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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q/A
(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, 2000
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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
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HEALTH GRADES, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 62-1623449
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
44 UNION BOULEVARD, SUITE 600, LAKEWOOD, COLORADO 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
-----------------------------
This amendment is being filed solely to reflect the reversal of revenues and
corresponding expenses related to our promotional agreements due to a change in
our accounting method for revenue recognition. As such, this change affected
only Part I, Items 1 and 2.
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, 2000, 21,516,468 shares of the Registrant's common stock, $.001
par value, were outstanding.
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PART I. FINANCIAL INFORMATION
HealthGrades.com, Inc. and Subsidiaries
Consolidated Balance Sheets
MARCH 31 DECEMBER 31
2000 1999
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(UNAUDITED)
ASSETS
Cash and cash equivalents $ 12,759,950 $ 316,767
Restricted cash -- 1,178,848
Accounts receivable, net 806,133 2,744,912
Due from affiliated practices in litigation, net 2,745,413 2,745,413
Prepaid expenses, inventories and other 258,797 205,665
Current portion notes receivable 551,922 3,531,099
Prepaid and recoverable income taxes 1,715,918 1,838,589
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Total current assets 18,838,133 12,561,293
Property and equipment, net 1,148,920 1,656,613
Goodwill, net of accumulated amortization of
$187,435 and $-- in 2000 and 1999, respectively 5,662,565 4,000,000
Notes receivable, less current portion 1,416,880 1,512,242
Other assets 663,554 662,720
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Total assets $ 27,730,052 $ 20,392,868
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 638,877 $ 520,767
Accrued payroll, incentive compensation and related
expenses 288,066 278,474
Accrued expenses 1,273,877 1,531,550
Notes payable 6,463,149 7,352,005
Notes payable to officers 350,000 350,000
Deferred income 938,728 1,144,552
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Total current liabilities 9,952,697 11,177,348
Note payable, less current portion 1,811,065 5,603,283
Notes payable to officers, less current portion -- 3,200,000
Deferred income 548,807 646,847
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Total liabilities 12,312,569 20,627,478
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 2,000,000
Shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, and 28,786,664 and 18,738,686
issued and outstanding in 2000 and 1999, respectively 28,787 18,739
Additional paid-in capital 87,310,488 67,509,276
Accumulated deficit (58,862,558) (56,722,141)
Treasury stock (13,059,234) (11,040,484)
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Total stockholders' equity (deficit) 15,417,483 (234,610)
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Total liabilities and stockholders' equity $ 27,730,052 $ 20,392,868
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See accompanying notes to consolidated financial statements
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HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MARCH 31
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2000 1999
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REVENUE:
Physician practice management revenue $ 1,579,430 $ 13,939,472
Internet revenue 310,533 74,040
Other 2,719 459,366
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1,892,682 14,472,878
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COSTS AND EXPENSES:
Physician practice management costs and expenses:
Clinic expenses -- 9,575,632
Litigation and other costs 369,223 1,107,700
Internet costs and expenses:
Production content and product development 618,827 62,280
Sales and marketing 269,309 --
General and administrative 2,174,166 3,491,697
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3,431,525 14,237,309
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(Loss) income from operations (1,538,843) 235,569
Other:
Loss on sale of assets and other (336,653) --
Gain on sale of subsidiary -- 221,258
Interest income 51,154 63,338
Interest expense (316,075) (1,007,243)
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Loss before income taxes (2,140,417) (487,078)
Income tax benefit -- 194,254
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Net loss $ (2,140,417) $ (292,824)
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Net loss per share (basic) $ (0.16) $ (0.02)
============ ============
Weighted average shares outstanding (basic) 13,504,008 16,494,704
============ ============
Net loss per share (diluted) $ (0.16) $ (0.02)
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Weighted average shares outstanding (diluted) 13,504,008 16,494,704
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See accompanying notes to consolidated financial statements.
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HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31
2000 1999
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OPERATING ACTIVITIES
Net loss $ (2,140,417) $ (292,824)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 241,486 721,205
Amortization 187,435 892,543
Bad debt expense 99,015 --
Gain on sale of subsidiary -- (221,258)
Equity in earnings of investee -- (14,884)
Officer notes financing fee 347,200 --
Loss on disposal of assets 336,653 29,604
Deferred income taxes -- (334,119)
Non-cash compensation expense-stock options 9,644 --
Changes in operating assets and liabilities, net of
the non-cash effects of the acquisitions of the
net assets of physician groups:
Accounts receivable, net (178,986) (360,191)
Due from affiliated practices in litigation -- (1,722)
Prepaid expenses and other assets (68,399) (34,366)
Accounts payable and accrued expenses 49,883 518,480
Accrued payroll, incentive compensation and
related expenses 9,592 (1,085,319)
Income taxes payable and prepaid and
recoverable income taxes, net 122,671 2,826,518
Due to physicians groups -- (582,438)
Deferred income (303,864) 1,550,457
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Net cash (used in) provided by operating activities (1,288,087) 3,611,686
INVESTING ACTIVITIES
Purchases of property and equipment (133,351) (701,625)
Proceeds from sales of majority interest in a subsidiary
and equity investments, net of cash -- 322,812
Proceeds from sale of medical equipment 125,000 --
Increase in other assets (834) (15,847)
Repayments from affiliates -- 77,511
Advances to investee -- (252,434)
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Net cash used in investing activities (9,185) (569,583)
FINANCING ACTIVITIES
Proceeds from sales of affiliated practices
assets and execution of new service agreements -- 7,953,068
Principal repayments on notes payable (3,691,672) (8,547,623)
Net proceeds from equity financing 14,358,592 --
Repayments from notes receivable 3,027,711 --
Principal repayments on capital lease obligations -- (46,289)
Loans to physician stockholders -- (48,178)
Exercise of common stock options 45,824 --
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Net cash provided by (used in) financing activities 13,740,455 (689,022)
Net increase in cash and cash equivalents 12,443,183 2,353,081
Cash and cash equivalents at beginning of period 316,767 1,418,201
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Cash and cash equivalents at end of period $ 12,759,950 $ 3,771,282
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See accompanying notes to consolidated financial statements.
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HealthGrades.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
HealthGrades.com, 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, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. 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, 1999.
In the fourth quarter of 2000, we changed our method of accounting for
promotional agreements. Under these agreements, companies that access our
content through licensing agreements offset their cash obligations to us by
providing significant Health Grades branding on their websites or by providing
other services to us. Revenue recognized under such arrangements is commonly
referred to as barter revenue. Previously, we recorded revenue under promotional
agreements at the fair value of the content licensing, in reliance upon
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions" and disclosed, in our filings with the Securities and Exchange
Commission, the amount of such revenue included in our Statements of Operations.
However, we became aware that, recently, the consensus reached by the Emerging
Issues Task Force in EITF 99-17, "Accounting for Advertising Barter
Transactions," is being applied by the staff of the Securities and Exchange
Commission to a broad range of barter transactions. By its express terms, EITF
99-17 addresses transactions in which companies exchange rights to place
advertisements on each others' web sites and not transactions, such as our
promotional agreements, involving the provision of content to websites.
Management has determined to apply EITF 99-17 to our barter transactions. As a
result, we have restated our year 2000 quarterly financial statements to reverse
revenues and the corresponding expenses relating to our promotional agreements.
DESCRIPTION OF BUSINESS
The Company operates two healthcare Internet sites and provides practice
management services to physicians. Through its wholly-owned subsidiary,
HealthcareRatings, Inc., the Company operates its HealthGrades.com website,
which provides ratings or "report cards" on hospitals, health plans and nursing
homes, provides listings of "leading physicians" that must meet certain criteria
and offers profiles of specialty healthcare providers across the country.
Through its wholly-owned subsidiary, ProviderWeb.net, Inc., the Company operates
its ProviderWeb.net website, which offers a subscription service for physician
practice administrators and managers that provides online tools and information.
All significant intercompany balances and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain amounts in the Consolidated Balance Sheet as of December 31, 1999 and
certain amounts in the Statement of Operations and the Consolidated Statement of
Cash Flows for the three months ended March 31, 1999 have been reclassified in
order to conform to the current presentation.
EARNINGS PER SHARE
The calculation of weighted average shares outstanding (diluted) for the three
months ended March 31, 2000, does not included the impact of certain stock
options whose exercise price was less than the average market price of the
common shares because the effect on loss per share would have be antidilutive.
If such options were included in the calculation, weighted average shares
outstanding (diluted) would have increased by approximately 1.5 million shares.
NOTE 2 - EQUITY FINANCING
On March 17, 2000, the Company closed on an equity financing transaction (the
"Equity Financing") which raised $18 million. Pursuant to the terms of the
Equity Financing, certain investors paid $14.8 million to the Company in return
for 7,400,000 shares of Company common stock. Net proceeds of the Equity
Financing, after payment of certain legal and other financing fees, was
approximately $14.4 million. In connection with the Equity Financing, the
Company also issued an aggregate of 165,000 shares to its bank syndicate as a
financing fee. Additionally, the Company issued warrants to the investors to
purchase 2,590,000 shares of Company common stock at an exercise price of $4.00
per share. The warrants have a five-year term. The Company also issued a warrant
to purchase 150,000 shares of Company common stock to a company that served as a
financial advisor to the Company in connection with the Equity Financing, at an
exercise price of $4.00 per share. In connection with the Equity Financing,
certain officers of the Company exchanged $3.2 million in notes payable for an
aggregate of 1.6 million shares of Company common stock and five-year warrants
to purchase 560,000 shares of Company common stock at $4.00 per share. In
accordance with the provisions of EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, upon the exchange of the notes payable, the Company recorded
an expense of $347,200 based upon the estimated fair market value of the
warrants issued to the officers. This expense is included in general and
administrative expenses in the Company's Consolidated Statement of Operations
for the three months ended March 31, 2000.
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NOTE 3 - SEGMENT DISCLOSURES
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Physician Practice Management ("PPM") and Internet
Services. PPM derives its revenue primarily from management services provided to
physician practices. Internet Service's revenue is derived primarily from
marketing arrangements with hospitals, fees related to the licensing of its
content (including set-up fees) and advertising. The Company's other segment for
the three months ended March 31, 1999, represents ambulatory surgery center
services and health care consulting. Both of the Company subsidiaries, which
generated revenue for the "other" segment, were liquidated during 1999.
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:
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31
2000 1999
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PPM
Revenue from external customers $ 1,579,430 $ 14,415,325
Interest income 51,154 63,338
Interest expense (316,075) 1,007,243
Segment net loss before income taxes (1,043,518) (291,095)
Segment assets 35,706,643 62,173,448
Segment asset expenditures 7,812 678,075
INTERNET SERVICES
Revenue from external customers $ 310,533 $ 74,040
Segment net loss before income taxes (1,096,899) (135,814)
Segment assets 6,668,203 140,919
Segment asset expenditures 125,539 21,137
OTHER
Revenue from external customers $ -- $ 132,831
Equity in net income of unconsolidated affiliate -- 14,884
Segment net loss before income taxes -- (58,317)
Segment assets -- 111,138
Segment asset expenditures -- 2,413
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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:
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
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REVENUE
Total for reportable segments $ 1,889,963 $ 14,472,878
Other revenue 2,719 --
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Total consolidated revenue $ 1,892,682 $ 14,472,878
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LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (2,140,417) $ (426,909)
Other net loss -- (58,317)
Adjustment -- (1,852)
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Loss before income taxes $ (2,140,417) $ (487,078)
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ASSETS
Total assets for reportable segments $ 42,374,846 $ 62,995,523)
Other assets -- 111,138
Elimination of advance to subsidiaries (6,849,774) (575,007)
Elimination of investment in subsidiaries (7,795,020) (1,210,436)
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Consolidated total assets $ 27,730,052 $ 61,215,069
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For each of the periods presented, the Company's primary operations and
assets were within the United States.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid amounted to approximately $259,000 and $825,000 for the three
months ended March 31, 2000 and 1999, respectively. Refunds received from income
taxes amounted to approximately $123,000 and $2,700,000, for the three months
ended March 31, 2000 and 1999, respectively.
Supplemental schedule of noncash investing and financing activities are as
follows:
During the three months ended March 31, 2000, approximately $1.2 million in
restricted cash was used to pay down the Company's term loan.
In January 2000, the Company received 850,000 shares of its common stock under
the terms of a settlement agreement with one of its former affiliated practices.
In February 2000, the Company merged its majority-owned subsidiary, HG.com, Inc.
into a recently formed, wholly-owned subsidiary, HealthCare Ratings, Inc.
(hereafter, the "Merger Transaction"). In connection with the Merger
Transaction, the minority shareholders of HG.com were given 800,000 shares of
Company common stock.
NOTE 5 - SUBSEQUENT EVENTS
In April 2000, we terminated our revised management services arrangement with
one of our former affiliated practices. Pursuant to the termination, we received
approximately $1.7 million and will no longer be required to provide management
services to the practice.
On April 21, 2000, pursuant to the terms of a settlement agreement with one of
our former affiliated practices, we received a payment of $1,500,000.
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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, the anticipated pay down of principal amounts due under our
term loan, our anticipated federal income tax refund, anticipated costs to
further develop and market our Internet sites and litigation costs 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 unanticipated expenditures, delays in payment or reduction of our
anticipated federal income tax refund, adverse litigation developments and other
factors discussed below and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, particularly under "Risk Factors" in Item 1.
GENERAL
We operate two healthcare Internet sites and provide practice management
services to physicians. Through our wholly-owned subsidiary, HealthcareRatings,
Inc., we operate our HealthGrades.com website, which provides ratings or "report
cards" on hospitals, health plans and nursing homes, designates "leading
physicians" that satisfy specified criteria and offers profiles of specialty
healthcare providers in the United States. Through our wholly-owned subsidiary,
ProviderWeb.net, Inc., we operate our ProviderWeb.net website, which offers a
subscription service for physician practice administrators and managers that
provides online tools and information.
As a result of transactions with 13 practices that restructured our management
service arrangements (six of which were later terminated) and other agreements,
including litigation settlements terminating our management services
arrangements with four other practices, our physician practice management
services have been substantially reduced. Therefore, our results of operations
for the three months ended March 31, 2000 are not comparable to our results of
operations for the three months ended March 31, 1999. In an effort to enhance
the presentation of our financial statements, we have identified those revenues
and costs and expenses that relate directly to our Internet and physician
practice management operations, respectively, and segregated them in the
Statements of Operations. As a result, we have made certain reclassifications to
the Statement of Operations for the three months ended March 31, 1999 in order
to conform to the current period presentation.
In the fourth quarter of 2000, we changed our method of accounting for
promotional agreements. Under these agreements, companies that access our
content through licensing agreements offset their cash obligations to us by
providing significant Health Grades branding on their websites or by providing
other services to us. Revenue recognized under such arrangements is commonly
referred to as barter revenue. Previously, we recorded revenue under promotional
agreements at the fair value of the content licensing, in reliance upon
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions" and disclosed, in our filings with the Securities and Exchange
Commission, the amount of such revenue included in our Statements of Operations.
However, we became aware that, recently, the consensus reached by the Emerging
Issues Task Force in EITF 99-17, "Accounting for Advertising Barter
Transactions," is being applied by the staff of the Securities and Exchange
Commission to a broad range of barter transactions. By its express terms, EITF
99-17 addresses transactions in which companies exchange rights to place
advertisements on each others' web sites and not transactions, such as our
promotional agreements, involving the provision of content to websites.
Management has determined to apply EITF 99-17 to our barter transactions. As a
result, we have restated our year 2000 quarterly financial statements to reverse
revenues and the corresponding expenses relating to our promotional agreements.
ACQUISITION OF MINORITY INTEREST
Effective February 3, 2000, we merged our majority-owned subsidiary, HG.com,
Inc. into a recently formed, wholly-owned subsidiary, HealthCare Ratings, Inc.
(hereafter, the "Merger Transaction"). In order to effectuate the Merger
Transaction, the minority shareholders of HG.com were given 800,000 shares of
our common stock. In connection with the Merger Transaction, we recorded
goodwill in the amount of $1,850,000 based on the fair value of our common stock
issued as of the transaction date. The goodwill is being amortized over an
estimated useful life of seven years.
RESULTS OF OPERATIONS
Physician practice management revenue. Physician practice management revenue
includes service fees and other revenue derived from our physician practice
management business. For the three months ended March 31, 2000, physician
practice management revenue includes a non-recurring payment of approximately
$810,000 related to the termination of a management services agreement with one
of our affiliated practices. Physician practice management revenue for the three
months ended March 31, 1999 was approximately $14.5 million, reflecting the much
larger scope of our physician practice management operations during that period.
Internet revenue. Internet revenue includes all revenues derived from our
Internet healthcare business. We derive these revenues primarily from marketing
arrangements with providers, fees related to the licensing of access to our
content (including set-up fees) and advertising. Marketing revenues are derived
from annual fees from hospitals, nursing homes and health plans in return for
our serving banner advertisements and providing other marketing services to the
hospitals. Revenue related to these arrangements is recognized on a
straight-line basis over the term of the agreement. Revenue related to the
licensing of content and initial set-up fees are recognized on a straight-line
basis over the term of the agreement. Advertising revenue relates to
advertisements served on both our sites and
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our share of advertising revenue derived from advertisements delivered on sites
of other online healthcare companies that provide access to our content.
Revenues derived from advertising arrangements where we contract directly with
the advertiser are recorded at the gross contract amount and commissions and
other revenue sharing splits with other online healthcare companies under those
contracts are recorded as general and administrative expenses. Advertising
revenues earned under revenue sharing arrangements from other web sites are
recorded net of commissions because the commissions are not contractual
obligations of ours.
Clinic expenses. Previously, under our long-term service agreements with
physician practices, provided, among other things, facilities and management,
administrative and development services to the affiliated practices, and
employed most non-physician personnel of the affiliated practices, in return for
specified service fees. The operating expenses incurred by us included the
salaries, wages and benefits of personnel (other than physician owners and
certain technical medical personnel), supplies, expenses involved in
administering the clinical aspects of the affiliated practices and depreciation
and amortization of assets. We did not incur any clinic expenses for the three
months ended March 31, 2000 as we are no longer obligated to pay clinic expenses
under our management services arrangements with physician practices.
Litigation and other costs. We continue to be involved in litigation with
certain of our former affiliated practices. For the three months ended March 31,
2000, we incurred approximately $290,000 in legal fees directly related to these
disputes. Litigation and other costs decreased approximately $738,000 from the
same period in 1999. This decrease is due to the fact that near the end of 1999,
we reached settlements with several of the practices with which we were
previously involved in litigation.
Production, content and product development costs. Beginning in 1999, we began
incurring production, content and product development costs related to the
development and support of our HealthGrades.com and ProviderWeb.net web sites.
These costs (which consist primarily of salaries and benefits, consulting fees
and other costs related to software development, application development and
operations expense) are expensed as incurred. Compared with the three months
ended March 31, 1999, these costs increased by approximately $560,000 during the
three months ended March 31, 2000. This increase is primarily due to the launch
and expansion of both the HealthGrades.com and ProviderWeb.net web sites.
Sales and marketing expenses. Sales and marketing expenses are costs incurred to
sell, market and advertise for our two Internet web sites. We incurred
approximately $270,000 in sales and marketing costs for the three months ended
March 31, 2000. There were no corresponding costs for the three months ended
March 31, 1999.
Loss on sale of assets and other. For the three months ended March 31, 2000, the
loss consists primarily of a loss of approximately $275,000 on the sale of two
MRI units.
Interest expense. During the three months ended March 31, 2000, we incurred
interest expense of approximately $316,000 compared to interest expense of
approximately $1.0 million for the same period of 1999. This decrease reflects
the reduction of our indebtedness with our bank syndicate from a balance of
approximately $44.4 million as of March 31, 1999 to a balance of approximately
$8.1 million as of March 31, 2000. Subsequent to March 31, 2000, we have further
reduced our indebtedness to our bank syndicate to approximately $4.4 million, as
discussed below under "Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had working capital of approximately $8.9 million, an
increase of $7.5 million from approximately $1.4 million as of December 31,
1999. For the first three months of 2000, cash flow used in operations was
approximately $1.3 million compared to cash flow provided by operations of $3.6
million for the same period of 1999.
On March 17, 2000, we closed on an equity financing transaction (the "Equity
Financing") which raised $18 million. Pursuant to the terms of the Equity
Financing, certain investors funded $14.8 million to us in return for 7,400,000
shares of our common stock. Net proceeds of the Equity Financing, after payment
of certain legal and other financing fees, was approximately $14.4 million.
Additionally, we issued warrants to the investors to purchase 2,590,000 shares
of our common stock at an exercise price of $4.00 per share. The warrants have a
five-year term. We also issued a warrant to purchase 150,000 shares of our
common stock to a company that served as a financial advisor to us in connection
with the Equity Financing, at an exercise price of $4.00 per share. In
connection with the Equity Financing, certain of our officers exchanged $3.2
million in notes payable for an aggregate of 1.6 million shares of our common
stock and five-year warrants to purchase 560,000 shares of our common stock at
$4.00 per share. In accordance with the provisions of EITF 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, upon the exchange of the notes payable, we
recorded an expense of $347,200 based upon the estimated fair market
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value of the warrants issued to the officers. This expense is included in
general and administrative expenses in our Consolidated Statement of Operations
for the three months ended March 31, 2000.
Effective March 2000, we entered into an amendment to our term loan with our
bank syndicate. The amendment extends the final payment on the loan from
November 2000 to November 2001. The revised term loan provides for monthly
principal and interest payments through November 2001, with interest payable at
a floating rate based on the lead bank's prime lending rate plus .75%. The
monthly principal payments under the term loan are $50,000 per month beginning
April 2000, with the final payment for any remaining balance on the loan due
November 2001. The amounts of the required principal payments are subject to
increase if we have not paid down the loan to certain levels throughout the term
of the loan. Currently, management does not expect the principal payments to be
increased at any point during the term of the loan. Our federal tax refund for
the year ended December 31, 1999, which is currently anticipated to be
approximately $2.3 million, is pledged for application to the balance of the
term loan. Our two wholly-owned subsidiaries, HealthcareRatings, Inc. and
ProviderWeb.net, Inc. are guarantors of the loan. We issued 165,000 shares of
our common stock to the bank syndicate in connection with the amendment as a
financing fee. As of March 31, 2000, the balance on our term loan was
approximately $8.1 million. Subsequent to March 31, 2000, we paid approximately
$3.7 million to further reduce the balance on the term loan.
We anticipate incurring costs in excess of revenues in 2000 to further develop
and market our Internet sites HealthGrades.com and ProviderWeb.net.
Additionally, although we have settled much of the litigation between our former
affiliated practices and us, we continue to incur legal fees and other costs
related to the remaining litigation with some former affiliated practices. As a
result of the cash raised under the Equity Financing transaction, we anticipate
that we have sufficient funds available to support ongoing operations and future
development and marketing efforts for at least the next twelve months.
YEAR 2000
To date, we have not experienced any significant Year 2000 issues with regard to
our internal systems or any third-party systems. Our expenditures related to
Year 2000 compliance have not been material. Despite the fact that the Year 2000
has commenced and we have experienced no problems to date, we cannot assure that
the risks posed by Year 2000 issues will not adversely affect our business in
the future, either as a result of unanticipated difficulties related to our own
systems or to third parties.
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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: April 20, 2001 By: /s/ D. Paul Davis
--------------------------------
D. Paul Davis
Senior Vice President, Finance
(Chief Financial Officer)
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