SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES Exchange Act of 1934 for the
fiscal year ended December 31, 2001 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
HEALTH GRADES, INC.
(Exact name of registrant as specified in its charter)
<Table>
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)
</Table>
Registrant's telephone number, including area code: (303) 716-0041
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
Title of each class Name of each exchange on which registered
None None
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [X]
As of March 29, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant was $718,300. Such aggregate market value was
computed by reference to the closing sale price of the common stock as reported
on the OTC Bulletin Board 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
registrant.
As of March 29, 2002 there were 36,406,649 shares of the registrant's common
stock outstanding.
This amendment to Health Grades, Inc.'s (the "Company") Form 10-K for the fiscal
year ended December 31, 2001 amends and modifies the Form 10-K to set forth the
information required in Part III of Form 10-K.
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
KERRY R. HICKS, age 42, one of our founders, has served as our Chief Executive
Officer and has been a director since our inception in 1995. He also served as
our President from our inception until November 1999 and since June 2001. From
1985 to 1995, he served as Senior Vice President of LBA Healthcare Management
(LBA).
PETER H. CHEESBROUGH, age 50, has served as one of our directors since December
1996. Since October 2000, Mr. Cheesbrough has been self-employed as a
consultant. From August 1999 through September 2000, Mr. Cheesbrough served as
Senior Vice President Finance and Chief Financial Officer of XCare.net, a
company providing internet-based business to business connectivity, information
exchange and electronic commerce applications solutions for healthcare. From
June 1993 to August 1999, Mr. Cheesbrough was the Senior Vice President-Finance
and Chief Finance Officer of Echo Bay Mines Ltd., a company engaged in precious
metals mining. Mr. Cheesbrough is a Fellow of the Institute of Chartered
Accountants of England and Wales and also a chartered accountant in Canada.
LESLIE S. MATTHEWS, M.D., age 50, has served as one of our directors since
December 1996. Since October 1994, Dr. Matthews has been an orthopaedic surgeon
at Greater Chesapeake Orthopaedic Associates, LLC, and since 1990, he has been
the Chief of Orthopaedic Surgery at Union Memorial Hospital.
MATS WAHLSTROM, age 47, has served as one of our directors since March 1997.
Since March 2002, Mr. Wahlstrom has been self-employed. From May 2000 to
February 2002, Mr. Wahlstrom served as an Executive Vice President for Securitas
AB, a multinational corporation engaged in guard services, alarm system design,
installation and monitoring and cash-in-transit services. From 1990 until
February 2000, Mr. Wahlstrom served in various capacities for Gambro AB and its
affiliated companies, which are engaged in the manufacture of equipment for
hemodialysis, cardiovascular surgery and blood component analysis and in the
provision of health care services. He was President of Gambro Healthcare, Inc.
from 1993 until February 2000, Executive Vice President of Gambro AB from 1990
until February 2000 and President of COBE Laboratories, Inc., a subsidiary of
Gambro AB engaged in the development and manufacture of hemodialysis products
and the operation of dialysis centers from 1991 until February 2000.
JOHN QUATTRONE, age 49, has served as one of our directors since November 2000.
Mr. Quattrone has served as General Director of Human Resources for General
Motors North America Automotive Operations since 1995.
J.D. KLEINKE, age 40, has served as one of our directors since April 2002. Mr.
Kleinke has served as President and CEO for HSN, a privately-held health
information technology development company since April 1998. From May 1992 to
February 1998, Mr. Kleinke served in various capacities for HCIA, Inc., a
healthcare information company that provides information products and services
to health care systems, managed care organizations and pharmaceutical companies.
Kerry R. Hicks and David G. Hicks, our Executive Vice President - Information
Technology, are brothers.
Health Grades, Inc., Kerry Hicks, our President and Chief Executive Officer,
David Hicks, our Executive Vice President - Information Technology, Sarah
Loughran, our Senior Vice President - Provider Services and certain of our
former executive officers, have agreed to take such actions (including in the
case of the individuals, voting their shares) as are in their control so that
(1) our Board of Directors is comprised of no more than eight members and (2)
one designee of each of Chancellor V, L.P. ("Chancellor") and Essex Woodlands
Health Ventures Fund IV, L.P. ("Essex") is elected to the Board of Directors. We
have been advised by Chancellor that it has irrevocably waived its right to
designate a director. In addition, at the present time, Essex has not designated
any person as a director, but reserves the right to do so in the future.
Section 16(a) Beneficial Ownership Reporting Compliance
Until March 31, 2002, Section 16(a) of the Securities Exchange Act of 1934 (the
"Act") requires our officers and directors and beneficial owners of more than
ten percent of our common stock to file reports of ownership of our securities
and changes in ownership with the Securities and Exchange Commission. We believe
that all filings required to be made during 2001 were made on a timely basis. On
December 31, 2001, we filed a Form 15 with the Securities and Exchange
Commission that resulted in the termination of registration of our common stock
under Section 12 of the Act. As a result, our officers, directors and holders of
more than 10% of our common stock are no longer subject to Section 16(a) of the
Act.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain information concerning the compensation
we paid to our Chief Executive Officer and the four other most highly paid
executive officers (collectively, the "named executive officers") during 2001,
2000 and 1999.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
--------------------- SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------------------------- ------ -------- -------- ------------ ---------------
Kerry R. Hicks 2001 $269,706 $ 67,250 61,719 $ 4,800
Chief Executive Officer 2000 $259,118 $195,000 260,000 $ 4,800
1999 $253,606 $ -- 475,000 $ 7,137
David G. Hicks 2001 $172,756 $ 27,176 24,940 $ 4,800
Executive Vice President - Information 2000 $175,419 $ 78,287 100,000 $ 4,800
& Technology 1999 $162,377 $ -- 200,000 $ 6,070
Peter Fatianow 2001 $149,577 $ 17,836 16,369 $ 4,800
Senior Vice President - Corporate Services 2000 $144,000 $ 28,565 100,000 $ 4,288
1999 $108,292 $ -- -- $ 3,083
Sarah Loughran 2001 $149,577 $ 17,836 16,369 $ 4,800
Senior Vice President - Provider Services 2000 $144,000 $ 28,565 100,000 $ 4,288
1999 $119,593 $ -- -- $ 2,999
Michael D. Phillips 2001 $215,186 $ -- 15,900 $ 4,800
Senior Vice President - Provider Sales
Peter Stahl III (2) 2001 $249,615 $ 8,563 7,859 $ 4,800
Former Chief Operating Officer 2000 $ 64,423 $ 8,914 400,000 $ 577
</Table>
(1) Includes amounts that we contributed for the account of the executive
officers under our Retirement Savings Plan.
(2) Mr. Stahl, formerly our Chief Operating Officer, ceased to be an
employee of Health Grades effective October 31, 2001.
Stock Options
The following table sets forth certain information regarding stock options
granted during 2001 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted (1) Fiscal Year Per Share(2) Date Present Value(3)
- -------------------- ------------ ------------- ------------ ---------- ----------------
Kerry R. Hicks 61,719 7.96% $ 0.7500 2/9/2011 $ 38,883
David G. Hicks 24,940 3.22% $ 0.7500 2/9/2011 $ 15,712
Peter Fatianow 16,369 2.11% $ 0.7500 2/9/2011 $ 10,312
Sarah Loughran 16,369 2.11% $ 0.7500 2/9/2011 $ 10,312
Michael D. Phillips 15,900 2.05% $ 0.1700 7/31/2011 $ 2,226
Peter Stahl III 7,859 1.01% $ 0.7500 1/29/2002(4) $ 4,951
</Table>
(1) The options vest in one-third increments on each of the first through
the third year anniversaries of the date of grant and terminate ten
years from the date of grant.
(2) The exercise price per share underlying all options is equal to the
closing price per share on the date of grant.
(3) These amounts represent the estimated fair value of stock options,
measured at the date of grant using the Black-Scholes option pricing
model. There are four underlying assumptions used in developing the
grant valuations: an expected volatility of 1.603; an expected term to
exercise of 3 years; risk-free interest rate over the life of the
option of 3.62%; and an expected dividend yield of zero. The actual
value, if any, an officer may realize will depend on the amount by
which the stock price exceeds the exercise price on the date the option
is exercised. Consequently, there is no assurance the value realized by
an officer will be at or near the value estimated above. These amounts
should not be used to predict stock performance.
(4) Mr. Stahl's options expired 90 days after October 31, 2001, which was
his separation date from Health Grades.
On February 7, 2002, we granted options to a number of our employees,
including our named executive officers. The options each have an exercise
price of $0.10, which was the closing price per share of our common stock on
the date of grant. Options were granted to the named executive officers to
purchase the following number of shares: Kerry R. Hicks, 1,493,104; David G.
Hicks, 900,000; Peter Fatianow, 600,000; Sarah Loughran, 900,000; Michael D.
Phillips, 400,000. Of the options granted to each named executive officer,
13.6% of the shares underlying stock options fully vest after six months;
13.6% of the shares underlying stock options fully vest after twelve months;
54.6% of the shares underlying stock options cliff-vest after two years,
subject to acceleration if certain cash flow targets are met; and 18.2% shares
underlying stock options cliff-vest after two years, subject to acceleration
if certain stock price targets our met for the market value of our common
stock.
The following table sets forth certain information regarding stock options held
as of December 31, 2001 by the named executive officers. The named executive
officers did not exercise any stock options in 2001.
FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------- ------------ ------------- ------------ -------------
Kerry R. Hicks 1,047,115 382,761 $ -- $ --
David G. Hicks 383,255 171,606 $ -- $ --
Peter Fatianow 33,334 83,035 $ -- $ --
Sarah Loughran 33,334 83,035 $ -- $ --
Michael D. Phillips 17,496 50,891 $ -- $ --
Peter Stahl III 133,334 -- $ -- $ --
</Table>
(1) Based on $0.07, the closing price of our common stock as reported on
the OTC Bulletin Board on December 31, 2001.
EMPLOYMENT AGREEMENTS
Mr. Kerry Hicks is employed by us under an employment agreement dated as of
April 1, 1996. The agreement is renewable automatically for one year periods
unless terminated by one of the parties. The agreement provided for Mr. Hicks to
receive an annual salary rate of $250,000 for 1998, with cost of living
increases for the years following 1998. In addition, the agreement provides for
annual incentive compensation equal to up to 100% of Mr. Hicks' base salary
based on performance targets established by the Board of Directors.
Mr. David Hicks is employed by us under an employment agreement dated as of
March 1, 1996. The agreement is renewable automatically for one year periods
unless terminated by one of the parties. The agreement provided for Messr. David
Hicks to receive an annual base salary of $144,000 for 1998, with cost of living
increases for the years following the third year. In addition, the agreement
provides for annual incentive compensation equal to up to 75% of his base salary
based on performance targets established by the Board of Directors. In
connection with Mr. David Hicks' appointment as Senior Vice President in 1999,
his base salary was increased to $172,500.
Under each of the employment agreements described above, in the event that the
officer is terminated without cause and there has been no change of control of
the Company, we will pay the officer his base salary for the remaining term of
the agreement and any earned but unpaid salary and incentive compensation. In
the event the officer is terminated with cause, regardless of whether there has
been a change of control, we will pay the officer his base salary for 60 days
following such termination. If the officer is terminated without cause upon a
change of control, he is entitled to receive a lump sum payment upon his
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
and non-competition covenants.
SEPARATION ARRANGEMENT
Mr. Stahl, our former Chief Operating Officer, ceased to be an employee of
Health Grades effective October 31, 2001. In connection with his departure, in
January 2002 we paid Mr. Stahl $130,000.
COMPENSATION OF DIRECTORS
Our directors generally do not receive compensation for their service on our
board of directors. However, effective January 1, 1999 through December 31,
2001, Messrs. Cheesbrough and Wahlstrom were entitled to receive $20,000 per
annum for their services on our board of directors and board committees. For the
2001 fiscal year, Messrs. Cheesbrough and Wahlstrom waived their right to
receive such compensation.
Effective April 17, 2002, we granted options to our non-employee directors to
purchase the following numbers of shares: Mr. Cheesbrough, 200,000; Mr. Kleinke,
100,000; Dr. Matthews, 100,000; Mr. Quattrone, 100,000; and Mr. Wahlstrom,
200,000 shares. Mr. Cheesbrough and Mr. Wahlstrom were granted options in excess
of the grants to the other Board members in recognition for their respective
chairmanships of various Board committees. The options all have an exercise
price of $0.06 per share (the closing price per share of our Common Stock at the
date of grant) and terminate on April 16, 2012. The options will be fully vested
on April 17, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF OUR COMMON STOCK BY CERTAIN PERSONS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of May 10, 2002 by (i) each person
known to us to own beneficially more than five percent of our common stock
(including such person's address), (ii) the named executive officers, (iii) each
director and (iv) all directors and executive officers as a group.
<Table>
<Caption>
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned Outstanding Shares (1)
- ------------------------ ------------------ ----------------------
Kerry R. Hicks (2) 3,126,509 8.3%
David G. Hicks (3) 842,295 2.3%
Peter Fatianow (4) 754,498 2.1%
Sarah Loughran (5) 628,753 1.7%
Michael Phillips (6) 202,354 *
Peter Stahl III (7) 202,500 *
Mats Wahlstrom (8) 163,343 *
Leslie S. Matthews, M.D. (9) 115,116 *
Peter H. Cheesebrough (10) 92,678 *
John Quattrone (11) 6,667 *
J.D. Kleinke -- *
Chancellor V, L.P. (12) 13,976,153 36.4%
Essex Woodlands Health Ventures Fund IV, L.P. (13) 9,947,430 26.3%
All directors and executive officers as a group
(11 persons)(14) 6,136,781 15.9%
</Table>
* Less than one percent
(1) Applicable percentage of ownership is based on 36,406,649 shares of
common stock outstanding on May 10, 2002. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and means voting or investment power with respect to
securities. Shares of common stock issuable upon the exercise of stock
options exercisable currently or within 60 days of May 10, 2002 are
deemed outstanding and to be beneficially owned by the person holding
such option for purposes of computing such person's percentage
ownership but are not deemed outstanding for the purpose of computing
the percentage ownership of any other person. Except for shares held
jointly with a person's spouse or subject to applicable community
property laws, or as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by such stockholder.
(2) Includes 10,000 shares of common stock held by The David G. Hicks
Irrevocable Children's Trust, warrants to purchase 350,000 shares and
1,067,688 shares underlying stock options. Does not include 60,000
shares of common stock held by The Hicks Family Irrevocable Trust, for
which shares Mr. Hicks disclaims beneficial ownership. Mr. Hicks'
address is 44 Union Blvd., Suite 600, Lakewood, Colorado 80228.
(3) Includes warrants to purchase 17,500 shares and 391,569 shares
underlying stock options.
(4) Includes 38,791 shares underlying stock options.
(5) Includes 38,791 shares underlying stock options.
(6) Includes 34,991 shares underlying stock options.
(7) Mr. Stahl ceased to be an employee of Health Grades effective October
31, 2001.
(8) Includes 63,343 shares underlying stock options.
(9) Includes 73,333 shares underlying stock options.
(10) Includes 71,678 shares underlying stock options.
(11) Includes 6,667 shares underlying stock options.
(12) Includes warrants to purchase 1,971,820 shares. The address of
Chancellor V, L.P. is 1166 Avenue of the Americas, New York, NY 10036.
(13) Includes warrants to purchase 1,403,430 shares. The address of Essex
Woodlands Health Ventures Fund IV, L.P. is 190 South LaSalle Street,
Suite 2800, Chicago, IL 60603.
(14) Include warrants to purchase 367,500 shares and 1,872,625 shares
underlying stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective April 16, 2001, we reached an agreement with Chancellor V.,
L.P. ("Chancellor V") and Essex Woodlands Health Ventures Fund IV, L.P.
("Essex"), regarding a commitment (the "Commitment") to provide us with up to
$2.0 million of equity financing. Chancellor V and Essex were the two principal
investors in the Equity Financing described above. In consideration for the
commitment, we issued to Chancellor and Essex warrants (the "Commitment
Warrants") to purchase an aggregate of 500,000 shares of our common stock at an
exercise price per share of $0.26, which was the closing market price per share
of our common stock as reported by Nasdaq on April 16, 2001. The Commitment
Warrants will expire on April 16, 2007. In addition, we repriced warrants to
purchase 100,000 shares of our common stock that were issued to Chancellor V and
Essex in March 2000 to the same $0.26 per share exercise price.
Under the terms of the agreement with Chancellor V and Essex, we were
granted the option until December 31, 2001, to sell our common stock to
Chancellor V and Essex at an aggregate purchase price of up to $2.0 million.
Effective October 9, 2001, we exercised our option to receive the entire $2.0
million. Under the terms of the Commitment, in exchange for the $2.0 million, we
issued an aggregate of 13,333,333 shares of our common stock to Chancellor and
Essex. In addition, we issued six-year warrants to purchase 350,000 shares of
our common stock at an exercise price per share of $0.15. The warrants have a
six-year term.
Under the terms of the Commitment, the price per share for the purchase
of our common stock was equal to the lesser of $0.26 and the closing market
price per share of our common stock on the date that we provided notice to
Chancellor V and Essex that we intended to exercise the option, but in no event
less than $0.15 per share. As the closing market price per share of our common
stock was less than $0.15 per share on the date we provided notice to Chancellor
V and Essex, the common stock was issued to Chancellor V and Essex at $0.15 per
share.
On February 7, 2002, our stockholders approved the Health Grades, Inc.
Stock Purchase Plan (the "Plan"). The Plan enabled participating employees to
purchase shares of our Common Stock by electing to have payroll deductions in
2002 of up to 30 percent of their annual base rate of pay (excluding bonuses,
overtime pay, commissions and severance pay) as in effect on January 1, 2002.
The share price for this purpose was based upon the average of the last reported
sales price on each of the 20 trading days ending on, and including, February
15, 2002, as reported on the OTC Bulletin Board. The shares may not be sold
prior to January 1, 2003. The number of shares purchased by our named executive
officers, based upon a share price of $0.1195 per share as determined utilizing
the calculation described above, were as follows:
<Table>
<Caption>
Name Number of shares purchased Aggregate share price
---- -------------------------- ---------------------
Kerry R. Hicks 293,403 $35,062
David G. Hicks 306,945 $36,680
Peter Fatianow 162,962 $19,474
Sarah Loughran 162,962 $19,474
Michael D. Phillips 167,363 $20,000
</Table>
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.
HEALTH GRADES, INC.
Date: April 29, 2002 By /s/ Kerry R. Hicks
-----------------------
Kerry R. Hicks
Chief Executive Officer