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SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
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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 2001 Annual Meeting of
Stockholders of Health Grades, Inc., to be held at the offices of the Company at
44 Union Boulevard, Suite 600, Lakewood, Colorado, on June 29, 2001 at 8:00 a.m.
local time. The meeting will be held for the following purposes:
1. To elect seven directors for the ensuing year.
2. To vote upon a proposal to amend the Health Grades, Inc. 1996 Equity
Compensation Plan by increasing the number of shares of Health Grades
common stock that may be issued under the plan from 7,000,000 to
8,000,000.
3. 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 April 30,
2001 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
Senior Vice President -- Finance,
Chief Financial Officer and Secretary
May 29, 2001
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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
2001 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, 2001.
At the annual meeting, holders of our common stock will vote upon the
election of seven directors to serve until the 2002 annual meeting of
stockholders and upon a proposal to amend the Health Grades, Inc. 1996 Equity
Compensation Plan by increasing in the number of shares that may be issued under
the plan from 7,000,000 to 8,000,000.
Our Board of Directors has fixed the close of business on April 30, 2001 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.
Accordingly, 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, 21,273,425 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 choices by marking the appropriate boxes 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 and for the
proposal to amend the Health Grades, Inc. 1996 Equity Compensation Plan. 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.
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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 30, 2001 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.
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING SHARES(1)
- ------------------------ ------------------ ---------------------
Kerry R. Hicks(2)......................................... 2,700,866 12.0
Patrick M. Jaeckle(3)..................................... 1,826,475 8.2
D. Paul Davis(4).......................................... 324,499 1.5
David G. Hicks(5)......................................... 487,702 2.3
Timothy D. O'Hare(6)...................................... 469,921 2.2
Parag Saxena(7)........................................... 5,982,350 26.0
Marc S. Sandroff(8)....................................... 4,257,900 18.9
Mats Wahlstrom(9)......................................... 156,677 *
Leslie S. Matthews, M.D.(10).............................. 108,450 *
Peter H. Cheesbrough(11).................................. 86,102 *
John J. Quattrone......................................... -- *
Alan M. Kittner(12)....................................... -- *
Chancellor V, L.P.(13).................................... 5,982,350 26.0
Essex Woodlands Health Ventures Fund IV, L.P.(14)......... 4,257,900 18.9
All directors and executive officers as a group (14
persons)(15)............................................ 17,583,097 63.1
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* Less than one percent.
(1) Applicable percentage of ownership is based on 21,273,425 shares of common
stock outstanding on April 30, 2001. 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 30, 2001 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
945,448 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 175,000 shares and 861,351 shares underlying
stock options. Does not include 100,000 shares of common stock held by The
Patrick M. Jaeckle Family Irrevocable Children's Trust, for which shares
Mr. Jaeckle disclaims beneficial ownership. Mr. Jaeckle's address is 1500
E. 7th Avenue, Denver, CO 80218.
(4) Includes warrants to purchase 17,500 shares and 200,000 shares underlying
stock options.
(5) Includes warrants to purchase 17,500 shares and 343,921 shares underlying
stock options.
(6) Includes 469,921 shares underlying stock options.
(7) Includes 4,215,000 shares and 1,767,350 shares underlying warrants held by
Chancellor V, L.P. Mr. Saxena is Chief Executive Officer of INVESCO Private
Capital, Inc., the Managing Member of
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IPC Direct Associates V, L.L.C., which is the General Partner of Chancellor
V, L.P. Mr. Saxena's address is INVESCO Private Capital, Inc., 1166 Avenue
of the Americas, New York, NY 10036.
(8) Includes 3,000,000 shares and 1,257,900 shares underlying warrants held by
Essex Woodlands Health Ventures Fund IV, L.P. (the "Fund"). Mr. Sandroff is
a Managing Director of Essex Woodlands Health Ventures Fund IV, L.L.C. ,
which is the General Partner of the Fund. Mr. Sandroff and the Fund's other
two managing directors, James L. Currie and Martin P. Satter, have the
power by unanimous consent to buy and sell our common stock and direct the
voting of shares of our common stock. Mr. Sandroff's address is Essex
Woodlands Health Ventures, 190 South LaSalle Street, Suite 2800, Chicago,
IL 60603.
(9) Includes 56,677 shares underlying stock options.
(10) Includes 66,667 shares underlying stock options.
(11) Includes 65,012 shares underlying stock options.
(12) Does not include shares held by Chancellor V, L.P. Mr. Kittner is a
Managing Director of INVESCO Private Capital, Inc., the Managing Member of
IPC Direct Associates V, L.L.C., which is the General Partner of Chancellor
V, L.P.
(13) Includes warrants to purchase 1,767,350 shares. The address of Chancellor
V, L.P. is 1166 Avenue of the Americas, New York, NY 10036. See note 7.
(14) Includes warrants to purchase 1,257,900 shares. The address of Essex
Woodlands Health Ventures Fund IV, L.P. is 190 South LaSalle Street, Suite
2800, Chicago, IL 60603. See note 8.
(15) Includes warrants to purchase 3,585,250 shares and 3,008,997 shares
underlying stock options.
ELECTION OF DIRECTORS
At the meeting, seven directors will be elected to hold office until the
Annual Meeting of Stockholders in 2002 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, other than Alan M. Kittner, 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, Patrick Jaeckle, our former President, David Hicks, our Executive Vice
President -- Information Technology, Paul Davis, our former Chief Financial
Officer, Peter Fatianow, our Senior Vice President -- Business Development, and
Sarah Loughran, our Senior Vice President -- Content, 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. See "Certain Transactions." In addition, we have agreed
that, at the option of Chancellor and Essex, their respective designees may
serve on both the Audit Committee and the Compensation Committee of the Board of
Directors. Chancellor previously designated Mr. Saxena and has now designated
Mr. Kittner. Essex has designated Mr. Sandroff. Mr. Sandroff serves on the
Compensation Committee and Mr. Saxena serves on the Audit Committee. It is
currently anticipated that Mr. Kittner will serve on the Audit Committee
following the meeting. The agreement remains in effect as to each of the
director designees until the later of March 17, 2005 or the date on which the
respective designating entity fails to own in the aggregate more than five
percent of our issued and outstanding common stock.
Information concerning the nominees for election as directors is set forth
below:
KERRY R. HICKS, age 41, 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 has served as our President from our inception
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until November 1999 and since May 2001. From 1985 to March 1996, Mr. Hicks
served as Senior Vice President of LBA Health Care Management.
PETER H. CHEESBROUGH, age 49, 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
Chief Financial Officer of XCare.net, a company providing electronic commerce
architecture and business to business 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. From April 1988 to June 1993, he was Echo Bay
Mines' Vice President and Controller. Mr. Cheesbrough is a Fellow of the
Institute of Chartered Accountants of England and Wales and is also a chartered
accountant in Canada.
ALAN M. KITTNER, age 44, has served as Managing Director of INVESCO Private
Capital since May 2001. From 1995 to October 2000, Mr. Kittner served as the
President and Chief Executive Officer of OneBody, Inc. (formerly Consensus
Health Care, Inc.). Prior to starting Consensus Health, Mr. Kittner was a
partner at Montgomery Medical Ventures LP and Montgomery Medical Ventures LP II.
LESLIE S. MATTHEWS, M.D., age 49, has served as a director of Health Grades
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. From July 1982 to October 1994, Dr. Matthews was also
engaged in private practice.
JOHN J. QUATTRONE, age 48, has served as one of our directors since
November 2000. Mr. Quattrone is currently Vice President, General Motors North
America -- Human Resources. He has held this position since December 1998. From
1995 to December 1998, Mr. Quattrone served as General Director of Human
Resources for General Motors Vehicle Sales, Services and Marketing.
MARC S. SANDROFF, age 43, has served as one of our directors since March
2000. Mr. Sandroff has been a general partner and/or Managing Director of Essex
Woodlands Health Venture Funds since 1987. From 1984 to 1987, he was one of nine
professionals responsible for managing the venture capital portfolio for
Allstate Insurance. Prior to entering the venture capital industry, he was a
founder of and had direct operating responsibility for several rehabilitation
and long-term care facilities.
MATS WAHLSTROM, age 46, has served as one of our directors since March
1997. Since May 2000, Mr. Wahlstrom has 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.
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 seven meetings during 2000. The Board has an
Audit Committee, a Compensation Committee, and a Nominating Committee. Each of
our directors, with the exception of Mr. Saxena, 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
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of independent auditors for appointment by us. Messrs. Wahlstrom (Chairman),
Cheesbrough and Saxena are the current members of the Audit Committee. A copy of
the Charter of the Audit Committee is attached to this Proxy Statement as
Appendix A. The Audit Committee held four meetings during 2000.
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. Messrs. Cheesbrough (Chairman), Sandroff and
Quattrone are the current members of the Compensation Committee. The
Compensation Committee held six meetings during 2000.
The Nominating Committee is authorized to consider and recommend to the
Board of Directors nominees for election as directors, and to evaluate current
directors and their contribution to our strategic direction and management. Mr.
Cheesbrough, Dr. Matthews and Mr. Wahlstrom are the current members of the
Nominating Committee. The Nominating Committee held no meetings in 2000. The
Committee will consider qualified candidates for election as directors suggested
by stockholders that are submitted in writing to our Secretary in accordance
with procedures set forth in our by-laws.
COMPENSATION OF DIRECTORS
On June 20, 2000, we granted options to our non-employee directors (other
than Messrs. Sandroff and Saxena) to purchase 20,000 shares of common stock.
Each of the options has an exercise price of $1.5312 per share (the closing
price per share of our common stock at the date of grant) and terminates on June
20, 2010. The options vest in one-third increments on each of the first three
anniversaries of the date of grant.
On November 29, 2000, following his election to our board of directors, we
granted an option to Mr. Quattrone to purchase 20,000 shares of our common
stock. The option has an exercise price of $.50 per share (the closing price per
share of our common stock at the date of grant) and terminates on November 29,
2010.
Effective January 1, 1999, Messrs. Cheesbrough and Wahlstrom are entitled
to receive $20,000 per annum for their services on our board of directors and
board committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Sandroff, who serves on our Compensation Committee, is a Managing
Director of Essex Woodlands Health Ventures Fund IV, L.P ("Essex"). On March 17,
2000, we sold 3,000,000 shares of our common stock and warrants to purchase
1,050,000 shares to Essex for $6,000,000.
Effective April 16, 2001, we reached an agreement with Chancellor V, L.P.
("Chancellor") and Essex, regarding a commitment to provide up to $2.0 million
of equity financing to us (of which up to $831,600 would be provided by Essex).
In consideration for the commitment, we issued to Chancellor and Essex warrants
(the "Commitment Warrants") to purchase an aggregate of 500,000 shares of our
common stock (of which warrants to purchase 207,900 shares were issued to Essex)
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, in connection
with our agreement with Chancellor and Essex, we repriced warrants to purchase
an aggregate of 100,000 shares of our common stock (of which warrants to
purchase 41,580 shares are held by Essex) that were issued to Chancellor and
Essex in March 2000 to the same $0.26 exercise price.
Under the terms of the agreement with Chancellor and Essex, we were granted
the option, which may be exercised solely at our discretion until December 31,
2001, to sell our common stock to Chancellor and Essex at an aggregate purchase
price of up to $2.0 million (of which up to $831,600 of common stock may be sold
to Essex). If we exercise the option, the price per share will be equal to the
lesser of $0.26 and the closing price per share of our common stock on the date
that we provide notice to Chancellor and Essex that we intend to exercise the
option, but in no event less than $0.15 per share. If we decide to exercise the
option, we will also issue warrants to purchase up to an additional 350,000
shares of our common stock (of which a maximum of 145,530 shares would be issued
to Essex) at an exercise price per share equal to the price at which we sell our
common stock upon our exercise of the option. Those warrants will have a
six-year term.
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REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is composed of three 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 2000
Health Grades devoted significant efforts in 2000 toward developing its
healthcare information business. The Committee recognized that this is
essentially a new business, and that appropriate incentives should be provided
to those executive officers whose continued commitment to the Company were
deemed important for the growth of the Company. In addition, the Committee
sought to reward those executives who were instrumental in furthering Health
Grades' transition from a physician practice management company to a healthcare
information company. On the other hand, the Committee considered the need to
conserve the Company's cash resources in determining discretionary cash
compensation to executive officers.
Executive compensation in 2000 consisted of three components: (1) base
salaries, (2) cash bonuses and (3) longer-term incentives through the provision
of stock options under the Equity Compensation Plan. The basis for determining
executive compensation in 2000 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. All of
these employment agreements were entered into prior to 2000. 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. In addition, one newly-hired executive officer received compensation
in accordance with terms he negotiated prior to commencement of his employment.
Two other persons who became executives in 2000 continued to be paid at the
salary level in effect at the time they became executives.
BONUS
Prior to 2000, cash bonuses were awarded to executive officers only in
1996. In August 2000, the Committee paid bonuses in recognition of the efforts
of executive officers in effecting the transition from a physician practice
management business to a healthcare information business. This was a lengthy
process that began in 1998 and culminated with the Company's acquisition, in
February 2000, of remaining minority interests in the entity that conducted the
internet healthcare business that eventually evolved into the Company's current
internet healthcare business. The Committee believed special recognition of the
efforts of executives was appropriate, particularly since no bonuses were
otherwise paid in respect of 1998 and 1999. No specific criteria was utilized in
determining the bonuses; however, the Committee took into account the
recommendations of the Chief Executive Officer as well as its own perspective on
the efforts of the individual executives. The Committee noted particularly the
commitment of most of the executives to helping the Company persevere through a
very difficult period. In the case of Mr. Hicks, the Committee recognized his
extraordinary efforts in difficult negotiations with physician practices and
some minority stockholders of the entity that conducted the internet healthcare
business. In respect of services rendered by the executives in 2000, the
Committee felt that it was appropriate to provide bonuses in recognition of the
contribution made by the executives in facilitating the development of the
Company's healthcare information business. The Committee gave substantial weight
to the recommendations of the Chief Executive Officer regarding the relative
contributions of the executives other than Mr. Hicks, although the Committee
determined to modify the relative bonuses in some instances and limit the
overall amount of bonuses in light of the Company's cash
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position. In the case of Mr. Hicks, the Committee considered his oversight of
the transition to the healthcare information business, the formation of an
appropriate infrastructure and establishment of a sales and marketing effort.
STOCK OPTIONS
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. Moreover, in considering stock option grants for 2000, the Committee
noted that cash incentives had been limited. The Committee also recognized that,
while the executives already held stock options, the exercise price of most of
the options was above the market price of the Company's common stock. Therefore,
these options may not have fulfilled their purpose, namely, to provide a
meaningful incentive to further the development of Health Grades' business. As a
result, the Committee determined to make stock option grants in 2000 to
encourage the executives to continue their employment with the Company and to
devote the substantial time and effort necessary to develop the healthcare
information business. However, in light of previous grants, the Committee
determined to grant options covering a substantially lower number of shares than
in previous years. The determination of the number of shares underlying stock
options granted to executive officers 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. With regard to Mr. Hicks, the Committee recognized his
central role in completing the transition from a physician practice management
company to a healthcare information company and in securing equity financing for
Health Grades and his leadership in building a new business.
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
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.
This report is provided by the members of the Compensation Committee during
2000. Mr. Quattrone was appointed to the Compensation Committee in February
2001.
Peter H. Cheesbrough
Marc S. Sandroff
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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 (see Appendix A). 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 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, 2000 filed with the Securities and Exchange Commission.
Mats Wahlstrom
Peter Cheesbrough
Parag Saxena
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 2000 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, 2000 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, 2000 were $104,615.
ALL OTHER FEES
The aggregate fees billed for all other services rendered by Ernst & Young
LLP during fiscal year 2000, other than the services referred to above under the
caption "Audit Fees," were $37,585, and such other fees were primarily related
to assistance to us in our preparation of a registration statement filed with
the Securities and Exchange Commission in June 2000 and the audit of the
financial statements of our Retirement Savings Plan.
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EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information concerning the
compensation we paid to our Chief Executive Officer and the four other most
highly paid executive officers during 2000. We refer to these persons in this
proxy statement as the "named executive officers."
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS COMPENSATION(1)
- --------------------------- ---- -------- -------- ------------ ---------------
Kerry R. Hicks....................... 2000 $259,118 $195,000 260,000 $4,800
Chief Executive Officer 1999 $253,606 -- 475,000 $7,137
1998 $248,923 -- 500,000 $4,197
Patrick M. Jaeckle(3)................ 2000 $259,118 $125,482 140,000 $4,800
President 1999 $253,606 -- 475,000 $4,800
1998 $250,400 -- 500,000 --
D. Paul Davis(4)..................... 2000 $177,828 $ 88,282 100,000 $4,800
Executive Vice President -- Finance 1999 $174,391 -- 200,000 $6,392
1998 $166,442 -- 305,310 $6,402
David G. Hicks....................... 2000 $175,419 $ 78,287 100,000 $4,800
Executive Vice President -- 1999 $162,377 -- 200,000 $6,070
Information Technology 1998 $139,615 -- 183,65 $5,584
Timothy D. O'Hare.................... 2000 $149,252 $ 37,984 100,000 $4,800
Senior Vice President -- 1999 $146,077 -- 200,000 $5,728
Providerweb.net 1998 $143,402 -- 183,659 $5,736
- ---------------
(1) Includes amounts that we contributed for the account of the executive
officers under our Retirement Savings Plan.
(2) As described under "Report of the Compensation Committee," a portion of the
bonuses listed was intended to recognize the efforts of the executive
officers in effecting the transition of our business from physician practice
management to health care information during the period from 1998 through
early 2000.
(3) Mr. Jaeckle resigned effective March 29, 2001. He will continue to provide
services to us as a consultant through September 2001. See "Certain
Transactions" for more information.
(4) Mr. Davis resigned effective April 30, 2001.
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STOCK OPTIONS
The following table sets forth information regarding stock options granted
during 2000 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR SHARE DATE PRESENT VALUE(2)
- ---- ---------- ------------- --------- ---------- ----------------
Kerry R. Hicks................. 260,000 11.9% $0.6250 11/20/2010 $132,600
Patrick M. Jaeckle............. 140,000 6.03% $0.6250 11/20/2010 $ 71,400
D. Paul Davis.................. 100,000 4.31% $0.6250 11/20/2010 $ 51,000
David G. Hicks................. 100,000 4.31% $0.6250 11/20/2010 $ 51,000
Timothy D. O'Hare.............. 100,000 4.31% $0.6250 11/20/2010 $ 51,000
- ---------------
(1) On November 20, 2000, we granted options to a number of our employees,
including our executive officers. The options each have an exercise price of
$0.625, which was the closing price per share of our common stock on the
date of grant. The options vest in one-third increments on each of the first
through third anniversaries of the date of grant and terminate ten years
from the date of grant.
(2) These amounts represent the estimated fair value of stock options, measured
at the date of grant, using the Black-Scholes option pricing model. There
are four underlying assumptions used in developing the grant valuations: an
expected volatility of 1.46; an expected term to exercise of 3 years;
risk-free interest rate over the life of the option of 5.06%; and an
expected dividend yield of zero. The actual value, if any, an option holder
may realize will depend on the amount by which the stock price exceeds the
exercise price on the date the option is exercised. Consequently, there is
no assurance the value realized by an option holder will be at or near the
value estimated above. These amounts should not be used to predict stock
performance.
The following table sets forth certain information regarding stock options
held as of December 31, 2000 by the named executive officers. The named
executive officers did not exercise any stock options in 2000.
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Kerry R. Hicks................................ 861,351 506,806 -- --
Patrick M. Jaeckle............................ 861,351 386,806 -- --
D. Paul Davis................................. 363,621 293,270 -- --
David G. Hicks................................ 319,701 210,220 -- --
Timothy D. O'Hare............................. 445,701 204,220 -- --
- ---------------
(1) Based on $0.344, the closing price of our common stock as reported on the
Nasdaq Small Cap Market on December 31, 2000.
EMPLOYMENT AGREEMENTS
Mr. Kerry Hicks is employed by us under an employment agreement dated as of
April 1, 1996. The agreement has an initial term of five years and is renewable
automatically for one-year periods unless terminated by either of the parties.
The agreement provides for Mr. Hicks to receive an annual salary at a rate
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of $187,500 for 1996, $215,000 for 1997 and $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 upon performance targets established by the Board of
Directors.
Mr. David Hicks and Mr. O'Hare are employed by us under employment
agreements dated as of March 1, 1996 and August 12, 1996, respectively. Each
agreement has an initial term of five years and is renewable automatically for
one-year periods unless terminated by either of the parties. The agreements
provide for Messrs. David Hicks and O'Hare to receive an annual base salary of
$108,000 for 1996, $125,000 for 1997 and $144,000 for 1998, with cost of living
increases for the years following the third year. In addition, the agreements
provide for annual incentive compensation to each officer equal to up to 75% of
his base salary based upon 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.
Messrs. Jaeckle and Davis were also employed by us under employment
agreements. Effective March 29, 2001, Mr. Jaeckle resigned and entered into an
agreement under which, among other things, he will provide consulting services
to us through September 2001. A discussion of Mr. Jaeckle's agreement is
included in "Certain Transactions." Mr. Davis resigned effective April 30, 2001.
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.
The initial terms of employment of Peter J. Stahl, III are set forth in a
term sheet between Mr. Stahl and the Company. The term sheet provides for Mr.
Stahl to receive an annual salary at a rate of $250,000 per year. In addition,
the term sheet provides for annual incentive compensation equal to up to 100% of
Mr. Stahl's base salary based upon performance targets that are mutually agreed
upon and that are approved by the Compensation Committee of the Board of
Directors. In accordance with the term sheet, Mr. Stahl received a grant of
options to purchase 400,000 shares of our common stock. Mr. Stahl was granted
those options effective September 14, 2000, the date he commenced his employment
with us.
CERTAIN TRANSACTIONS
In December 1999, Kerry Hicks, our Chief Executive Officer, Patrick
Jaeckle, our former President, Paul Davis, our former Executive Vice President
- -- Finance and Chief Financial Officer and David Hicks, our Executive Vice
President -- Information Technology, made loans to us in the principal amounts
of $2 million, $1 million, $100,000 and $100,000, respectively. Mr. Kerry Hicks
and Mr. Jaeckle also jointly loaned us an additional $350,000. We used the
proceeds of those loans to purchase shares of HG.com (HG.com owned certain
assets that we ultimately developed into our healthgrades.com website) that were
held by the members of Venture5, LLC other than Sarah Loughran (now our Senior
Vice President -- Content). We issued notes (the "Officer Notes") to those
officers in connection with those loans. The notes bore interest at 10.5% per
annum and were payable on December 31, 2000.
In February 2000, through a series of transactions, we acquired the
remaining minority interests in HG.com from Peter A. Fatianow and Sarah
Loughran, each of whom owned five percent of the outstanding stock of HG.com. We
issued 400,000 shares to each of Mr. Fatianow and Ms. Loughran in exchange for
their minority interests. In March 2000, Mr. Fatianow became our Senior Vice
President -- Business Development and Ms. Loughran became our Senior Vice
President -- Content.
On March 17, 2000, we closed a private placement of our securities. In
connection with the offering, we sold 4,215,000 shares of our common stock and
warrants to purchase 1,475,250 shares of our common stock to Chancellor for
$8,430,000. Parag Saxena, one of our directors, is an affiliate of Chancellor.
We also sold
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3,000,000 shares of our common stock and warrants to purchase 1,050,000 shares
to Essex for $6,000,000. Marc Sandroff, one of our directors, is an affiliate of
Essex. In addition, the holders of $3,200,000 principal amount Officer Notes
surrendered their notes in exchange for our common stock and warrants as
follows:
PRINCIPAL AMOUNT NUMBER OF NUMBER OF SHARES
OF NOTE SHARES UNDERLYING WARRANTS
NAME SURRENDERED ISSUED ISSUED
- ---- ---------------- --------- -------------------
Kerry R. Hicks........................... $2,000,000 1,000,000 350,000
Patrick M. Jaeckle....................... 1,000,000 500,000 175,000
D. Paul Davis............................ 100,000 50,000 17,500
David G. Hicks........................... 100,000 50,000 17,500
The warrants issued in the transaction each have an exercise price of $4.00
per share and have a term of five years.
Effective April 16, 2001, we reached an agreement with Chancellor and Essex
regarding a commitment to provide up to $2.0 million of equity financing to us.
In consideration for the commitment, we issued to Chancellor and Essex warrants
(the "Commitment Warrants") to purchase an aggregate of 500,000 shares of our
common stock at an exercise price per share of $0.26, which was the closing
market price per share of our common stock as reported by Nasdaq on April 16,
2001. The Commitment Warrants will expire on April 16, 2007. In addition, in
connection with our agreement with Chancellor and Essex, we repriced warrants to
purchase an aggregate of 100,000 shares of our common stock that were issued to
Chancellor and Essex in March 2000 to the same $0.26 exercise price.
Under the terms of the agreement with Chancellor and Essex, we were granted
the option, which may be exercised solely at our discretion until December 31,
2001, to sell our common stock to the Chancellor and Essex at an aggregate
purchase price of up to $2.0 million. If we exercise the option, the price per
share will be equal to the lesser of $0.26 and the closing price per share of
our common stock as reported by Nasdaq on the date that we provide notice to
Chancellor and Essex that we intend to exercise the option, but in no event less
than $0.15 per share. If we decide to exercise the option, we will also issue
warrants to purchase up to an additional 350,000 shares of our common stock at
an exercise price per share equal to the price at which we sell our common stock
upon our exercise of the option. Those warrants will have a six-year term.
Effective March 29, 2001, Mr. Jaeckle resigned his employment with us. In
connection with his resignation, we entered into a severance agreement with Mr.
Jaeckle. Under the agreement, Mr. Jaeckle agreed to serve as a consultant to us
through September 30, 2001 and to surrender 250,000 shares of Health Grades
common stock to us. We agreed to make payments to Mr. Jaeckle totaling
approximately $435,000 in consideration of his consulting services, the
surrender of his shares and other commitments, including certain confidentiality
commitments. We also extended the termination date of options to purchase
861,351 shares of our common stock held by Mr. Jaeckle until September 30, 2003
and agreed to pay Mr. Jaeckle an additional fee of approximately $90,000 if he
provides to the Company a bona fide written offer of an entity to provide equity
financing or enter into a business combination transaction with us on terms
specified in the agreement.
Effective April 30, 2001, Mr. Davis resigned his employment with us. In
connection with his resignation, we extended the termination date of certain
options to purchase 200,000 shares of our common stock held by Mr. Davis from
ninety days from the date of Mr. Davis' resignation to two years from the date
of his resignation.
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PROPOSAL TO AMEND THE 1996 EQUITY
COMPENSATION PLAN
Our 1996 Equity Compensation Plan (the "Plan") provides for grants of stock
options to our employees and employees of our subsidiaries, certain consultants
and advisers, and non-employee members of our Board of Directors ("non-employee
directors"). Shares of our common stock, par value $.001 per share ("Shares"),
may be issued upon exercise of stock options issued under the Plan. The Plan was
designed to serve as an incentive to participants to contribute materially to
our growth, thereby benefiting our stockholders and aligning the economic
interests of the participants with those of our stockholders.
At the meeting, we will present a proposal to our stockholders to amend the
Plan by increasing the number of Shares reserved for issuance under the Plan
from 7,000,000 to 8,000,000. Our Board of Directors believes that the grant of
options is an important component of our compensation and has been instrumental
in the motivation of our management and other key employees. In addition, as
Health Grades continues to grow and the number of employees increase, we will
need to grant additional options as incentive compensation.
As of April 30, 2001, options to purchase 1,190,903 shares of our common
stock remain available for grant under the Plan.
The key provisions of the Plan are as follows:
General. If the proposal is approved, the Plan will authorize up to
8,000,000 Shares for issuance, subject to adjustment in certain circumstances
discussed below. If and to the extent stock options that have been granted under
the Plan terminate, expire or are canceled without being exercised, the Shares
subject to those stock options will again be available for grant under the Plan.
No individual may receive grants of stock options for more than an aggregate of
500,000 Shares in any calendar year during the term of the Plan.
Administration of the Plan. The Board of Directors or a committee of not
less than two persons appointed by the Board of Directors from among its members
(the "Committee") administers and interprets the Plan. The Compensation
Committee of the Board of Directors currently serves as the Committee. However,
with respect to the grant of stock options to non-employee directors and other
members of the Committee, the Board of Directors exercises the authority of the
Committee. The Committee has the authority to determine (i) persons to whom
stock options may be granted under the Plan, (ii) the type, number of underlying
Shares and other terms of each stock option, (iii) the time when the grants of
stock options will be made and (iv) any other matters arising under the Plan. In
addition, a Non-Officer Grant Committee of the Board of Directors may grant
options to employees who are not our officers, subject to limitations described
below. Kerry Hicks, our Chief Executive Officer, currently serves on the
Non-Officer Grant Committee.
The Committee has full power and authority to administer and interpret the
Plan, to make factual determinations and to adopt or amend such rules,
regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable, in its sole
discretion.
Grants and Awards. All grants of stock options are subject to the terms
and conditions set forth in the Plan and to other terms and conditions
consistent with the Plan that are specified in writing by the Committee in a
grant instrument given to the individual receiving the grant. The Committee must
approve the form and provisions of each grant instrument. Grants of options
under the Plan need not be uniform as among other recipients of the same type of
grant.
Eligibility for Participation. Subject to the terms of the Plan, the
Committee is responsible for designating our employees and consultants and
advisors and those of any of our subsidiaries who may participate in the Plan.
As of April 30, 2001, 49 employees were eligible for grants of stock options
under the Plan. The Committee is authorized to select the persons to receive
grants of stock options (the "grantees") from among those eligible and to
determine the number of Shares that are subject to each grant of a stock option.
To be eligible, consultants and advisors must render bona fide services and such
services must not be in connection with an offer or sale of securities in a
capital raising transaction.
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Grant of Stock Options. The Committee may grant stock options intended to
qualify as incentive stock options ("ISOs"), within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or so-called
"non-qualified stock options" that are not intended to so qualify ("NQSOs").
Only employees may receive ISOs.
The Committee fixes the option price per Share at the date of grant of the
stock option. The option price of any ISO granted under the Plan may not be less
than the fair market value of the underlying Shares on the date of grant, and
the option price of any NQSO may be equal to, less than or greater than the fair
market value of the underlying Shares on the date of grant. However, if the
grantee of an ISO is a person who holds more than 10% of the combined voting
power of all classes of our outstanding stock, the option price per Share of an
ISO must be at least 110% of the fair market value of a Share on the date of
grant. To the extent that the aggregate fair market value of Shares, determined
as of the date of the grant, with respect to which any ISOs granted under the
Plan and any other plan to a grantee initially become exercisable during any
calendar year exceeds $100,000, the ISOs, to the extent of that excess, must be
treated as NQSOs. On April 30, 2001 the fair market value of our common stock,
determined in accordance with the Plan, was $0.25.
Term of Stock Option. The term of each stock option is determined by the
Committee but may not exceed ten years from the date of grant, or five years
from the date of grant if the grantee of an ISO is a person who holds more than
10% of the combined voting power of all classes of our outstanding stock. Stock
options are subject to earlier termination as described below under "Termination
of Stock Options as a Result of Termination of Employment or Service, Disability
or Death." The Committee also determines the vesting period for stock options,
if any, and specifies the vesting schedule in the grant instrument. The
Committee, in its sole discretion, may accelerate the exercisability of any
stock option.
Grants by Non-Employee Grant Committee. The Non-Employee Grant Committee
may grant options (not to exceed 25,000 Shares underlying the grant of such
options to a single employee in a calendar year or 100,000 Shares underlying all
such options in any calendar quarter) to new employee hires and to employees
promoted to non-officer positions. Such options may vest over no less than three
years, must have an exercise price per Share at least equal to the fair market
value of a Share on the date of grant and may not have a term exceeding ten
years. Such options will be ISOs to the extent permissible under the Code.
Payment for Shares Underlying Stock Option. A grantee may exercise a stock
option by delivering to us a notice of exercise and payment of the option price.
The grantee may pay the option price in cash or by check or wire transfer in
immediately available funds, or by delivering Shares that the grantee already
owns (subject to such restrictions as the Committee deems appropriate). The
Committee has the option to designate additional methods of payment, including
payment through a broker in accordance with procedures permitted by Regulation T
of the Federal Reserve Board. At the time of exercise, the grantee must pay the
option price and the amount of any federal, state or local withholding tax due
in connection with such stock option exercise.
Termination of Stock Options as a Result of Termination of Employment or
Service, Disability or Death. If a grantee ceases to serve as an employee,
director, consultant or advisor to Health Grades or its subsidiary for any
reason other than disability, death or "termination for cause" (as defined in
the Plan) that person's stock option will terminate 90 days following the date
on which he or she ceases to serve. If the person's service ceases due to the
person becoming disabled within the meaning of Section 22(e)(3) of the Code, his
or her stock option will terminate one year following the date on which he or
she ceases to serve. In the event of the death of a grantee while providing
service or within three months after he or she ceases to serve, the grantee's
personal representative may exercise the stock option until one year from the
date of death. However, in each case described above, the Committee may specify
a different termination date, but the new termination date cannot be later than
expiration of the initial term of the stock option. If a grantee's service
ceases due to "termination for cause" as defined in the Plan, the grantee's
stock options will terminate immediately.
Restrictions on Transferability of Stock Options. Subject to the
exceptions set forth below, no stock option granted under the Plan may be
transferred, except by will or the laws of descent and distribution. However,
(i) if permitted in any specific case by the Committee in its sole discretion,
an NQSO may be
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transferred pursuant to a "qualified domestic relations order," within the
meaning of the Code or of Title I of the Employee Retirement Income Security Act
of 1974 and (ii) the Committee may provide in a grant instrument that a grantee
may transfer stock options to his or her family members or other persons or
entities according to terms that the Committee determines.
Amendment or Termination of the Plan. The Board of Directors may amend or
terminate the Plan at any time. Nevertheless, the Board of Directors may not
amend the Plan without stockholder approval if stockholder approval is required
by Section 162(m) of the Code and the Plan is subject to Section 162(m). The
Plan will terminate on October 14, 2006 unless it is terminated earlier by the
Board of Directors or it is extended by the Board of Directors with approval of
the stockholders. The termination of the Plan will not affect the power and
authority of the Committee over outstanding stock options.
Amendment and Termination of Outstanding Stock Options. A termination or
amendment of the Plan that occurs after a grant is made will not result in the
termination or amendment of the stock option unless the grantee consents, but
the Committee may revoke any stock option that contains terms contrary to
applicable law, or modify any grant to bring it into compliance with any valid
and mandatory government regulation. Stock options may also be modified,
replaced or exchanged under the "Change of Control" provisions described below.
Adjustment Provisions. If there is any change in the number or kind of
Shares outstanding due to a stock dividend, spin off, recapitalization, stock
split, or combination or exchange of shares, or merger, reorganization or
consolidation, reclassification or change in the par value or similar event, or
if the value of our outstanding Shares are substantially reduced as a result of
a spin-off or our payment of an extraordinary dividend or distribution, the
number of Shares available for stock options, the maximum number of Shares for
which any individual participating in the Plan may receive stock options in any
year, the kind of shares issued under the Plan and the number of shares and
option price per share subject to outstanding stock options will be
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of, or change in kind or value of, issued shares of our stock.
Change of Control Provisions. In the event of a "Change of Control," all
outstanding stock options will automatically become immediately exercisable,
unless the Committee determines otherwise. In addition, subject to certain
exceptions, upon a Change of Control where Health Grades is not the surviving
corporation (or survives only as a subsidiary of another corporation), all
outstanding stock options that are not exercised will be assumed by, or replaced
with comparable options by, the surviving corporation, unless the Committee
determines otherwise.
In the event of a Change of Control, the Committee may require that
grantees surrender their outstanding stock options in exchange for a payment (in
cash or Shares as determined by the Committee) equal to the amount by which the
then fair market value of the Shares subject to the grantee's outstanding
options exceeds the option price.
The Plan limits the discretion of the Committee if its membership changes
following a Change of Control or if actions of the Committee could have certain
adverse accounting or tax effects.
Under the Plan, a "Change of Control" will be deemed to have occurred upon
the earliest to occur of the following events:
- any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) becomes a beneficial owner of securities
representing 35% or more of the voting power of our then outstanding
securities, except where the acquisition is approved by the Board;
- our stockholders approve (or, if stockholder approval is not required,
the Board approves) an agreement providing for:
- our merger or consolidation with another corporation, subject to certain
exceptions;
- a sale or other disposition of all or substantially all of our assets;
or
- our liquidation or dissolution;
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- any person has commenced a tender offer or exchange offer for 35% or more
of the voting power of our then outstanding Shares; or
- a majority of the members of the Board of Directors elected have been
members of the Board of Directors for less than two years, unless the
election or nomination for election of each new director who was not a
director at the beginning of the two year period was approved by a vote
of at least two-thirds of the directors then in office who were directors
at the beginning of the two year period.
Section 162(m). Under Section 162(m) of the Code, we may be precluded from
claiming a federal income tax deduction for total remuneration in excess of
$1,000,000 paid to the chief executive officer or to any of the other four most
highly compensated officers in any one year. Total remuneration includes amounts
received upon the exercise of stock options granted under the Plan. An exception
does exist, however, for "performance-based compensation," including amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The Plan is intended to allow
grants of options thereunder to meet the requirements of "performance-based
compensation."
Option grants, net of cancellations, to purchase Shares have been made
under the Plan from inception of the Plan through April 30, 2001, as follows:
Kerry R. Hicks, 1,368,157 Shares; Patrick M. Jaeckle, 861,351 Shares; D. Paul
Davis, 200,000 Shares; David G. Hicks 529,921 Shares; Timothy D. O'Hare, 649,921
Shares; current executive officers as a group, 4,209,350 shares; non-employee
directors as a group, 248,355 Shares; and all other employees as a group,
975,431 Shares.
The following table sets forth information regarding the grant of options
to individuals and groups referred to below that are subject to stockholder
approval of the proposed amendment to the Plan.
NEW PLAN BENEFITS
HEALTH GRADES, INC. 1996 EQUITY COMPENSATION PLAN
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
- ----------------- ------------------
Kerry R. Hicks...................................... 61,719
Chief Executive Officer
David G. Hicks...................................... 24,940
Executive Vice President -- Information Technology
Timothy D. O'Hare................................... 7,039
Senior Vice President -- Providerweb.net
Executive Group..................................... 134,295
Non-Executive Director Group........................ --
Non-Executive Officer Employee Group................ --
Federal Tax Consequences. There are no federal income tax consequences to
a grantee or to Health Grades upon the grant of an NQSO under the Plan. Upon the
exercise of an NQSO, a grantee will recognize ordinary compensation income in an
amount equal to the excess of the fair market value of the Shares underlying the
NQSO at the time of exercise over the option price of the NQSO, and we generally
will be entitled to a corresponding federal income tax deduction in that amount.
Upon the sale of Shares acquired by the exercise of an NQSO, a grantee will have
a capital gain or loss (long-term or short-term depending upon the length of
time the Shares were held) in an amount equal to the difference between the
amount realized upon the sale and the grantee's adjusted tax basis in the Shares
(the option price plus the amount of ordinary income recognized by the grantee
at the time of exercise of the NQSO).
A grantee of an ISO will not recognize taxable income for purposes of the
regular income tax, upon either the grant or exercise of the ISO. However, for
purposes of the alternative minimum tax imposed under the Code, the amount by
which the fair market value of the Shares acquired upon exercise exceeds the
option price will be treated as an item of adjustment and included in the
computation of the recipient's alternative
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minimum taxable income in the year of exercise. A grantee who disposes of the
Shares acquired upon exercise of an ISO after two years from the date the ISO
was granted and after one year from the date such Shares were transferred to him
or her will recognize long-term capital gain or loss in the amount of the
difference between the amount realized on the sale and the option price (or the
grantee's other tax basis in the Shares), and we will not be entitled to any tax
deduction by reason of the grant or exercise of the ISO. As a general rule, if a
grantee disposes of the Shares acquired upon exercise of an ISO before
satisfying both holding period requirements (a "disqualifying disposition"), his
or her gain recognized on such a disposition will be taxed as ordinary income to
the extent of the difference between the fair market value of such Shares on the
date of exercise and the option price, and we will be entitled to a deduction in
that amount. The gain, if any, in excess of the amount recognized as ordinary
income on such a disqualifying disposition will be long-term or short-term
capital gain, depending upon the length of time the grantee held his or her
Shares prior to the disposition.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL TO AMEND
THE PLAN
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PERFORMANCE GRAPH
The graph below compares the percentage change in total stockholder return
for our common stock with the CRSP Index for the Nasdaq Stock Market (US
companies) ("Nasdaq Stock Market (US)") and the CRSP index for Nasdaq Health
Services Stocks ("Nasdaq Health Services Index").
This graph assumes the investment of $100 in Company common stock, the
Nasdaq Stock Market (US) and the Nasdaq Health Services Index on February 7,
1997, when our common stock was first traded on Nasdaq, and covers the period
from February 7, 1997 through December 31, 2000. Dividend reinvestment has been
assumed.
(GRAPH)
FEBRUARY 7, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
---------------- ----------------- ----------------- ----------------- -----------------
Health Grades,
Inc. .............. $100.00 $168.99 $ 15.50 $ 31.01 $ 4.27
Nasdaq Stock Market
(US)............... $100.00 $116.48 $163.74 $296.05 $183.27
Nasdaq Health
Services Index..... $100.00 $101.89 $ 87.37 $ 71.35 $ 95.92
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has selected the firm of Ernst & Young LLP to serve
as our independent auditors for the current fiscal year. 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
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors and beneficial owners of more than ten percent of our common stock
to file reports of ownership of our securities and changes in ownership with the
Securities and Exchange Commission. We believe that all filings required to be
made during 2000 were made on a timely basis, except that Peter Stahl and John
Quattrone each filed their initial ownership report after the applicable due
date. We attribute the late filing to errors in our internal procedures that
have been rectified.
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21
ADVANCE NOTICE PROCEDURES
In accordance with our by-laws, notice relating to nominations for director
or proposed business to be considered at the 2002 annual meeting of stockholders
must be given no earlier than March 31, 2002 nor later than April 30, 2002.
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 2002 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 23, 2002.
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, 2001
19
22
APPENDIX A
HEALTH GRADES, INC.
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. AUDIT COMMITTEE PURPOSE
The Audit Committee is appointed by the Board of Directors to assist the
Board in fulfilling its oversight responsibilities. The Audit Committee's
primary duties and responsibilities are to:
- Review financial information to be provided to stockholders and others.
- Monitor the integrity of the Company's financial reporting processing and
systems of internal controls.
- Monitor the independence and performance of the Company's independent
auditors.
- Provide an avenue of communication among the independent auditors,
management, and the Board of Directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to the
independent auditors as well as anyone in the Company. The Audit Committee may
retain, at the Company's expense, special legal, accounting, or other
consultants or experts it deems necessary in the performance of its duties.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
The Audit Committee shall be comprised of at least three directors, each of
whom shall be independent, as determined by the Board of Directors and in
accordance with the applicable provisions of the Marketplace Rules of the
National Association of Securities Dealers, Inc. applicable to the Nasdaq Stock
Market. Audit Committee members also shall satisfy the qualification
requirements of the Nasdaq Stock Market for audit committee membership.
The Board of Directors shall appoint the members of the Audit Committee. If
the Chairman of the Audit Committee is not designated or present, the members of
the Committee may designate a Chairman by majority vote of the Committee
membership.
The Audit Committee shall meet at least four times annually, or more
frequently as circumstances dictate. The Chairman of the Audit Committee shall
prepare and/or approve an agenda in advance of each meeting. The Audit Committee
should meet privately in executive session at least annually with management,
the independent auditors and as a committee to discuss any matters that the
Audit Committee or each of these groups believe should be discussed. In
addition, the Audit Committee should communicate with management and the
independent auditors quarterly to review the Company's interim financial
statements and any significant findings based upon the auditors' review
procedures before the Company's Quarterly Report on Form 10-Q is filed with the
Securities and Exchange Commission.
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
Review Procedures
In fulfilling its responsibilities, the Audit Committee is expected to
perform the following procedures:
1. Review and reassess the Charter of the Audit Committee at least
annually and recommend to the Board of Directors, as appropriate,
amendments to the Charter.
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2. Review the Company's annual audited financial statements prior to
filing or distribution. In conducting its review, the Audit Committee
should discuss the following matters with management and the independent
auditors:
a. The independent auditors' audit of the financial statements and
its report thereon.
b. Any significant changes required in the independent auditors'
audit plan.
c. Any significant difficulties encountered during the course of
the audit (including any restriction on the scope of work or access to
required information).
d. Any significant disagreement among management and the
independent auditors in connection with preparation of the financial
statements.
e. Other matters related to the conduct of the audit which are
communicated to the Audit Committee under generally accepted auditing
standards.
3. In consultation with the management and the independent auditors,
consider the integrity of the Company's financial reporting processes and
controls. Discuss significant financial risk exposures and the steps
management has taken to monitor, control and report such exposures. Review
significant findings prepared by the independent auditors together with
management's responses.
4. Review with financial management and the independent auditors the
Company's quarterly financial results prior to the release of earnings and
the Company's quarterly financial statements prior to filing or
distribution. Discuss any significant changes to the Company's accounting
principles and any items communicated by the independent auditors in
accordance with Statement on Auditing Standards No. 61 (see Item 11). The
Chairman of the Committee may represent the entire Audit Committee for
purposes of this review.
5. Meet with the independent auditors and management in separate
executive sessions to discuss any matters that the Audit Committee or these
groups believe should be discussed privately with the Audit Committee.
Duties Relating to the Independent Auditors
The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors, as representatives of the stockholders. Accordingly,
the Audit Committee is expected to perform the following activities with, or as
they relate to, the independent auditors:
6. Review the independence and performance of the auditors and
annually recommend to the Board of Directors the appointment of the
independent auditors or approve any discharge of auditors when
circumstances warrant.
7. Approve the fees and other significant compensation to be paid to
the independent auditors.
8. Review and approve requests for significant management consulting
engagements to be performed by the independent auditors' firm and be
advised of any other significant study undertaken at the request of
management that is beyond the scope of the audit engagement letter.
9. On an annual basis, the Committee should review, and discuss with
the independent auditors, all significant relationships the independent
auditors have with the Company that could impair the auditors'
independence. This review should include, without limitation, the
following:
a. Receiving a formal written statement from the independent
auditor delineating all relationships between the auditor and the
Company, consistent with Independence Standards Board Standard No. 1.
b. Actively engaging in a dialog with the independent auditor with
respect to any disclosed relationships or services that may have an
impact on the objectivity and independence of the independent auditor.
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10. Review the independent auditors audit plan. This review should
include a discussion of scope, staffing, reliance upon management and
general audit approach.
11. Prior to releasing the year-end earnings, discuss, out of the
presence of management, the results of the audit with the independent
auditors. The discussion should include the matters set forth in item 2, as
well as the following:
a. The adequacy of the Company's internal controls, including
computerized information system controls and security.
b. Any related significant findings and recommendations of the
independent auditor together with management's responses to them.
c. The independent auditor's judgment about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting. Without limiting the foregoing, the Audit Committee
is expected to inquire as to the independent auditors' views about
whether management's choices of accounting principles appear reasonable
from the perspective of income, asset and liability recognition, and
whether those principles are common practices or are minority practices.
Other Audit Committee Responsibilities
12. Recommend to the Board of Directors whether the Company's audited
financial statements should be included in the Company's Annual Report on
Form 10-K for filing with the Securities and Exchange Commission.
13. Annually prepare a report to shareholders as required by the
Securities and Exchange Commission. The report should be included in the
Company's proxy statement relating to the annual meeting of stockholders.
14. Perform any other activities consistent with this Charter, the
Company's by-laws, and governing law, as the Committee or the Board deems
necessary or appropriate.
15. Maintain minutes of meetings and periodically report to the Board
of Directors on its activities.
16. Periodically perform self-assessment of audit committee
performance.
17. Annually review policies and procedures as well as audit results
associated with directors' and officers expense accounts and perquisites.
Annually review a summary of directors' and officers' related party
transactions and potential conflicts of interest.
18. Discuss and address with the independent auditors any significant
issues relative to overall board responsibility that, in the judgment of
the independent auditors, have been communicated to management but have not
been adequately resolved.
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EXHIBIT A
HEALTH GRADES, INC.
1996 EQUITY COMPENSATION PLAN
The purpose of the Health Grades, Inc. 1996 Equity Compensation Plan
(the "Plan") is to provide (i) designated employees (including employees who are
also officers or directors) of Health Grades, Inc. (the "Company") and its
subsidiaries, (ii) certain consultants and advisors to the Company or its
subsidiaries and (iii) non-employee members of the Board of Directors of the
Company (the "Board") with the opportunity to receive grants of incentive stock
options and nonqualified stock options ("Options"). The Company believes that
the Plan will encourage the participants to contribute materially to the growth
of the Company, thereby benefitting the Company's shareholders, and will align
the economic interests of the participants with those of the shareholders.
1. Administration
(a) The Plan may be administered by the Board or by a
committee (the "Committee") or two or more directors appointed by the Board.
Notwithstanding the foregoing, the Board of Directors shall exercise the powers
of the Committee with respect to the grant of options to members of the Board
who are not employees of the Company or its subsidiaries or who are members of
the Committee ("Non-Employee Directors"). With respect to employees who are not
officers of the Company, the Board of Directors may delegate certain Committee
powers to a Non-Officer Grant Committee pursuant to the provisions of Section 18
hereof. If no administrative committee is appointed, all references in the Plan
to the "Committee" shall be deemed to refer to the Board.
(b) The Committee shall have the sole authority to (i)
determine the individuals to whom Options shall be granted under the Plan, (ii)
determine the type, size and terms of the Options to be granted to each such
individual, (iii) determine the time when the Options will be granted and the
duration of any applicable exercise period, including the criteria for
exercisability and the acceleration of exercisability and (iv) deal with any
other matters arising under the Plan.
(c) The Committee shall have full power and authority to
administer and interpret the Plan, to make factual determinations and to adopt
or amend such rules, regulations, agreements and instruments for implementing
the Plan and for the conduct of its business as it deems necessary or advisable,
in its sole discretion. The Committee's interpretations of the Plan and all
determinations made by the Committee pursuant to the powers vested in it
hereunder shall be conclusive and binding on all persons having any interest in
the Plan or in any awards granted hereunder. All powers of the Committee shall
be executed in its sole discretion, in the best interest of the Company, not as
a fiduciary, and in keeping with the objectives of the Plan and need not be
uniform as to similarly situated individuals.
26
2. Options
Options granted under the Plan may be incentive stock options
("Incentive Stock Options") or nonqualified stock options ("Nonqualified Stock
Options") as described in Section 5. All Options shall be subject to the terms
and conditions set forth herein and to such other terms and conditions
consistent with the Plan as the Committee deems appropriate and as are specified
in writing by the Committee to the individual in a grant instrument (the "Grant
Instrument") or an amendment to the Grant Instrument. The Committee shall
approve the form and provisions of each Grant Instrument.
3. Shares Subject to the Plan
(a) Subject to the adjustment specified below, the aggregate
number of shares of common stock of the Company ("Company Stock") that may be
issued under the Plan is 8,000,000 shares. If the Company Stock becomes publicly
traded as a result of a public offering under the Securities Act of 1933, as
amended, the maximum aggregate number of shares of Company Stock that shall be
subject to Options granted under the Plan to any individual during any calendar
year shall be 500,000 shares. The shares may be authorized but unissued shares
of Company Stock or reacquired shares of Company Stock, including shares
purchased by the Company on the open market for purposes of the Plan. If and to
the extent Options granted under the Plan terminate, expire, or are canceled,
forfeited, exchanged or surrendered without having been exercised, the shares
subject to such Options shall again be available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of
Company Stock outstanding (i) by reason of a stock dividend, spin off,
recapitalization, stock split, or combination or exchange of shares, (ii) by
reason of a merger, reorganization or consolidation in which the Company is the
surviving corporation, (iii) by reason of a reclassification or change in par
value, or (iv) by reason of any other extraordinary or unusual event affecting
the outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Options, the maximum number of shares of Company Stock for
which any individual participating in the Plan may receive Options in any year,
the number of shares covered by outstanding Options, the kind of shares issued
under the Plan, and the price per share of such Options shall be appropriately
adjusted by the Committee to reflect any increase or decrease in the number of,
or change in the kind or value of, issued shares of Company Stock to preclude,
to the extent practicable, the enlargement or dilution of rights and benefits
under such Options; provided, however, that any fractional shares resulting from
such adjustment shall be eliminated. Any adjustments determined by the Committee
shall be final, binding and conclusive.
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4. Eligibility for Participation
(a) All employees of the Company and its subsidiaries
("Employees"), including Employees who are officers or members of the Board, and
Non-Employee Directors shall be eligible to participate in the Plan. Consultants
and advisors who perform services to the Company or any of its subsidiaries
("Key Advisors") shall be eligible to participate in the Plan if the Key
Advisors render bona fide services and such services are not in connection with
the offer or sale of securities in a capital-raising transaction. The term "Key
Advisors" shall include personnel of medical practices that have entered into
and remain subject to management agreements with the Company or any subsidiary,
and the provision of services to those practices shall be considered the
performance of services with respect to the Company for purposes of the Plan.
(b) The Committee shall select the Employees, Non-Employee
Directors and Key Advisors to receive Options and shall determine the number of
shares of Company Stock subject to a particular grant in such manner as the
Committee determines. Employees, Key Advisors and Non-Employee Directors who
receive Options under this Plan shall hereinafter be referred to as "Grantees".
5. Granting of Options
(a) Number of Shares. The Committee shall determine the number
of shares of Company Stock that will be subject to each grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) Type of Option and Price.
(i) The Committee may grant Incentive Stock
Options that are intended to qualify as
"incentive stock options" within the meaning
of section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or
Nonqualified Stock Options that are not
intended so to qualify, or any combination
of Incentive Stock Options and Nonqualified
Stock Options, all in accordance with the
terms and conditions set forth herein.
Incentive Stock Options may be granted only
to Employees. Nonqualified Stock Options may
be granted to Employees, Non-Employee
Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of
Company Stock subject to an Option shall be
determined by the Committee and may be equal
to, greater than, or less than the Fair
Market Value (as defined below) of a share
of such Stock on the date the Option is
granted; provided, however, that (x) the
Exercise Price of an Incentive Stock Option
shall be equal to, or greater than, the Fair
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Market Value of a share of Company Stock on
the date the Incentive Stock Option is
granted and (y) an Incentive Stock Option
may not be granted to an Employee who, at
the time of grant, owns stock possessing
more than 10 percent of the total combined
voting power of all classes of stock of the
Company or any parent or subsidiary of the
Company, unless the Exercise Price per share
is not less than 110% of the Fair Market
Value of Company Stock on the date of grant.
(iii) If Company Stock is publicly traded, then
the Fair Market Value per share shall be
determined as follows: (x) if the principal
trading market for the Company Stock is a
national securities exchange or the Nasdaq
National Market, the last reported sale
price thereof on the relevant date or, if
there were no trades on that date, the
latest preceding date upon which a sale was
reported, or (y) if the Company Stock is not
principally traded on such exchange or
market, the mean between the last reported
"bid" and "asked" prices of Company Stock on
the relevant date, as reported on Nasdaq or,
if not so reported, as reported by the
National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting
service, as applicable and as the Committee
determines. If the Company Stock is not
publicly traded or, if publicly traded, not
subject to reported transactions or "bid" or
"asked" quotations as set forth above, the
Fair Market Value per share shall be as
determined by the Committee.
(c) Option Term. The Committee shall determine the term of
each Option. The term of any Option shall not exceed ten years from the date of
grant. However, an Incentive Stock Option that is granted to an Employee who, at
the time of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company, or any parent or
subsidiary of the Company, may not have a term that exceeds five years from the
date of grant.
(d) Exercisability of Options. Options shall become
exercisable in accordance with such terms and conditions, consistent with the
Plan, as may be determined by the Committee and specified in the Grant
Instrument or an amendment to the Grant Instrument. The Committee may accelerate
the exercisability of any or all outstanding Options at any time for any reason.
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29
(e) Termination of Employment, Disability or Death.
(i) Except as provided below, an Option may only
be exercised while the Grantee is employed
by, or providing service to, the Company as
an Employee, Key Advisor or member of the
Board. In the event that a Grantee ceases to
be employed by, or provide service to, the
Company for any reason other than
"disability", death, or "termination for
cause", any Option which is otherwise
exercisable by the Grantee shall terminate
unless exercised within 90 days of the date
on which the Grantee ceases to be employed
by, or provide service to, the Company (or
within such other period of time as may be
specified by the Committee), but in any
event no later than the date of expiration
of the Option term. Unless otherwise
specified by the Committee, any portion of
the Grantee's Option that is not otherwise
exercisable as of the date on which the
Grantee ceases to be employed by or provide
service to the Company shall terminate as of
such date.
(ii) In the event the Grantee ceases to be
employed by, or provide service to, the
Company on account of a "termination for
cause" by the Company, any Option held by
the Grantee shall terminate as of the date
the Grantee ceases to be employed by, or
provide service to, the Company.
(iii) In the event the Grantee ceases to be
employed by, or provide service to, the
Company because the Grantee is "disabled",
any Option which is otherwise exercisable by
the Grantee shall terminate unless exercised
within one year after the date on which the
Grantee ceases to be employed by, or provide
service to, the Company (or within such
other period of time as may be specified by
the Committee), but in any event no later
than the date of expiration of the Option
term. Any of the Grantee's Options which are
not otherwise exercisable as of the date on
which the Grantee ceases to be employed by,
or provide service to, the Company shall
terminate as of such date.
(iv) If the Grantee dies while employed by, or
providing service to, the Company or within
90 days after the date on which the Grantee
ceases to be employed, or provide service,
on account of a termination of employment or
service specified in Section 5(e)(i) above
(or within such other period of time as may
be specified by the Committee), any Option
that is otherwise exercisable by the Grantee
shall terminate unless exercised within one
year after the
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date on which the Grantee ceases to be
employed by, or provide service to, the
Company (or within such other period of time
as may be specified by the Committee), but
in any event no later than the date of
expiration of the Option term. Any of the
Grantee's Options that are not otherwise
exercisable as of the date on which the
Grantee ceases to be employed by, or provide
service to, the Company shall terminate as
of such date.
(v) For purposes of this Section 5(e):
(1) The term "Company" shall mean the
Company and its parent and
subsidiary corporations. With
request to personnel employed by
medical practices that have entered
into, and remain subject to,
management agreements with the
Company or any subsidiary, the term
"Company" shall include any such
medical practice, but only so long
as the practice remains subject to
such management agreement.
(2) "Employed by, or providing service
to, the Company" shall mean
employment as an Employee or the
provision of services to the
Company as a Key Advisor or member
of the Board (so that, for purposes
of exercising Options, a Grantee
shall not be considered to have
terminated employment or ceased to
provide services until the Grantee
ceases to be an Employee, Key
Advisor and member of the Board).
(3) "Disability" shall mean a Grantee's
becoming disabled within the
meaning of section 22(e)(3) of the
Code.
(4) "Termination for cause" shall mean
a finding by the Committee that the
Grantee has breached his or her
employment or service contract with
the Company, or has been engaged in
disloyalty to the Company,
including, without limitation,
fraud, embezzlement, theft,
commission of a felony or proven
dishonesty in the course of his or
her employment or service, or has
disclosed trade secrets or
confidential information of the
Company to persons not entitled to
receive such information. In the
event a Grantee's employment or
service is terminated for cause, in
addition to the immediate
termination of all Options, the
Grantee shall automatically forfeit
all shares underlying any exercised
portion of an Option for which the
Company has
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not yet delivered the share
certificates, upon refund by the
Company of the Exercise Price paid
by the Grantee for such shares.
(f) Exercise of Options. A Grantee may exercise an Option that
has become exercisable, in whole or in part, by delivering a notice of exercise
to the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option (i) in cash or by check or wire transfer in
immediately available funds, (ii) by delivering shares of Company Stock owned by
the Grantee (including Company Stock acquired in connection with the exercise of
an Option, subject to such restrictions as the Committee deems appropriate) and
having a Fair Market Value on the date of exercise equal to the Exercise Price
or (iii) by such other method as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Shares of Company Stock used to exercise an Option shall
have been held by the Grantee for the requisite period of time to avoid adverse
accounting consequences to the Company with respect to the Option. The Grantee
shall pay the Exercise Price and the amount of any withholding tax due (pursuant
to Section 6) at the time of exercise. Shares of Company Stock shall not be
issued upon exercise of an Option until the Exercise Price is fully paid and any
required withholding is made.
(g) Limits on Incentive Stock Options. Each Incentive Stock
Option shall provide that, if the aggregate Fair Market Value of the stock on
the date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year, under the
Plan or any other stock option plan of the Company or a parent or subsidiary,
exceeds $100,000, then the option, as to the excess, shall be treated as a
Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any
person who is not an Employee of the Company or a parent or subsidiary (within
the meaning of section 424(f) of the Code). If and to the extent that an Option
designated as an Incentive Stock Option fails so to qualify under the Code, the
Option shall remain outstanding according to its terms as a Nonqualified Stock
Option.
6. Withholding of Taxes
(a) Required Withholding. All Options under the Plan shall be
granted subject to any applicable federal (including FICA), state and local tax
withholding requirements. The Company shall have the right to deduct from wages
paid to the Grantee any federal, state or local taxes required by law to be
withheld with respect to Options, or the Company may require the Grantee or
other person receiving shares upon exercise of an Option to pay to the Company
the amount of any such taxes that the Company is required to withhold.
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(b) Election to Withhold Shares. If the Committee so permits,
a Grantee may elect to satisfy the Company's income tax withholding obligation
with respect to an Option by having shares withheld up to an amount that does
not exceed the Grantee's maximum marginal tax rate for federal (including FICA),
state and local tax liabilities. The election must be in a form and manner
prescribed by the Committee and shall be subject to the prior approval of the
Committee.
7. Transferability of Options
(a) Except as provided below, only the Grantee or his or her
authorized representative may exercise rights under an Option. A Grantee may not
transfer those rights except by will or by the laws of descent and distribution
or, with respect to Nonqualified Options, if permitted in any specific case by
the Committee in its sole discretion, pursuant to a qualified domestic relations
order (as defined under the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder). When a Grantee dies,
the representative or other person entitled to succeed to the rights of the
Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must
furnish proof satisfactory to the Company of his or her right to receive the
Grant under the Grantee's will or under the applicable laws of descent and
distribution.
(b) Notwithstanding the foregoing, the Committee may provide,
in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to
family members or other persons or entities according to such terms as the
Committee may determine.
8. Change of Control of the Company
As used herein, a "Change of Control" shall be deemed to have
occurred if:
(a) After the effective date of the Plan, any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 35% or more of the
voting power of the then outstanding securities of the Company, except where the
acquisition is approved by the Board;
(b) The shareholders of the Company approve (or, if
shareholder approval is not required, the Board approves) an agreement providing
for (i) the merger or consolidation of the Company with another corporation
where the shareholders of the Company, immediately prior to the merger or
consolidation, will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to a majority of all votes to
which all shareholders of the surviving corporation would be entitled in the
election of directors, or where the members of the Board, immediately prior to
the merger or consolidation, would not, immediately after the merger or
consolidation, constitute a majority of the board of directors of
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the surviving corporation, (ii) a sale or other disposition of all or
substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company;
(c) Any person has commenced a tender offer or exchange offer
for 35% or more of the voting power of the then outstanding shares of the
Company; or
(d) After this Plan is approved by the shareholders of the
Company, directors are elected such that a majority of the members of the Board
shall have been members of the Board for less than two years, unless the
election or nomination for election of each new director who was not a director
at the beginning of such two-year period was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period.
9. Consequences of a Change of Control
(a) Upon a Change of Control, unless the Committee determines
otherwise, (i) the Company shall provide each Grantee with outstanding Options
written notice of such Change of Control and (ii) all outstanding Options shall
automatically accelerate and become fully exercisable.
(b) In addition, upon a Change of Control described in Section
8(b)(i) where the Company is not the surviving corporation (or survives only as
a subsidiary of another corporation), unless the Committee determines otherwise,
all outstanding Options that are not exercised shall be assumed by, or replaced
with comparable options by, the surviving corporation. Any replacement options
shall entitle the Grantee to receive the same amount and type of securities as
the Grantee would have received as a result of the Change of Control had the
Grantee exercised the Options immediately prior to the Change of Control.
(c) Notwithstanding the foregoing, subject to subsection (d)
below, in the event of a Change of Control, the Committee may require that
Grantees surrender their outstanding Options in exchange for a payment by the
Company, in cash or Company Stock as determined by the Committee, in an amount
equal to the amount by which the then Fair Market Value of the shares of Company
Stock subject to the Grantee's outstanding Options exceeds the Exercise Price of
the Options.
(d) Notwithstanding the foregoing, the Committee making the
determinations under this Section 9 following a Change of Control must be
comprised of the same members as those on the Committee immediately before the
Change of Control. If the Committee members do not meet this requirement, the
automatic provisions of Subsections (a) and (b) shall apply, and the Committee
shall not have discretion to vary them.
(e) Notwithstanding anything in the Plan to the contrary, in
the event of a Change of Control, the Committee shall not have the right to take
any actions described in the
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34
Plan (including without limitation actions described in Subsection (c) above)
that would make the Change of Control ineligible for pooling of interest
accounting treatment or that would make the Change of Control ineligible for
desired tax treatment if, in the absence of such right, the Change of Control
would qualify for such treatment and the Company intends to use such treatment
with respect to the Change of Control.
10. Amendment and Termination of the Plan
(a) Amendment. The Board may amend or terminate the Plan at
any time; provided, however, that if the Company Stock becomes publicly traded,
the Board shall not amend the Plan without shareholder approval if such approval
is required by Section 162(m) of the Code and if Section 162(m) is applicable to
the Plan.
(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date unless
terminated earlier by the Board or unless extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Options. A
termination or amendment of the Plan that occurs after an Option is granted
shall not materially impair the rights of a Grantee unless the Grantee consents
or unless the Committee acts under Section 17(b). The termination of the Plan
shall not impair the power and authority of the Committee with respect to an
outstanding Option. Whether or not the Plan has terminated, an outstanding
Option may be terminated or modified under Sections 9 and 17(b) or may be
amended by agreement of the Company and the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan shall be
binding upon and enforceable against the Company and its successors and assigns.
11. Funding of the Plan
This Plan shall be unfunded. The Company shall not be required
to establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Options under this Plan. In no event shall
interest be paid or accrued on any Options.
12. Rights of Participants
Nothing in this Plan shall entitle any Employee, Key Advisor
or other person to any claim or right to be granted an Option under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any individual any rights to be retained by or in the employ of the Company or
any other employment rights.
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35
13. No Fractional Shares
No fractional shares of Company Stock shall be issued or
delivered pursuant to the Plan or any Option. The Committee shall determine
whether cash, other awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
14. Requirements for Issuance of Shares
No Company Stock shall be issued or transferred in connection
with any Option hereunder unless and until all legal requirements applicable to
the issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Option granted to any Grantee hereunder on such Grantee's undertaking in
writing to comply with such restrictions on his or her subsequent disposition of
such shares of Company Stock as the Committee shall deem necessary or advisable
as a result of any applicable law, regulation or official interpretation thereof
and certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and interpretations, including any
requirement that a legend or legends be placed thereon.
15. Headings
Section headings are for reference only. In the event of a
conflict between a title and the content of a Section, the content of the
Section shall control.
16. Effective Date of the Plan.
Subject to the approval of the Company's shareholders, this
Plan shall be effective on October 15, 1996.
17. Miscellaneous
(a) Options in Connection with Corporate Transactions and
Otherwise. Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to grant Options under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including options
granted to employees thereof who become Employees of the Company, or for other
proper corporate purpose, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan. Without limiting the
foregoing, the Committee may grant Options to an employee of another corporation
who becomes an Employee by reason of a corporate merger, consolidation,
acquisition of stock or property, reorganization or liquidation
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36
involving the Company or any of its subsidiaries in substitution for a stock
option or restricted stock grant made by such corporation. The Committee shall
prescribe the provisions of the substitute Options.
(b) Compliance with Law. The Plan, the grant and exercise of
Options, and the obligations of the Company to issue or transfer shares of
Company Stock under Options shall be subject to all applicable laws and to
approvals by any governmental or regulatory agency as may be required. The
Committee may revoke any Grant if it is contrary to law or modify a Grant to
bring it into compliance with any valid and mandatory government regulation. The
Committee may also adopt rules regarding the withholding of taxes on payments to
Grantees. The Committee may, in its sole discretion, agree to limit its
authority under this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall
have no rights as a shareholder with respect to any shares of Company Stock
covered by an Option until the shares are issued or transferred to the Grantee
or Successor Grantee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation
and effect of the Plan and Grant Instruments issued under the Plan shall
exclusively be governed by and determined in accordance with the law of the
State of Delaware.
18. Non-Officer Grant Committee
The Board of Directors may establish a Non-Officer Grant
Committee which, notwithstanding anything in this Plan to the contrary, shall
have the power, solely with respect to employees of the Company that are not
officers of the Company, to grant options, subject to the following terms and
limitations:
(a) The Non-Officer Grant Committee may grant options only in
connection with the hiring of new employees or in connection with the promotion
of employees to non-officer positions.
(b) The maximum number of shares of Company Stock underlying
option grants made to any individual employee by the Non-Officer Grant Committee
may not exceed 25,000 in any calendar year.
(c) The Non-Officer Grant Committee shall grant Incentive
Stock Options to the extent permissible under the Code; otherwise, such options
shall be Non-Qualified Stock Options.
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37
(d) The Non-Officer Grant Committee may set such vesting terms
with respect to the options as it deems appropriate; provided, however, that no
more than one-third of the shares of Company Stock underlying an option (subject
to adjustment to avoid fractional shares) may vest in any calendar year, and no
options may vest until the first anniversary of the date of grant.
(e) The Exercise Price per share of any options granted by the
Non-Officer Grant Committee shall be at least equal to the Fair Market Value of
a share of Company Stock on the date of grant.
(f) The Non-Officer Grant Committee may provide for an option
term shorter than ten years.
(g) In all other respects, the options granted by the
Non-Officer Grant Committee shall be governed by the terms of the Grant
Instruments relating to Incentive Stock Options or Non-Qualified Stock Options,
as appropriate and in the form then authorized by the Committee.
(h) The Non-Officer Grant Committee powers shall be as
enumerated in this section; the Non-Officer Grant Committee shall not otherwise
perform the functions of the Committee under this Plan.
(i) The Committee may also grant options to non-officer
employees in accordance with the provisions of the Plan.
(j) The maximum number of shares underlying options that may
be granted by the Non-Officer Grant Committee in any calendar quarter shall not
exceed 100,000.
Amended : June 5, 1997
July 25, 1997
September 12, 1997
June 5, 1998
March 27, 2000
April 25, 2000
June 20, 2000
[June 29, 2001]
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38
(front)
PROXY PROXY
HEALTH GRADES, INC.
ANNUAL MEETING OF STOCKHOLDERS, JUNE 29, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kerry R. Hicks and Peter J. Stahl, III,
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 2001 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 AND IN FAVOR OF PROPOSAL 2 SET FORTH 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)
(reverse)
A. [X] Please mark your votes as in this example
FOR all nominees WITHHOLD 1. PROPOSAL TO FOR AGAINST ABSTAIN
listed at right AUTHORITY AMEND THE HEALTH [ ] [ ] [ ]
(except as marked to vote for all GRADES, INC. 1996
to the contrary) nominees listed EQUITY
at right. COMPENSATION PLAN
NOMINEES:
1. Election [ ] [ ] Kerry R. Hicks
of Peter H. Cheesbrough 2. In their discretion, the Proxies are
Directors Leslie S. Matthews, M.D. authorized to vote upon such other business
Mats Wahlstrom as may properly come before the meeting.
Marc S. Sandroff
Alan M. Kittner
(INSTRUCTION: TO WITHHOLD AUTHORITY John J. Quattrone THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT
TO VOTE FOR ANY INDIVIDUAL AUTHORITY OF THE NOTICE OF ANNUAL MEETING, PROXY
STRIKE A LINE THROUGH THAT NOMINEE'S STATEMENT AND ANNUAL REPORT OF HEALTH
NAME IN THE LIST AT RIGHT.) GRADES, INC.
Signature: ______________________________(Seal) Signature if held jointly: __________________________ Date: ___________, 2001
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.