Health Grades extends tender offer period for outstanding shares of common stock

HealthGradesSep 16 2010

Health Grades, Inc. (Nasdaq:HGRD) ("HealthGrades") today announced the extension of the offer period for the previously announced tender offer for all of the outstanding shares of common stock of HealthGrades for $8.20 per share in cash, without interest and less any applicable withholding taxes, until 9:00 AM, New York City time, on Thursday, October 7, 2010, and certain modifications to its merger agreement with Mountain Acquisition Corp. and Mountain Merger Sub Corp., both affiliates of Vestar Capital Partners V, L.P. ("Vestar"), including those that will provide additional time for the submission and consideration of alternative acquisition proposals.

As previously announced, on August 10, 2010, Mountain Acquisition Corp. and Mountain Merger Sub Corp. commenced a tender offer for all outstanding shares of common stock of HealthGrades at a price of $8.20 per share in cash, without interest and less any applicable withholding taxes. The tender offer was previously scheduled to expire at 9:00 AM, New York City time, on Thursday, September 16, 2010.

The depositary for the tender offer has advised that as of 5:00 PM, New York City time, on Wednesday, September 15, 2010, approximately 26,246,711 HealthGrades shares had been validly tendered and not withdrawn (excluding shares tendered by notices of guaranteed delivery). These shares, in addition to the restricted and option shares (net of withholding for taxes and costs of exercise) that are committed to be sold to Mountain Merger Sub Corp. pursuant to the previously disclosed support agreements with certain executives of HealthGrades, represent approximately 85.30% of the total outstanding shares of HealthGrades on a fully diluted basis, excluding certain shares to be issued pursuant to a non-competition agreement with one of the executives. Including the shares to be issued pursuant to such non-competition agreement, such tendered and committed shares represent approximately 90.19% of the total outstanding shares of HealthGrades on a fully-diluted basis, such that Mountain Merger Sub Corp. would be permitted to consummate a "short-form" merger under Delaware law. Excluding shares tendered pursuant to the support agreements, the tendered shares represent approximately 71.42% of the total outstanding shares on a fully-diluted basis, excluding certain shares to be issued pursuant to the non-competition agreement, and approximately 87.38% of all shares not subject to support agreements.

The modifications announced today have been made pursuant to a Memorandum of Understanding entered into on behalf of HealthGrades, Mountain Acquisition Corp., Mountain Merger Sub Corp., Mountain Acquisition Holdings, LLC and Vestar Capital Partners V, L.P., which outlines the terms of the parties' agreement in principle to settle the actions pending in the Delaware Court of Chancery captioned Peter P. Weigard v. Hicks, C.A. et al., No. 5732-VCS, and Tove Forgo v. Health Grades, Inc., et al., C.A. No. 5716-VCS. The terms of the proposed settlement are subject to approval by the Delaware Court of Chancery. Pursuant to the modified merger and support agreements:

• A committee of the HealthGrades Board of Directors comprised of the four independent directors (the "Independent Committee") has been authorized to review, consider, recommend, negotiate and approve any Acquisition Proposals received during the pendency of the tender offer. In this regard, HealthGrades' Chairman and Chief Executive Officer will not participate in any consideration, deliberation or action by the Independent Committee or the Board of Directors with respect to any Acquisition Proposal that may be made.
• The initial expiration of the tender offer has been extended to 9:00 AM, New York City time, on October 7, 2010. The Independent Committee may cause this date to be extended for 10 business days if an Acquisition Proposal (as defined below, but substituting 50.1% for 15%) that the Company Board or the Independent Committee determines in good faith constitutes, or is reasonably likely to result in, a Superior Proposal (as defined below) is received before the initial expiration of the tender offer.
• The "minimum condition" of the Vestar offer has been modified to include a requirement that a majority of all outstanding shares not subject to support agreements be validly tendered and not withdrawn.
• The fee payable by HealthGrades to a Vestar affiliate in the event the merger agreement is terminated under certain circumstances has been reduced from $9,550,000 to $7,346,000.
• The period for notice to Vestar before HealthGrades may enter into a Superior Proposal has been reduced from 5 business days to 3 business days.
• Executive officers of HealthGrades who entered into support agreements with respect to the pending tender offer have agreed to enter into comparable agreements with respect to any transaction that the Independent Committee determines is a Superior Proposal and with respect to which HealthGrades enters into a definitive agreement after terminating the pending merger agreement.

HealthGrades will provide information to, and engage and participate in good faith discussions and negotiations with, any third party who makes a bona fide written Acquisition Proposal at any time prior to the expiration of the Vestar affiliates' tender offer if:

• The third party enters into a confidentiality agreement substantially in the form attached to the merger agreement (which was filed by HealthGrades with the Securities and Exchange Commission (the "SEC") as Exhibit 2.1 to a Current Report on Form 8-K filed on July 28, 2010);
• The Independent Committee determines in good faith, after consultation with outside legal counsel, that failure to provide information, and engage or participate in discussions or negotiations, would violate its fiduciary duties; and
• The Independent Committee determines in good faith, based on the information then available and after consultation with its independent financial advisor and outside legal counsel, that the Acquisition Proposal constitutes, or is reasonably likely to result in, a Superior Proposal.

If the Independent Committee concludes in good faith that it has received a Superior Proposal, then it may amend or withdraw its recommendation of the Vestar merger agreement and/or may authorize HealthGrades to terminate the Vestar merger agreement, pay a $7,346,000 termination fee to Vestar, and enter into a definitive agreement with respect to the Superior Proposal, so long as HealthGrades first:

• Provides 3 business days written notice to Vestar of the terms and conditions of the Superior Proposal; and
• Negotiates with Vestar during such 3-business day period to provide Vestar with the opportunity to propose adjustments to the Vestar merger agreement such that the third party's proposal would no longer constitute a Superior Proposal.

Citigroup Global Markets Inc. is serving as financial advisor to HealthGrades. Shearman & Sterling LLP, Faegre & Benson LLP and Morris, Nichols, Arsht & Tunnell LLP are serving as legal counsel to HealthGrades.

HealthGrades has directed its advisors to be available to receive inquiries from any other parties interested in a possible acquisition of HealthGrades and, as appropriate, to provide information and, in conjunction with the Independent Committee, enter into discussions and negotiations with such parties in connection with any such indication of interest.