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Filed Pursuant to Rule 424(b)(3)
Under the Securities Act of 1933
Registration No. 333-39600
HEALTH GRADES, INC.
SUPPLEMENT DATED NOVEMBER 30, 2000
TO PROSPECTUS DATED AUGUST 31, 2000
1. NAME CHANGE
On November 13, 2000, we changed our name from HealthGrades.com, Inc.
to Health Grades, Inc.
2. SHARES SOLD BY A SELLING STOCKHOLDER
As of the date of this supplement, one of the selling stockholders has
sold 55,200 shares of our common stock. Accordingly, 12,409,800 shares remain
subject to the prospectus and this prospectus supplement, including 3,300,000
shares underlying warrants.
3. FINANCIAL INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30,
2000
Set forth below is the financial information principally derived from
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000 filed with the Securities and Exchange Commission.
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Health Grades, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,092,283 $ 316,767
Restricted cash -- 1,178,848
Accounts receivable, net 454,928 2,744,912
Due from affiliated practices in litigation, net 1,232,748 2,745,413
Prepaid expenses, inventories and other 227,918 205,665
Current portion notes receivable 285,018 3,531,099
Prepaid and recoverable income taxes -- 1,838,589
------------ ------------
Total current assets 9,292,895 12,561,293
Property and equipment, net 973,279 1,656,613
Goodwill, net of accumulated amortization of
$467,068 and $-- in 2000 and 1999, respectively 5,243,115 4,000,000
Notes receivable, less current portion 1,414,133 1,661,485
Other assets 508,174 513,477
------------ ------------
Total assets $ 17,431,596 $ 20,392,868
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 71,040 $ 520,767
Accrued payroll, incentive compensation and related
expenses 386,012 278,474
Accrued expenses 726,668 1,531,550
Income taxes payable 556,792 --
Notes payable 663,149 7,352,005
Notes payable to officers -- 350,000
Deferred income 1,018,269 1,144,552
------------ ------------
Total current liabilities 3,421,930 11,177,348
Note payable, less current portion 1,146,065 5,603,283
Notes payable to officers, less current portion -- 3,200,000
Deferred income 303,560 646,847
------------ ------------
Total liabilities 4,871,555 20,627,478
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 2,000,000
Shares authorized, no shares issued or
outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, and 28,817,400 and 18,738,686
issued and outstanding in 2000 and 1999,
respectively 28,817 18,739
Additional paid-in capital 87,349,730 67,509,276
Accumulated deficit (61,759,272) (56,722,141)
Treasury stock (13,059,234) (11,040,484)
------------ ------------
Total stockholders' equity (deficit) 12,560,041 (234,610)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 17,431,596 $ 20,392,868
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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Health Grades, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Physician practice management revenue $ 375,923 $ 5,280,185 $ 3,943,734 $ 27,029,889
Internet revenue 909,558 142,986 2,172,125 279,778
Other 1,128 -- 3,847 459,366
------------ ------------ ------------ ------------
1,286,609 5,423,171 6,119,706 27,769,033
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Physician practice management costs and expenses:
Clinic expenses -- 424,236 -- 14,866,690
Litigation and other costs 85,271 906,035 657,106 4,269,295
Internet costs and expenses:
Production content and product development 466,593 477,188 1,672,185 741,732
Sales and marketing 973,273 561,096 2,219,926 680,340
General and administrative 2,260,894 2,433,118 6,323,307 8,436,102
------------ ------------ ------------ ------------
3,786,031 4,801,673 10,872,524 28,994,159
------------ ------------ ------------ ------------
(Loss) income from operations (2,499,422) 621,498 (4,752,818) (1,225,126)
Other:
Gain (loss) on sale of assets and other (61,473) 117,485 (256,252) 3,649,243
Gain on sale of equity investment -- 127,974 -- 127,974
Gain on sale of subsidiary -- -- -- 221,258
Interest income 141,024 88,749 400,380 249,245
Interest expense (52,648) (318,566) (428,441) (2,205,552)
------------ ------------ ------------ ------------
(Loss) income before income taxes (2,472,519) 637,140 (5,037,131) 817,042
Income tax (expense) benefit -- (920,786) -- 775,561
------------ ------------ ------------ ------------
Net (loss) income $ (2,472,519) $ (283,646) $ (5,037,131) $ 1,592,603
============ ============ ============ ============
Net (loss) income per share (basic) $ (0.11) $ (0.02) $ (0.27) $ 0.11
============ ============ ============ ============
Weighted average shares outstanding (basic) 21,536,065 12,429,197 18,863,324 14,817,837
============ ============ ============ ============
Net (loss) income per share (diluted) $ (0.11) $ (0.02) $ (0.27) $ 0.10
============ ============ ============ ============
Weighted average shares outstanding (diluted) 21,536,065 12,429,197 18,863,324 15,637,817
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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Health Grades, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (5,037,131) $ 1,592,603
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 537,281 1,491,225
Amortization 606,885 1,425,645
Bad debt expense 199,343 --
Gain on sale of subsidiary -- (221,258)
Gain on sale of equity investment -- (127,974)
Gain on sale of assets, amendment and
restatement of service agreements and
litigation settlement -- (3,649,243)
Impact of termination agreements -- (1,073,777)
Equity in loss of unconsolidated affiliate -- 23,852
Officer notes financing fee 347,200 --
Loss (gain) on disposal of assets 256,253 (5,891)
Deferred income taxes -- (1,285,395)
Non-cash compensation expense-stock options 34,331 394,277
Changes in operating assets and liabilities,
net of the non-cash effects of the
acquisitions of the net assets of physician
groups:
Accounts receivable, net 71,891 3,294,746
Due from affiliated practices in
litigation 1,654,539 (1,423,324)
Prepaid expenses and other assets (37,520) 168,192
Accounts payable and accrued expenses (1,065,163) (1,926,666)
Accrued payroll, incentive
compensation and related expenses 107,538 7,782
Income taxes payable and prepaid and
recoverable income taxes, net 2,395,381 3,188,703
Due to affiliated physician practices -- (3,121,548)
Deferred income (469,570) 1,946,009
------------ ------------
Net cash (used in) provided by operating activities (398,742) 697,958
INVESTING ACTIVITIES
Purchases of property and equipment (315,179) (954,220)
Proceeds from sales of majority interest in a
subsidiary and equity investments, net of cash -- 3,208,397
Proceeds from sale of medical equipment 125,200 1,001,856
Increase in other assets 5,303 (39,403)
Repayments from affiliates -- 108,815
Advances to investee -- (899,342)
------------ ------------
Net cash (used in) provided by investing activities (184,676) 2,426,103
FINANCING ACTIVITIES
Proceeds from sales of affiliated practices
assets and execution of new service agreements -- 36,693,110
Cash restricted for repayment of line-of-credit -- --
Principal repayments on notes payable (10,156,672) (40,425,000)
Net proceeds from equity financing 14,356,201 --
Repayments from notes receivable 3,446,605 --
Principal repayments on capital lease obligations -- (47,686)
Loans to physician stockholders -- (48,178)
Escrowed payment related to acquisition
of additional interest in majority-owned
subsidiary -- (60,000)
Repayment of Officer notes (350,000) --
Repayment on loans to physician stockholders -- 135,451
Exercise of common stock options 62,800 7,545
------------ ------------
Net cash provided by (used in) financing activities 7,358,934 (3,744,758)
Net increase (decrease) in cash and cash equivalents 6,775,516 (620,697)
Cash and cash equivalents at beginning of period 316,767 1,418,201
------------ ------------
Cash and cash equivalents at end of period $ 7,092,283 $ 797,504
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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Health Grades, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Health Grades,
Inc. and subsidiaries (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, these statements include all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods reported herein. Operating results for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the prospectus.
DESCRIPTION OF BUSINESS
The Company operates two Internet health care sites and provides practice
management services to physicians. Through its wholly-owned subsidiary,
Healthcare Ratings, Inc., the Company operates its HealthGrades.com web site,
which provides ratings and other information on health care providers and
facilities. Through its wholly-owned subsidiary, ProviderWeb.net, Inc., the
Company operates its ProviderWeb.net web site, which offers a subscription
service for physician practice administrators and managers that provides online
tools and resources. All significant intercompany balances and transactions have
been eliminated in consolidation. Due to the intent of management to focus its
efforts on continuing the development of the HealthGrades.com web site, the
Company is currently exploring strategic alternatives for ProviderWeb.net.
RECLASSIFICATIONS
Certain amounts in the Consolidated Balance Sheet as of December 31, 1999 and
certain amounts in the Statement of Operations and the Consolidated Statement of
Cash Flows for the three and nine months ended September 30, 1999 have been
reclassified in order to conform to the current presentation.
EARNINGS PER SHARE
The calculation of weighted average shares outstanding for the three and nine
months ended September 30, 2000, and for the three months ended September 30,
1999, does not
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include the impact of certain stock options whose exercise price was less than
the average market price of the common shares because the effect on loss per
share would have be antidilutive. If such options were included in the
calculation, weighted average shares outstanding would have increased by
approximately 1.2 million and 1.3 million shares for the three and nine months
ended September 30, 2000, respectively, and approximately 1.8 million for the
three months ended September 30, 1999.
NOTE 2 - EQUITY FINANCING
On March 17, 2000, the Company closed on an equity financing transaction (the
"Equity Financing") which raised $18 million. Pursuant to the terms of the
Equity Financing, certain investors paid $14.8 million to the Company in return
for 7,400,000 shares of Company common stock and five-year warrants to purchase
2,590,000 shares of Company common stock at an exercise price of $4.00 per
share. Net proceeds of the Equity Financing, after payment of certain legal and
other financing fees, were approximately $14.4 million. In connection with the
Equity Financing, the Company also issued an aggregate of 165,000 shares to its
bank syndicate as a financing fee. The Company also issued a warrant to purchase
150,000 shares of Company common stock to a company that served as a financial
advisor to the Company in connection with the Equity Financing, at an exercise
price of $4.00 per share. In connection with the Equity Financing, certain
officers of the Company exchanged $3.2 million in notes payable for an aggregate
of 1.6 million shares of Company common stock and five-year warrants to purchase
560,000 shares of Company common stock at $4.00 per share. In accordance with
the provisions of EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,
upon the exchange of the notes payable, the Company recorded an expense of
$347,200 based upon the estimated fair market value of the warrants issued to
the officers. This expense is included in general and administrative expenses in
the Company's Consolidated Statement of Operations.
NOTE 3 - SEGMENT DISCLOSURES
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Physician Practice Management ("PPM") and Internet
Services. PPM derives its revenue primarily from management services provided to
physician practices. Internet Services revenue is derived primarily from
marketing arrangements with hospitals, fees related to the licensing of the
Company's content (including set-up fees) and advertising. The Company's "other"
segment for the three and nine months ended September 30, 1999 represents
ambulatory surgery center services and health care consulting. Both of the
Company subsidiaries that generated revenue for the "other" segment were
liquidated during 1999.
The Company uses net loss before income taxes for purposes of performance
measurement. The measurement basis for segment assets includes intangible
assets.
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Summary information by segment is as follows:
<TABLE>
<CAPTION>
As of And For As of And For
The Three Months Ended The Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
PPM
Revenue from external customers $ 375,923 $ 5,306,998 $ 3,943,734 $ 27,544,417
Interest income -- 39,619 -- 157,419
Interest expense (52,648) 318,566 (428,441) 2,205,552
Segment net income
(loss) before income taxes (1,230,975) 2,970,613 (1,765,933) 4,828,522
Segment assets 27,966,141 21,282,908 27,966,141 21,282,908
Segment asset expenditures 6,010 29,042 13,822 775,797
INTERNET SERVICES
Revenue from external customers $ 909,558 $ 143,047 $ 2,172,125 $ 279,839
Interest income 141,024 -- 400,380 --
Segment net loss before
income taxes (1,241,544) (1,946,611) (3,271,198) (2,877,376)
Segment assets 6,091,992 340,539 6,091,992 340,539
Segment asset expenditures 2,855 78,765 301,357 178,423
OTHER
Revenue from external customers $-- $-- $-- $ 132,831
Interest income -- 49,130 -- 91,826
Equity in net loss of
unconsolidated affiliate -- (4,874) -- (23,852)
Segment net loss before
income taxes -- (385,008) -- (1,023,633)
Segment assets -- -- -- --
Segment asset expenditures -- -- -- --
</TABLE>
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A reconciliation of the Company's segment revenue, segment net loss
before income taxes, segment assets and other significant items to the
corresponding amounts in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
As of And For As of And For
The Three Months Ended The Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUE
Total for reportable segments $ 1,285,481 $ 5,450,045 $ 6,115,859 $ 27,824,256
Other revenue 1,128 (26,874) 3,847 (55,223)
------------ ------------ ------------ ------------
Total consolidated revenue $ 1,286,609 $ 5,423,171 $ 6,119,706 $ 27,769,033
============ ============ ============ ============
LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (2,472,519) $ 1,024,002 $ (5,037,131) $ 1,951,146
Other net loss -- (385,008) -- (1,023,633)
Adjustment -- (1,854) -- (110,471)
------------ ------------ ------------ ------------
Loss before income taxes $ (2,472,519) $ 637,140 $ (5,037,131) $ 817,042
============ ============ ============ ============
ASSETS
Total assets for
reportable segments $ 34,058,133 $ 21,623,447 $ 34,058,133 $ 21,623,447
Other assets -- -- -- --
Elimination of advance
to subsidiaries (8,831,517) -- (8,831,517) --
Elimination of investment in
subsidiaries (7,795,020) (4,215,224) (7,795,020) (4,215,224)
------------ ------------ ------------ ------------
Consolidated total assets $ 17,431,596 $ 17,408,223 $ 17,431,596 $ 17,408,223
============ ============ ============ ============
</TABLE>
For each of the periods presented, the Company's primary operations and
assets were within the United States.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid amounted to approximately $514,000 and $2.2 million for the
nine months ended September 30, 2000 and 1999, respectively. Refunds received
from income taxes amounted to approximately $2,300,000 and $2,700,000 for the
nine months ended September 30, 2000 and 1999, respectively.
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Supplemental schedule of noncash investing and financing activities are as
follows:
During the nine months ended September 30, 2000, approximately $1.2 million in
restricted cash was used to pay down the Company's term loan.
In January 2000, the Company received 850,000 shares of its common stock under
the terms of a settlement agreement with one of its former affiliated practices.
In February 2000, the Company merged its majority-owned subsidiary, HG.com, Inc.
into a recently formed, wholly-owned subsidiary, HealthCare Ratings, Inc.
(hereafter, the "Merger Transaction"). In connection with the Merger
Transaction, the minority shareholders of HG.com were given 800,000 shares of
Company common stock.
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning raising debt and/or
equity financing and anticipated costs to further develop and market our
Internet sites 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 inability to obtain additional financing and other
factors discussed below and in our prospectus, particularly under "Risk
Factors."
GENERAL
We operate two Internet health care sites and provide practice management
services to physicians. Through our wholly-owned subsidiary, Healthcare Ratings,
Inc., we operate our HealthGrades.com web site, which provides ratings and other
information on health care providers and facilities. Through our wholly-owned
subsidiary, ProviderWeb.net, Inc., we operate our ProviderWeb.net web site,
which offers a subscription service for physician practice administrators and
managers that provides online tools and resources. Due to the intent of
management to focus its efforts on continuing the development of the
HealthGrades.com web site, we are currently exploring strategic alternatives for
ProviderWeb.net.
As a result of transactions with 13 practices that restructured our management
service arrangements (six of which were later terminated) and other agreements,
including litigation settlements terminating our management services
arrangements with four other practices, our physician practice management
services have been substantially reduced. Therefore, our results of operations
for the three and nine months ended September 30, 2000 are not comparable to our
results of operations for the three and nine months ended September 30, 1999. In
an effort to enhance the presentation of our financial statements, we have
identified those revenues and costs and expenses that relate directly to our
Internet and physician practice management operations, respectively, and
segregated
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them in the Consolidated Statements of Operations. As a result, we have made
certain reclassifications to the Consolidated Statement of Operations for the
three and nine months ended September 30, 1999 in order to conform to the
current period presentation.
ACQUISITION OF MINORITY INTEREST
Effective February 3, 2000, we merged our majority-owned subsidiary, HG.com,
Inc. into a recently formed, wholly-owned subsidiary, HealthCare Ratings, Inc.
(hereafter, the "Merger Transaction"). In order to effectuate the Merger
Transaction, we gave the minority shareholders of HG.com 800,000 shares of our
common stock. In connection with the Merger Transaction, we recorded goodwill in
the amount of $1,850,000 based on the fair value of our common stock issued as
of the transaction date. The goodwill is being amortized over an estimated
useful life of seven years.
RESULTS OF OPERATIONS
PHYSICIAN PRACTICE MANAGEMENT REVENUE
Physician practice management revenue includes service fees and other revenue
derived from our physician practice management business. For the three and nine
months ended September 30, 2000, physician practice management revenue includes
non-recurring payments of approximately $70,000 and $2.4 million, respectively,
related to the termination of management services agreements with three of our
affiliated practices. Physician practice management revenue for the three and
nine months ended September 30, 1999 was approximately $5.3 million and $27.0
million, respectively, reflecting the much larger scope of our physician
practice management operations during the prior period.
INTERNET REVENUE
Internet revenue includes all revenues derived from our Internet health care
business. We derive these revenues primarily from strategic marketing services
provided to hospitals, nursing homes and other health care providers, and fees
related to the licensing access to our content (including set-up fees) and
advertising. Marketing revenues are derived from annual fees from hospitals,
nursing homes and health plans in return for our serving banner advertisements
and providing other marketing services. Revenue related to these arrangements is
recognized on a straight-line basis over the term of the agreement. Revenue
related to the licensing of content and initial set-up fees also are recognized
on a straight-line basis over the term of the agreement. In conjunction with
certain of our licensing agreements, we have entered into promotional agreements
under which the licensees may offset their cash obligations to us by providing
significant HealthGrades.com branding on their web sites, or by providing
certain other services to us. For these arrangements, we record the value of the
content licensing as revenue in our Consolidated Statement of Operations, and a
corresponding expense for the value of the branding or other services we
receive. For the three and nine months ended September 30, 2000, we recorded
approximately $424,000 and $1.0 million, respectively, in revenue and
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corresponding expense related to these type of arrangements. Advertising revenue
relates to advertisements served on both our sites and our share of advertising
revenue derived from advertisements delivered on sites of other online health
care companies that provide access to our content. Revenues derived from
advertising arrangements where we contract directly with the advertiser are
recorded at the gross contract amount and commissions and other revenue sharing
splits with other online health care companies under those contracts are
recorded as general and administrative expenses. Advertising revenues earned
under revenue sharing arrangements from other web sites are recorded net of
commissions because the commissions are not contractual obligations of ours.
CLINIC EXPENSES
Previously, under our long-term service agreements with physician practices, we
provided, among other things, facilities and management, administrative and
development services to the affiliated practices, and employed most
non-physician personnel of the affiliated practices, in return for specified
service fees. The operating expenses incurred by us included the salaries, wages
and benefits of personnel (other than physician owners and certain technical
medical personnel), supplies, expenses involved in administering the clinical
aspects of the affiliated practices and depreciation and amortization of assets.
We did not incur any clinic expenses for the three and nine months ended
September 30, 2000 as we are no longer obligated to pay clinic expenses under
our management services arrangements with physician practices.
LITIGATION AND OTHER COSTS
We continue to be involved in litigation with certain of our former affiliated
practices. For the three and nine months ended September 30, 2000, we incurred
approximately $85,000 and $657,000, respectively, in legal fees directly related
to these disputes. Compared with the corresponding periods from 1999, litigation
and other costs decreased approximately $821,000 and $3.6 million, respectively,
for the three and nine months ended September 30, 2000. This decrease is due to
the fact that during the latter part of 1999 and in the first half of 2000, we
reached settlement agreements with several former affiliated practices.
PRODUCTION, CONTENT AND PRODUCT DEVELOPMENT COSTS
Beginning in 1999, we began incurring production, content and product
development costs related to the development and support of our HealthGrades.com
and ProviderWeb.net web sites. These costs (which consist primarily of salaries
and benefits, consulting fees and other costs related to software development,
application development and operations expense) are expensed as incurred.
Production, content and product development costs were approximately $500,000
and $1.7 million for the three and nine months ended September 30, 2000,
respectively. These expenses increased substantially during the later part of
1999 and the first half of 2000, due to the expansion of the HealthGrades.com
web site during this time period. Since January 1, 2000, we have enhanced our
web site by adding directories for naturopathic physicians and birthing
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centers and including report card pages for home health agencies and hospices.
Additionally, we have enhanced our physician data through a strategic alliance
with GeoAccess under which, among other things, our data is being co-marketed to
GeoAccess' clients and we are licensing GeoAccess' physician data.
SALES AND MARKETING EXPENSES
We incurred approximately $1 million and $2.2 million in sales and marketing
costs for the three and nine months ended September 30, 2000, respectively. Of
this amount, approximately $424,000 and $1 million for the three and nine months
ended September 30, 2000, respectively, related to expenses incurred in
connection with promotional agreements under which we received advertising and
other services in return for access to our content. There were no corresponding
costs for the three and nine months ended September 30, 1999.
GAIN (LOSS) ON SALE OF ASSETS AND OTHER
During the nine months ended September 30, 2000, we incurred a loss on sale of
assets and other, of approximately $256,000. This amount consisted primarily of
a loss of $275,000 on the sale of two MRI units, a gain of approximately
$142,000 primarily related to a litigation settlement with one of our former
affiliated practices, and a loss of approximately $61,000 related to the
writedown of certain assets.
INTEREST EXPENSE
We incurred interest expense of approximately $53,000 and $428,000 for the three
and nine months ended September 30, 2000, respectively, compared to interest
expense of approximately $319,000 and $2.2 million for the corresponding periods
of 1999. This decrease reflects the reduction of our indebtedness with our bank
syndicate from a balance of approximately $12.5 million as of September 30, 1999
to a balance of approximately $1.6 million as of September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had working capital of approximately $5.9 million, an
increase of $4.5 million from approximately $1.4 million as of December 31,
1999. For the first nine months of 2000, cash flow used in operations was
approximately $399,000 compared to cash flow provided by operations of $698,000
for the same period of 1999.
On March 17, 2000, we closed on an equity financing transaction (the "Equity
Financing") which raised $18 million. Pursuant to the terms of the Equity
Financing, certain investors funded $14.8 million to us in return for 7,400,000
shares of our common stock and five-year warrants to purchase 2,590,000 shares
of our common stock at an exercise price of $4.00 per share. Net proceeds of the
Equity Financing, after payment of certain legal and other financing fees, was
approximately $14.4 million. We also issued a warrant to purchase 150,000 shares
of our common stock to a company that served as a
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financial advisor to us in connection with the Equity Financing, at an exercise
price of $3.45 per share. In connection with the Equity Financing, certain of
our officers exchanged $3.2 million in notes payable for an aggregate of 1.6
million shares of our common stock and five-year warrants to purchase 560,000
shares of our common stock at $4.00 per share. In accordance with the provisions
of EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, upon the exchange of the
notes payable, we recorded an expense of $347,200 based upon the estimated fair
market value of the warrants issued to the officers. This expense is included in
general and administrative expenses in our Consolidated Statement of Operations
for the nine months ended September 30, 2000.
Effective March 2000, we entered into an amendment to our term loan with our
bank syndicate. The amendment extends the final payment on the loan from
November 2000 to November 2001. The revised term loan provides for monthly
principal and interest payments through November 2001, with interest payable at
a floating rate based on the lead bank's prime lending rate plus .75%. The
monthly principal payments under the term loan are $50,000 per month beginning
April 2000, with the final payment for any remaining balance on the loan due
November 2001. We received our federal tax refund for the year ended December
31, 1999, totaling approximately $2.3 million, during the second quarter of
2000. This amount was applied to reduce the balance of the term loan in June
2000. Our two wholly-owned subsidiaries, Healthcare Ratings, Inc. and
ProviderWeb.net, Inc. are guarantors of the loan. We issued 165,000 shares of
our common stock to the bank syndicate in connection with the amendment as a
financing fee. We anticipate incurring costs in excess of revenues for the
remainder of 2000 and during 2001 to further develop and market our product
offerings. Our revenues to date from ProviderWeb.net have not been material. Due
to the intent of management to focus its efforts on continuing the development
of the HealthGrades.com web site, we are currently exploring strategic
alternatives for ProviderWeb.net. Additionally, although we have settled much of
the litigation between our former affiliated practices and us, we continue to
incur legal fees and other costs related to the remaining litigation with some
former affiliated practices.
We anticipate that we will require additional funds to finance our operations
over the next twelve months. Management is currently examining various
alternatives to raise debt and/or equity financing. The availability and terms
of any financing will depend on market and other conditions. We cannot assure
that sufficient funds will be available on terms acceptable to us, if at all.
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<PAGE> 14
4. OTHER INFORMATION
Reference is made to the discussion in the prospectus under the caption
"Business - Legal Proceedings - Reconstructive Orthopaedic Associates," relating
to a complaint filed against us on May 11, 2000 by Drs. Richard H. Rothman, Todd
J. Albert and Alexander R. Vaccaro in the United States District Court for the
Eastern District of Pennsylvania. By order dated October 2, 2000, the court
denied the plaintiffs' motion to reconsider the court's order dismissing Count
II of the complaint. In addition, on October 12, 2000, the court denied the
plaintiffs' motion to dismiss our counterclaim.
Reference is made to the discussion of Company management in the
prospectus under the caption "Management." The following are developments that
occurred after the date of the prospectus.
We appointed Peter J. Stahl, III, age 51, our chief operating officer
on September 14, 2000. Mr. Stahl served from February 1991 to April 2000 as
executive vice president of business development at Duff & Phelps Credit Rating
Co., a financial advisory company specializing in credit rating and research.
Mr. Stahl will receive a base salary of $250,000 per year and will be
eligible to receive a bonus equal to 100% of his base salary. In addition, at
the commencement of his employment, we granted to Mr. Stahl an option to
purchase 400,000 shares of our common stock at an exercise price of $1.50 per
share, which was the closing price per share of our common stock, as reported on
Nasdaq, on the date of grant. The option vests in three equal annual
increments beginning September 14, 2001. The option expires on September 13,
2010.
John J. Quattrone, age 48, became one of our directors on November 10,
2000. Since 1975, Mr. Quattrone has held various positions in personnel and
labor relations at General Motors North America. Since 1995, Mr. Quattrone has
served as General Director of Human Resources for General Motors North America.
On November 29, 2000, we granted an option to purchase 20,000 shares of
our common stock to Mr. Quattrone. The exercise price of the option is $0.50 per
share (the closing price per share of our common stock as reported by Nasdaq on
the date of grant) and the option terminates on November 29, 2010. The option
vests in equal increments on each of the first three anniversaries of the date
of grant.
Mr. Cheesbrough, one of our directors, left the employ of Xcare.net,
Inc. in September 2000.
Reference is made to the discussion in the prospectus under the caption
"Management - Executive Compensation - Compensation of Directors." On June 20,
2000, we granted options to each of our non-employee directors to purchase
20,000 shares of our common stock at an exercise price of $1.5312 per share (the
closing price per share of our common stock as reported by Nasdaq on the date of
grant), which options terminate on June 20, 2010. The options vest in equal
increments on each of the first three anniversaries of the date of grant.
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<PAGE> 15
Reference is made to the discussion in the prospectus under the caption
"Management - Executive Compensation" regarding grants of options to executive
officers on July 31, 2000. Because of erroneous assumptions regarding accounting
matters relating to grants to Messrs. Kerry Hicks, Jaeckle, Davis, David Hicks
and O'Hare (the "Named Executive Officers") of options to purchase a total of
700,000 shares of our common stock at an exercise price of $0.875 per share,
which options were to vest in three equal annual increments beginning on July
31, 2001, these grants were declared void by the Compensation Committee of our
Board of Directors. In addition, certain cancellations of options by the Named
Executive Officers (covering 463,419 shares) were also declared void by the
Compensation Committee. The Named Executive Officers concurred in this
determination.
On November 20, 2000, we granted options to each of the Named Executive
Officers. The options each have an exercise price of $0.625, which was the
closing price per share of our common stock, as reported on Nasdaq, on the date
of grant. The options vest in equal increments on each of the first three
anniversaries of the date of grant and terminate ten years from the date of
grant. Options were granted to the Named Executive Officers to purchase the
following number of shares: Kerry R. Hicks - 260,000 shares; Patrick M. Jaeckle
- 140,000 shares; D. Paul Davis - 100,000 shares; David G. Hicks - 100,000
shares; Timothy D. O'Hare - 100,000 shares.
In light of the developments set forth above, as well as the sale of
our common stock by one of the selling stockholders prior to the date of this
prospectus supplement, the disclosure in the prospectus under the caption
"Principal and Selling Stockholders" is revised in its entirety as follows:
PRINCIPAL AND SELLING STOCKHOLDERS
The Shares being offered under this prospectus include shares currently
held by the selling stockholders as well as shares issuable upon exercise of
warrants held by some of the selling stockholders. The selling stockholders
obtained the shares in various transactions. Chancellor V, L.P., Essex Woodlands
Health Ventures Fund IV, L.P., Punk, Ziegel & Company Investors, L.L.C. and
William J. Punk (collectively, "the Investors") acquired their securities in
connection with a private financing in March 2000. The Investors paid an
aggregate of $14.8 million for their securities. Neil Grossman, Irwin J. Newman
and Alan S. Frankel, who are officers of Triton Capital, Inc. received warrants
to purchase an aggregate of 150,000 shares in consideration of services rendered
by Triton Capital in connection with the private financing. Bank of America
Corporation, AmSouth Bank Corporation, Paribas North America, Inc. and Key
Corporate Capital, Inc., our lending banks, received their shares as a financing
fee in connection with certain modifications to our credit facility. Kerry R.
Hicks, Patrick M. Jaeckle, D. Paul Davis and David G. Hicks, who are some of our
executive officers, received their shares and warrants covered by this
prospectus in March 2000, in exchange for their surrender of $3.2 million of
notes that we issued to them in December 1999. We issued the notes in connection
with loans that the executive officers made to us in December 1999 to enable us
to acquire a portion of the minority interest in a subsidiary that operated our
HealthGrades.com
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<PAGE> 16
web site. See "Certain Transactions" in the prospectus for additional
information concerning some of these transactions.
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of November 20, 2000 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 in
the Summary Compensation Table in the prospectus under "Management - Executive
Compensation"; (iii) each of our directors; (iv) all directors and executive
officers as a group; and (v) other selling stockholders. Some of this
information is based on information provided by or on behalf of the selling
stockholders and, with regard to the beneficial holdings of the selling
stockholders, is accurate only to the extent beneficial holdings information was
disclosed to us by or on behalf of the selling stockholders. The selling
stockholders and any of their transferees, pledgees, donees or successors to
these persons, may from time to time offer and sell, pursuant to the prospectus
and this and any subsequent prospectus supplement, any and all of these shares.
The amounts shown under "Shares Beneficially Owned After Offering"
assume that the selling stockholders will sell all shares owned by them,
including all shares issuable upon the exercise of warrants held by them.
However, because each of the selling stockholders may offer all, some or none of
his or its respective Shares, we cannot provide a definitive estimate as to the
amount and percentage of common stock that each of the selling stockholders will
hold upon the termination of any sales. In addition, because the warrants held
by some of the selling stockholders have "net exercise" provisions, the actual
number of shares issued upon exercise of the warrants may be less than indicated
in the footnotes to the table. Generally, a "net exercise" provision enables a
holder of a warrant to surrender a warrant and receive, without any cash
payment, a number of shares based upon a formula that takes into account the
excess of the market value of the shares underlying the warrant over the
exercise price of such shares.
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<PAGE> 17
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) OFFERING
NUMBER PERCENT NUMBER OF NUMBER PERCENT
OF OF SHARES BEING OF OF
NAME SHARES TOTAL OFFERED TOTAL TOTAL
<S> <C> <C> <C> <C> <C>
DIRECTORS AND OFFICERS:
Kerry R. Hicks(2) 2,626,769 11.5 1,350,000 1,276,769 5.6
Patrick M. Jaeckle(3) 2,076,475 9.2 675,000 1,401,475 6.2
D. Paul Davis(4) 488,120 2.2 67,500 420,620 1.9
David G. Hicks(5) 463,482 2.1 67,500 395,982 1.8
Timothy D. O'Hare(6) 445,701 2.0 -- 445,701 2.0
Parag Saxena(7) 5,690,250 24.7 5,690,250 -- --
Marc S. Sandroff(8) 4,050,000 17.9 4,050,000 -- --
Leslie S. Matthews, M.D.(9) 85,116 * -- 85,116 *
Peter H. Cheesbrough(10) 54,345 * -- 54,345 *
Mats Wahlstrom(11) 146,677 * -- 146,677 *
All Directors and Officers as a group
(14 persons) (12) 17,285,848 64.8 11,900,250 5,385,598 19.5
FIVE PERCENT STOCKHOLDERS:
Chancellor V, L.P.(13) 5,690,250 24.7 5,690,250 -- --
Essex Woodlands
Health Ventures Fund IV, L.P.(14) 4,050,000 17.9 4,050,000 -- --
OTHER SELLING STOCKHOLDERS:
Bank of America Corporation(15) 66,000 * 66,000 -- --
AmSouth Bancorporation(15) 33,000 * 33,000 -- --
Paribas North America, Inc.(15) 33,000 * 33,000 -- --
Key Corporate Capital, Inc.(15) 33,000 * 33,000 -- --
Punk, Ziegel & Company
Investors, L.L.C.(16) 160,800 * 160,800 -- --
William J. Punk(17) 33,750 * 33,750 -- --
Neil Grossman(18) 90,000 * 90,000 -- --
Irwin J. Newman(18) 30,000 * 30,000 -- --
Alan S. Frankel(18) 30,000 * 30,000 -- --
</TABLE>
* Less than one percent
(1) Applicable percentage of ownership is based on 21,547,204 shares of
common stock outstanding on November 20, 2000. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and means voting and investment power with respect to
securities. Shares of common stock issuable upon the exercise of stock
options or warrants exercisable currently or within 60 days of November
20, 2000 are deemed outstanding and to be beneficially owned by the
person holding such option for purposes of computing
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<PAGE> 18
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 jointly held 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, 350,000 shares underlying warrants and
861,351 shares underlying stock options. Does not include 60,000 shares
of common stock held by The Hicks Family Irrevocable Trust, for which
shares Mr. Kerry Hicks disclaims beneficial ownership. Mr. Kerry Hicks
is our Chief Executive Officer and one of our directors. Mr. Hicks'
address is Health Grades, Inc., 44 Union Boulevard, Suite 600,
Lakewood, CO 80228.
(3) Includes 175,000 shares underlying warrants 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 is our President and one of our directors. Mr. Jaeckle's
address is Health Grades, Inc., 44 Union Boulevard, Suite 600,
Lakewood, CO 80228.
(4) Includes 17,500 shares underlying warrants and 363,621 shares
underlying stock options. Mr. Davis is our Executive Vice President -
Finance and our Chief Financial Officer.
(5) Includes 17,500 shares underlying warrants and 319,701 shares
underlying stock options. Mr. David Hicks is our Executive Vice
President - Information Technology.
(6) Includes 445,701 shares underlying stock options.
(7) Includes 4,215,000 shares and 1,475,250 shares underlying warrants held
by Chancellor V, L.P. Mr. Saxena 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. Mr. Saxena's
address is INVESCO Private Capital, Inc., 1166 Avenue of the Americas,
New York, NY 10036. Mr. Saxena is one of our directors.
(8) Includes 3,000,000 shares and 1,050,000 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. (the "LLC"), which is the General Partner of the Fund. Mr.
Sandroff's address is Essex Woodlands Health Ventures IV, L.L.C., 190
South LaSalle Street, Suite 2800, Chicago, IL 60603. Mr. Sandroff is
one of our directors.
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(9) Includes 43,333 shares underlying stock options.
(10) Includes 53,345 shares underlying stock options.
(11) Includes 46,677 shares underlying stock options.
(12) Includes 3,085,250 shares underlying warrants and 3,046,748 shares
underlying stock options.
(13) Includes 1,475,250 shares underlying warrants. See note 7. The address
of Chancellor V, L.P. is 1166 Avenue of the Americas, New York, NY
10036.
(14) Includes 1,050,000 shares underlying warrants. See note 8. The address
of Essex Woodlands Health Ventures Fund IV, L.P. is 190 South LaSalle
Street, Suite 2800, Chicago, IL 60603.
(15) The stockholder is one of our lending banks.
(16) Includes 56,000 shares underlying warrants.
(17) Includes 8,750 shares underlying warrants.
(18) All shares listed are underlying warrants. Messrs. Grossman, Newman and
Frankel are officers of Triton Capital, Inc., which provided financial
advisory services to us in connection with a private placement in March
2000.
------------------------------
You should rely only on the information in the prospectus and this
prospectus supplement. We have not authorized any person to provide you with
different information. The prospectus is not an offer to sell these securities
or a solicitation of your offer to buy these securities in any state where the
offer or sale is not permitted. Except as may be updated by any supplement
attached to the prospectus, the information in the prospectus is accurate only
as of the date of the prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock.
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