<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-22019
HEALTHGRADES.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 62-1623449
incorporation or organization) (I.R.S. Employer Identification No.)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [X]
As of March 27, 2000, the aggregate market value of the common stock held by
non-affiliates of the registrant was $26,500,295. Such aggregate market value
was computed by reference to the closing sale price of the common stock as
reported on the Nasdaq Small Cap Market on such date. For purposes of making
this calculation only, the registrant has defined "affiliates" as including all
directors and beneficial owners of more than five percent of the common stock of
the Company.
As of March 27, 2000 there were 21,516,468 shares of the registrant's common
stock outstanding.
This amendment to the Company's Form 10-K for the fiscal year ended December 31,
1999 amends the Form 10-K to amend and restate in their entirety Items 10, 11,
12 and 13 of Part III.
<PAGE> 2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
KERRY R. HICKS, age 40, a founder of HealthGrades.com, has served as our Chief
Executive Officer since our inception in 1995. He also served as our President
from our inception until November 1999. From 1985 to 1995, he served as Senior
Vice President of LBA Healthcare Management (LBA). Mr. Hicks received a BS in
Business and a Masters in Information Systems from Colorado State University.
PATRICK M. JAECKLE, one of our founders, has served as our President since
November 1999. He was an Executive Vice President from our inception in 1995
until November 1999. From February 1994 through March 1996, Mr. Jaeckle served
as Director of Healthcare Corporate Finance at Morgan Keegan & Co., Inc.
Previously, Mr. Jaeckle was a member of the healthcare groups at both CS First
Boston and Smith Barney. Prior to his career in investment banking, Mr. Jaeckle
was a member of the International Business Development Group at Merck & Company.
Mr. Jaeckle received an MBA from Columbia Business School.
PETER H. CHEESBROUGH, age 48, has served as a director of HealthGrades.com 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 HealthGrades.com
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.
MATS WAHLSTROM, age 45, has served as a director of HealthGrades.com 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 was President of Gambro Healthcare, Inc.
from 1993 until February 2000, Executive Vice President of Gambro AB from 1990
until February 2000 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 from 1991 until February 2000.
PARAG SAXENA, age 44, has served as a director of HealthGrades.com since April
2000. Mr. Saxena was a founder of INVESCO's Private Capital Group, where he has
served since 1983. He is currently head of the Group. Mr. Saxena received an
M.B.A. from The Wharton School of Business.
MARC S. SANDROFF, age 42, has served as a director of HealthGrades.com since
April 2000. Mr. Sandroff has more than twenty years of experience as a health
care entrepreneur and as a venture capitalist. Mr. Sandroff has been Managing
Director of Essex Woodland Health Venture Fund IV, L.P. since 1986. From 1984 to
1987, he was one of nine professionals responsible for managing the venture
capital portfolio for Allstate Insurance. Prior to entering the venture capital
industry, he was a founder of and had direct operating responsibilities for
several rehabilitation and long-term care facilities. Mr. Sandroff has a Masters
degree in strategic management and healthcare industry policy from the
University of Chicago.
EXECUTIVE OFFICERS OF THE REGISTRANT
KERRY R. HICKS, age 40, a founder of HealthGrades.com, has served as our Chief
Executive Officer since our inception in 1995. He also served as our President
from our inception until November 1999. From 1985 to 1995, he served as Senior
Vice President of LBA Healthcare Management (LBA). Mr. Hicks received a BS in
Business and a Masters in Information Systems from Colorado State University.
PATRICK M. JAECKLE, one of our founders, has served as our President since
November 1999. He was an Executive Vice President from our inception in 1995
until November 1999. From February 1994 through March 1996, Mr. Jaeckle served
as Director of Healthcare Corporate Finance at Morgan Keegan & Co., Inc.
Previously, Mr. Jaeckle was a member of the healthcare groups at both CS First
Boston and Smith Barney. Prior to his career in investment banking, Mr. Jaeckle
was a member of the International Business Development Group at Merck & Company.
Mr. Jaeckle received an MBA from Columbia Business School.
D. PAUL DAVIS has served as Executive Vice President - Finance for
HealthGrades.com, Inc. since November 1999. He has been our Chief Financial
Officer since August 1998. He was our Senior Vice President of Finance and Chief
Financial Officer from March 1997 until August 1998, and from March 1996 until
March 1997 he was Vice President of Finance. From January 1993 to March 1996,
Mr. Davis served as Vice President of Finance for Surgical Partners of America,
Inc. His responsibilities included oversight of all accounting functions and
corporate financing. He served as Chief Financial Officer for Anesthesia Service
Medical Group, Inc., from April 1987 to January 1993. From January 1982 to April
1987, Mr. Davis was employed by Intermountain Health Care, Inc., as Corporate
Accountant. He is a Certified Public Accountant and a Certified Management
Accountant.
DAVID G. HICKS has served as our Executive Vice President - Information
Technology since November 1999. He was Senior Vice President of Information
Technology from May 1999 to November 1999 and Vice President of Management
Information Systems from March 1996 until May 1999. From 1994 to March 1996, Mr.
Hicks worked as Manager of Information Technology for the Association of
Operating Room Nurses. He was responsible for all information technology
development. From 1992 to 1994, Mr. Hicks worked as Manager of Financial Systems
for Coors Brewing Company, where he was responsible for all technology within
the Internal Financial Systems Department. From 1982 to 1992, Mr. Hicks served
as Manager of Internal Systems for Martin Marietta Data Systems. He was
responsible for developing proprietary billing systems and centralized data
exchange and data warehousing.
TIMOTHY D. O'HARE has served as our Senior Vice President - ProviderWeb.net
since November 1999. He was our Vice President - Operations from August 1996
until November 1999. From 1987 to 1994, Mr. O'Hare served as Vice President and
Executive Director of HealthCare of North Carolina. From 1994 to 1996, Mr.
O'Hare served as Executive Director of Kaiser Foundation Health Plan of North
Carolina. Mr. O'Hare has over 20 years experience in healthcare, having worked
for managed care companies, hospitals, and physicians.
FRANK W. RIESENECKER has served as our Senior Vice President - Corporate
Operations since September 1999. From March 1997 to August 1999, Mr. Riesenecker
served as President of Chums, Inc., a leading manufacturer of sports and safety
products for consumer and industrial markets worldwide. Previously, Mr.
Riesenecker served as President of Tundra, Inc. an industrial and commercial
construction project management company.
SARAH LOUGHRAN has served as our Senior Vice President - Content since March
2000 and as Senior Vice President - Content of HG.com and its successor,
Healthcare Ratings, Inc. since 1998. From 1996 to 1997, Ms. Loughran worked as
Assistant Vice President for Product Development for HCIA, where she developed a
number of information application products. From 1994 to 1996, Ms. Loughran
served as a Senior Consultant at LBA Healthcare Management. In this role, she
consulted with more than 35 different hospitals on managing cost by clinical
specialty. Prior to this, she was Assistant Vice President for Clinical Support
Services in a large not-for-profit hospital system.
PETER A. FATIANOW has served as our Senior Vice President - Business Development
since March 2000. He has served in several capacities for HG.com and its
successor, Healthcare Ratings, Inc. Since July 1998, most recently as Senior
Vice President - Operations. He was previously our Vice President of Business
Development from our inception until July 1998. From July 1998 until February
1999, he was a partner of Consolidation Capital Partners LLC, which provided
consulting services to us in connection with our restructuring transaction with
our former affiliated practices. From July 1994 to February 1996, Mr. Fatianow
worked as an Associate Vice President in Healthcare Corporate Finance with
Morgan Keegan & Company, Inc. Previously, he spent two years in CS First
Boston's Health Care Group in New York where he worked on a variety of merger
and acquisition advisory and corporate finance assignments.
Kerry R. Hicks and David G. Hicks are brothers.
<PAGE> 3
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors and beneficial owners of more than ten percent of our common stock to
file reports of ownership of our securities and changes in ownership with the
Securities and Exchange Commission. We believe that all filings required to be
made during 1999 were made on a timely basis.
ITEM 11. 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 (collectively, the "named executive officers") during 1999,
1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------------------------------- ------ --------- ------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Kerry R. Hicks 1999 $ 253,606 $ -- 475,000 $ 7,137
Chief Executive Officer 1998 $ 248,923 $ -- 500,000 $ 4,197
1997 $ 214,260 $ -- 172,622 $ 8,226
Patrick M. Jaeckle 1999 $ 253,606 $ -- 475,000 $ 4,800
President 1998 $ 250,400 $ -- 500,000 $ -
1997 $ 214,260 $ -- 172,622 $ 6,572
D. Paul Davis 1999 $ 174,391 $ -- 200,000 $ 6,392
Executive Vice President - Finance/CFO 1998 $ 166,442 $ -- 305,310 $ 6,402
1997 $ 135,519 $ -- 60,217 $ 8,236
David G. Hicks 1999 $ 162,377 $ -- 200,000 $ 6,070
Executive Vice President - Information 1998 $ 139,615 $ -- 183,659 $ 5,584
Technology 1997 $ 121,731 $ -- 50,181 $ 7,110
Timothy D. O'Hare 1999 $ 146,077 $ -- 200,000 $ 5,728
Senior Vice President - ProviderWeb.net 1998 $ 143,402 $ -- 183,659 $ 5,736
1997 $ 124,717 $ -- 50,181 $ 4,552
</TABLE>
(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, $692 distributed upon termination
of medical savings accounts that we initially established for all
employees.
<PAGE> 4
Stock Options
The following table sets forth certain information regarding stock options
granted during 1999 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
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 DATE PRESENT VALUE (2)
- ------------------------------ ---------------- ------------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Kerry R. Hicks 475,000 20.25% $ 0.5625 4/28/09 $ 223,250
Patrick M. Jaeckle 475,000 20.25% $ 0.5625 4/28/09 $ 223,250
D. Paul Davis 200,000 8.53% $ 0.5625 4/28/09 $ 94,000
David G. Hicks 200,000 8.53% $ 0.5625 4/28/09 $ 94,000
Timothy D. O'Hare 200,000 8.53% $ 0.5625 4/28/09 $ 94,000
</TABLE>
(1) 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 fully vested on October 29, 1999
and terminate ten years from the date of grant.
(2) 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 1.55; an expected term to
exercise of 3 years; risk-free interest rate over the life of the option
of 6%; and an expected dividend yield of zero. The actual value, if any,
an option holder 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.
The following table sets forth certain information regarding stock options held
as of December 31, 1999 by the named executive officers. The named executive
officers did not exercise any stock options in 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXCERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END (1)
---------------------------- ----------------------------
Name EXCERCISABLE UNEXERCISABLE EXCERCISABLE UNEXERCISABLE
- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Kerry R. Hicks 769,766 452,856 $ 920,313 $ --
Patrick M. Jaeckle 769,766 452,856 $ 920,313 $ --
D. Paul Davis 311,997 283,530 $ 387,500 $ --
David G. Hicks 286,006 179,834 $ 387,500 $ --
Timothy D. O'Hare 388,007 195,833 $ 387,500 $ --
</TABLE>
(1) Based on $2.50, the closing price of our common stock as reported on the
Nasdaq Small Cap Market on December 31, 1999.
<PAGE> 5
EMPLOYMENT AGREEMENTS
We have employment agreements with each of Mr. Kerry Hicks and Mr. 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, Mr. David Hicks 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. In connection with Mr. David Hicks'
appointment as Senior Vice President in 1999, his base salary was increased to
$172,500 per annum.
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, we will pay such officer his base salary for the remaining term of
the agreement and any earned but unpaid salary and incentive compensation. In
the event the officer is terminated with cause, regardless of whether there has
been a change of control, we will pay such officer his base salary for 60 days
following such termination. If the officer is terminated without cause upon a
change of control, he is entitled to receive a lump sum payment upon such
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
covenants.
COMPENSATION OF DIRECTORS
Effective January 1, 1999, Messrs. Cheesbrough and Wahlstrom are entitled to
receive $20,000 per annum for their services on our board of directors and board
committees.
On May 5, 1999, we granted options to our non-employee directors to purchase the
following numbers of shares: Messrs. Cheesbrough, 23,345 shares: Dr. Matthews,
27,236 shares; and Messrs. Wahlstrom, 20,000 shares. The options have an
exercise price of $.5313 per shares (the closing price per share of our Common
Stock at the date of grant) and terminate on May 4, 2009. The options fully
vested on November 5, 1999.
<PAGE> 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 April 1, 2000 by (i) each person
known to us to own beneficially more than five percent of our common stock
(including such person's address), (ii) the named executive officers, (iii)
each director 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
- -------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Kerry R. Hicks (2) 2,633,035 11.6%
Patrick M. Jaeckle (3) 2,082,741 9.2%
D. Paul Davis (4) 490,349 2.2%
David G. Hicks (5) 464,339 2.1%
Timothy O'Hare (6) 422,559 1.9%
Peter H. Cheesbrough (7) 49,345 *
Leslie S. Matthews, M.D. (8) 83,450 *
Mats Wahlstrom (9) 36,677 *
Parag Saxena (10) 5,690,250 24.7%
Marc S. Sandroff (11) 4,050,000 17.9%
Chancellor V, L.P. (12) 5,690,250 24.7%
Essex Woodlands Health Venture Fund IV, L.P. (13) 4,050,000 17.9%
All directors and executive officers as a group
(13 persons) (14) 16,982,490 61.6%
</TABLE>
* Less than one percent
(1) Applicable percentage of ownership is based on 21,516,468 shares of
common stock outstanding on April 1, 2000. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and means voting or investment power with respect to
securities. Shares of common stock issuable upon the exercise of stock
options exercisable currently or within 60 days of April 1, 2000 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 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 held by The David G. Hicks
Irrevocable Children's Trust, warrants to purchase 350,000 shares and
867,617 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 warrants to purchase 175,000 shares and 867,617 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 warrants to purchase 17,500 shares and 365,850 shares
underlying stock options.
(5) Includes warrants to purchase 17,500 shares and 320,558 shares
underlying stock options
(6) Includes 422,559 shares underlying stock options
(7) Includes 48,345 shares underlying stock options
(8) Includes 41,667 shares underlying stock options
<PAGE> 7
(9) Includes 36,677 shares underlying stock options
(10) Includes 4,215,000 shares and 1,475,250 shares underlying warrants held
by Chancellor V, L.P. Mr. Saxena is a Managing Director of INVESCO
Private Capital, Inc. ("INVESCO"), the Managing Member of IPC Direct
Associates V, L.L.C., which is the General Partner of Chancellor V, L.P.
(11) Includes 3,000,000 shares and 1,050,000 shares underlying warrants held
by Essex Woodlands Health Ventures Fund IV, L.P. (the "Fund"). Mr.
Sandroff is a Managing Director of Essex Woodlands Health Ventures Fund
IV, L.L.C. (the "LLC"), which is the General Partner of the Fund.
(12) Includes warrants to purchase 1,475,250 shares. See Note 10.
(13) Includes warrants to purchase 1,050,000 shares. See Note 11.
(14) Includes warrants to purchase 3,085,250 shares and 2,980,890 shares
underlying stock options
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, when our business was principally focused on physician
practice management, we had service agreements with certain medical practices
(the "Director Affiliated Practices") and their respective physician owners,
including physicians who have served as our directors. Under the service
agreements, we, among other things, provided facilities and management,
administrative and development services, and employed most of the non-medical
personnel in 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 with the Director Affiliated Practices,
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 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 pre-paid its service fee
obligation with a lump sum payment of $1,185,271.
In September 1999, we agreed to terminate the management services
agreement with GCOA. In connection with this termination, we retained the
prepaid service fee. 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. In December 1999, we terminated the lease agreements with GCOA and
sold the fixed assets previously under lease to GCOA. We received $200,000 from
GCOA as consideration for the fixed assets.
Effective June 15, 1999, we restructured our relationship with ten
affiliated practices, including Princeton Orthopaedic Associates, II, P.A.
("POA") (collectively, the "Restructuring Transaction"). Dr. Richard E. Fleming,
Jr., one of our directors until November 18, 1999, is a physician owner of POA.
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 services 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 significantly. 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
<PAGE> 8
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 pre-paid its
service fee obligation with a lump sum payment of $972,155.
In 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 us through 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 in the amount
of $2,120,619 was issued to ASI by 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 from us 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 of the
LLC to us and $502,633 in full payment of working capital advances made by ASI
to the LLC.
In 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, brother of Kerry Hicks, our Chief Executive
Officer, and David Hicks, our Executive Vice President - Information Technology,
was one of the principals of PPI and was elected to serve as our Executive Vice
President-Provider Businesses, following that transaction. Mr. Kevin Hicks'
employment with us terminated in 1999.
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 and Venture5,
LLC ("Venture5"), an entity formed by the former PPI stockholders, to resolve
these matters. Under the agreements:
o We formed a new company ("HG.com") that owned certain aspects of
our Internet health care business. In substance, we owned 75% of
HG.com, Venture5 owned 20 percent of the company and Peter A.
Fatianow owned five percent of the company.
o We entered into a stockholders agreement under which we agreed to
place representatives of Venture5 on the HG.com Board of
Directors, and provide to Venture5 certain preemptive rights,
voting rights, registration rights and rights to participate in
some sales with respect to HG.com stock.
o We agreed, under the stockholders agreement, to facilitate
financing to fund the operations of HG.com. Under the agreements,
if we were unable to facilitate financing of at least $4 million
by December 31, 1999, we would be required to transfer sufficient
shares of HG.com stock that we owned so that the former PPI
stockholders would become the majority stockholders of HG.com.
o We sold most of the assets of PPI to the former PPI stockholders
for notes receivable totaling approximately $172,000 (the "PPI
Notes"). The PPI Notes bore interest at the greater of 4.8% per
annum or the "Applicable Federal Rate," as defined in Section
1274(d) of the Internal Revenue Code of 1986. We also funded
approximately $500,000 in expenses of PPI from July 1, 1999
through December 31, 1999.
o The former PPI stockholders waived their options to purchase
760,000 shares of our common stock that they previously held.
o We and the former PPI stockholders mutually released each other
from claims relating to our acquisition of PPI.
In December 1999, in exchange for $4,000,000 and our cancellation of
the PPI Notes, we purchased from Venture5 a number of shares of HG.com that
increased our ownership interest in HG.com to 90%. Sarah Loughran, a member of
Venture5, did not participate in the transaction and retained a five percent
interest in HG.com.
In December 1999, Kerry Hicks, our Chief Executive Officer, Patrick
Jaeckle, our President, Paul Davis, our Executive Vice President - Finance and
Chief Financial Officer and David Hicks, our Executive Vice President -
Information Technology, made loans to HealthGrades.com in the principal amounts
of $2 million, $1 million, $100,000 and $100,000, respectively. Mr. Kerry Hicks
and Mr. Jaeckle also jointly loaned an additional $350,000 to HealthGrades.com.
We used the proceeds of those loans to purchase the HG.com shares held by the
members of Venture5 other than Ms. Loughran. We issued notes (the "Officer
Notes") to those officers in connection with those loans. The notes bore
interest at 10.5% per annum and were payable on December 31, 2000.
<PAGE> 9
On March 17, 2000, we closed a private placement of our securities. In
connection with the offering, we sold 4,215,000 shares of our common stock and
warrants to purchase 1,475,250 shares of our common stock to Chancellor V, L.P.
for $8,430,000. Parag Saxena, one of our directors, is an affiliate of
Chancellor V, L.P. We also sold 3,000,000 shares of our common stock and
warrants to purchase 1,050,000 shares to Essex Woodlands Health Ventures Fund
IV, L.P. for $1,500,000. Marc Sandroff, one of our directors, is an affiliate of
Essex Woodlands Health Ventures Fund IV, L.P. In addition, the holders of
$3,200,000 principal amount of Officer Notes surrendered their notes in exchange
for our common stock and warrants as follows:
<TABLE>
<CAPTION>
Number of Shares
Principal Amount of Note Number of Shares Issued Underlying Warrants
Name Surrendered Issued
--------------------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Kerry R. Hicks $ 2,000,000 1,000,000 350,000
--------------------------------------- -------------------------- ------------------------- -------------------------
Patrick M. Jaeckle 1,000,000 500,000 175,000
--------------------------------------- -------------------------- ------------------------- -------------------------
D. Paul Davis 100,000 50,000 17,500
--------------------------------------- -------------------------- ------------------------- -------------------------
David G. Hicks 100,000 50,000 17,500
--------------------------------------- -------------------------- ------------------------- -------------------------
</TABLE>
The warrants issued in the transaction each have an exercise price of $4.00 per
share and have a term of five years.
In February 2000, through a series of transactions, we acquired the
remaining minority interests in HG.com from Peter A. Fatianow and Sarah
Loughran, each of whom owned five percent of the outstanding stock of HG.com. We
issued 400,000 shares of our common stock to each of Mr. Fatianow and Ms.
Loughran in exchange for their minority interests. In March 2000, Mr. Fatianow
became our Senior Vice President - Business Development and Ms. Loughran became
our Senior Vice President - Content.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
Date: May 1, 2000 By /s/ Kerry R. Hicks
-------------------------------------
Kerry R. Hicks
Chief Executive Officer
