UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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<Table>
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Commission Only (as permitted by
Rule 14a-6(e)(2))
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[ ] Soliciting Material Pursuant to Rule 14a-12
</Table>
Health Grades, Inc
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HEALTH GRADES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholder:
It is my pleasure to invite you to attend the 2002 Annual Meeting of
Stockholders of Health Grades, Inc., to be held at our corporate headquarters,
44 Union Boulevard, Lakewood, Colorado, on Tuesday, June 25, 2002 at 9:00 a.m.
local time. The meeting will be held for the following purposes:
1. To elect six directors for the ensuing year.
2. To act upon such other matters as may properly come before the
meeting.
Holders of record of our common stock at the close of business on May
10, 2002 are entitled to receive this notice and to vote at the meeting or any
adjournment.
Your vote is important. Whether you plan to attend the meeting or not,
we urge you to complete, sign and return your proxy card as soon as possible in
the envelope provided. This will ensure representation of your shares in the
event you are not able to attend the meeting. You may revoke your proxy and vote
in person at the meeting if you so desire.
/s/ ALLEN DODGE
Allen Dodge
May 29, 2002 Senior Vice President - Finance, Chief
Financial Officer and Secretary
HEALTH GRADES, INC.
44 UNION BOULEVARD
SUITE 600
LAKEWOOD, COLORADO 80228
PROXY STATEMENT
This proxy statement is being furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Health Grades,
Inc. for the 2002 annual meeting of stockholders. We are first mailing copies of
this proxy statement, the attached notice of annual meeting of stockholders and
the enclosed form of proxy on or about May 29, 2002.
At the annual meeting, holders of our common stock will vote upon the
election of six directors to serve until the 2003 annual meeting of
stockholders.
Our Board of Directors has fixed the close of business on May 10, 2002
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the annual meeting or any adjournment of the annual meeting. You
may vote at the annual meeting only if you are a holder of record of common
stock at the close of business on the record date. As of the record date,
36,406,649 shares of common stock were issued and outstanding.
If you complete and return your proxy card and we receive it at or
prior to the annual meeting, your shares will be voted in accordance with your
directions. You can specify your choice by marking the appropriate box on the
enclosed proxy card. If your proxy card is signed and returned without
directions, the shares will be voted for the persons identified in this proxy
statement as nominees for election to the Board of Directors. You may revoke
your proxy at any time before it is voted at the meeting by sending a notice of
revocation to our Secretary, executing a later-dated proxy or voting by ballot
at the meeting.
The holders of a majority of our common stock entitled to vote, present
in person or represented by proxy, will constitute a quorum for the transaction
of business. Abstentions and broker "non-votes" are counted as present and
entitled to vote for purposes of determining a quorum. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received instructions from the beneficial
owner.
Holders of common stock are entitled to one vote per share on all
matters properly brought before the meeting. Directors are elected by a
plurality of the votes cast. A plurality means that the nominees with the
largest number of votes are elected as directors up to the maximum number of
directors to be chosen at the meeting. All other matters to be acted upon at the
meeting will be determined by the affirmative vote of the holders of the
majority of the common stock present in person or represented by proxy and
entitled to vote. An abstention is counted as a vote against and a broker
"non-vote" generally is not counted for purposes of approving these matters.
The Board of Directors is not aware of any matters that will be brought
before the meeting other than those described in this proxy statement. However,
if any other matters properly come before the meeting, the persons named on the
enclosed proxy card will vote in accordance with their best judgment on such
matters.
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) our executive officers listed under
"Executive Compensation--Summary of Cash and Certain Other Compensation," (iii)
each director and nominee for election as a 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 D. 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. Cheesbrough(10) 92,678 *
John J. 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 or warrants exercisable currently or within 60 days of May 10,
2002 are deemed outstanding and to be beneficially owned by the person
holding such option or warrant 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
(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 Health Grades, Inc., 44 Union Boulevard, Suite 600,
Lakewood, CO, 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) Includes warrants to purchase 367,500 shares and 1,872,625 shares
underlying stock options.
3
ELECTION OF DIRECTORS
At the meeting, six directors will be elected to hold office until the
Annual Meeting of Stockholders in 2003 or until their successors have been
elected and qualified. Unless contrary instructions are given, the shares
represented by a properly executed proxy will be voted for the nominees listed
below. All of the nominees are currently members of our Board of Directors.
If, at the time of the meeting, one or more of the nominees has become
unavailable to serve, shares represented by proxies will be voted for the
remaining nominees and for any substitute nominee or nominees designated by the
Board of Directors, unless the size of the Board is reduced. The Board of
Directors knows of no reason why any of the nominees will be unavailable or
unable to serve.
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 to be nominated to our Board of Directors, but reserves the right to
do so in the future.
Information concerning the nominees for election as directors is set
forth below:
KERRY R. HICKS, age 42, who is one of our founders, has served as our Chief
Executive Officer and as one of our directors since our inception in December
1995. He also served as our President from our inception until November 1999 and
since June 2001. From 1985 to 1995, Mr. Hicks served as Senior Vice President of
LBA Health Care Management.
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 is 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 in Baltimore,
Maryland.
4
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 J. 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 Chief Executive Officer 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held twelve meetings during 2001. The Board has an
Audit Committee and a Compensation Committee. The Board does not have a
Nominating Committee. Each of our directors attended more than 75 percent of
each of the meetings of the Board and of all committees on which he served.
The Audit Committee is authorized to review our audited financial
statements prior to filing or distribution and consider the adequacy of our
internal controls, to review with the independent auditors the scope of their
activities and findings, to review the independence of our independent auditors,
to review with management and the independent auditors our quarterly financial
statements prior to filing or distribution and to review with the appropriate
officers our internal controls. The Audit Committee also recommends the firm of
independent auditors for appointment by us. Messrs. Wahlstrom (Chairman) and
Cheesbrough and Dr. Matthews are the current members of the Audit Committee. The
Audit Committee held six meetings during 2001.
The Compensation Committee is authorized to determine the terms and
conditions of the employment of our executive officers and to administer our
1996 Equity Compensation Plan.
5
Messrs. Cheesbrough (Chairman) and Quattrone are the current members of the
Compensation Committee. The Compensation Committee held eight meetings during
2001.
COMPENSATION OF DIRECTORS
Our directors generally do not receive compensation for their service
on our board of directors. However, effective January 1, 1999, 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. This compensation arrangement was terminated on December 31, 2001.
Effective April 17, 2002, we granted options to our non-employee
directors to purchase the following numbers of shares: Mr. Cheesbrough, 200,000
shares; Mr. Kleinke, 100,000 shares; Dr. Matthews, 100,000 shares; Mr.
Quattrone, 100,000 shares; 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 Board
committees. All of the options have an exercise price of $0.06 per share (the
closing price per share of our Common Stock on the OTC Bulletin Board the date
of grant) and terminate on April 16, 2012. The options vest in equal increments
on each of the first three anniversaries of the date of grant and will be fully
vested on April 17, 2005.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Marc S. Sandroff, a former director who served on our Compensation
Committee during 2001, was a Managing Director of Essex Woodlands Health
Ventures Fund IV, L.P ("Essex").
Effective April 16, 2001, we reached an agreement with Chancellor V.,
L.P. ("Chancellor V") and Essex, regarding a commitment (the "Commitment") to
provide us with up to $2.0 million of equity financing. Chancellor V and Essex
were two of our existing investors. In consideration for the commitment, we
issued to Chancellor V 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 sell such number of shares
as would provide us with 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 V 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.
6
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.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is currently composed of two members of the
Board of Directors who are not current or former employees of Health Grades. The
Committee is authorized to determine the terms and conditions of the employment
of Health Grades' executive officers, including compensation, and to administer
the Health Grades, Inc. 1996 Equity Compensation Plan. In its administration of
the Equity Compensation Plan, the Committee has the power to grant and determine
the terms and conditions of stock options, other than stock options granted to
non-employee directors.
Compensation Philosophy in 2001
Health Grades devoted significant efforts in 2001 toward further
development of its healthcare information business. Nevertheless, efforts to
control expenses contributed to a reduction in its workforce and increased tasks
for those employees, including our executive officers, who remained in the
employ of Health Grades. In this regard, some of Health Grades' executive
officers left the Company in 2001, and rather than replace those officers, our
remaining executive officers were asked to assume additional duties. The
Committee recognized that appropriate incentives must be provided to the
remaining executive officers, whose continued commitment to Health Grades is
critical to the growth of the company. For this reason, as well as the need to
conserve Health Grades' cash resources, equity based incentives became the
paramount component of executive compensation by the end of 2001.
The basis for determining executive compensation in 2001 for the
executive officers generally, and specifically for Kerry R. Hicks, Health
Grades' Chief Executive Officer, is described below.
Base Salary
The base salary of certain of our executives was governed by the terms
of employment agreements between each of the executives and Health Grades, which
were in effect prior to 2001. Certain of our executives, not including Mr.
Hicks, received salaries above the levels set forth in their employment
agreements because the executives assumed increased responsibilities subsequent
to the execution of the employment agreements. Mr. Hicks' base salary was paid
in accordance with the terms of his employment agreement. Executive officers who
were not subject to an employment agreement did not receive any salary increases
in 2001.
7
Bonus
The Committee paid bonuses in May 2001 to the executive officers in
recognition of their increasing responsibilities in light of the departure of
three executive officers earlier in the year, the settlement of litigation with
a former affiliated practice, the receipt of a discounted prepayment of the
obligation of a former affiliated practice and the arrangement of a $2.0 million
financing commitment from Chancellor V, L.P. and Essex Woodlands Health Ventures
Fund IV, L.P. No specific criteria was utilized in determining the amount of
bonuses. The Committee gave substantial weight to the recommendations of the
Chief Executive Officer regarding the relative contributions of the executives
other than Mr. Hicks with regard to the designated matters. In the case of Mr.
Hicks, the Committee considered his increased responsibilities, his oversight
with regard to resolution of matters involving former affiliated practices and
his active involvement in securing the $2.0 million financing commitment.
Stock Options and Stock Purchase Plan
The Committee generally believes that equity compensation, in the form
of stock options, should be a significant component of each executive officer's
compensation. Stock options are designed to provide incentives for the
enhancement of stockholder value since the full benefit of stock option grants
is not realized unless there has been appreciation in share values over several
years.
However, in light of a continuing expense control program that
effectively precluded meaningful salary increases or bonuses for executives and
led to further reductions in Health Grades' staff, the Committee engaged in
discussions with management to determine a mechanism that would encourage the
executives to continue their employment with Health Grades and devote the
substantial time and effort necessary to further develop its healthcare
information business. In December 2001, the Committee, following discussions
with senior management, recommended to the Board of Directors a new management
incentive and retention program designed to enhance management incentives and
equity participation through a stock purchase plan and grants of stock options.
The Board of Directors approved, subject to stockholder approval, the Health
Grades, Inc. Stock Purchase Plan, under which executives could purchase Health
Grades' stock through salary reduction contributions during 2002. In addition,
the Committee approved an amendment to the Health Grades Inc. 1996 Equity
Compensation Plan, increasing the number of shares authorized for issuance by
5,000,000. The Committee also granted additional options to its executives,
subject to stockholder approval of the proposed amendment to the 1996 Equity
Compensation Plan. The plans were submitted to, and approved by, Health Grades'
stockholders, at a special meeting held on February 7, 2002.
With respect to the stock option grants described above, the
determination of the number of shares underlying stock options granted to
executive officers during 2001 was not based on any specific criteria. However,
at the time of the grants, the Committee considered the number of shares
available for grant and the nature of the responsibilities of the executive
officers and the recommendations of the Chief Executive Officer. With regard to
Mr. Hicks, the Committee recognized his central role in continuing the
development of Health Grades' healthcare information business. In connection
with the December 2001 grants that became effective in
8
February 2002, the Committee determined to provide for the acceleration of
vesting of the options with respect to a majority of the shares underlying the
options in the event certain cash flow targets are met and, with respect to a
smaller number of shares underlying the options, if certain market price targets
were met with respect to our common stock.
Certain provisions of the Internal Revenue Code provide that a publicly
held corporation may not deduct compensation for its chief executive officer or
each of certain other executive officers to the extent that such compensation
exceeds $1 million for the executive officer. It is not expected that these
provisions will adversely affect Health Grades based on its current compensatory
structure. In this regard, base salary and bonus levels are expected to remain
below the $1 million limitation for the foreseeable future. In addition, the
1996 Equity Compensation Plan is designed to preserve the deductibility of
income realized upon the exercise of stock options under the plan regardless of
whether such income, together with salary, bonus and other compensation, exceeds
the limitation.
Marc S. Sandroff, formerly a director of Health Grades, was a member of
the Compensation Committee in 2001, but ceased to be a member upon his
resignation from the Board of Directors. This report is provided by the
remaining members of the Compensation Committee.
Peter H. Cheesbrough
John J. Quattrone
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is composed of three
independent directors and operates under a written charter adopted by the Board
of Directors. The Audit Committee recommends to the Board of Directors the
selection of the Company's independent accountants.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent accountants are responsible for
performing an independent audit of the Company's consolidated financial
statements in accordance with generally accepted auditing standards and to issue
a report thereon. The Audit Committee's responsibility is to monitor and oversee
these processes.
In this context, the Audit Committee has met and held discussions with
management and the independent accountants. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements with
management and the independent accountants. The Audit Committee discussed with
the independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61 (Communication with Audit Committees).
The Company's independent accountants also provided to the Audit
Committee the written disclosures required by Independence Standards Board
Standard No.1 (Independence
9
Discussions with Audit Committees), and the Audit Committee discussed with the
independent accountants that firm's independence.
Based on these discussions and reviews, the Audit Committee recommended
that the Board of Directors include the audited consolidated financial
statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission.
Mats Wahlstrom
Peter Cheesbrough
Leslie S. Matthews, M.D.
AUDIT AND RELATED FEES
The Audit Committee also considered whether the provision of services
other than audit services by Ernst & Young LLP is compatible with maintaining
Ernst & Young LLP's independence.
Fees for all services provided by Ernst & Young LLP for 2001 were as
follows:
AUDIT FEES
The aggregate fees billed for professional services rendered by Ernst &
Young LLP for the audit of the Company's annual financial statements for the
year ended December 31, 2001 and the reviews of the Company's financial
statements included in the Company's quarterly reports on Form 10-Q for the year
ended December 31, 2001 were $92,654.
ALL OTHER FEES
The aggregate fees billed for all services rendered by Ernst & Young
LLP during fiscal year 2001, other than the services referred to above under the
caption "Audit Fees," were $21,971, and such other fees were primarily related
to audits of the Company's retirement plan and certain litigation support.
10
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 five other most
highly paid executive officers during 2001, including one executive officer who
ceased to be our employee during 2001. We refer to these persons in this proxy
statement as the "named executive officers."
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 Technology 2000 $ 175,419 $ 78,287 100,000 $ 4,800
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 16,139 $ 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 ceased to be an employee of Health Grades effective October
31, 2001.
11
STOCK OPTIONS
The following table sets forth 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>
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(1) The options vest in one-third increments on each of the first through
third 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 OTC Bulletin Board 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
the date he ceased to be an employee of Health Grades.
On December 12, 2001, the Compensation Committee of our Board of
Directors approved the grant of options to a number of our employees, including
our named executive officers, subject to stockholder approval of a proposed
amendment increasing the number of shares issuable under our 1996 Equity
Compensation Plan from 8,000,000 shares to 13,000,000 shares. Upon shareholder
approval, on February 7, 2002, of the amendment to the 1996 Equity Compensation
Plan, the grants became effective. The options each have exercise price of
$0.10, which was the closing price per share of our common stock on the date of
grant. Options were granted to the named executive officers to purchase the
following number of shares: Kerry R. Hicks, 1,493,104 shares; David G. Hicks,
900,000 shares; Peter Fatianow, 600,000 shares; Sarah Loughran, 900,000 shares;
and Michael D. Phillips, 400,000 shares. Of the options granted to each named
executive officer, 13.6% of the shares underlying stock options fully vest six
months following the date of grant; 13.6% of the shares underlying stock options
fully vest 12 months following the date of grant; 54.6% of the shares underlying
stock options vest after two years following the date of grant, subject to
acceleration if certain cash flow targets are met; and 18.2%
12
shares underlying stock options vest two years following the date of grant,
subject to acceleration if certain market price targets are met with respect to
our common stock.
The following table sets forth certain information regarding stock
options held as of December 31, 2001 by the named executive officers. The named
executive officers did not exercise any stock options in 2001.
FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
------------------------------- -------------------------------
NAME EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
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>
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(1) Based on $0.07, the closing price of our common stock as reported on
the OTC Bulletin Board on December 31, 2001.
STOCK PURCHASE PLAN
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 PURCHASE 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>
13
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.
Kerry Hicks to receive an annual base salary 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 Mr.
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 Health Grades, 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 ARRANGEMENTS
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.
14
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has not selected an accounting firm to serve as
our independent auditors for the current fiscal year. As part of our effort to
control expenses, our Audit Committee has authorized management to seek
proposals to audit our 2002 financial statements from several qualified
accounting firms, including Ernst & Young LLP, who audited our 2001 financial
statements. Representatives of Ernst & Young LLP are expected to be present at
the meeting, will have the opportunity to make a statement if they so desire and
will be available to respond to appropriate questions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Until March 31, 2002, Section 16(a) of the Securities Exchange Act of
1934 (the "Act") required 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 on March 31, 2002. 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.
ADVANCE NOTICE PROCEDURES
In accordance with our by-laws, notice relating to nominations for
director or proposed business to be considered at the 2003 annual meeting of
stockholders must be given no earlier than March 27, 2003 nor later than April
26, 2003. These requirements do not affect the deadline for submitting
stockholder proposals for inclusion in the proxy statement, nor do they apply to
questions a stockholder may wish to ask at the meeting. Stockholders may request
a copy of the by-law provisions discussed above from the Secretary, Health
Grades, Inc., 44 Union Boulevard, Suite 600, Lakewood, Colorado 80228.
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for
stockholder action at annual meetings in accordance with regulations adopted by
the Securities and Exchange Commission. Any proposal that an eligible
stockholder desires to have presented at the 2003 annual meeting of stockholders
concerning a proper subject for inclusion in the proxy statement and for
consideration at the annual meeting will be included in our proxy statement and
related proxy card if we receive it no later than January 29, 2003.
15
SOLICITATION OF PROXIES
We will pay the cost of solicitation of proxies for the annual meeting.
In addition to the mailing of the proxy material, such solicitation may be made,
without extra compensation, in person or by telephone or telecopy by our
directors, officers or regular employees.
ANNUAL REPORT ON FORM 10-K
We will provide without charge to each person solicited by this proxy
statement, on the written request of any such person, a copy of the our Annual
Report on Form 10-K (excluding exhibits) as filed with the Securities and
Exchange Commission for our most recent fiscal year. Such written request should
be directed to Allen Dodge at the address of Health Grades appearing on the
first page of this proxy statement.
The above Notice and Proxy Statement are sent by order of the Board of
Directors.
/s/ ALLEN DODGE
Allen Dodge
Senior Vice President - Finance, Chief
Financial Officer and Secretary
May 29, 2002
16
PROXY PROXY
HEALTH GRADES, INC.
ANNUAL MEETING OF STOCKHOLDERS, JUNE 25, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kerry R. Hicks and David G. Hicks, or
either of them, proxy, with full power of substitution, to vote, as designated
on the reverse side hereof, all shares of Common Stock which the undersigned is
entitled to vote if personally present at the 2002 Annual Meeting of
Stockholders of Health Grades, Inc. or any adjournment or postponement thereof,
subject to the directions indicated on the reverse.
IF INSTRUCTIONS ARE GIVEN IN THE SPACES ON THE REVERSE SIDE HEREOF, THE
SHARES WILL BE VOTED IN ACCORDANCE THEREWITH; IF INSTRUCTIONS ARE NOT GIVEN, THE
SHARES WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS NAMED IN PROPOSAL 1 ON
THE REVERSE SIDE HEREOF. THIS PROXY ALSO DELEGATES DISCRETIONARY AUTHORITY TO
VOTE WITH RESPECT TO ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
PLEASE DATE, SIGN AND MAIL YOUR PROXY
CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
HEALTH GRADES, INC.
JUNE 25, 2002
<Table>
o PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED o
- ------------------------------------------------------------------------------------------------------------------------------------
Please mark your
A [X] votes as in this
example.
FOR all nominees WITHHOLD
listed at right AUTHORITY
(except as marked to vote for all nominees
to the contrary) listed at right. NOMINEES:
1. ELECTION Kerry R. Hicks 2. In their discretion, the Proxies are
OF [ ] [ ] Peter H. Cheesbrough authorized to vote upon such other business
DIRECTORS. Leslie S. Matthews, M.D. as may properly come before the meeting.
Mats Wahlstrom
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR John J. Quattrone THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT
ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THAT J. D. Kleinke OF THE NOTICE OF ANNUAL MEETING, PROXY
NOMINEE'S NAME IN THE LIST AT RIGHT.) STATEMENT AND ANNUAL REPORT OF HEALTH
GRADES, INC.
Signature (SEAL) Signature if held jointly Date: , 2002
--------------------------- ---------------------------------- --------------
NOTE: Please sign this proxy exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in
full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized
person.
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</Table>