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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _________________
Commission file number 0-22019
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HEALTH GRADES, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 62-1623449
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
44 UNION BOULEVARD, SUITE 600, LAKEWOOD, COLORADO 80228
------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
On July 31, 2003, 24,402,316 shares of the Registrant's common stock,
$.001 par value, were outstanding.
Health Grades, Inc. and Subsidiaries
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002........................................... 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2003 and 2002............................. 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002....................................... 5
Notes to Condensed Consolidated Financial
Statements.................................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................... 14
Item 4. Controls and Procedures....................................................... 14
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders........................... 15
Item 6. Exhibits and Reports on Form 8-K.............................................. 15
2
PART I. FINANCIAL INFORMATION
Health Grades, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
JUNE 30 DECEMBER 31
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,943,618 $ 2,947,047
Accounts receivable, net 836,077 675,514
Prepaid expenses and other 244,663 284,898
------------ ------------
Total current assets 4,024,358 3,907,459
Property and equipment, net 106,800 103,911
Goodwill 3,106,181 3,106,181
------------ ------------
Total assets $ 7,237,339 $ 7,117,551
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 48,687 $ 23,332
Accrued payroll, incentive compensation and related expenses 785,335 396,774
Accrued expenses 110,513 114,798
Note payable, current portion 245,200 --
Deferred income 3,719,299 3,251,625
Income taxes payable 76,303 76,723
------------ ------------
Total current liabilities 4,985,337 3,863,252
Note payable, less current portion 193,841 --
------------ ------------
Total liabilities 5,179,178 3,863,252
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares authorized,
and 43,965,706 shares issued and outstanding 43,966 43,966
Treasury stock (13,767,580) (13,267,580)
Additional paid-in capital 89,777,836 89,762,836
Retained deficit (73,996,061) (73,284,923)
------------ ------------
Total stockholders' equity 2,058,161 3,254,299
------------ ------------
Total liabilities and stockholders' equity $ 7,237,339 $ 7,117,551
============ ============
See accompanying notes to condensed consolidated financial statements
3
Health Grades, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Ratings and advisory revenue $ 2,009,311 $ 1,196,017 $ 3,747,052 $ 2,280,972
Physician practice service fees -- 83,661 -- 195,492
Other 1,444 670 1,487 2,691
------------ ------------ ------------ ------------
2,010,755 1,280,348 3,748,539 2,479,155
Expenses:
Cost of ratings and advisory revenue 464,998 332,882 905,107 704,119
Cost of physician practice management revenue -- 15,872 -- 35,684
------------ ------------ ------------ ------------
Gross margin 1,545,757 931,594 2,843,432 1,739,352
Operating expenses:
Sales and marketing 847,083 494,203 1,489,605 963,402
Product development 332,748 318,925 660,178 625,728
General and administrative 811,494 527,154 1,401,411 1,065,462
------------ ------------ ------------ ------------
Loss from operations (445,568) (408,688) (707,762) (915,240)
Other:
Gain on sale of assets and other 50 141,668 75 141,668
Interest income 1,830 2,961 4,015 7,067
Interest expense (6,888) -- (7,466) --
------------ ------------ ------------ ------------
Loss before income tax benefit and cumulative effect
of a change in accounting principle (450,576) (264,059) (711,138) (766,505)
Income tax benefit -- -- -- 1,046,296
------------ ------------ ------------ ------------
Net (loss) income before cumulative effect of a change in
accounting principle $ (450,576) $ (264,059) $ (711,138) $ 279,791
============ ============ ============ ============
Cumulative effect of a change in accounting
principle -- (1,088,311) -- (1,088,311)
------------ ------------ ------------ ------------
Net loss $ (450,576) $ (1,352,370) $ (711,138) $ (808,520)
============ ============ ============ ============
Net loss per common share (basic and diluted) $ (0.02) $ (0.04) $ (0.02) $ (0.02)
============ ============ ============ ============
Weighted average number of common shares
used in computation (basic and diluted) 24,402,398 36,406,731 28,978,635 35,969,169
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
Health Grades, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED JUNE 30
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net loss $ (711,138) $ (808,520)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Cumulative effect of a change in accounting principle -- 1,088,311
Depreciation 49,199 132,050
Bad debt expense 11,667 4,500
Gain on disposal of assets (75) --
Non-cash compensation expense related to non-employee
stock options 15,000 --
Change in operating assets and liabilities:
Accounts receivable net (172,230) 254,068
Prepaid expenses and other assets 40,235 (32,424)
Accounts payable and accrued expenses 21,070 (192,531)
Accrued payroll, incentive compensation
and related expenses 388,561 (106,038)
Income taxes payable (420) (176)
Deferred income 467,674 (151,655)
----------- -----------
Net cash provided by operating activities 109,543 187,585
INVESTING ACTIVITIES
Purchase of property and equipment (52,088) (7,362)
Sale of property and equipment 75 --
----------- -----------
Net cash used in investing activities (52,013) (7,362)
FINANCING ACTIVITIES
Proceeds from stock purchases -- 86,040
Proceeds from note payable 500,000 --
Principal repayments on note payable (60,959) --
Purchases of treasury stock (500,000) --
----------- -----------
Net cash (used in) provided by financing activities (60,959) 86,040
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,429) 266,263
Cash and cash equivalents at beginning of period 2,947,047 2,295,557
----------- -----------
Cash and cash equivalents at end of period $ 2,943,618 $ 2,561,820
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
Health Grades, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2003
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Health
Grades, Inc. and subsidiaries ("HealthGrades") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results of the interim periods reported herein.
Operating results for the three and six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
Effective December 31, 2002, we liquidated our Healthcare Ratings, Inc. and
Providerweb.net subsidiaries. This liquidation had no impact on our financial
position or operations. All significant intercompany balances and transactions
for the periods presented prior to December 31, 2002 have been eliminated in
consolidation.
DESCRIPTION OF BUSINESS
HealthGrades provides healthcare ratings, advisory services and other healthcare
information. We grade, or provide the means to assess and compare the quality or
qualifications of, various types of healthcare providers. Our customers include
healthcare providers, employers, health plans, insurance companies and
consumers.
We offer services to hospitals that are either attempting to build a reputation
based upon quality of care or are working to identify areas to improve quality.
For hospitals that have received high ratings, we offer the opportunity to
license our ratings and trademarks and provide assistance in their marketing
programs. For hospitals that have not received high ratings, we offer quality
improvement services.
We also provide basic and expanded profile information on a variety of providers
and facilities. We make this information available to consumers, employers and
health plans to assist them in selecting healthcare providers. The basic profile
information is available free of charge on our website, www.healthgrades.com.
For a fee, we offer healthcare quality reports with respect to certain
healthcare providers. These reports provide more detailed information than is
available free of charge on our website. Report pricing and content varies based
upon the type of provider and whether the user is a consumer or a healthcare
professional (for example, a medical professional underwriter).
We provide online integrated healthcare quality services for employers, health
plans and other organizations that license access to our database of healthcare
providers.
We have also entered into strategic arrangements with other service providers,
including GeoAccess and J.D. Power & Associates, in an effort to increase our
name recognition and market presence, as well as enhance our service offerings.
In addition to the services noted above, which constitute our ratings and
advisory business, we also provided, through September 2002, limited physician
practice management services to musculoskeletal practices under management
services agreements. As of December 31, 2002, all of these agreements had
expired or had been terminated.
FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
At a November 21, 2002 meeting, the Emerging Issues Task Force (EITF) reached a
final consensus regarding EITF issue number 00-21, Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"). The consensus provides that revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if certain criteria are met. The consideration for the arrangement
should be allocated to the separate units of accounting based on their relative
fair values, subject to different reporting guidance if the fair value of all
deliverables are not known or if the fair value is contingent on delivery of
specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003.
6
During the quarter ended March 31, 2003, we completed our analysis of EITF
00-21. We examined our QAI -- Phase I contracts (which we formerly called
Ratings Quality Analysis or "RQA"), QAI -- Phase II contracts (which we formerly
called Quality Assessment and Improvement or "QAI") contracts and Strategic
Quality Initiative(TM) ("SQI") contracts to determine if the adoption of EITF
00- 21 would have any impact on our current revenue recognition policies. As our
QAI -- Phase I contracts consist of a single deliverable (as defined by EITF
00-21), namely a comprehensive quality analysis, no change is required with
respect to our current policy of recognizing revenue under these arrangements at
the point in time that services are delivered. In addition, as our QAI -- Phase
II contracts consist of consulting services provided over the term of the
contract, no change is required with respect to our current policy of
recognizing revenue under these arrangements over the term of the contract on a
straight-line basis.
Our SQI contracts contain both an analysis of quality outcomes data as well as a
license to utilize our name and certain ratings information for an annual
period. Based upon our analysis, we concluded that there was not reliable and
verifiable evidence of fair value from which to allocate the consideration
received between the two deliverables. Moreover, we believe the primary
deliverable under these agreements clearly is the license to utilize our name
and certain ratings information for an annual term. In addition, although we
sell the analysis of quality outcomes data separately via our QAI -- Phase I
contracts, these contracts are generally sold to clients that have lower quality
ratings (as rated by HealthGrades) and thus may be deemed to have a more
significant value than the quality analysis imbedded within our SQI contracts.
Furthermore, some of our SQI clients never choose to receive the quality
outcomes analysis included within our SQI contracts. Based upon these factors,
we have concluded that no change is required with respect to our current policy
of recognizing revenue under these arrangements over the term of the contract on
a straight-line basis.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the requirements
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
provides guidance to improve financial reporting for enterprises involved with
variable interest entities. FIN 46 requires a variable interest entity to be
consolidated by the company that is subject to a majority of the risk of loss or
return from the variable interest entity's activities. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. For the variable interest entities that existed prior to
February 1, 2003, the consolidation requirements are effective for financial
statements of interim or annual periods that end after June 15, 2003. We have
completed our initial evaluation and do not believe that adoption of FIN 46 will
have a significant impact on our financial statements and thus no transitional
disclosures have been included herein.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. The accounting and reporting requirements will be effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Currently, we do not have any
derivative instruments and do not anticipate entering into any derivative
contracts. Accordingly, SFAS 149 is not expected to have a significant impact to
our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS 150 is not expected to
have a significant impact to our financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements and
notes to conform to the 2003 presentation with no effect on consolidated net
income, equity or cash flows as previously reported.
NOTE 2 -- STOCK-BASED COMPENSATION
We account for our stock-based compensation arrangements using the intrinsic
value method under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations.
In January 2003, the FASB issued Statement of Financial Accounting Standard No.
148 (SFAS 148), Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS 148 amends FASB Statement No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements of the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. SFAS 148 is effective for
fiscal years, including interim periods beginning after December 15, 2002. SFAS
148 also requires disclosure of pro-forma results on an interim basis as if the
company had applied the fair value recognition provisions of SFAS 123. We do not
expect to change to the fair value based method of accounting for stock-based
employee compensation and therefore, adoption of SFAS 148 is not expected to
impact our financial results.
The Black-Scholes option valuation model was utilized for the disclosures
required by SFAS 148. The Black-Scholes model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the options' vesting period. Because
compensation expense associated with an award is recognized over the vesting
period, the impact on pro forma net (loss) income as disclosed below may not be
representative of compensation expense in future years.
The fair value for options awarded during the six months ended June 30, 2003 and
2002 were estimated using an option pricing model with the following
assumptions: risk-free interest rate over the life of the options of between
1.32% and 2.23%; no dividend yield; and expected three year lives of the
options. The volatility factors utilized ranged from 1.91 to 2.04.
The following table illustrates the effect on net loss and loss per share if we
had applied the fair value recognition provisions of SFAS 123, to our
stock-based compensation plan.
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss as reported $ (450,576) $(1,352,370) $ (711,138) $ (808,520)
Add: Stock-based compensation expense included in
reported net income under APB No. 25 15,000 -- 15,000 --
Less: Total stock-based compensation expense determined under
fair value based method for awards, net of related tax effects (91,702) (241,985) (194,654) (438,441)
----------- ----------- ----------- -----------
Pro forma net loss $ (527,278) $(1,594,355) $ (890,792) $(1,246,961)
=========== =========== =========== ===========
Loss per share:
Basic and diluted as reported $ (0.02) $ (0.04) $ (0.02) $ (0.02)
=========== =========== =========== ===========
Basic and diluted pro forma $ (0.02) $ (0.04) $ (0.03) $ (0.03)
=========== =========== =========== ===========
As of June 30, 2003, we had approximately 5.2 million shares underlying options
and warrants that are currently exercisable, but were not included in our
calculation of weighted average common shares outstanding as they were
antidilutive.
NOTE 3 -- GOODWILL IMPAIRMENT
As a result of the adoption of Statement of Financial Accounting Standards No.
142 (SFAS 142), we discontinued the amortization of goodwill effective January
1, 2002. SFAS 142 also requires companies to perform a transitional test of
goodwill for impairment as of
7
January 1, 2002, and we completed this test during the second quarter of 2002.
Based upon the results of the test, we recorded a charge of approximately $1.1
million in our condensed consolidated statement of operations for the quarter
ended June 30, 2002 as a cumulative effect of a change in accounting principle.
Goodwill in the accompanying condensed consolidated balance sheet, as of June
30, 2003 and December 31, 2002, is shown net of the impairment charge described
above.
SFAS 142 describes various potential methodologies for determining fair value,
including market capitalization (if a public company has one reporting unit),
discounted cash flow analysis (present value technique) and techniques based on
multiples of earnings, revenue, EBITDA, and/or other financial measures. SFAS
142 also states that if a valuation technique is used that considers multiple
sources of information, such as an average of the quoted market prices of the
reporting unit over a specific time period and the results of a present value
technique, the company should apply that technique consistently period to period
(i.e., in the required annual impairment analysis in subsequent years).
As HealthGrades consists of only one reporting unit, and is publicly traded,
management began its fair value analysis with an evaluation of our market
capitalization. We applied a market capitalization approach by multiplying the
number of actual shares outstanding by an average market price. We applied an
additional premium of 30% to this valuation to give effect to management's best
estimate of a "control premium." As the majority of our outstanding shares were
owned by management and two venture capitalist investors at the time of this
analysis, we believe a premium of 30% is reasonable to give effect to additional
benefits a purchaser would derive from control of HealthGrades.
As our shares are very thinly traded, management believes that any analysis of
HealthGrades' fair value should include valuation techniques in addition to
overall market capitalization. We contemplated utilizing cost, market or income
approaches. However, utilization of cost or market approaches was not feasible,
particularly given the fact that HealthGrades does not fall into an easily
identifiable "peer group" of companies from which to compare valuations in the
form of price/earnings ratios, sales of similar companies, etc. Therefore,
management determined to utilize an approach using the present value of expected
future cash flows as an additional valuation technique. Due to the inherent
uncertainty involved in projecting cash flows, in particular for a growth
company, management developed a range of possible cash flows and derived a
probability-weighted average of the range of possible amounts to determine the
expected cash flow.
After deriving the market capitalization and expected cash flow valuations as
described above, we then applied an equal weighting to each model to derive an
overall fair value estimate of HealthGrades. Subsequent to this valuation, we
compared the implied fair value of goodwill to the carrying amount of goodwill
to arrive at the final impairment loss calculation of approximately $1.1
million.
As required under SFAS 142, we performed our annual test for impairment of our
goodwill during the fourth quarter of 2002. This test resulted in no additional
impairment to our goodwill balance. We will perform the annual impairment test
in the fourth quarter of subsequent years, or sooner, if indicators of
impairment arise at an interim date. Any impairment identified during the
impairment tests will be recorded as an operating expense in our consolidated
statement of operations. We expect to continue to utilize the combined market
capitalization and expected cash flow approach described above to perform our
annual impairment analysis and interim tests if necessary. For the six months
ended June 30, 2003, no indicators of impairment were present; therefore, no
interim impairment test was performed.
NOTE 4 -- STOCK AND WARRANT REPURCHASE AGREEMENT
Pursuant to a Stock and Warrant Repurchase Agreement, dated March 11, 2003,
between Chancellor V, L.P. (Chancellor) and us, we repurchased from Chancellor
12,004,333 shares of our common stock and warrants to purchase 1,971,820 shares
of our common stock for a total purchase price of $500,000. Chancellor initially
acquired the common stock and warrants from us in two private transactions in
2000 and 2001. Immediately prior to the repurchase, Chancellor's ownership of
HealthGrades common stock represented 33% of our outstanding common stock, and
Chancellor's ownership of HealthGrades common stock and warrants represented 36%
of our total outstanding common stock (assuming full exercise of the warrants
held by Chancellor, but assuming no exercise of any other warrants or options).
NOTE 5 -- LINE OF CREDIT
Effective March 11, 2003, we executed an amendment to our line of credit
arrangement with Silicon Valley Bank. The terms of the amendment provide for an
extension of the maturity date of the $1,000,000 line of credit arrangement to
February 20, 2004. To date, we have not borrowed any funds under the line of
credit. In addition, the amendment provided for a term loan of $500,000. The
term loan accrues interest at 5.94% and requires us to pay twenty-four equal
installments of principal and interest over the term, beginning on April 1,
2003. We have the ability, at our option, to prepay all, but not less than all,
of the term loan without penalty after August
8
21, 2003, provided we give Silicon Valley Bank at least thirty days written
notice prior to such repayment. As of June 30, 2003, the outstanding balance
under the term loan was $439,041.
NOTE 6 -- LEGAL PROCEEDINGS
On or about October 10, 2002, Strategic Performance Fund -- II ("SPF-II")
commenced an action in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida against us, alleging breach of two leases. These leases
relate to two buildings in which one of our former affiliated practices,
Orthopaedic Associates, P.A. d/b/a Park Place Therapeutic Center ("Park Place")
leased office space. Park Place ceased the payment of its rental obligations
with respect to the two leases in May 2002, and subsequently filed a petition
for bankruptcy, under Chapter 11 of the Bankruptcy Code, in the United States
Bankruptcy Court, Southern District of Florida, Ft. Lauderdale Division. SPF-II
is seeking damages against HealthGrades in the amount of approximately $4.7
million.
The basis of the allegation against HealthGrades is that while under the
corporate name of Specialty Care Network, Inc., we entered into an Assignment,
Assumption and Release Agreement dated July 8, 1997, under which we assumed the
obligations of Orthopaedic Management Services, Inc., as lessee, under leases
with the owner and lessor, Park Place Orthopaedic Center II, Ltd. The agreement
was executed in connection with our acquisition of most of the non-medical
assets of the Park Place practice. On October 1, 1997, the owner of the leased
properties sold its interests in the leasehold estates to SPF-II, Inc. On June
10, 1999, we sold the assets of the Park Place practice, including the leasehold
interests, back to Park Place and entered into an Absolute Assignment and
Assumption Agreement with Park Place, under which Park Place agreed to indemnify
us in connection with the leasehold obligations. In addition, we entered into an
Indemnification Agreement with Park Place and its individual physician owners,
under which the individual physician owners (severally up to their ownership
interest in the practice) agreed to indemnify us in connection with the
leasehold obligations. SPF-II alleges that, notwithstanding the assignment of
our leasehold interests to Park Place, HealthGrades remains liable for all
lessee obligations under the leases.
We have filed a response to the initial complaint instituted by SPF-II, denying
all liability with respect to the subject leases. In addition, we have filed a
third-party complaint against the individual physician owners seeking
indemnification from each of these individuals under the terms of the
Indemnification Agreement. The physician owners have filed a response to our
complaint denying their liability under the Indemnification Agreement, and
asserting several affirmative defenses, including, among others, our failure to
mitigate damages, lack of consideration, our assertion of a premature claim as
liability and damages have not been established by SPF-II, rejection of the
leases by the bankruptcy court, and, in the case of one physician owner, a claim
that an "agent" of ours (who was, in fact, an employee of Park Place both before
and after our affiliation with the practice) fraudulently induced the purchase
of the Park Place practice's assets from us. The physician owners have also
filed a motion to enjoin further prosecution of the action instituted against
them by HealthGrades and Bank of America, the lender in connection with their
repurchase of the assets of the Park Place practice, pending resolution of the
bankruptcy proceeding.
In March 2003, we filed a motion to dismiss or for summary judgment that seeks
the entry of judgment in our favor based on the language of the lease agreements
and SPF-II's relationship with Park Place, as lessee.
We intend to contest our obligations under the Assignment, Assumption and
Release Agreement, fully explore SPF-II's obligations to mitigate damages and
vigorously pursue our rights against Park Place and the individual physician
owners.
We are subject to other legal proceedings and claims that arise in the ordinary
course of our business. In the opinion of management, these actions are unlikely
to materially affect our financial position.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid amounted to approximately $5,293 and $0 for the six months
ended June 30, 2003 and 2002, respectively. Cash paid for income taxes amounted
to approximately $400 for the six months ended June 30, 2003 and refunds
received from income taxes amounted to approximately $1,000,000 for the six
months ended June 30, 2002.
For the six months ended June 30, 2002, participants in our 2002 Stock Purchase
Plan (the "Plan") paid approximately $86,000 for shares purchased through
payroll deductions. This amount has been included in cash received from
financing activities in the Company's consolidated statement of cash flows. The
Plan enabled participating employees to purchase shares of our common stock by
electing to have payroll deductions in 2002 of up to 30 percent of their annual
base rate of pay (excluding bonuses, overtime pay, commissions and severance
pay) as in effect on January 1, 2002. The Plan terminated on December 31, 2002.
9
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning the sufficiency of
available funds, anticipated future revenues and level of commission expense are
"forward looking statements." Actual events or results may differ materially
from those discussed in forward looking statements as a result of various
factors, including failure to achieve revenue increases, unanticipated
expenditures, customer turnover and other factors discussed below and in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002,
particularly under "Risk Factors" in Item 1.
Overview
In evaluating our financial results and financial condition, management has
focused principally on the following:
o Revenue growth -- We believe this is the key factor affecting both our
results of operations and our liquidity. In the second quarter of 2003,
we announced the winners of our Distinguished Hospital Award for
Clinical Excellence(TM) (DHA). Winners of the DHA represent the
highest-scoring of the nation's full-service hospitals based on a
proprietary, three-year, risk-adjusted analysis of the top procedures
and diagnoses in six major clinical specialties. Similar to our
Strategic Quality Initiative (SQI) program, we give DHA winners the
opportunity to enter into a licensing agreement with us so that they
can market this award. For the six months ended June 30, 2003, our
increased revenues reflected our success in adding new hospital
customers to our DHA, SQI and Quality Assessment and Improvement (QAI)
programs and obtaining renewals from hospitals already enrolled in
these programs. Because we typically receive payment in advance for the
annual terms of these agreements, the addition of new customers could
significantly affect our liquidity. Management is focused on increasing
revenues in other areas of our business as well. We believe the
principal risk we confront in this regard is that we may be unable to
effect market penetration and growth in these other areas.
o Cost control -- We have been successful in controlling expenses, due
largely to personnel reductions in 2001. We do not anticipate that
further significant expense reductions are feasible or advisable,
particularly because we want to be positioned to accommodate increased
business if our efforts to increase revenues are successful. During the
first six months of 2003, we have added and anticipate we will continue
to add personnel who provide client consulting and support for our DHA,
SQI and QAI programs. Moreover, we believe it is important to provide
incentives to our continuing and new employees to contribute to the
further growth of our company. In July 2003, we paid cash bonuses of
approximately $268,000. This amount is reflected in the consolidated
statement of operations for the three and six months ended June 30,
2003. In addition, if certain revenue and cash flow targets are met for
the second half of 2003, additional bonuses will be paid in early 2004.
In the third and fourth quarters of 2003, we will review our progress
toward these targets and we will accrue for potential bonus amounts if
and when it becomes probable that such targets will be met. Management
recognizes, however, that any increases in expenses to accommodate such
growth must be applied in a disciplined fashion so as to enable us to
obtain meaningful benefits from the standpoint of our operations and
cash flows.
o Liquidity -- We believe that current economic conditions and our
depressed market price provides a very challenging environment for
external financing, although we have a maximum of $1,000,000
availability under our line of credit with a bank. Therefore, we
believe that our focus must be devoted to generating cash flow from
operations. During 2002, we benefited from significantly reduced losses
from operations, as well as a $1,000,000 tax refund resulting from tax
legislation enacted last year. For the first six months of 2003, we had
cash flow from operations of approximately $110,000. As noted above
under "revenue growth" we typically receive payment in advance for the
annual term of our agreements; as a result of sales efforts during
first six months of 2003, advance payments received for the annual
terms of most of our agreements contributed substantially to our cash
flow. We believe our cash resources are sufficient to support ongoing
operations for the next twelve months, but we confront the risk that
our inability to generate revenues as expected could compel us to seek
additional financing. Moreover, as described in Note 6 to the
consolidated financial statements included in this report, we are
engaged in litigation relating to property leased by a former
affiliated practice. Our legal fees related to the defense of this
matter continue to increase. While we do not currently anticipate an
outcome that would fundamentally affect our liquidity, an unanticipated
result could be materially harmful to our financial position.
o Recent Financing Activities- Effective March 11, 2003, we executed an
amendment to our agreement with a bank as described in Note 5 to our
consolidated financial statements included in this report. The terms of
the amendment provide for an extension of the maturity date of the
$1,000,000 line of credit arrangement to February 20, 2004. To date, we
have not borrowed any funds
10
under the line of credit. In addition, the amendment provided for a
term loan of $500,000. The term loan accrues interest at 5.94% and
requires us to pay twenty-four equal installments of principal and
interest over the term, beginning on April 1, 2003. Quarterly debt
service under the term loan is approximately $67,000. As of June 30,
2003, the remaining principal balance on the term loan was
approximately $439,000. We have the ability, at our option, to prepay
all, but not less than all, of the term loan without penalty after
August 21, 2003, provided we give the bank at least thirty days written
notice prior to such repayment. We currently anticipate that we will
repay the balance of the term loan some time prior to the end of 2003.
In addition, we entered into a Stock and Warrant Repurchase Agreement,
dated March 11, 2003, with Chancellor V, L.P. ("Chancellor"). Under the
terms of the Stock and Warrant Repurchase Agreement, we repurchased
from Chancellor 12,004,333 shares of our common stock and warrants to
purchase 1,971,820 shares of our common stock for a total purchase
price of $500,000. Chancellor initially acquired the common stock and
warrants from us in two private transactions in 2000 and 2001.
Immediately prior to the repurchase, Chancellor's ownership of
HealthGrades common stock represented 33% of our outstanding common
stock, and Chancellor's ownership of HealthGrades common stock and
warrants represented 36% of the our total outstanding common stock
(assuming full exercise of the warrants held by Chancellor, but
assuming no exercise of any other warrants or options).
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, management is required to make estimates
and assumptions that, among other things, affect the reported amounts of assets,
revenues and expenses. These estimates are most significant in connection with
our critical accounting policies, namely those of our accounting policies that
are most important to the presentation of financial condition and results of
operations and that require the most difficult, subjective, complex judgments.
These judgments often result from the need to make estimates about the effects
of matters that are inherently uncertain. For the first six months of 2003, we
have identified evaluation of goodwill impairment and revenue recognition as our
critical accounting policies.
Goodwill Impairment
As a result of the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142), we discontinued the
amortization of goodwill effective January 1, 2002. SFAS 142 also requires
companies to perform a transitional test of goodwill for impairment, and we
completed this test during the second quarter of 2002. Based upon the results of
the test, we recorded a charge of approximately $1.1 million in our consolidated
statement of operations for the quarter ended June 30, 2002 as a cumulative
effect of a change in accounting principle. Goodwill in the consolidated balance
sheets included in this report is shown net of the impairment charge described
above as of June 30, 2003 and December 31, 2002.
SFAS 142 describes various potential methodologies for determining fair value,
including market capitalization (if a public company has one reporting unit, as
is the case with HealthGrades), discounted cash flow analysis (present value
technique) and techniques based on multiples of earnings, revenue, EBITDA,
and/or other financial measures. SFAS 142 also states that if a valuation
technique is used that considers multiple sources of information, such as an
average of the quoted market prices of the reporting unit over a specific time
period and the results of a present value technique, the company should apply
that technique consistently period to period (i.e. in the required annual
impairment analysis in subsequent years).
Consistent with the methodology utilized in 2002, for our 2003 annual impairment
test, which will occur in the fourth quarter (or sooner, if any indicators of
impairment are then present), we plan to apply an approach that provides equal
weight to market capitalization (adjusted to reflect a 30% "control premium")
and a probability-weighted average of future cash flows. As the majority of our
outstanding shares are owned by management and a venture capitalist investor, we
believe a premium of 30% is reasonable to give effect to additional benefits a
purchaser would derive from control of Health Grades, Inc.
As our shares are very thinly traded, we believe that any analysis of
HealthGrades' fair value should include valuation techniques in addition to the
overall market capitalization. We contemplated utilizing cost, market or income
approaches. However, utilization of cost or market approaches was not feasible,
particularly given the fact that HealthGrades does not fall into an easily
identifiable "peer group" of companies from which to compare valuations in the
form of price to earnings ratios, sales of similar companies, etc. Therefore, we
determined to utilize an approach using the present value of expected future
cash flows as an additional valuation technique. Due to the inherent uncertainty
involved in projecting cash flows, in particular for a growth company, we will,
consistent with our previously used methodology, develop a range of possible
cash flows and derive a probability-weighted average of the range of possible
amounts to determine the expected cash flow over a five-year period. Based upon
the inherent uncertainty of future cash flows, in particular for a growth
company, we feel the utilization of a longer time period would not be
appropriate. As we utilize the expected future cash flow approach for our
present value measurements, the appropriate discount rate to utilize for
application to future cash flow estimates is the risk-free rate of interest over
the time period of the expected cash flows (or five years in our case). This is
due to the fact that in our expected cash flows, we
11
have already built in our assumptions concerning the uncertainty of cash flows.
Therefore, these assumptions should not be taken into account again in our
discount rate.
As required under SFAS 142, we performed our annual test for impairment of our
goodwill during the fourth quarter of 2002. This test resulted in no additional
impairment to our goodwill balance. As noted above, we will perform the annual
impairment test in the fourth quarter of 2003 and subsequent years or, if
indicators of impairment arise at an interim date, earlier in the year. Any
impairment identified during the annual impairment tests will be recorded as an
operating expense in our consolidated statement of operations. We expect to
continue to utilize the combined market capitalization and expected cash flow
approach described above to perform our annual impairment analysis and interim
tests, if necessary. For the six months ended June 30, 2003, as no indicators of
impairment were present, no interim impairment test was performed.
Revenue Recognition -- Ratings and Advisory Revenue
We currently derive our ratings and advisory revenue principally paid by annual
fees from hospitals that participate in our Strategic Quality Initiative (SQI)
and Distinguished Hospital Award (DHA) programs. The SQI program provides
business development tools to hospitals that are highly rated on our website.
Under our SQI program, we license the HealthGrades name and our "report card"
ratings to hospitals. The license may be in a single area (for example, Cardiac)
or multiple areas (for example, Cardiac, Neurosciences and Orthopedics.) We also
assist hospitals in promoting their ratings and measuring the success of their
efforts utilizing our team of in-house healthcare consultants. Another key
feature of this program is a detailed comparison of the data underlying a
hospital's rating to local and national benchmarks. Similar to our SQI program,
we give DHA winners the opportunity to enter into a licensing agreement with us
so that they can market this award.
We recognize revenue related to these arrangements in a straight-line manner
over the term of the agreement. We follow this method because the primary
deliverable under the agreement is the license to utilize our rating over the
contract term. In addition, consulting services are performed as requested by
the client over the term of the agreement. As we typically receive a
non-refundable payment for the first year of the contract term upon execution of
the agreement, we record the cash payment as deferred revenue that is then
amortized to revenue over the first year of the contract term.
At a November 21, 2002 meeting, the Emerging Issues Task Force (EITF) reached a
final consensus regarding EITF 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"). The consensus provides that revenue arrangements
with multiple deliverables should be divided into separate units of accounting
if certain criteria are met. The consideration for the arrangement should be
allocated to the separate units of accounting based on their relative fair
values, subject to different reporting guidance if the fair value of all
deliverables are not known or if the fair value is contingent on delivery of
specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003.
During the quarter ended March 31, 2003, we completed our analysis of EITF
00-21. We examined our QAI -- Phase I contracts (formally known as Ratings
Quality Analysis or "RQA"), QAI -- Phase II contracts (formally known as Quality
Assessment and Improvement or "QAI") contracts and SQI contracts to determine if
the adoption of EITF 00- 21 would have any impact on our current revenue
recognition policies. As our QAI -- Phase I contracts consist of a single
deliverable (as defined by EITF 00-21), namely a comprehensive quality analysis,
no change is required with respect to our current policy of recognizing revenue
under these arrangements at the point in time that the services are delivered.
In addition, as our QAI -- Phase II contracts consist of consulting services
provided over the term of the contract, no change is required with respect to
our current policy of recognizing revenue under these arrangements over the term
of the contract on a straight-line basis.
Our SQI contracts contain both an analysis of quality outcomes data as well as a
license to utilize our name and certain ratings information for an annual
period. Based upon our analysis, we concluded that there was not reliable and
verifiable evidence of fair value with which to allocate the consideration
received between the two deliverables. Moreover, the primary deliverable under
these agreements is the license to utilize our name and certain ratings
information for an annual term. In addition, although we do sell the analysis of
quality outcomes data separately via our QAI -- Phase I contracts, these
contracts are sold to clients that have lower quality ratings (as rated by
HealthGrades) and thus may be deemed to have a more significant value than the
quality analysis imbedded within our SQI contracts. Furthermore, some of our SQI
clients never choose to receive the quality outcomes analysis included within
our SQI contracts. Based upon these factors, we have concluded that no change is
required with respect to our current policy of recognizing revenue under these
arrangements over the term of the contract on a straight-line basis.
Were we to recognize revenue for the quality outcomes data analysis in the
period in which the services were delivered, the amount of revenues reported in
any particular period would increase or decrease, depending on the timing of the
provision of these services.
12
RESULTS OF OPERATIONS
Ratings and advisory revenue. For the three and six months ended June 30, 2003,
ratings and advisory revenue was approximately $2.0 million and $3.7 million
respectively, compared to ratings and advisory revenue of approximately $1.2
million and $2.3 million for the three and six months ended June 30, 2002,
respectively. These increases are primarily due to the addition of hospital
clients under our SQI and DHA programs. For the second quarter of 2003 and 2002,
approximately 75% and 76%, respectively, of our ratings and advisory revenue was
derived from these services. In addition, approximately 11% of our ratings and
advisory revenue for the second quarter of 2003 was derived from our QAI
services, compared to 10% for the same period in 2002. The remainder of our
revenue for the first quarter of 2003 was derived primarily from sales of
physician reports for consumers and reimbursement of consultant travel expenses.
Cost of ratings and advisory revenue. For three and six months ended June 30,
2003, cost of ratings and advisory revenue was $465,000 and $905,000,
respectively, or approximately 23% and 24% of ratings and advisory revenue,
compared to $333,000 and $704,000, respectively, or approximately 28% and 31%
for the same period of 2002. This difference is primarily due to a reduction in
costs to acquire data. During 2002 we renegotiated a data purchase agreement
with a vendor, which substantially reduced our cost to acquire certain physician
data.
Sales and marketing expenses. Sales and marketing costs include salaries, wages
and commission expenses related to our sales efforts, as well as other direct
sales and marketing costs. For our SQI, DHA and QAI agreements, we pay our sales
personnel commissions as we receive payment from our hospital clients. We
typically receive a non-refundable payment for the first year of the contract
term upon execution of the agreement. Although we typically record revenue
earned from our SQI, DHA and QAI -- Phase II agreements over the term of the
agreement (typically one year), we record the commission expense in the period
it is earned, which is typically upon contract execution. We record the
commission expense in this manner because, once a contract is signed, the
salesperson has no remaining obligations to perform in order to earn the
commission.
Sales and marketing costs increased from approximately $494,000 and $963,000,
respectively, or 41% and 42% of ratings and advisory revenue for three or six
months ended June 30, 2002, to approximately $847,000 and $1,490,000,
respectively, or 42% and 40% of ratings and advisory revenue for the same period
of 2003. Sales and marketing costs as a percentage of ratings and advisory
revenue has remained relatively constant due to a combination of new sales,
which involve higher commissions expense, offset by our increased renewal base
of business. Since we pay a lesser percentage of commissions to our sales group
upon renewals of contracts than we pay with respect to new contracts, as our
business expands, we anticipate that the overall commission cost as a percentage
of ratings and advisory revenue will decline.
General and administrative expenses. For the three and six months ended June 30,
2003, general and administrative expenses were approximately $811,000 and
$1,401,000, an increase of approximately $284,000 and $336,000 over general and
administrative expenses of approximately $527,000 and $1,065,000 for the same
period of 2002. This increase is primarily the result of an accrual made for
$268,000 related to the cash bonuses paid in July 2003 and increased legal fees
related to the completion of the Stock and Warrant Purchase Agreement with
Chancellor described above as well as increased litigation costs with respect to
our ongoing dispute with SPF-II, as more fully described in Note 6 to our
consolidated financial statements included in this report.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had a working capital deficit of approximately $961,000, a
decrease of $1,005,000 from working capital of approximately $44,000 as of
December 31, 2002. For the first six months of 2003, cash flow provided by
operations was approximately $110,000 compared to $188,000 for the same period
of 2002. Included in cash flow provided by operations for the six months ended
June 30, 2002 was an income tax refund of approximately $1,000,000 related to
the carry back of our 2001 tax loss to reduce taxable income in 1997 made
possible by the Job Creation and Worker Assistance Act of 2002. The decrease in
working capital is primarily attributable to our current obligations under our
term loan as well as increased deferred income, reflecting increased contractual
payments that we have already received but will be recognized as revenue on a
straight-line basis over the term of the contract.
As described in more detail in note 4 to our consolidated financial statements
included in this report, we repurchased from Chancellor, pursuant to a Stock and
Warrant Repurchase Agreement, dated March 11, 2003, 12,004,333 shares of our
common stock and warrants to purchase 1,971,820 shares of our common stock for a
total purchase price of $500,000.
We have a line of credit arrangement as amended (the "Agreement") with Silicon
Valley Bank. Under the terms of the Agreement, we may request advances not to
exceed an aggregate amount of $1.0 million over the term of the Agreement,
subject to 75% of Eligible
13
Accounts (as defined in the Agreement) plus 50% of our cash invested with
Silicon Valley Bank. As of June 30, 2003, the entire $1.0 million is available
to us. Advances under the Agreement bear interest at Silicon Valley Bank's prime
rate plus .75% and are secured by substantially all of our assets. Interest is
due monthly on advances outstanding and the principal balance of any advances
taken by us are due at February 20, 2004, the end of the Agreement term. Our
ability to request advances under the Agreement is subject to certain financial
and other covenants. As of June 30, 2003, we were in compliance with these
covenants.
Under the Agreement, we also have a term loan with a remaining principal balance
of approximately $439,000 as of June 30, 2003. The term loan accrues interest at
5.94% and requires us to pay twenty-four equal installments of principal and
interest over the term, beginning on April 1, 2003. We have the ability, at our
option, to prepay all, but not less than all, of the term loan without penalty
after August 21, 2003, provided we give Silicon Valley Bank at least thirty days
written notice prior to such repayment. We currently anticipate that we will
repay the balance of the term loan some time prior to the end of 2003.
Although we anticipate that we have sufficient funds available to support
ongoing operations for at least the next twelve months, if our revenues fall
short of our expectations or our expenses exceed our expectations, we may need
to raise additional capital through public or private debt or equity financing.
We may not be able to secure sufficient funds on terms acceptable to us. If
equity securities are issued to raise funds, our stockholders' equity may be
diluted. If additional funds are raised through debt financing, we may be
subject to significant restrictions. Furthermore, upon execution of our SQI, DHA
and QAI agreements, we typically receive a non-refundable payment for the first
year of the contract term. This payment is recorded as deferred revenue, which
is reflected as a current liability in our consolidated balance sheet. Revenues
related to these agreements are recorded ratably over the term of the agreement.
As a result, our operating cash flow is substantially dependent upon our ability
to continue to sign new agreements. Our current operating plan includes growth
in new sales from these agreements. For the reasons described above, failure to
achieve our sales plan would have a material negative impact on our financial
position and cash flow. Moreover, as noted elsewhere in this report, we are
engaged in litigation relating to property leased by a former affiliated
practice. While we do not currently anticipate an outcome that would
fundamentally affect our liquidity, an unanticipated result could be materially
harmful to our financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain investments in a treasury obligation fund maintained by Silicon
Valley Bank. As of June 30, 2003, our investment in this fund amounted to
approximately $2.2 million. This amount is included within the cash and cash
equivalent line item of our balance sheet and consists of investments in highly
liquid U.S. treasury securities with maturities of 90 days or less. For the six
months ended June 30, 2003, interest earned on this balance was approximately
$4,000. Any decrease in interest rates in this investment account would not have
a material impact on our financial position.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness the our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report are functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. A controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 25, 2003, we held our annual meeting of stockholders. At the meeting,
the stockholders voted on the election of five members of the Board of
Directors.
The voting results are set forth below.
1. Election of Directors:
NAME OF NOMINEE FOR WITHHELD
-------------------------- --------------- --------------
Kerry R. Hicks 21,535,116 248,486
Peter H. Cheesbrough 21,641,056 142,546
Leslie S. Matthews 21,535,116 248,486
John J. Quattrone 21,641,056 142,546
J. D. Kleinke 21,641,056 142,546
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
3.1 Amended and Restated Certificate of Incorporation, as amended
(Incorporated by reference to Exhibit 3.1 to our Annual Report
on Form 10-K for the year ended December 31, 2001).
3.2 Amended and Restated Bylaws, as amended (Incorporated by
reference to Exhibit 3.2 to our Annual Report on Form 10-K for
the year ended December 31, 2001).
31.1 Certificate of the Chief Executive Officer of Health Grades,
Inc. required by Rule 15d--14(a).
31.2 Certificate of the Chief Financial Officer of Health Grades,
Inc. required by Rule 15d--14(a).
32.1 Certificate of the Chief Executive Officer of Health Grades,
Inc. required by Rule 15d--14(b).
32.2 Certificate of the Chief Financial Officer of Health Grades,
Inc. required by Rule 15d--14(b).
(b) Reports on Form 8-K.
During the quarter ended June 30, 2003, we furnished a report on Form
8-K. The report, furnished on May 15, 2003 and dated May 15, 2003
provided information responsive to Items 7 and 12 in connection with
our second quarter results of operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH GRADES, INC.
Date: August 14, 2003 By: /s/ Allen Dodge
--------------------------------------
Allen Dodge
Senior Vice President - Finance and
Chief Financial Officer
15
Exhibit Index
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation, as amended
(Incorporated by reference to Exhibit 3.1 to our Annual Report
on Form 10-K for the year ended December 31, 2001).
3.2 Amended and Restated Bylaws, as amended (Incorporated by
reference to Exhibit 3.2 to our Annual Report on Form 10-K for
the year ended December 31, 2001).
31.1 Certificate of the Chief Executive Officer of Health Grades,
Inc. required by Rule 15d--14(a).
31.2 Certificate of the Chief Financial Officer of Health Grades,
Inc. required by Rule 15d--14(a).
32.1 Certificate of the Chief Executive Officer of Health Grades,
Inc. required by Rule 15d--14(b).
32.2 Certificate of the Chief Financial Officer of Health Grades,
Inc. required by Rule 15d--14(b).
16