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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [ ]
As of March 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.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K -- Part III.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 27
Item 3. Legal Proceedings................................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders.............................. 28
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................................ 30
Item 6. Selected Financial Data.......................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................................... 32
Item 7A Quantitative and Qualitative Disclosures About Market Risk....................... 38
Item 8. Financial Statements and Supplementary Data...................................... 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 38
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 38
Item 11. Executive Compensation............................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 38
Item 13. Certain Relationships and Related Transactions.................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................................................ 39
</TABLE>
This Report contains forward-looking statements that address, among other
things, changes to our HealthGrades.com website, fee based services to be
introduced on our ProviderWeb.net website, proposed revenue showing
arrangements, planned advertising and marketing activities, anticipated losses,
expected closing date of settlement with Mid-Atlantic Orthopedic Specialists,
anticipated federal income tax refund, costs relating to further development of
our websites, anticipated legal fees relating to litigation and sufficiency of
available resources to fund operations. These statements may be found under
"Item 1- Business," "Item 1-Risk Factors," and "Item 7-Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as in the
Report generally. We generally identify forward-looking statements in this
report using words like "believe," "intend," "expect," "may," "will," "should,"
"plan," "project," "contemplate," "anticipate" or similar statements. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including: technical difficulties in
effecting improvements to our websites, lack of market acceptance by physician
practices of our ProviderWeb.net basic subscription or value added services,
inability to enter into additional revenue sharing agreements with respect to
our websites, unanticipated cash requirements to support current operations or
expansion of our websites, advertising and marketing activities, and other
expenditures, inability to appropriately match personnel to our business needs,
the creation of new websites by our competitors that encompass rating or other
attributes that are attractive to hospitals, licensees, sponsors and others
seeking to promote their products or services on the Internet, increased
competition in the provision of online physician practice administration
information and tools, enactment of new legislation or administrative
regulation, application to our business of court decisions and regulatory
interpretations, adverse developments in our pending litigation, claims that
exceed our insurance coverage and unexpected challenge to, or delay in payment
of, our tax refund claim. In addition other factors that could cause actual
events or results to differ materially from those discussed in the forward
looking statements are addressed in "Item 1-Risk Factors" and matters set forth
in the Report generally. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
PART I
Item 1. Business.
BUSINESS
We are principally engaged in the operation of two health care Internet
sites. HealthGrades.com(TM) provides quality ratings and other information on
health care providers and facilities. ProviderWeb.net(TM) is a
subscription-based site that provides articles, tools and other resources to
physician practice administrators and managers.
HealthGrades.com Internet Site
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HealthGrades.com is a comprehensive healthcare information site that
provides rating and other profile information for a variety of providers and
facilities. We provide this information through several healthcare "report card"
sections and provider profile modules. Our goal is to provide comprehensive,
objective healthcare ratings and profiles to assist consumers in making the most
informed decisions regarding their health and that of their families. Our site
is available to consumers for free. We license access to our information to
hospitals, nursing homes, other internet sites and other groups.
We distinguish ourselves from most other healthcare information sites based
on the nature of the information we provide. Most other healthcare information
sites provide general information regarding specific diseases, conditions or
procedures. HealthGrades.com, in contrast provides, information to assist the
user in finding quality care or a quality provider, using our proprietary rating
information. However, we do not endorse any particular provider or facility. We
strive to provide unbiased ratings regarding the quality of providers and
facilities by developing proprietary algorithims or other methodologies and
applying them to a number of databases used on our ratings sites.
We provide information on our HealthGrades.com website through the
following section:
Hospital Report Cards(TM) - This page provides a list of hospitals and
ratings for the hospitals with respect to different medical procedures or
diagnoses chosen by the user. Information with regard to procedures and
diagnoses is provided in the following areas:
o cardiac
o orthopaedics
o neurosciences
o pulmonary/respiratory
o obstetrics
o vascular surgery
For each particular diagnosis or procedure chosen by the user, other than
there relating to obstetrics, we provide a five star rating (five stars is the
highest rating; one star is the lowest) with regard to the performance of all
hospitals in the United States. We base all of our ratings, except ratings on
obstetrics, on three years of MEDPAR (Medicare Provider Analysis and Review)
data that we purchase from the Health Care Financing Administration, known as
HCFA. For our obstetrics ratings, which also are subject to the five star rating
system, we use data from 14 individual states derived from the inpatient records
of persons who utilize hospitals in those states. We believe that the 14 states
are the only states with sufficient data for use on our website. We apply
proprietary algorithms to the MEDPAR and state data to account for variations in
risk in order to make the data comparable from hospital to hospital. Generally,
approximately 70% of hospitals studied are classified as three stars. The three
star rating is applied when there is very little difference, statistically
speaking, between a hospital's predicted and actual performance. Approximately
15% of hospitals are rated four and five stars, which means that their
performance is better than expected on statistically significant basis.
Approximately 15% of hospitals are rated 1 or 2 stars, meaning that their
performance was worse than expected on a statistically significant basis. We
have applied for a patent with respect to our hospital rating system and
methodology.
Health Plan Report Cards(TM) - We provide two ratings pages on health
plans. The first, HMO Report Cards(TM), addresses managed care organizations,
including health maintenance organizations (HMOs), and HMOs with point of
service plans (POSs). HMO report cards provides information on an aggregate of
297 HMOs and HMO/POS plans administered by 216 organizations across the United
States. Our ratings are based on data we purchase from the National Committee on
Quality Assurance (NCQA), a private, not-for-profit organization dedicated to
assessing and reporting on the quality of managed care organizations. The data
provided to us from the NCQA is a subset of HEDIS (Health Plan Employer Data and
Information Set). We base our ratings on 28 HEDIS measures that we believe
capture the quality of service and care provided by a managed care organization,
which we group into the following six categories:
o Access and Services (4 measures)
o Child and Adolescent Health (5 measures)
o Getting Better/Living with Illness (4 measures)
o Women's Health (4 measures)
o Member's Satisfaction (4 measures)
o Qualified Providers (7 measures)
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We apply a statistical analysis designed to obtain a weighted average of
the six rating categories that explains the greatest percentage of the overall
variation between categories across all managed care organizations. The overall
scores are then sorted and star grades are assigned (five stars is highest
rating). The top 10% of all managed care organizations nationally receive five
stars. The next 20% of managed care organizations are assigned four stars. The
middle 40% of managed care organizations analyzed receive three stars. The next
20% of managed care organizations are assigned two stars, and the bottom 10%
receive one star. HMO Report Cards also supplies NCQA accreditation status for
each plan on the site.
The second set of ratings on health plans is provided under the Health Plan
Report Cards page. Health Plan Report Cards ranks the performance of health
plans across the United States based on customer satisfaction studies provided
by the HCIA Sachs. HCIA Sachs commissioned Scarborough Research Organization, a
local market media and consumer research organization, to perform enrollee
satisfaction survey. Comprehensive questionnaires were completed and analyzed
for every health plan rated on the site (currently 244 health care plans from 39
major U.S. metropolitan markets). We apply a statistical analysis to assign
weights to nine performance ratings derived from the questionnaires. An overall
general score for each health plan analyzed is derived from a weighted average
of the nine performance ratings. These scores are displayed on the site. A five
star rating system is used in conjunction with the overall score. The
distribution between the best and worst performing health plans is allocated in
the same manner as on the HMO Report Cards page.
Nursing Home Report Cards(TM) - This page provides rankings of the
performance of nursing homes across the United States that were Medicare or
Medicaid certified during 1996 through 1999, using data provided by HCFA in the
Online Survey Certification and Reporting (OSCAR) database. The OSCAR database
contains information on nursing homes, including survey dates, survey results,
resident characteristics and staffing distribution. This information is derived
from individual state agencies, which enter the information into the OSCAR
database. In preparing the ratings, we reviewed four years of nursing home
survey information for nursing homes that were active in the Medicare and/or
Medicaid programs. Specifically, we analyzed the following elements to rate the
quality of care provided by each nursing home:
o Recent survey deficiencies
o Past survey deficiencies
o Repeating deficiencies found in all surveys not related to
quality of care
o Repeating deficiencies found in all surveys related to quality of
care.
Working with a group of health care professionals whose expertise is in
nursing home care, we developed a proprietary scoring system that translates the
scope and severity of each deficiency into numerical points. Our site provides a
three tier rating system under which five stars were awarded to the top 30% of
all nursing homes by state, three stars are awarded to the middle 40% of all
nursing homes by state and one star is awarded to the bottom 30% of all nursing
homes by state. The ratings were assigned on a state-by-state basis, rather than
nationally, because the surveys from which information is derived on the OSCAR
database are conducted by state agencies, and there may be variations in the
states' survey process and results. In addition, our site provides specific
information with regard to particular deficiencies found in the surveys.
Physician Report Cards(TM) - This page differs from our other report card
pages in that it does not provide ratings. Instead, it lists "Leading
Physicians," based on physicians who satisfy all of the following criteria,
which we believe reflect the quality of care provided by a physician. To be on
the "Leading Physicians" list:
o The physician must have been in practice for more than two years
following the end of residency training
o The physician must be board certified in the speciality in which
he or she is practicing
o The physician must have no Medicare sanctions in the past five
years.
o The physician must have no State Medical Board sanctions in the
past five years.
o For those physicians practicing in the specialities covered by
the Hospital Report Cards page, the physician must practice at or
be affiliated with at least one hospital that is rated as a
three, four or five star hospital
We are planning to make a change in our Physician Report Cards site. In
addition to our list of "Leading Physicians" derived from our methodology, we
plan to provide users a list of all physicians from which they will have the
ability to narrow their search on our site by choosing one or more of the
criteria utilized in our methodology, based on their own preferences. We expect
to introduce this feature in April 2000.
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Other Provider Profiles - In addition to the report card sites, we provide
profiles containing information with regard to the following providers or
facilities. The approximate number of providers or facilities addressed in each
profile is indicated in parenthesis:
o Hospitals (5,000)
o Dentists (150,000)
o Chiropractors (60,000)
o Assisted living residences (21,000)
o Fertility clinics (300)
o Mammography facilities (10,000)
o Acupuncturists (8,000)
o Naturopathic physicians (700)
Licensing Activities
Information on our site is free to consumers. We seek to obtain revenues on
a business to business basis as follows:
Licensing links to HealthGrades.com Content to Other Websites - We provide
linking arrangements that permit other companies operating healthcare websites
to provide their users access to HealthGrades.com from their locations. As of
March 27, 2000, we have licensed seven companies that pay a cash fee to us for
the provision of such access, and five additional companies that either provide
their on-line content to us or share advertising revenue derived from their
sites with us or both.
License Data and Trademark Rights to Highly Rated Hospitals and Nursing
Homes - After our ratings are objectively determined, we contact hospitals and
nursing homes that have received four or five star ratings and seek to have them
license our data and trademark rights in connection with their own marketing
programs. As of March 27, 2000, we have entered into agreements with 15
hospitals and one nursing home.
We approach potential licensees only after our ratings have been compiled.
We do not adjust our ratings based on whether a hospital or nursing home is
willing to license with us. We believe the success of our business is largely
dependent on the credibility of our ratings.
License Data to Payors/Employers - Through an arrangement with XCare.net,
we provide customized health care ratings and profile services to payor
organizations, provider groups and medical suppliers.
Advertising
We generate advertising revenue through banner advertisements that are
served on our site. We also receive a percentage of advertising revenue derived
from banner advertisements delivered on sites of other on line healthcare
companies that display our content.
Advertisements served on our websites are primarily served by a consulting
company which retains a percentage of the advertising revenue generated as a
commission fee.
Marketing and Public Relations Activities
We market our site through relationships with other companies that operate
healthcare websites and an aggressive public relations campaign. As noted above
under "Licensing HealthGrades.com Content to Other Websites," several of the
companies pay a fee to us for licensing access to our information. We pay a fee
to one of the companies for including links to our site and increased number of
users. The websites through whom we provide access to our information include
the following:
o iVillage.com
o Onhealth.com
o HealthAnswers.com
o VitalRX.com
o MediZine.com
o WeMedia.com
o Healthpicks.com
o Newsweek.com
o Washingtonpost.com
o BuyMedDirect.com
o SimplyHealth.com
o WebHealthy.com
o Sleepsolutions.com
These arrangements provide additional exposure to our site and increased
number of users. As a result, we believe our marketing to healthcare providers,
Payors and others is enhanced because of the increased user population that we
can make available to those entities who wish to advertise on our site, or
license our data in connection with their own marketing programs.
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In addition, we have engaged in an aggressive public relations campaign,
which includes references to our site in connection with our licensing of data
to hospitals, appearances on national television and radio programs and coverage
in newspapers and periodicals.
Competition
We believe that HealthGrades.com is the most comprehensive source of
healthcare ratings and provider profiles on the Internet. Other Internet sites,
such as thehealthpages.com and DoctorDirectory.com contain directories of
certain providers and facilities, but do not contain objective ratings of
quality outcomes. Moreoever, we believe our provider profiles include more
extensive information than directories or other websites. US News and World
Report and HCIA-Sachs publish lists of top hospitals, but do not provide ratings
of all hospitals, by procedure/diagnosis, as we do.
PROVIDERWEB.NET
ProviderWeb.net is a subscription based, online physician practice
management resource. ProviderWeb.net provides financial and administrative
tools, articles and resources covering a broad range of matters relating to
practice administration. We market subscriptions to our site to practice
administrators and others involved in the financial and operational performance
of physician practices.
ProviderWeb.net provides tools and information in the following areas:
Finance and Accounting - In addition to articles on various aspects of
financial management of a practice, we provide the following tools:
o An extensive budget template with multiple worksheets that
can be utilized to create a detailed practice budget
o An application that calculates key practice financial ratios
o An application that creates graphs and charts comparing
year-to-year practice results
Human Resources - Our human resources site contains the following
information and tools:
o A complete, downloadable employee handbook
o Employment contract templates
o Human resource forms covering a variety of issues from patient
dismissal to reference checks
o An anti-harassment and nondiscrimination policy
Marketing - We provide articles dealing with various aspects of marketing
including medical practice advertising and steps a practice should take when
developing a market plan. In addition, our tools include the following:
o A Web Builder feature that enables a practice to design and build
its own web page
o A marketing plan template that can be utilized to develop a
detailed practice marketing plan
Planning - We provide several articles to assist practices with respect to
strategic planning, as well as the following tools:
o Strategic planning tools, that includes forms designed to
enable a practice to gather and evaluate detailed internal
and external planning information
o An operational assessment template designed to enable the
practice administrator to perform an objective evaluation of the
practice's day-to-day operations
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Billing and Collections - In addition to an article designed to assist the
practice in evaluating billing problems, we provide the following tools and
applications:
o A payor mix application that enables a practice to track revenues
from various sources and display results in graphs and charts
o A business office assessment tool that enables a practice to
evaluate the effectiveness of its business office functions
o A payment preparation policy
o An aged accounts receivable application that enables a practice
to track and display results in graphs and charts
o Downloadable information supplementing an article that explains
in detail the HCFA 1500 Form, a universal form used for billing
physician services
Coding and Compliance - We provide information and tools to assist practice
administrators in providing a billing code that correctly relates to procedures
performed by physicians in the practice. Among the tools we offer are the
following:
o Documentation tools for insuring proper coding and accurate
billing for ten different specialty areas.
o A guide to proper use of CPT (Current Procedural Terminology)
code modifiers, which are used to more accurately reflect, on a
claim form, the level of service performed by physician than
would be the case if only a standard CPT code is used; the proper
use of CPT code modifiers can facilitate appropriate
reimbursement to providers.
Policies and Procedures - We provide 25 downloadable policies and
procedures covering various aspects of the physician practice, including
accounting, patient registration and collection.
Credentials File - We provide articles containing information with
respect to credentialing and the completion of hospital and insurance
applications as well as the verification of credentials. In addition, we offer
the following features:
o A downloadable universal credentialing application
o A downloadable malpractice claims/suit history form
o A credential reminder application designed to result in our
transmission of reminder e-mails after the practice inputs
information regarding renewal dates for certificates, licensing
and insurance policies with respect to each physician
Patient Satisfaction - In addition to information with regard to improving
customer service for patients, we provide a patient satisfaction survey form
with instructions for use. Once the survey form has been completed and sent to
us, we provide the results of the survey online to the practice.
Other Areas - We provide information and in some cases tools in other
areas, including legal matters, insurance, reimbursement, imaging, front desk,
information systems and managed care.
Sales
We seek to derive revenues from three separate sources:
Subscription fees - Users of our site pay an annual user license fee for
access to our site, information and tools. As of March 22, 2000, we had a
subscriber base of 33 practices including 457 physicians. Of the 33 practices,
17 are paying subscribers. In connection with the initial marketing of
ProviderWeb.net we gave 16 practices a free annual subscription. User license
fees are paid by the practices based on the number of users of our service. We
also provide fee based web page development services, and are planning to
introduce additional fee based services in the future, including online access
to financial management reporting for the practice, online help in determining
appropriate CPT codes, online supply purchasing, online malpractice insurance
applications and other services.
Revenue Sharing Arrangements - We will seek to derive revenues through
revenue sharing arrangements with other companies. We have recently entered into
an agreement with Global HealthNet, Inc. under which we will provide our
subscribers access to Global HealthNet's online claim eligibility and referral
service. This service provides online communication with payors to confirm
patient eligibility for coverage and to receive payor approval for referrals to
physicians for the provision of services. We will receive a portion of any fee
Global HealthNet
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receives from subscribers who access their service through our site. In
addition, we have entered into an agreement with FirstNet Learning, Inc. under
which we will offer FirstNet's online training and education programs to our
subscribers. Under the agreement, we will receive a portion of any training fee
received by First Net Learning in connection with our subscribers who access the
online training course through our site. In addition, we will seek to enter into
similar arrangements with companies that provide medical supplies, coding
assistance and malpractice and life insurance online. To date, we have not
entered into any revenue sharing agreements other than those specifically
referenced above.
Other Activities - Ultimately, as our subscriber base grows, we hope to
obtain additional revenues through the sale of banners, links and other forms of
advertising by other companies, including the sale of promotional subscriptions
for use by the companies in their own marketing programs.
Marketing
We currently market our ProviderWeb.net site by a direct sales effort to
large physician organizations, including independent practice organizations,
physician/hospital organizations and management services organizations. We also
use a direct sales approach to larger physician group practices. In addition, we
telemarket to individual practices. Our sales force consists of two direct sales
personnel and one telemarketer. In addition, we have commission arrangements
with several independent sales consultants.
We also have commenced and intend to expand a program of appearances at
conferences of organizations that include members who we believe would be
interested in our site, including the Medical Group Management Association and
the Professional Association of Healthcare Office Managers. In addition, we
intend to begin a print advertising campaign in several journals directed toward
practice administrators and a direct mail program.
Competition
There are many Internet based products and services directed to the
physician practice market. We believe that our two principal online competitors
are WebMD and CyBear. While these sites both offer some administrative tools,
they are also focused on providing clinical (disease management) information.
WebMD also provides consumer information. We believe that the principal
competitive factors in the provision of online services to physician practices
is the breath of information and tools available, ease of use, and price. We
believe that ProviderWeb.net provides a more comprehensive array of
administrative tools and resources than any other site. We also compete with
traditional private consulting firms that provide services to physician
practices.
PHYSICIAN PRACTICE MANAGEMENT OPERATIONS
We provide services under management services agreements to seven
musculoskeletal physician practices under management services agreements. We
provide the following services:
o Assessment of the financial performance, organizational
structure, wages and strategic plan of the practice
o Advice with respect to current and future marketing and
contracting plans with third-party payors and managed care plans
o Negotiation of malpractice insurance coverage
o Provision of access to our patient information databases
o Analysis of annual performance on a comparative basis with other
practices that have contracted with us
o Analysis of coding and billing practices
We provide these services under management services agreements that have
terms expiring through March 2003. The scope of our physician practice
management business has contracted significantly as a result of the
transactions described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Modification of Arrangements and
Restructuring Transaction."
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GOVERNMENT REGULATION
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare and Medicaid programs. Each of these programs is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment.
We believe our internet service activities and physician practice
management operations materially comply with applicable laws. However, we have
not received or applied for a legal opinion from counsel or from any federal
or state judicial or regulatory authority with respect to our internet service
activities on our practice management operations. Additionally, many aspects of
our business have not been the subject of state or federal regulatory
interpretation. The laws applicable to us and the practices that contract with
us are subject to evolving interpretations. If we, or these practices, are
reviewed by a government authority, we may receive a determination that could
be adverse to us or the practices. Furthermore, the laws applicable to either us
or the practices may be amended in a manner that could adversely affect us.
Federal Anti-kickback Law. A federal law commonly known as the
"Anti-kickback Law" prohibits the knowing or willful, solicitation, receipt,
offer or payment of any remuneration which is made in return for:
o the referral of patients covered under Medicare, Medicaid and other
federally-funded health care programs; or
o the purchasing, leasing, ordering, or arranging of any good, facility,
items or service reimbursable under those programs.
The law also prohibits remuneration that is made for the recommendation
of, or the arranging for, the purchasing, leasing, or ordering of any good,
facility, item or service reimbursable under those programs. The law has been
broadly interpreted by a number of courts to prohibit remuneration that is
solicited, received, offered or paid for otherwise legitimate purposes if one
purpose of the arrangement is to induce referrals or the other prescribed
activities. The penalties for violations of this law include:
o civil monetary penalties;
o criminal sanctions;
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o exclusion from further participation in federally-funded health care
programs (mandatory exclusion in certain cases);
o the ability of the Secretary of Health and Human Services to refuse
to enter into or terminate a provider agreement; and
o debarment from participation in other federal programs.
In 1991, the Federal Government published regulations that provide
exceptions of "safe harbors," to the Anti-kickback Law. Subsequently, in
November 1999, final regulations were issued establishing additional safe
harbor provisions under the Anti-kickback Law, as well as clarifying the
original 1991 safe harbor regulation. The failure of an activity to qualify
under a safe harbor provision, while potentially leading to greater regulatory
scrutiny, does not render the activity illegal.
There are several aspects of our activities to which the Anti-kickback Law
may be relevant. For example, the Anti-kickback Law has been construed to apply
to referral services, where a consumer group, professional society or some
other organization charges a health care provider a fee or other payment in
exchange for referring such health care provider to a prospective patient. The
Anti-kickback Law, and the safe harbor regulations promulgated thereunder, are
unclear as to whether activities such as our activities with respect to our
healthGrades.com website, would be construed as "referral services." Since
under certain circumstances, hospitals, nursing homes and other health care
providers achieving a four-star or five-star rating may pay us a fee in
exchange exchange for banner ads on our website and the use of our name and
logo in marketing the health care provider's services, it is possible that we
could be deemed to be engaged in referral services in such a manner so as to
implicate the Anti-kickback Law. Although a referral services safe harbor was
adopted in 1991, we do not believe that our current activities with respect to
our HealthGrades.com website would qualify under the referral services safe
harbor.
Additionally, the Office of Inspector General has stated on a number of
occasions that any compensation arrangement between a health care provider
and another party for the purpose of marketing health care items or services
that are directly or indirectly reimbursable by a Federal health care program
potentially implicates the Anti-kickback Law, irrespective of the methodology
used to compensate the party providing the marketing services. Generally, the
Office of Inspector General takes the position that marketing services fall
under the category of a "recommendation" of a good, facility, item or service
reimbursable under the Federal health care program. To the extent that certain
health care providers pay a flat fee payment to us in exchange for placing a
banner ad on our websites or in exchange for other activities by us which
could be construed as marketing services, the Anti-kickback Law may be
implicated. In addressing this issue, the Office of Inspector General has
identified several characteristics of arrangements among health care providers
and sales agents that appear to be associated with an increased potential for
program abuse. These suspect characteristics include:
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o compensation to the sales agent based on a percentage of sales;
o direct billing of a health care program by the health care provider
for the item or services sold by the sales agent;
o direct contact between a sales agent and physicians in a position or
order items or services;
o direct contact between the sales agent and Federal health care
program beneficiaries;
o the use of sales agents who are health care professionals or persons
in a similar position to exert undue influence or purchases or
patients; or
o the marketing of items or services that are separately reimbursable
by a Federal health care program (whether on the basis of charges or
costs).
We do not believe that our activities with respect to certain health care
providers who achieve a four-star or five-star ratings on the HealthGrades.com
website involve any of these suspect characteristics, or other characteristics
which the Office of Inspector General would consider abusive of likely to lead
to Federal health care program abuse. Fees paid to us by health care providers
are not in any manner determined based on the amount of revenue or other
financial benefit generated by our activities, we are not marketing specific
services or items with respect to hospitals, or other health care providers,
and our HealthGrades.com website is not directed to physicians, other health
care professionals or Federal health care program beneficiaries.
Finally, we continue to provide, on a limited basis, certain management
services to physician practices. These management services are provided through
our ProviderWeb.net website and under short-term management services agreements
with a limited number of physician practices.
In at least one advisory opinion, the Inspector General of the Department
of Health and Services has stated that under certain circumstances, payments
by a physician practice to a medical practice management company in exchange
for certain marketing services, billing and collection services, and managed
care contract negotiation services could constitute illegal remuneration as
defined in the Anti-kickback law, especially where the fee paid by the medical
practice to the management company is based on a percentage of medical
practice revenue. We do not believe that the limited management services we
provide to physician practices or the practice management information and tools
we provide to physician practices or the practice management information and
tools we provide under our ProviderWeb.net website are the types of services to
which this advisory opinion is directed, and our fees under our management
services arrangements are no longer based on a percentage of medical practice
revenue.
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We do not provide billing and collection services, marketing services or
managed care contracting services under any of our current physician practice
management operations. Although our HealthGrades.com activities (to the extent
they may be deemed "referral services") and general marketing activities do not
qualify for protection under the safe harbor regulations, we believe that our
activities are not the type of activities and arrangements the Anti-kickback
Law prohibits. We are not aware of any legal challenge or proceeding pending
against similar activities under the Anti-kickback Law. A determination that we
violated the Anti-kickback Law would be detrimental to us.
State Anti-kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. A number of these laws
apply to all health care services in the state, regardless of the source of
payment for the service. Based on court and administrative interpretation of
federal anti-kickback laws, we believe that most of these laws prohibit
payments to referral sources where a purpose for the payment is in the
interpretation. Therefore, it is possible that our activities may be found not
to comply with these laws. Noncompliance with such laws could subject us to
penalties and sanctions.
Fee-Splitting Laws. Most states prohibit a physician from splitting fees
with a referral source. Some states have a broader prohibition against any
splitting of a physician's fees, regardless of whether the other party is a
referral source. In most states, we believe that a management fee payment made
by a physician to a management company would not be considered fee-spitting if
the payment constitutes reasonable payment for services rendered to the
physician or physician's medical practice.
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We are paid by physicians (and their medical practices) for whom we provide
management services. Although we believe that our ProviderWeb.net practice
management services and our management service agreements comply with
applicable state laws relating to fee-splitting, a state authority may
nevertheless determine that we and the practices that contract with us are
violating the state's fee-splitting laws. Such a determination could render any
of our service agreements in such state unenforceable or subject to modification
in a manner that is adverse to us.
Health Care Reform. In recent years, a variety of legislative proposals
designed to change access to and payment for health care services in the United
States have been introduced. Although no major health reform proposals have
been passed by Congress to date, such legislation has been and may be
considered by Congress and state legislatures. No prediction can be made as to
whether health care reform legislation or similar legislation will be enacted
or, if enacted, its effect on us.
Potential Government Regulation of the Internet
Any new law or regulation pertaining to the Internet, or the
application or interpretation of existing laws, could decrease demand for our
services, increase our cost of doing business or otherwise cause our business to
suffer.
Laws and regulations may be adopted in the future that address
Internet-related issues, including online content, user privacy, pricing and
quality of products and services. This legislation could increase our cost of
doing business and negatively affect our business. Moreover, it may take years
to determine the extent to which existing laws governing issues like property
ownership, libel, negligence and personal privacy are applicable to the
Internet. Currently, U.S. privacy law consists of disparate state and federal
statutes regulating specific industries that collect personal data. Most of them
predate and therefore do not specifically address online activities. In
addition, a number of comprehensive legislative and regulatory privacy proposals
are now under consideration by federal, state and local governments in the
United States.
INTELLECTUAL PROPERTY
We regard the protection of our intellectual property rights to be
important. We rely on a combination of trademark, patent, and trade secret
restrictions and contractual provisions to protect our intellectual property
rights. We require selected employees to enter into confidentiality and
invention assignment agreements as well as non-competition agreements. The
contractual provisions and other steps we have taken to protect our intellectual
property may not prevent misappropriation of our technology or deter
third-parties from developing similar or competing
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technologies. We are seeking or will seek registration of trademarks for
HealthGrades, HealthGrades.com, Healthcarereportcards.com, Physician report
cards, Physicianreportcards.com, Dentist report cards, Healthcare Report
Cards.com, ProviderWeb.net, The Healthcare Ratings Experts, Health Plan Report
Cards, HMO Report Cards, Nursing Home Report Cards and our HealthGrades.com plus
design with the US Patent and Trademark Office. We also have a patent pending on
our health care rating system and methods. We cannot assure that this patent
will be issued, or that, even if issued, this patent will adequately protect our
technology or processees or otherwise result in commercial advantage to us.
There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership and other
intellectual property rights. The vast majority of these laws were adopted prior
to the advent of the Internet and, as a result, do not contemplate or address
the unique issues of the Internet and related technologies.
For further information, see "Risk Factors - Our propriety rights may not
be fully protected, and we may be subject to intellectual property infringement
claims by other."
EMPLOYEES
As of March 27, 2000, we had fifty-two employees, most of whom were
located at our corporate offices.
COMPANY HISTORY
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We were incorporated in Delaware in December 1995 under the name Speciality
Care Network, Inc. Upon commencement of operations in 1996, we were principally
engaged in the management of physician practices engaged in musculoskeletal
care, which is the treatment of conditions relating to bones, joints, muscles
and connective tissues. We entered into comprehensive affiliation arrangements
with 21 practices including 164 physicians through March 31, 1998. Due to
difficulties in the physician practice management industry generally, and with
respect to our physician practices in particular, we terminated or restructured
our arrangements with various physician practices, beginning in late 1998 and
continuing thereafter. As a result, the scope of our physician practice
management business has become far more limited, particularly after a
restructuring of our arrangements with nine practices in June 1999. During
1998, we began our internet business, and we launched our present
HealthGrades.com and ProviderWeb.net Internet sites in August 1999. In January
2000, we changed our name to HealthGrades.com, Inc.
Recent Developments
On March 17, 2000 we raised $18 million in a financing transaction
involving the investment of $14.8 million by new investors and the cancellation
of $3.2 million in promissory notes held by some of our executive officers. For
further information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
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RISK FACTORS
Risks Related to Our Business
OUR INTERNET HEALTHCARE BUSINESS HAS NOT BEEN PROFITABLE AND MAY NEVER BECOME
PROFITABLE.
We began developing Internet operations in 1998. For the year ended
December 31, 1999, net losses before income taxes for our Internet business was
$5,558,935. We expect to continue to incur operating losses for the foreseeable
future as we fund operating and capital expenditures to expand the content on
our websites, market our websites, upgrade our technology and continue to build
our brand. Our business model assumes that, with respect to HealthGrades.com,
consumers will be attracted to and use the healthcare ratings and profile
information and related content available on our website, which will, in turn,
enable us to license access to the information on our site to other Internet
sites, payors, hospitals and other providers and sell advertising on our site.
With regard to ProviderWeb.net, our business model assumes physician practice
administrators and managers will be willing to pay a subscription fee to have
online access to practice tools and other information and purchase additional
products and services to be made available on the website. Our business model
is not yet proven, and we cannot assure you that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future.
SINCE WE RECENTLY CHANGED OUR PRINCIPAL BUSINESS FOCUS, WE ARE ESSENTIALLY A NEW
COMPANY AND ACCORDINGLY ARE SUBJECT TO THOSE RISKS ASSOCIATED WITH A NEW
COMPANY.
We were founded in 1995, but have only been engaged in the Internet
healthcare information business since 1998. As a result, our company is
essentially a new venture. Therefore, we do not have a significant operating
history upon which you can evaluate us or our prospects, and you should not rely
upon our past performance to predict our future performance. In making the
transition from a physician practice management company to an Internet
healthcare company, we substantially changed our business operations and
management focus. We are also facing new recent challenges, including a lack of
meaningful historical financial data upon which to plan future budgets, a
radically different competitive environment and other risks described below. We
cannot assure you that our new model will be successful.
WE MAY NEED ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS IF WE DO NOT GENERATE
SUFFICIENT REVENUES OVER THE NEXT TWELVE MONTHS.
We believe that as a result of our recent financing, we have sufficient
resources to meet our requirements for at least the next 12 months. However, if
our revenues fall short of our expectations or our expenses exceed our
expectations, we may need to raise additional capital through public or private
debt or equity financings. We may not be able to secure sufficient funds on
terms acceptable to us. If equity securities are issued to raise funds, our
stockholders'
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equity may be diluted. If additional funds are raised through debt, we may be
subject to significant restrictions.
OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO OBTAIN RELIABLE DATA AS A
BASIS FOR OUR VARIOUS RATINGS AND PROFILE INFORMATION.
In order to provide our rating and profile information, we must be able
to receive comprehensive, reliable data. We currently seek this data from a
number of sources, including the Health Care Financing Administration, state
agencies, the National Committee on Quality Assurance, and several other private
healthcare information content companies. Our business would suffer if any of
these sources were to cease to make such information available, and suitable
alternative sources could not be identified on a timely basis. Moreover, our
ability to attract and retain consumer interest is dependent on the reliability
of the information that we purchase. If our information is inaccurate or
otherwise erroneous, our reputation and consumer following could be damaged.
Recently, an information content company that provides data for one of our pages
has alleged that we are in default under an agreement between us and the company
because of the manner in which we make our content available to users of the
websites of other Internet healthcare information companies. We believe this
assertion is unfounded and are contesting the claim. While we believe that
alternate sources of this information are readily available, our business could
suffer if we were forced to cease using this information prior to the time we
enter into an agreement with an alternative source.
OUR PLAN FOR REVENUE GENERATION MAY NOT BE VIABLE.
Our business plan contemplates that we will obtain revenues on our
HealthGrades.com site principally through licensing access to our ratings
content through linking agreements to other companies that operate Internet
healthcare websites, by licensing our data, HealthGrades.com name and trademarks
to highly-rated hospitals and nursing homes for use in connection with their
marketing programs, by directly or indirectly licensing our data to payors and
employers and by banner advertisement sales. With regard to ProviderWeb.net, we
are seeking to generate revenues through practice subscriptions, revenue sharing
arrangements with providers of services on our site and corporate sponsorships
for subscriptions to our site. We do not know if this plan will work.
Specifically, while we have licensed access to our HealthGrades.com content to
several healthcare information sites, these contracts generally have a
relatively short term or can be terminated on short notice. We do not know if
the Internet information companies that have licensed our data will view it as
helpful in connection with their own businesses, and they may determine not to
continue to license our services. Moreover, many of the Internet healthcare
companies that license our data are recently formed entities that do not have a
history of financial viability and may not have the resources to continue
licensing arrangements with us, even if they view such arrangements to be
helpful. In addition, the use of Internet information in conjunction with
hospital and nursing home marketing campaigns is a new, unproven concept that
may not achieve acceptance by hospitals and nursing homes. We also cannot
predict whether payors and employers will view our rating and profile
information as useful in connection with their operations. With regard to our
ProviderWeb.net service, we have only achieved limited penetration in our
physician practice market. As of March 27, 2000, we have received
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subscriptions from only 33 practices only 17 of which are paying subscribers. In
connection with the initial marketing of ProviderWeb.net we gave 16 practices a
free annual subscription. While our marketing efforts were hampered by severe
cash constraints that were rectified only upon completion of a recent financing
in March 2000, we do not know if additional marketing efforts will enable us to
achieve a level of subscriptions that will make the site profitable. Moreover,
although we have entered into two revenue-sharing arrangements with companies
that will provide services through our ProviderWeb.net site, we have not yet
begun to offer the services, and cannot predict whether any meaningful revenues
will be derived from these services. In addition, we have only recently begun a
marketing effort to obtain corporate sponsorships for subscriptions, and do not
know whether pharmaceutical companies and other entities we intend to approach
will deem subscriptions to our service to be useful for their own marketing
purposes. We may not be successful in obtaining meaningful corporate
sponsorships for our ProviderWeb.net site.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR WEBSITES.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our websites. These types of claims have been brought,
sometimes successfully, against online services as well as other print
publications in past. We have received threats from some providers that they
will assert defamation claims in connection with the information posted on our
HealthGrades.com website. Moreover, patients who file lawsuits against providers
often name as defendants all persons or companies with any nexus to the
providers. As a result, patients may file lawsuits against us based on treatment
provided by hospitals or other facilities that are highly rated on our site, or
doctors who are included as "Leading Physicians" on our site. In addition, a
court or government agency may take the position that our delivery of health
information directly, or information delivered by a third-party site that a
consumer accesses through our website, exposes us to malpractice or other
personal injury liability for wrongful delivery of healthcare services or
erroneous health information. The amount of insurance we maintain with insurance
carriers may not be sufficient to cover all of the losses we might incur from
these claims and legal actions. In addition, insurance for some risks is
difficult, impossible or too costly to obtain, and as a result, we may not be
able to purchase insurance for some types of risks.
WE MUST ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRANDS IN ORDER TO ATTRACT USERS
TO OUR WEBSITES AND GENERATE LICENSES, SUBSCRIPTIONS AND SPONSORSHIPS.
In order to expand our audience of users and increase our online
traffic, as well as subscriptions on our ProviderWeb.net site, we must
establish, maintain and strengthen our brands. For us to be successful in
establishing our brands, consumers must perceive us as a trusted source of
healthcare information, practice administrators must perceive us as a valuable
source of tools and information for the operation of physician practices, and
hospitals, nursing homes and other healthcare information sites must perceive us
as an effective marketing and sales channel for their services and products. We
expect that we will need to increase substantially our marketing budget in our
efforts to establish brand recognition and brand loyalty.
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Our business will suffer if our marketing efforts are not productive or if we
cannot strengthen our brands.
IN ORDER TO EXECUTE OUR GROWTH PLAN, WE MUST ATTRACT, RETAIN AND MOTIVATE
HIGHLY-SKILLED EMPLOYEES, AND WE FACE SIGNIFICANT COMPETITION FROM OTHER
INTERNET COMPANIES IN DOING SO.
Our ability to execute our business plan and be successful depends our
continuing ability to attract, retain and motivate highly-skilled employees. We
depend on the continued services of our senior management and other personnel.
As we continue to grow, we will need to hire additional personnel in all
operational areas. Competition for personnel throughout the Internet is intense.
We may be unable to retain our key employees or attract, assimilate or retain
other highly-qualified employees in the future. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will suffer.
IF OUR ABILITY TO EXPAND OUR NETWORK INFRASTRUCTURE IS CONSTRAINED, WE COULD
LOSE CONSUMER USERS OR SUBSCRIBERS, AND OUR BUSINESS COULD BE IMPAIRED.
A growing number of consumers use our HealthGrades.com website, and
only a limited number of practices subscribe to our ProviderWeb.net site. We
must continue to expand and adapt our network infrastructure to accommodate
additional users, changing consumer and subscriber requirements and increasing
transaction volumes. We may not be able to accurately project the rate or timing
of increases, if any, in the use of our websites or expand and upgrade our
systems and infrastructure to accommodate such increases. If our systems do not
accommodate increased use while maintaining overall performance, our users may
instead use the online services of our competitors.
WE MAY EXPERIENCE SYSTEM FAILURES THAT COULD INTERRUPT OUR SERVICES
The success of our business will depend on the capacity, reliability
and security of our network infrastructure. We rely on telephone communication
providers to provide the external telecommunications infrastructure necessary
for Internet communications. We will also increasingly depend on providers of
online content and services for some of the content and applications that we
make available through HealthGrades.com and ProviderWeb.net. Any significant
interruptions in our services or an increase in response time could result in
the loss of potential or existing users and subscribers, licensees, sponsors and
advertisers and, if sustained or repeated, could reduce the attractiveness of
our sites to them. Although we maintain insurance for our business, we cannot
guarantee that our insurance will be adequate to compensate us for losses that
may occur or to provide for costs associated with business interruptions.
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To succeed, we must be able to operate our websites 24 hours a day, 7
days a week, without material interruption. To operate without interruption, we
and our content provider must guard against:
o damage from fire, power loss and other natural disasters;
o communications failures;
o software and hardware errors, failures or crashes;
o security breaches, computer viruses and similar disruptive problems;
and
o other potential interruptions.
Our websites may be required to accommodate a high volume of traffic
and deliver frequently updated information. Our users and subscribers may
experience slower response times or system failures due to increased traffic on
our site or for a variety of other reasons. We will also increasingly depend on
content and applications providers to provide information and data feeds on a
timely basis. We could experience disruptions or interruptions in service due to
the failure or delay in the transmission or receipt of this information. Any
significant interruption of our operations could damage our business.
OUR PROPRIETARY RIGHTS MAY NOT BE FULLY PROTECTED, AND WE MAY BE SUBJECT TO
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BY OTHERS.
Our failure to adequately protect our intellectual property rights
could harm our business by making it easier for our competitors to duplicate our
services. HealthGrades, HealthGrades.com, Healthcarereportcards.com, Physician
report cards, Physicianreportcards.com, Dentist report cards, ProviderWeb.net,
The Healthcare Ratings Experts Health Plan Report Cards, HMO Report Cards,
Nursing Home Report Cards and our HealthGrades.com plus design are our
trademarks, and we are seeking or will seek registration of these marks with the
US Patent and Trademark office. We also have a patent pending on our hospital
rating system and methodology, but we can give no assurance that the patent will
be issued. We also require some of our employees to enter into a confidentiality
and invention assignment agreement and, in some cases, non-competition
agreements. Nevertheless, our efforts to establish and protect our proprietary
rights may be inadequate to prevent imitation of our services by others or may
be subject to challenge by others. Furthermore, our ability to protect our
proprietary rights is uncertain since legal standards relating to the validity,
enforceability and scope of intellectual property rights in Internet related
industries is uncertain and still evolving.
In addition to the risk of failing to adequately protect our
proprietary rights, there is a risk that we may become subject to a claim that
we infringe upon the proprietary rights of others. Although we do not believe
that we are infringing upon the rights of others, third parties may claim that
we are doing so. The possibility of inadvertently infringing upon the
proprietary rights of another is increased for businesses such as ours because
there is significant uncertainty
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regarding the applicability to the Internet of existing laws regarding matters
such as property ownership, copyrights and other intellectual property rights. A
claim of intellectual property infringement may cause us to incur significant
expenses in defending against the claim, which could adversely affect our
business, financial condition and results of operations. If we are not
successful in defending against an infringement claim, we could be liable for
substantial damages or may be prevented from offering some aspects of our
services. We may be required to make royalty payments, which could be
substantial, to a party claiming that we have infringed their rights. These
events could damage our business.
WE MAY LOSE BUSINESS IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL OR
OTHER CHANGES.
If we are unable to keep up with changing technology and other factors
related to our market, we may be unable to attract and retain users,
subscribers, licensees, sponsors and advertisers, which would reduce our
revenues. The markets in which we compete are characterized by rapidly changing
technology, evolving technological standards in the industry, frequent new
service and product announcements and changing consumer demand. Our future
success will depend on our ability to adapt to these changes, and to
continuously improve the performance, features and reliability of our services
in response to competitive service and product offerings and the evolving
demands of the marketplace. In addition, the widespread adoption of new Internet
networking or telecommunications technologies or other technological changes
could require us to incur substantial expenditures to modify or adapt our
services or infrastructure, which might negatively affect our ability to become
or remain profitable.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The market for Internet content, services, product and advertising is
new, rapidly evolving and intensely competitive. We expect this competition to
increase significantly, and our business will be adversely affected if we are
unable to compete successfully. We currently compete, or potentially compete,
with many providers of web content, information services and products, as well
as traditional media and promotional efforts, for audience attention and
advertising and sponsorship expenditures. We expect competition to intensify in
the future. Barriers to entry are not significant, and current and new
competitors may be able to launch new websites at a relatively low cost. We
compete, directly and indirectly, for consumers, subscribers, licensees and
advertisers with:
o companies or organizations providing or maintaining online services
or websites targeted to consumers, physician practices and practice
administrators within the healthcare industry;
o companies and organizations providing or maintaining general purpose
consumer online services that provide access to healthcare content
and services;
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o companies and organizations providing or maintaining public sector
and non-profit websites that provide healthcare information and
services without advertising or commercial sponsorships;
o companies and organizations providing or maintaining web search and
retrieval services and other high-traffic websites;
o publishers and distributors of traditional media, including those
targeted to practice administrators, some of which have established
or may establish websites;
o other websites that offer products and services to improve the
efficiency of administrative and communication tasks of the
healthcare providers; and
o vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging.
We believe that one of providerweb.net's competitors has sold a large
number of subscriptions to a major corporation, which, as part of its own
promotional efforts, is distributing the subscriptions free of charge to
physician practices. This may affect our ability to market our providerweb.net
service to some practices.
Competition for subscribers, users, licensees, sponsors and
advertisers, as well as competition in the electronic commerce market, is
intense and expected to increase significantly.
Risks Related to Online Healthcare Services and the Internet
HEALTHCARE REFORMS AND THE COST OF REGULATORY COMPLIANCE COULD NEGATIVELY AFFECT
OUR BUSINESS.
The healthcare industry is heavily regulated. Various laws, regulations
and guidelines promulgated by government, industry and professional bodies
affect, among other matters, the provision, licensing, labeling, marketing,
promotion and reimbursement of healthcare services and products. Our failure or
the failure of our subscribers, licensees, sponsors or advertisers to comply
with any applicable regulatory requirements or industry guidelines could:
o limit or prohibit business activities;
o subject us or subscribers, licensees, sponsors or advertisers to
adverse publicity; or
o increase the costs of regulatory compliance or subject us or our
subscribers, licensees, sponsors or advertisers to monetary fines or
other penalties.
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A federal law commonly known as the Medicare/Medicaid antikickback law,
and several similar state laws, prohibit payments that are intended to induce
physicians or others either to refer patients or to acquire or arrange for or
recommend the acquisition of healthcare products or services, including
pharmaceuticals. Another federal law, commonly known as the "Stark" law,
prohibits physicians from referring Medicare and Medicaid patients for
designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. Some of these laws have been applied to payments by physicians
for marketing and referral services and could constrain our relationships,
including financial and marketing relationships, with sponsors and licensees,
including hospitals and nursing homes. It is possible that additional or changed
laws, regulations or guidelines could be adopted in the future.
In addition, implementation of government healthcare reform may
adversely affect promotional and marketing expenditures by pharmaceutical
companies, which could decrease the business opportunities available to us.
While we do not presently have any promotional agreements with pharmaceutical
companies, we are pursuing such agreements.
THE INTERNET IS SUBJECT TO MANY LEGAL UNCERTAINTIES AND POTENTIAL GOVERNMENT
REGULATIONS THAT MAY DECREASE DEMAND FOR OUR SERVICES, INCREASE OUR COST OF
DOING BUSINESS OR OTHERWISE HAVE A DAMAGING EFFECT ON OUR BUSINESS.
Any new law or regulation pertaining to the Internet, or the
application or interpretation of existing laws, could decrease demand for our
services, increase our cost of doing business or otherwise cause our business to
suffer.
Laws and regulations may be adopted in the future that address
Internet-related issues, including online content, user privacy, pricing and
quality of products and services. This legislation could increase our cost of
doing business and negatively affect our business. Moreover, it may take years
to determine the extent to which existing laws governing issues like property
ownership, libel, negligence and personal privacy are applicable to the
Internet. Currently, U.S. privacy law consists of disparate state and federal
statutes regulating specific industries that collect personal data. Most of them
predate and therefore do not specifically address online activities. In
addition, a number of comprehensive legislative and regulatory privacy proposals
are now under consideration by federal, state and local governments in the
United States.
STATE AND FEDERAL LAWS THAT PROTECT INDIVIDUAL HEALTH INFORMATION MAY LIMIT OUR
PLANS TO COLLECT, USE AND DISCLOSE THAT INFORMATION.
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If we fail to comply with current or future laws or regulations
governing the collection, dissemination, use and confidentiality of patient
health information, our business could suffer.
Consumers sometimes enter private information about themselves or their
family members when using our services. Also, our systems record use patterns
when consumers access our databases that may reveal health-related information
or other private information about the user. Numerous federal and state laws and
regulations govern collection, dissemination, use and confidentiality of
patient-identifiable health information, including:
o state privacy and confidentiality laws;
o state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
o Medicaid laws;
o the Health Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Health Care Financing Administration;
and
o Health Care Financing Administration standards for Internet
transmission of health data.
Congress has been considering proposed legislation that would establish
a new federal standard for protection and use of health information. While we
are not gathering patient health information at this time, other third-party
sites that consumers access through our site may not maintain systems to
safeguard any health information they may be collecting. In some cases, we may
place our content on computers that are under the physical control of others,
which may increase the risk of an inappropriate disclosure of information. For
example, we may contract out the hosting of our Web site to a third party. In
addition, future laws or changes in current laws may necessitate costly
adaptations to our systems.
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FDA AND FTC REGULATIONS ON ADVERTISING MAY BE BURDENSOME AND NEGATIVELY AFFECT
OUR ABILITY TO PROVIDE SOME APPLICATIONS OR SERVICES, WHICH COULD LEAD TO HIGHER
THAN ANTICIPATED COSTS OR LOWER THAN ANTICIPATED REVENUES.
Complying with Food and Drug Administration and Federal Trade
Commission regulations may be time consuming, burdensome and expensive and
could negatively affect our ability to continue providing some applications or
services, or to introduce new applications or services in a timely manner. This
may result in higher than anticipated costs or lower than anticipated revenues.
In addition, because part of our business may in the future involve
direct-to-consumer advertising of prescription drugs, any increase in FDA or
FTC regulation of these advertisements or the enforcement of these regulations
or policies could make it more difficult for us to provide existing or future
applications or services to our users and subscribers or obtain the necessary
corporate sponsorship to do so.
Any current or future regulatory requirements that the FDA or the FTC
impose on us or our advertisers and sponsors could harm us by:
o making it harder to persuade pharmaceutical, biotechnology and
medical device companies to advertise or promote their products on
our websites;
o restricting our ability to continue to provide some of our services
or content, or to introduce new services or content in a timely
manner;
o damaging our relationships with pharmaceutical, biotechnology and
medical device companies, particularly if programs we recommend or
endorse result in FDA or FTC enforcement action directed against us
or these companies; or
o making it more expensive and time-consuming to comply with new
requirements.
As a consequence of these events, we might lose advertising or
sponsorship revenue, spend significant amounts of our limited resources on
regulatory experts in the area of FDA or FTC compliance, or receive adverse
publicity that negatively affects our business. In addition to existing FDA and
FTC regulation of advertising and promotion by pharmaceutical, biotechnology and
medical device companies, our business faces a potential risk of increased FDA
and FTC regulation of these activities in an online context.
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<PAGE> 26
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
Our security measures may not prevent security breaches. Substantial or
ongoing security breaches on our system or other Internet-based systems could
reduce user confidence in our websites, causing reduced usage that adversely
affects our business. The secure transmission of confidential information over
the Internet is essential to maintain confidence in our websites and will be
increasingly important as we expand our services. Consumers generally are
concerned with security and privacy on the Internet, and any publicized security
problems could inhibit the growth of the Internet and, therefore, our services.
We will need to incur significant expense to protect and remedy
against security breaches when we identify a significant business risk.
Currently, we do not store sensitive information, like patient information or
credit card information, on our websites. If we launch services that require us
to gather sensitive information, our security expenditures will increase
significantly.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Security
breaches could also damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies may not be adequate
to reimburse us for losses caused by security breaches. We also face risks
associated with security breaches affecting third parties conducting business
over the Internet.
Other Risks
OUR OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS MAINTAIN SIGNIFICANT CONTROL OF
HEALTHGRADES.COM.
Our officers, directors and two major stockholders own approximately
50.7% of our outstanding common stock. If our officers, directors and the
stockholders act together, they will be able to control the management and
affairs of HealthGrades.com and will have the ability to control all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may have
the effect of delaying, deferring or preventing an acquisition of us and may
adversely affect the market price for our common stock. Under an agreement among
us, the two major stockholders, and our principal executive officers, the
parties other than us have agreed to vote their shares for the election of a
designee of each of the major stockholders.
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<PAGE> 27
OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE ANTITAKEOVER PROVISIONS THAT
MAY DETER OR PREVENT A TAKEOVER ATTEMPT.
Some provisions of our certificate of incorporation and bylaws and
provisions of Delaware law may deter or prevent a takeover attempt, including an
attempt that might result in a premium over the market price for our common
stock. Our certificate of incorporation requires the vote of 66 2/3% of the
outstanding voting securities in order to effect certain actions, including a
sale of substantially all of our assets, certain mergers and consolidations and
our dissolution or liquidation, unless these actions have been approved by a
majority of the directors. Our certificate of incorporation also authorizes our
Board of Directors to issue up to 2,000,000 shares of preferred stock having
such rights as may be designated by our Board of Directors, without stockholder
approval. Our bylaws provide that stockholders must follow an advance
notification procedure for certain nominations of candidates for the Board of
Directors and for certain other stockholder business to be conducted at a
stockholders meeting. The General Corporation Law of Delaware restricts certain
business combinations with interested stockholders upon their acquisition of 15%
or more of our common stock.
All of these provisions could make it more difficult for a third party
to acquire, or could discourage a third party from attempting to acquire,
control of us.
WE HAVE NO INTENTION TO PAY DIVIDENDS ON OUR COMMON STOCK.
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain all future earnings to finance the expansion of
our business.
26
<PAGE> 28
Item 2. Properties
We have a five-year lease for our approximately 12,000 sq. foot headquarters
facility in Lakewood, Colorado, which expires on March 15, 2001. Our annual
lease payments for this facility is approximately $196,000.
Item 3. Legal Proceedings
Reconstructive Orthopaedic Associates
On October 27, 1999, Reconstructive Orthopaedic Associates II, P.C., ("ROA"),
filed a complaint against us in the U.S. District Court for the Eastern District
of Pennsylvania. The complaint asserts that, during negotiations between ROA and
us related to the restructure agreement by and between ROA and us, we agreed
that if we entered into a similar restructuring agreement with any other
affiliated practice on financial terms more favorable to such affiliated
practice than those extended to ROA under its restructure agreement, we would
modify and adjust the terms of their restructure agreement to ensure that ROA
received financial terms as favorable as those extended to such other affiliated
practice. The complaint further alleges that one or more lawsuits or other
adversary proceedings between us and one or more other affiliated practices have
been settled, in fact or in principle, on financial terms materially more
favorable to the other affiliated practices than the terms extended to ROA under
its restructure agreement. ROA seeks compensatory, consequential and incidental
damages in excess of $75,000, punitive damages in excess of $1,000,000 and
attorneys fees. Additionally, ROA seeks a declaratory judgment that if any of
the alleged settlements were entered into between us and any other affiliated
practices on terms materially more favorable than those extended to ROA, we
would be required to modify and adjust the terms of their restructure agreement
to ensure that ROA received financial terms as favorable as those extended to
such other affiliated practices.
On November 8, 1999, we filed a complaint in the U.S. District Court
for the District of Colorado against ROA. The complaint asserts that ROA has
taken actions in direct contravention of our management services agreement with
ROA, including trying to terminate the agreement in a manner not allowed by the
contract, threatening to withhold payments due under the agreement, and filing
suit in another jurisdiction in violation of the agreement. We seek a
declaration and adjudication of both parties' contractual rights and obligations
in order to terminate this dispute. We also seek injunctive relief and
damages.
We believe we have strong legal and factual defenses to ROA's claims.
We intend to vigorously defend against ROA's lawsuit and aggressively
pursue our claims.
Orthopaedic Institute of Ohio
On November 1, 1999, we filed a complaint in the U.S. District Court for the
District of Colorado against the Orthopaedic Institute of Ohio, Inc. ("OIO").
The compliant asserts that, prior to the closing of the restructure agreement
between OIO and us, OIO, its physician owners and the administrator of OIO
diverted over $470,000 from our bank account and deposited such funds into a
bank account held by OIO and the physician owners. The compliant further asserts
that OIO and the physician owners are continuing to withhold from us amounts
that remain due under the restructure agreement of over $720,000. OIO
subsequently filed a Motion for Stay of Proceedings and a Motion to Dismiss.
Essentially, OIO has argued that all claims made by us are subject to the
arbitration clause of the Restructure Agreement by and between us and OIO. We
filed a response to OIO's Motions and oral arguments occurred in March 2000. The
court has not yet made a ruling.
Associated Orthopaedic and Sports Medicine Center
On August 11, 1999, we filed a complaint in the U.S. District Court for the
Northern District of Texas, Dallas Division against the Associated Orthopaedics
& Sports Medicine, P.A., Associated Arthroscopy Institute, Inc., Access Medical
Supply, Inc. d/b/a Associated Physical Therapy, Allied Health Services, P.A.
d/b/a Associated Occupational Rehabilitation, Neal C. Small, M.D. and Alexander
I. Glogau, M.D. (collectively, the "Plano entities"). The complaint asserted
that, on April 29, 1999, in violation of their service agreements with us, the
Plano entities assumed control and management of their respective
administration and finances. The complaint further alleged that the Plano
entities diverted our accounts receivable receipts into an account controlled
by them and failed to pay our service fees.
Effective December 31, 1999, we entered into a settlement and release
agreement with the Plano entities
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<PAGE> 29
that resolves all legal disputes and litigation between us and the Plano
entities. In connection with the settlement agreement, we received a cash
payment of $778,848 in December 1999, and an additional cash payment in the
amount of $1,536,384, in January 2000 in consideration for the tangible book
value of the Plano entities assets and the termination of their service
agreements.
Mid-Atlantic Orthopedic Specialists
On January 4, 1999, Mid-Atlantic Orthopaedic Specialists, P.C. ("MAOS"), one of
our affiliated practices, gave us notice that they intended to terminate the
service agreement between us and the practice based on our material default in
the performance of our duties and obligations imposed upon us by the service
agreement. Under the terms of the service agreement, in the event that an
affiliated practice asserts a material default under the service agreement, we
have sixty days in which to cure any such default. In our response letter to the
practice, we informed the practice that we did not believe that we were in
material default under the service agreement and that in any event the practice
had failed to give us adequate notice of a material default in order to give us
a reasonable opportunity to cure any specific default within the sixty-day
period provided for in the service agreement.
On May 7, 1999, we filed a declaratory judgment action in the U.S. District
Court for the District of Colorado against MAOS, seeking a determination and
adjudication of the rights and liabilities of the parties under the merger
agreement and service agreement. We also sought a declaration confirming that we
did not materially breach the service agreement and that MAOS was not entitled
to terminate that agreement.
On October 28, 1999, we filed a Second Amended Complaint against Mid-Atlantic
Orthopedic Specialists, asserting in addition to a previous declaratory
judgment claim, claims for breach of contract, replevin, indemnification,
enforcement of restrictive covenants, promissory estoppel, unjust enrichment,
conversion, civil theft, tortious interference, accounting and constructive
trust. MAOS and the Physician Owners filed a Motion to dismiss the claims for
civil theft, conversion, replevin and punitive damages. On August 31, 1999,
MAOS and the Physician Owners filed a counterclaim against SCN and two of its
officers, Kerry Hicks and Pat Jaeckle, asserting claims for breach of contract,
breach of covenant of good faith and fair dealing, fraud, negligent
misrepresentation, and state and federal securities law claims.
On March 7, 2000, the Company entered into a binding agreement as to material
terms with MAOS that resolves all legal disputes and litigation between the
Company and MAOS. Under the terms of the agreement, the Company will receive a
payment of $1,500,000 in consideration for the tangible book value of the MAOS
assets and the termination of the MAOS service agreement. Pursuant to the terms
of the agreement, the closing will be no later than April 21, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information concerning the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Kerry R. Hicks................ 40 Chief Executive Officer
Patrick M. Jaeckle............ 41 President and Secretary
D. Paul Davis................. 42 Executive Vice President-Finance, CFO & Treasurer
David G. Hicks................ 41 Executive Vice President-Information Technology
Timothy D. O'Hare............. 47 Senior Vice President-Provider Web.net
Frank W. Riesenecker.......... 42 Senior Vice President-Corporate Operations
Peter A. Fatianow............. 36 Senior Vice President-Business Development
Sarah Loughran................ 35 Senior Vice President-Content
</TABLE>
KERRY R. HICKS, one of our founders, 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 and a BA from the
University of Texas at Austin.
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. Mr. Davis received a BS degree in Accounting from the University of
Utah. He is a Certified Public Accountant and a Certified Management Accountant.
DAVID G. HICKS has served as 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. Mr. Hicks received a BS degree in Management
Information Systems from Colorado State University.
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<PAGE> 30
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. Mr. O'Hare received a BS
degree in Business from Virginia Tech and an MHA degree from Virginia
Commonwealth University
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. Ms. Loughran received a BA
in Economics from Vanderbilt University and an MBA and MHSA from the University
of Michigan.
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. Mr. Fatianow
received a BS in Business Management with an emphasis in finance from Brigham
Young University.
Kerry R. Hicks and David G. Hicks are brothers.
29
<PAGE> 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the high and low sales prices for our Common
Stock for the quarters indicated as reported on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1998
First Quarter................................. $ 13 3/8 $ 11 1/8
Second Quarter................................ 12 1/2 5 3/4
Third Quarter................................. 6 5/8 1 1/32
Fourth Quarter ............................... 2 7/32 3/4
Year Ended December 31, 1999
First Quarter................................. $ 1 7/8 $ 5/8
Second Quarter................................ 3 3/8
Third Quarter................................. 5 7/8 1 27/32
Fourth Quarter (1)............................ 4 7/8 1 7/16
</TABLE>
(1) Beginning November 24, 1999, the Company began trading on the Nasdaq Small
Cap Market. The stock previously traded on the Nasdaq National Market.
We have never paid or declared any cash dividends and do not anticipate paying
any cash dividends in the foreseeable future. We currently intend to retain any
future earnings for use in our business. Our credit facility with a bank
syndicate prohibits the payment of any dividends without written approval from
the bank syndicate.
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<PAGE> 32
Item 6. Selected Financial Data
Statement of Operations Data
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31,1997 DECEMBER 31, 1996
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Service fees $ 29,045,291 $ 76,649,778 $ 45,966,531 $ 4,392,050
Marketing, advertising and
Other Internet revenue 407,577 -- -- --
Other 2,132,880 2,531,524 3,689,390 --
------------- ------------- ------------- -------------
31,585,748 79,181,302 49,655,921 4,392,050
------------- ------------- ------------- -------------
Costs and expenses:
Clinic expenses 15,234,416 55,188,411 31,644,618 2,820,743
General and administrative 12,423,414 14,468,537 7,861,015 3,770,263
Impairment loss on service agreements -- 94,582,227 -- --
Production, content and product development 1,217,917 -- -- --
Litigation and other costs 5,309,168 3,564,392 -- --
Impairment loss on intangible assets and
other long-lived assets -- 3,316,651 -- --
------------- ------------- ------------- -------------
Total costs and expenses 34,184,915 171,120,218 39,505,633 6,591,006
------------- ------------- ------------- -------------
(Loss) income from operations (2,599,167) (91,938,916) 10,150,288 (2,198,956)
Other:
Gain on sale of assets, practice disputes, and
Amendment and restatement of service
agreements 2,766,284 -- -- --
Gain on sale of equity investment 127,974 1,240,078 -- --
Gain on sale of subsidiary 221,258 -- -- --
Interest income 312,447 187,450 536,180 11,870
Interest expense (2,489,427) (3,741,089) (942,144) (90,368)
------------- ------------- ------------- -------------
(Loss) income before income taxes (1,660,631) (94,252,477) 9,744,324 (2,277,454)
Income tax benefit (expense) 2,625,561 32,466,391 (3,873,926) 506,071
------------- ------------- ------------- -------------
Net income (loss) $ 964,930 $ (61,786,086) $ 5,870,398 $ (1,771,383)
============= ============= ============= =============
Net income (loss) per common share (basic) $ 0.07 $ (3.39) $ 0.38 $ (0.16)
============= ============= ============= =============
Weighted average number of common shares
used in computation (basic) 14,202,748 18,237,827 15,559,368 11,422,387
============= ============= ============= =============
Net income (loss) per common share (diluted) $ 0.07 $ (3.39) $ 0.37 $ (0.14)
============= ============= ============= =============
Weighted average number of common
shares and common share equivalents
used in computation (diluted) 14,817,732 18,237,827 16,071,153 12,454,477
============= ============= ============= =============
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Working capital (deficit) $ 869,430 $ (21,457,105) $ 21,924,386 $ 7,637,724
Total assets 20,450,118 70,179,278 140,301,650 16,013,125
Total long-term debt 8,803,283 680,152 33,885,141 5,142,450
Total short-term debt 7,702,005 53,514,615 -- --
</TABLE>
(1) The 1996 net income (loss) per share and weighted average share amounts
have been restated to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
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<PAGE> 33
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
We operate two healthcare Internet sites and provide practice management
services to physicians. Through our Internet website, HealthGrades.com, we
provide ratings or "report cards" on hospitals, health plans and nursing homes,
designate "Leading Physicians" and offer profiles of specialty healthcare
providers across the country. Our other website, ProviderWeb.net is a
subscription service for physician practice administrators and managers that
provides online tools and information.
Prior to the restructuring transaction described below under "MODIFICATION OF
ARRANGEMENTS AND RESTRUCTURING TRANSACTION", we entered into long-term service
agreements with 21 practices that affiliated with us. When we entered into the
transactions, we also acquired all of the non-medical assets of the affiliated
practices. In exchange, we paid consideration consisting of cash, our securities
or both. Under our service agreements, we, among other things, provided
facilities and management, administrative and development services to the
affiliated practices, and employed most non-physician personnel of the
affiliated practices, in return for specified service fees. The operating
expenses incurred by us included the salaries, wages and benefits of personnel
(other than physician owners and certain technical medical personnel), supplies,
expenses involved in administering the clinical aspects of the affiliated
practices and depreciation and amortization of assets. In addition to the
operating expenses discussed above, we incurred personnel and administrative
expenses in connection with our corporate offices, which provided management,
administrative and development services to the affiliated practices.
MODIFICATION OF ARRANGEMENTS AND RESTRUCTURING TRANSACTION
As a result of transactions with 13 practices that restructured our management
service arrangements (six of which were later terminated) and other agreements,
including litigation settlements terminating our management services
arrangements with four other practices, our physician practice management
services have been substantially reduced.
Effective December 31, 1998, we entered into transactions with four of our
affiliated practices. In these transactions, we sold to each of the practices
accounts receivable, fixed assets and certain other assets relating to the
respective practices and replaced the original management service arrangements
with new arrangements. Under the revised management services agreements, which
terminate at certain dates between November 2001 and March 2003, we provide
substantially reduced services to the practices, and the practices pay
significantly reduced service fees. As a result of the completion of these four
transactions, we reacquired 2,124,959 shares of our common stock and reduced our
outstanding indebtedness at December 31, 1998 by approximately $5.5 million
through the cancellation with restructuring of a convertible note with one of
the practices. Additionally, in 1999, we used the proceeds from the completion
of these four transactions to reduce the amount outstanding under our Credit
Facility by approximately $8.5 million.
Effective June 15, 1999, we closed a restructuring transaction through ten
separate restructure agreements involving the following nine practices: Floyd R.
Jaggears, Jr., M.D., P.C., II; Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic
and Sports Medicine Center, II, P.A.; Orthopaedic Associates of West Florida,
P.A.; Orthopaedic Institute of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II;
Princeton Orthopaedic Associates, II, P.A.; Reconstructive Orthopaedic
Associates, II, P.C.; and Steven P. Surgnier, M.D., P.A., II. (See Note 2 to the
Consolidated Financial Statements for information regarding this transaction.)
We have received to date approximately $16.3 million in payment for the
restructuring transaction. Most of these funds were used to reduce indebtedness.
In addition, we reacquired 3,254,519 shares of our common stock.
OTHER TRANSACTIONS
Effective June 14, 1999, we entered into a termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center ("PPTC"), which
terminated the affiliation of PPTC with us. The consideration paid to us
consisted of payment for the tangible book value of PPTC assets and payment for
the termination of the service agreement. In connection with the termination
agreement, we received a cash payment of $8,775,217. Additionally, approximately
545,000 warrants were canceled in connection with the PPTC termination
agreement.
Effective June 16, 1999, we entered into a settlement agreement with TOC
Specialists, PL ("TOC") that resolved all legal disputes and litigation between
us and TOC. In connection with the settlement agreement, we received a cash
payment of $3,500,000 and 762,128 shares of our common stock in consideration
for the tangible book value of the TOC assets and the termination of the service
agreement.
Effective November 12, 1999, we entered into a settlement and release agreement
with The Specialists Orthopaedic Medical Corporation and The Specialists Surgery
Center (collectively, "The Specialists") that resolved all legal disputes and
litigation between us and The Specialists. In connection with the settlement
agreement, we received cash payments during 1999 of $500,000, a note receivable
in the amount of $1,500,000 and 165,987 shares of our common stock in
consideration for the tangible book value of The Specialists assets and the
termination of the Specialists service agreements.
Effective December 31, 1999, we entered into a settlement and release agreement
with Associated Orthopaedics & Sports Medicine, P.A., Associated Arthroscopy
Institute, Inc. Access Medical Supply, Inc. d/b/a Associated Physical Therapy,
Allied Health Services, P.A., d/b/a Associated Occupational Rehabilitation, Neal
C. Small, M.D. and Alexander I. Glogau, M.D. (collectively, "Plano") that
resolved all legal disputes and litigation between us and Plano. In connection
with the settlement agreement, we received a cash
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<PAGE> 34
payment of $778,848 in December 1999 and an additional cash payment in the
amount of $1,536,384 in January 2000 in consideration for the tangible book
value of the Plano assets and the termination of the Plano service agreements.
ACQUISITION OF MINORITY INTERESTS AND OFFICER NOTES
In June 1999, we entered into an agreement with the former stockholders of
Provider Partnerships, Inc. ("PPI") to resolve certain issues raised by the
former stockholders of PPI relating to the transaction in which we acquired PPI.
At that time, we formed HG.com, Inc. (formerly known as HealthGrades.com, Inc.)
("HG.com") and transferred to HG.com certain assets that were developed by us
into one of our websites (formerly HealthCareReportCards.com, currently
HealthGrades.com) and other related internet products. The remaining
non-internet related assets of PPI were transferred to us, and PPI was
subsequently liquidated. Additionally, one of our employees and Venture5 LLC,
whose members consist of the former PPI stockholders, owned minority interests
in HG.com. We owned the majority interest. In September 1999, we entered into an
agreement with Venture5 under which we agreed to purchase a number of shares of
our majority-owned subsidiary, HG.com, Inc. that would increase our ownership in
HG.com, Inc. to 90%. The agreement required that we pay Venture5 $4,000,000 by
November 1, 1999. In November 1999, the purchase date was extended until
December 31, 1999. On December 31, 1999, we paid $4,000,000 to Venture5 (the
"Minority Interest Purchase") in full satisfaction of this obligation. We
financed the Minority Interest Purchase by borrowing $3,550,000 from some of our
officers (the "Officers") and issued notes to the officers totaling $3,550,000
(hereafter, the "Officer Notes"). The Officer Notes bear interest at prime plus
two percentage points and are payable on December 31, 2000. The remainder of the
purchase price was financed with our working capital.
In an effort to raise the funding to comply with our commitments described
above, during November and December 1999, we pursued various financing
alternatives through our relationship with our primary lender, various venture
capital firms and personal financing by our officers. On December 29, 1999, our
Board of Directors approved a term sheet relating to an equity investment (the
"Proposed Financing") in us by a venture capital firm (hereafter, the "VC
firm"). On December 30, 1999, we executed the term sheet. In March 2000, we
consummated an equity financing which raised $18 million. This financing (the
"Revised Financing") superceded the Proposed Financing. Under the terms of the
Revised Financing, in March 2000, the Officers converted $3.2 million of the
Officer Notes into an aggregate of 1.6 million shares of common stock and five
year warrants to purchase 560,000 shares of common stock at $4.00 per share.
Effective February 3, 2000, we merged our majority-owned subsidiary, HG.com,
Inc., into a recently formed, wholly-owned subsidiary, HealthcareRatings, Inc.
(hereafter, the "Merger Transaction"). In order to effect the Merger
Transaction, we gave the minority shareholders of HG.com 800,000 shares of
Company common stock. In connection with the Merger Transaction, we recorded
goodwill in the amount of $1,850,000 based on the fair value of the stock issued
as of the transaction date. The goodwill is being amortized over an estimated
useful life of seven years.
ACCOUNTING TREATMENT
Commencing January 1, 1999, costs of obtaining long-term service agreements for
practices affiliated with us that were not a party to the restructuring
transaction are amortized using the straight-line method over estimated lives of
five years from January 1, 1999.
Goodwill, which is stated at cost, was acquired in connection with the Minority
Interest Purchase described above and is being amortized on a straight-line
basis over a seven-year period. (See Note 7 to the Consolidated Financial
Statements for further discussion of this transaction.) In addition, the
additional goodwill acquired in February 2000 in connection with the Merger
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<PAGE> 35
Transaction described above is also being amortized over an estimated useful
life of seven years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES:
Service fees
These revenues are derived from our physician practice management business.
Service fees revenue was $29.0 million for the year ended December 31, 1999,
compared to $76.6 million for the same period in 1998. The decrease was
primarily the result of the reduced service fees received by us due to the
modification of arrangements with four practices beginning January 1, 1999 and
as a result of the restructuring transaction. In connection with the
restructuring transaction, management services obligations and service fees were
reduced commencing April 1, 1999.
During the year ended December 31, 1999, we terminated our management services
agreements with several of our affiliated practices. As a result of these
terminations, we are no longer required to provide management services to these
practices. Included in service fee revenue for the year ended December 31, 1999
is $2.7 million related to revenue recognized as a result of these terminations.
Marketing, advertising and other Internet revenue
These revenues are derived from our Internet healthcare business. We derive
these revenues primarily from marketing arrangements with hospitals, fees
related to the licensing of access to our content (including set-up fees) and
advertising. Marketing revenues are derived from annual fees from hospitals in
return for our serving banner advertisements and providing other marketing
services to the hospitals. Revenue related to these arrangements is recognized
on a straight-line basis over the term of the agreement. Revenue related to the
licensing of content and initial set-up fees are recognized on a straight-line
basis over the term of the agreement. Advertising revenue relates to
advertisements served on both our sites and our share of advertising revenue
derived from advertisements delivered on sites of other on-line healthcare
companies that provide access to our content. Revenues derived from advertising
arrangements where we contract directly with the advertiser are recorded at the
gross contract amount and commissions and other revenue-sharing splits with
other on-line healthcare companies are recorded as general and administrative
expenses. Advertising revenues earned under revenue sharing arrangements from
other web sites are recorded net of commissions because the commissions are not
contractual obligations of ours.
Marketing, advertising and other Internet revenue was approximately $408,000 for
the year ended December 31, 1999. There was no corresponding revenue during
1998.
Other
Other revenue for the year ended December 31, 1999 included $1.7 million of bad
debt recovery related to the settlement of a lawsuit.
COSTS AND EXPENSES:
Clinic expenses and general and administrative expenses
For the year ended December 31, 1999, total clinic expenses were $15.2 million
compared to $55.2 million for the same period of 1998. This decrease was
primarily the result of the elimination of our obligation to pay clinic expenses
with respect to practices that were party to the transactions described above
under "Revenues - Service Fees." General and administrative expenses were $12.4
million for the year ended December 31, 1999, compared to $14.5 million for the
same period in 1998. The decrease in general and administrative expenses is
primarily the result of the reduction in corporate overhead due to the
transactions described above.
Production, content and product development costs
Beginning in 1999, we began incurring production, content and product
development costs related to the development and support of our HealthGrades.com
and ProviderWeb.net Internet sites. These costs, which consist primarily of
salaries and benefits, consulting fees and other costs related to software
development, application development and operations expense, are expensed as
incurred. Total costs for the year ended December 31, 1999 were $1.2 million.
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Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon our product development
process, technological feasibility is established upon the completion of a
working model. Costs incurred by us between completion of a working model and
the launch of our websites have not been significant.
Litigation and other costs
We continue to be involved in litigation with certain of our affiliated
practices. As a result of the disputes, we recorded a charge of approximately
$3.4 million for the year ended December 31, 1999 to reserve for service fee
revenues that have not been paid by these practices. For the year ended December
31, 1999, we incurred approximately $1.1 million in expenses directly related to
these disputes. In addition, we incurred legal and other consulting fees
associated with the negotiation of the restructuring transaction with nine of
our affiliated practices of approximately $750,000 for the year ended December
31, 1999.
Gain on sale of assets, practice disputes and amendment and restatement of
service agreements
Effective June 15, 1999, we closed the restructuring transaction with nine
practices. Additionally, we terminated our relationship with two practices and
entered into litigation settlements with several practices that resulted in
termination of our affiliation with these practices. We recorded a pre-tax gain
on these transactions of approximately $2.8 million for the year ended December
31, 1999.
Gain on sale
During 1998, we funded, through our 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 SCN of Maryland, LLC (the "LLC"), which was wholly owned by ASI. In March
1999, the LLC issued to ASI, a promissory note in the amount of $2,120,619 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. In March 1999, we sold 68% of our interest
in the LLC to certain physician owners of a practice affiliated with us for
$360,505. The sale resulted in a pre-tax gain of $221,258. In September 1999, we
sold our remaining interest in the LLC to the affiliated practice for $169,650.
In addition, we received $2,212,445, in full payment of the obligation,
including accrued interest, of the LLC to us and $502,633 to repay working
capital advances made by ASI to the LLC. This sale resulted in a pre-tax gain of
$127,974. We used approximately $1.6 million of the proceeds from this sale to
reduce the amount outstanding under our credit facility.
Income taxes
For the year ended December 31, 1999, our effective income tax benefit rate was
(158%). The effective income tax rate for the year ended December 31, 1999 is
less than the expected federal tax rate principally due to reductions in the
valuation allowance for deferred tax assets recorded resulting from our
restructuring and other transactions. The reduction in the valuation allowance
for the year ended December 31, 1999 was partially offset by our inability to
record a future income tax benefit for our deferred tax assets due to the
uncertainty regarding our ability to produce sufficient taxable income in future
periods necessary to realize such benefits.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue
Our service fees revenue, including reimbursement of clinic expenses, increased
by $30.6 million to $76.6 million for the twelve months ended December 31, 1998
compared to $46.0 million for the same period in 1997. These increases primarily
reflect affiliation transactions that occurred during the latter part of 1997
and in the first quarter in 1998. Other revenue for the year ended December 31,
1998 was $2.5 million compared to $3.7 million for the same period in 1997. The
decrease in other revenue was primarily due to a decrease in business consulting
fees earned and bad debt recovery in 1998 compared to the same period of 1997.
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Clinic expenses and general and administrative expenses
For the year ended December 31, 1998, total clinic expenses were $55.1 million
compared to $31.6 million for the same period of 1997. Clinic expenses are costs
incurred by us, in accordance with service agreements then in effect, on behalf
of the affiliated practices for which they were obligated to reimburse us.
Reimbursement of clinic expenses is a component of the service fee revenue
recorded by us.
For the year ended December 31, 1998, general and administrative expenses were
$14.5 million compared to $7.9 million for the same period of 1997. This
increase was primarily due to increased amortization expense related to the
additional long-term service agreements we entered into with affiliated
practices in the latter part of 1997 and first quarter 1998. In addition, we
shortened the lives over which the service agreements are amortized effective
June 1998.
Impairment losses, litigation and other costs
Due to the then pending restructuring transaction, as well as numerous other
factors in the physician practice management industry in general, we undertook
during the fourth quarter of 1998 an evaluation of the carrying amount of our
management service agreements pursuant to the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. As a result of
this evaluation, we recorded an impairment loss on our management service
agreements of approximately $94.6 million in December 1998. (See Note 2 to the
Consolidated Financial Statements for further discussion of this impairment
charge.)
As a result of disputes with certain of our affiliated practices, we recorded a
charge of approximately $2.7 million to reserve for service fees recorded for
these practices. In addition, as of December 31, 1998, we incurred approximately
$200,000 in legal fees directly related to these disputes. In connection with
the restructuring transaction described above, we also incurred expenses of
approximately $700,000 for financial advisors and legal consultation.
During 1998, we were engaged in negotiations to resolve certain issues raised by
the former stockholders of Provider Partnerships, Inc. ("PPI"), a corporation
acquired by us in August 1998. PPI was a company engaged in providing consulting
services to hospitals, and it also provided certain assets that were developed
by us into the HealthCareReportCards.com web site. Because of the dispute with
the former PPI stockholders, we recorded an impairment loss in December 1998 of
approximately $1.2 million on the intangible asset created with the acquisition
of PPI. In addition, as a result of the proposed restructuring transaction, we
performed a review of the carrying amount of our other long-lived assets, which
resulted in an impairment loss of approximately $2.1 million during the fourth
quarter of 1998.
Gain on sale of equity investment
In March 1998, we sold our entire interest in West Central Ohio Group, Ltd., an
Ohio limited liability company, for a pre-tax gain of approximately $1.2
million.
Interest expense
During the year ended December 31, 1998, we incurred interest expense of $3.7
million compared to $.9 million for the same period of 1997. This increase was
primarily the result of additional borrowings under our bank credit facility
which were made to fund our affiliation transactions and to fund our purchase of
ancillary equipment for installation at affiliated practices.
YEAR ENDED DECEMBER 31, 1997
For 1997, we had service fees revenues of approximately $46.0 million, including
reimbursement of clinic expenses. Of this amount, approximately $17.6 million in
service fees were derived from practices that affiliated with us during 1997. We
also generated other revenues totaling approximately $3.7 million, which consist
mainly of business consulting fees, medical director fees and miscellaneous
revenue, of which approximately $.5 million is derived from ongoing operations
and may be deemed recurring.
During 1997, we incurred costs and expenses totaling approximately $39.5
million, of which approximately $7.9 million are general and administrative
expenses, principally comprised of personnel and administrative expenses
relating to the provision of services to the Affiliated Practices. In addition,
approximately $1.2 million of such expenses constitutes amortization expense
relating to the costs and expenses incurred in the Service Agreement intangible
asset.
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In 1997, we incurred approximately $942,000 of interest expense on weighted
average outstanding debt of approximately $14.7 million. At the end of 1997,
outstanding indebtedness on our bank line of credit was approximately $33
million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of approximately $869,000, an
increase of $22.4 million from a working capital deficit of $21.5 million as of
December 31, 1998. The increase in working capital is primarily a result of the
application of proceeds from restructuring and other transactions described
above to reduce the amount outstanding under our credit facility.
Effective September 1999, we entered into an amendment to our credit facility,
which converted the existing credit facility to a term loan. The term loan
provided for monthly principal and interest payments through November 2000, with
interest payable at a floating rate based on the lead banks' prime lending rate
plus .75%. At December 31, 1999, the effective interest rate was 9.25%. The
monthly principal payments under the term loan were as follows: $167,000 for the
months of October 1999 through December 1999, $200,000 for the months of January
2000 through March 2000, $233,000 for the months of April 2000 through June
2000, $267,000 for the months of July 2000 through October 2000 and a final
payment of the balance on the loan in November 2000. The term loan does not
contain any financial covenants other than a requirement that we pay principal
and interest on a timely basis. The term loan is secured by substantially all of
our assets.
Effective March 2000, we entered into an amendment to the term loan. The
amendment extends the final payment on the loan to November 2001. The revised
term loan provides for monthly principal and interest payments through November
2001, with interest payable at a floating rate based on the lead banks' prime
lending rate plus .75%. The monthly principal payments under the term loan are
$50,000 per month beginning April 2000, with the final payment for any remaining
balance on the loan due November 2001. The amounts of the required principal
payments are subject to increase if we have not paid down the loan to certain
levels throughout the term of the loan. Currently, management does not expect
the principal payments to be increased at any point during the term of the loan.
Our federal tax refund for the year ended December 31, 1999, which is currently
anticipated to be approximately $2.0 million, is pledged for application to the
balance of the term loan. Based upon payments made on the term loan in January
2000 of approximately $3.2 million from settlements we entered into in the
fourth quarter of 1999, the estimate of the federal tax refund of $2.0 million
and scheduled principal payments in 2000 of approximately $1.1 million, we have
classified approximately $6.3 million of the term loan as a current liability in
the consolidated balance sheet as of December 31, 1999. Our two wholly-owned
subsidiaries, HealthcareRatings, Inc. and ProviderWeb.net, Inc. are guarantors
of the loan. (See Note 20 to the Consolidated Financial Statements for further
discussion of the formation of these subsidiaries.) We issued 165,000 shares of
our common stock to the bank syndicate in connection with the amendment as a
financing fee.
For the year ended December 31, 1999, cash flow used in operations was $737,928
compared to cash flow provided by operations of approximately $922,000 for the
same period of 1998.
During the year ended December 31, 1999, we received an income tax refund of
approximately $4.0 million related to the overpayment of 1998 estimated taxes.
We expect to receive, by the third quarter of 2000, an additional $2.0 million
of tax refunds related to carryback of 1999 net operating losses being applied
towards taxable income for 1997 on which we paid income taxes.
We anticipate incurring costs in excess of revenues in 2000 to further develop
and market our Internet sites HealthGrades.com and ProviderWeb.net. Although we
have settled much of the litigation between our former affiliated practices and
us, we continue to incur legal fees and other costs related to the remaining
litigation with some former affiliated practices. As of March 27, 2000, we have
$8.1 million of debt outstanding under our term loan.
On March 17, 2000, we closed on the Revised Financing, which raised $18 million.
Under the terms of the Revised Financing, certain investors paid us $14.8
million in return for 7,400,000 shares of our common stock. Additionally, we
issued warrants to the investors to purchase 2,590,000 shares of our common
stock at an exercise price of $4.00 per share. The warrants have a five-year
term. We also issued a warrant to purchase 150,000 shares of our common stock to
a company that served as a financial advisor for the Revised Financing. Upon the
closing of the Revised Financing, the Officers converted $3.2 million of the
Officer Notes into an aggregate of 1,600,000 shares of common stock and
five-year warrants to purchase 560,000 shares of common stock at $4.00 per
share. As a result of the cash raised
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<PAGE> 39
under the Revised Financing transaction, we anticipate that we have sufficient
funds available to support ongoing operations and future development and
marketing efforts for at least the next twelve months.
YEAR 2000
To date, we have not experienced Year 2000 issues with regard to our internal
systems or any third-party systems. Our expenditures related to Year 2000
compliance have not been material. Despite the fact that the Year 2000 has
commenced and we have experienced no problems to date, we cannot assure that the
risks posed by Year 2000 issues will not adversely affect our business in the
future, either as a result of unanticipated difficulties related to our own
systems or to third parties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Amounts outstanding under our credit facility bear interest at the prime
lending rate of our bank syndicates' leading bank plus .75%. As a result, this
debt is subject to fluctuations in the market which affect the prime rate.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-27 and page S-1 of this document.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
This information (other than the information relating to executive officers
included in Part I) will be included in the Company's Proxy Statement relating
to its Annual Meeting of Stockholders, or in an amendment to this Form 10-K,
which will be filed within 120 days after the close of the Company's fiscal year
covered by this report, and is hereby incorporated by reference to such Proxy
Statement or amendment.
Item 11. Executive Compensation
This information will be included in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders, or an amendment to this Form 10-K, which
will be filed within 120 days after the close of the Company's fiscal year
covered by this report, and is hereby incorporated by reference to such Proxy
Statement or amendment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information will be included in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders, or in an amendment to this Form 10-K, which
will be filed within 120 days after the close of the Company's fiscal year
covered by this report, and is hereby incorporated by reference to such Proxy
Statement or amendment.
Item 13. Certain Relationships and Related Transactions
This information will be included in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders, or in an amendment to this Form 10-K, which
will be filed within 120 days after the close of the Company's fiscal year
covered by this report, and is hereby incorporated by reference to such Proxy
Statement or amendment.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedule at page S-1 are filed as part
of this Form 10-K.
2. Financial Statement Schedules.
The following financial statement schedule is filed as part of this Form 10-K:
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or notes
thereto.
3. Exhibits.
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference.
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EXHIBIT
NUMBER DESCRIPTION
2.1 Restructure Agreement by and Among Specialty Care Network, Inc.,
Medical Rehabilitation Specialists II, P.A. and Kirk J. Mauro,
M.D. dated as of December 31, 1998. (incorporated by reference to
Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998)
2.11 Management Services Agreement by and Among Specialty Care
Network, Inc., Medical Rehabilitation Specialists II, P.A., and
Kirk J. Mauro, M.D. dated as of January 1, 1999. (incorporated by
reference to Exhibit 2.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
2.2 Restructure Agreement by and Among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Leslie S. Matthews, M.D.,
Stewart D. Miller, M.D., Mark S. Meyerson, M.D., John B.
O'Donnell, M.D. and Lew C. Schon, M.D., dated as of December 31,
1998. (incorporated by reference to Exhibit 2.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998)
2.21 Management Services Agreement by and Among Specialty Care
Network, Inc., Greater Chesapeake Orthopaedic Associates, L.L.C.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie S.
Matthews, M.D., Stewart D. Miller, M.D., Mark S. Meyerson, M.D.,
John B. O'Donnell, M.D. and Lew C. Schon, M.D., dated as of
January 1, 1999. (incorporated by reference to Exhibit 2.21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998)
2.3 Restructure Agreement by and Among Specialty Care Network, Inc.,
Vero Orthopaedics II, P.A., James L. Cain, M.D., David W.
Griffin, M.D., George K. Nichols, M.D. and Peter G. Wernicki,
M.D. dated as of December 31, 1998. (incorporated by reference to
Exhibit 2.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998)
2.31 Management Services Agreement by and Among Specialty Care
Network, Inc., Vero Orthopaedics II, P.A., James L. Cain, M.D.,
David W. Griffin, M.D., George K. Nichols, M.D. and Peter G.
Wernicki, M.D. dated as of January 1, 1999. (incorporated by
reference to Exhibit 2.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
2.4 Restructure Agreement by and Among Specialty Care Network, Inc.,
Orlin & Cohen Orthopedic Associates, LLP, Harvey Orlin, M.D.,
Isaac Cohen, M.D., John M. Feder, M.D., Gregory Lieberman, M.D.,
Sebastian Lattuga, M.D., Harvey Orlin, M.D., P.C. and Rockville
Centre Arthroscopic Associates, P.C. dated as of December 31,
1998. (incorporated by reference to Exhibit 2.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998)
2.41 Management Services Agreement by and Among Specialty Care
Network, Inc., Orlin & Cohen Orthopedic Associates, LLP, Harvey
Orlin, M.D., Isaac Cohen, M.D., John M. Feder, M.D., Gregory
Lieberman, M.D., Sebastian Lattuga, M.D., Harvey Orlin, M.D.,
P.C. and Rockville Centre Arthroscopic Associates, P.C. dated as
of January 1, 1999. (incorporated by reference to Exhibit 2.41 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998)
2.5(1) Form of Restructure Agreement (incorporated by reference to
Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999)
2.6(1) Form of Management Services Agreement (incorporated by reference
to Exhibit 2.11 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999)
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation and Amended and Restated Certificate of
Incorporation
3.2 Amended and Restated Bylaws
10.1+ 1996 Equity Compensation Plan, as amended (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.)
10.2 Second Amended and Restated Revolving Loan and Security Agreement
dated as of November 21, 1997 among Specialty Care Network, Inc.,
SCN of Princeton, Inc., NationsBank of Tennessee N.A., AmSouth
Bank, Banque Paribas, Key Corporate Capital Inc. and NationsBank
of Tennessee, N.A., as Agent (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
10.3+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Kerry R. Hicks (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-17627))
10.4+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Patrick M. Jaeckle (incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.6+ Employment Agreement dated as of February 22, 1996 by and between
Specialty Care Network, Inc. and Paul Davis (incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement
on Form S-1 (File No. 333-17627)).
10.6.1+ Amendment to Employment Agreement between Specialty Care Network,
Inc. and D. Paul Davis dated December 5, 1997. (incorporated by
reference to Exhibit 10.6.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997)
10.7+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and David Hicks (incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 (File No. 333-17627))
10.7.1+ Amendment to Employment Agreement between Specialty Care Network,
Inc. and David Hicks, dated December 2, 1997. (incorporated by
reference to Exhibit 10.8.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997)
10.8 Amendment No. 3 to the Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997 among
Specialty Care Network, Inc., SCN of Princeton, Inc., NationsBank
of Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and NationsBank of Tennessee, N.A., as Agent
10.9 Amendment No. 4 to the Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997 among
Specialty Care Network, Inc, SCN of Princeton, Inc., Nationsbank
of Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and Nationsbank of Tennessee, N.A., as Agent
21 Subsidiaries of the registrant.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1999.
- - --------------
(1) Effective June 15, 1999, the Company closed its previously announced
restructuring transaction through ten separate restructure agreements
involving the following nine practices: Floyd R. Jaggears, Jr., M.D., P.C.,
II; Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine
Center, II, P.A.; Orthopaedic Associates of West Florida, P.A.; Orthopaedic
Institute of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton
Orthopaedic Associates, II, P.A.; Reconstructive Orthopaedic Associates, II,
P.C.; and Steven P. Surgnier, M.D., P.A., II. Simultaneously, the Company
executed revised Management Services Agreements with these practices. The
Company has attached a generic form of these agreements to this Quarterly
Report on Form 10-Q as the terms of the agreements between the Company and
the individual practices are substantially equivalent.
(b) Reports on Form 8-K
On October 21, 1999, the Company filed a report on Form 8-K, dated October 19,
1999, relating to a press release addressing certain recent developments.
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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.
HEALTHGRADES.COM, INC.
Date: March 31, 2000 By /s/ Kerry R. Hicks
--------------------------------
Kerry R. Hicks
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- - --------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ Kerry R. Hicks Chief Executive Officer March 31, 2000
- - ------------------ (Principal Executive Officer)
Kerry R. Hicks
/s/ Patrick M. Jaeckle President and Secretary March 31, 2000
- - ----------------------
Patrick M. Jaeckle
/s/ D. Paul Davis Executive Vice President - Finance March 31, 2000
- - ----------------- (Chief Financial Officer) and Treasurer
D. Paul Davis
/s/ Peter H. Cheesbrough Director March 31, 2000
- - ------------------------
Peter H. Cheesbrough
/s/ Leslie S. Matthews, M.D. Director March 31, 2000
- - ----------------------------
Leslie S. Matthews, M.D.
Director March 31, 2000
- - ------------------
Mats Wahlstrom
Director March 31, 2000
- - ------------------
Marc S. Sandroff
Director March 31, 2000
- - ------------------
Parag Saxena
</TABLE>
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<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HEALTHGRADES.COM, INC. AND SUBSIDIARIES:
Report of Independent Auditors............................. F-1
Consolidated Balance Sheets................................ F-2
Consolidated Statements of Operations...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).. F-5
Consolidated Statements of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................. F-8
</TABLE>
<PAGE> 44
Report of Independent Auditors
Board of Directors and Stockholders of HealthGrades.com, Inc.
We have audited the accompanying consolidated balance sheets of
HealthGrades.com, Inc. and subsidiaries (collectively the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthGrades.com,
Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
----------------------------------------
Ernst & Young LLP
Denver, Colorado
March 17, 2000
F-1
<PAGE> 45
HealthGrades.com, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 316,767 $ 1,418,201
Restricted cash 1,178,848 --
Accounts receivable, net 2,973,941 22,281,471
Due from affiliated practices in litigation, net 2,032,559 4,747,940
Receivables from sales of affiliated practices assets
and execution of new service agreements -- 7,953,068
Loans to physician stockholders -- 521,355
Prepaid expenses, inventories and other 232,225 1,500,382
Current portion notes receivable 3,531,099 --
Prepaid and recoverable income taxes 1,838,589 4,258,102
----------- -----------
Total current assets 12,104,028 42,680,519
Property and equipment, net 1,732,536 11,050,365
Goodwill 4,000,000 --
Intangible assets, net of accumulated amortization of
$64,241 in 1998 -- 134,319
Management service agreements, net of accumulated
amortization of $4,675,892 and $4,350,647 in
1999 and 1998, respectively 437,547 13,153,048
Advances to affiliates and other 813,287 944,520
Notes receivable, less current portion 700,000 --
Other assets 662,720 2,216,507
----------- -----------
Total assets $20,450,118 $70,179,278
=========== ===========
</TABLE>
F-2
<PAGE> 46
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portion of capital lease obligations $ -- $ 244,446
Accounts payable 520,767 785,649
Accrued payroll, incentive compensation and related
expenses 334,679 2,453,653
Accrued expenses 1,532,595 2,730,069
Line-of-credit -- 52,925,000
Notes payable 7,352,005 --
Notes payable to officers 350,000 --
Due to affiliated practices -- 3,326,014
Deferred income 1,144,552 --
Deferred income taxes -- 1,083,178
Convertible debentures -- 589,615
------------ ------------
Total current liabilities 11,234,598 64,137,624
Capital lease obligations, less current portion -- 680,152
Note payable, less current portion 5,603,283 --
Notes payable to officers, less current portion 3,200,000 --
Deferred income 646,847 --
------------ ------------
Total liabilities 20,684,728 64,817,776
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 2,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, and 18,738,686 and
18,618,873 shares issued and outstanding in 1999
and 1998, respectively 18,739 18,619
Additional paid-in capital 67,509,276 66,993,627
Accumulated deficit (56,722,141) (57,687,071)
Treasury stock (11,040,484) (3,963,673)
------------ ------------
Total stockholders' equity (deficit) (234,610) 5,361,502
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 20,450,118 $ 70,179,278
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Service fees $ 29,045,291 $ 76,649,778 $ 45,966,531
Marketing, advertising and
other Internet revenue 407,577 -- --
Other 2,132,880 2,531,524 3,689,390
------------- ------------- -------------
31,585,748 79,181,302 49,655,921
------------- ------------- -------------
Costs and expenses:
Clinic expenses 15,234,416 55,188,411 31,644,618
General and administrative 12,423,414 14,468,537 7,861,015
Impairment loss on service
agreements -- 94,582,227 --
Production, content and
product development 1,217,917 -- --
Litigation and other costs 5,309,168 3,564,392 --
Impairment loss on intangible assets
and other long-lived assets -- 3,316,651 --
------------- ------------- -------------
34,184,915 171,120,218 39,505,633
------------- ------------- -------------
(Loss) income from operations (2,599,167) (91,938,916) 10,150,288
Other:
Gain on sale of assets, practice disputes,
and amendment and restatement of 2,766,284 -- --
service agreements
Gain on sale of equity investment 127,974 1,240,078 --
Gain on sale of subsidiary 221,258 -- --
Interest income 312,447 187,450 536,180
Interest expense (2,489,427) (3,741,089) (942,144)
------------- ------------- -------------
(Loss) income before income taxes (1,660,631) (94,252,477) 9,744,324
Income tax benefit (expense) 2,625,561 32,466,391 (3,873,926)
------------- ------------- -------------
Net income (loss) $ 964,930 $ (61,786,086) $ 5,870,398
============= ============= =============
Net income (loss) per common share
(basic) $ 0.07 $ (3.39) $ 0.38
============= ============= =============
Weighted average number of common
shares used in computation (basic) 14,202,748 18,237,827 15,559,368
============= ============= =============
Net income (loss) per common
share (diluted) $ 0.07 $ (3.39) $ 0.37
============= ============= =============
Weighted average number of common
shares and common share equivalents
used in computation (diluted) 14,817,732 18,237,827 16,071,153
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Stockholders'
Equity (Deficit) Years ended
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK
$0.001 PAR VALUE (ACCUMULATED
--------------------------- ADDITIONAL DEFICIT)
PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 11,045,015 $ 11,045 $ 6,465,205 ($ 1,771,383) $ -- $ 4,704,867
Shares issued in connection with
an initial public offering of
common stock, including the
underwriters' overallotment 3,208,338 3,208 22,188,283 -- -- 22,191,491
Shares and other equity
instruments issued in
connection with the
acquisitions of net assets of
affiliated practices 3,222,891 3,223 31,147,368 -- -- 31,150,591
Exercise of employee stock options 227,049 227 265,160 -- -- 265,387
Tax benefit related to employee
stock options -- -- 717,140 -- -- 717,140
Non-cash compensation expense
related to employee stock
options -- -- 212,021 -- -- 212,021
Net income -- -- -- 5,870,398 -- 5,870,398
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 17,703,293 17,703 60,995,177 4,099,015 -- 65,111,895
Shares and other equity
instruments issued in
connection with the
acquisitions of net assets of
affiliated practices and
Provider Partnerships, Inc. 879,480 880 5,561,101 -- -- 5,561,981
Exercise of employee stock options 36,100 36 231,314 -- -- 231,350
2,237,644 shares acquired as
treasury stock -- -- -- -- (3,963,673) (3,963,673)
Tax benefit related to employee
stock options -- -- 86,863 -- -- 86,863
Non-cash compensation expense
related to employee stock
options -- -- 119,172 -- -- 119,172
Net loss -- -- -- (61,786,086) -- (61,786,086)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 18,618,873 18,619 66,993,627 (57,687,071) (3,963,673) 5,361,502
Non-cash compensation expense
related to employee stock options 448,374 -- -- 448,374
Exercise of employee stock options 119,813 120 67,275 -- -- 67,395
4,182,634 shares acquired as
treasury stock -- -- -- -- (7,076,811) (7,076,811)
Net income -- -- -- 964,930 -- 964,930
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 18,738,686 $ 18,739 $ 67,509,276 $(56,722,141) $(11,040,484) $ (234,610)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 49
HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 964,930 $(61,786,086) $ 5,870,398
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-cash compensation expense related to
employee stock options 448,374 119,172 212,021
Depreciation expense 1,757,700 2,227,101 965,492
Amortization expense 1,567,352 4,374,607 1,377,746
Bad debt expense 33,570 -- --
Gain on sale of equity investment (127,973) (1,240,078) --
Gain on sale of subsidiary (221,258) -- --
Loss on disposal of assets 181,251 -- --
Gain on sale of assets, practice disputes,
and amendment and restatement of
service agreements (2,766,284) -- --
Impact of termination agreement (1,073,777) -- --
Equity in loss of investee 23,852 -- --
Impairment loss on service agreements, non-cash -- 94,582,227 --
Impairment loss on intangible assets and
other long-lived assets, non-cash -- 3,316,651 --
Litigation and other costs, non-cash -- 3,431,734 --
Interest on convertible debentures -- -- --
Deferred income tax benefit (1,083,178) (31,520,026) (1,279,497)
Changes in operating assets and liabilities, net
of the effects of the non-cash acquisitions of
net assets of affiliated physician practices and
Provider Partnerships, Inc., sale of assets
and execution of new service agreements
and practice disputes:
Accounts receivable, net (259,264) (9,092,730) (9,313,152)
Due from affiliated practices in litigation (1,360,023) -- --
Prepaid expenses and other assets 600,456 (1,265,926) (1,572,849)
Prepaid and recoverable income taxes 2,419,513 (4,170,177) --
Accounts payable and accrued expenses 962,440 1,420,027 (1,171,896)
Accrued payroll, incentive compensation
and related expenses (1,270,994) 735,390 876,369
Income taxes payable -- (944,632) 432,497
Deferred income 1,791,399 -- --
Due to affiliated physician practices, net (3,326,014) 734,676 1,798,545
------------ ------------ ------------
Net cash (used in) provided by operating activities (737,928) 921,930 (1,804,326)
INVESTING ACTIVITIES
Purchases of property and equipment (1,140,438) (9,141,785) (1,568,795)
Proceeds from sale of medical equipment 1,001,856 -- --
Proceeds from sale of majority interest in a subsidiary
and equity investments, net of cash 3,208,397 1,075,000 --
Repayments of advances to affiliates and
notes receivable 1,022,621 --
Increases in goodwill and intangible assets (4,000,000) (116,048) (1,111,257)
Repayments from (advances to) affiliates 131,233 (1,753,742) (922,022)
Advances to investee (991,386) -- --
Acquisitions of physician practices and Provider
Partnerships, Inc., net of cash acquired -- (12,636,948) (44,452,105)
------------ ------------ ------------
Net cash used in investing activities (1,790,338) (21,550,902) (48,054,179)
</TABLE>
F-6
<PAGE> 50
HealthGrades.com, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
FINANCING ACTIVITIES
<S> <C> <C> <C>
Proceeds from sale of assets, practice disputes $ 39,416,313 $ -- $ --
and amendment and restatement of service agreements
Proceeds from initial public offering, net of
period offering costs -- -- 22,939,338
Cash restricted for repayment of note payable (1,178,848) -- --
Proceeds from line-of-credit agreement -- 20,325,000 35,500,000
Proceeds from officer notes 3,550,000 -- --
Principal repayments on line-of-credit agreement -- (400,000) (6,677,681)
Principal repayments on note payable (41,030,000)
Principal repayments on capital lease obligations (48,805) (221,757) (229,711)
Purchases of treasury stock -- (921,491) --
Exercise of employee stock options 67,395 231,350 265,387
Principal payments from loans to physician
stockholders 124,756 78,427 1,026,419
Repayments of notes receivable 556,569 -- --
Loans to physician stockholders (30,548) (488,873) (964,737)
------------- ------------- -------------
Net cash provided by financing activities 1,426,832 18,602,656 51,859,015
------------- ------------- -------------
Net (decrease) increase in cash and
cash equivalents (1,101,434) (2,026,316) 2,000,510
Cash and cash equivalents at beginning of period 1,418,201 3,444,517 1,444,007
------------- ------------- -------------
Cash and cash equivalents at end of period $ 316,767 $ 1,418,201 $ 3,444,517
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,393,289 $ 3,509,592 $ 910,000
============= ============= =============
Income taxes paid (received) $ (3,961,898) $ 4,169,506 $ 4,720,926
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Effects of the acquisitions of net assets of
affiliated physician practices:
Assets acquired $ -- $ 23,196,873 $ 110,952,707
Liabilities assumed -- (294,042) (2,429,726)
Income tax liabilities assumed -- -- (32,920,285)
Convertible note payable issued -- (6,044,054) --
Less: Cash paid for acquisitions -- (12,400,360) (44,452,105)
------------- ------------- -------------
$ -- $ 4,458,417 $ 31,150,591
============= ============= =============
Realized loss on four affiliated practice restructurings in
1998:
Assets disposed of $ -- $ 29,909,279 $ --
Liabilities transferred -- (1,361,040) --
Convertible debentures payable forgiven -- (5,454,439) --
Treasury stock acquired -- (2,656,199) --
Less: Receivable from affiliated practices -- (7,953,068) --
------------- ------------- -------------
Pretax impairment loss on four restructurings closed in 1998 $ -- $ 12,484,533 $ --
============= ============= =============
Gain on sale of assets, practice disputes and amendment
and restatement of service agreements
Assets disposed of $ 43,069,171
Liabilities transferred (3,859,015)
Treasury stock acquired (7,076,811)
Less: Notes receivable (3,436,384)
Cash received (31,463,245)
-------------
Gain on sale of assets, practice disputes and amendment
and restatement of service agreements $ (2,766,284)
=============
Sale of subsidiary
Assets disposed of $ 9,619
Liabilities assumed 343,832
Note receivable (172,200)
-------------
Loss on sale of assets $ 181,251
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 51
HealthGrades.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. DESCRIPTION OF BUSINESS
Effective January 4, 2000, Specialty Care Network, Inc. changed its name to
HealthGrades.com, Inc. (hereafter, "the Company"). Simultaneously, the Company
changed the name of its majority-owned subsidiary, HealthGrades.com, Inc. to
HG.com, Inc. Effective February 3, 2000, the Company merged its majority-owned
subsidiary, HG.com, Inc. into a recently formed, wholly-owned subsidiary,
HealthcareRatings, Inc. (See Note 20 for further discussion of this merger
transaction). Additionally, in February 2000, a new, wholly-owned subsidiary of
the Company, ProviderWeb.net was formed. The Company operates two healthcare
Internet sites. HealthGrades.com provides quality ratings on healthcare
providers and facilities. ProviderWeb.net is a subscription-based site focused
on providing articles, tools and other resources to physician practice
administrators and managers.
2. RESTRUCTURING AND OTHER TRANSACTIONS
Effective June 15, 1999, the Company closed its previously announced
restructuring transaction through ten separate restructure agreements involving
the following nine practices: Floyd R. Jaggears, Jr., M.D., P.C., II; Riyaz H.
Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine Center, II, P.A.;
Orthopaedic Associates of West Florida, P.A.; Orthopedic Institute of Ohio,
Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton Orthopaedic Associates,
II, P.A.; Reconstructive Orthopaedic Associates, II, P.C.; and Steven P.
Surgnier, M.D., P.A., II.
Under the restructure agreements, the Company transferred, with respect to each
practice, all of the accounts receivable relating to the practice; tangible and
intangible assets purchased or acquired by the Company in respect of the
practice, other than those disposed of in the ordinary course of business since
the date the Company affiliated with the practice; all prepaid expenses relating
to the practice; all inventory relating to the practice; and all other assets
relating to the practice. The amount received by the Company from each practice
and its physician owners for the assets sold to the practice generally equals
the sum of (1) the book value of the accounts receivable relating to the
practice on the effective date of closing; (2) the book value of all fixed
assets and other capital assets relating to the practice on the effective date
of closing; (3) the book value of all prepaid expenses relating to the practice
on the effective date of closing; (4) the book value of all notes and other
receivables the physician owners of the practice owe to the Company on the
effective date of closing; and (5) the cash balance of the practice's deposit
account on the effective date of closing, reduced by the book value of the
liabilities and obligations relating to the practice on the effective date of
closing.
In addition, the Company and each of the practices and their physician owners
entered into a management services agreement to replace the existing service
agreement. As consideration for the Company's agreement to enter into the
management services agreement, the practices and their physician owners paid to
the Company an additional amount of cash, or paid cash and returned to the
Company shares of its common stock.
Under the management services agreements, the Company provides only limited
services to the practices. In addition, the terms of the management services
arrangements were reduced, generally from forty year terms to five year terms
beginning from the initial affiliation date of the affected practice; the
management services agreements expire at various times between one year after
closing of the restructuring transaction and March 2003. In addition, the
practices pay reduced service fees to the Company under the management services
agreements. Six of the practices pay monthly service fees, while three paid a
lump sum fee in connection with the closing of the restructuring transaction, in
lieu of the monthly fee obligation.
With respect to the restructuring transaction, the Company has received to date
approximately $16.3 million and expects to receive an additional approximately
$760,000. Most of the funds received were used to reduce indebtedness. In
addition, shares outstanding were reduced by 3,254,519 shares.
F-8
<PAGE> 52
During the latter part of 1999, the Company terminated the revised management
services arrangements with two of the restructured practices and two practices
which were not party to the restructuring transaction, but entered into
transactions during 1998 which resulted in revised management service
arrangements. (See Modification of Arrangements With Four Practices below). In
connection with these terminations, the Company is no longer required to provide
management services to the practices. Included in service fee revenues for the
year ended December 31, 1999 is approximately $2.7 million related to revenue
recognized as a result of these terminations.
OTHER TRANSACTIONS
Effective June 14, 1999, the Company entered into a termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center ("PPTC"), which
terminated the affiliation of PPTC with the Company. The consideration paid to
the Company consisted of payment for the tangible book value of PPTC assets and
payment for the termination of the service agreement. In connection with the
termination agreement, the Company received a cash payment of $8,775,217.
Additionally, approximately 545,000 warrants were canceled in connection with
the PPTC termination agreement.
Effective June 16, 1999, the Company entered into a settlement agreement with
TOC Specialists, PL ("TOC") that resolved all legal disputes and litigation
between the Company and TOC. In connection with the settlement agreement, the
Company received a cash payment of $3,500,000 and 762,128 shares of the
Company's common stock in consideration for the tangible book value of the TOC
assets and the termination of the service agreement.
Effective November 12, 1999, the Company entered into a settlement and release
agreement with The Specialists Orthopaedic Medical Corporation and The
Specialists Surgery Center (collectively, "The Specialists") that resolved all
legal disputes and litigation between the Company and The Specialists. In
connection with the settlement agreement, the Company received cash payments
during 1999 of $500,000, a note receivable in the amount of $1,500,000 and
165,987 shares of the Company's common stock in consideration for the tangible
book value of the Specialists assets and the termination of the Specialists
service agreements.
Effective December 31, 1999, the Company entered into a settlement and release
agreement with Associated Orthopaedics & Sports Medicine, P.A., Associated
Arthroscopy Institute, Inc. Access Medical Supply, Inc. d/b/a Associated
Physical Therapy, Allied Health Services, P.A., d/b/a Associated Occupational
Rehabilitation, Neal C. Small, M.D. and Alexander I. Glogau, M.D. (collectively,
"Plano") that resolved all legal disputes and litigation between the Company and
Plano. In connection with the settlement agreement, the Company received a cash
payment of $778,848 in December 1999, and an additional cash payment in the
amount of $1,536,384, in January 2000 in consideration for the tangible book
value of the Plano assets and the termination of the Plano service agreements.
Modification of Arrangements With Four Practices
On December 31, 1998, the Company entered into transactions with four of its
affiliated practices. In these transactions, the Company sold to each of the
practices accounts receivable, fixed assets and certain other assets relating to
the respective practices and replaced the original service agreements with new
agreements. Under the new agreements, which terminate at certain dates between
November 2001 and March 2003, the Company provides substantially reduced
services to the practices, and the practices pay significantly reduced service
fees. As a result of the completion of these four transactions, the Company
reacquired 2,124,959 shares of its common stock and reduced its outstanding
indebtedness at December 31, 1998 by approximately $5.5 million through the
cancellation of a convertible note with one of the affiliated practices.
Additionally, in 1999, the Company used additional proceeds from these four
transactions to reduce the amount outstanding under its Credit Facility by
approximately $8.5 million.
IMPAIRMENT LOSSES, LITIGATION AND OTHER COSTS
Impairment Loss on Management Service Agreements
Based on the restructuring transaction, as well as numerous other factors in the
physician practice management industry in general, during the fourth quarter of
1998, management of the Company undertook an evaluation of the carrying amount
of its management service agreements pursuant to the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. As a result of
this evaluation, the Company recorded an impairment loss on its management
service agreements of approximately $94.6 million in December 1998. This
impairment loss consisted of approximately $12.5 million related to the
management service agreements on the four transactions which closed effective
December 31, 1998, approximately $53.6 million related to the management service
agreements for practices which were party to the restructuring transaction,
approximately $9.0 million related to the management service agreements for
practices which were currently involved in litigation with the Company and
approximately $19.5 million related to the management service agreements for
F-9
<PAGE> 53
practices which are maintaining their long-term agreements with the Company.
(See Note 16 for further discussion of legal proceedings involving the Company's
Affiliated Practices).
Litigation And Other Costs
During the years ended December 31, 1999 and 1998, the Company was involved in
litigation with several of its affiliated practices. As a result of these
disputes, the Company recorded a charge of approximately $3.4 million and $2.7
million for the years ended December 31, 1999 and 1998, respectively, to reserve
for service fee revenue for these practices. (See Note 16 for further discussion
related to these legal proceedings). In addition, for the years ended December
31, 1999 and 1998, the Company incurred approximately $1.1 million and $0.2
million, respectively, in legal fees directly related to these disputes.
In connection with the restructuring transaction described above, the Company
also incurred expenses of approximately $750,000 and $660,000, for the years
ended December 31, 1999 and 1998, respectively, for financial advisors and legal
consultation.
Impairment loss on Intangible Assets And Other Long-Lived Assets
During 1998, the Company became involved in negotiations to resolve certain
issues raised by the former stockholders of Provider Partnerships, Inc. ("PPI"),
a corporation acquired by the Company in August 1998. PPI was a company engaged
in providing consulting services to hospitals, and it also provided certain
assets that were developed by the Company into one of its web sites. Because of
this dispute, the Company recorded an impairment loss in December 1998 of
approximately $1.2 million on the intangible asset created with the acquisition
of PPI.
Additionally, as a result of the restructuring transaction, management of the
Company performed a review of the carrying amount of its other long-lived
assets, which resulted in an impairment loss of approximately $2.1 million
during the fourth quarter of 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The Company uses the equity method of accounting to account for
investments in entities in which it exhibits significant influence, but not
control, and generally does not have an ownership interest in excess of 50%.
PRINCIPLES OF ACQUISITION ACCOUNTING AND CHANGE IN ACCOUNTING ESTIMATE
The accompanying financial statements give effect to the acquisitions of
substantially all of the assets of five physician practices on November 12,
1996, through asset purchases, a share exchange and mergers, at their historical
cost basis in accordance with the accounting treatment prescribed by Securities
and Exchange Commission Staff Accounting Bulletin No. 48, Transfers of
Nonmonetary Assets by Promoters or Shareholders. In connection with all
subsequent affiliations with physician practices, a substantial portion of the
consideration paid to the physician owners of the practice was restricted
securities and cash, and is allocated to the management service agreement (the
"Service Agreements"). Hereinafter, all physician practices that have affiliated
with the Company, including the initial five physician practices, are referred
to collectively as the "Affiliated Practices." The Company also recognizes the
income tax effects of temporary differences related to all identifiable
acquisition intangible assets, including the Service Agreements.
Beginning June 1, 1998, the Company reduced the amortizable lives of its
long-term management service agreements to a range of 5 to 30 years by assigning
specific lives to each management service agreement based on factors such as
practice market share, length of operating history and other factors.
Previously, the Company amortized such service agreements over the term of the
underlying agreements, which is generally forty years. This action was taken in
response to viewpoints expressed by the Securities and Exchange Commission
regarding the amortization periods used by the physician practice management
industry. The change in accounting estimate resulted in additional amortization
expense of approximately $870,000 for the period June 1, 1998 through December
31, 1998, or $0.03 per common share for the year ended December 31, 1998 after
consideration of the related income tax effect.
In addition, as a result of the Company's evaluation of the carrying amount of
its management service agreements (as more fully described in Note 2), effective
January 1, 1999, the Company reduced the estimated useful lives of its
management service agreements to lives ranging from 3 to 5 years.
F-10
<PAGE> 54
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes. Although
these estimates are based on management's knowledge of current events and
actions they may undertake in the future, actual results could differ from those
estimates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Service fees
Service fee revenue is recognized based upon the contractual arrangements of the
underlying long-term Service Agreements between the Company and the Affiliated
Practices. The five largest Affiliated Practices represent 49%, 48%, and 39%, of
total management service fee revenue for the years ended December 31, 1999, 1998
and 1997, respectively. See Note 14 for further discussion of such contractual
arrangements, including certain guaranteed minimum management fees.
Marketing, advertising and other Internet revenue
The Company derives its revenue primarily from marketing arrangements with
hospitals, fees related to the licensing of access to its content (including
set-up fees) and advertising.
Marketing revenues are derived from annual fees from hospitals in return for the
Company serving banner advertisements and providing other marketing services to
the hospitals. Revenue related to these arrangements is recognized straight-line
over the term of the agreement.
Revenue related to the licensing of access to the Company's content and initial
set-up fees are recognized straight-line over the term of the agreement.
Advertising revenue relates to advertisements served on both the Company's sites
and the Company's share of advertising revenue derived from advertisements
delivered on sites of other healthcare companies which display the Company's
content. Revenues derived from advertising arrangements where the Company
contracts directly with the advertiser are recorded at the gross contract amount
and commissions and other revenue-sharing splits with other on-line healthcare
companies are recorded as general and administrative expenses. Advertising
revenues earned under revenue sharing arrangements from other websites are
recorded net of commissions as the commissions are not contractual obligations
of the Company.
Other revenue consists primarily of recoveries of bad debts and other
miscellaneous income.
PRODUCTION, CONTENT AND PRODUCT DEVELOPMENT COSTS
Beginning in 1999, the Company began incurring production, content and product
development costs related to the development and support of its HealthGrades.com
and ProviderWeb.net web sites. These costs (which consist primarily of salaries
and benefits, consulting fees and other costs related to software development,
application development and operations expense) are expensed as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between completion
of a working model and the launch of its web sites have not been significant.
F-11
<PAGE> 55
EARNINGS PER SHARE
In 1997, Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
Earnings Per Share, was issued. SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous method of reporting earnings per share. All earnings per share amounts
for all periods have been presented in conformity with SFAS No. 128
requirements.
RESTRICTED CASH
At December 31, 1999, the Company had $1,178,848 in cash received related to
settlements of practice disputes which was restricted for the paydown of its
indebtedness. In January 2000, the Company used this cash to pay down its note
payable with the bank syndicate.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments as reported in the accompanying
balance sheets approximate their fair value primarily due to the short-term
and/or variable-rate nature of such financial instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including assets acquired from the
Affiliated Practices. Equipment held under capital leases is stated at the
present value of minimum lease payments at inception of the related lease. Costs
of repairs and maintenance are expensed as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the underlying
assets. Amortization of capital lease assets and leasehold improvements are
computed using the straight-line method over the shorter of the lease term or
the estimated useful lives of the underlying assets. The estimated useful lives
used are as follows:
<TABLE>
<S> <C>
Computer equipment and software 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements 5 years
</TABLE>
GOODWILL AND INTANGIBLE ASSETS
Goodwill, which is stated at cost, was acquired in connection with the Company's
purchase of a number of shares of its majority-owned subsidiary, HG.com, Inc.
which increased the Company's ownership in HG.com, Inc. to 90%. Goodwill is
being amortized on a straight-line basis over a seven-year period. (See Note 7
for further discussion of this transaction.)
Pursuant to the provisions of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the carrying value of long-lived assets, including
goodwill and management service agreements, is reviewed quarterly to determine
if any impairment indicators are present. If it is determined that such
indicators are present and the review indicates that the assets will not be
recoverable, based on undiscounted estimated cash flows over the remaining
amortization and depreciation period, the carrying value of such assets are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits; historic or anticipated decline in revenue
or operating profit; adverse legal, regulatory or reimbursement developments;
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset; or a material decrease in the fair market value of some or
all of the assets.
The Company reviews its long-lived assets separately for each physician practice
because the cash flows and operations of each individual physician practice are
largely independent of each other and of other aspects of the Company's
business. Intangible and other long-lived assets are allocated to each physician
practice based on the specific identification methodology. During the years
ended December 31, 1997 and 1999, no impairment charges were recognized by the
Company. However, during the fourth quarter of 1998, based on the circumstances
described in Note 2, the Company recorded impairment losses of approximately
$94.6 million on its service agreements, $1.2 million on the intangible asset
created with the acquisition of PPI and $2.1 million on its other long-lived
assets, including deferred debt issuance costs.
F-12
<PAGE> 56
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25"). In 1995, Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), was issued, whereby companies may elect to account for stock-based
compensation using a fair value based method or continue measuring compensation
expense using the intrinsic value method prescribed in APB No. 25. SFAS No. 123
requires that companies electing to continue to use the intrinsic value method
make pro forma disclosure of net income and net income per share as if the fair
value based method of accounting had been applied.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting
Comprehensive Income, was issued in June 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(e.g., revenue, expenses, gains, losses, etc.) in a full set of general purpose
financial statements. This accounting pronouncement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. SFAS No.
130 was effective for the Company's year ended December 31, 1999; however, as
the Company currently has no comprehensive income items, there was no impact on
the Company's financial statement presentation. If the Company has items of
comprehensive income in future periods, these items will be reported and
displayed in accordance with SFAS No. 130.
OPERATING SEGMENTS
During 1998, the Company adopted Statement of Financial Accounting Standard No.
131, Disclosures About Segments of an Enterprise and Related Information, ("SFAS
No. 131") which requires reporting of summarized financial results for operating
segments and establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company evaluates
performance based on two different operating segments: physician practice
management and internet services. For 1998 and 1997, physician practice
management was the only significant operating segment.
FUTURE ACCOUNTING PRONOUNCEMENTS
Accounting For Derivative Instruments And Hedging Activities
In June 1998, Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued. SFAS
No. 133 requires the recording of all derivative instruments as assets or
liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. In June 1999, SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 was issued, which deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. Therefore, the Company
will adopt the new requirement effective January 1, 2001. Management has
completed its review of SFAS No. 133 and does not expect there to be any
material impact on its financial position or results of operations from the
implementation of this statement.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform with the 1999 presentation.
F-13
<PAGE> 57
4. ACCOUNTS RECEIVABLE AND MANAGEMENT FEE REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
Gross patient accounts receivable purchased
from the affiliated physician practices $ 168,858 $41,779,935
Less allowance for contractual adjustments
and doubtful accounts -- 22,161,082
----------- -----------
168,858 19,618,853
Management fees, including reimbursement of
clinic expenses (net of an allowance of
$1,773,105 in 1999) 2,577,629 2,501,628
Other receivables 227,454 160,990
----------- -----------
$ 2,973,941 $22,281,471
=========== ===========
</TABLE>
Management fee revenue, exclusive of reimbursed clinic expenses, was
approximately $11.6 million, $21.5 million and $14.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively. One of the Affiliated Practices
exceeded 20% of management fee revenue in 1997.
An integral component of the computation of management fees earned by the
Company is net patient revenue of the Affiliated Practices. The Affiliated
Practices recognize net patient revenue for medical services at established
rates reduced by allowances for contractual adjustments and doubtful accounts.
Contractual adjustments arise due to the terms of certain reimbursement and
managed care contracts. Such adjustments represent the difference between
charges at established rates and estimated recoverable amounts and are
recognized by the Affiliated Practices in the period the services are rendered.
Any differences between estimated contractual adjustments and actual final
settlements under reimbursement and managed care contracts are reported as
contractual adjustments in the year the final settlements are made. Net patient
revenue is not recognized as revenue in the accompanying financial statements.
The Company's Affiliated Practices derived approximately 19.4% and 21.9% of
their net revenue from services provided under the Medicare program for the
years ended December 31, 1998 and 1997, respectively. Laws and regulations
governing the Medicare program are complex and subject to interpretation. The
Company believes that the Affiliated Practices are in compliance, in all
material respects, with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. Such laws and regulations can be subject to future government review
and interpretation. Violation of such laws could result in significant
regulatory action including fines, penalties and exclusion from the Medicare
program. Other than the Medicare program, no single payor provided more than 10%
of aggregate net clinic revenue or 5% of accounts receivable as of and for the
years ended December 31, 1998 and 1997.
Due from Affiliated Practices in litigation represent amounts due from
Affiliated Practices with which the Company is currently involved in disputes.
See Note 16 for further discussion of legal proceedings involving the Company's
Affiliated Practices. Gross accounts receivable for these practices were
$2,532,559 and $12,145,102, as of December 31, 1999 and 1998, respectively, net
of an allowance for contractual adjustments and doubtful accounts of $500,000
and $7,397,144, respectively. Gross accounts receivable include patient accounts
receivable purchased from the related Affiliated Practice, management fees and
reimbursement of clinic expenses.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------ ------------
<S> <C> <C>
Furniture and fixtures $ 1,581,598 $ 10,455,889
Computer equipment and software 1,519,020 2,851,399
Leasehold improvements and other 20,605 770,717
Construction in progress -- 1,749,731
------------ ------------
3,121,223 15,827,736
Accumulated depreciation and amortization (1,388,687) (4,777,371)
------------ ------------
Net property and equipment $ 1,732,536 $ 11,050,365
============ ============
</TABLE>
F-14
<PAGE> 58
Included in the above are assets recorded under capital leases which consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------- ----------
<S> <C> <C>
Furniture and fixtures $ -- $1,234,383
Computer equipment -- 178,693
------------- ----------
-- 1,413,076
Accumulated amortization -- 917,336
============= ==========
Net assets under capital leases $ -- $ 495,740
============= ==========
</TABLE>
6. DEBT
Line-of-Credit
On November 1, 1996, the Company entered into a $30 million Revolving Loan and
Security Agreement (the "Credit Facility") with a bank, which provided certain
amounts necessary to effectuate acquisitions of Affiliated Practices. Through
October 31, 1997, the Credit Facility interest rates ranged from 7.2% to 7.4%,
primarily based on a LIBOR rate plus an applicable margin.
In November 1997, the Credit Facility was restated to permit maximum borrowings
of $75 million, subject to certain limitations. Prior to the loan covenant
violations described below, the Credit Facility could be used (i) to fund the
cash portion of affiliation transactions, and (ii) for the development of
musculoskeletal focused surgery centers. The Company could elect to borrow on
the Credit Facility at a floating rate based on the prime rate plus an
adjustable applicable margin of 0% to 0.75% or at a rate based on LIBOR plus an
adjustable applicable margin of 1.0% to 2.25%.
As of December 31, 1998, the Company was not in compliance with certain of the
financial ratio covenants required by the Company's Credit Facility. As a result
of the non-compliance, the Company was in default under the terms of the Credit
Facility. In the event of default, the terms of the Credit Facility provided
that the bank syndicate can immediately terminate its obligation to make further
advances under the respective commitments and/or declare the Company's
outstanding debt under the Credit Facility to be immediately due and payable.
Accordingly, the total amount outstanding under the Credit Facility of
approximately $52.9 million has been included in the Company's Consolidated
Balance Sheet as a current liability at December 31, 1998.
Effective September 1999, the Company entered into an amendment to its Credit
Facility, which converted the existing credit facility to a term loan. The term
loan provided for monthly principal and interest payments through November 2000,
with interest payable at a floating rate based on the bank syndicate's prime
lending rate plus .75%. At December 31, 1999, the effective interest rate was
9.25%. The monthly principal payments under the term loan were as follows:
$167,000 for the months of October 1999 through December 1999, $200,000 for the
months of January 2000 through March 2000, $233,000 for the months of April 2000
through June 2000, $267,000 for the months of July 2000 through October 2000 and
a final payment of the balance on the loan in November 2000. The term loan does
not contain any financial covenants other than timely principal and interest
payments. The term loan is secured by substantially all of the assets of the
Company.
Effective March 2000, the Company entered into an amendment to its term loan.
The amendment extends the final payment on the loan to November 2001. The
revised term loan provides for monthly principal and interest payments through
November 2001, with interest payable at a floating rate based on the bank
syndicate's prime lending rate plus .75%. The monthly principal payments under
the term loan are $50,000 per month beginning April 2000, with the final payment
for any remaining balance on the loan due November 2001. The amounts of the
required principal payments are subject to increase if the Company has not paid
down the loan to certain levels throughout the term of the loan. Currently,
management of the Company does not expect the principal payments to be increased
at any point during the term of the loan. The Company's federal tax refund for
the year ended December 31, 1999, which is currently anticipated to be
approximately $2.0 million is pledged for application to the balance of the term
loan. Based upon payments made on the term loan in January 2000 of approximately
$3.2 million from settlements entered into by the Company in the fourth quarter
of 1999, the estimate of the federal tax refund of $2.0 million and scheduled
principal payments in 2000 of approximately $1.1 million, the Company has
classified approximately $6.3 million of the term loan as a current liability in
the consolidated balance sheet as of December 31, 1999. The Company's two
wholly-owned subsidiaries, HealthcareRatings, Inc. and ProviderWeb.net, Inc. are
guarantors of the loan. (See Note 20 for further discussion of the formation of
these subsidiaries.) The Company issued 165,000 shares of Company common stock
to the bank syndicate in connection with the amendment as a financing fee.
F-15
<PAGE> 59
Convertible Debentures Issued in 1998
In connection with an acquisition of an Affiliated Practice on March 31, 1998,
the Company issued $5,454,439 of convertible debentures; however, such
convertible debentures and the related accrued interest totaling $205,479 were
subsequently canceled contemporaneous with a restructuring of the related
Affiliated Practice's management service agreement on December 31, 1998.
In connection with an affiliation on October 1, 1998 of certain assets of two
physicians who were made party to one of the Company's service agreements with
an Affiliated Practice, the Company issued $589,615 of convertible debentures.
The 2% convertible debentures were convertible into Company common stock at a
conversion price of $10 per share. No debt was converted in 1998. The debentures
were canceled in connection with the restructuring transactions described in
Note 2.
7. ACQUISITION OF MINORITY INTERESTS AND OFFICER NOTES
In June 1999, the Company entered into an agreement with the former PPI
stockholders to resolve certain issues raised by the former stockholders of PPI
relating to the transaction in which the Company acquired PPI. At this time, the
Company formed HG.com, Inc. (f/k/a HealthGrades.com, Inc., hereafter, "HG.com")
and transferred to HG.com one of the Company's websites (formerly
HealthCareReportCards.com, currently HealthGrades.com) and other related
internet products. The remaining non-internet related assets of PPI were
transferred into the Company and PPI was subsequently liquidated. Additionally,
Venture5 LLC, whose members consist of the former PPI stockholders, and an
employee of the Company, owned a minority interest in HG.com. The Company owned
a majority interest. In September 1999, the Company entered into an agreement
with Venture5 under which the Company agreed to purchase a number of shares of
its majority-owned subsidiary, HG.com, Inc. that would increase the Company's
ownership in HG.com, Inc. to 90%. The agreement required that the Company pay
Venture5 $4,000,000 by November 1, 1999. In November 1999, the purchase date was
extended until December 31, 1999. On December 31, 1999, the Company paid
$4,000,000 to Venture5 (the "Minority Interest Purchase") in full satisfaction
of this obligation. The Company financed the Minority Interest Purchase through
the issuance of notes payable to certain officers (the "Officers") of the
Company totaling $3,550,000 (hereafter, the "Officer Notes"). The Officer Notes
bear interest at prime plus two percentage points and are payable on December
31, 2000. The remainder of the purchase price was financed with the Company's
working capital.
In an effort to raise the funding to comply with the Company's commitments
described above, during November and December 1999, management of the Company
pursued various financing alternatives through its relationship with its primary
lender, various venture capital firms and personal financing by the Company's
officers. On December 29, 1999, the Company's Board of Directors approved a term
sheet relating to an equity investment (the "Proposed Financing") in the Company
by a venture capital firm (hereafter, the "VC firm"). On December 30, 1999,
management of the Company executed the term sheet. In March 2000 the Company
consummated an equity financing which raised $18 million. This financing (the
"Revised Financing") superceded the Proposed Financing. Pursuant to the terms of
the Revised Financing, in March 2000, the Officers converted $3.2 million of the
Officer Notes into an aggregate of 1.6 million shares of common stock and five
year warrants to purchase 560,000 shares of common stock at $4.00 per share.
Based on the provisions of EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,
once the Officer Notes are cancelled, the Company will record an expense of
approximately $350,000 based on the estimated fair market value of the 560,000
warrants issued to the Officers in connection with the share purchase.
Subsequent to year-end, after further discussion with the VC firm and other
potential investors, the Company entered into a revised financing transaction.
(See Note 20 for further discussion of the Revised Financing.)
8. SALE OF INTEREST IN AMBULATORY SURGERY CENTER
During 1998, the Company funded, through its 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 SCN of Maryland, LLC, (the "LLC"), which was owned by ASI. 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. In March 1999, the Company sold 68% of its
interest in the LLC to certain physician owners of a practice affiliated with
the Company for $360,505. The sale resulted in a pre-tax gain of $221,258. In
September 1999, the Company sold its remaining interest in the LLC to the
affiliated practice for $169,650. In addition, ASI received $2,212,445, in full
payment of the obligation (including accrued interest) of the LLC to the Company
and $502,633 to repay working capital advances made by ASI to the LLC. This sale
resulted in a pre-tax gain of $127,974. The Company used approximately $1.6
million of the proceeds from this sale to pay down its credit facility. In
December 1999, ASI's remaining net assets were transferred into the parent
company, HealthGrades.com, and ASI was liquidated.
F-16
<PAGE> 60
9. SEGMENT DISCLOSURES
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Physician Practice Management ("PPM") and Internet
Services. PPM derives its revenue primarily from management services provided to
physician practices. Internet Service's revenue is derived primarily from
marketing arrangements with hospitals, fees related to the licensing of its
content (including set-up fees) and advertising. The Company's other segment
represents ambulatory surgery center services and health care consulting for the
year ended December 31, 1999. Both of the Company subsidiaries, which generated
revenue for the "other" segment, were liquidated during 1999.
The Company uses net (loss) income before income taxes for purposes of
performance measurement. The measurement basis for segment assets includes
intangible assets.
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
PPM
Revenue from external customers $ 1,969,446 $ 20,685,788 $ 29,513,863 $ 76,649,778
Interest income 63,202 46,095 220,621 187,450
Interest expense 283,875 1,042,421 2,489,427 3,741,089
Segment net income before income taxes 201,415 (100,971,377) 5,029,937 (94,252,477)
Segment assets 26,854,149 70,179,278 26,854,149 70,179,278
Segment asset expenditures 18,461 8,187,565 794,258 9,141,785
INTERNET SERVICES
Revenue from external customers $ 127,738 $ -- $ 407,577 $ --
Segment net loss before income taxes (2,681,559) -- (5,558,935) --
Segment assets 4,634,979 -- 4,634,979 --
Segment asset expenditures 167,757 -- 346,180 --
OTHER
Revenue from external customers $ -- $ -- $ 132,831 $ --
Interest income -- -- 91,826 --
Equity in net loss of investee -- -- (23,852) --
Segment net loss before income taxes -- -- (1,023,633) --
Segment assets -- -- -- --
Segment asset expenditures -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Total for reportable segments $ 2,097,184 $ 20,685,788 $ 30,054,271 $ 76,649,778
Other revenue 1,719,531 -- 1,531,477 --
------------- ------------- ------------- -------------
Total consolidated revenue $ 3,816,715 $ 20,685,788 $ 31,585,748 $ 76,649,778
============= ============= ============= =============
LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (2,480,144) $(100,971,377) $ (1,552,631) $ (94,252,477)
Other net loss -- -- -- --
Adjustment 2,471 -- (108,000) --
------------- ------------- ------------- -------------
Income (loss) before income taxes $ (2,477,673) $(100,971,377) $ (1,660,631) $ (94,252,477)
============= ============= ============= =============
ASSETS
Total assets for reportable segments $ 31,489,128 $ 70,179,278 $ 31,489,128 $ 70,179,278
Elimination of advances to subsidiaries (5,095,805) -- (5,095,805) --
Elimination of investment in
subsidiaries (5,943,205) -- (5,943,205) --
------------- ------------- ------------- -------------
Consolidated total assets $ 20,450,118 $ 70,179,278 $ 20,450,118 $ 70,179,278
============= ============= ============= =============
</TABLE>
For each of the years presented, the Company's primary operations and
assets were within the United States.
F-17
<PAGE> 61
10. COMMON STOCK
On February 6, 1997, the Company's initial public offering of its common stock
became effective. In connection therewith, 3,208,338 shares of common stock were
issued at $8.00 per share, including 208,338 common shares issued upon exercise
of the underwriters' overallotment option.
In connection with the acquisition, through merger, of substantially all of the
assets and certain liabilities of Orthopaedic Surgery, Ltd. ("OSL"), on July 1,
1997, the Company granted one physician associated with OSL the option to
require the Company to purchase 74,844 shares of common stock issued to such
physician as consideration for the OSL merger at a purchase price equal to
approximately $11.21 per share. In addition, in connection with the acquisition,
by asset purchase, of substantially all of the assets and certain liabilities of
Steven P. Surgnier, M.D., P.A., the Company granted Dr. Surgnier the option to
require the Company to purchase 37,841 shares of common stock at a purchase
price equal to approximately $12.38 per share. During the year ended December
31, 1998, the above mentioned options were exercised. The Company paid $921,491
and canceled a loan to a physician stockholder in the amount of $385,983 as
consideration for the repurchase of shares and has included this amount as
treasury stock in its consolidated balance sheet at December 31, 1998.
The Company records treasury stock at cost with regard to monetary transactions
(e.g., settlement of put options). With regard to non-monetary transactions, the
common stock transferred to the Company is record at estimated fair value.
As of December 31, 1999, the Company had the following common shares reserved
for future issuance:
<TABLE>
<S> <C>
Awards under the 1996 Equity Compensation Plan 5,532,812
Awards under the 1996 Incentive and Non-Qualified Stock Option Plan 3,500
---------
Total shares reserved for future issuance 5,536,312
=========
</TABLE>
The Company issued 9,000,000 shares of Company common stock in March 2000 in
connection with an equity financing transaction. (See further discussion in Note
20.)
11. STOCK OPTION PLANS
On March 22, 1996, the Company adopted the 1996 Incentive and Non-Qualified
Stock Option Plan (the "Plan") pursuant to which nontransferable options to
purchase up to 5,000,000 shares of common stock of the Company were available
for award to eligible directors, officers, advisors, consultants and key
employees. On January 10, 1997, the Board of Directors voted to terminate the
Plan. The exercise price for incentive stock options awarded during the year
ended December 31, 1996 was not less than the fair market value of each share at
the date of the grant, and the options granted thereunder had a term of ten
years. Options, which are generally contingent on continued employment with the
Company, could be exercised only in accordance with a vesting schedule
established by the Company's Board of Directors. Of the 553,500 shares
underlying the option grants approved during the year ended December 31, 1996 at
an exercise price of $1.00 per share, 3,500 shares underlying the options remain
outstanding and exercisable at December 31, 1999. The other 550,000 grant
options were forfeited or exercised during 1997.
On October 15, 1996, the Company's Board of Directors approved the 1996 Equity
Compensation Plan (the "Equity Plan"), which provides for the granting of
options to purchase up to 2,000,000 shares of the Company's common stock. The
total number of shares authorized by the Equity Plan increased to 6,000,000 in
1998. Both incentive stock options and non-qualified stock options may be issued
under the provisions of the Equity Plan. Employees of the Company and any future
subsidiaries, members of the Board of Directors and certain advisors are
eligible to participate in this plan, which will terminate no later than October
14, 2006. The granting and vesting of options under the Equity Plan are
authorized by the Company's Board of Directors or a committee of the Board of
Directors.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that accounting
pronouncement. The fair value for options awarded during the years ended
December 31, 1999, 1998 and 1997 were estimated at the date of grant using an
option pricing model with the following weighted-average assumptions: risk-free
interest rate over the life of the option of 6.0%; no dividend yield; and
expected two to eight year lives of the options. The estimated fair value for
these options was calculated using the minimum value method in 1996 and may not
be indicative of the future impact since this model does not take into
consideration volatility and the commencement of public trading in the Company's
common stock on February 7, 1997. The Black-Scholes model was utilized to
calculate the value of the options issued during 1999, 1998 and 1997. The
volatility factors utilized in 1999, 1998 and 1997 were 1.55, 0.36 and 0.47,
respectively.
F-18
<PAGE> 62
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. Because compensation
expense associated with an award is recognized over the vesting period, the
impact on pro forma net (loss) income as disclosed below may not be
representative of compensation expense in future years.
The Company's pro forma information for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- --------------
<S> <C> <C> <C>
Pro forma net (loss) income $ (404,224) $(64,073,357) $ 5,354,571
Pro forma net (loss) income per common
share (basic) (0.03) (3.51) 0.34
Pro forma net (loss) income per common
share (diluted) (0.03) (3.51) 0.33
</TABLE>
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year 5,277,665 $ 8.41 2,365,007 $ 9.57 1,758,748 $ 5.25
Granted
Exercise price equal to
fair value of common stock 2,345,692 0.91 3,625,572 7.89 1,073,751 12.07
Exercise price greater than
fair value of common stock -- -- -- -- 160,000 10.00
Exercised (119,813) 0.56 (36,100) 6.41 (227,049) 1.17
Forfeited (1,967,232) 6.43 (676,814) 9.82 (400,443) 2.26
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 5,536,312 6.10 5,277,665 8.40 2,365,007 $ 9.57
========== ========== ========== ==========
Exercisable at end of year 3,130,383 4.52 644,341 9.75 231,537 $ 7.38
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Weighted-Average Fair Value of Options:
Exercise price equal to fair value of
common stock $ .72 $2.56 $4.62
Exercise price greater than fair value
of common stock -- -- 4.35
</TABLE>
F-19
<PAGE> 63
Exercise prices for options outstanding and the weighted-average remaining
contractual lives of those options at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - ----------------------------------------------------- -----------------------
WEIGHTED
AVERAGE WIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 - $0.99 1,886,508 9.33 $ 0.56 1,833,508 $ 0.56
1.00 - 1.99 41,000 9.22 1.69 3,500 1.00
3.00 - 4.99 220,000 9.76 3.99 -- 3.99
6.00 - 6.99 1,010,287 8.05 6.55 103,487 6.36
8.00 526,000 6.93 8.00 372,000 8.00
9.00 - 9.99 833,460 8.34 9.86 286,687 9.85
10.00 - 12.99 741,321 7.87 12.23 346,046 12.14
13.00 - 13.25 277,736 7.87 13.25 185,155 13.25
---------- ----------
0.50 - 13.25 5,536,312 8.46 6.10 3,130,383 4.52
============== ========== ==========
</TABLE>
12. LEASES
The Company is obligated under operating leases for its offices. Future minimum
payments under the operating leases with terms in excess of one year are
summarized as follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $196,131
2001 49,033
2002 --
2003 --
2004 --
--------
Totals $245,164
========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 under all
operating leases was approximately $2,100,000, $7,800,000 and $4,800,000,
respectively. Approximately $1,900,000, $7,600,000 and $4,600,000, respectively,
of such amounts were charged directly to the Affiliated Practices as clinic
expenses. Excluded from total minimum operating lease payments are approximately
$1.5 million in total future payments related to Affiliated Practices currently
in disputes with the Company. These Affiliated Practices are currently paying
these leases directly.
13. INCOME TAXES
The Company is a corporation subject to federal and certain state and local
income taxes. The provision for income taxes is made pursuant to the liability
method as prescribed in Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. The liability method requires recognition of
deferred income taxes based on temporary differences between the financial
reporting and income tax bases of assets and liabilities, using currently
enacted income tax rates and regulations.
F-20
<PAGE> 64
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred start-up expenditures $ 404,360 $ 678,515
Allowance for doubtful accounts 366,422 389,062
Accrued liabilities 283,775 307,603
Web development costs 166,449 --
Financing fees 88,147 293,697
Property and equipment, net 24,948 421,654
Management service agreements -- 4,510,554
Net operating loss carryforwards 2,025,411 --
----------- -----------
3,359,512 6,601,085
Valuation allowance for deferred
tax assets (3,011,642) (5,498,609)
----------- -----------
Net deferred tax asset 347,870 1,102,476
----------- -----------
Deferred tax liabilities:
Deferred gain on installment sale 196,362 218,976
Prepaid expenses 75,899 483,399
Net cash basis assets assumed in
Physician practice affiliations 59,324 1,483,279
Management service agreements 16,285 --
----------- -----------
347,870 2,185,654
----------- -----------
Net deferred tax liability $ -- $ 1,083,178
=========== ===========
</TABLE>
The Company has established a $3,011,642 valuation allowance as of December 31,
1999. The valuation allowance results from uncertainty regarding the Company's
ability to produce sufficient taxable income in future periods necessary to
realize the benefits of the related deferred tax assets. During 1999, the
valuation allowance was reduced by $2,486,967 due to tax benefits recognized in
connection with the Company's restructuring and other transactions.
The income tax (benefit) expense for the years ended December 31, 1999, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ (1,662,165) $ (1,071,968) $ 4,074,033
State 119,782 125,603 1,079,390
------------ ------------ ------------
(1,542,383) (946,365) 5,153,423
------------ ------------ ------------
Deferred:
Federal (839,331) (24,424,176) (991,430)
State (243,847) (7,095,850) (288,067)
------------ ------------ ------------
(1,083,178) (31,520,026) (1,279,497)
------------ ------------ ------------
Total $ (2,625,561) $(32,466,391) $ 3,873,926
============ ============ ============
</TABLE>
The income tax (benefit) expense differs from amounts currently payable because
certain revenues and expenses are reported in the statement of operations in
periods that differ from those in which they are subject to taxation. The
principal differences relate to asset impairment charges that are not deductible
for income tax purposes until the related asset is disposed, business
acquisition and start-up expenditures that are capitalized for income tax
purposes and expensed for financial statement purposes, and the amortization of
certain cash basis net assets included in taxable income in periods subsequent
to the date of affiliation with physician practices.
A reconciliation between the statutory federal income tax rate of 34% and the
Company's (158.1%), (34.4%) and 39.8% effective tax rates for the years ended
December 31, 1999, 1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit (4.9) (5.8) 5.1
Nondeductible business acquisition and
other costs 5.3 -- 0.7
Miscellaneous 3.4 (0.4) --
Deferred tax asset valuation allowance (127.9) 5.8 --
-------- -------- --------
Effective income tax rates (158.1)% (34.4)% 39.8%
======== ======== ========
</TABLE>
The Company has approximately $4,900,000 in net operating loss carryforwards,
which expire in 2019. Approximately $4,500,000 of the net operating loss
carryforwards relate to the Company's majority-owned subsidiary, HG.com, Inc.,
and are subject to Separate Return Limitation Year ("SRLY") limitations. The
SRLY limitations permit an offset to consolidated taxable income only to the
extent of taxable income attributable to the member with the SRLY loss.
F-21
<PAGE> 65
14. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS
1997 ACTIVITY
During 1997, the Company acquired substantially all of the assets and certain
liabilities of additional physician practices through a combination of asset
purchases and mergers as detailed in the table below:
<TABLE>
<CAPTION>
AFFILIATION AFFILIATED ACQUISITION HEADQUARTERS
DATE PRACTICE(1) TYPE LOCATION
------------------------- ------------------------------- ---------------- ---------------------
<S> <C> <C> <C>
March 1997 Medical Rehabilitation Merger Tallahassee, Florida
Specialists II, P.A., Riyaz H. Baltimore, Maryland
Jinnah, M.D., II, P.A., Floyd Thomasville, Georgia
R. Jaggears, Jr., M.D., P.C.,
II
April 4, 1997 The Orthopaedic and Sports Merger Annapolis, Maryland
Medicine Center, II, P.A.
July 1, 1997 Southeastern Neurology Group Asset Portsmouth, Virginia
II, P.C. Purchase/
Merger
July 1, 1997 Orthopaedic Surgery Centers, Merger Portsmouth, Virginia
P.C. II
July 3, 1997 Associated Orthopaedics & Merger Plano, Texas
Sports Medicine, P.A.
July 3, 1997 Associated Arthroscopy Asset Plano, Texas
Institute, Inc. Purchase
July 3, 1997 Access Medical Supply, Inc. Asset Plano, Texas
d/b/a Associated Physical Purchase
Therapy
July 3, 1997 Allied Health Services, P.A. Asset Plano, Texas
d/b/a Associated Occupational Purchase
Rehabilitation
July 7, 1997 Ortho-Associates P.A. d/b/a Asset Plantation, Florida
Park Place Therapeutic Center Purchase
July 16, 1997 Mid-Atlantic Orthopaedic Asset Hagerstown, Maryland
Specialists. Cirincione, Purchase
Milford, Stowell, and
Amalfitano, P.C.
August 29, 1997 Northeast Florida Merger Orange Park, Florida
Orthopaedics, Sports Medicine
and Rehabilitation II, P.A.
August 29, 1997 Steven P. Surgnier, M.D., Asset Mariana, Florida
P.A., II Purchase
September 1, 1997 Orthopaedic Associates of Merger Clearwater, Florida
West Florida, P.A.
September 10, 1997 Orthopedic Institute of Ohio, Merger Lima, Ohio
Inc.
November 14, 1997 The Specialists Orthopaedic Merger/ Fairfield, California
Medical Corporation Asset
Purchase
November 14, 1997 The Specialists Surgery Center Asset Fairfield, California
Purchase
</TABLE>
(1) Some of the Affiliated Practices listed are successors to entities acquired
by the Company.
F-22
<PAGE> 66
Total consideration for the 1997 merger and asset acquisitions was 3,222,891
shares of the Company's common stock and $44,452,105 in cash. As part of the
consideration in three of the mergers, the Company issued an aggregate 13,322
shares of common stock and paid an aggregate $189,000 in cash to Michael E.
West, who served as a consultant to three of the predecessors to the Affiliated
Practices. Mr. West subsequently became Senior Vice President of Operations of
the Company in August 1997 and terminated his employment with the Company in
March 1999. Furthermore, the Company granted one physician associated with
Orthopaedic Surgery Centers, P.C. II the right, until June 30, 1998, to require
the Company to re-purchase 74,844 shares of common stock issued to such
physician in the merger at a purchase price equal to $11.21 per share and, in
connection therewith, such shares were put to the Company in 1998 (see Note 10).
Additionally, in connection with the asset purchase of Ortho-Associates P.A.
d/b/a Park Place Therapeutic Center, the Company issued to the physician owners
warrants to purchase, in the aggregate, 544,681 shares of common stock at an
exercise price of $14.69 per share, which were canceled in connection with the
PPTC termination agreement (see Note 2). The Company also had an escrowed
deposit of approximately $900,000 in cash and 113,393 shares which was released
as additional consideration in the restructuring transaction described in Note
2.
Effective September 10, 1997, the Company acquired, by purchase from the
physician owners of Orthopedic Institute of Ohio, Inc., one-half of the
outstanding membership interests of West Central Ohio Group, Ltd., an Ohio
limited liability company ("WCOG"). WCOG constructed an orthopaedic institute in
Lima, Ohio (the "Institute"), which commenced operations in February 1998. In
connection with the acquisition, the Company paid $400,000 in cash for its
investment in WCOG, which consisted of a $180,000 equity investment and $220,000
of goodwill. Included in advances to affiliates and other in the accompanying
financial statements at December 31, 1997 is the $400,000 investment in WCOG and
$522,022 in advances to WCOG. Additionally, the Company agreed to pay an amount
equal to 25% of WCOG's first $6,000,000 of net income as contingent
consideration.
1998 ACTIVITY
In March 1998, the Company sold its entire interest in WCOG to the physician
owners of Orthopedic Institute of Ohio, Inc. and a company (the "Acquiring
Company") for total consideration of approximately $1,950,000. In addition, the
Company was relieved of its obligation to pay an amount equal to 25% of WCOG's
first $6,000,000 of net income as contingent consideration. The sale resulted in
a pre-tax gain of $1,240,078 which has been included in the accompanying
consolidated financial statements for the year ended December 31, 1998. The
Company maintains non-interest bearing long-term advances receivable from WCOG
in the aggregate amount of $813,287 and $944,520, as of December 31, 1999 and
1998, respectively. An officer and 50% stockholder of the Acquiring Company is
the brother of the Chief Executive Officer of the Company.
Effective March 31, 1998, in connection with the acquisition, by asset purchase,
of substantially all of the assets and certain liabilities of Orlin & Cohen
Associates LLP ("OCOA"), the Company issued to OCOA 459,562 shares of common
stock and a promissory note (convertible debenture) in the principal amount of
$5,454,539 and paid cash in the amount of $11,375,000. In addition, the Company
paid a finder's fee of $114,000 in connection with the acquisition. The
convertible debenture was canceled pursuant to one of the transactions described
in Note 2.
MANAGEMENT SERVICE AGREEMENT DISCUSSION
Concurrent with its acquisitions, the Company simultaneously entered into
long-term service agreements with the Affiliated Practices. Pursuant to the
terms of the Service Agreements, the Company, among other things, provided
facilities and management, administrative and development services, including
assistance in the negotiations of contracts signed between the affiliate
practice and third party payors, in return for service fees. Such fees are
payable monthly and consist of the following: (i) service fees based on a
percentage ranging from 20%-50% of the adjusted pre-tax income of the Affiliated
Practices (generally defined as revenue of the Affiliated Practices related to
professional services less amounts equal to certain clinic expenses but not
including physician owner compensation or most benefits to physician owners)
plus (ii) reimbursement of certain clinic expenses.
Typically, 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"), which was generally calculated by applying the
respective service fee percentage of adjusted pre-tax income of the predecessors
to the Affiliated Practices for the twelve months prior to affiliation. In
addition, with respect to its management of certain facilities and ancillary
services associated with certain of the Affiliated Practices, the Company
receives fees ranging from 2%-8% of net revenue.
F-23
<PAGE> 67
The Service Agreements have terms of forty years, with automatic extensions
(unless specified notice is given) of additional five-year terms. A Service
Agreement may be terminated by either party if the other party (i) files a
petition in bankruptcy or other similar events occur or (ii) defaults on the
performance of a material duty or obligation, which default continues for a
specified term after notice. In addition, the Company may terminate the
agreement if the Affiliated Practice's Medicare or Medicaid number is terminated
or suspended as a result of some act or omission of the Affiliated Practice or
the physicians, and the Affiliated Practice may terminate the agreement if the
Company misapplies funds or assets or violates certain laws.
Upon termination of a Service Agreement by the Company for one of the reasons
set forth above, the Company generally has the option to require the Affiliated
Practice to purchase and assume the assets and liabilities related to the
Affiliated Practice at the fair market value thereof. In addition, upon
termination of a Service Agreement by the Company during the first five years of
the term, the physician owners of the Affiliated Practice are required to pay
the Company or return to the Company an amount of cash or stock of the Company
equal to one-third of the total consideration received by such physicians in
connection with the Company's affiliation with the practice.
Under the Service Agreements, each physician owner must give the Company twelve
months notice of an intent to retire from the Affiliated Practice. If a
physician gives such notice during the first five years of the agreement, the
physician must also locate a replacement physician or physicians acceptable to a
Joint Policy Board and pay the Company an amount based on a formula relating to
any loss of service fee for the first five years of the term. Furthermore, the
physician must pay the Company an amount of cash or stock of the Company equal
to one-third of the total consideration received by such physician in connection
with the Company's affiliation with the practice. The agreement also provides
that after the fifth year no more than 20% of the physician owners at an
Affiliated Practice may retire within a one-year period.
NEW MANAGEMENT SERVICE AGREEMENT DISCUSSION
As discussed in Note 2, the Company completed restructuring agreements with nine
of the Company's Affiliated Practices and a modification of arrangements with
four of the Affiliated Practices. The purchase price paid to the Company
consisted of payment for the book value of the assets to be purchased by the
practices, less the practice liabilities as of the closing date of the
transaction and payment for the execution of a new management services agreement
to replace the existing service agreement.
Under the new management service agreements, the Company reduced the level of
services previously provided to the practices participating in the
restructuring. The following services are currently provided to each practice:
o Assessing the financial performance, organizational structure, wages and
strategic plan of the practice;
o Advising with respect to current and future marketing and contracting plans
with third party payors and managed care plans;
o Negotiating malpractice insurance coverage;
o Providing access to patient information databases;
o Analyzing annual performance on a comparative basis with other practices
that have contracted with the Company; and
o Analyzing billing practices.
As a result of the reduced services offered, the service fees under the new
management service agreements were substantially reduced; and are paid for a
period ending five years from the initial practice affiliation date.
15. ACQUISITION OF PROVIDER PARTNERSHIPS, INC. ("PPI")
During the third quarter of 1998, the Company acquired PPI as a wholly-owned
subsidiary in exchange for 420,000 shares of Company common stock. PPI was
formed to provide consulting services to hospitals to increase their operating
performance, with a specific focus on the cardiac areas. Pursuant to an
agreement with the former PPI stockholders to resolve certain issues raised by
the former stockholders of PPI relating to the transaction in which the Company
acquired PPI, the subsidiary was liquidated during 1999. (See further discussion
in Note 7).
F-24
<PAGE> 68
16. LEGAL PROCEEDINGS
Reconstructive Orthopaedic Associates
On October 27, 1999, Reconstructive Orthopaedic Associates II, P.C., ("ROA"),
filed a complaint against the Company in the U.S. District Court for the Eastern
District of Pennsylvania. The complaint asserts that, during negotiations
between ROA and the Company related to the restructure agreement by and between
ROA and the Company, the Company agreed that if the Company entered into a
similar restructuring agreement with any other affiliated practice on financial
terms more favorable to such affiliated practice than those extended to ROA
under its restructure agreement, the Company would modify and adjust the terms
of their restructure agreement to ensure that ROA received financial terms as
favorable as those extended to such other affiliated practice. The complaint
further alleges that one or more lawsuits or other adversary proceedings between
the Company and one or more other affiliated practices have been settled, in
fact or in principle, on financial terms materially more favorable to the other
affiliated practices than the terms extended to ROA under its restructure
agreement. ROA seeks compensatory, consequential and incidental damages in
excess of $75,000, punitive damages in excess of $1,000,000 and attorneys fees.
Additionally, ROA seeks a declaratory judgment that if any of the alleged
settlements were entered into between the Company and any other affiliated
practices on terms materially more favorable than those extended to ROA, the
Company would be required to modify and adjust the terms of their restructure
agreement to ensure that ROA received financial terms as favorable as those
extended to such other affiliated practices.
On November 8, 1999, the Company filed a complaint in the U.S. District Court
for the District of Colorado against ROA. The complaint asserts that ROA has
taken actions in direct contravention of our management service agreement with
ROA, including trying to terminate the agreement in a manner not allowed by the
contract, threatening to withhold payments due under the agreement, and filing
suit in another jurisdiction in violation of the agreement. The Company seeks a
declaration and adjudication of both parties' contractual rights and obligations
in order to terminate this dispute. The Company also seek injunctive relief and
damages.
The Company believes it has strong legal and factual defenses to ROA's claims.
The Company intends to vigorously defend against their lawsuit and aggressively
pursue its claims.
Orthopaedic Institute of Ohio
On November 1, 1999, the Company filed a complaint in the U.S. District Court
for the District of Colorado against the Orthopaedic Institute of Ohio, Inc.
("OIO"). The compliant asserts that, prior to the closing of the restructure
agreement between OIO and the Company, OIO, the physician owners and the
administrator of OIO diverted over $470,000 from the Company's bank account and
deposited such funds into a bank account held by OIO and the physician owners.
The compliant further asserts that OIO and the physician owners are continuing
to withhold from the Company amounts that remain due under the restructure
agreement of over $720,000. OIO subsequently filed a Motion for Stay of
Proceedings and a Motion to Dismiss. Essentially, OIO has argued that all claims
made by the Company are subject to the arbitration clause of the Restructure
Agreement by and between the Company and OIO. The Company has filed a response
to OIO's Motions and currently oral arguments have been set for March 2000 in
this case.
17. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements that provide key executives
and employees with minimum base pay, annual incentive awards and other fringe
benefits. The Company expenses all costs related to the agreements in the period
that the services are rendered by the employee. In the event of death,
disability, termination with or without cause, voluntary employee termination,
change in ownership of the Company, etc., the Company may be partially or wholly
relieved of its financial obligations to such individuals. However, under
certain circumstances, a change in control of the Company may provide
significant and immediate enhanced compensation to the employees possessing
employment contracts. At December 31, 1999, the Company was contractually
obligated for the following base pay compensation amounts (summarized by years
ending December 31):
<TABLE>
<S> <C>
2000 $ 1,053,000
2001 477,167
------------
$ 1,530,167
============
</TABLE>
F-25
<PAGE> 69
18. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for both basic and diluted earnings
per share:
Net income (loss) $ 964,930 $(61,786,086) $ 5,870,398
============ ============ ============
Denominator:
Weighted average shares outstanding 14,202,748 18,237,827 15,559,368
Cheap stock shares:
Employee stock options -- -- 118,761
------------ ------------ ------------
Denominator for basic net income (loss) per
common share--weighted average shares 14,202,748 18,237,827 15,678,129
Effect of dilutive securities:
Employee stock options 614,984 -- 393,024
------------ ------------ ------------
Denominator for diluted net income (loss) per
common share--adjusted weighted average
shares and assumed conversion 14,817,732 18,237,827 16,071,153
============ ============ ============
Net (loss) income per common share (basic) $ 0.07 $ (3.39) $ 0.38
============ ============ ============
Net (loss) income per common share (diluted) $ 0.07 $ (3.39) $ 0.37
============ ============ ============
</TABLE>
For additional disclosures regarding employee stock options, puts and warrants,
see Notes 10, 11 and 14.
Outstanding options to purchase 3,608,804 and 943,251 shares of common stock
were outstanding during 1999 and 1997, respectively, but were not included in
the computation of diluted earnings per share for the years then ended because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
Options to purchase 5,261,165 shares of common stock were outstanding during
1998 but were not included in the computation of diluted earnings per common
share for 1998 because the effect would be antidilutive based on the Company's
net loss for the year.
Warrants to purchase 544,681 shares of common stock were outstanding during 1997
but were not included in the computation of diluted earnings per share because
the warrants' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
The Company used a portion of the proceeds from the initial public offering of
its common stock to repay borrowings under the Company's Credit Facility
Agreement. If shares issued to repay amounts outstanding under the Company's
Credit Facility Agreement were outstanding for the year ended December 31, 1997,
the net income per common share would not have changed from the amount reported.
19. EMPLOYEE BENEFIT PLAN
Effective May 1, 1997, the Company adopted a defined contribution employee
benefit plan covering substantially all employees of the Company, most
affiliated physicians and other employees of the affiliated practices.
Participants must have attained age 21 and completed one year of service with
either the Company or one of the Affiliated Practices in order to participate in
the plan. The plan is designed to qualify under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The plan includes a matching contribution
equal to up to 4% of eligible employee salaries and a discretionary defined
contribution (5.5% in 1997). There was no discretionary contribution made for
the year ended December 31, 1998. Although the Company's Board of Directors has
until the filing of the 1999 employee benefit plan financial statements to
determine whether or not a discretionary contribution will be made, management
currently anticipates that there will not be a discretionary contribution made
for the 1999 plan year.
Effective January 1, 1999, the matching contribution component of the employee
benefit plan was eliminated and replaced with a Qualified Non-Elective
Contribution equal to 3% of annual compensation. The employer contribution is
applicable to all eligible participants, regardless of whether or not the
participant contributes to the employee benefit plan. Additionally, effective
April 1, 1999, the age and service requirements of the employee benefit plan
were eliminated.
Expense under this plan, including the discretionary defined contributions,
aggregated approximately $612,000, $1,611,000 and $711,000 for 1999, 1998 and
1997, respectively, of which approximately $540,000, $1,445,000 and $654,000 was
charged directly to the Affiliated Practices as clinic expenses.
F-26
<PAGE> 70
20. SUBSEQUENT EVENTS
In January 2000, the Company terminated its revised management services
arrangement with one of the affiliated practices. Pursuant to the termination,
the Company received approximately $850,000 and will no longer be required to
provide management services to the practice.
Effective February 3, 2000, the Company merged its majority-owned subsidiary,
HG.com, Inc. into a recently formed, wholly-owned subsidiary, HealthcareRatings,
Inc. (hereafter, the "Merger Transaction"). In order to effectuate the Merger
Transaction, the minority shareholders of HG.com were given 800,000 shares of
Company common stock. In connection with the Merger Transaction, the Company
recorded goodwill in the amount of $1,850,000 based on the fair value of the
stock issued as of the transaction date. The goodwill is being amortized over an
estimated useful life of seven years.
On March 7, 2000, the Company entered into a binding agreement as to material
terms with Mid-Atlantic Orthopedic Specialists, et. al. ("MAOS") that resolves
all legal disputes and litigation between the Company and MAOS. Under the terms
of the agreement, the Company will receive a payment of $1,500,000 at closing in
consideration for the tangible book value of the MAOS assets and the termination
of the MAOS service agreement. Pursuant to the terms of the agreement, the
closing will be no later than April 21, 2000.
Effective March 17, 2000, the Company closed on an equity financing transaction
(the "Revised Financing") which raised $18 million. Pursuant to the terms of the
Revised Financing, certain investors funded $14.8 million to the Company in
return for 7,400,000 shares of Company common stock. Additionally, the Company
issued warrants to the investors to purchase 2,590,000 shares of Company common
stock at an exercise price of $4.00 per share. The warrants have a five-year
term. The Company also issued a warrant to purchase 150,000 shares of Company
common stock to a company that served as a financial advisor to the Revised
Financing. Upon the closing of the Revised Financing, the Officers exchanged
$3.2 million of the Officer Notes into an aggregate of 1.6 million shares of
common stock and five-year warrants to purchase 560,000 shares of common stock
at $4.00 per share. (See further discussion of Officer Notes in Note 7.)
F-27
<PAGE> 71
Specialty Care Network, Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- - ---------------------------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts on patient
accounts receivable $ 22,161,082 $ -- $ 29,670,283(1) (21,862,431)(6) $ --
(29,968,934)(3)
Allowance for contractual
adjustments and doubtful
accounts on receivables
due from affiliated
Physician practices in
litigation $ 7,397,144 $ 2,407,848 $ -- $ (6,706,068)(6) $ 500,000
(1,719,532)(4) -- (879,392)(9)
Allowance for doubtful
accounts on management fee
receivables $ -- $ 1,040,428 $ 879,392(9) $ (146,715)(6) $ 1,773,105
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts on patient
accounts receivable $ 26,225,860 $ 1,210,126 (8) 125,086,140(1) (12,454,506)(6) $ 22,161,082
(592,659)(4) 6,816,751(2) (119,406,005)(3)
Allowance for contractual (4,724,624)(7)
adjustments and doubtful
accounts on receivables
due from affiliated
physician practices
in litigation $ -- $ 2,672,520 (5) $ 4,724,624(7) $ -- $ 7,397,144
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts on patient
accounts receivable $ 15,719,542 $ 100,380 $ 87,199,182(1) $(84,589,217)(3) $ 26,225,860
(1,542,354)(4) 9,338,327(2)
</TABLE>
(1) Contractual adjustments recognized in the purchase of monthly net accounts
receivable balances for the periods presented.
(2) Acquired in conjunction with acquisition of affiliated practices.
(3) Represents actual amounts charged against the allowance for the periods
presented.
(4) Recoveries of amounts previously reserved, included in other revenue in the
consolidated financial statements.
(5) Charged to litigation and other costs in the consolidated statements of
operations.
(6) Sold in conjunction with disposition of restructured affiliated practices.
(7) Transferred from allowance for contractual adjustments and doubtful accounts
for patient accounts receivable to allowance for contractual adjustments and
doubtful accounts due from affiliated practices in litigation.
(8) Charged to impairment loss on service agreements in the consolidated
statements of operations.
(9) Transferred from allowance for contractual adjustments and doubtful accounts
due from affiliated practices in litigation to allowance for doubtful
accounts on management service fee receivables.
S-1
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
2.1 Restructure Agreement by and Among Specialty Care Network, Inc.,
Medical Rehabilitation Specialists II, P.A. and Kirk J. Mauro,
M.D. dated as of December 31, 1998. (incorporated by reference to
Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998)
2.11 Management Services Agreement by and Among Specialty Care
Network, Inc., Medical Rehabilitation Specialists II, P.A., and
Kirk J. Mauro, M.D. dated as of January 1, 1999. (incorporated by
reference to Exhibit 2.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
2.2 Restructure Agreement by and Among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Leslie S. Matthews, M.D.,
Stewart D. Miller, M.D., Mark S. Meyerson, M.D., John B.
O'Donnell, M.D. and Lew C. Schon, M.D., dated as of December 31,
1998. (incorporated by reference to Exhibit 2.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998)
2.21 Management Services Agreement by and Among Specialty Care
Network, Inc., Greater Chesapeake Orthopaedic Associates, L.L.C.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Leslie S.
Matthews, M.D., Stewart D. Miller, M.D., Mark S. Meyerson, M.D.,
John B. O'Donnell, M.D. and Lew C. Schon, M.D., dated as of
January 1, 1999. (incorporated by reference to Exhibit 2.21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998)
2.3 Restructure Agreement by and Among Specialty Care Network, Inc.,
Vero Orthopaedics II, P.A., James L. Cain, M.D., David W.
Griffin, M.D., George K. Nichols, M.D. and Peter G. Wernicki,
M.D. dated as of December 31, 1998. (incorporated by reference to
Exhibit 2.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998)
2.31 Management Services Agreement by and Among Specialty Care
Network, Inc., Vero Orthopaedics II, P.A., James L. Cain, M.D.,
David W. Griffin, M.D., George K. Nichols, M.D. and Peter G.
Wernicki, M.D. dated as of January 1, 1999. (incorporated by
reference to Exhibit 2.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
2.4 Restructure Agreement by and Among Specialty Care Network, Inc.,
Orlin & Cohen Orthopedic Associates, LLP, Harvey Orlin, M.D.,
Isaac Cohen, M.D., John M. Feder, M.D., Gregory Lieberman, M.D.,
Sebastian Lattuga, M.D., Harvey Orlin, M.D., P.C. and Rockville
Centre Arthroscopic Associates, P.C. dated as of December 31,
1998. (incorporated by reference to Exhibit 2.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998)
2.41 Management Services Agreement by and Among Specialty Care
Network, Inc., Orlin & Cohen Orthopedic Associates, LLP, Harvey
Orlin, M.D., Isaac Cohen, M.D., John M. Feder, M.D., Gregory
Lieberman, M.D., Sebastian Lattuga, M.D., Harvey Orlin, M.D.,
P.C. and Rockville Centre Arthroscopic Associates, P.C. dated as
of January 1, 1999. (incorporated by reference to Exhibit 2.41 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998)
2.5(1) Form of Restructure Agreement (incorporated by reference to
Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999)
2.6(1) Form of Management Services Agreement (incorporated by reference
to Exhibit 2.11 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999)
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation and Amended and Restated Certificate of
Incorporation
3.2 Amended and Restated Bylaws
10.1+ 1996 Equity Compensation Plan, as amended (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.)
10.2 Second Amended and Restated Revolving Loan and Security Agreement
dated as of November 21, 1997 among Specialty Care Network, Inc.,
SCN of Princeton, Inc., NationsBank of Tennessee N.A., AmSouth
Bank, Banque Paribas, Key Corporate Capital Inc. and NationsBank
of Tennessee, N.A., as Agent (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
10.3+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Kerry R. Hicks (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-17627))
10.4+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Patrick M. Jaeckle (incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.6+ Employment Agreement dated as of February 22, 1996 by and between
Specialty Care Network, Inc. and Paul Davis (incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement
on Form S-1 (File No. 333-17627)).
10.6.1+ Amendment to Employment Agreement between Specialty Care Network,
Inc. and D. Paul Davis dated December 5, 1997. (incorporated by
reference to Exhibit 10.6.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997)
10.7+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and David Hicks (incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 (File No. 333-17627))
10.7.1+ Amendment to Employment Agreement between Specialty Care Network,
Inc. and David Hicks, dated December 2, 1997. (incorporated by
reference to Exhibit 10.8.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997)
10.8 Amendment No. 3 to the Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997 among
Specialty Care Network, Inc., SCN of Princeton, Inc., NationsBank
of Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and NationsBank of Tennessee, N.A., as Agent
10.9 Amendment No. 4 to the Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997 among
Specialty Care Network, Inc, SCN of Princeton, Inc., Nationsbank
of Tennessee N.A., AmSouth Bank, Banque Paribas, Key Corporate
Capital Inc. and Nationsbank of Tennessee, N.A., as Agent
21 Subsidiaries of the registrant.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1999.
</TABLE>
- - --------------
(1) Effective June 15, 1999, the Company closed its previously announced
restructuring transaction through ten separate restructure agreements
involving the following nine practices: Floyd R. Jaggears, Jr., M.D., P.C.,
II; Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine
Center, II, P.A.; Orthopaedic Associates of West Florida, P.A.; Orthopaedic
Institute of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton
Orthopaedic Associates, II, P.A.; Reconstructive Orthopaedic Associates, II,
P.C.; and Steven P. Surgnier, M.D., P.A., II. Simultaneously, the Company
executed revised Management Services Agreements with these practices. The
Company has attached a generic form of these agreements to this Quarterly
Report on Form 10-Q as the terms of the agreements between the Company and
the individual practices are substantially equivalent.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SPECIALTY CARE NETWORK, INC.
Specialty Care Network, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware, for
the purpose of amending its Amended and Restated Certificate of Incorporation
pursuant to Section 242 of the Delaware General Corporation Law does hereby
certify as follows:
1. Article 1. of the Amended and Restated Certificate of Incorporation
of the Corporation is hereby amended to read in its entirety as follows:
"1. Corporate Name. The name of the Corporation is HealthGrades.com,
Inc."
2. The amendment set forth above has been duly adopted in accordance
with the provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of the Amended and Restated Certificate of Incorporation to be duly
adopted and executed in its corporate name and on its behalf by its duly
authorized officer as of the 3rd day of January, 2000.
SPECIALTY CARE NETWORK, INC.
By: /s/ D.Paul Davis
-----------------------------
Name: D. Paul Davis
Title: Executive Vice
President - Finance
<PAGE> 2
(Pursuant to Item 601(3)(b)(i) of Regulation S-K, the following consitutes a
complete copy of the Certificate of Incorporation of the Registrant, as amended
to dates and as currently in effect).
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF HEALTHGRADES.COM, INC.
1. Corporate Name. The name of the Corporation is HealthGrades.com,
Inc.
2. Registered Office. The registered office of the Corporation is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The name of
its registered agent at that address is The Corporation Trust Company.
3. Corporate Purpose. The purpose of the Corporation is to engage in
any lawful act or activity for which a corporation may now or hereafter be
organized under the General Corporation Law of the State of Delaware (the
"GCL").
4. Capital Stock.
4.1 Authorized Amount. The Corporation shall be authorized to
issue Fifty-Two Million (52,000,000) shares of capital stock, of which Fifty
Million (50,000,000) shares shall be Common Stock, par value $0.001 per share,
and Two Million (2,000,000) shares shall be Preferred Stock, par value $0.001
per share.
4.2 Authority of Board to Fix Terms of Preferred Stock. The Board of
Directors of the Corporation is hereby expressly authorized at any time and from
time to time to provide for the issuance of all or any shares of the Preferred
Stock in one or more series, and to fix for each such series such voting powers,
full or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such series and to the fullest extent as may now
or hereafter be permitted by the GCL, including, without limiting the generality
of the foregoing, the authority to provide that any such series may be (i)
subject to redemption at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, or other securities
or property, of the Corporation at such price or prices or at such rates of
exchange and with such adjustments, all as may be stated in such resolution or
resolutions. Unless otherwise provided in such resolution or resolutions, shares
of Preferred Stock of any series which shall be issued and thereafter acquired
by the
-2-
<PAGE> 3
Corporation through purchase, redemption, exchange, conversion or otherwise
shall return to the status of authorized but unissued Preferred Stock.
5. Board of Directors.
5.1 Number. Subject to the rights of the holders of any series of
Preferred Stock to elect directors under specified circumstances, the number of
directors shall be fixed from time to time exclusively pursuant to a resolution
adopted by a majority of the directors then in office.
5.2 Vacancies. Subject to applicable law and the rights of the
holders of any series of Preferred Stock with respect to such series of
Preferred Stock, and unless the Board of Directors otherwise determines,
vacancies resulting from death, resignation, retirement, disqualification,
removal from office or other cause, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled only by
the affirmative vote of a majority of the remaining directors, though less than
a quorum of the Board of Directors.
5.3 Removal of Directors. Subject to the rights of the holders of
any series of Preferred Stock with respect to such series of Preferred Stock,
any director, or the entire Board of Directors, may be removed from office at
any time, but only for cause and only by the affirmative vote of the holders of
at least sixty-six and two-thirds percent (66-2/3) of the voting power of all of
the then-outstanding shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class. No decrease or
increase in the size of the Board of Directors shall shorten or otherwise affect
the term of any incumbent director.
6. Special Meetings of Stockholders. Subject to the rights of the
holders of any series of Preferred Stock with respect to such series of
Preferred Stock, special meetings of the stockholders may be called only by the
Chairman of the Board, the President or by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors of the
Corporation.
7. Liability of Directors. A director of the Corporation shall not be
liable to the Corporation or its stockholders for monetary damages (including,
without limitation, any judgment, amount paid in settlement, fine, penalty,
punitive damages, excise tax assessed with respect to an employee benefit plan,
or expense of any nature, including attorneys' fees) for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of Title 8 of the GCL; or (iv) for any
transaction from which the director derived an improper personal benefit.
-3-
<PAGE> 4
If the GCL is amended after the date hereof to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall automatically be eliminated
or limited to the fullest extent permitted by the GCL as so amended. Neither the
amendment nor repeal of this Article 7 nor the adoption of any provision of this
Amended and Restated Certificate of Incorporation inconsistent with this Article
7 shall eliminate or reduce the effect of this Article 7 in respect of any
matter arising or relating to any actions or omissions occurring prior to such
amendment, repeal or adoption of an inconsistent provision.
8. Fundamental Transactions.
8.1 Stockholder Authorization of Fundamental Transaction Recommended
by the Board. Whenever a Fundamental Transaction to be taken by vote of the
stockholders has been recommended by a vote of a majority of the directors then
in office at a meeting at which a quorum is present, the proposed Fundamental
Transaction shall be authorized upon receiving the affirmative vote of the
holders of a majority of the voting power of all of the then-outstanding shares
of the Corporation entitled to vote upon such action, after taking into account
the express terms of any series of Preferred Stock of the Corporation with
respect to such vote.
8.2 Stockholder Authorization of Fundamental Transaction Not
Recommended by the Board. Except as provided in Section 8.1 above, whenever a
Fundamental Transaction is to be taken by vote of the stockholders, the proposed
Fundamental Transaction shall be authorized only upon receiving the affirmative
vote of the holders of sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, and,
in addition, the affirmative vote of the number or proportion of shares of any
series of Preferred Stock of the Corporation, if any, as shall at the time be
required by statute or the express terms of such series of Preferred Stock.
8.3 Fundamental Transaction Defined. For the purposes of this
Article 8, the term "Fundamental Transaction" shall mean any of the following,
if any such transaction requires the approval of the stockholders under the
Amended and Restated Certificate of Incorporation of the Corporation as then in
effect or the GCL as then in effect with respect to the Corporation: the sale,
lease, exchange or other disposition of all or substantially all of the assets
of the Corporation; or the merger or consolidation of the Corporation (other
than a merger or consolidation in which holders of outstanding voting securities
of the Corporation will have the ownership of at least a majority of the voting
power of the voting securities of the surviving corporation (which voting power
is to be held in the same proportion as held by stockholders of the Corporation
immediately prior to such merger or consolidation)) or the division,
reorganization, recapitalization, dissolution, liquidation or winding up of the
Corporation.
9. Amendment. Except as otherwise provided in this Article 9, this
Amended and Restated Certificate of Incorporation may be amended in the manner
now or hereafter prescribed
-4-
<PAGE> 5
by statute; provided, however, that unless such action has been recommended by a
vote of a majority of the directors then in office at a meeting at which a
quorum is present, the provisions set forth in Articles 5, 6 and 8 hereof may
not be repealed or amended in any respect and the provisions set forth in
Article 7 hereof may not be amended or repealed in any respect so as to
adversely affect the rights therein conferred upon directors (or such other
persons who may be entitled to the rights provided thereunder) of the
Corporation, unless in any of such cases such action is approved by the
affirmative vote of the holders of sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class; provided, however, that in no event shall the last sentence of
Article 7 be amended so as to adversely affect the rights herein conferred upon
directors.
10. Amendment of Bylaws. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized from time to time to make, adopt, alter, amend, supplement
and repeal the bylaws of the Corporation in any respect, subject to the right of
the stockholders entitled to vote with respect thereto to adopt, alter, amend
and repeal by-laws made by the Board of Directors; provided, however, that
bylaws shall not be made, adopted, altered, amended or repealed by the
stockholders of the Corporation except by the vote of the holders of not less
than sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of
stock of each class and series entitled to vote upon such matter.
11. Arrangements with Creditors. Whenever a compromise or arrangement
is proposed between this Corporation and its creditors or any class of them
and/or between this Corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for this Corporation under Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under Section 279 of Title 8 of the Delaware Code order a
meeting of the creditors or class creditors, and/or of the stockholders or class
of stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholder or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
-5-
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
HEALTHGRADES.COM, INC.
(a Delaware Corporation)
(effective October 18, 1996)
ARTICLE I
Offices, Fiscal Year and Records
1.01. Registered Office. The registered office of the Corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware until
otherwise established by resolution of the Board of Directors and a certificate
certifying the change is filed in the manner provided by statute.
1.02. Other Offices. The Corporation may also have offices at such
other places within or without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation requires.
1.03. Fiscal Year. The fiscal year of the Corporation shall end on the
31st of December in each year.
1.04. Books and Records. The books and records of the Corporation may
be kept outside the State of Delaware at such place or places as may from time
to time be designated by the Board of Directors. The stockholders and directors
of the Corporation shall have examination rights as specified in Section 7.06 of
these By-Laws.
ARTICLE II
Stockholders
2.01. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held on such date and at such place and time as may be
fixed by resolution of the Board of Directors.
2.02. Special Meeting. Subject to the rights of the holders of any
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation ("Preferred Stock") with respect to such series
of Preferred Stock, special meetings of the stockholders may be called only by
the Chairman of the Board or the Chief Executive Officer, or by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
directors then in office.
<PAGE> 2
2.03. Place of Meeting. The Board of Directors, the Chairman of the
Board or the Chief Executive Officer, as the case may be, may designate the
place of meeting for any annual meeting or for any special meeting of the
stockholders called by the Board of Directors, the Chief Executive Officer, the
President or the Chairman of the Board. If no designation is so made, the place
of meeting shall be the principal office of the Corporation.
2.04. Notice of Meeting. Written or printed notice, stating the place,
day and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be delivered by the Corporation not less than 10 days nor more
than 60 days before the date of the meeting, either personally or by mail, to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
with postage thereon prepaid, addressed to the stockholder at his address as it
appears on the stock transfer books of the Corporation. Such further notice
shall be given as may be required by law. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Meetings may be held
without notice if all stockholders entitled to vote are present, or if notice is
waived by those not present in accordance with Section 7.01 of these By-Laws.
Any previously scheduled meeting of the stockholders may be postponed, and
(unless the Certificate of Incorporation otherwise provides) any special meeting
of the stockholders may be cancelled, by resolution of a majority of the total
number of directors then in office upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
2.05. Quorum and Adjournment. Except as otherwise provided by law or by
the Certificate of Incorporation, the holders of a majority of the voting power
of the outstanding shares of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock"), represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series of stock voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum of such class or series for the transaction of such
business. The Chairman of the meeting or a majority of the shares so represented
may adjourn the meeting from time to time, whether or not there is such a
quorum. No notice of the time and place of adjourned meetings need be given
except as required by law. The stockholders present at a duly called meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
2.06. Proxies. At all meetings of stockholders, a stockholder may vote
by proxy executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware) by the stockholder, or by his duly
authorized attorney in fact.
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2.07. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (i) pursuant
to the Corporation's notice of meeting, (ii) by or at the direction of the Board
of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of notice provided for in this
By-Law, who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of paragraph
(a)(1) of this By-Law, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the l0th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; (iii) as to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (A) the name and address
of such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (B) the class or series and number of shares of the
Corporation which are owned of record and beneficially by such stockholder and
such beneficial owner; and (iv) a description of
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all arrangements or understandings among the stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the stockholder.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this By-Law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased Board of
Directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this By-Law shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the l0th day following the day on which such public announcement is
first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (1) by or at the direction of the Board of
Directors or (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the meeting and
who complies with the notice procedures set forth in this By-Law. In the event
the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (a)(2) of this By-Law shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
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(c) General.
(1) Only such persons who are nominated in accordance with
the procedures set forth in this By-Law shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this By-Law. Except as otherwise provided by law, the Certificate of
Incorporation, or these By-Laws, the Chairman of the meeting shall have the
power and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this By-Law and, if any proposed
nomination or business is not in compliance with this By-Law, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
2.08. Procedure for Election of Directors; Required Vote. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of any
series of Preferred Stock to elect directors under specified circumstances, a
plurality of the votes cast thereat shall elect directors. Except as otherwise
provided by law, the Certificate of Incorporation, or these By-Laws, in all
matters other than the election of directors, the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting and
entitled to vote on the matter shall be the act of the stockholders.
2.09. Inspectors of Elections; Opening and Closing the Polls. The Board
of Directors by resolution shall appoint one or more inspectors, which inspector
or inspectors may include individuals who serve the Corporation in other
capacities, including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of stockholders, the Chairman of
the
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meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the
duties prescribed by law.
ARTICLE III
Board of Directors
3.01. General Powers. The business and affairs of the Corporation shall
be managed under the direction of the Board of Directors. In addition to the
powers and authorities by these By-Laws expressly conferred upon it, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
3.02. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after, and at
the same place as, the annual meeting of stockholders, or at such other place or
time as the Board of Directors may determine by resolution and without other
notice than such resolution. The Board of Directors may, by resolution, provide
the time and place for the holding of additional regular meetings without other
notice than such resolution.
3.03. Special Meetings. Special meetings of the Board of Directors
shall be called at the request of the Chairman of the Board, the Chief Executive
Officer or a majority of the Board of Directors then in office. The person or
persons authorized to call special meetings of the Board of Directors may fix
the place and time of the meetings.
3.04. Notice. Notice of any special meeting of directors shall be given
to each director at his business or residence in writing by first-class or
overnight mail or courier service, telegram or facsimile transmission, orally by
telephone or by hand delivery. If mailed by first class mail, such notice shall
be deemed adequately delivered when deposited in the United States mails so
addressed, with postage thereon prepaid, at least five (5) days before such
meeting. If by telegram, overnight mail or courier service, such notice shall be
deemed adequately delivered when the telegram is delivered to the telegraph
company or the notice is delivered to the overnight mail or courier service
company at least twenty-four (24) hours before such meeting. If by facsimile
transmission, such notice shall be deemed adequately delivered when the notice
is transmitted at least twelve (12) hours prior to the time set for the meeting.
If by telephone or by hand delivery, the notice shall be given at least twelve
(12) hours prior to the time set for the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting
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of the Board of Directors need be specified in the notice of such meeting,
except for amendments to these By-Laws, as provided under Section 7.09. A
meeting may be held at any time without notice if all the directors are present
or if those not present waive notice of the meeting in accordance with Section
7.01 of these By-Laws.
3.05. Action by Consent of Board of Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
3.06. Conference Telephone Meetings. Members of the Board of Directors,
or any committee thereof, may participate in a meeting of the Board of Directors
or such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at such meeting.
3.07. Quorum. Except as otherwise required by the Certificate of
Incorporation, a whole number of directors equal to at least a majority of the
total number of directors then in office shall constitute a quorum for the
transaction of business, but if at any meeting of the Board of Directors there
shall be less than a quorum present, a majority of the directors present may
adjourn the meeting from time to time without further notice. Except as
otherwise required by the Certificate of Incorporation or these By-Laws, the act
of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. The directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
3.08. Executive and Other Committees. The Board of Directors may
designate an Executive Committee to exercise, subject to applicable provisions
of law, all the powers of the Board in the management of the business and
affairs of the Corporation when the Board is not in session, including without
limitation the power to declare dividends, to authorize the issuance of the
Corporation's capital stock and adopt a certificate of ownership and merger
pursuant to Section 253 of the General Corporation Law of the State of Delaware,
and may, by resolution similarly adopted, designate one or more other
committees. The Executive Committee and each such other committee shall consist
of two or more directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, other
than the Executive Committee (the powers of which are expressly provided for
herein), may to the extent permitted by law exercise such powers and shall have
such responsibilities as shall be specified in the designating resolution. In
the absence or disqualification of any member of such committee or committees,
the member or members thereof present at any
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meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
A majority of any committee may determine its action and fix the
time and place of its meetings, unless the Board shall otherwise provide. Notice
of such meetings shall be given to each member of the committee in the manner
provided for in Section 3.04 of these By-Laws. The Board shall have power at any
time to fill vacancies in, to change the membership of, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board.
3.09. Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation, the Board of Directors shall have the authority to
fix the compensation of directors.
ARTICLE IV
Officers
4.01. Number, Qualifications and Designation. The officers of the
Corporation shall be chosen by the Board of Directors and shall be a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary, a
Treasurer, and such other officers as may be elected in accordance with the
provisions of Section 4.03 of this Article. Any number of offices may be held by
the same person. Except as otherwise set forth herein, officers may, but need
not, be directors or stockholders of the Corporation. The Board of Directors may
elect from among the members of the Board a Chairman of the Board and a Vice
Chairman of the Board who may be officers of the Corporation if so designated by
the Board. All officers elected by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
4.02. Election and Term of Office. The officers of the Corporation,
except those elected by delegated authority pursuant to Section 4.03 of this
Article, shall be elected annually by the Board of Directors, and each such
officer shall hold office until the next annual organizational meeting of
directors and until a successor is elected and qualified, or until his or her
earlier resignation or removal.
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4.03. Subordinate Officers, Committees and Agents. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these By-Laws, or as the Board of Directors may from
time to time determine. The Board of Directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
4.04. Removal. Any officer elected, or agent appointed, by the Board of
Directors may be removed by the affirmative vote of a majority of the total
number of directors then in office whenever, in their judgment, the best
interests of the Corporation would be served thereby. Any officer or agent
appointed by another officer by delegated authority pursuant to Section 4.03 may
be removed by him whenever, in his judgment, the best interests of the
Corporation would be served thereby. No elected officer shall have any
contractual rights against the Corporation for compensation by virtue of such
election beyond the date of the election of his successor, his death, his
resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or under an employee deferred
compensation plan.
4.05. Vacancies. A newly created elected office and a vacancy in any
elected office because of death, resignation, or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of the
Board of Directors. Any vacancy in an office appointed by another officer by
delegated authority pursuant to Section 4.03 because of death, resignation, or
removal may be filled by such other officer.
4.06. The Chairman and Vice Chairman of the Board. The Chairman of the
Board, if there be one, or in the absence of the Chairman, the Vice Chairman of
the Board, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors, and shall perform such other duties as may from
time to time be assigned to them by the Board of Directors. To be eligible to
serve, the Chairman of the Board and the Vice Chairman must be directors of the
Corporation.
4.07. The Chief Executive Officer. The Chief Executive Officer shall have
general supervision over the business, operations and affairs of the
Corporation, subject, however, to the control of the Board of Directors, and
such other duties as from time to time may be assigned by the Board of
Directors.
4.08 The President. The President shall, in general, perform all duties
incident to the office of president, and such other duties as from time to time
may be assigned by the Board of Directors or by the Chief Executive Officer.
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4.09 The Vice Presidents. The Vice Presidents shall perform such duties
as may from time to time be assigned to them by the Board of Directors or by the
Chief Executive Officer.
4.10 The Secretary. The Secretary, or an Assistant Secretary, shall
attend all meetings of the stockholders and of the Board of Directors and shall
record the proceedings of the stockholders and of the directors and of
committees of the Board of Directors in a book or books to be kept for that
purpose; shall see that notices are given and records and reports properly kept
and filed by the Corporation as required by law; shall be the custodian of the
seal of the Corporation and see that it is affixed to all documents to be
executed on behalf of the Corporation under its seal; and, in general, shall
perform all duties incident to the office of secretary, and such other duties as
may from time to time be assigned by the Board of Directors or the Chief
Executive Officer.
4.11 The Treasurer. The Treasurer, or an Assistant Treasurer, shall
have or provide for the custody of the funds or other property of the
Corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the Corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the Board of Directors may from time to time
designate; whenever so required by the Board of Directors, shall render an
account showing his or her transactions as treasurer and the financial condition
of the Corporation; and, in general, shall discharge such other duties as may
from time to time be assigned by the Board of Directors or the Chief Executive
Officer.
4.12. Officers' Bonds. No officer of the Corporation need provide a
bond to guarantee the faithful discharge of the officer's duties unless the
Board of Directors shall by resolution so require a bond in which event such
officer shall give the Corporation a bond (which shall be renewed if and as
required) in such sum and with such surety or sureties as shall be satisfactory
to the Board of Directors for the faithful performance of the duties of office.
4.13. Salaries. The salaries of the officers and agents of the
Corporation elected by the Board of Directors shall be fixed from time to time
by the Board of Directors.
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ARTICLE V
Certificates of Stock, Transfer, Etc.
5.01. Form and Issuance.
(a) Issuance. The shares of the Corporation shall be represented
by certificates unless the Board of Directors shall by resolution provide that
some or all of any class or series of stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until the
certificate is surrendered to the Corporation. Notwithstanding the adoption of
any resolution providing for uncertificated shares, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or Vice President, and by the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary, representing the number of shares
registered in certificate form.
(b) Form and Records. Stock certificates of the Corporation shall
be in such form as approved by the Board of Directors. The stock record books
and the blank stock certificate books shall be kept by the Secretary or by any
agency designated by the Board of Directors for that purpose. The stock
certificates of the Corporation shall be numbered and registered in the stock
ledger and transfer books of the Corporation as they are issued.
(c) Signatures. Any of or all the signatures upon the stock
certificates of the Corporation may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any stock certificate shall have ceased to be such officer,
transfer agent or registrar, before the certificate is issued, it may be issued
with the same effect as if the signatory were such officer, transfer agent or
registrar at the date of its issue.
5.02. Transfer. Transfers of shares shall be made on the stock register
or transfer books of the Corporation upon surrender of the certificate therefor,
endorsed by the person named in the certificate or by an attorney lawfully
constituted in writing. No transfer shall be made which would be inconsistent
with the provisions of Article 8, Title 6 of the Delaware Uniform Commercial
Code.
5.03. Lost, Stolen, Destroyed or Mutilated Certificates. The Board of
Directors may direct a new certificate of stock or uncertificated shares to be
issued in place of any certificate theretofore issued by the Corporation alleged
to have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or uncertificated
shares, the Board of Directors may, in its discretion and as a
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condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or the legal representative of
the owner, to give the Corporation a bond sufficient to indemnify against any
claim that may be made against the Corporation on account of the alleged loss,
theft or destruction of such certificate or the issuance of such new certificate
or uncertificated shares.
5.04. Record Holder of Shares. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner. The Corporation shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
5.05. Determination of Stockholders of Record.
(a) Meetings of Stockholders. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than 60 nor less than 10 days before the date of such
meeting.
If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date for the adjourned meeting.
(b) Dividends. In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights of the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
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ARTICLE VI
Indemnification of Directors, Officers and
Other Authorized Representatives
6.01. Indemnification of Authorized Representatives in Third Party
Proceedings. The Corporation shall indemnify any person who was or is an
authorized representative of the Corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the Corporation,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the authorized representative did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to, the best
interests of the Corporation, and, with respect to any criminal third party
proceeding, had reasonable cause to believe that such conduct was unlawful.
6.02. Indemnification of Authorized Representatives in Corporate
Proceedings. The Corporation shall indemnify any person who was or is an
authorized representative of the Corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding, by reason of the fact
that such person was or is an authorized representative of the Corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such corporate proceeding, if such person
acted in good faith and in a manner reasonably believed to be in, or not opposed
to, the best interests of the Corporation; except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only to the extent
that the Court of Chancery or the court in which such corporate proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
6.03. Mandatory Indemnification of Authorized Representatives. To the
extent that an authorized representative or other employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
third party or corporate proceeding or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses actually and
reasonably incurred by such person in connection therewith.
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6.04. Determination of Entitlement to Indemnification. Any
indemnification under Section 6.01, 6.02 or 6.03 of this Article (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
or other employee or agent is proper in the circumstances because such person
has either met the applicable standard of conduct set forth in Section 6.01 or
6.02 or has been successful on the merits or otherwise as set forth in Section
6.03 and that the amount requested has been actually and reasonably incurred.
Such determination shall be made:
(a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such third party or corporate
proceeding; or
(b) if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or
(c) by the stockholders.
6.05. Advancing Expenses. Expenses actually and reasonably incurred in
defending a third party or corporate proceeding shall be paid on behalf of an
authorized representative by the Corporation in advance of the final disposition
of such third party or corporate proceeding upon receipt of an undertaking by or
on behalf of the authorized representative to repay such amount if it shall
ultimately be determined that the authorized representative is not entitled to
be indemnified by the Corporation as authorized in this Article. The financial
ability of any authorized representative to make a repayment contemplated by
this section shall not be a prerequisite to the making of an advance. Expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
6.06. Certain Terms. For purposes of this Article:
(a) "authorized representative" shall mean any and all directors
and officers of the Corporation and any person designated as an authorized
representative by the Board of Directors of the Corporation (which may, but need
not, include any person serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise);
(b) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor or investigative proceeding by the Corporation;
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<PAGE> 15
(c) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a third party proceeding that could
result in criminal penalties, and any such proceeding;
(d) "expenses" shall include, but not be limited to, attorneys'
fees and disbursements;
(e) "fines" shall include, but not be limited to, any excise
taxes assessed on a person with respect to an employee benefit plan;
(f) "not opposed to the best interests of the Corporation" shall
include actions taken in good faith and in a manner the authorized
representative reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan;
(g) "other enterprises" shall include employee benefit plans;
(h) "party" to a proceeding shall include a person who gives
testimony or is similarly involved in such proceeding;
(i) "serving at the request of the Corporation" shall include any
service as a director, officer or employee of the Corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries; and
(j) "third party proceeding" shall mean any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
Corporation.
6.07. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against the
person and incurred by the person in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power or the
obligation to indemnify such person against such liability under the provisions
of this Article.
6.08. Scope of Article. The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action
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<PAGE> 16
in another capacity while holding such office. The indemnification and
advancement of expenses provided by or granted pursuant to this Article shall
continue as to a person who has ceased to be an authorized representative and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
6.09. Reliance on Provisions. Each person who shall act as an
authorized representative of the Corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
ARTICLE VII
General Provisions
7.01. Waiver of Notice. Whenever any notice is required to be given to
any stockholder or director of the Corporation under the provisions of the
General Corporation Law of the State of Delaware or these By-Laws, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Neither the business to be transacted at, nor the
purpose of, any annual or special meeting of the stockholders or the Board of
Directors or committee thereof need be specified in any waiver of notice of such
meeting.
7.02. Dividends. Subject to the restrictions contained in the General
Corporation Law of the State of Delaware and any restrictions contained in the
Certificate of Incorporation, the Board of Directors may declare and pay
dividends upon the shares of capital stock of the Corporation.
7.03. Contracts. Except as otherwise required by law, the Certificate
of Incorporation, or these By-Laws, any contracts or other instruments may be
executed and delivered in the name and on the behalf of the Corporation by such
officer or officers of the Corporation as the Board of Directors may from time
to time direct. Such authority may be general or confined to specific instances
as the Board may determine. The Chairman of the Board, if an executive officer,
the Chief Executive Officer, the President or any Vice President may execute
bonds, contracts, deeds, leases, and other instruments to be made or executed
for or on behalf of the Corporation. Subject to any restrictions imposed by the
Board of Directors, the Chairman of the Board, if an executive officer, the
Chief Executive Officer, the President or any Vice President of the Corporation
may delegate contractual powers to others under his jurisdiction, it being
understood, however, that any such delegation of power shall not relieve such
officer of responsibility with respect to the exercise of such delegated power.
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<PAGE> 17
7.04. Corporate Seal. The Corporation shall have a corporate seal,
which shall have inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
7.05. Deposits. All funds of the Corporation shall be deposited from
time to time to the credit of the Corporation in such banks, trust companies, or
other depositories as the Board of Directors may approve or designate, and all
such funds shall be withdrawn only upon checks signed by such one or more
officers or employees as the Board of Directors shall from time to time
determine.
7.06. Corporate Records.
(a) Examination by Stockholders. Every stockholder shall, upon
written demand under oath stating the purpose thereof, have a right to examine,
in person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, list of stockholders, books or records of
account, and records of the proceedings of the stockholders and directors of the
Corporation, and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be directed
to the Corporation at its registered office in Delaware or at its principal
place of business. Where the stockholder seeks to inspect the books and records
of the Corporation, other than its stock ledger or list of stockholders, the
stockholder shall first establish (1) that the stockholder has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of such documents; and (2) that the inspection sought is for a proper
purpose. Where the stockholder seeks to inspect the stock ledger or list of
stockholders of the Corporation and has complied with the provisions of this
section respecting the form and manner of making demand for inspection of such
documents, the burden of proof shall be upon the Corporation to establish that
the inspection sought is for an improper purpose.
(b) Examination by Directors. Any director shall have the right
to examine the Corporation's stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to the person's
position as a director.
7.07. Resignations. Any director or any officer, whether elected or
appointed, may resign at any time by giving written notice of such resignation
to the Chairman of the Board, the Chief Executive Officer or the Secretary, and
such resignation shall be deemed to be effective as of the close of business on
the date said notice is received by the Chairman of the Board, the Chief
Executive Officer, the President, or the
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<PAGE> 18
Secretary, or at such later time as is specified therein. No formal action shall
be required of the Board of Directors or the stockholders to make any such
resignation effective.
7.08. Proxies. Unless otherwise provided by resolution adopted by the
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or any Vice President may from time to time appoint an attorney or
attorneys or agent or agents of the Corporation, in the name and on behalf of
the Corporation, to cast the votes which the Corporation may be entitled to cast
as the holder of stock or other securities in any other corporation, any of
whose stock or other securities may be held by the Corporation, at meetings of
the holders of the stock or other securities of such other corporation, or to
consent in writing, in the name of the Corporation as such holder, to any action
by such other corporation, and may instruct the person or persons so appointed
as to the manner of casting such votes or giving such consent, and may execute
or cause to be executed in the name and on behalf of the Corporation and under
its corporate seal or otherwise, all such written proxies or other instruments
as he may deem necessary or proper in the premises.
7.09. Amendment of By-Laws. These By-Laws may be altered, amended, or
repealed at any meeting of the Board of Directors or of the stockholders,
provided notice of the proposed change was given in the notice of the meeting
and, in the case of a meeting of the Board of Directors, in a notice given not
less than two days prior to the meeting; provided, however, that, in the case of
amendments by the Board of Directors, notwithstanding any other provisions of
these By-Laws or any provision of law which might otherwise permit a lesser vote
or no vote, the affirmative vote of a majority of the directors then in office
shall be required to alter, amend or repeal any provision of these By-Laws; and
further provided, that in the case of amendments by stockholders,
notwithstanding any other provisions of these By-Laws or any provision of law
which might otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of the capital
stock of the Corporation required by law, the Certificate of Incorporation or
these By-Laws, the affirmative vote of the holders of at least 66-2/3 percent of
the voting power of all the then outstanding shares of the Voting Stock, voting
together as a single class, shall be required to alter, amend or repeal any
provision of these By-Laws.
AMENDED: November 18, 1999
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<PAGE> 1
EXHIBIT 10.8
AMENDMENT NO. 3
DATED AS OF SEPTEMBER 16, 1999
TO
SECOND AMENDED AND RESTATED REVOLVING
LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 21, 1997
AMONG
SPECIALTY CARE NETWORK, INC.
SCN OF PRINCETON, INC.
AND
BANK OF AMERICA, N.A.,
AMSOUTH BANK,
PARIBAS,
KEY CORPORATE CAPITAL, INC.
AND
BANK OF AMERICA, N.A., AS AGENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definitions..............................................................1
2. Amendments to Agreement..................................................2
3. Representations and Warranties...........................................4
3.1 Incorporation...................................................4
3.2 Due Authorization, No Conflicts, Etc............................5
3.3 Due Execution, Etc..............................................5
4. Conditions Precedent.....................................................6
4.1 Conditions Precedent to Effectiveness of Amendment No. 3........6
5. Effectiveness of Amendment No. 3.........................................7
6. Closing..................................................................8
7. Governing Law, Etc.......................................................8
8. Section Titles and Table of Contents.....................................8
9. Arbitration..............................................................8
10. Counterparts............................................................10
11. Agreement to Remain in Effect...........................................10
</TABLE>
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<PAGE> 3
This Amendment No. 3 to Second Amended and Restated Revolving Loan and
Security Agreement, made and entered into as of this 16th day of September,
1999, by and among Specialty Care Network, Inc. (the "Borrower"); the
Guarantors, jointly and severally; the various banks and lending institutions on
the signature pages attached hereto together with all assignees of such banks
and lending institutions (each a "Bank" and collectively the "Banks"); and Bank
of America, N.A., successor to NationsBank, N.A., successor to NationsBank of
Tennessee, N.A., as agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the Borrower, the Guarantors, the Banks, the Swingline Bank,
and the Agent entered into a certain Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997, as amended by Amendment
No. 1 thereto dated March 30, 1998 and Amendment No. 2 thereto dated April 1,
1998 (collectively the "Loan Agreement"); and
WHEREAS, the parties to the Loan Agreement desire to amend the existing
Loan Agreement to convert it from a revolving loan facility to a term loan
facility, to eliminate the Swingline Bank and Swingline Loan, to delete the
existing financial ratios, to add Healthcare Report Cards, Inc., as a Guarantor,
to pledge additional collateral, and to modify certain of the negative
covenants, all as hereinafter more specifically set forth;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used in this Amendment No.3 which
are not otherwise defined herein shall have the respective meanings ascribed
thereto in the Agreement.
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<PAGE> 4
2. AMENDMENTS TO AGREEMENT.
2.1 In the Exhibits to the Agreement, EXHIBIT A, being the "Form of
Notes", is hereby amended by replacing the Notes attached thereto with the
modified and renewed Term Loan Notes attached hereto as Replacement EXHIBIT A.
2.2 Section I of the Agreement, DEFINITIONS, is hereby amended by
deleting "NOTICE OF BORROWING", "NOTICE OF CONVERSION", "PERMITTED ACQUISITION",
"PERMITTED ACQUISITION INDEBTEDNESS", "PERMITTED ACQUISITION Price", "REVOLVING
LOANS", "SWINGLINE BANK", "SWINGLINE COMMITMENT", "SWINGLINE COMMITTED AMOUNT",
"SWINGLINE Loan", "SWINGLINE NOTE", and "UNUTILIZED LOAN COMMITMENT", and by
adding thereto the following new definitions as follows:
"AMENDMENT NO. 3 EFFECTIVE DATE" has the meaning specified in
Section 5 of Amendment No. 3.
"TERM LOANS" means those term loans made pursuant to Paragraph
2.1 hereof.
In addition to the foregoing new definitions, the following definitions
are hereby amended: "COMMITTED AMOUNT" is hereby amended to equal that amount
set forth opposite each Bank=s signature hereto, which amount is for a Term Loan
only; "GUARANTOR" is hereby amended to add Healthcare Report Cards, Inc. as a
Guarantor; "COLLATERAL DOCUMENTS" and "PLEDGED INSTRUMENTS" are hereby amended
to add the Pledge Agreement required to be executed by Healthcare Report Cards,
Inc. pursuant to Paragraph 4.1(f) hereof and the stock pledged thereby,
respectively, and "TOTAL COMMITMENTS" is hereby amended to replace Seventy-Five
Million and No/100 Dollars ($75,000,000.00) with the figure of Twelve Million
Five Hundred Thousand and No/100 Dollars ($12,500,000.00).
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<PAGE> 5
2.3 Paragraphs 2.1 through and including 2.11 are hereby deleted in
their entirety. Remaining Paragraph 2.12 is hereby re-numbered 2.2, and there is
hereby inserted a new Paragraph 2.1 as follows:
"2.1 TERM LOANS. Subject to the terms and conditions of and relying
upon the representations, warranties and covenants contained in this
Agreement, each Bank severally agrees to convert its existing revolving
loans to the Borrower to Term Loans until the Termination Date, said
Term Loans to be evidenced by the Term Loan Notes attached hereto as
Replacement EXHIBIT A. Said Term Loans shall amortize and be payable at
the times and at the rates set forth in said Notes; provided, on or
before December 31, 1999, the Borrower shall also pay to the Banks to
be applied on a prorata basis the greater of: (i) one hundred percent
(100%) of all "true-up" proceeds received from the reconciliation of
the current assets and liabilities of practices disposed of prior to
September 3, 1999, or (ii) Two Hundred Fifty Thousand and No/100
Dollars ($250,000.00). As restructured hereby, there shall be no
Swingline Loan Subfacility nor Letter of Credit Facility, and Borrower
hereby certifies to the Banks that there are no outstanding Letters of
Credit issued and outstanding under the Agreement.
2.4 Paragraphs 3.2 and 3.3 in the Agreement are hereby deleted in their
entirety, and Paragraph 3.4 is hereby re-numbered as Paragraph 3.2.
2.5 Paragraph 6.16 of the Agreement is hereby deleted in its entirety.
2.6 Paragraph 7.5 is hereby amended to delete subparagraph (6) thereof
in its entirety and to re-number subparagraphs (7) and (8) as subparagraphs (6)
and (7).
2.7 Paragraph 7.10 is hereby amended to delete subparagraph (3) thereof
in its entirety and to re-number subparagraph (4) as subparagraph (3).
2.8 Paragraph 7.13 is hereby deleted in its entirety and replaced with
the following subparagraph 7.13:
"7.13 ACQUISITIONS. Neither the Borrower nor any Subsidiary will make
any Acquisition without first obtaining the prior written consent of
the Majority Banks.
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<PAGE> 6
2.9 The Swingline Bank is hereby deleted as a party to the Agreement
(although Bank of America, N.A. remains as a party to the Agreement in its other
capacities), and Healthcare Report Cards, Inc. is hereby added to the Agreement
as a Guarantor thereunder. In addition, all references in this Agreement to
Revolving Loans are hereby replaced with references to Term Loans, including any
references in the title of this Agreement, this Agreement being hereafter
entitled the "Second Amended and Restated Term Loan and Security Agreement".
3. REPRESENTATIONS AND WARRANTIES. To induce the Banks and the Agent to
enter into this Amendment No. 3, the Borrower and Guarantors jointly and
severally represent and warrant to the Banks and the Agent as follows:
3.1 INCORPORATION. Specialty Care Network, Inc. is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; has the corporate power to own its properties and to engage in the
business it conducts, and is duly qualified and in good standing as a foreign
corporation in the jurisdictions wherein the nature of its business or the
ownership of its properties requires it to be so qualified. SCN of Princeton,
Inc. is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; has the corporate power to own its
properties and to engage in the business it conducts, and is duly qualified and
in good standing as a foreign corporation in the jurisdictions wherein the
nature of its business or the ownership of its properties requires it to be so
qualified. Healthcare Report Cards, Inc. is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware;
has the corporate power to own its properties and to engage in the business its
conducts, and is duly qualified and in good standing as a foreign corporation in
the jurisdictions wherein the nature of its business or the ownership of its
properties requires it to be so qualified.
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<PAGE> 7
3.2 DUE AUTHORIZATION, NO CONFLICTS, ETC. The execution, delivery and
performance by the Borrower and Guarantors of this Amendment No. 3 and any and
all other agreements, instruments and documents to be executed and/or delivered
by the Borrower and Guarantors pursuant hereto or in connection herewith, and
the consummation by the Borrower and Guarantors of the transactions contemplated
hereby or thereby: (a) are within their respective corporate powers; (b) have
been duly authorized by all necessary corporate action, including without
limitation, the consent of stockholders where required; (c) do not and will not
conflict with or result in any breach of, or constitute with the passage of time
or the giving of notice or both, a default under (i) any Requirement of Law or
(ii) any agreement to which Borrower or any Guarantor is a party or by which
they, or any of their respective property, is bound; and (d) do not require the
consent, authorization by, or approval of, or notice to, or filing or
registration with, any governmental authority or any other Person other than
those which have been obtained and copies of which have been delivered to the
Agent pursuant to Subsection 4.1(a)(ii) hereof, each of which is in full force
and effect.
3.3 DUE EXECUTION, ETC. This Amendment No. 3 and each of the other
agreements, instruments and documents to be executed and/or delivered by the
Borrower or any Guarantor pursuant hereto or in connection herewith (a) has been
duly executed and delivered, and (b) constitutes the legal, valid and binding
obligation of the Borrower and each Guarantor, enforceable against it in
accordance with its terms, subject however to state and federal bankruptcy,
insolvency, reorganization and other laws and general principles of equity
affecting enforcement of the rights of creditors generally.
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<PAGE> 8
4. CONDITIONS PRECEDENT. The effectiveness of this Amendment No. 3 is
subject to the fulfillment of the following conditions precedent on or prior to
the Amendment No. 3 Effective Date (as hereinafter defined in Section 5 hereof):
4.1 CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT NO. 3. The Agent
shall have received, on or prior to the Amendment No. 3 Effective Date, the
following, each dated on or prior to the Amendment No. 3 Effective Date unless
otherwise indicated, in form and substance satisfactory to the Agent and in
sufficient copies for each Bank:
(a) Certified copies of (i) the resolutions of the Board
of Directors of the Borrower and each Guarantor approving this Amendment No. 3
and each other agreement, instrument or document to be executed by it pursuant
hereto or as contemplated hereby, and (ii) all documents evidencing other
necessary corporate action and required governmental and third party approvals,
licenses and consents with respect to this Amendment No. 3 and the transactions
contemplated hereby.
(b) A certificate of the Secretary or an Assistant
Secretary of Borrower and each Guarantor certifying the names and true
signatures of the officers of Borrower and each Guarantor who have been
authorized to execute on behalf of Borrower and each Guarantor this Amendment
No. 3 and any other agreement, instrument or document executed or to be executed
by Borrower or any Guarantor in connection herewith.
(c) A certificate dated the Amendment No. 3 Effective
Date signed by the President or any Vice-President of Borrower, to the following
effect:
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<PAGE> 9
(i) The representations and warranties of the
Borrower contained in Sections 3.1, 3.2, and 3.3 of this Amendment No.
3 are true and correct on and as of such date as though made on and as
of such date;
(ii) No Default or Event of Default has occurred and
is continuing, and no Default or Event of Default would result from the
execution and delivery of this Amendment No. 3 or the other agreements,
instruments and documents contemplated hereby; and
(iii) The Borrower has paid or agreed to pay all
amounts payable by it pursuant to the Agreement as amended hereby
(including, without limitation, all legal fees and expenses of Banks'
counsel incurred in connection herewith) to the extent then due and
payable.
(d) Executed Term Loan Notes in the form attached hereto as
Replacement EXHIBIT A.
(e) Executed Guaranty and Suretyship Agreement of Healthcare
Report Cards, Inc., in substantially the form of EXHIBIT 1 hereto.
(f) Executed Pledge Agreement executed by Healthcare Report
Cards, Inc. in favor of the Agent for the benefit of the Banks, in substantially
the form of EXHIBIT 2 hereto.
(g) A favorable opinion of Messrs. Baker Donelson Bearman &
Caldwell, counsel to the Borrower, in substantially the form of EXHIBIT 3
hereto, and as to such other matters as any Bank, through the Agent, may
reasonably request.
5. EFFECTIVENESS OF AMENDMENT NO. 3. This Amendment No. 3 shall become
effective at such time as (a) each of the conditions precedent set forth in
Section 4.1 hereof shall
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<PAGE> 10
have been satisfied, and (b) counterparts of this Amendment No. 3, executed and
delivered by the Borrowers, the Guarantors, the Banks, and the Agent shall have
been received by the Agent (or, alternatively, confirmation of the execution
hereof by such parties shall have been received by the Agent). The date upon
which the conditions described in clauses (a) and (b) of the foregoing sentence
shall have been fulfilled is referred to herein as the "Amendment No. 3
Effective Date".
6. CLOSING. The Closing under this Amendment No. 3 shall occur on the
Amendment Effective Date at the offices of Boult, Cummings, Conners & Berry,
PLC, 414 Union Street, Nashville, Tennessee 37219, or such other location as the
parties may agree.
7. GOVERNING LAW, ETC. This Amendment No. 3 shall be governed by, and
construed in accordance with, the laws of the State of Tennessee as provided in
Section 10.9 of the Agreement, which Section is incorporated herein by reference
and made a part hereof as though set forth in full herein.
8. SECTION TITLES AND TABLE OF CONTENTS. The Section Titles and Table
of Contents contained in this Amendment No. 3 are and shall be without
substantive meaning or content of any kind whatsoever and are not a part of the
agreement among the parties hereto.
9. ARBITRATION. Any controversy or claim between or among the parties
hereto including but not limited to those arising out of or relating to this
Instrument, Agreement or document or any related instruments, agreements or
documents, including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and
Mediation Services, Inc. (J.A.M.S.), and the "Special Rules" set forth below. In
the event of any
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<PAGE> 11
inconsistency, the Special Rules shall control. Judgment upon any arbitration
award may be entered in any court having jurisdiction. Any party to this
Agreement may bring an action, including a summary or expedited proceeding, to
compel arbitration of any controversy or claim to which this agreement applies
in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the
city of the Borrower=s domicile at the time of the execution of this instrument,
agreement or document and administered by J.A.M.S. who will appoint an
arbitrator; if J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within 90 days of the demand for
arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for up to an additional 60
days. In any such arbitration, the prevailing party will be awarded attorney's
fees, costs of arbitration and all out-of-pocket expenses against the defaulting
party.
(b) Reservation of Rights. Nothing in this instrument,
agreement or document shall be deemed to (i) limit the applicability of any
otherwise applicable statutes of limitation or repose or any waivers contained
in this Agreement; or (ii) be a waiver by the Agent or Banks of the protection
afforded to them by 12 U.S.C. ' 91 or any substantially equivalent state law; or
(iii) limit the right of the Agent or Banks hereto (A) to exercise self help
remedies such as (but not limited to) set off, or (B) to foreclose against any
real or personal property collateral, or (C) to obtain from a court provisional
or ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Agent or Banks may exercise
such self help rights, foreclose upon such property, or obtain such provisional
or ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this instrument,
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<PAGE> 12
agreement or document. Neither this exercise of self help remedies nor the
institution or maintenance of an action for foreclosure or provisional or
ancillary remedies shall constitute a waiver of the right of any party,
including the claimant in any such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
10. COUNTERPARTS. This Amendment No.3 may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
11. AGREEMENT TO REMAIN IN EFFECT. Except as expressly provided herein,
the Agreement and each other Collateral Document shall be and shall continue in
full force and effect in accordance with its respective terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER
SPECIALTY CARE NETWORK, INC.
BY:
--------------------------------
TITLE:
-----------------------------
GUARANTORS AND SUBSIDIARIES
SCN OF PRINCETON, INC.
BY:
--------------------------------
TITLE:
-----------------------------
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<PAGE> 13
HEALTHCARE REPORT CARDS, INC.
BY:
--------------------------------
TITLE:
-----------------------------
BANKS
Committed Amount: BANK OF AMERICA, N.A., successor to
$5,000,000.00 NationsBank, N.A., successor to NationsBank
of Tennessee, N.A., as Agent
BY:
--------------------------------
TITLE:
-----------------------------
Committed Amount: AMSOUTH BANK
$2,500,000.00
BY:
--------------------------------
TITLE:
-----------------------------
Committed Amount: PARIBAS
$2,500,000.00
BY:
--------------------------------
TITLE:
-----------------------------
-11-
<PAGE> 14
Committed Amount: KEY CORPORATE CAPITAL INC.,
$2,500,000.00 A MICHIGAN CORPORATION
BY:
--------------------------------
TITLE:
-----------------------------
AGENT
BANK OF AMERICA, N.A., AS AGENT
BY:
--------------------------------
TITLE:
-----------------------------
-12-
<PAGE> 1
EXHIBIT 10.9
AMENDMENT NO. 4
DATED AS OF MARCH 8, 2000
TO
SECOND AMENDED AND RESTATED REVOLVING
LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 21, 1997
AMONG
HEALTHGRADES.COM, INC.
FORMERLY SPECIALTY CARE NETWORK, INC.
HEALTHCARE RATINGS, INC.,
PROVIDERWEB.NET, INC.
AND
BANK OF AMERICA, N.A.,
AMSOUTH BANK,
PARIBAS,
KEY CORPORATE CAPITAL, INC.
AND
BANK OF AMERICA, N.A., AS AGENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definitions..........................................................2
2. Amendments to Agreement..............................................2
3. Representations and Warranties.......................................4
3.1 Incorporation...............................................4
3.2 Due Authorization, No Conflicts, Etc........................5
3.3 Due Execution, Etc..........................................5
4. Conditions Precedent.................................................6
4.1 Conditions Precedent to Effectiveness of Amendment No. 4....6
5. Effectiveness of Amendment No. 4.....................................8
6. Closing..............................................................8
7. Governing Law, Etc...................................................8
8. Section Titles and Table of Contents.................................9
9. Arbitration..........................................................9
10. Counterparts........................................................10
11. Agreement to Remain in Effect.......................................10
</TABLE>
-ii-
<PAGE> 3
This Amendment No. 4 to Second Amended and Restated Revolving Loan and
Security Agreement, made and entered into as of this 8th day of March, 2000, by
and among Healthgrades.com, Inc. (formerly Specialty Care Network, Inc.) (the
"Borrower"); the Guarantors, jointly and severally; the various banks and
lending institutions on the signature pages attached hereto together with all
assignees of such banks and lending institutions (each a "Bank" and collectively
the "Banks"); and Bank of America, N.A., successor to NationsBank, N.A.,
successor to NationsBank of Tennessee, N.A., as agent (the "Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, the Banks, the Swingline Bank,
and the Agent entered into a certain Second Amended and Restated Revolving Loan
and Security Agreement dated as of November 21, 1997, as amended by Amendment
No. 1 thereto dated March 30, 1998, Amendment No. 2 thereto dated April 1, 1998,
and Amendment No. 3 thereto dated September 16, 1999 (collectively the "Loan
Agreement"); and
WHEREAS, Healthcare Report Cards, Inc. and SCN of Princeton, Inc., both
formerly Guarantors, have each been dissolved; and
WHEREAS, at the time of its dissolution, Healthcare Report Cards, Inc.
owned ninety percent (90%) of the outstanding shares of HG.com, Inc., which
entity has been merged into Healthcare Ratings, Inc., a newly formed Subsidiary
of the Borrower; and
WHEREAS, the Borrower has also formed as a new Subsidiary
Providerweb.net, Inc.; and
WHEREAS, the parties to the Loan Agreement desire to amend the existing
Loan Agreement to delete Healthcare Report Cards, Inc. and SCN of Princeton,
Inc. as Guarantors thereunder, to add Healthcare Ratings, Inc., a Delaware
corporation, and Providerweb.net, Inc., a
- 1 -
<PAGE> 4
Delaware corporation, as Guarantors, to pledge additional Collateral including
without limitation all outstanding shares issued by Healthcare Ratings, Inc. and
Providerweb.net, Inc. to the Borrower, and to modify certain covenants, all as
hereinafter more specifically set forth;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used in this Amendment No. 4
which are not otherwise defined herein shall have the respective meanings
ascribed thereto in the Agreement.
2. AMENDMENTS TO AGREEMENT.
2.1 In the Exhibits to the Agreement, EXHIBIT A, being the "Form of
Notes", is hereby modified to the extent set forth in the Modification to Term
Loan Note attached hereto as EXHIBIT 1.
2.2 Section I of the Agreement, DEFINITIONS, is hereby amended by
adding thereto the following new definitions as follows:
"AMENDMENT NO. 4 EFFECTIVE DATE" has the meaning specified in
Section 5 of Amendment No. 4.
In addition to the foregoing new definitions, the following definitions
are hereby amended: "COMMITTED AMOUNT" is hereby amended to equal that amount
set forth opposite each Bank's signature hereto, which amount is for a Term Loan
only; "GUARANTOR" is hereby amended to add Healthcare Ratings, Inc. and
Providerweb.net, Inc. as Guarantors; and "TOTAL COMMITMENTS" is hereby amended
to replace the figure of Twelve Million Five Hundred Thousand and No/100 Dollars
($12,500,000.00) with the figure Eight Million One Hundred Thousand and No/100
Dollars ($8,100,000.00) in non-revolving Term Loans.
- 2 -
<PAGE> 5
2.3 Paragraph 2.1 is hereby amended to delete that portion of the
second sentence beginning with "provided" and to insert thereafter the
following:
provided, immediately upon receipt but in any event before July 1,
2000, the Borrower shall also apply as a principal prepayment on the
Notes the full amount of Borrower's federal tax refund for 1999, said
prepayment to be applied in inverse order of maturity.
2.4 Healthcare Ratings, Inc. and Providerweb.net, Inc. hereby agree to
become parties to the Loan Agreement and each hereby grants to the Agent on
behalf of the Banks a security interest in the Collateral, including without
limitation the grant of the security interest described in Section 4.3 of the
Loan Agreement, and confirms that, as more specifically set forth in Section 4.4
thereof, said liens are first and prior liens.
2.5 Borrower hereby covenants with the Banks that, at all times during
the term hereof, it shall maintain cumulative cash deposits with any one or more
of the Banks of no less than the lesser of: (i) Five Million and No/100 Dollars
($5,000,000.00), or (ii) 100% of the outstanding Obligations from time to time,
which cash shall be used at maturity to pay off the Term Loans and all other
Obligations. The Banks hereby covenant with the Borrower that the Banks shall
not exercise any right of setoff against said deposits unless and until there is
a payment default by the Borrower with respect to principal and/or interest on
the Obligations, including without limitation Borrower's failure to pay
principal and interest after an acceleration of the Obligations.
2.6 Subparagraph 6.2(H) is hereby deleted in its entirety and replaced
with a new subparagraph 6.2(H) as follows:
(H) On the 15th and 30th of each month, a bimonthly report setting
forth the following information: (a) the amount and location of cash
deposits held by Borrower with each of the Banks, and (b) the status of
any payments to be received by Borrower from each its managed
- 3 -
<PAGE> 6
Practices, including without limitation The Specialist, MAOS, Orlin &
Cohen, Lima, SEN, and the like.
2.7 As consideration for the Banks agreeing to this Amendment No. 4,
the Borrower has herewith delivered to the Banks as a non-refundable fee 165,000
shares of common stock of the Borrower, as follows: 66,000 shares issued to Bank
of America, N.A. or its designee; 33,000 shares issued to AmSouth Bank or its
designee; 33,000 shares issued to Key Corporate Capital, Inc. or its designee;
and 33,000 shares issued to Paribas or its designee. This stock is issued
pursuant to the provisions of TCA '47-24-101, and is intended as an "equity
participation" in Borrower and not as interest on the Obligations. In addition,
the Borrower agrees to enter into a registration rights agreement with each of
the Banks (or their respective designees) with respect to such stock granting to
the Banks (or their designee) piggyback registration rights.
3. REPRESENTATIONS AND WARRANTIES. To induce the Banks and the Agent to
enter into this Amendment No. 4, the Borrower and Guarantors jointly and
severally represent and warrant to the Banks and the Agent as follows:
3.1 INCORPORATION. Healthgrades.com, Inc. is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; has the corporate power to own its properties and to engage in the
business it conducts, and is duly qualified and in good standing as a foreign
corporation in the jurisdictions wherein the nature of its business or the
ownership of its properties requires it to be so qualified. Healthcare Ratings,
Inc. is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; has the corporate power to own its
properties and to engage in the business it conducts, and is duly qualified and
in good standing as a foreign corporation in the jurisdictions wherein the
nature of its business or the ownership of its properties requires it to be so
qualified. Providerweb.net, Inc. is
- 4 -
<PAGE> 7
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware; has the corporate power to own its properties and
to engage in the business it conducts, and is duly qualified and in good
standing as a foreign corporation in the jurisdictions wherein the nature of its
business or the ownership of its properties requires it to be so qualified.
3.2 DUE AUTHORIZATION, NO CONFLICTS, ETC. The execution, delivery and
performance by the Borrower and Guarantors of this Amendment No. 4 and any and
all other agreements, instruments and documents to be executed and/or delivered
by the Borrower and Guarantors pursuant hereto or in connection herewith, and
the consummation by the Borrower and Guarantors of the transactions contemplated
hereby or thereby: (a) are within their respective corporate powers; (b) have
been duly authorized by all necessary corporate action, including without
limitation, the consent of stockholders where required; (c) do not and will not
conflict with or result in any breach of, or constitute with the passage of time
or the giving of notice or both, a default under (i) any Requirement of Law or
(ii) any agreement to which Borrower or any Guarantor is a party or by which
they, or any of their respective property, is bound; and (d) do not require the
consent, authorization by, or approval of, or notice to, or filing or
registration with, any governmental authority or any other Person other than
those which have been obtained and copies of which have been delivered to the
Agent pursuant to Subsection 4.1(a)(ii) hereof, each of which is in full force
and effect.
3.3 DUE EXECUTION, ETC. This Amendment No. 4 and each of the other
agreements, instruments and documents to be executed and/or delivered by the
Borrower or any Guarantor pursuant hereto or in connection herewith (a) has been
duly executed and delivered, and (b) constitutes the legal, valid and binding
obligation of the Borrower and each Guarantor, enforceable
- 5 -
<PAGE> 8
against it in accordance with its terms, subject however to state and federal
bankruptcy, insolvency, reorganization and other laws and general principles of
equity affecting enforcement of the rights of creditors generally.
4. CONDITIONS PRECEDENT. The effectiveness of this Amendment No. 4 is
subject to the fulfillment of the following conditions precedent on or prior to
the Amendment No. 4 Effective Date (as hereinafter defined in Section 5 hereof):
4.1 CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT NO. 4. The Agent
shall have received, on or prior to the Amendment No. 4 Effective Date, the
following, each dated on or prior to the Amendment No. 4 Effective Date unless
otherwise indicated, in form and substance satisfactory to the Agent and in
sufficient copies for each Bank:
(a) Certified copies of (i) the resolutions of the Board of
Directors of the Borrower and each Guarantor approving this Amendment No. 4 and
each other agreement, instrument or document to be executed by it pursuant
hereto or as contemplated hereby, and (ii) all documents evidencing other
necessary corporate action and required governmental and third party approvals,
licenses and consents with respect to this Amendment No. 4 and the transactions
contemplated hereby.
(b) A certificate of the Secretary or an Assistant Secretary of
Borrower and each Guarantor certifying the names and true signatures of the
officers of Borrower and each Guarantor who have been authorized to execute on
behalf of Borrower and each Guarantor this Amendment No. 4 and any other
agreement, instrument or document executed or to be executed by Borrower or any
Guarantor in connection herewith.
- 6 -
<PAGE> 9
(c) A certificate dated the Amendment No. 4 Effective Date signed
by the President or any Vice-President of Borrower, to the following effect:
(i) The representations and warranties of
the Borrower contained in Sections 3.1, 3.2, and 3.3 of this
Amendment No. 4 are true and correct on and as of such date as
though made on and as of such date;
(ii) No Default or Event of Default has
occurred and is continuing, and no Default or Event of Default
would result from the execution and delivery of this Amendment
No. 4 or the other agreements, instruments and documents
contemplated hereby; and
(iii) The Borrower has paid or agreed to pay
all amounts payable by it pursuant to the Agreement as amended
hereby (including, without limitation, all legal fees and
expenses of Banks' counsel incurred in connection herewith) to
the extent then due and payable.
(d) Executed Modifications to Term Loan Notes in the form attached
hereto as EXHIBIT 1.
(e) Guaranty and Suretyship Agreement executed by each Guarantor,
in substantially the form of EXHIBIT 2 hereto.
(f) Amendment to Amended and Restated Pledge Agreement executed by
the Borrower, in favor of the Agent for the benefit of the Banks, in
substantially the form of EXHIBIT 3 hereto, pledging all of the outstanding
stock of each Guarantor, together with the originals of such certificates and
executed stock powers of attorney.
- 7 -
<PAGE> 10
(g) A favorable opinion of Messrs. Baker Donelson Bearman &
Caldwell, counsel to the Borrower, in substantially the form of EXHIBIT 4
hereto, and as to such other matters as any Bank, through the Agent, may
reasonably request.
(h) Evidence satisfactory to the Bank that the Borrower has closed
the sale of additional stock in Borrower to investors in an amount sufficient to
net to the Borrower no less than Fourteen Million and No/100 Dollars
($14,000,000.00) in cash proceeds.
5. EFFECTIVENESS OF AMENDMENT NO. 4. This Amendment No. 4 shall become
effective at such time as (a) each of the conditions precedent set forth in
Section 4.1 hereof shall have been satisfied, and (b) counterparts of this
Amendment No. 4, executed and delivered by the Borrowers, the Guarantors, the
Banks, and the Agent shall have been received by the Agent (or, alternatively,
confirmation of the execution hereof by such parties shall have been received by
the Agent). The date upon which the conditions described in clauses (a) and (b)
of the foregoing sentence shall have been fulfilled is referred to herein as the
"Amendment No. 4 Effective Date".
6. CLOSING. The Closing under this Amendment No. 4 shall occur on the
Amendment effective Date at the offices of Boult, Cummings, Conners & Berry,
PLC, 414 Union Street, Nashville, Tennessee 37219, or such other location as the
parties may agree.
7. GOVERNING LAW, ETC. This Amendment No. 4 shall be governed by, and
construed in accordance with, the laws of the State of Tennessee as provided in
Section 10.9 of the Agreement, which Section is incorporated herein by reference
and made a part hereof as though set forth in full herein.
- 8 -
<PAGE> 11
8. SECTION TITLES AND TABLE OF CONTENTS. The Section Titles and Table
of Contents contained in this Amendment No. 4 are and shall be without
substantive meaning or content of any kind whatsoever and are not a part of the
agreement among the parties hereto.
9. ARBITRATION. Any controversy or claim between or among the parties
hereto including but not limited to those arising out of or relating to this
Instrument, Agreement or document or any related instruments, agreements or
documents, including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and
Mediation Services, Inc. (J.A.M.S.), and the "Special Rules" set forth below. In
the event of any inconsistency, the Special Rules shall control. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any party
to this Agreement may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
agreement applies in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the
city of the Borrower's domicile at the time of the execution of this instrument,
agreement or document and administered by J.A.M.S. who will appoint an
arbitrator; if J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within 90 days of the demand for
arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for up to an additional 60
days. In any such arbitration, the prevailing party will be awarded attorney's
fees, costs of arbitration and all out-of-pocket expenses against the defaulting
party.
- 9 -
<PAGE> 12
(b) Reservation of Rights. Nothing in this instrument,
agreement or document shall be deemed to (i) limit the applicability of any
otherwise applicable statutes of limitation or repose or any waivers contained
in this Agreement; or (ii) be a waiver by the Agent or Banks of the protection
afforded to them by 12 U.S.C. '91 or any substantially equivalent state law; or
(iii) limit the right of the Agent or Banks hereto (A) to exercise self help
remedies such as (but not limited to) set off, or (B) to foreclose against any
real or personal property collateral, or (C) to obtain from a court provisional
or ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Agent or Banks may exercise
such self help rights, foreclose upon such property, or obtain such provisional
or ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this instrument, agreement or document. Neither
this exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall constitute a
waiver of the right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.
10. COUNTERPARTS. This Amendment No. 4 may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
11. AGREEMENT TO REMAIN IN EFFECT. Except as expressly provided herein,
the Agreement and each other Collateral Document shall be and shall continue in
full force and effect in accordance with its respective terms.
- 10 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 4
to be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER
HEALTHGRADES.COM, INC., FORMERLY
SPECIALTY CARE NETWORK, INC.
BY:
------------------------------
TITLE:
---------------------------
GUARANTORS AND SUBSIDIARIES
HEALTHCARE RATINGS, INC.
BY:
------------------------------
TITLE:
---------------------------
PROVIDERWEB.NET, INC.
BY:
------------------------------
TITLE:
---------------------------
- 11 -
<PAGE> 14
<TABLE>
<S> <C>
BANKS
Committed Amount: BANK OF AMERICA, N.A., successor
$3,240,000.00 to NationsBank, N.A., successor to
NationsBank of Tennessee, N.A., as
Agent
BY:
------------------------------
TITLE:
---------------------------
Committed Amount:
$1,620,000.00 AMSOUTH BANK
BY:
------------------------------
TITLE:
---------------------------
Committed Amount: PARIBAS
$1,620,000.00
BY:
------------------------------
TITLE:
---------------------------
Committed Amount: KEY CORPORATE CAPITAL INC.,
$1,620,000.00 A MICHIGAN CORPORATION
BY:
------------------------------
TITLE:
---------------------------
AGENT
BANK OF AMERICA, N.A., AS AGENT
BY:
------------------------------
TITLE:
---------------------------
</TABLE>
-12-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Healthcare Ratings, Inc., incorporated in Delaware.
ProviderWeb.net, Inc., incorporated in Delaware.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Forms
S-8 No. 333-36933 and S-8 No. 333-61717 pertaining to the Specialty Care
Network, Inc. and 1996 Equity Compensation Plan of our report dated March 17,
2000, with respect to the consolidated financial statements and schedule of
Healthgrades.com, Inc. (formerly Specialty Care Network, Inc.) and subsidiaries
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
-----------------------------
Ernst & Young LLP
Denver, Colorado
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,496
<SECURITIES> 0
<RECEIVABLES> 4,747
<ALLOWANCES> (1,773)
<INVENTORY> 0
<CURRENT-ASSETS> 12,104
<PP&E> 3,121
<DEPRECIATION> (1,389)
<TOTAL-ASSETS> 20,450
<CURRENT-LIABILITIES> 11,235
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> (253)
<TOTAL-LIABILITY-AND-EQUITY> 20,450
<SALES> 29,453
<TOTAL-REVENUES> 31,586
<CGS> 0
<TOTAL-COSTS> 28,876
<OTHER-EXPENSES> 5,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,489
<INCOME-PRETAX> (1,661)
<INCOME-TAX> 2,626
<INCOME-CONTINUING> 965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
