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, 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)
Delaware
(State or other jurisdiction of 62-1623449
incorporation or organization) (I.R.S. Employer Identification No.)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 28, 2002, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $724,305. 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 Company.
As of April 25, 2003 there were 24,402,316 shares of the registrant's Common
Stock outstanding.
This amendment to Health Grades, Inc.'s ("HealthGrades") Form 10-K for the
fiscal year ended December 31, 2002 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 43, 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 51, has served as one of our directors since December
1996. Since December 3, 2002, Mr. Cheesbrough has served as Chief Financial
Officer of Navigant Biotechnologies, a company that has developed a process for
the elimination of pathogens from blood used for transfusions. From October 2000
to November 2002, Mr. Cheesbrough was a self-employed 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 51, 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.
JOHN QUATTRONE, age 50, 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 41, 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.
During 2002, Chancellor waived its right to designate a director. Furthermore,
as further described in Item 13. Certain Relationships and Certain Transactions,
effective March 11, 2003, we repurchased from Chancellor 12,004,333 shares of
our common stock and warrants to purchase 1,971,820 shares of our common stock
for a total purchase price of $500,000. Subsequent to the repurchase, Chancellor
no longer retains the right to designate a director. In addition, 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") 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. For the
period from January 1, 2002 through March 31, 2002, we believe that all filings
required to be made during 2002 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 during 2002, 2001 and 2000, to our Chief Executive Officer and the four
other most highly paid executive officers (collectively, the "named executive
officers") during the year ended December 31, 2002.
<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 2002 $ 269,706 $ 6,000 1,493,104 $ 4,800
Chief Executive Officer 2001 $ 269,706 $ 67,250 61,719 $ 4,800
2000 $ 259,118 $ 195,000 260,000 $ 7,137
David G. Hicks 2002 $ 183,400 $ 4,000 900,000 $ 4,800
Executive Vice President - Information 2001 $ 172,756 $ 27,176 24,940 $ 4,800
& Technoloby 2000 $ 175,419 $ 78,287 100,000 $ 4,800
Peter Fatianow 2002 $ 149,800 $ 4,000 600,000 $ 4,614
Senior Vice President - Corporate Services 2001 $ 149,577 $ 17,836 16,369 $ 4,800
2000 $ 144,000 $ 28,565 100,000 $ 4,288
Sarah Loughran 2002 $ 148,825 $ 4,000 900,000 $ 4,585
Senior Vice President - Provider Services 2001 $ 149,577 $ 17,836 16,369 $ 4,800
2000 $ 144,000 $ 28,565 100,000 $ 4,288
Michael D. Phillips 2002 $ 259,382 $ -- 400,000 $ 4,800
Senior Vice President - Provider Sales 2001 $ 215,186 $ 15,900 15,900 $ 4,800
</Table>
(1) Includes amounts that we contributed for the account of the executive
officers under our Retirement Savings Plan.
Stock Options
The following table sets forth certain information regarding stock options
granted during 2002 to the named executive officers.
<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 1,493,104 25.13% $ 0.1000 2/7/2012 $ 134,379
David G. Hicks 900,000 15.15% $ 0.1000 2/7/2012 $ 81,000
Peter Fatianow 600,000 10.10% $ 0.1000 2/7/2012 $ 54,000
Sarah Loughran 900,000 15.15% $ 0.1000 2/7/2012 $ 81,000
Michael D. Phillips 400,000 6.73% $ 0.1000 2/7/2012 $ 36,000
</Table>
(1) Of the options granted to each named executive officer, 13.6% of the
shares underlying stock options fully vest after six months from date
of grant; 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 are met
for the market value of our common stock.
During 2002, the cash flow targets noted above were met. Therefore, all
options subject to acceleration based on these cash flow targets are
now fully vested.
(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 1.909; an expected term to
exercise of 3 years; risk-free interest rate over the life of the
option of 2.23%; and an expected dividend yield of zero. The actual
value, if any, an officer may realize will depend on the amount by
which the market value of our common stock exceeds the exercise price
on the date the option is exercised. Consequently, there is no
assurance the value realized by an officer will be at or near the value
estimated above. These amounts should not be used to predict stock
performance.
The following table sets forth certain information regarding stock options held
as of December 31, 2002 by the named executive officers. The named executive
officers did not exercise any stock options in 2002.
<Table>
<Caption>
Number of Securities Value of Unexcercised
Underlying Unexercised In-The-Money
Options At Options at
Fiscal Year-End (#) Fiscal Year-End ($) (1)
------------------------------- -------------------------------
Name Excercisable Unexercisable Excercisable Unexercisable
- ------------------------ -------------- -------------- -------------- --------------
Kerry R. Hicks 1,686,931 602,892 $ -- $ --
David G. Hicks 888,617 336,323 $ -- $ --
Peter Fatianow 481,215 235,154 $ -- $ --
Sarah Loughran 685,760 330,609 $ -- $ --
Michael D. Phillips 278,027 137,873 $ -- $ --
</Table>
(1) Based on $0.03, the closing price of our common stock as reported on
the OTC Bulletin Board on December 31, 2002.
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.
COMPENSATION OF DIRECTORS
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 vest in one-third
increments on each of the first through the third year anniversaries of the date
of grant.
In November 2002, Mr. Wahlstrom announced to the Board that he had accepted a
position with a Swedish company that, as a matter of policy, prohibits officers
from serving concurrently as a director of a U.S. company. As a result, Mr.
Wahlstrom resigned from the Board effective November 20, 2002. In consideration
for his service on the Board, the Board approved the payment of a $10,000 cash
bonus to Mr. Wahlstrom, which was paid in December 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF OUR COMMON STOCK BY CERTAIN PERSONS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of April 25, 2003 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 Benefical Owner Beneficially Owned Outstanding Shares (1)
- ----------------------- ------------------- ----------------------
Kerry R. Hicks (2) 3,969,930 14.9%
David G. Hicks (3) 1,470,383 5.8%
Peter Fatianow (4) 1,284,196 5.1%
Sarah Loughran (5) 1,403,905 5.6%
Michael Phillips (6) 499,935 2.0%
Leslie S. Matthews, M.D. (7) 75,117 *
Peter H. Cheesebrough (8) 111,012 *
John Quattrone (9) 46,667 *
J.D. Kleinke (10) 33,334 *
Essex Woodlands Health Ventures Fund IV, L.P. (11) 9,947,430 38.5%
All directors and executive officers as a group (10 persons)(12) (9,537,349) 31.6%
</Table>
* Less than one percent
(1) Applicable percentage of ownership is based on 24,402,316 shares of
common stock outstanding on April 25, 2003. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and means voting or investment power with respect to
securities. Shares of common stock issuable upon the exercise of stock
options exercisable currently or within 60 days of April 25, 2003 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
1,911,109 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 1,019,657 shares
underlying stock options.
(4) Includes 568,489 shares underlying stock options.
(5) Includes 813,943 shares underlying stock options.
(6) Includes 332,572 shares underlying stock options.
(7) Includes 33,334 shares underlying stock options.
(8) Includes 90,012 shares underlying stock options.
(9) Includes 46,667 shares underlying stock options.
(10) Includes 33,334 shares underlying stock options.
(11) 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.
(12) Include warrants to purchase 367,500 shares, 5,373,193 shares
underlying stock options and 10,000 shares of common stock held by The
David G. Hicks Irrevocable Children's Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 were restricted for
sale until 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>
We entered into a Stock and Warrant Repurchase Agreement, dated March
11, 2003, with Chancellor V, L.P. ("Chancellor"). Under the terms of the Stock
and Warrant Repurchase Agreement, we repurchased from Chancellor 12,004,333
shares of our common stock and warrants to purchase 1,971,820 shares of our
common stock for a total purchase price of $500,000. Chancellor initially
acquired the common stock and warrants from us in two private transactions in
2000 and 2001. Immediately prior to the repurchase, Chancellor's ownership of
HealthGrades common stock represented 33% of our outstanding common stock, and
Chancellor's ownership of HealthGrades common stock and warrants represented 36%
of the our total outstanding common stock (assuming full exercise of the
warrants held by Chancellor, but assuming no exercise of any other warrants or
options).
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 30, 2003 By /s/ Kerry R. Hicks
-----------------------------------
Kerry R. Hicks
Chief Executive Officer
Date: April 30, 2003 By /s/ Allen Dodge
-----------------------------------
Allen Dodge
Senior Vice President - Finance/CFO
CERTIFICATION
I, Kerry R. Hicks, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K of Health
Grades, Inc.; and
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this amendment
to the annual report;
Date: April 30, 2003
/s/Kerry R. Hicks
- -----------------
President and CEO
CERTIFICATION
I, G. Allen Dodge, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K of Health
Grades, Inc.;
2. Based on my knowledge, this amendment to the annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this amendment to the annual report;
Date: April 30, 2003
/s/ G. Allen Dodge
- -----------------------------------
Senior Vice President - Finance/CFO