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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-22019
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HEALTHGRADES.COM, 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
Incorporation or Organization) Identification No.)
44 UNION BOULEVARD, SUITE 600, LAKEWOOD, COLORADO 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
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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 [ ]
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On July 31, 2000, 21,530,716 shares of the Registrant's common stock, $.001
par value, were outstanding.
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HealthGrades.com, Inc. and Subsidiaries
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Consolidated Balance Sheets
June 30, 2000 and December 31, 1999........ 3
Consolidated Statements of Operations -
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999 ... 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999.... 5
Notes to Consolidated Financial
Statements................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk.......................... 11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.......................... 11
Item 4. Submission of Matters to a Vote of
Security Holders........................... 12
Item 6. Exhibits and Reports on Form 8-K........... 13
</TABLE>
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PART I. FINANCIAL INFORMATION
HealthGrades.com, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,436,600 $ 316,767
Restricted cash -- 1,178,848
Accounts receivable, net 561,918 2,744,912
Due from affiliated practices in litigation, net 1,235,411 2,745,413
Prepaid expenses, inventories and other 384,477 205,665
Current portion notes receivable 334,206 3,531,099
Prepaid and recoverable income taxes -- 1,838,589
------------ ------------
Total current assets 11,952,612 12,561,293
Property and equipment, net 1,173,587 1,656,613
Goodwill, net of accumulated amortization of
$397,160 and $-- in 2000 and 1999, respectively 5,452,840 4,000,000
Notes receivable, less current portion 1,468,390 1,661,485
Other assets 507,246 513,477
------------ ------------
Total assets $ 20,554,675 $ 20,392,868
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 58,078 $ 520,767
Accrued payroll, incentive compensation and related
expenses 454,402 278,474
Accrued expenses 1,038,478 1,531,550
Income taxes payable 556,792 --
Notes payable 663,149 7,352,005
Notes payable to officers -- 350,000
Deferred income 1,034,332 1,144,552
------------ ------------
Total current liabilities 3,805,231 11,177,348
Note payable, less current portion 1,316,065 5,603,283
Notes payable to officers, less current portion -- 3,200,000
Deferred income 422,434 646,847
------------ ------------
Total liabilities 5,543,730 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 28,800,912 and 18,738,686
issued and outstanding in 2000 and 1999,
respectively 28,801 18,739
Additional paid-in capital 87,328,131 67,509,276
Accumulated deficit (59,286,753) (56,722,141)
Treasury stock (13,059,234) (11,040,484)
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Total stockholders' equity (deficit) 15,010,945 (234,610)
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Total liabilities and stockholders' equity (deficit) $ 20,554,675 $ 20,392,868
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Physician practice management revenue $ 1,988,381 $ 7,810,232 $ 3,567,811 $ 21,749,704
Internet revenue 829,284 62,752 1,262,567 136,792
Other -- -- 2,719 459,366
------------ ------------ ------------ ------------
2,817,665 7,872,984 4,833,097 22,345,862
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Physician practice management costs and expenses:
Clinic expenses -- 4,866,822 -- 14,442,454
Litigation and other costs 202,612 2,255,560 571,835 3,363,260
Internet costs and expenses:
Production content and product development 586,765 202,264 1,205,592 264,544
Sales and marketing 854,594 119,244 1,246,653 119,244
General and administrative 1,888,247 2,511,287 4,062,413 6,002,984
------------ ------------ ------------ ------------
3,532,218 9,955,177 7,086,493 24,192,486
------------ ------------ ------------ ------------
Loss from operations (714,553) (2,082,193) (2,253,396) (1,846,624)
Other:
Gain (loss) on sale of assets and other 141,874 3,531,758 (194,779) 3,531,758
Gain on sale of subsidiary -- -- -- 221,258
Interest income 208,202 97,158 259,356 160,496
Interest expense (59,718) (879,743) (375,793) (1,886,986)
------------ ------------ ------------ ------------
(Loss) income before income taxes (424,195) 666,980 (2,564,612) 179,902
Income tax benefit -- 1,502,093 -- 1,696,347
------------ ------------ ------------ ------------
Net (loss) income $ (424,195) $ 2,169,073 $ (2,564,612) $ 1,876,249
============ ============ ============ ============
Net (loss) income per share (basic) $ (0.02) $ 0.14 $ (0.15) $ 0.12
============ ============ ============ ============
Weighted average shares outstanding (diluted) 21,522,105 15,686,434 17,512,743 16,031,953
============ ============ ============ ============
Net (loss) income per share (diluted) $ (0.02) $ 0.13 $ (0.15) $ 0.11
============ ============ ============ ============
Weighted average shares outstanding (diluted) 21,522,105 16,388,548 17,512,743 16,383,102
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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HealthGrades.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (2,564,612) $ 1,876,249
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 389,782 1,230,566
Amortization 397,160 1,279,418
Bad debt expense 172,260 --
Gain on sale of subsidiary -- (221,258)
Gain on sale of equity investment -- (3,531,758)
Equity in earnings of investee -- 18,978
Officer notes financing fee 347,200 --
Loss on disposal of assets 194,779 29,604
Deferred income taxes -- (1,083,178)
Non-cash compensation expense-stock options 19,287 --
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 (8,016) 3,251,158
Due from affiliated practices in litigation 1,651,876 (1,358,716)
Prepaid expenses and other assets (194,079) 89,525
Accounts payable and accrued expenses (766,315) (1,351,934)
Accrued payroll, incentive compensation and
related expenses 175,928 113,204
Income taxes payable and prepaid and
recoverable income taxes, net 2,395,381 2,065,700
Due to affiliated physician practices -- (3,121,548)
Deferred income (334,633) 3,380,060
------------ ------------
Net cash provided by operating activities 1,875,998 2,666,070
INVESTING ACTIVITIES
Purchases of property and equipment (306,314) (846,413)
Proceeds from sales of majority interest in a subsidiary
and equity investments, net of cash -- 322,812
Proceeds from sale of medical equipment 125,000 925,185
Increase in other assets 65,065 (38,708)
Increase in intangible assets -- --
Repayments from affiliates -- 58,354
Advances to investee -- (757,467)
------------ ------------
Net cash used in investing activities (116,249) (336,237)
FINANCING ACTIVITIES
Proceeds from sales of affiliated practices
assets and execution of new service agreements -- 34,388,567
Cash restricted for repayment of line-of-credit -- (3,732,101)
Principal repayments on notes payable (9,986,672) (33,172,808)
Net proceeds from equity financing 14,358,592 --
Repayments from notes receivable 3,284,326 --
Principal repayments on capital lease obligations -- (47,686)
Loans to physician stockholders -- (48,178)
Repayment of Officer notes (350,000)
Repayment on loans to physician stockholders -- 135,451
Exercise of common stock options 53,838 --
------------ ------------
Net cash provided by (used in) financing activities 7,360,084 (2,476,755)
Net increase (decrease) in cash and cash equivalents 9,119,833 (146,922)
Cash and cash equivalents at beginning of period 316,767 1,418,201
------------ ------------
Cash and cash equivalents at end of period $ 9,436,600 $ 1,271,279
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HealthGrades.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
HealthGrades.com, Inc. and subsidiaries (collectively the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, these statements include all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods reported herein. Operating
results for the three and six months ended June 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 Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
DESCRIPTION OF BUSINESS
The Company operates two Internet healthcare sites and provides practice
management services to physicians. Through its wholly-owned subsidiary,
HealthcareRatings, Inc., the Company operates its HealthGrades.com website,
which provides ratings and other information on health care providers and
facilities. Through its wholly-owned subsidiary, ProviderWeb.net, Inc., the
Company operates its ProviderWeb.net website, which offers a subscription
service for physician practice administrators and managers that provides online
tools and resources. All significant intercompany balances and transactions have
been eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts in the Consolidated Balance Sheet as of December 31, 1999 and
certain amounts in the Statement of Operations and the Consolidated Statement of
Cash Flows for the three and six months ended June 30, 1999 have been
reclassified in order to conform to the current presentation.
EARNING PER SHARE
The calculation of weighted average shares outstanding for the three and six
months ended June 30, 2000, does not included the impact of certain stock
options whose exercise price was less than the average market price of the
common shares because the effect on loss per share would have be antidilutive.
If such options were included in the calculation, weighted average shares
outstanding would have increased by approximately 1.3 million and 1.4 million
shares, for the three and six months ended June 30, 2000, respectively.
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, was approximately $14.4 million. In connection with the
Equity Financing, the Company also issued an aggregate of 165,000 shares to its
bank syndicate as a financing fee. 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 $3.45 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
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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 its
content (including set-up fees) and advertising. The Company's other segment for
the three and six months ended June 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.
Summary information by segment is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE THREE MONTHS ENDED THE SIX MONTHS ENDED
JUNE 30 JUNE 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PPM
Revenue from external customers $ 1,988,381 $ 7,822,094 $ 3,567,811 $ 22,237,419
Interest income -- 54,462 -- 117,800
Interest expense (59,718) (879,743) (375,793) (1,886,986)
Segment net income (loss) before income taxes 559,714 2,149,004 (534,958) 1,857,909
Segment assets 29,589,939 26,968,497 29,589,939 26,968,497
Segment asset expenditures -- 68,680 7,812 746,755
INTERNET SERVICES
Revenue from external customers $ 829,284 $ 62,752 $ 1,262,567 $ 136,792
Interest income 208,202 -- 259,356 --
Segment net loss before income taxes (983,909) (794,951) (2,029,654) (930,765)
Segment assets 7,071,525 340,740 7,071,525 340,740
Segment asset expenditures 172,963 78,521 298,502 99,658
OTHER
Revenue from external customers $ -- $ -- $ -- $ 132,831
Equity in net income of unconsolidated affiliate -- 27,812 -- 42,696
Segment net loss before income taxes -- (33,862) -- (18,978)
Segment assets -- (749,763) -- (638,625)
Segment asset expenditures -- 2,232,298 -- 2,232,298
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Total for reportable segments $ 2,817,665 $ 7,901,333 $ 4,830,378 $ 22,374,211
Other revenue -- (28,349) 2,719 (28,349)
------------ ------------ ------------ ------------
Total consolidated revenue $ 2,817,665 $ 7,872,984 $ 4,833,097 $ 22,345,882
============ ============ ============ ============
LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (424,195) $ 1,354,053 $ (2,564,612) $ 927,144
Other net loss -- (580,308) -- (638,625)
Adjustment -- (106,765) -- (108,617)
------------ ------------ ------------ ------------
Loss before income taxes $ (424,195) $ 666,980 $ (2,564,612) $ 179,902
============ ============ ============ ============
ASSETS
Total assets for reportable segments $ 36,661,464 $ 29,923,076 $ 36,661,464 $ 29,923,076
Other assets -- 2,227,182 -- 2,227,182
Elimination of advance to subsidiaries (8,311,769) (3,390,002) (8,311,769) (3,390,002)
Elimination of investment in subsidiaries (7,795,020) (1,937,836) (7,795,020) (1,937,836)
------------ ------------ ------------ ------------
Consolidated total assets $ 20,554,675 $ 26,822,420 $ 20,554,675 $ 26,822,420
============ ============ ============ ============
</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 $440,000 and $1,700,000 for the six
months ended June 30, 2000 and 1999, respectively. Refunds received from income
taxes amounted to approximately $2,300,000 and $2,700,000 for the six months
ended June 30, 2000 and 1999, respectively.
Supplemental schedule of noncash investing and financing activities are as
follows:
During the six months ended June 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.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning the sufficiency of
available funds, the anticipated pay down of principal amounts due under our
term loan, our anticipated federal income tax refund, anticipated costs to
further develop and market our Internet sites and litigation costs are "forward
looking statements." Actual events or results may differ materially from those
discussed in forward looking statements as a result of various factors,
including unanticipated expenditures, delays in payment or reduction of our
anticipated federal income tax refund, adverse litigation developments and other
factors discussed below and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, particularly under "Risk Factors" in Item 1.
GENERAL
We operate two Internet healthcare sites and provide practice management
services to physicians. Through our wholly-owned subsidiary, HealthcareRatings,
Inc., we operate our HealthGrades.com website, 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 website, which
offers a subscription service for physician practice administrators and managers
that provides online tools and resources.
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 six months ended June 30, 2000 are not comparable to our
results of operations for the three and six months ended June 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 them in the Statements of Operations. As a result, we have made
certain reclassifications to the Statement of Operations for the three and six
months ended June 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 six
months ended June 30, 2000, physician practice management revenue includes
non-recurring payments of approximately $1.5 million and $2.3 million,
respectively, related to the termination of management services agreements with
two of our affiliated practices. Physician practice management revenue for the
three and six months ended June 30, 1999 was approximately $7.8 million and
$21.7 million, respectively, reflecting the much larger scope of our physician
practice management operations during that period.
INTERNET REVENUE
Internet revenue includes all revenues derived from our Internet healthcare
business. We derive these revenues primarily from marketing arrangements with
providers, fees related to the licensing of access to our content (including
set-up fees) and advertising. Marketing revenues are derived from annual fees
from hospitals, nursing homes and health plans in return for our serving banner
advertisements and providing other marketing services to the hospitals. Revenue
related to these arrangements is recognized on a straight-line basis over the
term of the agreement. Revenue related to the licensing of content and initial
set-up
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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
Statement of Operations, and a corresponding expense for the value of the
branding or other services we receive. For the three and six months ended June
30, 2000, we recorded approximately $433,000 and $556,000, respectively, in
revenue and 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 healthcare companies that provide access to our content. Revenues
derived from advertising arrangements where we contract directly with the
advertiser are recorded at the gross contract amount and commissions and other
revenue sharing splits with other online healthcare companies under those
contracts are recorded as general and administrative expenses. Advertising
revenues earned under revenue sharing arrangements from other web sites are
recorded net of commissions because the commissions are not contractual
obligations of ours.
CLINIC EXPENSES
Previously, under our long-term service agreements with physician practices, 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 six months ended June 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 six months ended June 30, 2000, we incurred
approximately $203,000 and $494,000, respectively, in legal fees directly
related to these disputes. Compared with the corresponding periods from 1999,
litigation and other costs decreased approximately $2.1 million and $2.8
million, respectively, for the three and six months ended June 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 $587,000 and $1.2 million
for the three and six months ended June 30, 2000, respectively. These expenses
have increased substantially due to the expansion of the HealthGrades.com
website during the first six months of 2000. Since January 1, 2000, we have
enhanced our website by adding directories for naturopathic physicians and
birthing centers and including report card pages for home health agencies and
hospices.
SALES AND MARKETING EXPENSES
We incurred approximately $855,000 and $1.2 million in sales and marketing costs
for the three and six months ended June 30, 2000, respectively. Of this amount,
approximately $453,000 and $576,000 for the three and six months ended June 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 six
months ended June 30, 1999.
GAIN (LOSS) ON SALE OF ASSETS AND OTHER
During the first quarter of 2000, we incurred a loss of approximately $275,000
on the sale of two MRI units. For the three months ended June 30, 2000, we
recognized a gain of approximately $142,000 primarily related to a litigation
settlement with one of our former affiliated practices.
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INTEREST EXPENSE
We incurred interest expense of approximately $60,000 and $376,000 for the three
and six months ended June 30, 2000, respectively, compared to interest expense
of approximately $880,000 and $1.9 million for the corresponding periods of
1999. This decrease reflects the reduction of our indebtedness with our bank
syndicate from a balance of approximately $19.8 million as of June 30, 1999 to a
balance of approximately $1.8 million as of June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had working capital of approximately $8.1 million, an
increase of $6.7 million from approximately $1.4 million as of December 31,
1999. For the first six months of 2000, cash flow used in operations was
approximately $1.3 million compared to cash flow provided by operations of $3.6
million for the same period of 1999.
On March 17, 2000, we closed on an equity financing transaction (the "Equity
Financing") which raised $18 million. Pursuant to the terms of the Equity
Financing, certain investors funded $14.8 million to us in return for 7,400,000
shares of our common stock. Net proceeds of the Equity Financing, after payment
of certain legal and other financing fees, was approximately $14.4 million.
Additionally, we issued warrants to the investors to purchase 2,590,000 shares
of our common stock at an exercise price of $4.00 per share. The warrants have a
five-year term. We also issued a warrant to purchase 150,000 shares of our
common stock to a company that served as a financial advisor to us in connection
with the Equity Financing, at an exercise price of $4.00 per share. In
connection with the Equity Financing, certain of our officers exchanged $3.2
million in notes payable for an aggregate of 1.6 million shares of our common
stock and five-year warrants to purchase 560,000 shares of our common stock at
$4.00 per share. In accordance with the provisions of EITF 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, upon the exchange of the notes payable, we
recorded an expense of $347,200 based upon the estimated fair market 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 six
months ended June 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. Our federal tax refund for the year ended December 31, 1999, was
received during the second quarter of 2000 and totaled approximately $2.3
million. This amount was applied to the balance of the term loan in June 2000.
Our two wholly-owned subsidiaries, HealthcareRatings, Inc. and ProviderWeb.net,
Inc. are guarantors of the loan. We issued 165,000 shares of our common stock to
the bank syndicate in connection with the amendment as a financing fee.
We anticipate incurring costs in excess of revenues in 2000 to further develop
and market our HealthGrades.com Internet site. 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 website, 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.
Principally as a result of the cash raised under the Equity Financing
transaction, we anticipate that we have sufficient funds available to support
ongoing operations for at least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The amount outstanding under our term loan bears interest at the prime lending
rate of our bank syndicates' leading bank plus .75%. As a result, this debt is
subject to fluctuations in the market which affect the prime rate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Orthopaedic Institute of Ohio
On March 27, 2000, the Court entered an order staying the litigation and
ordering the parties to resolve their disputes through arbitration. The parties
selected an arbitrator to resolve their dispute on July 12, 2000. Our position
statement is due to be filed with the arbitrator on August 9, 2000. The
Orthopaedic Institute of Ohio's position statement will be due on or about
September 7, 2000. Thereafter, additional submissions and information may be
requested by the arbitrator.
11
<PAGE> 12
Reconstructive Orthopaedic Associates
By letter dated April 28, 2000, our counsel raised certain concerns with
Reconstructive Orthopaedic Associates ("ROA's") counsel that may become the
subject of an amended complaint in the Colorado action. In response to that
letter, on May 11, 2000, three individual doctors practicing at ROA, Richard H.
Rothman, Todd J. Albert and Alexander R. Vaccaro, filed a complaint against us
in Pennsylvania for declaratory and injunctive relief and damages. The April 28,
2000 letter, which is attached to the Complaint, questions whether Dr. Rothman
and/or other doctors practicing at ROA improperly purchased shares of our common
stock on the basis of material non-public information he/they acquired in a
position of trust. ROA seeks declaratory judgment that none of the plaintiffs
violated any fiduciary, contractual or common law duty to us and did not violate
section 10(b) of the Securities and Exchange Act of 1934. ROA also brings fraud
and negligent misrepresentation claims against us, contending that the stock
purchases by the individual doctors were acceptable to us and not otherwise in
violation of any legal duty.
On June 27, 2000, we filed a motion to dismiss count II (fraud and negligent
misrepresentation) and an answer and counterclaim. The counterclaim asserted
claims for breach of fiduciary duty against Drs. Rothman and Albert and
restitution of unjust enrichment and constructive trust and accounting claims
against all counterclaim defendants.
On or about July 11, 2000, Rothman filed an amended complaint attempting to
plead the fraud and negligent misrepresentation claims with greater specificity.
On July 19, 2000, the court entered an order dismissing Count II of the
Complaint. On or about July 28, 2000, Plaintiffs filed a Motion for
Reconsideration of the July 19, 2000, Order dismissing Count II.
On July 17, 2000, Plaintiffs filed a motion to dismiss our counterclaims. On
July 31, 2000, we submitted a response in opposition to the motion to dismiss
counterclaims. The three motions referenced above are pending with the Court.
For further history regarding the above proceedings, please see the Company's
Annual Report on Form 10-K for the year ending December 31, 1999, Part I, Item
3. Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 5, 1998, the Company held its annual meeting of stockholders. At the
meeting, the stockholders voted on the election of nine members of the Board of
Directors and on approval of the Company's 1996 Equity Compensation Plan, as
amended.
The voting results on the two matters are set forth below.
1. Election of Directors:
<TABLE>
<CAPTION>
Name of Nominee For Withheld
--------------- --- --------
<S> <C> <C>
Kerry R. Hicks 17,487,085 322,577
Patrick M. Jaeckle 17,384,897 424,765
Peter H. Cheesbrough 17,407,397 402,265
Leslie S. Matthews 17,415,155 394,507
Marc S. Sandroff 17,494,843 314,819
Parag Saxena 17,492,843 316,819
Mats Wahlstrom 17,492,843 316,819
</TABLE>
2. Approval of the HealthGrades.com Equity
Compensation Plan, as amended:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
16,478,625 1,286,086 44,951
</TABLE>
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The following is a list of exhibits filed as part of this
quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Statement re: computation of per share earnings
27 Summary financial data schedule
</TABLE>
(b) Reports on Form 8-K. During the three months ended June 30, 2000, there
were no reports on Form 8-K filed by the Company.
13
<PAGE> 14
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.
HEALTHGRADES.COM, INC.
Date: August 14, 2000 By: /s/ D. Paul Davis
--------------- ----------------------------------
D. Paul Davis
Executive Vice President, Finance
(Chief Financial Officer)
14
<PAGE> 15
HealthGrades.com, Inc. and Subsidiaries
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Statement re: computation of per share earnings
27 Summary Financial Data Schedule
</TABLE>
15
