SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 2002
-----------------------------------------------
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 62-1623449
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On April 30, 2002, 36,406,649 shares of the Registrant's common stock, $.001
par value, were outstanding.
Health Grades, Inc. and Subsidiaries
INDEX
<Table>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Balance Sheets
March 31, 2002 and December 31, 2001.................. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001............ 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001............ 5
Notes to Consolidated Financial
Statements............................................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................... 9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk........................................... 12
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders... 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
</Table>
2
PART I. FINANCIAL INFORMATION
Health Grades, Inc. and Subsidiaries
Consolidated Balance Sheets
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 1,727,312 $ 2,295,557
Accounts receivable, net 488,397 778,370
Prepaid expenses and other 152,439 132,581
Receivables from officers 42,239 12,726
Income tax receivable 1,046,296 --
------------ ------------
Total current assets 3,456,683 3,219,234
Property and equipment, net 263,448 334,178
Goodwill, net of accumulated amortization of $1,655,508 4,194,492 4,194,492
------------ ------------
Total assets $ 7,914,623 $ 7,747,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 17,133 $ 149,772
Accrued payroll, incentive compensation and related
expenses 327,679 472,067
Accrued expenses 166,316 222,966
Deferred income 2,071,408 2,136,175
Income taxes payable 76,733 76,930
------------ ------------
Total current liabilities 2,659,269 3,057,910
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 100,000,000
shares authorized, and 43,965,706 and 42,165,733
shares issued and outstanding in 2002 and 2001, respectively 43,966 42,166
Additional paid-in capital 89,762,836 89,549,538
Accumulated deficit (71,090,280) (71,634,130)
Receivable from stock purchase plan purchases (193,588) --
Treasury stock (7,559,057 shares) (13,267,580) (13,267,580)
------------ ------------
5,255,354 4,689,994
------------ ------------
Total liabilities and stockholders' equity $ 7,914,623 $ 7,747,904
============ ============
</Table>
See accompanying notes to consolidated financial statements
3
Health Grades, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
------------------------------
2002 2001
------------ ------------
REVENUE:
Ratings and advisory revenue $ 1,039,067 $ 558,862
Physician practice service fees 111,831 136,016
Other 2,021 2,709
------------ ------------
1,152,919 697,587
------------ ------------
COSTS AND EXPENSES:
Ratings and advisory costs and expenses:
Production, content and product development 198,629 291,435
Sales and marketing 270,668 371,652
Physician practice services costs and expenses:
Litigation and other costs 2,253 45,087
General and administrative 1,187,921 2,296,250
------------ ------------
1,659,471 3,004,424
------------ ------------
Loss from operations (506,552) (2,306,837)
Other:
Income on sale of assets and other -- 325
Interest income 4,106 54,566
Interest expense -- (28,563)
------------ ------------
Loss before income taxes (502,446) (2,280,509)
Income tax benefit 1,046,296 --
------------ ------------
Net income (loss) $ 543,850 $ (2,280,509)
============ ============
Net income (loss) per share (basic) $ 0.02 $ (0.11)
============ ============
Weighted average shares outstanding (basic) 35,526,744 21,507,758
============ ============
Net income (loss) per share (diluted) $ 0.02 $ (0.11)
============ ============
Weighted average shares outstanding (diluted) 35,526,744 21,507,758
============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
Health Grades, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 543,849 $ (2,280,509)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 76,729 139,564
Amortization -- 209,725
Bad debt expense -- 47,405
Gain on disposal of assets -- (325)
Retainer warrants -- 5,400
Changes in operating assets and liabilities:
Accounts receivable, net 260,460 363,956
Due from affiliated practices in litigation -- 1,944,919
Prepaid expenses and other assets (19,858) (808)
Accounts payable and accrued expenses (189,288) (240,140)
Accrued payroll, incentive compensation and
related expenses (144,388) (341,029)
Income taxes payable and prepaid and
recoverable income taxes, net (1,046,493) 2,045
Deferred income (64,767) 51,589
------------ ------------
Net cash used in operating activities (583,756) (98,208)
INVESTING ACTIVITIES
Purchases of property and equipment (5,999) (5,791)
Proceeds from sale of equipment -- 325
Increase in other assets -- (895)
------------ ------------
Net cash used in investing activities (5,999) (6,361)
FINANCING ACTIVITIES
Net proceeds from stock purchase plan 21,510 --
Principal repayments on notes payable -- (1,369,767)
Repayments from notes receivable -- 611,273
Purchase of treasury stock -- (187,500)
Exercise of common stock options -- 8,438
------------ ------------
Net cash provided by (used in) financing activities 21,510 (937,556)
Net decrease in cash and cash equivalents (568,245) (1,042,125)
Cash and cash equivalents at beginning of period 2,295,557 4,797,868
------------ ------------
Cash and cash equivalents at end of period $ 1,727,312 $ 3,755,743
============ ============
</Table>
See accompanying notes to consolidated financial statements.
5
Health Grades, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Health Grades,
Inc. and subsidiaries (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, these statements include all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods reported herein. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
DESCRIPTION OF BUSINESS
Health Grades, Inc. is a healthcare ratings, information and services company.
The Company grades, or provides consumers with the means to assess and compare
the quality or qualifications of, various types of healthcare providers.
The Company offers services to hospitals that are either attempting to build a
brand name reputation based upon quality of care or are working to identify
areas to improve quality. For hospitals that have received high ratings, the
Company offers the opportunity to license its ratings and trademarks and provide
assistance in their marketing programs. For providers who have not received high
ratings, the Company offers quality improvement services.
The Company provides basic and expanded profile information for a variety of
providers and facilities. This information is made available to consumers,
employers and health plans to assist them in selecting healthcare providers. The
basic profile information is available free of charge on the Company's website,
www.healthgrades.com. For certain providers, the Company offers healthcare
quality reports. These reports provide more detailed information than what is
available free of charge on the healthgrades.com website. Report pricing and
content varies based upon the type of provider and whether the user is a
consumer or a healthcare professional.
In addition to the services noted above, which constitute the Company's ratings
and advisory business, the Company also provides limited physician practice
management services to a musculoskeletal practice under a management services
agreement that expires in September 2002.
NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations. In June 2001, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 141,
Business Combinations ("Statement 141"), which requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The adoption of this
accounting pronouncement on January 1, 2002 had no effect on the Company's
financial position or results of operations.
Goodwill and Other Long-Lived Assets. In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"), which prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. Statement 142 also
requires that these assets be reviewed for impairment at least annually. Under
Statement 142, intangible assets with finite lives continue to be to be
amortized over their estimated useful lives. The Company adopted Statement 142
on January 1, 2002.
Through December 31, 2001, the Company had recorded accumulated goodwill
amortization of $1.7 million. Application of the non-amortization provisions of
Statement 142 is expected to result a reduction of operating expenses of
approximately $839,000 ($0.02 per share) for the year ending December 31, 2002.
Net income (loss) and net income (loss) per share, adjusted to exclude
amortization of goodwill, are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
---------- ------------
Reported net income (loss) 543,850 (2,280,509)
Add back: amortization of goodwill -- 209,725
---------- ------------
Adjusted net income (loss) 543,850 (2,070,784)
========== ============
Basic and diluted income (loss) per share 0.02 (0.11)
Add back: amortization of goodwill -- 0.01
---------- ------------
Adjusted basic income (loss) per share 0.02 (0.10)
========== ============
Management plans to test goodwill for impairment using the two-step process
described in Statement 142. The first step is a screen for potential impairment
and the second step measures the amount of impairment, if any. Management
expects to perform the first of the required goodwill impairment tests as of
January 1, 2002 in the second quarter of 2002. Management has not yet determined
what the effect of these tests will be on the results of operations and
financial position of the Company. Any impairment charge resulting from these
transitional impairment tests would be reflected as a cumulative effect of a
change in accounting principles in a restated first quarter 2002. Accordingly,
the results of operations and financial position of the Company for the first
quarter of 2002 reported in the consolidated financial statements included
herein could be restated.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, as far as they relate to the disposal of a segment of a
business. The Company adopted Statement 144 on January 1, 2002. The adoption of
Statement 144 did not have a material effect on the Company's results of
operations or financial position.
NOTE 2 - RECEIVABLES FROM OFFICERS
Receivables from officers include $29,513 due from certain officers for
withholding taxes due on shares purchased under the Health Grades, Inc. Stock
Purchase Plan. (See Note 4 for further discussion of the Health Grades, Inc.
Stock Purchase Plan). These amounts are due on May 30, 2002. In addition, one of
the Company's officers has a loan from the Company with a principal balance of
$12,726, bearing interest at 9.75% per annum. The note is currently due upon
demand by the Company.
6
NOTE 3 - INCOME TAX RECEIVABLE
On March 9, 2002, President Bush signed into law the Job Creation and Worker
Assistance Act of 2002 ("JCWA Act"). One of the provisions of the JCWA Act
extends the net operating loss carryback provisions of the Internal Revenue Code
from two years to five years for losses incurred in 2001 and 2002. Prior to the
passage of the JCWA Act the Company did not have the ability to utilize its 2001
tax loss to reduce prior year taxable income because the Company had no taxable
income in 2000 or 1999. However, with the passage of the JCWA Act, the Company
believes it has the ability to carryback its 2001 tax loss to reduce taxable
income in 1997. The Company has recorded the anticipated income tax benefit of
approximately $1.0 million in its statement of operations for the three months
ended March 31, 2002, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires that the effects of changes in tax laws be recognized in the period new
legislation is adopted. The Company anticipates it will receive the refund in
the second or third quarter of 2002.
NOTE 4 - STOCK PURCHASE PLAN
In February 2002, the Company's stockholders approved the Health Grades, Inc.
Stock Purchase Plan (the "Plan"). The Plan enables participating employees (the
"Participants") to purchase shares of Company 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 shares purchased under the Plan was $0.1195
per share, 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. Participants purchased a total of 1,799,973 shares with
an aggregate purchase price of approximately $215,000. Shares purchased under
the Plan have voting rights but are restricted from sale until December 31,
2002. Under the terms of the Plan, if a Participant terminates employment with
the Company prior to December 31, 2002, no further salary reduction will be made
and the Participant will forfeit a number of shares equal to the number of
shares that would have been purchased by the employee for the period beginning
on the employee's termination date and ending on December 31, 2002. The amount
remaining to be paid from future salary reductions by the Participants for the
purchase of shares under the Plan has been shown as a reduction to stockholders'
equity in the Company's consolidated balance sheet.
NOTE 5 - 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 Ratings and Advisory Revenue ("RAR") and Physician
Practice Services ("PPS"). RAR revenue is derived primarily from marketing
arrangements with hospitals and fees related to the licensing of its content
(including set-up fees). PPS revenue is derived primarily from management
services provided to physician practices.
The Company uses net loss before income taxes for purposes of performance
measurement. The measurement basis for segment assets includes intangible
assets.
Summary information by segment is as follows:
<Table>
<Caption>
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
RAR
Revenue from external customers $ 1,039,067 $ 558,862
Interest income 4,106 44,669
Depreciation and amortization expense 36,806 258,637
Segment net income (loss) before income taxes 46,157 (946,581)
Segment assets 5,493,533 5,856,012
Segment asset expenditures 5,999 715
PPS
Revenue from external customers $ 111,831 $ 136,016
Interest income -- 9,897
Interest expense -- (28,563)
Depreciation and amortization expense 39,923 90,652
Segment net loss before income taxes (548,604) (1,333,928)
Segment assets 20,945,541 22,348,067
Segment asset expenditures -- 5,076
</Table>
7
A reconciliation of the Company's segment revenue, segment net loss before
income taxes, segment assets and other significant items to the corresponding
amounts in the Consolidated Financial Statements is as follows:
<Table>
<Caption>
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
REVENUE
Total for reportable segments $ 1,150,898 $ 694,878
Other revenue 2,021 2,709
------------ ------------
Total consolidated revenue $ 1,152,919 $ 697,587
============ ============
LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (502,447) $ (2,280,509)
------------ ------------
Loss before income taxes $ (502,447) $ (2,280,509)
============ ============
ASSETS
Total assets for reportable segments $ 26,439,074 $ 28,204,079
Elimination of advance to subsidiaries (10,729,431) (10,389,358)
Elimination of investment in subsidiaries (7,795,020) (7,795,020)
------------ ------------
Consolidated total assets $ 7,914,623 $ 10,019,701
============ ============
</Table>
For each of the periods presented, the Company's primary operations and assets
were within the United States.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid amounted to approximately $-- and $38,000 for the three
months ended March 31, 2002 and 2001, respectively. Refunds received from income
taxes amounted to approximately $-- and $2,000 for the three months ended March
31, 2002 and 2001, respectively.
Supplemental schedule of noncash investing and financing activities are as
follows:
For the three months ended March 31, 2002, Participants in the Plan paid $21,510
for shares purchased through payroll deductions. This amount has been included
in cash received from financing activities in the Company's consolidated
statement of cash flows. In addition, the remaining receivable from stock
purchase plan purchases of $193,588 will be included in cash received from
financing activities in the Company's consolidated statement of cash flows as
the payroll deductions occur for the remainder of 2002.
NOTE 7 - SUBSEQUENT EVENTS
On May 13, 2002, the Company completed a line of credit arrangement (the
"Agreement") with Silicon Valley Bank. Under the terms of the Agreement, the
company may request advances not to exceed an aggregate amount of $1.0 million
over the one-year term of the Agreement. In addition, advances under the
Agreement are limited to 75% of Eligible Accounts (as defined in the Agreement)
plus 50% of the Company's cash invested with Silicon Valley Bank. Advances under
the Agreement bear interest at Silicon Valley Bank's prime rate plus .75%.
Interest is due monthly on advances outstanding and the principal balance of any
advances taken by the Company are due at the end of the one-year Agreement term,
subject to earlier payment to the extent advances exceed the limitations
described above. The Company's ability to request advances under the Agreement
is subject to certain financial and other covenants.
8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning the sufficiency of
available funds, anticipated future revenues and the anticipated receipt of our
tax refund are "forward looking statements." Actual events or results may differ
materially from those discussed in forward looking statements as a result of
various factors, including failure to achieve revenue increases, unanticipated
expenditures, delay in the receipt of our anticipated tax refund and other
factors discussed below and in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, particularly under "Risk Factors" in Item 1.
GENERAL
We are a healthcare ratings and consulting company. We grade, or provide
consumers with the means to assess and compare the quality or qualifications of,
various types of healthcare providers.
We offer services to hospitals that are either attempting to build a brand name
reputation based upon quality of care or are working to identify areas to
improve quality. For hospitals that have received high ratings, we offer the
opportunity to license our ratings and trademarks and provide assistance in
their marketing programs. For providers who have not received high ratings, we
offer quality improvement services.
We provide basic and expanded profile information for a variety of providers and
facilities. This information is made available to consumers, employers and
health plans to assist them in selecting healthcare providers. The basic profile
information is available free of charge on our website, www.healthgrades.com.
For certain providers, we offer healthcare quality reports. These reports
provide more detailed information than what is available free of charge on the
healthgrades.com website. Report pricing and content varies based upon the type
of provider and whether the user is a consumer or a healthcare professional.
In addition to the services noted above, which constitute our ratings and
advisory business, we also provide limited physician practice management
services to a musculoskeletal practice under a management services agreement
that expires in September 2002.
NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations. In June 2001, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 141,
Business Combinations ("Statement 141"), which requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The adoption of this
accounting pronouncement on January 1, 2002 had no effect on the Company's
financial position or results of operations.
Goodwill and Other Long-Lived Assets. In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"), which prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. Statement 142 also
requires that these assets be reviewed for impairment at least annually. Under
Statement 142, intangible assets with finite lives continue to be to be
amortized over their estimated useful lives. The Company adopted Statement 142
on January 1, 2002.
Through December 31, 2001, the Company had recorded accumulated goodwill
amortization of $1.7 million. Application of the non-amortization provisions of
Statement 142 is expected to result a reduction of operating expenses of
approximately $839,000 ($0.02 per share) for the year ending December 31, 2002.
Net income (loss) and net income (loss) per share, adjusted to exclude
amortization of goodwill, are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
---------- ------------
Reported net income (loss) 543,850 (2,280,509)
Add back: amortization of goodwill -- 209,725
---------- ------------
Adjusted net income (loss) 543,850 (2,070,784)
========== ============
Basic and diluted income (loss) per share 0.02 (0.11)
Add back: amortization of goodwill -- 0.01
---------- ------------
Adjusted basic income (loss) per share 0.02 (0.10)
========== ============
Management plans to test goodwill for impairment using the two-step process
described in Statement 142. The first step is a screen for potential impairment
and the second step measures the amount of impairment, if any. Management
expects to perform the first of the required goodwill impairment tests as of
January 1, 2002 in the second quarter of 2002. Management has not yet determined
what the effect of these tests will be on the results of operations and
financial position of the Company. Any impairment charge resulting from these
transitional impairment tests would be reflected as a cumulative effect of a
change in accounting principles in a restated first quarter 2002. Accordingly,
the results of operations and financial position of the Company for the first
quarter of 2002 reported in the consolidated financial statements included
herein could be restated.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, as far as they relate to the disposal of a segment of a
business. The Company adopted Statement 144 on January 1, 2002. The adoption of
Statement 144 did not have a material effect on the Company's results of
operations or financial position.
9
RESULTS OF OPERATIONS
Ratings and advisory revenue. For the three months ended March 31, 2002, ratings
and advisory revenue was approximately $1,039,000, an increase of $480,000, or
86%, over revenue of $559,000 for the three months ended March 31, 2001. This
increase is primarily due to the addition of hospital clients under our
strategic quality initiative program. For the first quarter of 2002,
approximately 79% of our ratings and advisory revenue was derived from our
strategic quality initiative services, compared to 77% for the same period of
2001. In addition, approximately 11% of our ratings and advisory revenue was
derived from our quality assessment and improvement services, compared to only
1% for the same period in 2001. Finally, approximately 9% of our ratings and
advisory revenue was derived from licensing access to our database of healthcare
information for the first quarter of 2002, compared to 21% for the same period
of 2001.
Physician practice service fee revenue. Physician practice service fee revenue
is recognized based upon the contractual arrangements of the underlying service
agreements between the Company and the affiliated practices. As of April 2002,
we have one service agreement remaining with an affiliated practice, which will
expire in September 2002.
10
General and administrative expenses. For the three months ended March 31, 2002,
general and administrative expenses were approximately $1,188,000, a decrease of
$1,108,000, or 48%, over general and administrative expenses of $2,296,000 for
the three months ended March 31, 2001. Contributing to this decrease was a
reduction in salaries and wages expenses of approximately $565,000, due to
certain employee reductions made during 2001. In addition, due to the
nonamortization provisions of Statement of Financial Accounting Standards No.
No. 142, Goodwill and Other Intangible Assets, we did not record amortization
expense related to goodwill for the three months ended March 31, 2002, whereas
we incurred approximately $210,000 in amortization expense for the same period
of 2001. Finally, due to certain cost reductions during the later part of 2001,
we incurred approximately $79,000 in certain investor relations expenses for the
three months ended March 31, 2001, with no corresponding expenses for the three
months ended March 31, 2002.
Litigation and other costs. For the three months ended March 31, 2001, we
incurred approximately $45,000 in legal fees related to disputes with two of our
affiliated practices. As of March 31, 2002, all disputes with our former
affiliated practices have been settled.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had working capital of approximately $797,000, an increase
of $636,000 from approximately $161,000 as of December 31, 2001. For the first
three months of 2002, cash flow used in operations was approximately $584,000
compared to $98,000 for the same period of 2001. The first quarter of 2001
included cash receipts from former affiliated practices of approximately $1.9
million.
On March 9, 2002, President Bush signed into law the Job Creation and Worker
Assistance Act of 2002 ("JCWA Act"). One of the provisions of the JCWA Act
extends the net operating loss carryback provisions of the Internal Revenue Code
from two years to five years for losses incurred in 2001 and 2002. Prior to the
passage of the JCWA Act, the Company did not have the ability to utilize its
2001 tax loss to reduce prior year taxable income because the Company had no
taxable income in 2000 or 1999. However, with the passage of the JCWA Act, the
Company believes it has the ability to carryback its 2001 tax loss to reduce
taxable income in 1997. In April 2002, the Company filed an Application for
Tentative Refund for the 1997 tax year and expects to receive a tax refund of
approximately $1.0 million. The Company has recorded the anticipated income tax
benefit in its statement of operations for the three months ended March 31,
2002, in accordance with the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, which requires that the effects
of changes in tax laws be recognized in the period new legislation is adopted.
The Company anticipates it will receive the refund in the second or third
quarter of 2002.
On May 13, 2002, the Company completed a line of credit arrangement (the
"Agreement") with Silicon Valley Bank. Under the terms of the Agreement, the
company may request advances not to exceed an aggregate amount of $1.0 million
over the one-year term of the Agreement. In addition, advances under the
Agreement are limited to 75% of Eligible Accounts (as defined in the Agreement)
plus 50% of the Company's cash invested with Silicon Valley Bank. Advances under
the Agreement bear interest at Silicon Valley Bank's prime rate plus .75%.
Interest is due monthly on advances outstanding and the principal balance of any
advances taken by the Company are due at the end of the one-year Agreement term,
subject to earlier payment to the extent advances exceed the limitations
described above. The Company's ability to request advances under the Agreement
is subject to certain financial and other covenants.
We are currently involved in a dispute with respect to one of our license and
content agreements. Under the terms of the agreement, through the end of the
contract term in July 2003, we are entitled to receive payment of at least
$300,000. The content partner is seeking to terminate the agreement with us. We
have submitted the matter to binding arbitration as required per the agreement.
Based upon the terms of the agreement, we do not believe the content partner has
the ability to terminate the agreement without payment in full to us. We plan to
vigorously pursue this matter.
Although we anticipate that we have sufficient funds available to support
ongoing operations for at least the next twelve months, if our revenues fall
short of our expectations or if our expenses exceed our expectations, we may
need to draw on the credit line available under the Agreement described above,
and/or raise additional capital through public or private debt or equity
financing. We may not be able to secure sufficient funds on terms acceptable to
us. If equity securities are issued to raise funds, our stockholders' equity may
be diluted. If additional funds are raised through debt financing, we may be
subject to significant restrictions. Furthermore, we typically receive a
non-refundable payment for the contract term upon execution of our strategic
quality initiative agreements. As a result, our operating cash flow is
substantially dependent upon our ability to continue to sign new agreements. Our
current operating plan includes growth in new sales from our strategic quality
initiative and quality assessment and improvement agreements. Failure to achieve
such new sales would have a material negative impact on our financial position
and cash flow.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 7, 2002, the Company held a Special Meeting of stockholders. At the
meeting, the stockholders voted on a proposal to approve the Health Grades, Inc.
Stock Purchase Plan, a proposal to amend the Company's 1996 Equity Compensation
Plan and a proposal to amend the Company's Certificate of Incorporation.
The voting results on the three matters are set forth below:
1. Proposal to approve the Health Grades, Inc. Stock Purchase Plan:
For Against Abstain
--- ------- -------
28,712,487 1,392,136 19,025
2. Proposal to amend the Health Grades, Inc. 1996 Equity Compensation Plan:
For Against Abstain
--- ------- -------
28,621,653 1,491,895 10,100
3. Proposal to amend Health Grades, Inc. Certificate of Incorporation:
For Against Abstain
--- ------- -------
28,895,742 1,218,306 9,600
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 - Health Grades, Inc. Stock Purchase Plan. (Incorporated
by reference to Exhibit 4.1 to the Company's
registration statement on Form S-8
(File No. 333-82398), filed with the Commission on
February 8, 2002.)
10.2 - Health Grades, Inc. 1996 Equity Compensation Plan, as
amended. (Incorporated by reference to Exhibit 4.2 to
the Company's registration statement on Form S-8
(File No. 333-82398), filed with the Commission on
February 8, 2002.)
(b) Reports on Form 8-K. During the period covered by this report,
the Company did not file any reports on Form 8-K with the
Commission.
SIGNATURES
Pursuant to the requirements 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: May 15, 2002 By: /s/ Allen Dodge
------------------------------------------
Allen Dodge
Senior Vice President - Finance and
Chief Financial Officer
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