788 *
Thomas C. Haney, M.D. (3)............................ 115,883 *
Leslie S. Matthews, M.D. (3)......................... 228,422 1.3%
Mats Wahlstrom (7)................................... 6,667 *
D. Paul Davis (9).................................... 62,999 *
Peter A. Fatianow (9)(10)............................ 51,236 *
Timothy D. O'Hare (11)............................... 60,000 *
William C. Behrens .................................. 185,132 1.0%
All directors and executive officers as a
group (15 persons) (12)........................... 3,134,545 17.5%
</TABLE>
- ----------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 17,736,393 shares of Common
Stock outstanding on April 15, 1998. 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 15, 1998 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 the purpose of computing the percentage
2
<PAGE>
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 449,102 shares of Common Stock held by the R & M Rothman Family
Partnership, L.P., a limited partnership of which the reporting person and
his spouse are the sole general partners. Does not include 200,000 shares
of Common Stock held in the Richard H. Rothman 1996 "SCN" Annuity Trust
dated November 26, 1996.
(3) Includes 3,334 shares underlying currently exercisable stock options.
(4) 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 15,000 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.
(5) Includes 15,000 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.
(6) Includes 66,000 shares of Common Stock held by the Cain Family Partnership,
Ltd., a limited partnership of which Dr. Cain is the sole general partner.
(7) Includes 6,667 shares underlying currently exercisable stock options.
(8) Includes 20,382 shares and 5,095 shares of Common Stock held by the Fleming
Charitable Remainder Unitrust and the Fleming Family Foundation,
respectively. 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.
(9) Includes 6,000 shares underlying currently exercisable stock options.
(10) Does not include 7,500 shares of Common Stock held by the Fatianow Family
Irrevocable Children's Trust, for which shares Mr. Fatianow disclaims
beneficial ownership.
(11) Includes 60,000 shares underlying currently exercisable stock options.
(12) Includes options to purchase 138,004 shares of Common Stock.
ELECTION OF DIRECTORS
At the meeting, nine directors will be elected to hold office until the
Annual Meeting of Stockholders in 1999 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 the Board of Directors of
the Company.
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.
3
<PAGE>
Certain information concerning the nominees for election as directors
is set forth below:
Richard H. Rothman, M.D., Ph.D., age 61, has been Chairman of the Board
of Directors of the Company since December 1996. Since 1970, Dr. Rothman has
been Chairman of The Rothman Institute, and since 1986, he has been Chairman of
the Department of Orthopaedic Surgery at Thomas Jefferson University. Dr.
Rothman is Editor-in-Chief of The Journal of Arthroplasty, a journal of joint
replacement surgery. Dr. Rothman received a B.A. degree from the University of
Pennsylvania, an M.D. degree from the University of Pennsylvania School of
Medicine and a Ph.D. degree from Jefferson Medical College.
Kerry R. Hicks, age 38, a founder of the Company, has served as
President and Chief Executive Officer and as a director of the Company since its
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 39, a founder of the Company, has served as
Executive Vice President - Finance/Development and as a director of the Company
since its 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.
Robert E. Booth, Jr., M.D., age 53, has served as a director of the
Company since December 1996. Since July 1997, Dr. Booth has been an orthopaedic
surgeon with 3B Orthopaedics and is Chair of the Orthopaedic Hospital at
Allegheny University Hospitals -- Graduate and Professor of Orthopaedic Surgery
at Allegheny University of the Health Sciences. From 1977 to June 1997, Dr.
Booth was an orthopaedic surgeon at Reconstructive Orthopaedic Associates, Inc.
and its successor, Reconstructive Orthopaedic Associates II, P.C., at
Pennsylvania Hospital. Dr. Booth received a B.A. degree from Princeton
University and an M.D. degree from the University of Pennsylvania.
James L. Cain, M.D., age 58, has served as a director of the Company
since December 1996. Since 1976, Dr. Cain has been an orthopaedic surgeon at,
and the physician manager of, Vero Orthopaedics in Vero Beach, Florida. Dr. Cain
received a B.A. degree from Emory University and an M.D. degree from the Tulane
University School of Medicine.
4
<PAGE>
Peter H. Cheesbrough, age 46, has served as a director of the Company
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 50, has served as a director of the
Company 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 46, has served as a director of the
Company 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 43, has served as a director of the Company 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.
Kerry R. Hicks and David G. Hicks, the Company's Vice President -
Management Information Systems, are brothers.
Meetings and Committees of the Board of Directors
The Board of Directors held ten meetings during 1997. 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 appropriate Company officers the Company's internal controls. The Audit
Committee also recommends the firm of independent auditors for appointment by
the Company. Messrs. Cheesbrough and Wahlstrom are the current members of the
Audit Committee. The Audit Committee held one meeting during 1997.
5
<PAGE>
The Compensation Committee is authorized to determine the terms and
conditions of the employment of the Company's executive officers and to
administer the Company's 1996 Equity Compensation Plan. Messrs. Cheesbrough and
Wahlstrom are the current members of the Compensation Committee. The
Compensation Committee held four meetings during 1997.
In September 1997, the Board of Directors established the Nominating
Committee. 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 the strategic direction and management of
the Company. Dr. Rothman and Messrs. Cheesbrough and Wahlstrom are the current
members of the Nominating Committee. The Committee will consider qualified
candidates for election as directors suggested by stockholders that are
submitted in writing to the Secretary of the Company in accordance with
procedures set forth in the By-Laws.
Compensation of Directors
Following his election to the Board of Directors in March 1997, Mr.
Wahlstrom, who serves on the Company's Audit, Compensation and Nominating
Committees, was granted an option to purchase 20,000 shares of Common Stock, at
an exercise price of $9.375 per share (the closing price per share of the
Company's Common Stock on the date of grant). The option expires in June 2007.
The option vests in substantially equal increments on each of the first three
anniversaries of the date of grant.
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 or physicians
affiliated with 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, the Committee has utilized the assistance of a compensation
consulting firm, which has provided to the Committee statistical information
concerning the compensation paid by other companies 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.
6
<PAGE>
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.
Base Salary
The base salary of the Company's executives generally is governed by
the terms of employment agreements between the Company and each of the
executives. All of the employment agreements were entered into prior to 1997,
except for one agreement that was executed in connection with the hiring of an
executive in 1997. The agreement for the new executive includes salary terms
that were not based upon any specific criteria, but were determined as a result
of negotiations between management and the executive, subject to consultation
with, and approval of compensatory terms by, the Committee. With one exception,
base salaries were paid in 1997 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 1997 his base salary was paid in
accordance with the terms of his employment agreement. While the base salary
terms of the Company's executive officers are set forth in their respective
employment agreements, the Committee intends to monitor salary levels of other
companies in the industry to insure that salaries of the Company's executives do
not deviate substantially from those generally available in the industry.
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 1997, 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. However, because of
management's desire that incentive bonuses not adversely affect earnings per
share in 1997, the Committee did not award any incentive bonuses to executives
in 1997. The Committee determined to consider the performance of executive
officers in 1997 in making decisions regarding the grant of stock options during
1998.
7
<PAGE>
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 1997 under the Equity Compensation Plan at fair
market value on the date of grant. The options all provide for vesting in equal
increments on each of the first three anniversaries of the date of grant, and
will continue to be exercisable until ten years from the date of grant.
In determining the level of stock option grants for 1997, the Committee
considered stock-based compensation provided by other physician practice
management companies and other comparable companies in the healthcare industry.
The Committee determined to grant stock options with an aggregate exercise price
equal to a multiple of either five or ten times the base salary of the Company's
executive officers, which the Committee believes is competitive with stock-based
compensation provided by the comparable companies considered by the Committee.
In the case of Mr. Hicks, options were granted with an aggregate exercise price
equal to ten times base salary. The grant of options was not subject to any
other specific criteria. However, the Committee considered the performance of
the executives in their respective capacities in determining to make the grants
described above, including considering factors such as negotiation of practice
affiliations, improvements in operations, integration of information systems and
development of ancillary services. In the case of Mr. Hicks, the Committee
considered his instrumental role in the completion of the Company's initial
public offering, expansion of the Company's operating infrastructure and
negotiation of affiliations with a number of physician practices.
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
8
<PAGE>
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain information concerning the
compensation paid by the Company to the Chief Executive Officer and the four
other most highly paid executive officers (collectively, the "Named Executive
Officers") during 1997 and 1996 and to the Chief Executive Officer of the
Company and the Company's only other executive officer during the fiscal year
ended December 31, 1995. No executive officer of the Company earned any salary
or bonus for services rendered during the year ended December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------------
Securities
Annual Compensation Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(2)
- --------------------------- ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Kerry R. Hicks
President and Chief Executive Officer ................ 1997 $214,260 $ -- 172,622 $ 8,226
1996 $138,876 $140,625 75,000 --
1995 $ -- $ -- -- --
Patrick M. Jaeckle
Executive Vice President - Finance/Development ....... 1997 $214,259 $ -- 172,622 $ 6,572
1996 $147,210 $140,625 75,000 --
1995 $ -- $ -- -- --
William C. Behrens (1)
Executive Vice President - Practice Management ....... 1997 $192,548 $ -- -- $ 2,906
1996 $ 85,516 $ 85,938 545,825 --
D. Paul Davis
Senior Vice President of Finance ..................... 1997 $135,519 $ -- 60,217 $ 8,236
1996 $ 89,338 $ 67,500 30,000 --
Peter A. Fatianow
Vice President - Development ......................... 1997 $124,543 $ -- 50,181 $ 7,110
1996 $ 89,339 $ 67,500 30,000 --
Timothy D. O'Hare ...................................... 1997 $124,717 $ -- 50,181 $ 4,552
Vice President - Payor Operations 1996 $ 39,613 $ 31,290 150,000 --
</TABLE>
- --------
(1) Effective July 1, 1997, Mr. Behrens resigned from his positions as an
officer and director of the Company. Mr. Behrens remained in the employ of
the Company through 1997.
(2) Includes amounts contributed by the Company, for the account of the
executive officers, under the Company's Retirement Savings Plan, as
follows: Mr. Hicks, $7,534; Dr. Jaeckle, $5,880; Mr. Behrens, $2,214; Mr.
Davis, $7,544; Mr. Fatianow, $6,418; Mr. O'Hare, $3,860. Also includes, for
each executive officer, $692 distributed upon termination of medical
savings accounts initially established by the Company for all employees.
9
<PAGE>
Stock Options
The following table sets forth certain information regarding stock
options granted during 1997 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted(2) Fiscal Year Per Share(3) Date Present Value (1)
- ---- ---------- ------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Kerry R. Hicks............. 91,490 7.4% $11.75 6/26/2007 $405,301
81,132 6.6% $13.25 11/13/2007 $405,660
Patrick M. Jaeckle......... 91,490 7.4% $11.75 6/26/2007 $405,301
81,132 6.6% $13.25 11/13/2007 $405,660
William C. Behrens......... -- -- -- -- --
D. Paul Davis.............. 31,915 2.6% $11.75 6/26/2007 $141,383
28,302 2.3% $13.25 11/13/2007 $141,510
Peter A. Fatianow.......... 26,596 2.2% $11.75 6/26/2007 $117,820
23,585 1.9% $13.25 11/13/2007 $117,925
Timothy D. O'Hare.......... 26,596 2.2% $11.75 6/26/2007 $117,820
23,585 1.9% $13.25 11/13/2007 $117,925
</TABLE>
- -----------------
(1) These amounts represent the estimated fair value of stock options, measured
at the date of grant using the Black-Scholes option pricing model. There
are four underlying assumptions used in developing the grant valuations: an
expected volatility of 0.47; an expected term to exercise of 3 years;
risk-free interest rate over the life of the option of 6.0%; and an
expected dividend yield of zero. The actual value, if any, an officer may
realize will depend on the amount by which the stock price exceeds the
exercise price on the date the option is exercised. Consequently, there is
no assurance the value realized by an officer will be at or near the value
estimated above. These amounts should not be used to predict stock
performance.
(2) The options vest in one-third percent increments on each of the first
through third anniversaries of the date of grant.
(3) The options were granted at a price per share equal to the closing price
per share on the Nasdaq National Market on the date of grant.
The following table sets forth certain information regarding exercises of
stock options during 1997 and stock options held as of December 31, 1997 by the
Named Executive Officers.
10
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Shares Fiscal Year-End(#) Fiscal Year-End($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise(#) Realized ($) Exerciseable Unexerciseable Exerciseable Unexerciseable
- ---- ----------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kerry R. Hicks ......... -- -- 15,000 232,622 $ 84,375 $ 539,468
Patrick M. Jaeckle ..... -- -- 15,000 232,622 $ 84,375 $ 539,468
William C. Behrens ..... 200,000 $1,587,499 0 0 0 0
D. Paul Davis .......... -- -- 6,000 84,217 $ 33,750 $ 205,454
Peter A. Fatianow ...... -- -- 6,000 74,181 $ 33,750 $ 193,712
Timothy D. O'Hare ...... -- -- 60,000 140,181 $ 337,500 $ 564,962
</TABLE>
- ------------------
(1) Based on $13.625, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market on December 31, 1997.
Employment Agreements
The Company has 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.
The Company has an employment agreement with Mr. Davis, Mr. Fatianow,
and Mr. O'Hare, dated as of February 22, 1996, March 1, 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 the Company, the Company will pay such officer his base salary for
the remaining term of the agreement and any earned but unpaid
11
<PAGE>
salary and incentive compensation. In the event the officer is terminated with
cause, regardless of whether there has been a change of control of the Company,
the Company 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
of the Company, 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.
CERTAIN TRANSACTIONS
The Company has service agreements with certain medical practices (the
"Director Affiliated Practices") and their respective physician owners,
including all of the Company's physician directors. Under the service
agreements, the Company, among other things, provides facilities and management,
administrative and development services, and employs 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%-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"). The annual Base Service Fees for the Director
Affiliated Practices is approximately $9.5 million in the aggregate. In
addition, with respect to its management of ancillary facilities services for
certain of the Director Affiliated Practices, the Company receives fees based on
net revenue related to such facilities and services. Fees paid by the Director
Affiliated Practices in 1997 are summarized below.
Greater Chesapeake Orthopaedic Associates, LLC ("GCOA"), one of whose
physician owners is Dr. Matthews, paid service fees of approximately $4,100,000
(including approximately $2,200,000 in respect of reimbursed Clinic Expenses) to
the Company in 1997. The Company leases the facilities utilized by GCOA from an
entity of which Dr. Matthews is a partial owner. The Company paid approximately
$300,000 under the lease in 1997, which was included in reimbursed Clinic
Expenses as described above.
Princeton Orthopaedic Associates II, P.A. ("POA"), one of whose
physician owners is Dr. Fleming, paid service fees of approximately $7,500,000
(including approximately $6,100,000 in respect of reimbursed Clinic Expenses) to
the Company in 1997. The Company leases the facilities utilized by POA from an
entity of which Dr. Fleming is a partial owner. The Company paid approximately
$1,300,000 under the lease in 1997, which was included in reimbursed Clinic
Expenses as described above.
12
<PAGE>
Reconstructive Orthopaedic Associates II, P.C. ("ROA"), whose owners
include Dr. Rothman and included, through June 1997, Dr. Booth, paid service
fees of approximately $8,600,000 (including approximately $5,400,000 in respect
of reimbursed Clinic Expenses) to the Company in 1997.
Effective July 1997, Dr. Booth discontinued practicing with ROA. While
Dr. Booth remains subject to the Service Agreement with ROA, the Company has
entered into an agreement with ROA and Dr. Booth pursuant to which an
independent practice whose physician owners include Dr. Booth ("3B
Orthopaedics") will enter into a new service agreement with the Company. The
Company is currently negotiating the new service agreement with 3B Orthopaedics.
During 1997, 3B Orthopaedics paid service fees of approximately $900,000.
TOC Specialists, P.L. ("TOC"), whose owners include Dr. Haney, paid
service fees of approximately $6,200,000 (including approximately $4,800,000 in
respect of reimbursed Clinic Expenses) to the Company in 1997. The Company
leases the facilities utilized by TOC from an entity of which Dr. Haney is a
partial owner. The Company paid approximately $700,000 under the lease in 1997,
which was included in reimbursed Clinic Expenses as described above.
Vero Orthopaedics II, P.A. ("VO"), whose owners include Dr. Cain, paid
service fees of approximately $2,200,000 (including approximately $1,300,000 in
respect of reimbursed Clinic Expenses) to the Company in 1997. The Company
leases certain of the facilities utilized by VO from an entity of which Dr. Cain
is a partial owner. The Company paid approximately $100,000 under the lease in
1997, which was included in reimbursed Clinic Expenses as described above.
In 1997, the Company 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 the Company (the "Ohio
Physician Owners"). In addition, the Company agreed to pay an amount equal to
25% of WCOG's first $6,000,000 of net income as contingent consideration (the
"Contingent Consideration"). The Company's 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, the Company
sold its one-half interest in WCOG to the Ohio Physician Owners for
consideration of approximately $875,000 and the remaining one-half of its
interest to Specialty Solutions, Inc. for consideration of $1,075,000. In
connection with the sale, the Ohio Physician Owners also forgave the Company's
obligation to pay the Contingent Consideration. Kevin J. Hicks, an officer and
50% stockholder of Specialty Solutions, Inc., is the brother of Kerry Hicks and
David Hicks.
13
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S 1996 EQUITY
COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan (the "Plan") provides for
grants of stock options ("Stock Options") to employees of the Company and any
subsidiary, certain consultants and advisers, and non-employee members of the
Board of Directors of the Company ("Non-employee Directors"). Shares of Common
Stock of the Company, par value $.001 per share ("Shares"), may be issued upon
exercise of Stock Options. The Plan was designed to be an incentive to
participants to contribute materially to the growth of the Company, thereby
benefiting the Company's stockholders and aligning the economic interests of the
participants with those of the stockholders. The Plan was initially approved by
the Company's stockholders on October 15, 1996, prior to the Company's initial
public offering.
At the meeting, there will be presented to stockholders a proposal to
amend the Plan by increasing the number of shares of Common Stock reserved for
issuance under the Plan from 4,000,000 to 6,000,000. In the opinion of the Board
of Directors, the Company's ability to grant options has been instrumental in
its retention of its management and other key employees. In addition, the
Company has continued to grow significantly and the number of employees who have
received stock options has increased.
As of April 15, 1998, options to purchase 2,977,685 shares of Common
Stock were granted (net of cancellations with respect to options to purchase
83,414 shares of Common Stock) under the 1996 Equity Compensation Plan.
The key provisions of the Plan are as follows:
General. If the proposal is approved, the Plan will authorize up to
6,000,000 shares of Common Stock for issuance, subject to adjustment in certain
circumstances discussed below. If and to the extent Stock Options granted under
the Plan terminate, expire or are canceled without being exercised, the shares
subject to such Stock Options will again be available for grant under the Plan.
No individual may receive grants of Stock Options for more than an aggregate of
500,000 shares in any calendar year during the term of the Plan.
Administration of the Plan. The Plan provides that it is to be
administered and interpreted by the Board of Directors or a committee of not
less than two persons appointed by the Board of Directors from among its
members. The Board of Directors or such committee is hereinafter referred to as
the "Committee." The Compensation Committee of the Board of Directors currently
serves as the Committee. However, with respect to the grant of Stock Options to
Non-employee directors and other members of the Committee, the Board of
Directors exercises the authority of the Committee. The Committee has the sole
authority to determine (i) persons to whom Stock Options
14
<PAGE>
may be granted under the Plan, (ii) the type, number of underlying shares and
other terms of each Stock Option, (iii) the time when the grants of Stock
Options will be made and (iv) any other matters arising under the Plan.
The Committee will have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable, in its sole
discretion.
Grants and Awards. All grants of Stock Options are subject to the terms
and conditions set forth in the Plan and to those other terms and conditions
consistent with the Plan as the Committee deems appropriate and as are specified
in writing by the Committee to the designated individual (the "Grant
Instrument"). The Committee must approve the form and provisions of each Grant
Instrument. Grants under the Plan need not be uniform as among other recipients
of the same type of grant.
Eligibility for Participation. Subject to the terms of the Plan, the
Committee is responsible for designating the employees and consultants and
advisors of the Company and any subsidiary who may participate in the Plan. As
of April 15, 1998 approximately 955 employees were eligible for grants of Stock
Options under the Plan. The Committee is authorized to select the persons to
receive grants of Stock Options (the "Grantees") from among those eligible and
to determine the number of Shares that are subject to each grant of a Stock
Option. To be eligible, consultants and advisors must render bona fide services
and such services must not be in connection with the offer or sale of securities
in a capital raising transaction.
Grant of Stock Options. The Committee may grant stock options intended
to qualify as incentive stock options ("ISOs"), within the meaning of section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or so-called
"non-qualified stock options" that are not intended to so qualify ("NQSOs").
Only employees may receive ISOs.
The Committee fixes the option price per share at the date of grant of
the Stock Option. The option price of any ISO granted under the Plan may not be
less than the fair market value of the underlying Shares on the date of grant,
and the option price of any NQSO may be equal to, less than or greater than the
fair market value of the underlying Shares on the date of grant. However, if the
Grantee of an ISO is a person who holds more than 10% of the combined voting
power of all classes of outstanding stock of the Company, the option price per
share of an ISO must be at least 110% of the fair market value of a Share on the
date of grant. To the extent that the aggregate fair market value of Shares,
determined on the date of grant, with respect to which ISOs granted under the
Plan and any other plan become exercisable for the first time by a Grantee
during any calendar year exceeds $100,000, such ISOs, to the extent of such
excess, must be treated as NQSOs. Currently, the measure of fair market value of
a Share on a particular date is the closing sale price of a Share as reported on
the Nasdaq National Market on that date. On April 15, 1998 the closing price per
share of the Company's Common Stock, as reported on Nasdaq, was $11.50.
15
<PAGE>
Term of Stock Option. The Committee determines the term of each Stock
Option, which may not exceed ten years from the date of grant or, if the Grantee
of an ISO is a person who holds more than 10% of the combined voting power of
all classes of outstanding stock of the Company, five years from the date of
grant. Stock Options will be subject to earlier termination as described below
under "Termination of Stock Options as a Result of Termination of Employment or
Service, Disability or Death." The vesting period for Stock Options, if any,
will be as determined by the Committee, and specified in the Grant Instrument.
The Committee, in its sole discretion, may accelerate the exercisability of any
Stock Option.
Payment for Shares Underlying Stock Option. A Grantee may exercise a
Stock Option by delivering notice of exercise to the Company with accompanying
payment of the option price. The Grantee may pay the option price in cash or by
check or wire transfer in immediately available funds, or by delivering shares
of Common Stock already owned by the Grantee (subject to such restrictions as
the Committee deems appropriate) or by such other mode as the Committee may
approve, including payment through a broker in accordance with procedures
permitted by Regulation T of the Federal Reserve Board. The Grantee must pay, at
the time of exercise, the option price and the amount of any federal, state or
local withholding tax due in connection with such Stock Option exercise.
Termination of Stock Options as a Result of Termination of Employment
or Service, Disability or Death. If a Grantee ceases to serve an employee,
director, consultant or advisor to the Company or its subsidiary for any reason
other than disability, death or "termination for cause" (as defined in the Plan)
such person's Stock Option will terminate 90 days following the date on which he
or she ceases to serve. If such person's service ceases due to the person
becoming disabled within the meaning of Section 22(e)(3) of the Code, such
person's Stock Option will terminate one year following the date on which he or
she ceases to serve. In the event of the death of such person, while providing
such service or within three months after he or she ceases to serve, such
person's personal representative may exercise the Stock Option until one year
from the date of death. However, in each case described above, the Committee may
specify a different termination date, but in any event no later than expiration
of the initial term of the Stock Option. If such person's service ceases due to
"termination for cause" by the Company as defined in the Plan, such person's
Stock Options will terminate immediately.
Restrictions on Transferability of Stock Options. Subject to the
exceptions set forth below, no Stock Option granted under the Plan may be
transferred, except by will or the laws of descent and distribution. However,
(i) if permitted in any specific case by the Committee in its sole discretion,
an NQSO may be transferred pursuant to a "qualified domestic relations order,"
within the meaning of the Code or of Title I of ERISA and (ii) the Committee may
provide, in a Grant Instrument, that a Grantee may transfer Stock Options to his
or her family members or other persons or entities according to such terms as
the Committee may determine.
Amendment or Termination of the Plan. The Board of Directors may amend
or terminate the Plan at any time. Nevertheless, the Board of Directors may not
amend the Plan without shareholder
16
<PAGE>
approval if such approval is required by Section 162(m) of the Code and the Plan
is subject to Section 162(m). The Plan will terminate on October 14, 2006 unless
terminated earlier by the Board of Directors or extended by the Board of
Directors with approval of the stockholders. The termination of the Plan will
not impair the power and authority of the Committee with respect to outstanding
Stock Options.
Amendment and Termination of Outstanding Stock Options. A termination
or amendment of the Plan that occurs after a grant is made will not result in
the termination or amendment of the Stock Option unless the Grantee consents;
provided, however, that the Committee may revoke any Stock Option the terms of
which are contrary to applicable law, or modify any grant to bring it into
compliance with any valid and mandatory government regulation. Stock Options may
also be modified, replaced or exchanged under the "Change of Control" provisions
described below.
Adjustment Provisions. If there is any change in the number or kind of
shares of Company stock outstanding by reason of a stock dividend, spin off,
recapitalization, stock split, or combination or exchange of such shares, or
merger, reorganization or consolidation of the Company, reclassification or
change in the par value or similar event, or if the value of outstanding Shares
is substantially reduced as a result of a spin-off or the Company's payment of
an extraordinary dividend or distribution, the number of Shares available for
Stock Options, the maximum number of Shares for which any individual
participating in the Plan may receive Stock Options in any year, and the number
of Shares and option price per Share subject to outstanding Stock Options, will
be appropriately adjusted by the Committee to reflect any increase or decrease
in the number of, or change in kind or value of, issued shares of Company stock.
Change of Control Provisions. In the event of a "Change of Control,"
all outstanding Stock Options will automatically accelerate and become
immediately exercisable, unless the Committee determines otherwise. In addition,
subject to certain exceptions, upon a Change of Control where the Company is not
the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding Stock
Options that are not exercised will be assumed by, or replaced with comparable
options by, the surviving corporation.
In the event of a Change of Control, the Committee may require that
Grantees surrender their outstanding Stock Options in exchange for a payment by
the Company, in cash or Shares as determined by the Committee, in an amount
equal to the amount by which the then fair market value of the shares of Company
Stock subject to the Grantee's outstanding Options exceeds the option price.
The Plan limits the discretion of the Committee if its membership
changes following a Change of Control or if actions of the Committee could have
certain adverse accounting or tax effects.
Under the Plan, a "Change of Control" will be deemed to have occurred
upon the earliest to occur of the following events: (i) Any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934)
becomes a beneficial owner of securities of the Company
17
<PAGE>
representing 35% or more of the voting power of the then outstanding securities
of the Company, except where the acquisition is approved by the Board; (ii) The
stockholders of the Company approve (or, if stockholder approval is not
required, the Board approves) an agreement providing for (a) subject to certain
exceptions, the merger or consolidation of the Company with another corporation,
(b) a sale or other disposition of all or substantially all of the assets of the
Company or (c) a liquidation or dissolution of the Company; (iii) Any person has
commenced a tender offer or exchange offer for 35% or more of the voting power
of the then outstanding shares of the Company; or (iv) Directors are elected
such that a majority of the members of the Board of Directors will have been
members of the Board of Directors for less than two years, unless the election
or nomination for election of each new director who was not a director at the
beginning of such two year period was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
such period.
Section 162(m). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration in
excess of $1,000,000 paid to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
includes amounts received upon the exercise of stock options granted under the
Plan. An exception does exist, however, for "performance-based compensation,"
including amounts received upon the exercise of stock options pursuant to a plan
approved by stockholders that meets certain requirements. The Plan is intended
to allow grants of options thereunder to meet the requirements of
"performance-based compensation."
Option grants, net of cancellations, to purchase the following number
of shares of Common Stock have been made under the Plan from inception of the
Plan through April 15, 1998; Kerry R. Hicks, 347,622 shares; Patrick M. Jaeckle,
347,622 shares; D. Paul Davis, 121,217 shares; Peter A. Fatianow, 111,181
shares; Timothy D. O'Hare, 231,181 shares; current executive officers as a
group, 1,432,608 shares; non-employee directors as a group, 145,000 shares; all
other employees as a group, 807,487 shares; and physicians affiliated with the
Company (other than physicians who were granted options in their capacity as
directors), 592,590 shares. Because options are granted from time to time by the
Committee to those persons whom the Committee determines in its discretion
should receive options, the benefits and amounts that may be received in the
future by persons eligible to participate in the Plan are not presently
determinable.
Federal Tax Consequences. There are no federal income tax consequences
to a Grantee or to the Company upon the grant of an NQSO under the Plan. Upon
the exercise of an NQSO, a Grantee will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Shares
underlying the NQSO at the time of exercise over the option price of the NQSO,
and the Company generally will be entitled to a corresponding federal income tax
deduction in that amount. Upon the sale of Shares acquired by the exercise of an
NQSO, a Grantee will have a capital gain or loss (long-term or short-term
depending upon the length of time the Shares were held) in an amount equal to
the difference between the amount realized upon the sale and the Grantee's
adjusted tax basis in the Shares (the option price plus the amount of ordinary
income recognized by the Grantee at the time of exercise of the NQSO).
18
<PAGE>
A Grantee of an ISO will not recognize taxable income for purposes of
the regular income tax, upon either the grant or exercise of the ISO. However,
for purposes of the alternative minimum tax imposed under the Code, the amount
by which the fair market value of the Shares acquired upon exercise exceeds the
option price will be treated as an item of adjustment and included in the
computation of the recipient's alternative minimum taxable income in the year of
exercise. A Grantee who disposes of the Shares acquired upon exercise of an ISO
after two years from the date the ISO was granted and after one year from the
date such Shares were transferred to him or her will recognize long-term capital
gain or loss in the amount of the difference between the amount realized on the
sale and the option price (or the Grantee's other tax basis in the Shares), and
the Company will not be entitled to any tax deduction by reason of the grant or
exercise of the ISO. As a general rule, if a Grantee disposes of the Shares
acquired upon exercise of an ISO before satisfying both holding period
requirements (a "disqualifying disposition"), his or her gain recognized on such
a disposition will be taxed as ordinary income to the extent of the difference
between the fair market value of such Shares on the date of exercise and the
option price, and the Company will be entitled to a deduction in that amount.
The gain, if any, in excess of the amount recognized as ordinary income on such
a disqualifying disposition will be long-term or short-term capital gain,
depending upon the length of time the Grantee held his or her Shares prior to
the disposition.
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE PROPOSAL TO ADOPT THE
AMENDMENT TO THE PLAN.
19
<PAGE>
PERFORMANCE GRAPH
The graph below compares the percentage change in total stockholder
return for the Company 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 the Company's Common Stock was first traded on the Nasdaq National
Market, and covers the period from February 7, 1997 through December 31, 1997.
Dividend reinvestment has been assumed.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts the
following plot points:
<TABLE>
<CAPTION>
February 7, 1997 June 30, 1997 December 31, 1997
---------------- ------------- -----------------
<S> <C> <C> <C>
Specialty Care Network, Inc.................... $100.00 $147.29 $168.99
Nasdaq Stock Market (US)....................... $100.00 $106.21 $116.48
Nasdaq Health Services Index................... $100.00 $104.20 $101.89
</TABLE>
20
<PAGE>
OTHER MATTERS
As previously disclosed, the Company has been advised that the Department
of Health and Human Services is conducting an inquiry regarding Reconstructive
Orthopaedic Associates, Inc., a practice whose assets were acquired through
merger with the Company, and physicians formerly associated with that practice,
including Richard H. Rothman, M.D., Chairman of the Board of the Company, and
Robert E. Booth, Jr., M.D., a director of the Company. The inquiry appears to be
concerned with the submission of claims for Medicare reimbursement by the
practice. The Company has not been contacted by the Department of Health and
Human Services in connection with the inquiry.
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has selected the firm of Ernst & Young LLP to
serve as independent auditors for the Company 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 the
Company's officers and directors and beneficial owners of more than ten percent
of the Company's Common Stock to file reports of ownership of Company securities
and changes in ownership with the Securities and Exchange Commission. The
Company believes that all filings required to be made during 1997 were made on a
timely basis, except that Drs. Cain and Haney each reported one transaction
after the applicable due date.
ADVANCE NOTICE PROCEDURES
The Company's 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 the Company notice within ten days following the date
of this Notice of Annual Meeting (in subsequent years, such notice generally
must be given at least 60 but no more than 120 days before the annual meeting),
and that the notice must meet certain requirements set forth in 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
shareholder may wish to ask at the meeting. Shareholders 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.
21
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders intended for inclusion in the proxy statement
for the Annual Meeting of Stockholders in 1999 must be received by the Company
at its principal office in Lakewood, Colorado, no later than December 21, 1998
in order to be considered for inclusion in the Company's proxy statement and
form of proxy relating to that meeting.
SOLICITATION OF PROXIES
The cost of solicitation of proxies for the Meeting will be paid by the
Company. In addition to the mailing of the proxy material, such solicitation may
be made in person or by telephone or telecopy by directors, officers or regular
employees of the Company.
ANNUAL REPORT ON FORM 10-K
The Company will provide without charge to each person solicited by
this Proxy Statement, on the written request of any such person, a copy of the
Company's 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 its most recent fiscal year. Such written request should
be directed to Delinda Romero at the address of the Company 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
of Development/Finance
and Secretary
Dated: April 27, 1998
22
<PAGE>
SPECIALTY CARE NETWORK, INC.
ANNUAL MEETING OF STOCKHOLDERS -- JUNE 5, 1998
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints KERRY R. HICKS and PATRICK M. JAECKLE with
full power of substitution, proxies of the undersigned to represent the
undersigned and to vote all shares of Common Stock of Specialty Care Network,
Inc. which the undersigned would be entitled to vote if personally present at
the Annual Meeting of Stockholders of Specialty Care Network, Inc. to be held at
the Hyatt Regency Denver, 1750 Welton Street, Denver, Colorado, at 9:00 A.M.
Mountain Daylight Time on June 5, 1998 and at any adjournment thereof, subject
to the directions indicated on the reverse.
(Continued and to be signed on reverse side)
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
SPECIALTY CARE NETWORK, INC.
June 5, 1998
Please Detach and Mail in the Envelope Provided
A | | Please mark your
|X| votes as in this
example.
WITHHOLD
FOR AUTHORITY
all nominees to vote for
listed at right nominees
1. Election of | | | |
Directors: |_| |_|
To WITHHOLD AUTHORITY to vote for any individual
nominee(s), place an X in the box below and indicate
the name of the nominee(s) on the line below.
| |
|_|__________________________________________
Nominees: Richard H. Rothman, M.D., Ph.D.
Kerry R. Hicks
Patrick M. Jaeckle
Robert E. Booth, Jr., M.D.
James L. Cain, M.D.
Peter H. Cheesbrough
Richard E. Fleming, Jr., M.D.
Leslie S. Matthews, M.D.
Mats Wahlstrom
FOR AGAINST ABSTAIN
2. Proposal to amend the Specialty | | | | | |
Care Network, Inc. 1996 Equity | | | | | |
Compensation Plan. |_| |_| |_|
3. To vote on such other matters that may properly come before
the meeting.
NOTE: THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
If no directions are given, the shares will be voted FOR the
election of the listed nominees for director and FOR the proposal
to amend the Specialty Care Network, Inc. 1996 Equity
Compensation Plan. This Proxy also delegates discretionary
authority to vote with respect to any other matters that may
properly come before the meeting or any adjournment or
postponement thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF
THE NOTICE OF ANNUAL MEETING, PROXY STATEMENT AND
ANNUAL REPORT OF SPECIALTY CARE NETWORK, INC.
Signature _____________________ Signature _______________________ Date: ________
Note: Please sign this proxy exactly as name(s) appear hereon. When signing as
attorney-in-fact, executor, administrator, trustee or guardian, please add
your title as such, and if signed as a corporation, please sign with full
corporate name by duly authorized officer or officers and affix the
corporate seal. Where stock is issued in the name of two or more persons,
all such persons should sign.
