<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 8299 62-1443555
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
HEALTHSTREAM, INC. ROBERT A. FRIST, JR.
209 10th Avenue South, Suite 450 209 10th Avenue South, Suite 450
Nashville, Tennessee 37203 Nashville, Tennessee 37203
(615) 301-3100 (615) 301-3100
(Address, including zip code, (Name, address, including zip code,
and telephone number, including area code, and telephone number, including area code,
of registrant's principal executive offices) of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
J. PAGE DAVIDSON, ESQ. KRIS F. HEINZELMAN, ESQ.
Bass, Berry & Sims PLC Cravath, Swaine & Moore
2700 First American Center Worldwide Plaza
Nashville, Tennessee 37238 825 Eighth Avenue
(615) 742-6200 New York, New York 10019
(212) 474-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value............................... $57,500,000 $15,985
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act. The proposed maximum
aggregate offering price includes amounts attributable to shares that may be
purchased by the Underwriters to cover over-allotments, if any.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 13, 1999
HEALTHSTREAM LOGO
HEALTHSTREAM, INC.
SHARES
COMMON STOCK
We are offering shares of our common stock. This is our initial public
offering and no public market currently exists for our shares. We intend to make
application for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "HSTM." We anticipate that the initial public
offering price will be between $ and $ per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to HealthStream, Inc............................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------------
ROBERTSON STEPHENS
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
E*OFFERING
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 26
Management.................................................. 40
Transactions with Executive Officers, Directors and More
than Five Percent Shareholders............................ 46
Principal Shareholders...................................... 49
Description of Capital Stock................................ 51
Shares Eligible for Future Sale............................. 55
Underwriting................................................ 57
Legal Matters............................................... 60
Experts..................................................... 60
Where You Can Find More Information......................... 60
Index to Financial Statements............................... F-1
</TABLE>
------------------------------
"TRAINING NAVIGATOR" AND "T.NAV" ARE OUR REGISTERED TRADEMARKS. ALL OTHER
TRADEMARKS AND SERVICE MARKS USED IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR
RESPECTIVE OWNERS.
i
<PAGE> 4
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including risk factors, regarding our company
and the common stock being sold in this offering.
OUR BUSINESS
We are pioneering a comprehensive Web-based solution to the continuing
education and training needs of the healthcare community utilizing our
proprietary technology. Through strategic relationships with our content
partners, including Vanderbilt University Medical Center, Duke University
Medical Center, The Cleveland Clinic Foundation and Challenger Corporation, we
have amassed over 1,000 hours of continuing education and training content
throughout a range of medical specialities. We currently distribute over 675
hours of this continuing education and training content to doctors, nurses,
allied health professionals and other healthcare workers through our network of
strategic distribution partners, which includes GE Medical Systems, Medsite.com,
IDX.com, PhyCor and HealthGate. This network of distribution partners reaches
more than 400 health Web sites, 2,000 hospitals and clinics and 400,000
healthcare professionals. We are developing and implementing a comprehensive set
of online administrative and management tools which we will host on an
application service provider, or ASP, basis and which will enable healthcare
administrators to configure, assess and manage training for employees in their
organizations.
We believe that our combination of high quality continuing education and
training content and the reach of our distribution partnerships positions us to
be a leading provider of comprehensive Web-based solutions to the continuing
education and training needs of the healthcare community.
THE MARKET OPPORTUNITY
The healthcare industry spends over $6.0 billion annually on continuing
education and training. According to a recent study, healthcare workers receive
more training than workers in any other industry, with approximately 82% of all
healthcare workers receiving some kind of continuing education or work-related
training every year. The continuing education and training market in the
healthcare industry is highly fragmented, with thousands of providers offering a
limited selection of programs on specific topics. Healthcare professionals
historically have received continuing education and training through offline
publications such as medical journals and CD-ROMs and by attending conferences
and seminars. In addition, other healthcare workers and pharmaceutical and
medical equipment manufacturers' sales and internal regulatory personnel have
historically fulfilled their education and training needs through instructor-led
programs from external vendors or internal training departments.
Although these existing approaches satisfy continuing education and
training requirements, they are limited in a number of ways. Seminars and
instructor-led training may be inconvenient and costly to attend and may result
in lost productivity. Continuing education and training courses offered locally
may be limited in terms of breadth of offering and timeliness and may be costly
to produce on a per user basis. In addition, administrators find it difficult to
review and assess results, track employee compliance with certification
requirements and respond to the effectiveness of education and training
programs. These inefficiencies, combined with the time constraints and the
increased cost pressures in the healthcare industry, have prompted healthcare
professionals and organizations to improve information exchange and consider
alternative training methodologies. The emergence of the Internet enables the
delivery of a greater breadth and depth of continuing education and training
programs to healthcare professionals and other healthcare workers more cost
effectively and conveniently than by traditional methods.
OUR SERVICES
Most healthcare professionals are individually responsible for meeting
their continuing education requirements, and we enable them to meet their
requirements by obtaining credit through the use of our online courseware.
Healthcare organizations are responsible for providing both government mandated
and internally required training to their employees. We are developing an online
solution that enables
1
<PAGE> 5
healthcare organizations to provide, assess and manage the training process
through an ASP-type approach, which we refer to as our learning service
provider, or LSP, model. Our hosted LSP service is scalable, which enables
healthcare organizations to monitor and administer the continuing education and
training needs of large and geographically dispersed employee bases.
We believe our services will provide a comprehensive Web-based continuing
education and training solution for our end users, distribution partners and
content partners.
- We offer healthcare professionals and other healthcare workers a
cost-effective, convenient, efficient and easy to use one-stop shop for
meeting their continuing education and training needs.
- We will enable healthcare organizations to configure, assess and track
continuing education and training for their employees on a cost-effective
basis.
- We offer our distribution partners one of the largest online libraries of
continuing education and training content from premier healthcare
organizations and a predictable source of online traffic due to the
recurring nature of regulated continuing education and training
requirements.
- We offer our content partners one of the largest online distribution
channels targeted to the healthcare industry and our experience in
producing interactive materials for the healthcare industry.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of comprehensive Web-based
continuing education and training solutions for the healthcare community. The
following are the key elements of our growth strategy:
- Expand and enhance our online continuing education and training library.
- Develop strategic distribution relationships with Web sites that target
healthcare professionals and with healthcare organizations.
- Implement a focused branding strategy targeted to healthcare
professionals, healthcare organizations and potential content and
distribution partners.
- Use our hosted LSP model to provide healthcare organizations with
Web-based access to our continuing education and training services.
- Leverage the attractive demographics of our end users and the quality of
our content to develop additional revenue opportunities from e-commerce
offerings, data mining and sponsorship.
------------------------------
Our principal executive office is located at 209 10th Avenue South, Suite
450, Nashville, Tennessee 37203, our telephone number is (615) 301-3100, and our
Web address is www.healthstream.com. The contents of our Web site are not part
of this prospectus.
2
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after the
offering................................... shares, or shares if the
underwriters exercise their over-allotment
option in full. These shares do not include
shares reserved for issuance
pursuant to options or warrants we may issue
in the future or 1,706,111 shares subject to
warrants and outstanding options issued
pursuant to our stock option plans.
Use of proceeds.............................. For general corporate purposes, including
working capital, sales and marketing expenses
and possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... HSTM
</TABLE>
------------------------------
Except as otherwise indicated, all information in this prospectus:
- reflects the conversion of a $1,293,000 promissory note payable to Robert
A. Frist, Jr., our chief executive officer and chairman, into 123,900
shares of our series B preferred stock;
- reflects the conversion of each outstanding share of our series A and B
preferred stock into 2.3148 shares of our common stock upon completion of
this offering;
- reflects the conversion of each outstanding share of our series C
preferred stock into 1.3298 shares of our common stock upon completion of
this offering; and
- assumes no exercise of the underwriters' over-allotment option.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the financial data for our business.
You should read this information together with the financial statements and the
related notes appearing at the end of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The pro forma condensed statements of operations data assume the
acquisition of SilverPlatter Education, Inc., subsequent issuances of our common
stock and series B and C preferred stock, the conversion of series A, B and C
preferred stock into our common stock, the conversion of notes payable-related
party into series B preferred stock and conversion of the series B preferred
stock into our common stock and the issuance of our common stock in this
offering as described in "Use of Proceeds" as if each of such transactions had
occurred as of January 1, 1998.
The pro forma balance sheet data assume the acquisition of SilverPlatter
Education, Inc., subsequent issuances of our common stock and series B and C
preferred stock, the conversion of series A, B and C preferred stock into our
common stock, the conversion of notes payable-related party into series B
preferred stock and conversion of the series B preferred stock into our common
stock, and the issuance of our common stock in this offering as described in
"Use of Proceeds" as if each of such transactions had occurred as of June 30,
1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1996 1997 1998 1998 1998 1999 1999
------ ------ ------- ----------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 556 $1,268 $ 1,716 $ $ 830 $ 1,113 $
Loss from operations.......... (736) (771) (1,261) (506) (1,374)
Net loss...................... (779) (960) (1,590) (647) (1,478)
Basic and diluted loss per
share....................... (0.47) (0.55) (0.90) (0.37) (0.77)
Weighted average shares used
in the calculation of basic
and diluted loss per
share....................... 1,659 1,760 1,760 1,760 1,923
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
1998 ---------------------
------------ PRO FORMA
ACTUAL ACTUAL AS ADJUSTED
------------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 51 $3,967 $
Working capital (deficit)................................... (2,854) 2,254
Total assets................................................ 1,153 5,297
Long-term debt and capital leases, net of current portion... 32 64
Shareholders' equity (deficit).............................. (2,285) 2,973
</TABLE>
4
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
you decide to invest in shares of our common stock.
RISKS RELATED TO OUR BUSINESS MODEL
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
Although we were incorporated in 1990, we did not initiate our online
operations until March 1999. As a result, we have only a limited operating
history on which you can base an evaluation of our business and prospects. Our
prospects must be considered in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets like
ours. Our failure to successfully address these risks and uncertainties could
have a material adverse effect on our financial condition. Some of these risks
and uncertainties relate to our ability to:
- attract and maintain a large base of end users;
- develop and introduce desirable services and compelling content;
- establish and maintain strategic relationships with content and
distribution partners;
- establish and maintain relationships with sponsors and advertisers;
- respond effectively to competitive and technological developments; and
- further develop our infrastructure, including additional hardware and
software, customer support, personnel and facilities, to support our
business.
WE ARE COMPETING IN A NEW MARKET WHICH MAY NOT DEVELOP OR IN WHICH WE MAY FAIL
TO GAIN MARKET ACCEPTANCE.
The market for online continuing education and training in the healthcare
industry is new and rapidly evolving. As a result, uncertainty as to the level
of demand and market acceptance exposes us to a high degree of risk. We cannot
assure you that the healthcare community will accept online continuing education
and training as a replacement for, or alternative to, traditional sources of
continuing education and training. Market acceptance of online continuing
education and training depends upon continued growth in the use of the Internet
generally and, in particular, as a source of continuing education and training
services. If the market for online continuing education and training fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or our services do not achieve or sustain market acceptance, our
business will suffer.
FAILURE TO EFFECTIVELY MANAGE GROWTH OF OUR OPERATIONS AND INFRASTRUCTURE COULD
DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING THE REVENUES WE EXPECT.
We currently are experiencing a period of expansion in our end user
traffic, personnel, facilities and infrastructure. Our number of employees
nearly doubled between December 31, 1998 and September 30, 1999. In addition, we
anticipate a rapid expansion in end user traffic on our Web site and the
co-branded Web sites we operate with our distribution partners. To manage our
growth, we must successfully implement, constantly improve and effectively
utilize our operational and financial systems while aggressively expanding our
workforce. We must also maintain and strengthen the breadth and depth of our
current strategic relationships while rapidly developing new relationships. Our
existing or planned operational and financial systems may not be sufficient to
support our growth, and our management may not be able to effectively identify,
manage and exploit existing and emerging market opportunities. If our potential
growth is not adequately managed, our business will suffer.
5
<PAGE> 9
WE MAY BE UNABLE TO MAINTAIN OUR EXISTING RELATIONSHIPS WITH OUR CONTENT
PROVIDERS OR TO BUILD NEW RELATIONSHIPS WITH OTHER CONTENT PROVIDERS.
Our success depends significantly on our ability to maintain our existing
relationships with the publishers and authors who provide continuing education
and training content for our library and our ability to build new relationships
with other content partners. Many of our agreements with publishers and authors
are non-exclusive, and our competitors offer, or could offer, continuing
education and training content that is similar to or the same as ours. If
publishers and authors, including our current content partners, offer
information to users or our competitors on more favorable terms than those
offered to us, our competitive position and our profit margins and prospects
could be harmed. In addition, the failure by our content partners to deliver
high-quality content and to continuously upgrade their content in response to
user demand and evolving healthcare advances and trends could result in user
dissatisfaction and inhibit our ability to attract users.
WE MAY BE UNABLE TO MAINTAIN OUR EXISTING RELATIONSHIPS WITH OUR DISTRIBUTION
PARTNERS OR TO BUILD NEW RELATIONSHIPS WITH OTHER DISTRIBUTION PARTNERS.
If we are not successful in developing and enhancing our relationships with
distribution partners, we could become less competitive and our revenues could
decline. We formed our existing relationships recently, and our distribution
partners may not view their relationships with us as significant to the success
of their business. As a result, they may reassess their commitment to us or
decide to compete directly with us in the future. We generally do not have
agreements that prohibit our distribution partners from competing against us
directly or from contracting with our competitors. Arrangements with our
distribution partners generally do not establish minimum performance
requirements, but instead rely on the voluntary efforts of our distribution
partners. As a result, these relationships may not be successful.
OUR FUTURE SUCCESS DEPENDS IN PART ON REVENUES FROM SPONSORSHIPS AND, TO A
LESSER EXTENT, ADVERTISING, AND THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET
SPONSORSHIP AND ADVERTISING IS UNCERTAIN.
We plan to derive significant revenues from sponsorships and, to a lesser
extent, the sale of advertisements, in conjunction with our online continuing
education and training services. The market for corporate sponsorship and
advertising on the Internet is new and rapidly evolving. Many sponsors and
advertisers have limited experience with Internet sponsorship and advertising,
and may ultimately conclude that Internet sponsorship and advertising are not
effective relative to traditional sponsorship and advertising opportunities. As
a result, the market for sponsorship or advertising on the Internet may not
continue to emerge or become sustainable. This makes it difficult to project our
future sponsorship and advertising revenues and rates. If the market for
Internet sponsorship or advertising fails to develop or develops more slowly
than we expect, our business will suffer.
WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET AND THE
AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS, OUR BUSINESS MAY NOT SUCCEED.
Given the online nature of our business, without the continued development
and maintenance of the Internet infrastructure, we could fail to meet our
overall strategic objectives and ultimately fail to generate the user traffic
and revenues we expect. This continued development of the Internet includes
maintenance of a reliable network with the necessary speed, data capacity and
security, as well as timely development of complementary products for providing
reliable Internet access and services. Because commerce on the Internet and the
online exchange of information is new and evolving, we cannot predict whether
the Internet will prove to be a viable commercial marketplace in the long term.
The success of our business will rely on the continued improvement of the
Internet as a convenient and efficient means of information and content
distribution. Our business will depend on the ability of our end users to access
and use our courseware, as well as to conduct commercial transactions with us,
without significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth
6
<PAGE> 10
and access to our Web sites. Our penetration of a broader consumer market will
depend, in part, on continued proliferation of high speed Internet access.
The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased frequency
of use and increased bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. In addition, increased users or
bandwidth requirements may impair the performance of the Internet. The Internet
has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the
future. This might include outages and delays resulting from the "Year 2000"
problem. See "-- The Year 2000 problem may adversely affect our business" for a
more complete discussion of this risk. These outages and delays could reduce the
level of Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of continuing education
and training. The infrastructure and complementary products or services
necessary to make the Internet a viable educational media and commercial
marketplace for the long term may not be developed successfully or in a timely
manner. Even if these products or services are developed, the Internet may not
become a viable educational medium and commercial marketplace for the services
that we offer.
WE MAY BE UNABLE TO IMPLEMENT OUR ACQUISITION GROWTH STRATEGY, WHICH COULD HAVE
AN ADVERSE EFFECT ON OUR BUSINESS AND COMPETITIVE POSITION IN THE INDUSTRY.
Our business strategy includes increasing our market share and presence
through strategic acquisitions of companies that complement or enhance our
business. We may not be able to identify, complete or realize the anticipated
results of future acquisitions. Some of the risks that we may encounter in
implementing our acquisition growth strategy include:
- expenses and difficulties in identifying potential targets and the costs
associated with acquisitions that are not completed;
- expenses, delays and difficulties of integrating the acquired company
into our existing organization;
- diversion of management's attention from other business matters;
- expenses of amortizing the acquired company's intangible assets;
- impact on our financial condition due to the timing of the acquisition;
and
- expenses of any undisclosed or potential legal liabilities of the
acquired company.
If realized, any of these risks could cause our business to grow more
slowly or suffer financial difficulty.
FINANCIAL RISKS
OUR STOCK PRICE MAY FALL IF OUR PERFORMANCE DOES NOT MEET ANALYSTS' OR
INVESTORS' EXPECTATIONS.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods upon which to forecast
quarterly revenues and results of operations. We believe that period-to-period
comparisons of our operating results are not meaningful and should not be relied
upon as indicators of future performance. In addition, our revenues and earnings
may vary substantially. However, the actual effect of these factors on the price
of our stock will be difficult to assess due to our limited operating history.
In one or more future quarters, our results of operations may fall below the
expectations of securities analysts and investors, and the trading price of our
common stock may decline.
7
<PAGE> 11
WE EXPECT NET LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY, WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
In 1998, we had a pro forma net loss of approximately $1.8 million and,
during the first six months of 1999, we had a pro forma net loss of
approximately $1.6 million. We expect substantial net losses and negative cash
flow for the foreseeable future and significant increases in our operating
expenses over the next several years. With increased expenses, we will need to
generate significant additional revenues in order to achieve profitability. As a
result, we may never achieve or sustain profitability and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
WE MAY NOT BE ABLE TO MEET OUR STRATEGIC BUSINESS OBJECTIVES UNLESS WE OBTAIN
ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS OR AT
ALL.
The proceeds of this offering are expected to be sufficient to meet our
cash requirements for at least 12 months. However, we may need to raise
additional funds in order to:
- acquire complementary businesses, technologies, content or products;
- finance working capital requirements;
- develop or enhance existing services or products; or
- respond to competitive pressures.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take advantage
of available opportunities, develop or enhance services or products or otherwise
respond to competitive pressures would be significantly limited. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our shareholders will be reduced, and these securities
may have rights, preferences or privileges senior to those of our shareholders.
RISKS RELATED TO SALES, MARKETING AND COMPETITION
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE WHICH COULD REDUCE
OUR REVENUES, POTENTIAL PROFITS AND OVERALL MARKET SHARE.
The market for traditional and online continuing education and training
services is competitive. Barriers to entry on the Internet are relatively low,
and we expect competition to increase significantly in the future. We face
competitive pressures from numerous actual and potential competitors, both
online and offline, many of which have longer operating histories, greater brand
name recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do. We cannot assure you that online
continuing education and training services maintained by our existing and
potential competitors will not be perceived by the healthcare community as being
superior to ours.
IF WE FAIL TO COLLECT ACCURATE AND USEFUL DATA ABOUT OUR END USERS, POTENTIAL
SPONSORS AND ADVERTISERS MAY NOT SUPPORT OUR SERVICES, WHICH MAY RESULT IN
REDUCED SPONSORSHIP AND ADVERTISING REVENUES.
We plan to use data about our end users to expand, refine and target our
marketing and sales efforts. We collect most of our data from end users who
report information to us as they register for courses on our, or our
distribution partners' Web sites. If a large proportion of users impedes our
ability to collect data or if they falsify data, our marketing and sales efforts
would be less effective since sponsors and advertisers generally require
detailed demographic data on their target audiences. In addition, laws relating
to privacy and the use of the Internet to collect personal information could
limit our ability to collect data and utilize our database. Failure to collect
accurate and useful data could result in a substantial reduction in sponsorship
and advertising revenues.
8
<PAGE> 12
RISKS RELATED TO OPERATIONS
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO INTEGRATE, OUR MANAGEMENT TEAM.
Our future performance will be substantially dependent on the continued
services of our management team and our ability to retain and motivate them. The
loss of the services of any of our officers or senior managers could harm our
business, as we may not be able to find suitable replacements. We do not have
long-term employment agreements with any of our key personnel, other than our
chief executive officer, and we do not maintain any "key person" life insurance
policies, except on our chief executive officer. In addition, although we do not
currently have a full-time chief financial officer, we are in the process of
recruiting for this position as well as for additional accounting support
personnel. We cannot assure you as to when we will engage a chief financial
officer or additional accounting support personnel.
WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED EMPLOYEES
AND, AS A RESULT, WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR MAINTAIN THE
QUALITY OF OUR SERVICES.
Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, Web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. If we cannot integrate
newly-hired employees into our business, we will not be able to effectively
manage our growth. In addition, our inability to hire, integrate and retain
qualified personnel in sufficient numbers may reduce the quality of our
services.
WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE, OR WE WILL BE UNABLE
TO EFFECTIVELY MEET DEMAND FOR OUR SERVICES.
We must continue to add hardware and enhance software to accommodate the
increased content in our library and increased use of our and our distribution
partners' Web sites. If we are unable to increase the data storage and
processing capacity of our systems at least as fast as the growth in demand, our
systems may become unstable and may fail to operate for unknown periods of time.
Unscheduled downtime could harm our business and also could discourage current
and potential end users and reduce future revenues.
OUR DATA AND WEB SERVER SYSTEMS MAY STOP WORKING OR WORK IMPROPERLY DUE TO
NATURAL DISASTERS, FAILURE OF THIRD-PARTY SERVICES AND OTHER UNEXPECTED
PROBLEMS.
An unexpected event like a power or telecommunications failure, fire, flood
or earthquake at our on-site data facility or at our Internet service providers'
facilities could cause the loss of critical data and prevent us from offering
our services. Our business interruption insurance may not adequately compensate
us for losses that may occur. In addition, we rely on third parties to securely
store our archived data, house our Web server and network systems and connect us
to the Internet. The failure by any of these third parties to provide these
services satisfactorily and our inability to find suitable replacements would
impair our ability to access archives and operate our systems.
WE MAY LOSE USERS AND LOSE REVENUES IF OUR ONLINE SECURITY MEASURES FAIL.
If the security measures that we use to protect personal information are
ineffective, we may lose users of our services, which could reduce our revenues.
We rely on security and authentication technology licensed from third parties.
With this technology, we perform real-time credit card authorization and
verification. We cannot predict whether these security measures could be
circumvented by new technological developments. In addition, our software,
databases and servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to spend significant
resources to protect against security breaches or to alleviate problems caused
by any breaches. We cannot assure you that we can prevent all security breaches.
9
<PAGE> 13
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS.
The risks posed by the Year 2000 problem could adversely affect our
business in a number of significant ways. We rely on third parties to provide
much of our software, hardware and Internet access. We have limited or no
control over the actions of these third-party suppliers. While we are in the
process of obtaining assurances from our suppliers that the products and
services they are supplying to us and their internal systems are Year 2000
compliant, we cannot assure you that our third-party suppliers will resolve all
Year 2000 problems with their products, services and systems before the
occurrence of a material disruption to our business.
In addition, many of our distribution partners maintain their operations on
systems that could be impacted by Year 2000 problems, which could harm our
business particularly if demand for our products and services declines while our
distribution partners redirect their resources to upgrade their computer
systems. Disruptions in the Internet infrastructure arising from Year 2000
problems could also harm our business, financial condition and results of
operations. We cannot guarantee that we will not experience disruptions in our
service or other disruptions due to Year 2000 problems. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000" for a further discussion of the potential effects of the Year 2000 problem
on our business.
RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY
GOVERNMENT REGULATION MAY REQUIRE US TO CHANGE THE WAY WE DO BUSINESS.
The laws and regulations that govern our business change rapidly. The
United States government and the governments of states and foreign countries
have attempted to regulate activities on the Internet. Evolving areas of law
that are relevant to our business include privacy law, proposed encryption laws,
content regulation and sales and use tax laws and regulations. Because of this
rapidly evolving and uncertain regulatory environment, we cannot predict how
these laws and regulations might affect our business. In addition, these
uncertainties make it difficult to ensure compliance with the laws and
regulations governing the Internet. These laws and regulations could harm us by
subjecting us to liability or forcing us to change how we do business. See
"Business -- Government Regulation of the Internet and the Healthcare Industry"
for a more complete discussion of these laws and regulations.
WE MAY BE LIABLE TO THIRD PARTIES FOR CONTENT THAT IS AVAILABLE FROM OUR ONLINE
LIBRARY.
We may be liable to third parties for the content in our online library if
the text, graphics, software or other content in our library violates copyright,
trademark, or other intellectual property rights, our content partners violate
their contractual obligations to others by providing content to our library or
the content does not conform to accepted standards of care in the healthcare
profession. We may also be liable for anything that is accessible from our Web
site or our distribution partners' Web sites through links to other Web sites.
We attempt to minimize these types of liabilities by requiring representations
and warranties relating to our content partners' ownership of, the rights to
distribute as well as the accuracy of their content. We also take necessary
measures to review this content ourselves. Although our agreements with our
content partners contain provisions providing for indemnification by the content
providers in the event of inaccurate content, we cannot assure you that our
content partners will have the financial resources to meet this obligation.
Alleged liability could harm our business by damaging our reputation, requiring
us to incur legal costs in defense, exposing us to awards of damages and costs
and diverting management's attention away from our business. See
"Business -- Intellectual Property and Other Proprietary Rights" for a more
complete discussion of the potential effects of this liability on our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE LIABLE FOR
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our business could be harmed if unauthorized parties infringe upon or
misappropriate our proprietary systems, content, services or other information.
Our efforts to protect our intellectual property through
10
<PAGE> 14
copyright, trademarks and other controls may not be adequate. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others, which
could be time consuming and costly. Intellectual property infringement claims
could be made against us as the number of our competitors grows. These claims,
even if not meritorious, could be expensive and divert our attention from
operating our company. In addition, if we become liable to third parties for
infringing their intellectual property rights, we could be required to pay a
substantial damage award and develop comparable non-infringing intellectual
property, to obtain a license or to cease providing the content or services that
contain the infringing intellectual property. We may be unable to develop non-
infringing intellectual property or obtain a license on commercially reasonable
terms, or at all.
ANY REDUCTION IN THE REGULATION OF CONTINUING EDUCATION AND TRAINING IN THE
HEALTHCARE INDUSTRY MAY ADVERSELY AFFECT OUR BUSINESS.
Our business model is dependent in part on required continuing education
and training for healthcare professionals and other healthcare workers resulting
from regulations of state and Federal agencies, state licensing boards and
professional organizations. Any change in these regulations which reduce the
requirements for continuing education and training for the healthcare industry
could harm our business.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF OUR INDUSTRY.
The stock market has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations, especially in the industry in which we operate, are beyond
our control. Regardless of our performance, this volatility could adversely
affect the market price of our common stock.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We have not allocated most of the net proceeds of this offering for
specific uses. Our management has broad discretion to spend the proceeds from
this offering in ways with which our shareholders may not agree. The failure of
our management to apply these funds effectively could result in unfavorable
returns, which could significantly harm our financial condition and could cause
the price of our common stock to decline.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR SHAREHOLDERS WILL CONTROL % OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, beneficially own
% of our outstanding common stock. These shareholders will be able to
significantly influence all matters requiring approval by our shareholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of our company and may
make some transactions more difficult or impossible to complete without the
support of these shareholders.
11
<PAGE> 15
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Tennessee corporate law and our charter and bylaws contain provisions that
could delay, defer or prevent a change in control of our company or our
management. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock. These
provisions:
- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors, without
prior shareholder approval, with rights senior to those of common stock;
- provide for a staggered board of directors, so that no more than three
directors could be replaced each year and it would take three successive
annual meetings to replace all directors;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
OUR COMMON STOCK HAS NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock and, following the offering, the trading market price of our common stock
may decline below the initial public offering price. The initial public offering
price will be determined by negotiations between us and the representatives of
the underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. In addition, an
active public market for our common stock may not develop or be sustained after
this offering.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since these investments will be at a substantially higher per
share price than they were for our existing shareholders. The dilution will be
$ per share in the pro forma net tangible book value of the common
stock from the initial public offering price. If additional shares are sold by
the underwriters following exercise of their over-allotment option, or if
outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution. As a result of this dilution, common
shareholders purchasing stock in this offering may receive significantly less
than the full purchase price that they paid for the shares purchased in this
offering in the event of a liquidation.
APPROXIMATELY , OR %, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, we will have outstanding shares
of common stock. The shares offered for sale through the
underwriters will be freely tradable unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters. Of the remaining
shares of common stock outstanding after this offering,
shares will be eligible for sale in the public market beginning
181 days after the date of this prospectus. The remaining shares
will become available at various times thereafter upon the expiration of
one-year holding periods. For a more complete discussion regarding when shares
of our common stock will become eligible for sale, see "Shares Eligible for
Future Sale." We also plan to register up to additional shares of
our common stock after this offering for issuance under our equity plans.
12
<PAGE> 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
13
<PAGE> 17
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock in this offering will be approximately $ million, assuming an initial
public offering price of $ per share and after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $ million.
We plan to use the net proceeds of this offering for general corporate
purposes, including for working capital and sales and marketing initiatives. We
may use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, services or products. As of the date of this
prospectus, we cannot specify with certainty the particular uses for the net
proceeds to be received upon the completion of the offering. Accordingly, our
management will have broad discretion in applying the net proceeds.
Pending such uses of the net proceeds as discussed above, we plan to invest
the net proceeds of this offering in short-term, interest-bearing, investment
grade securities, certificates of deposit or direct or guaranteed obligations of
the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently plan to retain future earnings, if any, to finance the growth and
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. We may incur indebtedness in the future which may
prohibit or effectively restrict the payment of dividends, although we have no
current plans to do so. Any future determination to pay cash dividends will be
at the discretion of our board of directors.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect (1) the issuance of 26,596 shares of
common stock for the acquisition of SilverPlatter Education, Inc. in July
1999; (2) the issuance of 225,000 shares of common stock upon the
exercise of options and 2,500 shares of common stock for services
provided by an outside consultant; and (3) the issuance of 582,550 shares
of series B preferred stock and 627,406 shares of series C preferred
stock; and
- on a pro forma as adjusted basis to give further effect to (1) the
conversion of $1,293,000 of notes payable-related party into 129,300
shares of series B preferred stock; (2) the conversion of all outstanding
shares of preferred stock into 3,580,373 shares of common stock effective
upon completion of this offering; and (3) the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and the application of the net
proceeds after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 3,967 $15,261 $
======= ======= ===
Notes payable-related parties, long-term debt-related party
and capital lease obligations............................. $ 1,714 $ 1,464 $
------- ------- ---
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized;
issued and outstanding: 1,991,647 shares, actual,
2,245,743 shares pro forma and shares
pro forma as adjusted.................................. $ 3,057 $ 3,501 $
Preferred stock, no par value; 5,000,000 shares
authorized............................................. -- -- --
Series A convertible preferred stock, issued and
outstanding: 76,000 shares actual, 76,000 shares pro
forma and 0 shares pro forma as adjusted............... 760 760
Series B convertible preferred stock, issued and
outstanding: 527,750 shares actual, 1,110,301 shares
pro forma and 0 shares pro forma as adjusted........... 5,128 10,953
Series C convertible preferred stock, issued and
outstanding: 0 shares actual, 627,406 shares pro forma
and 0 shares pro forma as adjusted..................... -- 6,274
Accumulated deficit......................................... (5,972) (5,972)
------- ------- ---
Total shareholders' equity................................ 2,973 15,516
------- ------- ---
Total capitalization...................................... $ 4,687 $16,980 $
======= ======= ===
</TABLE>
This table excludes the following shares:
- 915,616 shares of common stock issuable upon the exercise of outstanding
stock options with a weighted average exercise price of $2.04 per share;
- 3,084,084 additional shares reserved for issuance under our stock option
plan;
- 132,450 shares of common stock issuable upon the exercise of a warrant
issued to GE Medical Systems in connection with our entering into a
development and distribution agreement with them; and
- 221,300 shares of series B preferred stock in the aggregate issuable upon
the exercise of an option issued to each investor in our series A and B
preferred stock pursuant to the terms of their respective purchase
agreements.
15
<PAGE> 19
DILUTION
Purchasers of the common stock offered by this prospectus will suffer an
immediate and substantial dilution in the net tangible book value per share.
Dilution is the amount by which the initial public offering price paid by the
purchasers of the shares of common stock will exceed the net tangible book value
per share of common stock after the offering. As of June 30, 1999, our pro forma
net tangible book value after giving effect to the acquisition of SilverPlatter
Education, Inc. and the issuance of our common stock and our convertible
preferred stock in transactions subsequent to June 30, 1999 was a deficit of
approximately $ million, or a deficit of $ per share. Pro forma
net tangible book value per share represents the amount of our pro forma total
tangible assets less pro forma total liabilities, divided by the pro forma
shares of common stock outstanding as of June 30, 1999. After giving effect to
the conversion of notes payable-related party into series B preferred stock, the
conversion of all shares of our preferred stock into our common stock and the
sale of the shares of common stock offered in this offering, and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable, our pro forma net tangible book value as of June 30,
1999 would have been $ million, or $ per share. This represents
an immediate increase in pro forma net tangible book value to existing
shareholders of $ per share and an immediate dilution of $ per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at June 30,
1999................................................... $
Increase per share attributable to new investors..........
-------
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table summarizes, on a pro forma basis as adjusted as of June
30, 1999, the number of shares of common stock purchased from us, the estimated
value of the total consideration paid for or attributed to such common stock and
the average price per share paid by or attributable to (1) existing
shareholders, (2) shareholders converting the series A, B and C preferred stock
into common stock and (3) new investors purchasing shares in this offering at an
assumed initial offering price of $ per share, and before deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED
OR CONVERTED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 3,389,210 % $ 8,705,666 % $ 2.57
Converting preferred shareholders...........
New investors...............................
--------- --- ----------- ----
Total.................................. 100% $ 100%
========= === =========== ====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of June 30,
1999, there were options and warrants outstanding to purchase 1,560,331 shares
of common stock at a weighted average exercise price of $3.25 per share. If any
of these options or warrants are exercised, there may be further dilution to new
investors.
16
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus. The selected statement of operations data
presented below for the three-year period ended December 31, 1998 and the
balance sheet data at December 31, 1996, 1997 and 1998, are derived from our
audited financial statements that are included elsewhere in this prospectus. The
selected statement of operations data presented below for the two-year period
ended December 31, 1995 and the balance sheet data at December 31, 1994 and 1995
are derived from unaudited financial statements that are not included in this
prospectus. The statement of operations data for the six months ended June 30,
1998 and 1999 and the balance sheet data at June 30, 1998 and 1999 are
unaudited. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited interim results when read in connection with the audited financial
statements and notes to those statements. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 1999. In July 1999, we
acquired SilverPlatter Education, Inc. Please refer to the pro forma financial
statements and the audited financial statements of SilverPlatter Education, Inc.
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 159 $ 91 $ 556 $1,268 $ 1,716 $ 830 $ 1,113
Operating costs and expenses:
Cost of revenue.................... 161 204 475 870 1,057 578 791
Product development................ 76 144 142 294 443 183 765
Selling, general and administrative
expenses........................ 204 510 675 875 1,477 575 931
------ ------ ------ ------ ------- ------ -------
Total operating costs and
expenses................. 441 858 1,292 2,039 2,977 1,336 2,487
------ ------ ------ ------ ------- ------ -------
Loss from operations................. (282) (767) (736) (771) (1,261) (506) (1,374)
Other income (expense)............... (7) (44) (43) (189) (329) (141) (104)
------ ------ ------ ------ ------- ------ -------
Net loss............................. $ (289) $ (811) $ (779) $ (960) $(1,590) $ (647) $(1,478)
====== ====== ====== ====== ======= ====== =======
Net loss per share -- basic and
diluted............................ $(0.95) $(0.99) $(0.47) $(0.55) $ (0.90) $(0.37) $ (0.77)
====== ====== ====== ====== ======= ====== =======
Weighted average shares of common
stock outstanding.................. 303 821 1,659 1,760 1,760 1,760 1,923
====== ====== ====== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 62 $ 17 $ 29 $ 84 $ 51 $ 23 $ 3,967
Working capital (deficit)............. (203) (165) (604) (1,708) (2,854) (2,399) 2,254
Total assets.......................... 184 418 540 948 1,153 812 5,297
Long-term debt and capital leases, net
of current portion.................. -- 76 57 36 32 37 64
Shareholders' equity (deficit)........ (96) 103 (276) (1,236) (2,285) (1,883) 2,973
</TABLE>
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and operations should
be read in conjunction with the consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of many factors, including but not limited to, those
described under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Historically, we have generated our revenues primarily from licensing our
Training Navigator software, which we refer to as T.NAV, to healthcare
organizations and from the performance of custom multimedia development
services. We have established relationships with major healthcare institutions
that license our software or contract with us to develop custom multimedia
products in a CD-ROM or Web-based format. Clients who license our software pay a
one-time license fee for the software and may purchase training content modules
for an additional fee. We also provide upgrades, maintenance and technical
support for an annual fee. In March 1999, we launched our online continuing
education and training service, which uses T.NAV to deliver content over the
Internet on a transaction fee basis. In July 1999, we acquired selected assets,
assumed certain liabilities and hired all of the employees of SilverPlatter
Education, Inc., which owned a series of multimedia CME titles and operated Web
sites which marketed these products and provided other information to
physicians.
Revenues from T.NAV software license fees are recognized when the software
is delivered. Upgrade, maintenance and technical support revenues is accrued
over the term of the service period. We recognize multimedia development
revenues based on the percentage of a project that is completed. Revenues from
the delivery of our content over the Internet are recognized when goods or
services are purchased, typically on a transaction fee basis.
Historically, we have marketed T.NAV directly or licensed it to resellers
to re-brand and distribute under their private label. These resellers pay us a
percentage of net revenues on a monthly or quarterly basis recognized from the
distribution of T.NAV.
Currently, we generate revenues from delivery of our content over the
Internet on a transaction fee basis when healthcare professionals elect to
receive credit for viewing our content, or content licensed from a third-party,
through our Web site or the Web site of one of our distribution partners.
Healthcare professionals pay for receiving this credit with a credit card. The
costs of these sales are in the form of royalties we pay to third-party content
owners and distributors and costs we incur to develop content or convert content
from traditional media to a Web-enabled format.
We plan to generate revenues by marketing our Web-based services to
healthcare workers through healthcare organizations. Specifically, we will seek
to generate revenues from healthcare workers by marketing to their employers or
sponsoring organizations. The transaction fees for courseware resulting from
this marketing may either be paid by the employer or sponsoring organization or,
in the case of healthcare professionals, may be billed directly to the
individual. Our LSP model will allow us to host our system in a central data
center, therefore eliminating the need for costly onsite installations of our
software. Under the LSP model, revenues will be generated by charging for use of
our courseware on a per transaction basis, based on usage by the end user. In
addition, the LSP model will allow us to generate revenues from healthcare
organizations by entering into agreements for administration and hosting
services. We will recognize administration and hosting fees ratably over the
terms of these agreements.
To date, we have incurred substantial costs to develop our technologies,
create, license and acquire our content, build brand awareness, develop our
infrastructure and expand our business, and have yet to achieve significant
revenues. As a result, we have incurred operating losses in each fiscal quarter
since 1994. We expect operating losses and negative cash flow to continue for
the foreseeable future as we plan to significantly increase our operating
expenses to help expand our business. These costs could have a
18
<PAGE> 22
material adverse effect on our future financial condition or operating results.
We believe that period-to-period comparisons of our financial results are not
necessarily meaningful, and you should not rely upon them as an indication of
our future performance.
RESULTS OF OPERATIONS
REVENUES AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses apply
to the comparison of results of operations.
Revenues. Revenues currently consist primarily of sales of multimedia
development services for training modules and promotional materials for the
healthcare industry. Revenues also include licensing fees and royalties from
product sales of proprietary training software to healthcare companies as well
as transaction fees from sales of continuing education credit from content
delivered over the Internet. We expect that revenues in future periods will be
derived primarily from online services to healthcare professionals and
healthcare organizations.
Cost of Revenue. Cost of revenue consists primarily of salaries and
employee benefits, materials, and depreciation associated with the development
of interactive media projects as well as royalties paid to content providers.
Product Development. Product development expenses consist primarily of
salaries and employee benefits, depreciation, third-party content acquisition
costs, costs associated with the development of content and expenditures
associated with maintaining and enhancing our Web site and training delivery and
administration platform.
Selling, General and Administrative. General and administrative expenses
consist primarily of salaries and employee benefits, facility costs,
depreciation and fees for professional services. Sales and marketing expenses
consist primarily of salaries and employee benefits, bonuses, advertising,
promotions and related marketing costs.
Other Income/Expense. The primary component of other expense is interest
expense related to loans from related parties. The primary component of other
income is interest income related to interest earned on cash and cash
equivalents.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Revenues increased 34.1% from $830,000 for the six months ended
June 30, 1998 to $1,113,000 for the six months ended June 30, 1999. The increase
in revenues was due to increased sales and marketing of our T.NAV product and
multimedia development services as well as increased production capacity due to
an increase in the size of our production staff.
Cost of Revenue. Cost of revenue increased 36.9% from $578,000 for the six
months ended June 30, 1998 to $791,000 for the six months ended June 30, 1999.
The increase is primarily attributable to increased volume of business. As a
percentage of revenues, cost of revenue decreased from 69.6% for the six months
ended June 30, 1998 to 71.1% for the six months ended June 30, 1999.
Product Development. Product development expenses increased 318.0% from
$183,000 for the six months ended June 30, 1998 to $765,000 for the six months
ended June 30, 1999. The increase was primarily attributable to increased hiring
of production staff and the issuance of a warrant to purchase shares of our
common stock to GE Medical Systems in connection with entering into an agreement
pursuant to which GE Medical Systems will distribute some of our continuing
education and training content. We recognized product development expense of
$258,000 upon issuance of the warrant. As a percentage of revenues, product
development expenses increased from 22.0% for the six months ended June 30, 1998
to 68.7% for the six months ended June 30, 1999. The increase as a percentage of
revenues was due to significant upfront product development expenses incurred to
implement our online service,
19
<PAGE> 23
including salaries and employee benefits associated with increased content
conversion and development of new releases of our software and the issuance of
the warrant to GE Medical Systems. We anticipate significant additional product
development expenses in future periods due to salaries and employee benefits
associated with increased content conversion and development of online
administrative tools for our LSP model.
Selling, General and Administrative. Selling, general and administrative
expenses increased 61.9% from $575,000 for the six months ended June 30, 1998 to
$931,000 for the six months ended June 30, 1999. As a percentage of revenues,
selling, general and administrative expenses increased from 69.3% for the six
months ended June 30, 1998 to 83.6% for the six months ended June 30, 1999. The
increase was primarily due to increased personnel costs associated with new
employees and other employee compensation expenses and an increase in
advertising and marketing expenditures, professional service fees, and facility
expenses. We expect to incur significant selling, general and administrative
expenses as we hire additional personnel and increase our advertising and
marketing expenses to support our planned growth.
Other Income/Expense. Other expense decreased 26.2% from $141,000 for the
six months ended June 30, 1998 to $104,000 for the six months ended June 30,
1999. The decrease was primarily due to a conversion by a related party of
$1,250,000 of indebtedness into shares of series B preferred stock, which was
partially offset by an increase in interest expense on capital leases. In
addition, other income increased from $1,000 for the six months ended June 30,
1998 to $35,000 for the six months ended June 30, 1999, due to a higher average
net cash and cash equivalents balance as a result of our issuance of preferred
stock.
Net Loss. Net loss increased 128.4% from $647,000 for the six months ended
June 30, 1998 to $1,478,000 for the six months ended June 30, 1999 due to the
factors described above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased 35.3% from $1,268,000 in 1997 to $1,716,000
in 1998. The increase in revenues was driven in part by $166,000 in revenues
realized from the distribution of our T.NAV software through a newly added
reseller. Revenues also increased due to increased production capacity and
increased sales efforts.
Cost of Revenue. Cost of revenue increased 21.5% from $870,000 in 1997 to
$1,057,000 in 1998. The increase was primarily attributable to increased volume
of business. As a percentage of revenues, cost of revenue decreased from 68.6%
in 1997 to 61.6% in 1998. The decrease as a percentage of revenues was primarily
attributable to an increase in the proportion of development work performed
in-house and an increase in efficiencies in our development process.
Product Development. Product development expenses increased 50.7% from
$294,000 in 1997 to $443,000 in 1998. As a percentage of revenues, product
development increased from 23.2% in 1997 to 25.8% in 1998. The increase was
primarily due to increased product development costs associated with the
conversion of educational and training content to a Web-enabled format as well
as from the addition of production and technology personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased 68.8% from $875,000 in 1997 to $1,477,000 in 1998. As a
percentage of revenues, selling, general and administrative expenses increased
from 69.0% in 1997 to 86.1% in 1998. The increase was primarily due to an
expansion of our sales force, client services staff and senior management and
related recruitment fees and increased marketing, branding campaigns and support
cost.
Other Income/Expense. Other expense increased 74.1% from $189,000 in 1997
to $329,000 in 1998. The increase was primarily attributable to an increase of
$146,000 in interest expense due to additional related party loans incurred to
fund operations.
Net Loss. Net loss increased 65.6% from $960,000 in 1997 to $1,590,000 in
1998 due to the factors described above.
20
<PAGE> 24
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 128.1% from $556,000 in 1996 to $1,268,000 in
1997. The increase in revenues was driven primarily by increased production
capacity through an increase in personnel from 25 employees at the end of 1996
to 41 employees at the end of 1997. We also began to realize revenues from sales
of our T.NAV system in 1997.
Cost of Revenue. Cost of revenue increased 83.2% from $475,000 in 1996 to
$870,000 in 1997. The increase was primarily attributable to increased volume of
business. As a percentage of revenues, cost of revenue decreased from 85.4% in
1996 to 68.6% in 1997. The decrease as a percentage of revenues was primarily
due to an increase in the proportion of development work performed in-house and
an increase in the efficiencies in our development process.
Product Development. Product development expenses increased 107.0% from
$142,000 in 1996 to $294,000 in 1997. The increase in costs was primarily due to
increased variable expenses associated with the development of multimedia
content as well as from additional production and technology personnel. As a
percentage of revenues, product development decreased from 25.5% in 1996 to
23.2% in 1997.
Selling, General and Administrative. Selling, general, and administrative
expenses increased 29.6% from $675,000 in 1996 to $875,000 in 1997. The increase
was primarily due to an expansion of our sales force, client services staff and
senior management and related recruitment fees and increased marketing campaigns
and support cost. As a percentage of revenues, selling, general and
administrative expenses decreased from 121.4% in 1996 to 69.0% in 1997. The
decrease as a percentage of revenues was attributable to slower growth of our
sales force than the growth of our customer base.
Other Income/Expense. Other expense increased 339.5% from $43,000 in 1996
to $189,000 in 1997. The increase was primarily attributable to increased
interest expense due to additional related party loans incurred to fund
operations
Net Loss. Net loss increased 23.2% from $779,000 in 1996 to $960,000 in
1997 due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations largely through the
private placement of equity securities, loans from a related party and, to a
lesser extent, from revenues generated from custom development fees and product
sales.
Our current ratio at December 31, 1997, 1998 and June 30, 1999 was 0.2 to
1, 0.2 to 1 and 2.0 to 1, respectively.
Net cash used in operating activities was $705,000, $872,000 and $1.2
million for the years ended December 31, 1996, 1997 and 1998, respectively. Net
cash used in operating activities for the six months ended June 30, 1999 was
$1.1 million. Cash used in operating activities from January 1, 1996 through
June 30, 1999 was attributable to funding net operating losses and increases in
accounts receivable and prepaid expenses, which were partially offset by
increases in deferred revenues, accrued liabilities and accounts payable.
Net cash used in investing activities was $113,000, $240,000 and $209,000
for the years ended December 31, 1996, 1997 and 1998, respectively. Net cash
used in investing activities for the six months ended June 30, 1999 was
$175,000. Cash used in investing activities was for the purchase of property and
equipment.
Cash provided by financing activities was $831,000, $1.2 million and $1.4
million for the years ended December 31, 1996, 1997 and 1998, respectively. For
the six months ended June 30, 1999, cash provided by financing activities was
$5.2 million and was attributable to the issuance of $5.5 million of preferred
stock. As of June 30, 1999, our primary source of liquidity was $4.0 million of
cash and cash equivalents. As of this date, we had no bank credit facility.
21
<PAGE> 25
On August 23, 1999 we called the remainder of the commitments made pursuant
to a round of equity financing completed in April and May 1999. The total amount
raised under the remainder of these commitments was approximately $5.0 million.
Holders of series A preferred stock and series B preferred stock were also
granted an option to purchase an aggregate of 221,300 shares of our series B
preferred stock, which expires on October 15, 1999.
We raised an additional $6.3 million in connection with the sale of an
aggregate of 627,406 shares of our series C preferred stock in August and
September 1999.
In July and August 1999, a related party exercised options to purchase an
aggregate of 225,000 shares of common stock for $225,000.
As of September 30, 1999, we had approximately $14.0 million in cash.
Our indebtedness consists of a promissory note in the principal amount of
$1,293,000 payable to Robert A. Frist, Jr., our chief executive officer and
chairman of the board of directors. Interest is charged at the lesser of a
designated brokerage account rate and 10.5%. This note is payable in full or can
be converted into 129,300 shares of our series B preferred stock, at Mr. Frist's
option, upon completion of this offering. Mr. Frist has indicated to us his
intent to convert the note into shares of series B preferred stock.
We expect to incur significantly higher costs, particularly content
creation costs and sales and marketing costs, to grow our business. For 1999, we
expect total marketing costs, and related capital expenditures, to be
approximately $729,000, $273,000 of which had been expended through June 30,
1999.
We believe that the net proceeds from this offering, together with current
cash and cash equivalents and any cash generated from operations, will be
sufficient to meet anticipated cash needs for working capital, capital
expenditures and acquisitions for at least the 12 months following this
offering. Our growth strategy also includes acquiring companies that complement
our products and services. We anticipate that these acquisitions, if any, will
be effected through a combination of stock and cash consideration. Failure to
generate sufficient cash flow from operations or raise additional capital when
required during or following that period in sufficient amounts and on terms
acceptable to us could harm our business, results of operations and financial
condition.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 130, Reporting
Comprehensive Income, which is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The new rule requires that we classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. The adoption of SFAS No. 130 had no effect on our financial statements
contained in this prospectus.
In 1998, we adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires companies to report
selected segment information when certain tests are met. We have determined that
we operate in only one reportable segment meeting the applicable tests.
As of January 1, 1998, we adopted Statement of Position, or SOP, 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 establishes standards for reporting and presenting in a full set
of general purpose financial statements the costs incurred in the development of
internal-use computer software. Internal-use software is acquired, internally
developed, or modified solely to meet a company's internal needs without the
intent to market externally. The adoption of SOP 98-1 had no effect on our
financial statements contained in this prospectus.
As of January 1, 1998, we adopted SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 establishes standards for reporting and presenting
start-up costs in a full set of general purpose
22
<PAGE> 26
financial statements. Start-up costs, including organizational costs, are
expensed as incurred under this SOP. The adoption of SOP 98-5 had no effect on
our financial statements contained in this prospectus.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits -- an amendment of FASB
Statement Nos. 87, 88 and 106, which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The adoption of SFAS No. 132 had no
effect on our financial statements contained in this prospectus.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective as amended for fiscal
quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. We do not expect the adoption of SFAS No. 133
to have a material effect on our financial statements.
In December 1998, the American Institute of Certified Public Accountants,
or AICPA, issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. SOP 98-9 requires recognition
of revenue using the "residual method" in a multiple-element software
arrangement when fair value does not exist for one or more of the delivered
elements in the arrangement. Under the "residual method," the total fair value
of the undelivered elements is deferred and recognized in accordance with SOP
97-2. We are required to implement SOP 98-9 for the year ending December 31,
2000. We do not expect adoption of SOP 98-9 to have a material effect on our
financial statements.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates falling on or after January 1, 2000 from earlier dates. Many
software and computer systems used by businesses and governmental agencies may
need to be upgraded or replaced in order to correctly process dates beginning in
2000 and comply with Year 2000 requirements.
We are conducting a comprehensive review of both information technology and
non-information systems to ensure that they are, or prior to the end of 1999
will be, Year 2000 compliant. Significant information technology systems include
our production system, composed of the servers, networks and software that
comprise the underlying technical infrastructure that runs our business, and
various internal office systems. Our significant non-information technology
systems include our telephone systems, air conditioning and security system. Our
Year 2000 review project includes the following phases:
- conducting a comprehensive inventory of our internal systems and the
systems acquired or to be acquired by us;
- assessing and prioritizing any required remediation;
- remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems; and
- testing all remediated systems for Year 2000 compliance.
Based upon the results of our review to date, it appears that there are no
significant Year 2000 issues within our systems that would have a negative
effect on our ability to conduct business. In addition to assessing the
readiness of our systems, we have gathered information from, and have directly
communicated through written correspondence, telephone calls and in face-to-face
meetings with, our third-party systems and software vendors, as well as other
suppliers, to identify and, to the extent possible, resolve issues involving the
Year 2000 problem. Based on representations made to us by applicable suppliers,
we believe that the third-party software and systems that are material to our
business are Year 2000 compliant. However, we have limited or no control over
the actions of our third-party suppliers.
23
<PAGE> 27
Thus, while we expect that we will be able to resolve any significant Year 2000
problems with our systems, we cannot assure you that our third-party suppliers
will resolve all Year 2000 problems with their systems before the occurrence of
a material disruption to our business. Any failure of material third-party
suppliers to resolve Year 2000 problems with their systems in a timely manner
would have a negative effect on our ability to conduct business.
To date, we have spent approximately $90,000 on Year 2000 compliance issues
and expect to incur approximately an additional $30,000 in connection with
evaluating and addressing these issues. We expect to pay for these expenses from
our working capital. Most of our expenses have related to operating costs
associated with the time spent by employees and consultants in the evaluation
process and Year 2000 compliance matters generally. These expenses, if higher
than anticipated, could have a negative effect on our financial condition.
We expect to identify and resolve by October 15, 1999 all Year 2000
problems that could harm our business, financial condition or operating results.
We cannot assure you, however, that we will achieve full Year 2000 compliance
before the end of 1999. A failure of our computer systems or the failure of our
suppliers or customers to effectively upgrade their software and systems for
transition to the Year 2000 could harm our business, financial condition and
results of operations. In addition, we cannot be certain that governmental
agencies, utility companies, Internet access companies, third-party service
providers and others outside of our control will be Year 2000 compliant. The
failure by these entities to be Year 2000 compliant could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, that could prevent us from delivering our services to our
customers, decrease the use of the Internet or prevent users from accessing our
services, any of which could have a material adverse effect on our business,
financial condition and results of operations.
We completed an acquisition during 1999 and are finalizing the integration
of the systems of the acquired business into our operations. Those systems are
included in our Year 2000 review. For any other acquisitions that we may
complete prior to the end of 1999, we will evaluate the extent of the Year 2000
problems associated with the potential acquisitions and the cost and timing of
remediation. This work will be done as part of the due diligence process as well
as post-acquisition integration. We cannot assure you, however, that the systems
of any acquired business will be Year 2000 compliant when we acquire them or
will be capable of timely remediation.
As discussed above, we are engaged in an ongoing Year 2000 assessment. We
have taken the results of our assessment into account in determining the nature
and extent of our contingency plans. We have established a contingency plan to
remedy issues for a key element of our production system. If the planned
remediation is not successful by November 15, 1999 we will execute our
contingency plan. This plan will involve outsourcing the service and could be
implemented within a reasonable time frame.
MARKET RISK
We are exposed to market risk from changes in interest rates. We do not
believe that we have any foreign currency exchange rate risk or commodity price
risk.
As of December 31, 1998, we had solely fixed rate debt. Debt instruments
with both fixed and variable interest rates carry a degree of interest rate
risk. Fixed rate debt may have its fair value affected if interest rates change,
and variable rate debt may incur a higher cost if interest rates rise.
At December 31, 1998 and June 30, 1999, the fair value of our total fixed
rate debt was estimated to be $2.9 million and $171,000, respectively, based on
our current incremental borrowing rate for similar types of borrowing
arrangements. At this borrowing level, a hypothetical 10% decrease in interest
rates on the fixed rate debt would increase the fair value of the debt by
approximately $279,000 and $2,200, respectively. The amount was determined by
considering the effect of the hypothetical interest rate decrease on our
borrowing cost at December 31, 1998 and June 30, 1999 borrowing levels.
Subsequent to December 31, 1998, we converted approximately $1.5 million of
the notes payable -- related party to equity. We converted the interest rate
payable on the remaining note payable from a fixed
24
<PAGE> 28
interest rate to a variable interest rate. At June 30, 1999, the fair value of
our total variable debt was estimated to be $1.5 million, which approximated
carrying value based on our current incremental borrowing rates for similar
types of borrowing arrangements. At this borrowing level, a hypothetical 10%
adverse change in interest rates on the variable rate debt would increase
interest expense and increase net loss by approximately $85,000. The amount was
determined by considering the impact of the hypothetical interest rate increase
on our borrowing cost at the June 30, 1999 borrowing level.
At June 30, 1999, we had $4.0 million of cash and cash equivalents, which
we have invested on a short-term basis. At this investment level a hypothetical
10% decrease in the interest rate would decrease interest income and increase
net loss by approximately $18,000.
The above market risk discussion and the estimated amounts presented are
forward-looking statements of market risk assuming the occurrence of certain
adverse market conditions. Actual results in the future may differ materially
from those projected as a result of actual developments in the market.
25
<PAGE> 29
BUSINESS
OVERVIEW
We are pioneering a comprehensive Web-based solution to the continuing
education and training needs of the healthcare community utilizing our
proprietary technology. Continuing education and training for healthcare workers
is often mandated by federal, state and professional licensing agencies. We
currently provide one of the largest online libraries of continuing education
and training content for doctors, nurses, allied health professionals and other
healthcare workers through our network of distribution partners, which reaches
more than 400 health Web sites, 2,000 hospitals and clinics and 400,000
healthcare professionals. We are developing and implementing a comprehensive set
of online administrative and management tools which we will host on an ASP basis
and which will enable healthcare administrators to configure training to meet
the precise needs of different groups of employees, modify training materials
and monitor the results of training. We believe that our comprehensive online
solution will result in lower costs and enhanced access in comparison to
traditional continuing education and training, provide a superior user
experience in terms of convenience and breadth of content, increase distribution
opportunities for providers of content and improve the efficiency of licensing
content for distributors.
Through strategic relationships with our content partners, including
Vanderbilt University Medical Center, Duke University Medical Center, The
Cleveland Clinic Foundation and Challenger Corporation, we have amassed over
1,000 hours of continuing education and training content throughout a range of
medical specialities. We currently distribute over 675 hours of this continuing
education and training content to healthcare professionals and other healthcare
workers through our network of strategic distribution partners, which includes
GE Medical Systems, Medsite.com, IDX.com, PhyCor and HealthGate. We plan to
leverage our existing relationships with premier healthcare institutions and our
position as a neutral content provider to extend our position as a leading
aggregator of continuing education and training content for the healthcare
industry.
We launched our online continuing education and training service in March
1999. We were incorporated in 1990 as NewOrder Media, Inc. and began developing
multimedia presentations and interactive presentation systems for a variety of
businesses, with the majority of our customer base in the healthcare industry.
In 1993, we began development of our education management system that serves as
the application for our online continuing education and training service, and in
1996 we began deploying this application as a network and stand-alone product.
We are currently focusing on providing transaction-based services delivered over
the Internet rather than providing installed software.
We believe that our combination of high quality continuing education and
training content and the reach of our distribution partnerships positions us to
be a leading provider of comprehensive Web-based solutions to the continuing
education and training needs of the healthcare community.
INDUSTRY BACKGROUND
Continuing Education in the Healthcare Industry
The increase in the number of healthcare professionals, new therapeutic
treatments and procedures, and innovations in medical technology have all led to
greater demand for information exchange. To keep abreast of the latest
developments and to meet licensing and certification requirements, healthcare
professionals must obtain continuing education. In addition, government
regulations and accrediting bodies require employers to provide healthcare
professionals and other healthcare workers with training on an increasing number
and variety of topics. Simultaneously, the healthcare industry has come under
intense pressure to reduce costs as a result of reductions in government
reimbursement and increased participation of patients in managed care programs.
We believe these pressures in the industry have led to an increased demand for
high quality, low cost continuing education and training solutions.
Healthcare services in the U.S. are delivered by over 600,000 active
physicians, 2.3 million nurses, 5.0 million allied healthcare professionals and
2.4 million non-clinical healthcare workers. The healthcare industry spends over
$6.0 billion annually on continuing education and training, including over $3.0
billion
26
<PAGE> 30
on continuing medical education, or CME, for physicians and continuing education
units, or CEU, for nurses. According to a recent study, healthcare workers
receive more training than workers in any other industry, with approximately 82%
of all healthcare workers receiving some kind of continuing education or
work-related training every year.
Regulations administered by various state and Federal agencies require
continuing education and training for healthcare professionals and other
healthcare workers. Continuing education and training typically consist of
educational programs that bring healthcare workers up to date in a particular
area of knowledge or skills. State licensing boards, professional organizations
and employers require physicians and selected healthcare professionals to
fulfill continuing education and training requirements and to certify annually
that they have accumulated a minimum number of CME or CEU hours to maintain
their licenses. For physicians, these licensing boards require up to 50 CME
hours per year. In addition, many specialty boards, including the American Board
of Family Practice and the American Board of Surgery, require doctors to obtain
CME hours that are accredited by these organizations to maintain their specialty
certification. Other agencies, including the Occupational Safety and Health
Administration, or OSHA, the Healthcare Financing Administration, or HCFA, and
the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO,
require hospitals and other healthcare providers to provide employees with
various types of workplace safety training.
The continuing education and training market in the healthcare industry is
highly fragmented, with thousands of providers offering a limited selection of
programs on specific topics. There are over 600 providers of CME accredited by
the Accreditation Council for Continuing Medical Education, or ACCME. The sheer
volume of healthcare information available to satisfy continuing education
needs, rapid advances in medical developments and the time constraints that
healthcare professionals face make it extremely difficult to stay current and to
quickly and efficiently access the continuing education content most relevant to
their practice or profession. Historically, healthcare professionals have
received continuing education and training through offline publications, such as
medical journals and CD-ROMs, and by attending conferences and seminars. In
addition, other healthcare workers and pharmaceutical and medical equipment
manufacturers' sales and internal regulatory personnel usually fulfill their
education and training needs through instructor-led programs from external
vendors or internal training departments. Although these existing approaches
satisfy continuing education and training requirements, they are limited in the
following ways:
- Seminars and instructor-led training may be inconvenient and costly to
attend and may result in lost productivity.
- Continuing education and training courses offered locally may be limited
in terms of breadth of offering and timeliness and may be costly to
produce on a per user basis.
- Administrators find it difficult to review and assess results, track
employee compliance with certification requirements and respond to the
effectiveness of education and training programs.
The inefficiencies inherent in traditional methods of providing continuing
education and training, combined with the time constraints and the increased
cost pressures in the healthcare industry, have prompted healthcare
professionals and organizations to improve information exchange and consider
alternative training methodologies.
Growth of the Internet
The Internet has emerged as a mass communications and commerce medium that
enables millions of people worldwide to share information, communicate and
conduct business. International Data Corporation, or IDC, estimates that the
number of Internet users in the U.S. will increase from approximately 80.8
million in 1999 to approximately 177 million by the end of 2003. Increasingly,
the Internet is being used for electronic commerce between businesses. Forrester
Research, Inc. estimates that the volume of electronic commerce among businesses
over the Web in the U.S. will increase from $109 billion in 1999 to more than
$1.3 trillion in 2003.
27
<PAGE> 31
The Internet allows content delivery in a manner not possible through
traditional broadcast and print media. Although these traditional media can
reach large audiences, they generally are limited to a specific geographic area,
can deliver only limited content and are not effective for quickly distributing
customized content. The Internet, on the other hand, offers immediate access to
dynamic and interactive content, enables the content to be customized toward a
specific audience of users and provides instantaneous and targeted feedback. As
a result, the Internet has become an important alternative to traditional
broadcast and print media, enabling content providers to aggregate vast amounts
of information and to organize and deliver that information in a personalized,
easy-to-use and cost-effective manner. As bandwith availability continues to
increase, the delivery of full-motion video will become more widespread,
allowing for richer content. These characteristics, combined with the rapid
growth of the Internet, have created a new channel to distribute and access
timely and dynamic content.
The Internet is also enabling businesses to eliminate the burden of buying
and running expensive and high maintenance computer systems and software
packages by outsourcing these services to a centralized provider. An increasing
number of businesses are accessing applications over the Internet rather than
through dedicated private networks. New classes of software companies, including
ASPs, are providing a growing array of traditionally packaged software
applications over the Internet on a per transaction or subscription basis. ASPs
are attractive as they allow companies to focus on their core business by
eliminating the need to maintain and update large-scale software applications,
and reducing the capital expenditures required to keep up with leading
technologies. We believe that as more companies have integrated the Internet
into their daily work flow, the demand for outsourced packaged software has
significantly increased.
Convergence of the Internet and Online Healthcare Education Services
Participants in the healthcare industry are increasingly relying on the
Internet for communication and the delivery of information. There are currently
over 10,000 Web sites providing healthcare and healthcare-related information.
Many of these Web sites cater to the needs of healthcare professionals and are
seeking to become an integral part of the delivery of healthcare services.
Recently, an increasing number of traditional offline services in the healthcare
industry have begun to migrate online, including insurance enrollment
verification, prescription writing, supply purchases, storage and accessing of
medical records and claims filing and processing. In addition, physicians are
using the Internet as a valuable tool to access the latest medical information.
According to a June 1998 PERQ/HCI report, over 50% of physicians accessed
medical information online. In addition, we believe healthcare professionals and
other healthcare workers are increasingly able to access the Internet from work.
We believe the healthcare continuing education and training market is
particularly well-suited for business-to-business e-commerce and online services
because of the high degree of fragmentation among the healthcare community, the
industry's dependence on a high volume of information exchange and the
inefficiencies inherent in the existing methods of information exchange. The
emergence of the Internet enables the delivery of a greater breadth and depth of
continuing education and training for healthcare professionals and other
healthcare workers more cost effectively and conveniently than traditional
methods. The Internet allows for the aggregation and delivery of large amounts
of varied and highly specific content. Web-based delivery allows healthcare
professionals and other healthcare workers a significant degree of scheduling
and geographic flexibility in meeting their continuing education and training
requirements, saving them and their employers travel expenses and limiting
productivity losses.
THE HEALTHSTREAM SOLUTION
We are pioneering a comprehensive Web-based solution to the continuing
education and training needs of the healthcare community utilizing our
proprietary technology. We bring authors and publishers of continuing education
and training content, including both commercial publishers and educational
institutions, together with end users, which include healthcare professionals,
other healthcare workers and healthcare organizations, through our network of
distribution partners, including health Web sites, healthcare equipment vendors
and healthcare providers. We are also developing a comprehensive set of
28
<PAGE> 32
online administrative and management tools, based on our existing installed
software products, which we will host on an ASP basis and which will enable
healthcare administrators to configure training to meet the precise needs of
different groups of employees, modify training materials and monitor the results
of training. We believe our services will provide a comprehensive online
continuing education and training solution for our end users, distribution
partners and content partners.
Value to End Users
Comprehensive Continuing Education and Training Offerings. We offer
healthcare professionals and other healthcare workers a centralized location to
satisfy their continuing education and training needs. We provide one of the
largest online libraries of continuing education and training content covering a
range of medical specialties. We organize and list our course offerings
according to profession and specialty. In addition, our course listings can be
targeted to specific audiences and interests. Our content comes from a broad
range of leading medical education institutions, commercial providers and
professional groups such as Vanderbilt University Medical Center, Duke
University Medical Center, The Cleveland Clinic Foundation and Challenger
Corporation.
Cost-Effective Continuing Education and Training. We believe our online
solution will reduce the cost of meeting continuing education and training
requirements to the healthcare community. By eliminating the need for travel and
expensive in-house programs, we estimate that we can significantly reduce the
cost of continuing education and training. Our end users pay for our services on
a per transaction and/or subscription basis, eliminating the need for
substantial up-front expenditures.
Convenient Access and Compelling User Experience. We offer healthcare
professionals and other healthcare workers a convenient, efficient and easy to
use system. Our online service allows our end users the freedom to utilize our
services when it is convenient for them. Users of our service have immediate
access to a broad selection of continuing education and training programs and
instantaneous and targeted feedback from anywhere there is an Internet
connection, any time, day or night. We provide course selection and registration
interfaces that make it simple for healthcare professionals to find, enroll in
and purchase the educational programs they are seeking. In addition, upon
completion we enable users to print certificates of completion to submit to
regulatory authorities. In the event a user has a question, they can either call
one of our customer service representatives or communicate with a representative
through an online live chat technical support service.
Convenient and Cost-Effective Access to and Administration of Education and
Training Services for Healthcare Providers. We will offer organizations which
employ healthcare workers the ability to provide access to high quality content
on a cost-effective basis as a means of providing for the continuing education
and training needs of their employees. Currently, these organizations often pay
for the cost of meeting continuing education and training requirements. Our
services allow these organizations to contribute to and enhance the content
provided through our service and to configure training to meet the specific
needs of different groups of employees. In addition, we plan to provide
administrators with the ability to track compliance with certification
requirements and measure the effectiveness and results of training.
Value to Distribution Partners
Comprehensive Continuing Education and Training Solution. We offer our
distribution partners a comprehensive online continuing education and training
solution that includes our software platform and one of the largest online
libraries of continuing education and training content. Most of our distribution
partners provide online access to continuing education and training as an
ancillary service to their core businesses. To drive traffic to their Web sites,
our distribution partners want to provide their online users with a compelling
continuing education and training experience. Our comprehensive solution
delivers these services to our distribution partners without the need to
purchase or create content, maintain customer service for continuing education
and training, or purchase, install or develop specialized delivery software. We
also create customized programs to meet our partners' specific needs.
29
<PAGE> 33
Premier Healthcare Content. We offer our distribution partners access to
content from premier healthcare organizations through our established
relationships with medical education and professional institutions and
commercial publishers such as Vanderbilt University Medical Center, Duke
University Medical Center, The Cleveland Clinic Foundation and Challenger
Corporation. We have the exclusive right to distribute some of these
institutions' content online. Our relationships with these organizations will
allow our distribution partners to distinguish themselves from their competitors
by providing high quality continuing education and training content.
Substantial Recurring Traffic. We offer our distribution partners a
predictable source of online traffic due to the recurring nature of regulated
continuing education and training requirements. Physicians and nurses are
required to complete a certain amount of continuing medical education every
year. Allied healthcare professionals and other healthcare workers may also be
required by their employers or regulatory agencies to complete relevant
continuing education and training annually. We believe these users will visit
Web sites that provide a convenient and compelling experience to meet their
continuing education and training requirements. Because our system enables our
distribution partners to store, track and generate reports about regulatory
requirements and completed coursework, they can become a repository of a
healthcare professional's continuing education and training data, creating a
compelling relationship between themselves and the healthcare professional. In
addition, we believe visits by online users accessing our service through one of
our distribution partners' Web sites should be substantially longer than a
typical online experience due to the nature of our product offering. This
recurring and "sticky" base of traffic will complement the other services
provided by our distribution partners.
Value to Content Partners
Compelling Distribution Channel. We believe we offer our content partners
the largest online distribution channel, which is expected to reach 400 health
Web sites, 3,000 hospitals and 400,000 healthcare professionals. Through our
distribution channels, our content partners can realize new product sales by
targeting a broader audience than they could on their own.
Comprehensive Outsourcing Solution. By providing a comprehensive
conversion and distribution solution, we enable our content partners to focus on
their core competency of producing and authoring content and to reallocate
resources they may have used to develop their own delivery systems and
distribution partnerships. In addition, our online solution will provide content
partners access to valuable comparative data about customer use, demographic
characteristics and response to their content offerings. The data will also
allow our content partners to assess how users perform on their content
offerings, which allows our partners to refine their materials.
Significant Expertise in Content Conversion. We offer publishers and
authors of continuing education and training content our experience in producing
online materials for the healthcare industry. We provide customers with a
complete set of proprietary tools which enables them to quickly and
inexpensively develop online courseware. Our template-driven development process
allows courseware to be produced at a lower cost. For example, we have developed
several successful new electronic products, including hybrid CD-online textbooks
developed for leading traditional medical publishers.
GROWTH STRATEGY
Our objective is to be the leading provider of complete Web-based
continuing education and training solutions for the healthcare community. We
plan to achieve this objective by pursuing the following strategies.
Expand and Enhance Our Online Continuing Education and Training
Library. We plan to expand our online continuing education and training library
through proprietary development and licensing arrangements. We also plan to grow
our library through acquisitions, such as our recently completed acquisition of
SilverPlatter Education, Inc., a provider of CD-ROM and Web-based CME for
physicians. We plan to use our existing relationships with premier healthcare
institutions and our position as a neutral content provider to strengthen our
position as a leading aggregator of continuing education and training
30
<PAGE> 34
content for the healthcare industry. Our strategy is to acquire a large
collection of courses across multiple clinical education and training topics and
then to supplement those acquired courses with courses licensed from other
content providers on an exclusive or non-exclusive basis. We believe this
strategy is the most cost-effective and efficient way to create a substantial
barrier to entry for other prospective providers of online continuing education
and training content.
Develop Strategic Relationships to Enhance Distribution. We have strategic
relationships with a network of distribution partners which is expected to reach
more than 400 health Web sites, 3,000 hospitals and 400,000 healthcare
professionals. We plan to increase our distribution reach and market share
through developing additional strategic and distribution relationships. We
believe that potential distribution partners will be attracted to our position
as a neutral content provider, the recurring nature of continuing education and
training requirements and the time a typical user of our service spends on our
Web site or one of our distribution partners' Web sites. We are primarily
pursuing distribution relationships with three main groups: Web sites that
target healthcare professionals; healthcare providers, such as hospitals and
clinics, that provide continuing education and training content to their
professionals and other healthcare workers; and pharmaceutical and equipment
manufacturers that promote their products and services to healthcare
professionals and train their sales forces.
Implement a Focused Branding Strategy. We plan to develop HealthStream as
the leading brand for online continuing education and training solutions in the
healthcare community. To achieve this objective, we will market our HealthStream
brand to end users, leading authors and publishers of continuing healthcare
education content and leading health Web sites, healthcare equipment vendors and
healthcare providers. We will not attempt to achieve widespread consumer
recognition outside of the healthcare community. Instead, we will seek to
establish our brand among our targeted group of end users and potential content
and distribution partners in the healthcare community to drive not only sales to
these end users but increased adoption by content and distribution partners. In
marketing directly to these potential partners, we will focus on our ability to
provide our content partners with compelling distribution channels and to
provide our distribution partners with premier content from a broad range of
sources. In addition, we will continue to focus on generating additional brand
equity through co-branding arrangements with our distribution partners.
Enhance Online Product Offerings Through Learning Service Provider
Model. We plan to offer an online solution that allows organizations to provide
access to our continuing education and training services through an ASP-type
approach, which we refer to as our LSP model. Under the LSP model, our training
software is hosted in a central data center that allows end users Web-based
access to our continuing education and training services, eliminating the need
for onsite installations of software. Our LSP model also includes a set of
administrative and management tools which enable administrators to configure and
modify training materials and monitor training expenses. We plan to leverage the
existing functionalities of our training software that is installed at more than
250 hospitals and clinic locations, including facilities owned and operated by
Gambro Healthcare, Columbia/HCA Healthcare Corporation and The Cleveland Clinic
Foundation. We plan to transition those organizations to our LSP model, under
which they will begin to pay for these services on a per transaction or
subscription basis, eliminating the need for upfront capital expenditures. By
reducing capital outlays, we believe that selling our continuing education and
training solution as a service will accelerate customer purchase decisions and
increase adoption among new customers.
Expand Multiple Revenue Sources. We plan to leverage the recurring nature
of our end user visits by providing additional products and services. We believe
the demographics of our audience and our high-quality content offerings provide
significant opportunities to develop multiple sources of revenue. In addition to
our transaction-based courseware sales, we plan to generate e-commerce revenues
from direct and indirect sales of related continuing education and training
products. We are also developing products that capitalize on our ability to
gather data regarding users of our service and we plan to expand our ability to
capture advertising and sponsorship revenue from pharmaceutical and medical
equipment companies as well as healthcare providers.
31
<PAGE> 35
HEALTHSTREAM SERVICES
We provide our complete Web-based continuing education and training
services to two types of end users in the healthcare community: individual
healthcare professionals and healthcare organizations.
Services for Healthcare Professionals
Most healthcare professionals are responsible for meeting their own
continuing education requirements. We enable these healthcare professionals to
meet their continuing education requirements by obtaining credit through use of
our online courseware. We deliver our online courseware to healthcare
professionals through multiple, co-marketed Web sites offered in partnership
with health Web sites, academic and medical institutions, pharmaceutical and
equipment manufacturers and healthcare providers. Healthcare professionals and
other healthcare workers can sign up to become registered users of our service
after accessing our log-in screen at our or any one of our distribution
partners' Web sites. Each of these Web sites is based upon our standard template
but is customized to match the look and feel of the Web site of the referring
distribution partner. Our services for healthcare professionals include:
Online Courseware. The online courseware available through our network of
co-branded Web sites and our HealthStreamUniversity.com Web site is targeted to
healthcare professionals and includes primarily CME and CEU accredited content.
We organize our offerings on these Web sites by profession and specialty. The
content available from our library can be targeted to the specific interests of
a distribution partner's audience. Users access our catalog of courseware and
may select those offerings they wish to view. Users are guided through the
courses, usually in the form of a series of lessons and quizzes. Upon successful
completion of a course, the user is given the option of receiving continuing
education credit. If the user elects to receive credit, a printable certificate
will be issued. We acquire, license and develop our course content from and in
partnership with a broad range of commercial publishers and educational
institutions. To augment our library of courseware, we work with healthcare
organizations, publishers and authors of healthcare content to convert their
continuing education courses and materials from traditional media to a
Web-enabled format. In some cases, we retain partial ownership and resellers'
rights to this courseware.
Webcast Events. We offer both live and pre-recorded Webcasts of medical
procedures, the viewing of which may be credited toward CME requirements. These
Webcast events generally consist of the presentation of an edited streaming
video of a medical procedure followed by a live discussion that includes the
physician who performed the procedure and other leading physicians in the field.
In addition, our Webcast events may be followed by a related program in the form
of interactive courseware which may be completed for continuing education
credit. The Webcast event may be co-branded with the sponsors' name and the
sponsor can underwrite the fee for a certain number of users to participate
online.
E-Commerce Offerings. We plan to offer products and services that
complement our online continuing education and training courses and link sales
of our courseware to related books, videotapes, audio tapes, and other
educational and reference products produced by our content partners. We will
offer these products through affiliate programs with selected e-commerce
partners. In addition, we plan to provide online registration for live seminars
and conduct online surveys of our registered users on a contract basis for
pharmaceutical and medical equipment vendors and other healthcare organizations.
Services for Healthcare Organizations
Healthcare organizations are responsible for providing both government
mandated and internally required training to their employees. We are developing
our LSP model to enable these healthcare organizations to provide, assess and
manage this training process. Under our LSP model, our online systems are hosted
in a central data center that provides administrative access to our customers
through Web-based reporting and management tools, rather than through software
that is installed and maintained at the customer's site. We will bill our
customers on a per transaction and/or subscription fee basis, enabling them to
treat their investment in online continuing education and training as an
operating expense rather than a capital expense. We anticipate that eliminating
the need for a capital outlay may shorten the
32
<PAGE> 36
sales cycle to these customers. In addition, our hosted LSP service is scalable
to meet the need of healthcare organizations to monitor and administer the
continuing education and training needs of large and geographically dispersed
employee bases. Our services for healthcare organizations include:
Online Courseware. The courseware we provide under our LSP model will
primarily focus on mandated training content. In addition, employers may make
some CME and CEU content from our library available to their professional
employees. Most end users accessing the LSP courseware will be employees seeking
to fulfill training requirements established by outside agencies or their
employers. We are developing and converting this training content in partnership
with authors and publishers. Employees will select courses from among a list
determined by their employer.
Administrative and Management Tools. Our administrative and management
tools will be used by human resources, training and management personnel to
manage curriculum and employee population training performance data. The
administrator software will be used to configure continuing education and
training requirements, enter or modify training materials (lessons, quizzes,
exams, etc.), define groups of users and the criteria that users must meet to be
included in groups, and print reports about the resulting continuing education
and training. Our administrative and management tools will allow administrators
to organize and customize our library of courseware to suit the precise needs of
different groups of employees within the organization. In a hospital, for
example, doctors, nurses, technicians and housekeeping staff would each
automatically be assigned appropriate curriculum based on their job profiles. In
addition, our system will provide comprehensive tools for administrative
personnel using our system to manage their employees' training performance data.
Content Conversion and Development. Many healthcare organizations provide
their employees with organization-specific training. We have full-service
capabilities to convert existing course materials to a Web-enabled format or
develop custom courseware for these healthcare organizations. Our development
group includes instructional designers, scriptwriters, multimedia designers,
graphic artists, audio and video engineers, programmers, and project managers.
Our ability to market courseware developed for one healthcare organization to
our broad base of end users provides these healthcare organizations the
opportunity to offset their development costs through courseware sales
royalties.
STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We have recently entered into a number of strategic relationships with
content and distribution partners and plan to continue to pursue additional
strategic relationships. We believe that these strategic relationships along
with the acquisition of complementary businesses will enable us to increase our
course offerings, expand our product distribution and increase our brand
awareness. Selected content and distribution partners include:
Content Partners
Vanderbilt University Medical Center. In July 1999, we entered into an
agreement with Vanderbilt University Medical Center to design, create and
distribute online continuing education courses authored by Vanderbilt's
physicians and nurses. Under the terms of the agreement, we will serve as an
Internet distributor and marketer for courses developed with Vanderbilt's
Schools of Medicine and Nursing for a term of four years. Vanderbilt may also
provide us accreditation certification for additional courses developed by us
with their assistance.
Duke University Medical Center. In July 1999, we entered into an agreement
with Duke University Medical Center to design, create and distribute
interactive, Web-enabled CME courses for physicians in several specialties. We
are in the process of developing these courses and we will distribute them
through our online continuing education and training service. We are in active
discussions with Duke regarding developing additional CME courses under a new
agreement.
The Cleveland Clinic Foundation. In June 1999, we entered into an
agreement with The Cleveland Clinic Foundation, a leading research and medical
institution, to license its prestigious Intensive Review of
33
<PAGE> 37
Internal Medicine Course for online publication. This course includes CME
content and provides physicians a complete board preparation review through
lectures from some of the country's leading internists. In addition, in March
1999, we entered into a separate agreement with The Cleveland Clinic Foundation
under which they licensed our training software for use over their intranet to
train over 10,000 employees.
Challenger Corporation. In December 1998, we signed an agreement to
convert Challenger's entire library of accredited CME materials from a CD-ROM to
a Web-enabled format. This agreement also gives us the exclusive right to resell
their content on the Internet.
Distribution Partners
GE Medical Systems. In June 1999, we entered into an agreement with GE
Medical Systems, one of the world's leading manufacturers of diagnostic imaging
equipment, under which we will provide our online continuing education and
training service for GE Medical Systems Web sites. In addition to our content
development and online application development services, we will assist GE
Medical Systems in content conversion and description and will act as a reseller
of their content through our distribution partners. GE Medical Systems, through
its broadcast Training-in-Partnership, or TiP-TV, service, provides satellite
broadcast training services into over 1,600 hospitals.
Medsite.com. In June 1999, we entered into an agreement with Medsite.com,
a leading provider of medical books on the Internet, to be the provider of
continuing education for Medsite.com's MedUniversity.com. Our courseware will be
strategically linked to Medsite.com's catalog of medical books. In addition, we
will have access to Medsite.com's database of over 300,000 physicians and other
health professionals.
IDX.com. In September 1999, we entered into an agreement with IDX.com to
be the provider of continuing education on IDX.com's Physician Homebase for a
term of three years. IDX.com will deliver comprehensive Internet-based knowledge
management services for physicians, healthcare workers and patients. IDX.com's
parent company, IDX Services Corporation, is the provider of healthcare
information solutions at more than 1,650 customer sites, serving 118,000
physicians nationwide.
PhyCor. In March 1999, we entered into an agreement with PhyCor, the
nation's leading physician practice management company, to be the exclusive
provider of CME for PhyCor Online, the company's private intranet. PhyCor Online
reaches over 24,000 physicians who have access to the system through their
relationship with PhyCor.
HealthGate. In September 1999, we entered into agreements with HealthGate
Data Corp. through which we will provide our online continuing education and
training services to hospital and health system Web sites and intranets that use
HealthGate's suite of healthcare content products.
Recent Acquisition
SilverPlatter Education. We recently acquired selected assets, assumed
certain liabilities and hired all of the employees of SilverPlatter Education,
Inc., a leading provider of CD-ROM and Web-based CME for physicians. The
acquisition of SilverPlatter Education provides us with access to additional
online CME content and expertise in developing this content. In addition,
SilverPlatter Education is certified to provide accreditation for CME courses,
allowing us to internally develop and certify our own courseware. We are in the
process of integrating SilverPlatter Education's operations and employees, which
are located in Boston.
SALES AND MARKETING
As of September 30, 1999, we had a sales force of seven individuals with an
average of over seven years of healthcare sales experience. Our sales team
continues to focus on selling our continuing education and training service to
hospitals and health networks, and we are in the process of transitioning these
customers to our online service. Our sales team also targets pharmaceutical and
medical equipment
34
<PAGE> 38
vendors for sponsorship opportunities and courseware development. We plan to
increase our sales and marketing team to focus on marketing our LSP model to new
and existing customers.
Although our historical marketing efforts have been limited by our
financial resources, we plan to launch a branding and advertising campaign
focused on building awareness of our products and services to all of our market
segments. We have hired a public relations firm to assist our three person
marketing team in building brand awareness, especially via concept
advertisements aimed at larger healthcare organizations. The campaign will
consist of advertising in trade journals and industry publications, Web
advertising, direct mail, trade show attendance and new marketing materials. In
keeping with our existing strategy, we will focus on leveraging our marketing
efforts through co-branding arrangements with our distribution partners.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe our ability to establish and maintain long-term customer
relationships and high adoption and recurrence rates in part depends upon the
strength of our customer service and operations team. Our customer service team
consists of two customer service managers located in our headquarters. We
provide customer support to end users through our toll-free phone line. In
addition, we provide live chat support to end users through a third-party online
technical support and sales service. A representative of this outsourced service
is available 24 hours a day to provide technical support to end users who are
registering for or taking online continuing education courses. By providing live
chat support we reach those customers who, while connected to the Internet,
cannot place a support call on their one phone line. These representatives are
trained to understand our philosophy and corporate culture and our specific
sales, marketing and support issues.
TECHNOLOGY INFRASTRUCTURE
Our technology infrastructure is based on an open architecture designed to
be secure, reliable and expandable. Our software is a combination of proprietary
applications, third party database software and operating systems that supports
acquisition and conversion of content, management of that content, publication
of our Web sites, downloads of courseware, registration and tracking of users,
and reporting of information for both internal and external use. We have
designed this infrastructure to allow each component to be independently scaled,
usually by purchasing additional readily-available hardware and software
components.
T.NAV
T.NAV has become the application for our comprehensive online continuing
education and training solution. T.NAV is a scalable computer managed
instruction system that delivers interactive courseware. Users and
administrators may obtain detailed reports on information ranging from user
training history to content effectiveness. By automating knowledge delivery and
tracking training for every user, the system both improves knowledge
distribution and reduces training overhead.
Data Center and Hosting Facilities
Our network infrastructure, Web site and servers delivering our service are
hosted by PSINet. PSINet maintains suitable environmental conditions and
redundant power sources and network connectivity. PSINet provides its hosting
and connectivity services on high-quality Hewlett-Packard servers and Cisco
routers. PSINet's hosting center is connected to the Internet through high-speed
fiber optic circuits capable of carrying traffic at 160 gigabites per second.
Monitoring of all servers, networks and systems is performed on a continuous
basis. Through PSINet, we employ numerous levels of firewall systems to protect
our databases, customer information and content library. Backups of all
databases, data and content files are performed on a daily basis. Data back-up
tapes are archived at a remote location on a weekly basis.
35
<PAGE> 39
COMPETITION
The market for online continuing education and training for the healthcare
industry is new and rapidly evolving. We face competitive pressures from
numerous actual and potential competitors, including:
- Web sites targeting medical professionals that currently offer or may
develop their own continuing education content in the future;
- traditional medical publishers and continuing education providers;
- academic medical centers;
- other Web-based continuing education and training providers;
- software developers that bundle their training systems with industry
training content;
- professional membership organizations;
- companies that market general-purpose computer-managed instruction
systems into the healthcare industry; and
- interactive media development companies focused on the healthcare
industry.
Many of these companies have greater financial, technical, product
development, marketing and other resources than we have. These companies may be
better known and have longer operating histories than we have. We believe that
our ability to compete depends on many factors both within and beyond our
control, including the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us or our competitors;
- customer service and support efforts;
- sales and marketing efforts; and
- the ease of use, performance, price and reliability of solutions
developed either by us or our competitors.
GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY
The Internet
The laws and regulations that govern our business change rapidly. The
United States government and the governments of some states and foreign
countries have attempted to regulate activities on the Internet. The following
are some of the evolving areas of law that are relevant to our business:
- Privacy Law. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to use the information in
our databases to generate revenues.
- Encryption Laws. Many copyright owner associations have lobbied the
federal government for laws requiring copyrighted materials transmitted
over the Internet to be digitally encrypted in order to track rights and
prevent unauthorized use of copyrighted materials. If these laws are
adopted, we may need to incur substantial costs to comply with these
requirements or change the way we do business.
- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, indecency, libel and
defamation. We could be liable if content delivered by us violates these
regulations.
- Sales and Use Tax. We do not currently collect sales, use or other taxes
on the sale of CME courses on our Web sites other than on sales in
Tennessee and Massachusetts. However, states or
36
<PAGE> 40
foreign jurisdictions may seek to impose tax collection obligations on
companies like us that engage in online commerce. If they do, these
obligations could limit the growth of electronic commerce in general and
limit our ability to profit from the sale of our services over the
Internet.
The enactment of any additional laws or regulations may impede the growth
of the Internet, which could decrease our potential revenues or otherwise harm
our business, financial condition and operating results.
Laws and regulations directly applicable to e-commerce and Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding online copyright infringement. Although not yet
enacted, Congress is considering laws regarding Internet taxation. These are
recent enactments, and there is uncertainty regarding their marketplace impact.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could negatively
affect us. If we were alleged to violate federal, state or foreign, civil or
criminal law, even if we could successfully defend such claims, it could
negatively affect us.
Regulation of Continuing Education for Healthcare Professionals
CME. State licensing boards, professional organizations and employers
require physicians to certify that they have accumulated a minimum number of CME
hours to maintain their licenses. Generally, each state's medical practice laws
authorize the state's board of medicine to establish and track CME requirements.
Thirty four state medical licensing boards currently have CME requirements. The
number of CME hours required by each state ranges up to fifty hours per year.
Other sources of CME requirements are state medical societies and practice
speciality boards. The failure to obtain the requisite amount and type of CME
will result in non-renewal of the physician's license to practice medicine
and/or membership in a medical or practice specialty society.
The American Medical Association's, or AMA's, Physician Recognition Award,
or PRA, is the most widely recognized certificate for recognizing physician
completion of CME. The AMA classifies continuing education activities as either
category 1, which includes formal CME programs, or category 2, which includes
most informal activities. Sponsors want to designate CME activities for AMA PRA
category 1 because this has become the benchmark for quality in formally
organized educational programs. Almost all agencies nationwide that require CME
participation specify AMA PRA category 1 credit. Only institutions and
organizations accredited to provide CME can designate an activity for AMA PRA
category 1 credit or AMA PRA category 2 hours.
The ACCME is responsible for the accreditation of medical schools, state
medical societies, and other institutions and organizations that provide CME
activities for a national or regional audience of physicians. Only institutions
and organizations are accredited. The ACCME and state medical societies do not
accredit or approve individual activities. State medical societies, operating
under the aegis of ACCME, accredit institutions and organizations that provide
CME activities primarily for physicians within the state or bordering states.
CEU. As with CMEs, the state's nurse practice laws are usually the source
of authority for establishing the state board of nursing, which then establishes
the state's CEU requirements for professional nurses. The CEU programs are
accredited by the American Nurses Credentialing Center Commission on
Accreditation and/or the state board of nursing. CEU requirements vary widely
from state to state. Twenty nine states require some form of CEU in order to
renew a nurse's license. In some states, the CEU requirement only applies to
re-licensure of advance practice nurses or additional CEU's required of this
category of nurses. On average, twelve to fifteen CEU's are required annually,
with reporting generally on a bi-annual basis.
Other Disciplines. Various allied health professionals are required to
obtain continuing education to maintain their licenses. Generally, these
professionals meet this requirement by obtaining continuing education. For
example, a physician assistant must acquire 100 continuing education hours every
two years in order to renew his or her license.
37
<PAGE> 41
Joint Commission on Accreditation of Healthcare Organizations. The JCAHO
imposes CME requirements on physicians that relate to each physician's specific
staff appointments. In addition, the JCAHO mandates that employers in the
healthcare industry provide certain workplace safety and patient interaction
training to employees. JCAHO required training may include programs on infection
control, patient bill of rights, radiation safety and incident reporting.
Healthcare organizations are required to provide and document training on these
topics to receive JCAHO accreditation.
Occupational Safety and Health Administration. OSHA regulations require
employers to provide training to employees to minimize the risk of injury from
various potential workplace hazards. Employers in the healthcare industry are
required to provide such training with respect to various topics including
bloodborne pathogens exposure control, laboratory safety and tuberculosis
infection control. OSHA regulations require employers to keep records of their
employees' completion of training with respect to these workplace hazards.
The U.S. Food and Drug Administration and the Federal Trade Commission
Current FDA and FTC rules and enforcement actions and regulatory policies
or those that the FDA or the FTC may develop in the future could have a material
adverse effect on our ability to provide existing or future applications or
services to our end users or obtain the necessary corporate sponsorship to do
so. The FDA and the FTC regulate the form, content and dissemination of
labeling, advertising and promotional materials, including direct-to-consumer
prescription drug and medical device advertising, prepared by, or for,
pharmaceutical, biotechnology, or medical device companies. The FTC regulates
over-the-counter drug advertising and, in some cases, medical device
advertising. Generally, regulated companies must limit their advertising and
promotional materials to discussions of the FDA-approved claims and, in limited
circumstances, to a limited number of claims not approved by the FDA. Therefore,
any information that promotes the use of pharmaceutical or medical device
products that is presented with our service is subject to the full array of the
FDA and FTC requirements and enforcement actions. We believe that banner
advertisements, sponsorship links, and any educational programs that lack
independent editorial control that we may present with our service could be
subject to FDA or FTC regulation. While the FDA and the FTC place the principal
burden of compliance with advertising and promotional regulations on the
advertiser, if the FDA or FTC finds that any regulated information presented
with our service violates FDA or FTC regulations, they may take regulatory
action against us or the advertiser or sponsor of that information.
In 1996, the FDA announced it would develop a guidance document expressing
a broad set of policies dealing with the promotion of pharmaceutical,
biotechnology, and medical device products on the Internet. Although the FDA has
yet to issue that guidance document, agency officials continue to predict its
eventual release. The FDA guidance document may reflect new regulatory policies
that more tightly regulate the format and content of promotional information on
the Internet.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We obtain the majority of our content under license agreements with
publishers or authors, through assignments or work for hire arrangements with
third parties and from internal staff development. Generally, our license
agreements are for a period of one to three years and we consider the materials
obtained through these agreements as important to the continued enhancement of
the content in our library. We may be liable to third parties for the content in
our library and distributed through our distribution partners if the text,
graphics, software or other content in our library violates their copyright,
trademark, or other intellectual property rights or if our content partners
violate their contractual obligations to others by providing content in our
library.
We may also be liable for anything that is accessible from our Web site
through links to other Web sites. We attempt to minimize these types of
liability by requiring representations and warranties relating to our content
partners' ownership of and rights to distribute and submit their content and by
taking related measures to review content in our library. For example, we
require our content partners to
38
<PAGE> 42
represent and warrant that their content does not infringe on any third-party
copyrights and that they have the right to provide their content and have
obtained all third-party consents necessary to do so. Our content partners also
agree to indemnify us against liability we might sustain due to the content they
provide.
Proprietary rights are important to our success and our competitive
position. To protect our proprietary rights, we rely generally on copyright,
trademark, and trade secret laws, confidentiality agreements with employees and
third parties, and license agreements with consultants, vendors and customers.
We own the registrations for the marks "TRAINING NAVIGATOR" and "T.NAV." Despite
such protections, a third party could, without authorization, copy or otherwise
appropriate our content or other information from our database. Our agreements
with employees, consultants and others who participate in development activities
could be breached. We may not have adequate remedies for any breach, and our
trade secrets may otherwise become known or independently developed by
competitors. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective copyright, trademark and trade secret protection may not be available
in those jurisdictions.
We currently hold the domain names "HealthStream.com" and
"HealthStreamUniversity.com." The legal status of intellectual property on the
Internet is currently subject to various uncertainties. The current system for
registering, allocating and managing domain names has been the subject of
litigation and proposed regulatory reform. Additionally, legislative proposals
have been made by the federal government that would afford broad protection to
owners of databases of information, such as stock quotes. This protection of
databases already exists in the European Union.
There have been substantial amounts of litigation in the computer and
online industries regarding intellectual property assets. Third parties may
claim infringement by us with respect to current and future products, trademarks
or other proprietary rights, and we may counterclaim against such parties in
such actions. Any such claims or counterclaims could be time-consuming, result
in costly litigation, diversion of management's attention, cause product release
delays, require us to redesign our products or require us to enter into royalty
or licensing agreements, any of which could have a material adverse effect upon
our business, financial condition and operating results. Such royalty and
licensing agreements, if required, may not be available on terms acceptable to
us, if at all.
EMPLOYEES
As of September 30, 1999, we employed 93 persons. We are not subject to any
collective bargaining agreements, and we believe that our relationship with our
employees is satisfactory.
FACILITIES
Our principal executive offices are located in Nashville, Tennessee. Our
lease for approximately 13,454 square feet at this location expires in 2005. The
lease provides for two five-year renewal options. As a result of our acquisition
of SilverPlatter Education, we also lease space in Boston, Massachusetts. We are
currently negotiating terms for additional contiguous space at our Nashville
headquarters that will increase our total square footage to approximately
20,000.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
39
<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table presents information about our directors and executive
officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert A. Frist, Jr....................... 32 Chief Executive Officer and Chairman of the Board of
Directors
Jeffrey L. McLaren........................ 32 President and Director
Michael Pote.............................. 38 Senior Vice President
Scott Portis.............................. 33 Vice President of Technology
Stephen Clemens........................... 35 Vice President of Interactive Development
Robert H. Laird, Jr....................... 31 Vice President, Director of Finance, General Counsel
and Secretary
Charles N. Martin, Jr..................... 57 Director
Steve Kellett............................. 44 Director
Thompson S. Dent.......................... 48 Director
M. Fazle Husain........................... 35 Director
John H. Dayani, Sr., Ph.D................. 52 Director
James F. Daniell, M.D..................... 56 Director
William W. Stead, M.D..................... 51 Director
</TABLE>
Robert A. Frist, Jr. has served as our chief executive officer and chairman
of the board of directors since 1990. Mr. Frist serves on the board of directors
of Passport Health Communications, an online health insurance verification
provider, and Harkey & Associates, a healthcare publisher. He graduated with a
Bachelor of Science in business with concentrations in finance, economics and
marketing from Trinity University. Mr. Frist is the brother-in-law of Scott
Portis, our vice president of technology.
Jeffrey L. McLaren has served as our president and as one of our directors
since 1990. Mr. McLaren is a founding director of the Nashville Technology
Council. He graduated from Trinity University with a Bachelor of Arts in both
business and philosophy.
Michael Pote has served as our senior vice president since August 1997.
From January 1996 to August 1997, Mr. Pote served as vice president of Columbia
Health Care Network, a managed care contractor. From August 1994 to June 1996,
Mr. Pote served as vice president and administrator for Centennial Medical
Center. Mr. Pote is a director of eLearnX, Inc., an online continuing education
provider for the legal, accounting and real estate markets. Mr. Pote received a
Bachelor of Science and a Masters of Science from Syracuse University.
Scott Portis has served as our vice president of technology since 1994. He
has a Bachelor of Science in computer engineering from Auburn University. Mr.
Portis is the brother-in-law of Robert A. Frist, Jr., our chief executive
officer and chairman of the board of directors.
Stephen Clemens has served as our vice president of interactive development
since October 1997. From July 1994 to May 1997, Mr. Clemens served as president
of Copernican Systems, Inc., a software and consulting firm. He holds a Bachelor
of Science in finance from the University of Tennessee and a Masters of Business
Administration from the Owen School of Management at Vanderbilt University.
Robert H. Laird, Jr. has served as our vice president, director of finance
and general counsel since March 1997 and secretary since October 1999. He holds
a Bachelor of Arts in english from Tulane University, a J.D. from the University
of Tennessee College of Law and a Masters of Business Administration from the
University of Tennessee.
Charles N. Martin, Jr. has served as one of our directors since April 1999.
Mr. Martin currently serves as chairman of the board of directors, president and
chief executive officer of Vanguard Health Systems. From January 1992 to January
1997, Mr. Martin served as chairman of the board of directors,
40
<PAGE> 44
president, and chief executive officer of OrNda HealthCorp, an investor-owned
hospital company, except during the period from April 1994 to August 1995 when
Mr. Martin served as chairman and chief executive officer. He holds a Bachelor
of Science degree from Southern University in Collegedale, Tennessee.
Steve Kellett has served as one of our directors since June 1999 as the
designee of General Electric pursuant to a purchase agreement dated May 10,
1999. Mr. Kellett serves as general manager of Global eCommerce, GE Medical
Systems. Mr. Kellett joined General Electric after 13 years in the computer
industry with Honeywell and Data General. He holds a Bachelor of Business
Administration from the University of Notre Dame and a Masters of Business
Administration from Emory University.
Thompson S. Dent has served as one of our directors since March 1995. Mr.
Dent is a founder of PhyCor, Inc. and currently serves as its president and
served as its chief operating officer from October 1997 to October 1998. Mr.
Dent served as executive vice president, corporate services, from the inception
of PhyCor until October 1997 and served as secretary of PhyCor from 1991 to
October 1998. Mr. Dent is a director of PhyCor and Healthcare Realty Trust
Incorporated, a real estate investment trust. He holds a Masters in Healthcare
Administration from George Washington University.
M. Fazle Husain has served as one of our directors since April 1999 as the
designee of Morgan Stanley Venture Partners III, L.P., pursuant to a purchase
agreement dated April 21, 1999. Mr. Husain is a general partner of Morgan
Stanley Dean Witter Venture Partners. Mr. Husain joined Morgan Stanley Dean
Witter in 1987 in its corporate finance department, and joined Venture Partners
in 1988. He received a ScB. degree in chemical engineering from Brown University
in 1987 and a Masters of Business Administration from Harvard in 1991. Mr.
Husain serves as a director of IntegraMed America, a physician practice
management company, AllScripts, Inc., a provider of point-of-care physician
solutions, and Cardiac Pathways Corp., a manufacturer of minimally invasive
cardiac systems.
John H. Dayani, Sr., Ph.D. has served as one of our directors since August
1998. Dr. Dayani is executive chairman of Network Health Services, Inc. Dr.
Dayani was the founder, president and chief executive officer of Medifax, Inc.,
American Nursing Resources, Inc., American Nursing Resources Home Health Agency,
Inc., American Nursing Resources Home Infusion, Inc., Nurse America and Quality
Managed Care. Dr. Dayani earned a Bachelor of Science and Ph.D. in engineering
from Vanderbilt University.
James F. Daniell, M.D. has served as one of our directors since March 1995.
Dr. Daniell maintains a private medical practice at Centennial Medical Center in
Nashville. A founding member of the Society for Reproductive Surgeons, he served
as past president of the International Society of Gynecologic Endoscopy and the
Nashville OB/GYN Society. He holds a Bachelor of Science from David Lipscomb
University and an M.D. from the University of Tennessee.
William W. Stead, M.D. has served as one of our directors since May 1998.
Dr. Stead is the associate vice chancellor of Vanderbilt University. Dr. Stead
is also the chief technology officer of WebEBM. He is the editor-in-chief of the
Journal of American Medical Informatics Association and a founding fellow of the
American College of Medical Informatics and the American Institute for
Engineering in Biology and Medicine. A past president of the American
Association for Medical Systems and Informatics, he is the president elect of
the American College of Medical Informatics. Dr. Stead earned a Bachelor of Arts
in chemistry and an M.D. from Duke University.
LEGAL PROCEEDINGS
Mr. Dent, serving in his capacity as an officer and a director of PhyCor,
has been named as a defendant, along with PhyCor and some of its other current
and former officers and directors, in securities fraud class action lawsuits
filed in state and federal courts. These lawsuits allege that the defendants
issued false and misleading statements which materially misrepresented the
earnings and financial condition of PhyCor and failed to disclose other matters
in order to conceal the alleged failure of PhyCor's business
41
<PAGE> 45
model. The lawsuits further assert that the alleged misrepresentations caused
PhyCor's securities to trade at inflated levels while the individual defendants
sold shares.
Mr. Dent, serving in his capacity as an officer and director of PhyCor, has
also been named as a defendant, along with PhyCor and some of its other current
and former officers and directors, in an action brought by Prem Reddy, M.D., the
former majority shareholder of Prime Care International, Inc., a medical network
management company acquired by PhyCor in May 1998. The complaint asserts
fraudulent inducement relating to the Prime Care transaction and that the
defendants issued false and misleading statements which materially
misrepresented the earnings and financial condition of PhyCor and failed to
disclose other matters in order to conceal the alleged failure of PhyCor's
business model.
Mr. Dent and PhyCor believe that they have meritorious defenses to all of
these claims and intend to defend vigorously against these actions.
CLASSES OF DIRECTORS
Under the terms of our charter, the board of directors will be divided into
three classes: Class I, Class II and Class III. Directors of each class hold
office for staggered three-year terms. At each annual meeting of shareholders,
the shareholders will either re-elect the directors or elect the successors to
the directors whose terms expire at the meeting to serve from the time of their
election and qualification until the third annual meeting of shareholders
following their election or until a successor has been duly elected and
qualified. Messrs. Daniell, Dent and Stead will be Class I directors whose terms
will expire at the annual meeting of shareholders in 2000. Messrs. Dayani,
Kellett and McLaren will be Class II directors whose terms will expire at the
annual meeting of shareholders in 2001. Messrs. Frist, Husain and Martin will be
Class III directors whose terms will expire at the annual meeting of
shareholders in 2002.
BOARD COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee will review accounting practices and procedures and the
scope of the audit and will recommend the appointment of the independent
auditors. The members of the audit committee are Messrs. . The
compensation committee evaluates and approves the compensation policies for the
executive officers and will administer our employee benefit plans. The members
of the compensation committee are Messrs. Dayani, Dent and Martin.
DIRECTOR COMPENSATION
We do not currently pay cash fees to directors for attendance at meetings.
We do reimburse our directors for out-of-pocket expenses related to attending
meetings of the board of directors. Non-employee directors are eligible to
receive stock option grants under our 1994 Stock Option Plan and our 1999 Stock
Incentive Plan. During 1998, our non-employee directors each received a grant of
options to purchase 2,000 shares of our common stock at an exercise price of
$4.25 per share. During 1999, each of our non-employee directors received a
grant of options to purchase 8,000 shares of our common stock at an exercise
price of $7.52 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before April 1999, we did not have a compensation committee, and
compensation decisions were made by the full board of directors. Since that
time, the compensation committee has made all compensation decisions. No
interlocking relationship exists between the board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
42
<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1996, 1997 and 1998, by
our chief executive officer and the other executive officer whose aggregate cash
compensation exceeded $100,000 during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1998
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- --------------------------- ----------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert A. Frist, Jr.................... 1998 $66,027 $2,296 $ -- 25,900
Chief Executive Officer 1997 62,113 6,690 -- --
1996 51,544 5,686 -- --
Michael Pote........................... 1998 98,058 7,296 -- 25,900
Senior Vice President 1997 34,042 5,728 -- --
1996 -- -- -- --
</TABLE>
STOCK OPTIONS GRANTED DURING FISCAL YEAR 1998
The following table presents all individual grants of stock options during
the year ended December 31, 1998 to each of the executive officers named in the
Summary Compensation Table above. These options were granted with an exercise
price equal to the fair market value of our common stock on the date of grant as
determined by our board of directors. The 5% and 10% assumed annual rates of
compound stock price appreciation are prescribed by the rules and regulations of
the Securities and Exchange Commission and do not represent our estimate or
projection of the future trading prices of our common stock. We cannot assure
you that the actual stock price appreciation over the ten-year option term will
be at the assumed 5% and 10% levels or at any other defined level. Actual gains,
if any, on stock option exercises are dependent on numerous factors, including
our future performance, overall market conditions and the option holder's
continued employment with us throughout the entire vesting period and option
term, none of which are reflected in this table. The potential realizable value
is calculated by multiplying the fair market value per share of the common stock
on the date of grant as determined by the board of directors, which is equal to
the exercise price per share, by the stated annual appreciation rate compounded
annually for the option term, subtracting the exercise price per share from the
product, and multiplying the remainder by the number of shares underlying the
option granted.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------
NAME GRANTED(#) FISCAL YEAR(%) SHARE($) DATE 5%($) 10%($)
- ---- ----------- -------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Frist,
Jr.................. 25,900 10.2% $4.25 6/25/05 $44,807 $104,973
Michael Pote.......... 25,900 10.2 4.25 6/25/05 44,807 104,973
</TABLE>
43
<PAGE> 47
YEAR-END OPTION VALUES
The following table sets forth information about the number and year-end
value of exercisable and unexercisable options held by the executive officers
named in the Summary Compensation Table for the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998(#) AT DECEMBER 31, 1998($)(1)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Robert A. Frist, Jr......................... 395,000 25,900 $ $
Michael Pote................................ 2,000 25,900
</TABLE>
- ---------------
(1) Based on an assumed initial public offering price of $ per share,
minus the exercise price, multiplied by the number of shares underlying the
option.
No options were exercised during 1998 by the chief executive officer or any
of our other executive officers.
STOCK PLANS
1994 Stock Option Plan. We adopted the 1994 Stock Option Plan in April
1994. The purpose of the plan is to attract, retain and reward our directors,
officers, key employees and consultants by offering performance-based equity
interests in our company. The plan provides for grants of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and non-qualified stock options. Our board of directors and
shareholders authorized a total of 4,000,000 shares of common stock for issuance
under this plan. Upon completion of this offering, no further awards of stock
options will be granted under the 1994 plan.
As of October 12, 1999, we have granted options under this plan for the
purchase of 1,246,116 shares of common stock to employees, consultants,
directors and other persons having a business relationship with us.
1999 Stock Incentive Plan. The 1999 Stock Incentive Plan was adopted by
our board of directors on October 11, 1999. The purpose of the plan is to
attract, retain and reward key employees, consultants and non-employee
directors. This plan allows flexibility in the award of stock-based incentive
compensation to these people. The plan provides for grants of incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock, and other stock-based awards.
The plan authorizes the issuance of up to shares of common stock.
However, no individual may receive options to purchase more than 200,000 shares
of common stock in any fiscal year. Whenever a share of common stock underlying
a stock option is no longer subject to that option, that share of common stock
shall again be available for distribution under the plan.
This plan will be administered by the compensation committee of the board
of directors. The compensation committee will have the authority to:
- select the individuals who may receive the grant for the options;
- determine the number of shares to be covered by each option or other
awards to be granted; and
- determine the terms and conditions of the option, including the exercise
price, vesting schedule and any restrictions or limitations on the
options.
Grants under the plan may consist of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, non-qualified stock options that are not
intended to so qualify, stock appreciation rights, restricted stock or other
stock-based awards. Grants can be made to any key employee, consultant and
non-employee director. Incentive stock options may only be granted to our
employees.
The option price for each share of common stock underlying an incentive
stock option shall be at least 100% of the fair market value of the stock at the
date of grant. The option price for non-qualified
44
<PAGE> 48
stock options shall be at least 50% of the fair market value of the underlying
stock at the date of grant. No incentive stock option shall be exercisable after
10 years from the date of grant. Options are not transferrable except to members
of the optionee's immediate family or by will or the laws of descent and
distribution.
If an optionee's employment terminates because of death, any option held by
the optionee may be exercised to the extent the option was exercisable at the
time of death. This exercise must occur within one year from the date of death
or until the term of the option expires, whichever is shorter. If an optionee's
employment is terminated because of disability, any option held by the optionee
may be exercised to the extent the option was exercisable at the time of the
disability, unless accelerated by the committee. This exercise must occur within
three years from the date of the disability or until the term of the option
expires for non-qualified options and one year from the date of disability or
until the term of the option expires for incentive stock options, whichever is
shorter. If an optionee's employment terminates because of retirement, any
option held by the optionee may be exercised to the extent the option was
exercisable at the time of the retirement, unless accelerated by the committee.
This exercise must occur within three years from the date of the retirement or
until the term of the option expires for non-qualified options and three months
from the date of the retirement or until the term of the option expires for
incentive stock options, whichever is shorter. If an optionee voluntarily
terminates employment, the option shall thereupon terminate; however, the board
of directors may extend the exercise period for three months or until the term
of the option expires, whichever is shorter.
Stock appreciation rights can be granted in connection with all or part of
any stock option granted. They will terminate and no longer be exercisable when
the related stock option terminates. They are only exercisable at the time and
to the extent that the stock options to which they relate are exercisable.
Shares of restricted stock can be issued alone, in addition to or with other
awards granted under the plan. The committee can place limitations on the sale
or transfer of the restricted stock. Other stock-based awards can be granted by
the committee in its discretion. Except for specific grants set forth in the
plan, outside directors are not entitled to any awards under the plan. See
"Management -- Director Compensation."
The compensation committee can adjust the number of shares reserved for
issuance under the plan if there is a merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure. If there is a change in control, any
awarded option shall become fully exercisable and vested. This change of control
can occur if any person or entity acquires more than 50% of the voting power of
our capital stock or if our existing shareholders hold less than fifty percent
of our outstanding securities after a cash tender or exchange offer, merger or
other business combination, sale of assets or contested election of directors.
EMPLOYMENT AGREEMENTS
Agreement with Robert A. Frist, Jr. Under an employment agreement dated
April 21, 1999, Robert A. Frist, Jr. is employed as our chief executive officer
for a two-year period at an initial base salary of $85,000. He is also entitled
to participate in our 1994 Stock Option Plan. Under this employment agreement,
Mr. Frist has agreed not to compete with us and not to solicit our customers or
employees for one year after his employment is terminated, with limited
exceptions.
Mr. Frist is entitled to severance benefits if he is terminated by us
without cause. He is also entitled to severance benefits if he resigns for good
reason after a change in control, if he resigns upon the occurrence of a
material change in the terms of his employment or if he resigns upon the
occurrence of a material breach of the agreement. If termination occurs during
the initial two year term of the agreement, the severance benefit shall be the
sum of $290,000, less the cumulative amount of base salary actually paid to Mr.
Frist during the two year period through the effective date of termination, and
$145,000. If termination occurs during any extended one year term of the
agreement, the severance benefit shall be the sum of $145,000, less the
cumulative amount of base salary actually paid to Mr. Frist during the one year
period through the effective date of termination, and $145,000. In addition, if
Mr. Frist terminates his employment for good reason after the occurrence of a
change in control, all options, shares and other benefits will fully vest
immediately.
45
<PAGE> 49
TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS
AND MORE THAN FIVE PERCENT SHAREHOLDERS
In 1996, we issued 400,000 shares of our common stock in private placements
at $1.00 a share to Robert A. Frist, Jr., our chief executive officer and
chairman.
In April 1999, we issued 231,481 shares of our common stock upon the
conversion of $1.0 million of debt at $4.32 per share to Robert A. Frist, Jr.,
our chief executive officer and chairman.
In 1999, we issued 225,000 shares of our common stock upon the exercise of
options at $1.00 a share to Robert A. Frist, Jr., our chief executive officer
and chairman.
On November 16, 1998 and February 11, 1999, we issued shares of our series
A convertible preferred stock in private placements at $10.00 per share to the
following shareholders:
- 25,000 shares to Carol Frist, mother of Robert A. Frist, Jr., our chief
executive officer and chairman;
- 25,000 shares to Dr. Robert Frist, father of Robert A. Frist, Jr., our
chief executive officer and chairman; and
- 5,000 shares to James and Cassandra Daniell. James Daniell is one of our
directors.
In 1999, we issued shares of our series B convertible preferred stock in
private placement transactions at $10.00 per share to the following
shareholders:
- 20,000 shares to Scott and Carol Len Portis. Scott Portis is our vice
president of technology and brother-in-law of Robert Frist, Jr., our
chief executive officer and chairman, and Carol Len Portis is the sister
of Robert Frist, Jr., our chief executive officer and chairman;
- 150,000 shares to Martin Investment Partnership III, one of our more than
five percent shareholders. Charles N. Martin, Jr., its Managing Partner,
is one of our directors;
- 50,000 shares to Robert A. Frist, Jr., our chief executive officer and
chairman upon conversion of $500,000 worth of debt;
- 15,000 shares to John H. Dayani, Sr., Ph.D., one of our directors;
- 10,000 shares to The Seven Partnership. Thompson S. Dent, one of its
partners, is one of our directors;
- 5,000 shares to Dr. Scott Portis, father of Scott Portis, our vice
president of technology;
- 100,000 shares to GE Capital Equity Investments, Inc., an affiliate of
the General Electric Company, and together with GE Medical Systems is one
of our more than five percent shareholders. Steve Kellett, one of our
directors is the general manager of Global eCommerce, GE Medical Systems.
- 175,477 shares to Morgan Stanley Venture Partners III, L.P., 16,848
shares to Morgan Stanley Venture Investors III, L.P. and 7,676 shares to
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P., each of
which are affiliates of Morgan Stanley, one of our more than five percent
shareholders.
In 1999, we issued shares of our series B convertible preferred stock upon
the exercise of warrants at $10.00 per share to the following shareholders:
- 1,000 shares to James and Cassandra Daniell. James Daniell is one of our
directors; and
- 35,095 shares to Morgan Stanley Venture Partners III, L.P., 3,370 shares
to Morgan Stanley Venture Investors III, L.P. and 1,535 shares to The
Morgan Stanley Venture Partners Entrepreneur Fund, L.P., each of which
are affiliates of Morgan Stanley, one of our more than five percent
shareholders.
46
<PAGE> 50
On August 18, 1999, we issued 300,000 shares of our series C convertible
preferred stock at $10.00 per share to HealthStream Partners, one of our more
than five percent shareholders.
On September 15, 1999, we issued the following number of shares of our
series C convertible preferred stock at $10.00 per share to the following
shareholders:
- 3,000 shares to Jeffrey L. and Carrie McLaren. Jeffrey L. McLaren is our
president and one of our directors;
- 4,519 shares to Scott and Carol Len Portis. Scott Portis is our vice
president of technology and brother-in-law of Robert Frist, Jr., our
chief executive officer and chairman, and Carol Len Portis is the sister
of Robert Frist, Jr., our chief executive officer and chairman;
- 33,891 shares to Martin Investment Partnership III, one of our more than
five percent shareholders. Mr. Martin, its Managing Partner, is one of
our directors;
- 11,297 shares to Robert A. Frist, Jr., our chief executive officer and
chairman;
- 3,389 shares to John H. Dayani, Jr., Ph.D., one of our directors;
- 1,130 shares to Dr. Scott Portis, father of Scott Portis, our vice
president of technology;
- 39,647 shares to Morgan Stanley Venture Partners III, L.P., 3,807 shares
to Morgan Stanley Venture Investors III, L.P. and 1,734 shares to The
Morgan Stanley Venture Partners Entrepreneur Fund, L.P., each of which
are affiliates of Morgan Stanley, one of our more than five percent
shareholders;
- 5,648 shares to Carol Frist, mother of Robert A. Frist, Jr., our chief
executive officer and chairman;
- 1,130 shares to James and Cassandra Daniell. James Daniell is one of our
directors;
- 5,648 shares to Frist Family Internet Partners, an entity managed by Dr.
Robert Frist, father of Robert A. Frist, Jr., our chief executive officer
and chairman; and
- 24,648 shares to Borneo Partners, of which Michael Pote, our senior vice
president, is administrator.
Each share of series A and series B preferred stock will be converted into
2.3148 shares of common stock upon consummation of this offering. Each share of
series C preferred stock will be converted into 1.3298 shares of common stock
upon consummation of this offering.
In 1998 and 1999, we granted the following number of options to purchase
shares of our common stock at $4.25, $4.32 and $7.52 per share, respectively, to
the following directors, executive officers and shareholders who beneficially
own five percent or more of our stock:
- 25,900, 0 and 45,000 to Robert A. Frist, Jr., our chief executive officer
and chairman;
- 25,900, 0 and 45,000 to Jeffrey L. McLaren, our president and one of our
directors;
- 25,900, 0 and 45,000 to Michael Pote, our senior vice president;
- 25,900, 0 and 40,000 to Scott M. Portis, our vice president of technology
and brother-in-law of Robert Frist, Jr., our chief executive officer and
chairman;
- 12,950, 6,475 and 40,000 to Robert H. Laird, Jr., our vice president,
director of finance, general counsel and secretary;
- 12,950, 6,475 and 40,000 to Stephen Clemens, our vice president of
interactive development;
- 6,475, 0 and 4,000 to John Dayani, Jr., one of our employees and son of
one of our directors;
- 2,000, 0 and 8,000 to Thompson S. Dent, one of our directors;
- 2,000, 1,500 and 8,000 to James F. Daniell, M.D., one of our directors;
- 2,000, 0 and 8,000 to John H. Dayani, Sr., Ph.D., one of our directors;
47
<PAGE> 51
- 2,000, 0 and 8,000 to William Stead, M.D., one of our directors;
- 0, 0 and 8,000 to M. Fazle Husain, one of our directors;
- 0, 0 and 8,000 to Steve Kellett, one of our directors; and
- 0, 0 and 8,000 to Charles N. Martin, Jr., one of our directors.
On June 14, 1999 we issued a warrant to purchase 132,450 shares of our
common stock at $7.52 per share to GE Medical Systems. Mr. Kellett, one of our
directors, is the general manager of Global eCommerce, GE Medical Systems.
On April 21, 1999 we executed a promissory note in the principal amount of
$1,543,000 payable to Robert A. Frist, Jr., our chief executive officer and
chairman of the board of directors. Interest is charged at the lesser of a
designated brokerage account rate and 10.5%. On August 23, 1999, the principal
amount of the note was reduced to $1,293,000 to reflect the conversion of
$250,000 of the debt into series B preferred stock. This note is payable in full
or can be converted into 129,300 shares of our series B preferred stock, at Mr.
Frist's option, upon consummation of this offering. This note replaces and
supersedes notes dated January 18, 1994, February 23, 1994, March 30, 1994, July
11, 1997, December 31, 1997 and April 21, 1999.
We had a partially secured $60,000 demand note payable to Scott M. Portis,
our vice president of technology at December 31, 1998. The note accrued interest
at 12% and was payable monthly. We repaid this note in full on August 23, 1999.
Interest expense on the loans to Robert A. Frist, Jr. and Scott M. Portis for
the years ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1999 totaled $46,801, $182,708, $328,412 and $137,073, respectively.
We believe that all of these transactions were made on terms as favorable
to us as we would have received from unaffiliated third parties. Any future
transactions between us and our officers, directors and principal shareholders
and their affiliates will be approved by a majority of the board of directors,
including a majority of the independent and non-interested directors.
48
<PAGE> 52
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of October 12, 1999 and as adjusted to reflect
the sale of the shares of common stock offered in this offering by: (1) each
shareholder who owns beneficially more than 5% of our common stock, (2) each of
our executive officers and directors and (3) all of our executive officers and
directors as a group. The address of all the beneficial owners, unless otherwise
stated, is 209 10th Avenue South, Suite 450, Nashville, Tennessee 37203.
The ownership percentage in the table below is based on 6,967,143 shares
outstanding on October 12, 1999, on an as if converted basis, and
shares outstanding after this offering. Shares of common stock
subject to options that are currently exercisable or that will become
exercisable within 60 days after , 1999 are deemed outstanding in
computing the percentage ownership of the person holding the options but not for
purposes of computing percentage ownership of any other person. Unless otherwise
indicated below, the persons and entities named in the table have sole voting
and investment power with respect to all shares beneficially owned.
The percentage of shares outstanding assumes the underwriters'
over-allotment option is not exercised.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED AS SHARES
NUMBER OF A RESULT OF OPTIONS OUTSTANDING
SHARES EXERCISABLE WITHIN 60 -------------------
BENEFICIALLY DAYS OF THE DATE OF BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED THIS PROSPECTUS OFFERING OFFERING
- ------------------------ ------------ --------------------- -------- --------
<S> <C> <C> <C> <C>
Robert A. Frist, Jr............................ 2,743,431(1) 515,600 39.38%
Entities Associated with Morgan Stanley........ 615,645(2) -- 8.84%
1221 Avenue of the Americas
New York, New York 10020
Martin Investment Partnership III.............. 461,732 69,444 6.63%
20 Burton Hills Boulevard
Suite 100
Nashville, Tennessee 37215
HealthStream Partners.......................... 398,940 -- 5.73%
900-A, 3319 West End Avenue
Nashville, Tennessee 37203
Entities associated with The General Electric
Company...................................... 410,226 178,746 5.89%
120 Long Ridge Rd.
Stamford, CT 06927
Jeffrey L. McLaren............................. 189,489 82,100 2.72%
Michael Pote................................... 47,727(3) 14,950 *
Scott Portis................................... 264,498(4) 68,462 3.80%
Stephen Clemens................................ -- -- --
Robert H. Laird, Jr............................ 6,475 6,475 *
Charles N. Martin, Jr.......................... 469,732(5) 77,444 6.74%
Steve Kellett.................................. 8,000 8,000 *
Thompson S. Dent............................... 39,778(6) 16,630 *
M. Fazle Husain................................ 623,645(7) 8,000 8.95%
John H. Dayani, Sr., Ph.D...................... 56,173 16,944 *
James F. Daniell, M.D.......................... 28,891 13,500 *
William Stead, M.D............................. 10,000 10,000 *
All executive officers and directors as a group
(13 persons)................................. 4,494,318 844,580 64.51%
</TABLE>
- ---------------
* Less than one percent
49
<PAGE> 53
(1) 76,955 of these shares are held by Carol Frist, mother of Robert A. Frist,
Jr., 57,870 of these shares are held by Dr. Robert Frist, father of Robert
A. Frist, Jr. and 19,085 of these shares are held by a family partnership
known as Frist Family Internet Partners.
(2) 540,155 of these shares are held by Morgan Stanley Venture Partners III,
L.P., 51,863 are held by MS Venture Investors III, L.P. and 23,627 of these
shares are held by The Morgan Stanley Venture Partners Entrepreneur Fund,
L.P.
(3) 32,777 of these shares are owned by Borneo Partners, of which Mr. Pote is
administrator. Mr. Pote disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(4) 15,391 of these shares are held by Dr. Scott Portis, father of Scott Portis.
(5) 461,732 of these shares are owned by Martin Investment Partnership III, of
which Mr. Martin is managing partner. Mr. Martin disclaims beneficial
ownership of 250,874 of these shares except to the extent of his pecuniary
interest therein.
(6) 27,778 of these shares are held by The Seven Partnership of which Mr. Dent
is one of the partners. Mr. Dent disclaims beneficial ownership of 13,889 of
these shares except to the extent of his pecuniary interest therein.
(7) 615,645 of these shares are owned by entities associated with Morgan Stanley
of which Mr. Husain is a general partner. Mr. Husain disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
50
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
charter and bylaws are only summaries and are qualified by reference to our
charter and bylaws filed as exhibits to the registration statement of which this
prospectus is a part. Our authorized capital stock consists of 20,000,000 shares
of common stock, no par value per share, and 5,000,000 shares of preferred
stock, no par value per share. As of October 12, 1999, there were 2,245,743
shares of common stock outstanding held of record by eight shareholders, 76,000
shares of series A preferred stock outstanding held of record by five
shareholders, 1,110,301 shares of series B preferred stock outstanding held of
record by 30 shareholders and 627,406 shares of series C preferred stock
outstanding held of record by 39 shareholders. All of the shares of preferred
stock outstanding prior to this offering will automatically convert into shares
of common stock upon consummation of this offering.
COMMON STOCK
Holders of the common stock are entitled to receive, as, when and if
declared by the board of directors, dividends and other distributions in cash,
stock or property from our assets or funds legally available for those purposes
subject to any dividend preferences that may be attributable to preferred stock.
Holders of common stock are entitled to one vote for each share held of record
on all matters on which shareholders may vote. Holders of common stock are not
entitled to cumulative voting for the election of directors. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution.
PREFERRED STOCK
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 5,000,000 shares of preferred stock. Before
this offering, there were 1,813,707 shares of preferred stock outstanding. All
of these shares will be converted into shares of common stock upon consummation
of the offering. Currently, we have no plans to issue a new series of preferred
stock. Our board of directors may, without shareholder approval, issue preferred
stock with dividend rates, redemption prices, preferences on liquidation or
dissolution, conversion rights, voting rights and any other preferences, which
rights and preferences could adversely affect the voting power of the holders of
common stock. Issuances of preferred stock could make it harder for a third
party to acquire, or could discourage or delay a third party from acquiring, a
majority of our outstanding common stock.
REGISTRATION RIGHTS
After the consummation of the offering, the holders of 3,580,374 shares of
common stock issuable upon conversion of the preferred stock will have
registration rights with respect to those securities. These rights are described
in an investors rights agreement between us and the holders of those securities.
The agreement provides, in some instances, demand registration rights. In
addition, pursuant to that agreement, the holders are entitled, subject to
certain limitations, to require us to include their securities in future
registration statements we file under the Securities Act of 1933. The holders of
those securities also are entitled, subject to some limitations, to require us
to register their securities on a registration statement on Form S-3 once we are
eligible to use a registration statement on Form S-3 in connection with
registrations. However, holders of these shares will be restricted from
exercising these rights until 180 days after the date of this prospectus.
Registration of shares of common stock by the exercise of these demand
registration rights, piggyback registration rights or S-3 registration rights
under the Securities Act of 1933 would result in these shares becoming freely
tradable without restriction under the Securities Act of 1933 immediately upon
the effectiveness of such registration. See "Risk Factors -- Approximately
, or %, of our total outstanding shares are restricted from
immediate resale but may be sold into the market in the near future, which could
cause the market price of our common stock to drop significantly" and "Shares
Eligible for Future Sale."
51
<PAGE> 55
CLASSIFIED BOARD OF DIRECTORS
Our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors will be elected each year. This provision, along with the
provision authorizing the board of directors to fill vacant directorships or
increase the size of the board of directors, may deter a shareholder from
removing incumbent directors and gaining control of the board of directors by
filling vacancies created by the removal with its own nominees.
SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS
The charter states that shareholders may not take action by written
consent, but only at duly called annual or special meetings of shareholders. The
charter also provides that special meetings of shareholders may be called only
by the chairman of the board of directors or a majority of the board of
directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The bylaws provide that shareholders who want to bring business before an
annual meeting of shareholders, or to nominate candidates for election as
directors at an annual meeting of shareholders, must provide timely notice in
writing. To be timely, a shareholders's notice must be delivered to or mailed
and received at our principal executive offices at least 120 days prior to the
first anniversary of the date our notice of annual meeting was provided with
respect to the previous year's annual meeting of shareholders; provided, that if
no annual meeting of shareholders was held in the previous year or the date of
the annual meeting of shareholders has been changed to be more than 30 calendar
days earlier than or 60 calendar days after that anniversary, notice by the
shareholder, to be timely, must be received not more than 90 days before nor
later than the later of 60 days prior to the annual meeting of shareholders or
the close of business on the 10th day following the date on which notice of the
date of the meeting is given to shareholders or made public, whichever first
occurs. The bylaws also specify requirements as to the form and content of a
shareholders's notice. These provisions may keep shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make it harder or discourage an attempt to obtain
control of us by a proxy contest, tender offer, merger or otherwise.
TENNESSEE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS THAT MAY HAVE AN
ANTI-TAKEOVER EFFECT
Provisions in our charter, bylaws and Tennessee law could make it harder
for someone to acquire us through a tender offer, proxy contest or otherwise.
The Tennessee Business Combination Act provides that a party owning 10% or
more of the stock in a "resident domestic corporation" is an "interested
shareholder." An interested shareholder cannot engage in a business combination
with the resident domestic corporation unless the combination:
- takes place at least five years after the interested shareholder first
acquired 10% or more of the resident domestic corporation; and
- either is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or satisfies fairness
conditions specified in the Combination Act.
52
<PAGE> 56
These provisions apply unless one of two events occurs:
- a business combination with an entity can proceed without delay when
approved by the target corporation's board of directors before that
entity becomes an interested shareholder, or
- the resident corporation may enact a charter amendment or bylaw to remove
itself entirely from the Combination Act. This charter or bylaw amendment
must be approved by a majority of the shareholders who have held shares
for more than one year before the vote. In addition, the charter
amendment or bylaw cannot become operative until two years after the
vote.
An interested shareholder, for purposes of the Combination Act, is any
person who is an affiliate or associate of the corporation, or the beneficial
owner, directly or indirectly, of 10% or more of the outstanding voting shares
of the corporation.
The Tennessee Greenmail Act prohibits us from purchasing or agreeing to
purchase any of our securities, at a price higher than fair market value, from a
holder of 3% or more of any class of our securities who has beneficially owned
the securities for less than two years. We can make this purchase if the
majority of the outstanding shares of each class of voting stock issued by us
approves the purchase or we make an offer of at least equal value per share to
all holders of shares of that class.
The effect of the above may make a change of control of us harder by
delaying, deferring or preventing a tender offer or takeover attempt that you
might consider to be in your best interest, including those attempts that might
result in the payment of a premium over the market price for your shares. They
may also promote the continuity of our management by making it harder for you to
remove or change the incumbent members of the board of directors.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our charter provides that, to the fullest extent permitted by the Tennessee
Business Corporation Act, a director will not be liable to us or our
shareholders for monetary damages resulting from a breach of his or her
fiduciary duty as a director. Under the TBCA, directors have a fiduciary duty
which is not eliminated by this provision in our charter. In some circumstances,
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available. In addition, each director will continue to be subject to
liability under the TBCA for breach of the director's duty of loyalty, for acts
or omissions which are found by a court of competent jurisdiction to be not in
good faith or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends that are
prohibited by the TBCA. This provision does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws.
The TBCA provides that a corporation may indemnify any director or officer
against liability incurred in connection with a proceeding if the director or
officer acted in good faith or reasonably believed, in the case of conduct in
his or her official capacity with the corporation, that the conduct was in the
corporation's best interest. In all other civil cases, a corporation may
indemnify a director or officer who reasonably believed that his or her conduct
was not opposed to the best interest of the corporation. In connection with any
criminal proceeding, a corporation may indemnify any director or officer who had
no reasonable cause to believe that his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
does not allow indemnification if the director or officer is adjudged to be
liable to the corporation. Similarly, the TBCA prohibits indemnification in
connection with any proceeding charging improper personal benefit to a director
or officer if the director or officer is adjudged liable because a personal
benefit was improperly received.
In cases when the director or officer is wholly successful, on the merits
or otherwise, in the defense of any proceeding instigated because of his or her
status as a director or officer of a corporation, the TBCA mandates that the
corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court may order a corporation to
53
<PAGE> 57
indemnify a director or officer for reasonable expense if, in consideration of
all relevant circumstances, the court determines that the individual is fairly
and reasonably entitled to indemnification, whether or not the standard of
conduct set forth above was met.
Our bylaws provide that we shall indemnify and advance expenses to our
directors and officers to the fullest extent permitted by the TBCA. We also
maintain insurance to protect any director or officer against any liability and
will enter into indemnification agreements to indemnify our directors and
officers in addition to the indemnification provided in our charter and bylaws.
These agreements, among other things, indemnify our directors and officers for
some expenses, including attorneys' fees and associated legal expenses,
judgments and fines and amounts paid in settlement, actually and reasonably
incurred by any of these persons in any action, suit or proceeding arising out
of the person's services as our director or officer. We believe that these
provisions and agreements are necessary to attract and retain qualified
directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is .
Its address is , and its telephone number at this location is
( ) .
54
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering, shares of our common stock will be
outstanding, assuming that the underwriters do not exercise their over-allotment
option. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares of common stock
are aggregated, including persons who may be deemed our affiliates, who has
beneficially owned shares of our common stock for at least one year is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, is entitled to
sell the shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with certain restrictions, including the holding period, contained in
Rule 144.
LOCK-UP AGREEMENTS
All of our executive officers, directors and shareholders will sign lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of BancBoston Robertson Stephens Inc.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 3,879,677 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. See "Description of
55
<PAGE> 59
Capital Stock -- Registration Rights" for a description of these registration
rights. After the registration, these shares will become freely tradable without
restriction under the Securities Act. Any sales of securities by these
shareholders could have a material adverse effect on the trading price of our
common stock.
STOCK OPTIONS
Immediately after this offering we plan to file a registration statement
under the Securities Act covering shares of common stock reserved for
issuance under our stock option plans. As of October 12, 1999, options to
purchase 1,246,116 shares of common stock were issued and outstanding. When the
lock-up agreements described above expire, at least 514,178 shares of common
stock will be subject to vested options (based on options outstanding as of
October 12, 1999). This registration statement is expected to be filed and
become effective as soon as practicable after the effective date of the
registration statement for this offering. Accordingly, shares registered under
that registration statement will, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, be available for sale in the
open market immediately after the 180 day lock-up agreements expire.
56
<PAGE> 60
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., CIBC World Markets Corp., J.C. Bradford &
Co. and E*OFFERING Corp., have severally agreed with us, subject to the terms
and conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc...........................
CIBC World Markets Corp.....................................
J.C. Bradford & Co..........................................
E*OFFERING Corp.............................................
------
INTERNATIONAL UNDERWRITERS
- --------------------------
BancBoston Robertson Stephens International Limited.........
CIBC World Markets Inc......................................
J.C. Bradford & Co..........................................
------
Total.............................................
======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of the proceeds to be received by us as
set forth on the cover page of this prospectus. The common stock is offered by
the underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus will be determined through negotiations among the
representatives and us. Among the factors considered in those negotiations will
be prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to
additional shares of common stock to cover over-allotments, if
any, at the public offering price less the underwriting discount set forth on
the cover page of this prospectus. If the underwriters exercise their
over-allotment option to purchase any of the additional shares of
common stock, the underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof as the number
of shares to be purchased by each of them bears to the total number of shares of
common stock offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered hereby are being sold. We will be obligated, pursuant to the
over-allotment option, to
57
<PAGE> 61
sell shares to the underwriters to the extent the over-allotment option is
exercised. The underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
The following table summarizes the compensation to be paid by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITHOUT
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us......... $ $ $
Expenses payable by us.................................... $ $ $
</TABLE>
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against civil liabilities, including liabilities under the
Securities Act, and liabilities arising from breaches of representations and
warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers and directors and shareholders will agree,
during the period of 180 days after the effective date of this prospectus,
subject to specified exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock or any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock owned as of the date of this prospectus or thereafter acquired
directly by those holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Roberston Stephens
Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion and
at any time or from time to time, without notice, release all or any portion of
the securities subject to lock-up agreements. There are no existing agreements
between the representatives and any of our shareholders who will execute a
lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
In addition, we will agree that during the lock-up period we will not,
without the prior written consent of BancBoston Roberston Stephens Inc., subject
to some exceptions, consent to the disposition of any shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
LISTING
We intend to make application to list our common stock on the Nasdaq
National Market under the symbol "HSTM."
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or purchase
of common stock on behalf of the underwriters
58
<PAGE> 62
to reduce a short position incurred by the underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the representatives to
reclaim the selling concession otherwise accruing to an underwriter or syndicate
member in connection with the offering if the common stock originally sold by
that underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
the underwriter or syndicate member. The representatives have advised us that
these transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
A copy of the prospectus in electronic format will be made available on the
Internet Web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc.
E*TRADE will accept conditional offers to purchase shares from all of its
customers that pass and complete an online eligibility profile. In the event
that the demand for shares from customers of E*TRADE exceeds the amount of
shares allocated to it, E*TRADE will use a random allocation methodology to
distribute shares in even lots of 100 shares per customer.
J.C. Bradford & Co., one of the underwriters, acted as our financial
advisor in connection with the issuance of our series B preferred stock in
April, May and August 1999. J.C. Bradford & Co. received customary fees and
expenses in connection with these private placements paid in the form of our
series B preferred stock. Including the shares received by J.C. Bradford & Co.
as payment for its acting as our financial advisor, J.C. Bradford & Co. and JCB
Healthstream Investors LLC, JCB Venture Partnership IV, JCB CF Healthstream
Partners LLC, Savvy Investment Partners LLC and Robert Doolittle, each of which
are affiliates of J.C. Bradford & Co., collectively own shares of our preferred
stock representing 206,547 shares of our common stock on an as converted basis.
J.C. Bradford & Co. and certain of the other underwriters may act as an
underwriter, placement agent or financial advisor in our future financing
activities.
59
<PAGE> 63
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. The
underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The financial statements of HealthStream, Inc. and SilverPlatter Education,
Inc. appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon also appearing elsewhere herein and in the registration
statement. These financial statements have been included herein in reliance upon
those reports given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 that registers the shares
of common stock being offered. This prospectus does not contain all of the
information described in the registration statement and the related exhibits and
schedule. For more information about us and the common stock being offered, you
should review the registration statement and the related exhibits and schedule.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, you should review the copy of the contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and the related exhibits and schedule may be inspected
without charge and copied upon payment of prescribed fees at the following
location of the Securities and Exchange Commission:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may also obtain copies of all or any part of the registration statement from
that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
We plan to provide our shareholders with written annual reports containing
audited financial statements certified by an independent public accounting firm.
60
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF
HEALTHSTREAM, INC.
Basis of Presentation....................................... F-2
Unaudited Pro Forma Condensed Balance Sheet as of June 30,
1999...................................................... F-3
Notes to Unaudited Pro Forma Condensed Financial Balance
Sheet..................................................... F-4
Unaudited Pro Forma Condensed Statement of Operations for
the Year ended December 31, 1998.......................... F-5
Unaudited Pro Forma Condensed Statements of Operations for
the Six Months ended June 30, 1999........................ F-6
Notes to Unaudited Pro Forma Condensed Statements of
Operations................................................ F-7
AUDITED FINANCIAL STATEMENTS OF HEALTHSTREAM, INC.
Years ended December 31, 1996, 1997, and 1998 and the Six
Months ended June 30, 1999 (unaudited)
Report of Independent Auditors.............................. F-8
Balance Sheets.............................................. F-9
Statements of Operations.................................... F-10
Statements of Shareholders' Equity (Deficit)................ F-11
Statements of Cash Flows.................................... F-12
Notes to Financial Statements............................... F-13
AUDITED FINANCIAL STATEMENTS OF SILVERPLATTER EDUCATION,
INC.
Years ended December 31, 1997 and 1998 and the Six Months
ended June 30, 1999 (unaudited)
Report of Independent Auditors.............................. F-25
Balance Sheets.............................................. F-26
Statements of Operations.................................... F-27
Statements of Stockholders' Deficit......................... F-28
Statements of Cash Flows.................................... F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE> 65
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On July 23, 1999, we acquired certain assets and assumed certain
liabilities of SilverPlatter Education, Inc. from SilverPlatter Information,
Inc. for a combination of cash and shares. The acquisition was accounted for as
a purchase. In August and September 1999 we issued 225,000 shares of Common
Stock on the exercise of options and also in August we issued 2,500 shares of
Common Stock for service provided by an outside consultant. In July, August and
September 1999, we sold 1,209,957 shares of Series B and C Preferred Stock for
$12,099,570.
The unaudited pro forma balance sheet gives effect to: (i) the acquisition
of SilverPlatter Education, Inc. by HealthStream; (ii) the issuance of our
Common Stock and Series B and C Preferred Stock as described in the preceding
paragraph; (iii) the conversion of Series A, B and C Preferred Stock into our
Common Stock; (iv) the conversion of $1,293,000 of notes payable-related party
to Series B Preferred Stock and conversion to our Common Stock; and (v) the
issuance of our Common Stock in the offering (the "Offering") at the initial
offering price of $ per share (the midpoint of the range set forth on
the cover of this prospectus) as described in "Use of Proceeds," as if the
Offering and each of the other transactions had been completed as of June 30,
1999.
The unaudited pro forma condensed statements of operations give effect to:
(i) the acquisition of SilverPlatter Education, Inc.; (ii) the issuance of our
Common Stock and Series B and C Preferred Stock as described above; (iii) the
conversion of Series A, B and C Preferred Stock into our Common Stock; (iv) the
conversion of $1,293,000 of notes payable-related party to Series B Preferred
Stock and conversion to our Common Stock; and (v) the issuance of our Common
Stock in the Offering at the assumed initial offering price of $ per
share (the midpoint of the range set forth on the cover of this prospectus) as
described in "Use of Proceeds," as if the Offering and each of the other
transactions had been completed as of January 1, 1998.
The pro forma condensed financial information presented herein does not
purport to represent what our results of operations or financial position would
have been had such transactions in fact occurred at the beginning of the periods
presented or to project our results of operations in any future period. The pro
forma results of operations do not take into account certain operational changes
we instituted upon acquisition of SilverPlatter Education, Inc. The unaudited
pro forma condensed financial statements should be read in conjunction with the
audited financial statements, including the related notes thereto, that appear
elsewhere in this prospectus.
F-2
<PAGE> 66
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ACQUISITION PRE-OFFERING PRE-OFFERING
SILVERPLATTER PRO FORMA PRO FORMA PRO FORMA
HEALTHSTREAM EDUCATION ADJUSTMENTS(1) ADJUSTMENTS(2) CONSOLIDATED
------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $3,967,456 $ 347,287 $ (347,287)(a) 11,849,560(b) $15,260,816
(800,000)(a) 225,000(c)
18,800(d)
Accounts receivable, less
allowance for doubtful
accounts........................ 509,847 23,520 (23,520)(a) 509,847
Accounts receivable -- unbilled... 15,701 15,701
Deferred license fees............. 22,444 22,444
Prepaid and other assets.......... 21,454 34,475 55,929
---------- ----------- ----------- ----------- -----------
Total current assets........ 4,514,458 427,726 (1,170,807) 12,093,360 15,864,737
Property and equipment, net........ 748,356 53,559 801,915
Intangible assets.................. 41,672 1,234,393(a) 1,276,065
Other assets....................... 34,000 34,000
---------- ----------- ----------- ----------- -----------
Total assets................ $5,296,814 $ 522,957 $ 63,586 $12,093,360 $17,976,717
========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................... $ 171,880 $ 149,703 $ (149,703)(a) $ 171,880
Accrued liabilities............... 54,160 62,011 (47,223)(a) 68,948
Deferred revenue.................. 383,879 436,601 (64,846)(a) 755,634
Due to Parent Company............. 4,376,565 (4,376,565)(a)
Notes payable -- related
parties......................... 1,603,000 $ (250,000)(b) 1,353,000
Current portion of long-term
debt-related party............ 25,037 25,037
Current portion of capital lease
obligation.................... 22,113 22,113
---------- ----------- ----------- ----------- -----------
Total current liabilities... 2,260,069 5,024,880 (4,638,337) (250,000) 2,396,612
Capital lease obligation, less
current portion................... 64,165 64,165
Shareholders' equity (deficit):
Common stock.................... 3,056,776 10 (10)(a) 225,000(c) 3,500,576
200,000(a) 18,800(d)
Additional paid-in capital......... 990 (990)(a)
Preferred stock.................... 5,887,500 12,099,560(b) 17,987,060
Accumulated deficit................ (5,971,696) (4,502,923) 4,502,923(a) (5,971,696)
---------- ----------- ----------- ----------- -----------
Total shareholders' equity
(deficit)......................... 2,972,580 (4,501,923) 4,701,923 12,343,360 15,515,940
---------- ----------- ----------- ----------- -----------
$5,296,814 $ 522,957 $ 63,586 $12,093,360 $17,976,717
========== =========== =========== =========== ===========
<CAPTION>
OFFERING
PRO FORMA PRO FORMA
ADJUSTMENTS(3) CONSOLIDATED
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ (g) $
Accounts receivable, less
allowance for doubtful
accounts........................ 509,847
Accounts receivable -- unbilled... 15,701
Deferred license fees............. 22,444
Prepaid and other assets.......... 55,929
----------- -----------
Total current assets........
Property and equipment, net........ 801,915
Intangible assets.................. 1,276,065
Other assets....................... 34,000
----------- -----------
Total assets................ $ $
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................... $ 171,880
Accrued liabilities............... 68,948
Deferred revenue.................. 755,634
Due to Parent Company.............
Notes payable -- related
parties......................... $(1,293,000)(f) 60,000
Current portion of long-term
debt-related party............ 25,037
Current portion of capital lease
obligation.................... 22,113
----------- -----------
Total current liabilities... (1,293,000) 1,043,612
Capital lease obligation, less
current portion................... 64,165
Shareholders' equity (deficit):
Common stock.................... 19,280,060(e)
(g)
Additional paid-in capital.........
Preferred stock.................... (19,280,060)(e)
$ 1,293,000
Accumulated deficit................ (5,971,696)
----------- -----------
Total shareholders' equity
(deficit).........................
----------- -----------
$ $
=========== ===========
</TABLE>
- ---------------
(1) Reflects the effects of the acquisition of SilverPlatter Education.
(2) Reflects the effects of equity transactions subsequent to June 30, 1999 and
prior to the closing of the sale of Common Stock in the Offering.
(3) Reflects the effects of the sale of common stock in the offering and the
application of the estimated net proceeds thereof and the conversion of
series A, B and C Convertible Preferred Stock into Common Stock upon
completion of the Offering.
See accompanying notes to unaudited pro forma condensed balance sheet.
F-3
<PAGE> 67
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED BALANCE SHEET AS OF
JUNE 30, 1998.
(a) Reflects the elimination of assets not acquired, liabilities not assumed,
Common Stock, additional paid-in capital shareholders' deficit and the
payment of $800,000 in cash and issuance of 26,596 shares of Common Stock to
purchase SilverPlatter Education, Inc. and the recording of intangible
assets.
(b) Reflects the following transactions occurring subsequent to June 30, 1999:
the issuance of 582,550 shares of Series B Convertible Preferred Stock for
$5,575,500 in cash and the conversion of $250,000 of notes payable to the
Company's CEO into Series B Convertible Preferred Stock and the issuance of
627,406 shares of Series C Convertible Preferred Stock for $6,274,060 in
cash.
(c) Reflects the exercise of options granted in 1995 and purchase of 225,000
shares of the Company's Common Stock at an exercise price of $1.00 per share
by the Company's CEO in July and August 1999.
(d) Reflects the issuance of 2,500 shares of the Company's Common Stock on
August 9, 1999 to an outside consultant at $7.52 per share for services
provided.
(e) Reflects the conversion, upon completion of the Offering, of 76,000 shares
of Series A Convertible Preferred Stock, 1,239,601 shares of Series B
Convertible Preferred Stock, and 627,406 shares of Series C Convertible
Preferred Stock into 175,925 shares, 2,869,428 shares and 834,324 shares of
Common Stock, respectively.
(f) Reflects the conversion of $1,293,000 notes payable-related party into
129,300 shares of Series B Convertible Preferred Stock upon completion of
the Offering. Simultaneously, the 129,300 shares of Series B Convertible
Preferred Stock convert into 299,304 shares of Common Stock. See Pro Forma
adjustment (e).
(g) Reflects the sale of shares of Common Stock in the Offering
at the initial public offering price of $ per share for net
proceeds of $ as follows:
<TABLE>
<S> <C>
Common Stock.......................... $
Cash proceeds.........................
</TABLE>
F-4
<PAGE> 68
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACQUISITION PRE-OFFERING PRE-OFFERING OFFERING
SILVERPLATTER PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HEALTHSTREAM EDUCATION ADJUSTMENTS ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
------------ ------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 1,716,094 $2,343,435 $ 4,059,529
Operating costs and
expenses:
Cost of revenue........ 1,057,453 923,254 1,980,707
Product development.... 443,336 443,336
Selling, general and
administrative
expenses............. 1,476,639 1,637,370 $ 361,627(a) 3,475,636
----------- ---------- --------- ------- ----------- --------
Total operating
costs and
expenses....... 2,977,428 2,560,624 361,627 5,899,679
----------- ---------- --------- ------- ----------- --------
Loss from operations..... (1,261,334) (217,189) (361,627) (1,840,150)
Other income (expense),
net.................... (328,166) $48,182(b) (279,984) $273,030(c)
----------- ---------- --------- ------- ----------- --------
Net loss................. $(1,589,500) $ (217,189) $(361,627) $48,182 $(2,120,134) $273,030
=========== ========== ========= ======= =========== ========
Net loss per share:
Basic.................. $ (0.90)
===========
Diluted................ $ (0.90)
===========
Weighted average number
of common and common
equivalent shares:
Basic.................. 1,760,166 26,596(d) 1,786,762 (e)
=========== ========= =========== ========
Diluted................ 1,760,166 26,596(d) 1,786,762 (e)
=========== ========= =========== ========
<CAPTION>
PRO FORMA
CONSOLIDATED
------------
<S> <C>
Revenues................. $ 4,059,529
Operating costs and
expenses:
Cost of revenue........ 1,980,707
Product development.... 443,336
Selling, general and
administrative
expenses............. 3,475,636
-----------
Total operating
costs and
expenses....... 5,899,679
-----------
Loss from operations..... (1,840,150)
Other income (expense),
net.................... (6,954)
-----------
Net loss................. $(1,847,104)
===========
Net loss per share:
Basic.................. $ ()
===========
Diluted................ $ ()
===========
Weighted average number
of common and common
equivalent shares:
Basic..................
===========
Diluted................
===========
</TABLE>
See accompanying notes to unaudited pro forma condensed statement of operations.
F-5
<PAGE> 69
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ACQUISITION PRE-OFFERING PRE-OFFERING OFFERING
SILVERPLATTER PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HEALTHSTREAM EDUCATION ADJUSTMENTS ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
------------ ------------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 1,112,519 $835,847 $ 1,948,366 $ 1,948,366
Operating costs and
expenses:
Cost of revenue..... 790,911 790,911 790,911
Product
development....... 764,975 350,988 1,115,963 1,115,963
Selling, general and
administrative
expenses.......... 931,339 504,796 $ 188,321(a) 1,624,456 1,624,456
------------ -------- ----------- --------- ----------- ----------- -----------
Total
operating
costs and
expenses.... 2,487,225 855,784 188,321 3,531,330 3,531,330
------------ -------- ----------- --------- ----------- ----------- -----------
Loss from
operations.......... (1,374,706) (19,937) (188,321) (1,582,964) (1,582,964)
Other income
(expense), net...... (103,558) $ 20,025(b) (83,533) $ 113,478(c) 29,945
------------ -------- ----------- --------- ----------- ----------- -----------
Net loss.............. $ (1,478,264) $(19,937) $ (188,321) $ 20,025 $(1,666,497) $ 113,478 $(1,553,019)
============ ======== =========== ========= =========== =========== ===========
Net loss per share:
Basic............... $ (0.77) $ ()
============ ===========
Diluted............. $ (0.77) $ ()
============ ===========
Weighted average
number of common and
common equivalents
shares:
Basic............... 1,923,469 26,596(d) 1,950,065 (e)
============ =========== =========== =========== ===========
Diluted............. 1,923,469 26,596(d) 1,950,065 (e)
============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed statement of operations.
F-6
<PAGE> 70
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE
30, 1999.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------ -------------
<S> <C> <C>
(a) Reflects the elimination of the historical depreciation
expense of SilverPlatter Education and the inclusion of
HealthStream's depreciation of property and equipment
and amortization of goodwill and other intangible assets
over a three year life.................................. $361,627 $188,231
(b) Reflects the elimination of the historical interest
expense on related-party debt converted to Series B
Convertible Preferred Stock upon completion of the
Offering (see note (b) of "Notes to Unaudited Pro Forma
Condensed Balance Sheet")............................... 48,182 20,025
(c) Reflects the elimination of the historical interest
expense on related-party debt of $1,293,000 converted
into Series B Convertible Preferred Stock upon
completion of the Offering.............................. 273,030 113,478
(d) Reflects the issuance of 26,596 shares of Common Stock to purchase SilverPlatter
Education, Inc.
(e) Reflects (i) the conversion of Series A, B and C Preferred Stock into 3,879,677 shares
of Common Stock; and (ii) the sale of shares of Common Stock in the
Offering.
</TABLE>
F-7
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
HealthStream, Inc. formerly NewOrder Media, Inc.
We have audited the accompanying balance sheets of HealthStream, Inc.
formerly NewOrder Media, Inc. as of December 31, 1997 and 1998, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthStream, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 24, 1999
F-8
<PAGE> 72
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 84,365 $ 50,823 $3,967,456
Accounts receivable, less allowance for doubtful accounts
of $0 in 1997, $36,500 in 1998, and $38,000 in 1999
(unaudited)............................................. 285,223 481,316 509,847
Accounts receivable -- unbilled........................... 64,971 10,821 15,701
Prepaid expenses and other assets......................... 3,949 8,358 21,454
----------- ----------- ----------
Total current assets............................... 438,508 551,318 4,514,458
Property and equipment:
Furniture and fixtures.................................... 95,578 114,186 170,445
Equipment................................................. 525,780 671,072 814,199
Leasehold improvements.................................... 124,255 196,405 234,562
----------- ----------- ----------
745,613 981,663 1,219,206
Less accumulated depreciation and amortization............ (236,413) (380,134) (470,850)
----------- ----------- ----------
509,200 601,529 748,356
Other assets................................................ -- -- 34,000
----------- ----------- ----------
Total assets....................................... $ 947,708 $ 1,152,847 $5,296,814
=========== =========== ==========
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 47,160 $ 119,102 $ 171,880
Accrued liabilities....................................... 48,151 94,827 54,160
Deferred revenue.......................................... 235,755 322,760 383,879
Notes payable -- related parties.......................... 1,795,000 2,835,000 1,603,000
Current portion of long-term debt -- related party........ 20,931 23,585 25,037
Current portion of capital lease obligation............... -- 10,539 22,113
----------- ----------- ----------
Total current liabilities.......................... 2,146,997 3,405,813 2,260,069
Long-term debt -- related party............................. 36,477 12,892 --
Capital lease obligation, less current portion.............. -- 19,076 64,165
Shareholders' equity (deficit):
Common stock, no par value; 20,000,000 shares authorized;
1,760,166, 1,760,166 and 1,991,647 shares issued and
outstanding at December 31, 1997 and 1998 and June 30,
1999 (unaudited), respectively.......................... 1,668,166 1,798,498 3,056,776
Preferred Stock, no par value; 1,000,000, 1,000,000 and
5,000,000 (unaudited) shares authorized as of
December 31, 1997 and 1998 and June 30, 1999,
respectively............................................ -- -- --
Series A Convertible Preferred Stock; no shares, 41,000
and 76,000 shares issued and outstanding as of December
31, 1997 and 1998 and June 30, 1999 (unaudited),
respectively............................................ -- 410,000 760,000
Series B Convertible Preferred Stock; no shares issued and
outstanding as of December 31, 1997 and 1998, and
527,750 shares issued and outstanding as of June 30,
1999 (unaudited)........................................ -- -- 5,127,500
Accumulated deficit....................................... (2,903,932) (4,493,432) (5,971,696)
----------- ----------- ----------
Total shareholders' equity (deficit)............... (1,235,766) (2,284,934) 2,972,580
----------- ----------- ----------
Total liabilities and shareholders' equity
(deficit)........................................ $ 947,708 $ 1,152,847 $5,296,814
=========== =========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE> 73
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 556,217 $1,268,352 $ 1,716,094 $ 830,333 $ 1,112,519
Operating costs and expenses:
Cost of revenue.................. 474,580 870,061 1,057,453 577,854 790,911
Product development.............. 142,188 293,706 443,336 183,605 764,975
Selling, general and
administrative expenses....... 674,797 875,416 1,476,639 574,695 931,339
---------- ---------- ----------- ---------- -----------
Total operating costs and
expenses............... 1,291,565 2,039,183 2,977,428 1,336,154 2,487,225
---------- ---------- ----------- ---------- -----------
Loss from operations............... (735,348) (770,831) (1,261,334) (505,821) (1,374,706)
Other income (expense):
Interest and other income........ 3,186 2,226 2,634 954 35,494
Interest expense -- related
parties....................... (46,801) (182,708) (328,412) (141,443) (137,073)
Interest expense................. -- -- (2,070) (446) (1,979)
Other expense.................... -- (8,792) (318) -- --
---------- ---------- ----------- ---------- -----------
(43,615) (189,274) (328,166) (140,935) (103,558)
---------- ---------- ----------- ---------- -----------
Net loss........................... $ (778,963) $ (960,105) $(1,589,500) $ (646,756) $(1,478,264)
========== ========== =========== ========== ===========
Net loss per share:
Basic............................ $ (0.47) $ (0.55) $ (0.90) $ (0.37) $ (0.77)
========== ========== =========== ========== ===========
Diluted.......................... $ (0.47) $ (0.55) $ (0.90) $ (0.37) $ (0.77)
========== ========== =========== ========== ===========
Weighted average shares of common
stock outstanding:
Basic......................... 1,659,059 1,760,166 1,760,166 1,760,166 1,923,469
========== ========== =========== ========== ===========
Diluted....................... 1,659,059 1,760,166 1,760,166 1,760,166 1,923,469
========== ========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-10
<PAGE> 74
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK TOTAL
---------------------- ----------------- -------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
--------- ---------- ------ -------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... 1,360,166 $1,268,166 -- $ -- -- $ -- $(1,164,864) $ 103,302
Net loss................... -- -- -- -- -- -- (778,963) (778,963)
Issuance of common stock... 400,000 400,000 -- -- -- -- -- 400,000
--------- ---------- ------ -------- ------- ---------- ----------- -----------
Balance at December 31,
1996....................... 1,760,166 1,668,166 -- -- -- -- (1,943,827) (275,661)
Net loss................... -- -- -- -- -- -- (960,105) (960,105)
--------- ---------- ------ -------- ------- ---------- ----------- -----------
Balance at December 31,
1997....................... 1,760,166 1,668,166 -- -- -- -- (2,903,932) (1,235,766)
Net loss................... -- -- -- -- -- -- (1,589,500) (1,589,500)
Issuance of preferred
stock.................... -- -- 41,000 410,000 -- -- -- 410,000
Stock options granted...... -- 130,332 -- -- -- -- -- 130,332
--------- ---------- ------ -------- ------- ---------- ----------- -----------
Balance at December 31,
1998....................... 1,760,166 1,798,498 41,000 410,000 -- -- (4,493,432) (2,284,934)
Net loss (unaudited)....... -- -- -- -- -- -- (1,478,264) (1,478,264)
Issuance of preferred stock
(unaudited).............. -- -- 35,000 350,000 527,750 5,127,500 -- 5,477,500
Issuance of common stock
(unaudited).............. 231,481 1,000,000 -- -- -- -- -- 1,000,000
Issuance of warrant
(unaudited).............. -- 258,278 -- -- -- -- -- 258,278
--------- ---------- ------ -------- ------- ---------- ----------- -----------
Balance at June 30, 1999
(unaudited)................ 1,991,647 $3,056,776 76,000 $760,000 527,750 $5,127,500 $(5,971,696) $ 2,972,580
========= ========== ====== ======== ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-11
<PAGE> 75
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................. $(778,963) $(960,105) $(1,589,500) $(646,756) $(1,478,264)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................... 60,897 100,739 132,267 63,631 76,689
Amortization........................... 11,417 7,775 14,648 5,703 108,921
Provision for loss on doubtful
accounts............................. -- -- 36,500 15,825 23,000
Loss (gain) on disposal of assets...... -- 7,624 3,727 (96) 431
Noncash legal expense.................. -- -- 2,100 -- --
Noncash compensation expense........... -- -- 128,232 -- --
Noncash product development............ -- -- -- -- 258,278
Changes in operating assets and
liabilities:
Accounts receivable.................. (76,563) (165,126) (232,593) 79,628 (51,531)
Accounts receivable -- unbilled...... 8,953 (63,696) 54,150 29,326 (4,880)
Prepaid expenses and other assets.... - (502) (4,409) (165) (142,096)
Accounts payable..................... 39,161 (4,936) 71,942 (7,999) 52,778
Accrued liabilities.................. 1,749 29,425 46,676 3,605 (40,667)
Deferred revenue..................... 28,557 177,241 87,005 (122,446) 61,119
--------- --------- ----------- --------- -----------
Net cash used in operating
activities...................... (704,792) (871,561) (1,249,255) (579,744) (1,136,222)
INVESTING ACTIVITIES:
Purchase of property and equipment....... (113,367) (239,939) (208,577) (100,815) (175,261)
--------- --------- ----------- --------- -----------
Net cash used in investing activities.... (113,367) (239,939) (208,577) (100,815) (175,261)
FINANCING ACTIVITIES:
Proceeds from notes payable to related
parties................................ 450,000 1,185,000 1,040,000 630,000 18,000
Proceeds from issuance of common stock... 400,000 -- -- -- --
Proceeds from issuance of preferred
stock.................................. -- -- 410,000 -- 5,227,500
Payments on notes payable to related
party.................................. (19,045) (18,575) (20,931) (10,153) (11,440)
Payments on capital lease obligations.... - - (4,779) (1,039) (5,944)
--------- --------- ----------- --------- -----------
Net cash provided by financing
activities............................. 830,955 1,166,425 1,424,290 618,808 5,228,116
--------- --------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 12,796 54,925 (33,542) (61,751) 3,916,633
Cash and cash equivalents at beginning of
period................................. 16,644 29,440 84,365 84,365 50,823
--------- --------- ----------- --------- -----------
Cash and cash equivalents at end of
period................................. $ 29,440 $ 84,365 $ 50,823 $ 22,614 $ 3,967,456
========= ========= =========== ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................ $ 48,927 $ 176,708 $ 320,320 $ 134,143 $ 152,052
========= ========= =========== ========= ===========
Capital lease obligations incurred....... $ -- $ -- $ 34,394 $ 19,178 $ 62,607
========= ========= =========== ========= ===========
Conversion of notes payable to common
stock.................................. $ -- $ -- $ -- $ -- $ 1,000,000
========= ========= =========== ========= ===========
Conversion of notes payable to Series B
preferred stock........................ $ -- $ -- $ -- $ -- $ 250,000
========= ========= =========== ========= ===========
Issuance of Series B preferred stock in
exchange for professional services..... $ -- $ -- $ -- $ -- $ 150,000
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes.
F-12
<PAGE> 76
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
HealthStream, Inc., formerly NewOrder Media, Inc. ("the Company"), was
incorporated in 1990 and is an interactive multimedia systems company based in
Nashville, Tennessee. The Company changed its name to HealthStream, Inc. from
NewOrder Media, Inc. on September 1, 1998. The Company provides an interactive
training solution for delivering and tracking computer based education primarily
for the healthcare industry in the United States, utilizing the Training
Navigator(R) (T.NAV(R)) software suite developed by the Company. The Company
also provides custom content development through the organization and
translation of content into an interactive experience, and assists in the
development of websites.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited balance sheet as of June 30, 1999 and the related unaudited
statements of operations, shareholders' equity, and cash flows for the six
months ended June 30, 1998 and 1999, (interim financial statements) have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the interim financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the interim results.
The interim financial statements should be read in conjunction with the
audited financial statements appearing herein. The results of the six months
ended June 30, 1999 may not be indicative of operating results for the full
year.
RECOGNITION OF REVENUE
The Company recognizes revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition."
Revenues are derived from the license of the Company's T.NAV(R) software,
maintenance and support services, custom content development, website
development, professional and technical consulting services, implementation and
training services. Revenues derived from the sale of products requiring
significant modification or customization are recorded based on the percentage
of completion method using labor hours. Software support and maintenance
revenues are recognized ratably over the term of the related agreement. All
other service revenues are recognized as the related services are performed. In
March 1999, the Company began providing educational training services via the
Internet. Through June 30, 1999 revenues from these services have been less than
$5,000.
NET LOSS PER SHARE
The Company computes net loss per share following Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and SEC Staff
Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128, basic
net loss per share is computed by dividing the net loss available to common
shareholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares, composed of incremental common shares issuable upon the exercise of
stock options and warrants, and common shares issuable on assumed conversion of
Series A and B Preferred
F-13
<PAGE> 77
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock, are included in diluted net loss per share to the extent these shares are
dilutive. Common equivalent shares are not included in the computation of
dilutive net loss per share for the years ended December 31, 1996, 1997, 1998
and the six months ended June 30, 1999 because the effect would be anti-
dilutive.
Under the provisions of SAB 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company places its temporary excess cash investments in high quality
short-term money market instruments. At times, such investments may be in excess
of the FDIC insurance limits.
The Company sells its systems and services to various companies in the
healthcare industry. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. During 1996 and 1997, the Company derived approximately 30% and 16%
of its revenues from one customer (Mosby, Inc.), respectively. During 1998, the
Company derived approximately 48% of its revenues from two customers (Mosby,
Inc. and Waverly, Inc.).
CASH AND CASH EQUIVALENTS
The Company considers unrestricted, highly liquid investments with initial
maturities of less than three months to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts and the amounts charged to
bad debt expense were as follows:
<TABLE>
<CAPTION>
ALLOWANCE
BALANCE AT CHARGED TO ALLOWANCE
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES WRITE-OFFS END OF YEAR
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31:
1996...................................... $ -- $ -- $ -- $ --
1997...................................... -- -- -- --
1998...................................... -- 36,500 -- 36,500
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 5-10
Equipment................................................... 3-5
Leasehold improvements...................................... 15
</TABLE>
LONG-LIVED ASSETS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that companies consider whether
indicators of impairment of long-lived assets held for use are present. If such
indicators are present, companies determine whether the sum of the
F-14
<PAGE> 78
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimated undiscounted future cash flows attributable to such assets is less
than their carrying amount, and if so, companies recognize an impairment loss
based on the excess of the carrying amount of the assets over their fair value.
Management periodically evaluates the ongoing value of property and equipment
and has determined that there were no indications of impairment as of December
31, 1996, 1997 and 1998.
DEFERRED REVENUE
Deferred revenue represents the portion of revenue received where the
revenue recognition process is incomplete.
ADVERTISING
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1996, 1997 and 1998, was approximately
$12,500, $8,200 and $2,900, respectively.
PRODUCT DEVELOPMENT COSTS
Research and development costs incurred to establish the technological
feasibility of computer software products are charged to expense as incurred.
The Company capitalizes costs incurred between the point of establishing
technological feasibility and general release when such costs are material. As
of December 31, 1996, 1997 and 1998, the Company has no capitalized computer
software development costs.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates and such differences could be material
to the financial statements.
INCOME TAXES
Prior to October 1, 1998, the Company, with the consent of its
shareholders, elected Subchapter S status under the provisions of the Internal
Revenue Code. The shareholders of an S Corporation are taxed on their
proportionate share of the Company's taxable income in lieu of a corporate
income tax. Accordingly, no provision, benefit, or liability for federal income
taxes has been included in the financial statements for periods prior to October
1, 1998. The Subchapter S election was not available for Tennessee corporate
income tax. On October 1, 1998, the Company terminated the Subchapter S
election. Effective October 1, 1998, the Company began providing for federal
income taxes. Such taxes have been provided in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts approximate the fair
value because of the short maturity of such instruments.
Accounts receivable, accounts receivable-unbilled, accounts payable
and accrued liabilities: The carrying amounts approximate the fair value
because of the short maturity of such instruments.
F-15
<PAGE> 79
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Short and long-term debt: The carrying amounts approximate the fair
value based on current financing for similar loans available to the
Company.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. The adoption of SFAS No. 130 had no effect on the
Company's financial statements.
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires companies to
report selected segment information when certain tests are met. Management has
determined that the Company operates in only one reportable segment meeting the
applicable tests.
As of January 1, 1998, the Company early adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 establishes standards for reporting and presenting
in a full set of general purpose financial statements the costs incurred in the
development of internal-use computer software. Internal-use software is
acquired, internally developed, or modified solely to meet the Company's
internal needs without the intent to market externally. The adoption of SOP 98-1
had no effect on the Company's financial statements.
As of January 1, 1998, the Company early adopted SOP 98-5, "Reporting on
the Costs of Start-Up Activities." SOP 98-5 establishes standards for reporting
and presenting start-up costs in a full set of general purpose financial
statements. Start-up costs, including organizational costs, are expensed as
incurred under this SOP. The adoption of SOP 98-5 had no effect on the Company's
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits -- an amendment of FASB
Statements No. 87, 88 and 106" which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The adoption of SFAS No. 132 had no
effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective as amended for fiscal
quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management of the Company does not expect the
adoption of SFAS No. 133 to have a material effect on the Company's financial
statements.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP 97-2. The Company is required to implement SOP 98-9 for the
year ending December 31, 2000. Adoption of SOP 98-9 is not expected to have a
material effect on the Company's financial statements.
F-16
<PAGE> 80
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTES PAYABLE AND LONG-TERM DEBT -- RELATED PARTIES
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Notes payable-related parties............................... $1,795,000 $2,835,000
========== ==========
Long-term debt-related party................................ $ 57,408 $ 36,477
Less current portion........................................ (20,931) (23,585)
---------- ----------
$ 36,477 $ 12,892
========== ==========
</TABLE>
The Company has a demand notes payable to the Chief Executive Officer
("CEO") and principal shareholder totaling $1,285,000 at December 31, 1997 and
$2,325,000 at December 31, 1998. Subsequent to December 31, 1998, $1,250,000 of
the demand note was converted into Common Stock and Series B Convertible
Preferred Stock and the remaining balance was converted into a new promissory
note (see Note 10). The Company also had a note payable to the CEO totaling
$450,000 at December 31, 1997 and 1998 which was converted to a demand note upon
maturity. These notes were partially secured by accounts receivable and
equipment. Interest accrued at 12% for the amount secured by accounts
receivable, which was $517,000 at December 31, 1998. The remaining balance of
$2,258,000 was unsecured and accrued interest at 13%. Interest is payable
monthly.
The Company has a partially secured demand note payable to a vice president
and stockholder of the Company, totaling $60,000 at December 31, 1997 and 1998.
The note accrued interest at 12% and was paid in full on August 23, 1999.
The Company had an unsecured long-term promissory note payable to the CEO,
totaling $57,408 at December 31, 1997 and $36,477 at December 31, 1998. The note
requires monthly installments of principal and interest of $2,224 through May
23, 2000. The note accrues interest at 12%.
As of December 31, 1998, the annual principal maturities of long-term debt
are as follows:
<TABLE>
<S> <C>
1999........................................................ $23,585
2000........................................................ 12,892
Thereafter.................................................. --
-------
$36,477
=======
</TABLE>
3. INCOME TAXES
As described in Note 1, the Company terminated its Subchapter S election on
October 1, 1998 and became subject to federal income taxes. As a result of the
termination of the S election, the Company was required to provide deferred
federal income taxes under SFAS 109, "Accounting for Income Taxes." The 1998
provision for deferred income taxes includes the effect of recording a net
deferred tax asset and corresponding valuation allowance of $57,287.
F-17
<PAGE> 81
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit differs from the amounts computed by applying the
federal statutory rate of 34% to the loss before income taxes as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax benefit at the statutory rate................... $(264,847) $(326,436) $(540,430)
State income taxes, net of federal benefit.......... (46,738) (57,606) (63,335)
Other............................................... 376 619 2,086
Tax benefit of losses attributable to shareholders
due to S corporation status prior to October 1,
1998.............................................. 264,847 326,436 336,301
Deferred taxes recorded upon termination of S
corporation status................................ -- -- 57,287
Increase in valuation allowance..................... 46,362 56,987 208,091
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
Pro forma income taxes as if the Company had been a C Corporation for all
periods presented have not been reflected in the financial statements because a
100% valuation allowance would have been provided and accordingly there would
not have been a tax benefit.
Deferred federal and state income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ -- $ 13,870
Accrued liabilities....................................... 1,131 5,604
Deferred revenue.......................................... 14,145 122,649
Net operating loss carryforwards.......................... 162,281 271,332
--------- ---------
Total deferred tax assets......................... 177,557 413,455
Less: Valuation allowance................................... (172,391) (380,481)
--------- ---------
5,166 32,974
Deferred tax liability:
Depreciation.............................................. (5,166) (32,974)
Net deferred tax asset............................ $ -- $ --
========= =========
</TABLE>
As of December 31, 1998, the Company has federal and state net operating
loss carryforwards of $307,528 and $4,169,298, respectively, expiring in years
2012 through 2018.
The Company has established a valuation allowance for deferred tax assets
at December 31, 1997 and 1998 due to the uncertainty of realizing these assets
in the future. The valuation allowance increased $208,090 during 1998. No
federal or state income tax payments were made during the year ended December
31, 1996, 1997 or 1998.
4. STOCK OPTION PLAN
The Company's 1994 Employee Stock Option Plan authorizes the grant of
options to employees, officers and directors for up to 4,000,000 shares of
common stock. Options granted under the Plan have terms of no more than ten
years with certain restrictions. The Plan allows the Board of Directors to
F-18
<PAGE> 82
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
determine the vesting period of each grant. The vesting period of the options
granted ranges from immediate vesting to two years.
The Company accounts for its stock incentive plans in accordance with
Accounting Principles Board No. 25 ("APB 25"). The Company has not recognized
compensation expense for stock options, because the exercise price of the
options equals the market price of the underlying stock on the date of grant,
which is the measurement date. If the alternative method of accounting for stock
incentive plans prescribed by SFAS No. 123 had been followed, there would be no
difference in the Company's net loss and net loss per share for the years ended
December 31, 1996 and 1997 since all stock options outstanding during those
years were 100% vested at January 1, 1996. In 1998, the Company's net loss would
have been $1,670,319 and net loss per share would have been $0.95. The resulting
pro forma disclosures may not be representative of that to be expected in future
years. The weighted average fair value of options granted was determined using
the minimum value option pricing model with the indicated assumptions:
<TABLE>
<CAPTION>
1998
-----
<S> <C>
ASSUMPTIONS (WEIGHTED AVERAGE)
Risk-free interest rate..................................... 5.700%
Expected dividend yield..................................... 0.0%
Expected life (in years).................................... 5
</TABLE>
A progression of activity and various other information relative to stock
options is presented in the table below.
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
COMMONS EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year...... 632,778 $1.06 632,778 $1.06 632,778 $1.06
Granted............................... -- -- -- 268,288 4.25
Exercised............................. -- -- -- -- -- --
Forfeited............................. -- -- -- -- (8,750) 4.25
------- ------- -------
Outstanding -- end of year............ 632,778 1.06 632,778 1.06 892,316 1.98
======= ======= =======
Exercisable at end of year............ 632,778 1.06 632,778 1.06 646,778 1.13
======= ======= =======
</TABLE>
Shares of Common Stock available for future grants of options totaled
3,367,222 at December 31, 1997 and 3,107,684 at December 31, 1998. Exercise
prices per share and various other information for options outstanding at
December 31, 1998 are segregated into ranges as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER AVERAGE EXERCISE REMAINING NUMBER EXERCISE PRICE
EXERCISE PRICE PER SHARE OF SHARES PRICE PER SHARE CONTRACTUAL LIFE OF SHARES PER SHARE
------------------------ --------- ---------------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 -- $1.13.............. 632,778 $1.06 6.12 632,778 $1.06
$4.25.................. 259,538 4.25 6.49 14,000 4.25
------- ----- ---- ------- -----
892,316 $1.99 6.23 646,778 $1.13
======= ===== ==== ======= =====
</TABLE>
F-19
<PAGE> 83
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE COMMITMENTS
The Company leases its office facilities. During 1998, the Company leased
additional office space and extended the terms of the original lease through May
2005 under an amended lease agreement. The amended lease provides for two
five-year renewal options. The Company also leases certain office equipment.
Total lease expense under all operating leases was $66,200, $59,184 and $51,756
for the years ended December 31, 1996, 1997 and 1998, respectively. The Company
also leases certain computer equipment from various third parties accounted for
as capital leases. Future rental payment commitments at December 31, 1998 under
the capital and operating leases, having an initial term of one year or more,
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $14,123 $132,530
2000........................................................ 14,123 141,741
2001........................................................ 7,275 140,512
2002........................................................ -- 140,848
2003........................................................ -- 140,848
Thereafter.................................................. -- 168,233
------- --------
Total minimum lease payments...................... 35,521 $864,712
========
Less amounts representing interest.......................... (5,906)
-------
Present value of net minimum lease payments (including
$10,539 classified as current)............................ $29,615
=======
</TABLE>
The carrying value of assets under capital leases, which are included with
owned assets in the accompanying balance sheets is $0 at December 31, 1997 and
$29,140 at December 31, 1998. Amortization of the assets under the capital
leases is included in depreciation expense.
6. LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Numerator:
Net loss......................................... $(778,963) $(960,105) $(1,589,500)
========= ========= ===========
Denominator:
Weighted-average shares.......................... 1,659,059 1,760,166 1,760,166
========= ========= ===========
Net loss per share, basic and diluted.............. $ (0.47) $ (0.55) $ (0.90)
========= ========= ===========
Antidilutive options and convertible preferred
stock not included in loss per share
calculation...................................... 224,675 253,091 374,276
========= ========= ===========
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Employees of the
Company must have attained the age of 21 and have completed six months of
service to be eligible to participate in the plan. Under the plan's
F-20
<PAGE> 84
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
provisions, a plan member may make contributions, on a tax deferred basis, not
to exceed 15% of compensation subject to IRS limitations. The Company does not
provide matching contributions.
8. PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock in one or more series, having the relative voting powers, designations,
preferences, rights and qualifications, limitations or restrictions, and other
terms as the Board of Directors may fix in providing for the issuance of such
series, without any vote or action of the shareholders. At December 31, 1997 and
1998, zero shares and 50,000 shares had been designated as Series A Convertible
Preferred Stock and zero shares and 41,000 shares of Series A Convertible
Preferred Stock were issued and outstanding, respectively. Subsequent to
December 31, 1998, the number of authorized shares of Preferred Stock was
increased to 5,000,000 (see Note 10).
The Company is required at all times to reserve out of its authorized but
unissued shares of Common Stock, a number of its authorized shares of Common
Stock sufficient to effect the conversion into Common Stock of the Series A
Convertible Preferred Stock shares from time to time. At December 31, 1997 and
1998, the Company reserved and kept available zero shares and 94,907 shares of
Common Stock to effect the conversion of the Series A Convertible Preferred
Stock, respectively.
Reference should be made to Note 10 for a discussion of the voting,
conversion, dividend, and liquidation rights and preferences of the Series A
Convertible Preferred Stock as amended subsequent to December 31, 1998.
9. STRATEGIC ALLIANCE
On December 31, 1998, the Company entered into a two-year strategic
alliance with Challenger Corporation ("Challenger") whereby the Company is
granted an exclusive worldwide license for all of Challenger's existing and new
products. The Company is to pay Challenger $95,000 in 1999 and $125,000 in 2000
as nonrefundable advances against royalties. The Company will pay Challenger a
royalty from revenue generated from its products. In the event that royalties
due to Challenger are less than $85,000 through November 15, 1999, the Company
has the right to cancel the second year license.
10. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
Preferred Stock
Subsequent to December 31, 1998, the Company filed a Second Amended and
Restated Charter authorizing the issuance of 20 million shares of Common Stock,
no par value and 5 million shares of Preferred Stock, no par value. The
Preferred Stock may be issued from time to time in one or more series. The
Company has authorized the issuance of 76,000 shares of Preferred Stock
designated as Series A Convertible Preferred Stock and 1,436,961 shares
designated as Series B Convertible Preferred Stock. On August 18, 1999, the
Company filed a Third Amended and Restated Charter to authorize the Company to
issue 650,000 shares of Series C Convertible Preferred Stock.
Each holder of Preferred Stock is entitled to notice of any shareholders'
meeting and shall vote with the holders of Common Stock, except for those
matters required by law to be voted upon separately among the holders of Common
Stock and Preferred Stock. In all cases where the holders of Preferred Stock and
holders of Common Stock are to vote together, the holder of each share of
Preferred Stock is entitled to the number of votes equal to the number of shares
of Common Stock into which each share of Preferred Stock is convertible. Except
as otherwise required by law, the holders of the Preferred Stock have voting
rights and powers equal to the voting rights and powers of the Common Stock.
F-21
<PAGE> 85
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Each share of Series A and B Convertible Preferred Stock is currently
convertible into the Company's Common Stock at the conversion rate of 2.3148
shares of Common Stock per share of Series A and B Convertible Preferred Stock.
Each share of Series C Convertible Preferred Stock is currently convertible into
the Company's Common Stock at the conversion rate of 1.3298 shares of Common
Stock per share of Series C Convertible Preferred Stock. These rates are subject
to an antidilution adjustment if the Company issues or sells shares of Common
Stock at a per share price less than $4.32 for Series A and B Convertible
Preferred Stock and a price less than $7.52 for Series C Convertible Preferred
Stock. An adjustment to the conversion rate of the Preferred Stock would
increase the voting power of the holders thereof.
Each share of Series A, B and C Preferred Stock may, at the option of the
holder, be converted at any time into fully paid and non-assessable shares of
Common Stock. Each share of Preferred Stock shall automatically and immediately
be converted into shares of Common Stock at its then effective conversion rate
upon the earlier of (i) the closing of an initial public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
of 1933 raising gross proceeds of at least $30,000,000 and an offering price per
share greater than or equal to $9.00 or (ii) the date specified by written
agreement of the holders of 66 2/3% of the then outstanding shares of Preferred
Stock.
In the event the Company declares a dividend, the holders of Preferred
Stock shall be entitled to a proportionate share of such dividends as though the
holders of the Preferred Stock were the holders of a number of shares of Common
Stock into which their respective shares of Preferred Stock are convertible as
of the record date fixed for the determination of the holders of Common Stock
entitled to receive such dividend.
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary (a "Liquidation"), the holders of the Preferred
Stock will be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Company to the holders of the
Common Stock, an amount in cash equal to one and one-fourth (1.25) to two (2.00)
times the Liquidation Preference Payment. The Liquidation Preference Payment is
equal to $10.00 per share of Preferred Stock plus an amount equal to all
dividends declared but unpaid.
In January and February 1999 the Company issued 35,000 shares of Series A
Preferred Stock for $350,000. In April and May 1999 the Company received
commitments to purchase 1,030,500 shares of Series B Convertible Preferred Stock
at $10 per share. On April 21, 1999 and May 10, 1999, the Company issued 527,750
shares of the Series B Convertible Preferred Stock in a private placement to a
group of institutional and individual investors in exchange for $4,877,500 in
cash, the conversion of $250,000 of notes payable to the Company's CEO and the
contribution of $150,000 in professional services. The Company issued 502,750
shares of Series B Preferred Stock at $10 per share in August 1999 in exchange
for $4,777,500 in cash and the conversion of $250,000 of notes payable to the
Company's CEO. Also, each holder of Series A and Preferred Stock and Series B
Preferred Stock has an option to purchase up to an additional 20% of the number
of shares purchased in April and May and August 1999, at $10 per share. Each
investor may exercise their option any time prior to April 21, 2000 or upon a
subsequent equity financing of at least $5 million. This financing occurred on
September 15, 1999 and therefore these options expire on October 15, 1999.
Through September 15, 1999 investors have exercised options and purchased 79,801
shares of Series B Convertible Preferred Stock for cash at $10 per share.
Notes Payable -- Related Party
In connection with the above private placement, the Company's CEO converted
$1,250,000 of the $2,325,000 partially secured demand notes (see Note 2) into
Common Stock and Series B Convertible Preferred Stock. On April 21, 1999 the
remaining $1,525,000 was converted into a promissory note along
F-22
<PAGE> 86
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with approximately $18,000 of additional indebtedness loaned to the Company by
the CEO subsequent to December 31, 1998. This note is unsecured and accrues
interest at a variable rate equal to the lesser of the margin rate of interest
at a designated brokerage account or 10.5% and interest is payable monthly. The
note matures on October 21, 2006 or the earliest of: (i) the date determined by
the Company's Board of Directors; (ii) the closing of an initial public offering
of common stock ("IPO") of at least $30 million; (iii) the sale of the Company;
or (iv) the bankruptcy of the Company.
This Note is convertible into Series B Convertible Preferred Stock at the
option of the CEO, upon the occurrence of: (i) the termination by the Company of
the CEO; (ii) any liquidation, dissolution, winding up, consolidation, sale or
merger of the Company; or (iii) an IPO. In August 1999, the CEO converted an
additional $250,000 of notes payable into Series B Preferred Stock resulting in
a principal balance of $1,293,000.
Series C Convertible Preferred Stock
In August and September 1999, the Company issued 627,406 shares of the
Series C Convertible Preferred Stock to a group of institutional and individual
investors at $10 per share.
Common Stock and Common Stock Options and Warrants
In July and August 1999, the CEO exercised options granted in 1995 and
purchased 225,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
On August 9, 1999, the Company issued 2,500 shares of the Company's Common
Stock to an outside consultant at $7.52 per share, for services provided.
On June 14, 1999, the Company entered into a Development and Distribution
Agreement ("the Agreement") with GE Medical Systems, a division of the General
Electric Company. In connection with the Agreement, GE Medical Systems received
warrants to purchase 132,450 shares of the Company's Common Stock at an exercise
price of $7.52 per share. The warrants are exercisable for 10 years. The Company
recognized $258,278 in expense in June 1999 in connection with the issuance of
the warrants. No warrants have been exercised to date.
Subsequent to December 31, 1998 through September 24, 1999, the Company
granted 652,250 options to purchase Common Stock to employees, officers and
directors as follows:
<TABLE>
<CAPTION>
NUMBER OF
EXERCISE PRICE PER SHARE SHARES
- ------------------------ ---------
<S> <C>
$4.32..................................................... 24,250
$7.52..................................................... 628,000
-------
652,250
=======
</TABLE>
Acquisition of Business
On July 23, 1999, the Company acquired selected assets and assumed certain
liabilities of SilverPlatter Education, Inc., a subsidiary of SilverPlatter
Information, Inc., for $1 million. The purchase price was paid by issuing 26,596
shares of the Company's Common Stock at $7.52 per share and the payment of cash
of $800,000 at closing. The acquisition was accounted for as a purchase.
F-23
<PAGE> 87
HEALTHSTREAM, INC.
FORMERLY NEWORDER MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma results of operations give effect to the
operations of SilverPlatter Education as if the acquisition had occurred as of
the first day of the fiscal year immediately preceding the year of the
transaction. The pro forma results of operations do not purport to represent
what the Company's results of operations would have been had such transaction in
fact occurred at the beginning of the periods presented or to project the
Company's results of operations in any future period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
<S> <C> <C>
Revenue..................................................... $ 4,059,529 $ 1,948,346
Net loss.................................................... (2,168,316) (1,686,522)
Net loss per common share:
Basic..................................................... $ (1.21) $ (0.86)
Diluted................................................... $ (1.21) $ (0.86)
</TABLE>
F-24
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of SilverPlatter Education, Inc.,
a subsidiary of SilverPlatter Information, Inc.
We have audited the accompanying balance sheets of SilverPlatter Education,
Inc., a subsidiary of SilverPlatter Information, Inc., as of December 31, 1997
and 1998, and the related statements of operations, stockholders' deficit and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SilverPlatter Education,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 17, 1999
F-25
<PAGE> 89
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 150,151 $ 9,567 $ 347,287
Accounts receivable................................... 260,903 56,020 23,520
Deferred license fees................................. 70,393 34,547 22,444
Prepaid expenses...................................... 66,849 46,858 34,475
----------- ----------- -----------
Total current assets.......................... 548,296 146,992 427,726
Property and equipment:
Furniture and fixtures................................ 41,788 44,174 44,174
Equipment............................................. 325,164 296,618 296,618
Leasehold improvements................................ 3,131 3,131 3,131
----------- ----------- -----------
370,083 343,923 343,923
Less accumulated depreciation and amortization........ 225,225 267,462 290,364
----------- ----------- -----------
144,858 76,461 53,559
Intangible assets, net................................ 166,691 83,344 41,672
Other assets.......................................... 5,040 5,040 --
----------- ----------- -----------
Total assets.................................. $ 864,885 $ 311,837 $ 522,957
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 153,914 $ 80,607 $ 149,703
Accrued liabilities................................... 94,599 51,908 62,011
Due to parent company................................. 3,826,679 4,170,574 4,376,565
Deferred revenue...................................... 1,054,490 490,734 436,601
----------- ----------- -----------
Total current liabilities..................... 5,129,682 4,793,823 5,024,880
Stockholders' deficit:
Common stock, $.01 par value; 200,000 shares
authorized; 1,000 shares issued and outstanding at
December 31, 1997 and 1998 and June 30, 1999
(unaudited)........................................ 10 10 10
Additional paid-in capital............................ 990 990 990
Accumulated deficit................................... (4,265,797) (4,482,986) (4,502,923)
----------- ----------- -----------
Total stockholders' deficit................... (4,264,797) (4,481,986) (4,501,923)
----------- ----------- -----------
Total liabilities and stockholders' deficit... $ 864,885 $ 311,837 $ 522,957
=========== =========== ===========
</TABLE>
See accompanying notes.
F-26
<PAGE> 90
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................................... $ 2,175,894 $2,343,435 $1,291,761 $835,847
Operating costs and expenses:
Cost of revenue............................ 1,057,538 923,254 524,504 350,988
Selling, general and administrative
expenses................................ 2,315,524 1,637,370 880,097 504,796
----------- ---------- ---------- --------
Total operating costs and
expenses......................... 3,373,062 2,560,624 1,404,601 855,784
----------- ---------- ---------- --------
Net loss........................... $(1,197,168) $ (217,189) $ (112,840) $(19,937)
=========== ========== ========== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 91
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997................... 1,000 $10 $990 $(3,068,629) $(3,067,629)
Net loss................................... - - - (1,197,168) (1,197,168)
----- --- ---- ----------- -----------
Balance at December 31, 1997................. 1,000 10 990 (4,265,797) (4,264,797)
Net loss................................... - - - (217,189) (217,189)
----- --- ---- ----------- -----------
Balance at December 31, 1998................. 1,000 10 990 (4,482,986) (4,481,986)
Net loss................................... - - - (19,937) (19,937)
----- --- ---- ----------- -----------
Balance at June 30, 1999 (unaudited)......... 1,000 $10 $990 $(4,502,923) $(4,501,923)
===== === ==== =========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 92
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................ $(1,197,168) $(217,189) $(112,840) $ (19,937)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................. 136,501 143,984 71,591 64,574
Changes in operating assets and liabilities:
Accounts receivable........................ (211,828) 204,883 67,331 32,500
Deferred license fees...................... 25,352 35,846 19,302 12,103
Prepaid expenses and other assets.......... (11,821) 19,991 26,372 12,383
Other assets............................... -- -- -- 5,040
Accounts payable........................... (118,305) (73,307) (19,263) 69,096
Accrued liabilities........................ 12,509 (42,691) 11,115 10,103
Due to parent company...................... 877,603 359,056 147,887 205,991
Deferred revenue........................... 280,289 (563,756) (267,463) (54,133)
----------- --------- --------- ---------
Net cash (used in) provided by
operating activities................ (206,868) (133,183) (55,968) 337,720
INVESTING ACTIVITIES:
Purchase of property and equipment.............. (115,684) (7,401) (5,015) --
----------- --------- --------- ---------
Net cash used in investing activities........... (115,684) (7,401) (5,015) --
----------- --------- --------- ---------
Net increase (decrease) in cash................. (322,552) (140,584) (60,983) 337,720
Cash at beginning of period..................... 472,703 150,151 150,151 9,567
----------- --------- --------- ---------
Cash at end of period........................... $ 150,151 $ 9,567 $ 89,168 $ 347,287
=========== ========= ========= =========
NON-CASH TRANSACTIONS:
Assets transferred to (from) Parent Company, at
net book value................................ $ (250,035) $ 15,161 $ 15,161 $ --
=========== ========= ========= =========
</TABLE>
See accompanying notes.
F-29
<PAGE> 93
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
SilverPlatter Education, Inc. (the "Company") was incorporated on December
29, 1992 and is a publisher of CD-ROM and Internet products in the healthcare
industry. The Company is based in Norwood, Massachusetts and is a wholly-owned
subsidiary of SilverPlatter Information, Inc. (the "Parent"). The Company
primarily focuses on the use of multimedia for continuing medical education and
also produces specialty-oriented bibliographic databases on CD-ROM for
literature searching and clinical reference. The Company's products are offered
globally. SilverPlatter Education is accredited by the Accreditation Council for
Continuing Medical Education.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited balance sheet as of June 30, 1999 and the related unaudited
statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1998 and 1999, (interim financial statements) have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the interim financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the interim results.
The interim financial statements should be read in conjunction with the
audited financial statements appearing herein. The results of the six months
ended 1999 may not be indicative of operating results for the full year.
RECOGNITION OF REVENUE
Subscription revenue is deferred and recognized ratably over the
subscription period which is generally 12 months. Revenues derived from the sale
of products requiring significant modification or customization are recorded
based on the percentage of completion using labor hours. All other service
revenues are recognized as the related services are performed.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. At times, cash balances in the Company's accounts may exceed FDIC
insurance limits.
The Company sells its systems and services to various companies in the
healthcare industry. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers.
The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximate their fair
value because of the short maturity of such instruments.
The Company is dependent upon various information providers to provide
content for use on the Company's products.
F-30
<PAGE> 94
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 7
Equipment................................................... 3
Leasehold improvements...................................... 3
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of acquired subscription lists and are
recorded at cost. Amortization is provided using the straight-line method over
three years. Accumulated amortization totaled approximately $83,300 and $166,700
at December 31, 1997 and 1998, respectively.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Management periodically evaluates
the ongoing value of property, equipment and intangibles and has determined that
there were no indications of impairment for the years ended December 31, 1997
and 1998.
DEFERRED REVENUE
Deferred revenue represents the portion of revenue received where the
revenue recognition process is incomplete.
DEFERRED LICENSE FEES
Deferred license fees represent amounts paid in advance to information
providers. Such fees are deferred and expensed ratably over the terms of the
subscription periods to match the recognition of the related revenue.
ADVERTISING
The Company expenses the costs of advertising as incurred. During 1997 and
1998, advertising expense was approximately $38,400 and $1,100, respectively.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates and such differences could be material
to the financial statements.
F-31
<PAGE> 95
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes have been provided in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes."
NEWLY ISSUED ACCOUNTING STANDARDS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
standards for reporting and presenting in a full set of general purpose
financial statements the costs incurred in the development of internal-use
computer software. Internal-use software is acquired, internally developed, or
modified solely to meet the Company's internal needs without the intent to
market externally. The Company adopted SOP 98-1 on January 1, 1999. The adoption
of SOP 98-1 had no effect on the Company's financial condition or results of
operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP 97-2. The Company is required to implement SOP 98-9 for the
year ending December 31, 2000. SOP 98-9 also extends the deferral of the
application of SOP 97-2 to certain other multiple-element software arrangements
through the year ending December 31, 1999. Management does not expect the
adoption of SOP 98-9 to have a significant effect on the Company's financial
condition or results of operations.
ALLOCATION OF CERTAIN EXPENSES
The Parent provides various administrative services to the Company
including legal assistance, accounting, marketing and advertising services. The
Parent allocated these expenses to the Company. The allocation policy applied by
the Company is as follows: first on the basis of direct usage when identifiable,
with the remainder allocated among the Parent's subsidiaries on the basis of
their respective annual sales. In the opinion of management, this method of
allocation is reasonable and is consistent with Securities and Exchange
Commission Staff Accounting Bulletin No. 55, "Allocation of Expenses and Related
Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business
Components of Another Entity". However, the allocation methodology utilized in
preparing the financial statements of the Company may not necessarily reflect
the results of operations, cash flows, or financial position of the Company in
the future, or what the results of operations, cash flows or financial position
would have been had the Company been a separate stand-alone entity.
Due to parent company included in the balance sheets represents a net
balance as the result of various transactions between the Company and the
Parent. There are no terms of settlement or interest charges associated with the
account balance. The balance is primarily the result of the Parent funding
payroll, other operating, selling, general and administrative expenses of the
Company and allocated expenses incurred by the Parent on behalf of the Company.
F-32
<PAGE> 96
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of transactions in the Due to Parent Company account are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Balance at beginning of year................................ $2,699,041 $3,826,679
Net cash remitted from Parent............................... 876,244 161,584
Allocated expenses from the Parent.......................... 251,394 182,311
---------- ----------
Balance at end of year...................................... $3,826,679 $4,170,574
========== ==========
Average balance during the year............................. $3,251,330 $3,896,040
========== ==========
</TABLE>
2. INCOME TAXES
Income tax benefit differs from the amount computed by applying the federal
statutory rate of 34% to loss before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- --------
<S> <C> <C>
Tax benefit at the statutory rate........................... $(398,537) $(73,844)
State income taxes, net of federal benefit.................. (46,903) (8,722)
Change in valuation allowance............................... 445,440 82,566
--------- --------
Total $ -- $ --
========= ========
</TABLE>
Deferred federal and state income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets:
Depreciation.............................................. $ 18,670 $ 17,357
Amortization.............................................. 27,857 50,674
Allowance for doubtful accounts........................... 3,302 1,921
Net operating loss carryforwards.......................... 950,264 1,014,245
---------- -----------
Total deferred tax assets......................... 1,000,093 1,084,197
Less: Valuation allowance................................... (999,946) (1,082,512)
---------- -----------
147 1,685
Deferred tax liability:
Prepaid assets............................................ (147) (1,685)
---------- -----------
Net deferred tax asset $ -- $ --
========== ===========
</TABLE>
As of December 31, 1998 the Company had net operating loss carryforwards of
$2,699,065 expiring in years 2008 to 2019.
The Company has established a valuation allowance for deferred tax assets
at December 31, 1997 and 1998 due to the uncertainty of realizing these assets
in the future. The valuation allowance increased $82,566 during 1998.
F-33
<PAGE> 97
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASE COMMITMENTS
The Company leased office facilities under an operating lease that expired
in February 1999. Subsequent to February 1999, the Company leases its office
facilities on a month-to-month basis.
Total rent expense under all operating leases was approximately $62,125 and
$64,466 for 1997 and 1998, respectively.
4. EMPLOYEE BENEFIT PLAN
Employees of the Company participate in the Parent's employee benefit plan.
The Parent has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Under the plan's
provisions, a plan member may make contributions, on a tax deferred basis, not
to exceed 15% of compensation. It is the Company's policy to match employer
contributions at a rate of 25% of the first 4% contributed by the employee. The
Company incurred expense on behalf of its participants which totaled
approximately $7,400 and $8,200 in 1997 and 1998, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, along with three other SilverPlatter International, N.V.
(Parent Company of SilverPlatter Information, Inc.) subsidiaries, has guaranteed
repayment of indebtedness under promissory notes given by the Parent. The amount
outstanding at December 31, 1998 under these promissory notes was $1,704,928.
The guarantee is to remain in full force and effect until the promissory notes
are paid in full. The final payment of the promissory notes is for $558,900 and
is due on September 30, 1999.
The Company is a defendant in a legal proceeding in connection with
copyright infringements with one of the Company's vendors. The parties are in
settlement discussions and the plaintiffs are demanding $38,000 to settle the
case. In the opinion of management, the resolution of this proceeding will not
have a material adverse effect on the Company's financial position or results of
operations.
6. IMPACT OF YEAR 2000 (UNAUDITED)
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the Year 2000 as "00" and may assume that the year is 1900 rather than
2000. This could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken. The Company
recognizes the need to minimize the risk that its operations will be adversely
affected by Year 2000 software failures and is in the process of preparing for
the Year 2000.
The Parent has evaluated its Year 2000 risk in three separate categories:
information technology systems ("IT"), non-IT Systems ("Non-IT") and material
third party relationships. The Parent has developed a plan in which the risks in
each of these categories are being reviewed and addressed by the appropriate
level of management as follows:
IT. IT systems have been divided into three classification: database
products, ERL and SPIRS products and internal systems. To date, 169 of the
Parent and Company's database products will be ready by the end of 1999.
The Parent has performed an analysis and made programming changes to ensure
Year 2000 compliance. All of the significant functionality of the Parent
and Company's ERL and SPIRS products technology are Year 2000 compliant
with the exception of minor or cosmetic problems which will be addressed in
subsequent releases. Internal systems are currently 90% Year 2000 ready.
The Company has internally-developed sales, accounts receivable and cash
receipts
F-34
<PAGE> 98
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
software programs which are not Year 2000 compliant. The Company is in the
process of modifying these programs to ensure Year 2000 compliance and
expects that this process will be completed by October 31, 1999.
Non-IT. Non-IT systems involve embedded technologies, such as
microcontrollers or microprocessors. Management believes the Company's
Non-IT risks are minimal. Most of the costs of addressing Non-IT risks are
included in normal upgrade and replacement expenditures which were planned
outside of the Company's Year 2000 review.
Third Party Risk. To help the Company assess the level of Year 2000
exposure and the need for equipment replacement or upgrades, the Parent has
contacted the manufacturers and/or installers of the various software
products and systems used. The Parent and Company believe that with
modifications to existing software, conversions to new software, and
replacement or upgrade of equipment, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely,
the Year 2000 issue could have a material impact on the operations of the
Company.
The Parent and Company obtained written verification from each of its
significant vendors in 1998 and 1999 and performed Year 2000 compliance testing
on products distributed to each of its significant customers.
The Company and Parent believe that the Year 2000 issue is being
appropriately addressed by its material vendors and does not expect the Year
2000 issue to have a material adverse effect on the financial position, results
of operations or cash flows of the Company in future periods. The Parent's and
Company's statements regarding Year 2000 issues are dependent on many factors,
including the ability of the Company's vendors to achieve Year 2000 compliance
and the proper functioning of the IT and non-IT systems and development of
software, some of which are beyond the Company's control.
Given that no significant issues have arisen based on the assessments to
date, the Company has not developed a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. The Parent and the Company will continue to assess the
Year 2000 compliance issue on an on-going basis in an effort to resolve any Year
2000 issue in a timely manner.
The Company has expensed less than $10,000 of costs related to Year 2000
compliance and expects to incur less than $10,000 of additional costs. These
costs have been financed through the Parent.
As discussed in Note 7, on July 23, 1999, HealthStream, Inc. acquired
selected assets of the Company. In connection with this transaction, the Company
entered into a services agreement with the Parent to continue to provide certain
accounting and information systems support until October 31, 1999. Currently,
the Company is transitioning its accounting and information systems support to
HealthStream, Inc.'s own Year 2000 compliant accounting software. This
transition is expected to be complete before December 31, 1999.
7. SUBSEQUENT EVENT
On July 23, 1999, HealthStream, Inc. acquired certain assets and assumed
certain liabilities of the Company for $1 million.
F-35
<PAGE> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount payable by us in connection with the sale of the common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
------------
<S> <C>
SEC registration fee........................................ $ 15,985
NASD filing fee............................................. 6,250
Nasdaq National Market listing fee..........................
Printing and engraving fees and expenses....................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue sky fees and expenses (including legal fees)...........
Transfer agent fees.........................................
Miscellaneous...............................................
------------
Total............................................. $
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Tennessee Business Corporation Act, there is no specific
provision either expressly permitting or prohibiting a corporation from limiting
the liability of its directors for monetary damages. Our charter provides that,
to the fullest extent permitted by the TBCA, a director will not be liable to
the corporation or its shareholders for monetary damages for breach of his or
her fiduciary duty as a director.
The TBCA provides that a corporation may indemnify any director or officer
against liability incurred in connection with a proceeding if the director or
officer acted in good faith or reasonably believed, in the case of conduct in
his or her official capacity with the corporation, that the conduct was in the
corporation's best interest. In all other civil cases, a corporation may
indemnify a director or officer who reasonably believed that his or her conduct
was not opposed to the best interest of the corporation. In connection with any
criminal proceeding, a corporation may indemnify any director or officer who had
no reasonable cause to believe that his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
does not allow indemnification if the director or officer is adjudged to be
liable to the corporation. Similarly, the TBCA prohibits indemnification in
connection with any proceeding charging improper personal benefit to a director
or officer if the director or officer is adjudged liable because a personal
benefit was improperly received.
In cases when the director or officer is wholly successful, on the merits
or otherwise, in the defense of any proceeding instigated because of his or her
status as a director or officer of a corporation, the TBCA mandates that the
corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court may order a corporation to indemnify a director or officer for
reasonable expense if, in consideration of all relevant circumstances, the court
determines that the individual is fairly and reasonably entitled to
indemnification, whether or not the standard of conduct set forth above was met.
Our bylaws provide that we will indemnify and advance expenses to our
directors and officers to the fullest extent permitted by the TBCA. We also
maintain insurance to protect any director or officer against any liability and
will enter into indemnification agreements with each of our directors.
II-1
<PAGE> 100
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our charter. We are not aware of any threatened
litigation or proceeding that may result in a claim for indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following unregistered securities
since January 1, 1996:
- In 1996, an aggregate of 400,000 shares of our common stock were issued
to Robert A. Frist, Jr. in private placements pursuant to Section 4(2) of
the Securities Act at $1.00 per share;
- In 1999, Robert A. Frist, Jr. exercised options received under our
written 1994 stock option plan for 225,000 shares of our common stock
under Rule 701 of the Securities Act at $1.00 per share;
- On April 21, 1999, 231,481 shares of our common stock were issued to
Robert A. Frist, Jr. upon conversion of $1 million in debt pursuant to
Section 3(a)(9) of the Securities Act at $4.32 per share;
- On July 23, 1999, 26,596 shares of our common stock were issued to
SilverPlatter Information, Inc. for an aggregate of $200,000 pursuant to
Section 4(2) of the Securities Act;
- On August 9, 1999, 2,500 shares of our common stock were issued to
Richard Schapiro, for $18,800 worth of consulting services, in a private
placement pursuant to Section 4(2) of the Securities Act;
- In October and November 1998 and January and February 1999, an aggregate
of 76,000 shares of our series A preferred stock were issued only to
accredited investors in private placements under Rule 506 of the
Securities Act at $10.00 per share;
- In 1999, an aggregate of 1,060,301 shares of our series B preferred stock
were issued only to accredited investors in private placements under Rule
506 of the Securities Act at $10.00 per share;
- In 1999, 50,000 shares of our series B preferred stock were issued to
Robert A. Frist, Jr. upon conversion of $500,000 in debt pursuant to
Section 3(a)(9) of the Securities Act at $10.00 per share; and
- In August and September 1999, an aggregate of 627,406 shares of our
series C preferred stock were issued only to accredited investors in
private placements under Rule 506 of the Securities Act at $10.00 per
share.
II-2
<PAGE> 101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
1.1 -- Form of the underwriting agreement among HealthStream, Inc.
and the underwriters
*2.1 -- Asset Purchase Agreement, dated July 23, 1999, among
SilverPlatter Education, Inc., SilverPlatter Information,
Inc. and HealthStream, Inc.
*3.1 -- Form of Fourth Amended and Restated Charter of HealthStream,
Inc.
*3.2 -- Form of Amended and Restated Bylaws of HealthStream, Inc.
4.1 -- Form of certificate representing the common stock, no par
value per share, of HealthStream, Inc.
4.2 -- Article 7 of the Fourth Amended and Restated
Charter -- included in Exhibit 3.1
4.3 -- Article II of the Amended and Restated Bylaws -- included in
Exhibit 3.2
4.4 -- Investors' Rights Agreement, dated April 21, 1999, as
amended August 11, 1999, between HealthStream, Inc. and some
of its shareholders
*4.5 -- Promissory note, dated August 23, 1999, between
HealthStream, Inc., as maker, and Robert A. Frist, Jr., as
lender
5.1 -- Opinion of Bass, Berry & Sims PLC as to the legality of the
common stock being offered
*10.1 -- Series A Convertible Preferred Stock Purchase Agreement
*10.2 -- Series B Convertible Preferred Stock Purchase Agreement
*10.3 -- Series C Convertible Preferred Stock Purchase Agreement
*10.4 -- 1994 Employee Stock Option Plan, effective as of April 15,
1994
*10.5 -- Form of 1999 Stock Incentive Plan
*10.6 -- Form of Indemnification Agreement
*10.7 -- Executive Employment Agreement, dated April 21, 1999,
between HealthStream, Inc. and Robert A. Frist, Jr.
*10.8 -- Lease dated March 27, 1995, as amended June 6, 1995 and
September 22, 1998, between Cummins Station LLC, as
landlord, and NewOrder Media, Inc., as tenant
+10.9 -- Continuing Education Agreement between HealthStream, Inc.
and Vanderbilt University
+10.10 -- Interactive Content Development and Licensing Agreement
between NewOrder Media, Inc. d/b/a HealthStream, Inc. and
Duke University
+10.11 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and The Cleveland Clinic Center for
Continuing Education
+10.12 -- Strategic Alliance Agreement between HealthStream, Inc. and
Challenger Corporation
+10.13 -- Development and Distribution Agreement between HealthStream,
Inc. and GE Medical Systems
+10.14 -- Agreement between HealthStream, Inc. and Medsite.Com, Inc.
+10.15 -- Web Site Linking Agreement between HealthStream, Inc. and
IDX Systems Corporation
+10.16 -- Agreement between HealthStream, Inc. and Phycor, Inc.
+10.17 -- Marketing Services Agreement between HealthStream, Inc. and
HealthGate Data Corp.
+10.18 -- Continuing Education Services Agreement between
HealthStream, Inc. and HealthGate Data Corp.
*23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5.1)
*24.1 -- Power of Attorney (included on page II-5)
*27.1 -- Financial Data Schedule (for SEC use only)
*27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
(b) Financial Statement Schedules.
All schedules have been omitted because they are inapplicable or the
information is provided in the Company's financial statements, including the
notes thereto.
- ------------------
* Filed herewith
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions are included in the
confidential treatment request filed separately with the Commission.
II-3
<PAGE> 102
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; (ii) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on October 13, 1999.
HEALTHSTREAM, INC.
By: /s/ ROBERT A. FRIST, JR.
------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
hereby constitutes and appoints Robert A. Frist, Jr. and Robert H. Laird, Jr.,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and any registration
statement relating to the same offering as this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT A. FRIST, JR. Chief Executive Officer and October 13, 1999
- --------------------------------------------------- Chairman (principal
Robert A. Frist, Jr. executive officer)
/s/ JEFFREY L. MCLAREN President and Director October 13, 1999
- ---------------------------------------------------
Jeffrey L. McLaren
/s/ ROBERT H. LAIRD, JR. Vice President, Director of October 13, 1999
- --------------------------------------------------- Finance, General Counsel
Robert H. Laird, Jr. and Secretary (principal
financial and accounting
officer)
/s/ CHARLES N. MARTIN, JR. Director October 13, 1999
- ---------------------------------------------------
Charles N. Martin, Jr.
Director October , 1999
- ---------------------------------------------------
Steve Kellett
/s/ THOMPSON S. DENT Director October 13, 1999
- ---------------------------------------------------
Thompson S. Dent
</TABLE>
II-5
<PAGE> 104
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
Director October , 1999
- ---------------------------------------------------
M. Fazle Husain
/s/ JOHN H. DAYANI, SR., PH.D Director October 13, 1999
- ---------------------------------------------------
John H. Dayani, Sr., Ph.D
/s/ JAMES F. DANIELL, M.D. Director October 13, 1999
- ---------------------------------------------------
James F. Daniell, M.D.
/s/ WILLIAM STEAD, M.D. Director October 13, 1999
- ---------------------------------------------------
William Stead, M.D.
</TABLE>
II-6
<PAGE> 105
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
1.1 -- Form of the underwriting agreement among HealthStream, Inc.
and the underwriters
*2.1 -- Asset Purchase Agreement, dated July 23, 1999, among
SilverPlatter Education, Inc., SilverPlatter Information,
Inc. and HealthStream, Inc.
*3.1 -- Form of Fourth Amended and Restated Charter of HealthStream,
Inc.
*3.2 -- Form of Amended and Restated Bylaws of HealthStream, Inc.
4.1 -- Form of certificate representing the common stock, no par
value per share, of HealthStream, Inc.
4.2 -- Article 7 of the Fourth Amended and Restated
Charter -- included in Exhibit 3.1
4.3 -- Article II of the Amended and Restated Bylaws -- included in
Exhibit 3.2
4.4 -- Investors' Rights Agreement, dated April 21, 1999, as
amended August 11, 1999, between HealthStream, Inc. and some
of its shareholders
*4.5 -- Promissory note, dated August 23, 1999, between
HealthStream, Inc., as maker, and Robert A. Frist, Jr., as
lender
5.1 -- Opinion of Bass, Berry & Sims PLC as to the legality of the
common stock being offered
*10.1 -- Series A Convertible Preferred Stock Purchase Agreement
*10.2 -- Series B Convertible Preferred Stock Purchase Agreement
*10.3 -- Series C Convertible Preferred Stock Purchase Agreement
*10.4 -- 1994 Employee Stock Option Plan, effective as of April 15,
1994
*10.5 -- Form of 1999 Stock Incentive Plan
*10.6 -- Form of Indemnification Agreement
*10.7 -- Executive Employment Agreement, dated April 21, 1999,
between HealthStream, Inc. and Robert A. Frist, Jr.
*10.8 -- Lease dated March 27, 1995, as amended June 6, 1995 and
September 22, 1998, between Cummins Station LLC, as
landlord, and NewOrder Media, Inc., as tenant
+10.9 -- Continuing Education Agreement between HealthStream, Inc.
and Vanderbilt University
+10.10 -- Interactive Content Development and Licensing Agreement
between NewOrder Media, Inc. d/b/a HealthStream, Inc. and
Duke University
+10.11 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and The Cleveland Clinic Center for
Continuing Education
+10.12 -- Strategic Alliance Agreement between HealthStream, Inc. and
Challenger Corporation
+10.13 -- Development and Distribution Agreement between HealthStream,
Inc. and GE Medical Systems
+10.14 -- Agreement between HealthStream, Inc. and Medsite.Com, Inc.
+10.15 -- Web Site Linking Agreement between HealthStream, Inc. and
IDX Systems Corporation
+10.16 -- Agreement between HealthStream, Inc. and Phycor, Inc.
+10.17 -- Marketing Services Agreement between HealthStream, Inc. and
HealthGate Data Corp.
+10.18 -- Continuing Education Services Agreement between
HealthStream, Inc. and HealthGate Data Corp.
*23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5.1)
*24.1 -- Power of Attorney (included on page II-5)
*27.1 -- Financial Data Schedule (for SEC use only)
*27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------
* Filed herewith
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions are included in the
confidential treatment request filed separately with the Commission.
<PAGE> 1
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into this 23rd day of July 1999, among SilverPlatter Education, Inc., a
Massachusetts corporation ("Seller"), SilverPlatter Information, Inc.
("Shareholder"), and HealthStream, Inc., a Tennessee corporation ("Buyer").
Seller and Shareholder are sometimes hereinafter collectively referred to as the
"Selling Parties."
RECITAL:
WHEREAS, Seller desires to sell to Buyer at the Closing (as hereinafter
defined), and Buyer desires to purchase from Seller certain assets for
developing and providing continuing medical education programs to physicians on
CD-ROM and via the Internet under the names "SilverPlatter Education,"
"Physicians' Home Page" and "Core Curriculum" (the "Business") , as more fully
described herein, upon and subject to the terms and conditions contained in this
Agreement.
NOW, THEREFORE, IN CONSIDERATION of the premises and of the mutual
representations, warranties and covenants which are made and to be performed by
the respective parties, it is agreed as follows:
ARTICLE 1. PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions of this
Agreement, on the Closing Date (as hereinafter defined), Seller shall sell,
transfer, convey, assign and deliver to Buyer and Buyer shall purchase, acquire
and accept from Seller, effective as of midnight on the Closing Date, all of
Seller's right, title and interest in and to the following described assets to
the extent used exclusively in the Business, wherever located (collectively, the
"Assets"):
(a) all fixed assets, machinery and equipment, software, tools, dies,
fixtures, furniture, furnishings, plant and office equipment identified on
Schedule 1.1(a);
(b) all inventories, including supplies, work-in-process, spare parts
and finished goods;
(c) all prepaid supplies and other prepaid expenses (other than prepaid
insurance and postage meter, as set forth on Schedule 1.1(c));
(d) all of Seller's rights in and under leases, contracts set forth on
Schedule 4.17, know-how licenses, purchase and sale orders, quotations and other
agreements to which Seller is a party as of the Closing Date;
(e) all operating data and records of Seller, including books, records,
sales and sales promotional data, advertising materials, customer lists, credit
information, cost and pricing information, supplier lists, business plans,
reference catalogs, and computer programs and electronic data processing
software related to any of the foregoing items, except that minute books and
corporate records, tax returns and litigation files of Seller shall not be
included in the Assets;
1
<PAGE> 2
(f) all engineering and production designs, drawings, formulae,
technology, trade secrets, know-how and other similar data of Seller;
(g) all titles produced by Seller listed in Schedule 1.1(h);
(h) all patents, patent applications, trademarks listed in Schedule
1.1(i), trade names, service marks, registered user entries, copyrights and all
of Seller's right, title and interest in any application for any of the
foregoing, and all claims and causes of action relating to any of the foregoing,
including claims and causes of action for past infringement; and all rights
under permits, licenses, franchises and similar authorizations used by Seller in
its business to the extent transferable;
(i) fifty percent (50%) of the cash collected prior to the Closing with
respect to Seller's core curriculum seminars which have a commencement date
following the Closing Date; and
(j) the goodwill of the business conducted by Seller.
1.2 EXCLUDED ASSETS. Notwithstanding anything else contained herein, the
following assets are excluded from the Assets being acquired by or transferred
to Buyer on the Closing Date (collectively, the "Excluded Assets"):
(a) cash and cash equivalents and securities of Seller, except as
provided in Sections 1.1(i) and 3.2(b)(vi);
(b) accounts receivable and fifty percent (50%) of the balance due on
the core curriculum lectures as of the Closing Date as set forth on Schedule
1.2(b);
(c) rights as lessee or occupant of 100 River Ridge Drive, Norwood,
Massachusetts;
(d) all minute books and corporate records, tax returns and litigation
files of Seller;
(e) any right, title or interest of Seller in any Federal, state, local
or foreign tax refunds (and any income with respect thereto) and tax benefits;
and
(f) Seller's rights under any license to use the tradename
SilverPlatter Education, Inc., the compound trademark SILVERPLATTER EDUCATION,
the trademarks SILVERPLATTER (plus design) (which is the subject of United
States Trademark Registration No. 2,013,062), SILVERPLATTER (stylized) (which is
the subject of United States Trademark Registration No. 1,433,651), ______SPIRS
(which is the subject of United States Trademark Application No. 75/571,060),
WEBMEDLIT, PHYSICIANS' SILVERPLATTER and the design trademark which is the
subject of United States Registration No. 2,122,689, any trade names or
trademarks that are similar to any of the foregoing trade names or trademarks in
visual appearance, phonetic pronunciation or overall commercial impression.
1.3 ASSUMPTION OF LIABILITIES. Except as set forth on Schedule 1.3 hereto and
made a part hereof, or otherwise set forth in this Agreement, Buyer will not
assume any debts, liabilities, obligations, expenses, taxes, contracts or
commitments of Seller of any kind, character or description, whether accrued,
absolute, contingent or otherwise, no matter whether arising before or after the
Closing, and whether or not reflected or reserved against in Seller's financial
statements, books of accounts or records. The Selling Parties will indemnify
Buyer against and hold it harmless from any such obligations and liabilities not
assumed by Buyer. The liabilities and obligations set forth on Schedule 1.3 are
herein referred to as the "Assumed Liabilities."
1.4 ASSIGNMENT OF CONTRACTS. Anything in this Agreement to the contrary
notwithstanding, this
2
<PAGE> 3
Agreement shall not constitute an agreement to assign, and the Assets shall not
include, any claim, contract, instrument, agreement, license, lease, commitment,
sales order, purchase order or any claim or right, or any benefit arising
thereunder or resulting therefrom, if an attempted assignment thereof, without
the consent of a third party thereto, would constitute a breach thereof or in
any way affect the rights of Buyer or Seller thereunder. Seller will use good
faith efforts to obtain the consent of any and all third parties to the
assignment of any such contract or agreement. Seller shall be responsible for
the payment of any transfer or assignment fees required by any third party to
effect the assignment of any such contracts or agreements listed on Schedule
4.17 attached hereto. If such consent is not obtained, or if an attempted
assignment thereof would be ineffective or would affect such rights, Seller will
cooperate with Buyer (but shall not be obligated to incur any expenses in such
efforts) in any arrangement designed to provide for Buyer the benefits under any
such claims, contracts, instruments, agreements, licenses, leases, commitments,
sales orders or purchase orders, including, without limitation, enforcement for
the benefit of Buyer of any and all rights of Buyer or Seller against a third
party thereto arising out of a breach or cancellation by such third party or
otherwise; and any transfer or assignment to Buyer of any property or property
rights or any contract or agreement which shall require the consent or approval
of any third party shall be made subject to such consent or approval being
obtained.
ARTICLE 2. CONSIDERATION
2.1 PURCHASE PRICE. The purchase price for the Assets shall be $1,000,000 (the
"Purchase Price"). Fifty percent (50%) of the Purchase Price shall be paid to
the Seller at Closing by cashier's check or wire transfer of funds. Thirty
percent (30%) of the Purchase Price shall, at Closing, be deposited in an escrow
account at the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
pursuant to an Escrow Agreement under which Buyer shall receive all interest for
deposits in said account, in the form attached as Exhibit A, and shall be paid
to the Seller sixty (60) days from the Closing Date as defined herein by
certified check or wire transfer of funds. The remaining twenty percent (20%)
shall be paid to the Shareholder in the form of Buyer's Common Stock at Closing.
The value of Buyer's Common Stock as of the Closing Date shall be $7.52 per
share. This is the price per share that Buyer is currently offering Series C
Convertible Preferred Stock to a select group of investors. If Buyer sells
Series C Convertible Preferred Stock, or any other class of stock, at its next
round of financing which secures at least $3 million of proceeds for Buyer for
less than $7.52 per share, then the price per share of Buyer's Common Stock that
Seller receives under this Agreement shall be reset to the price per share paid
by investors at the Buyer's next round of financing, and Buyer shall issue to
the Shareholder that number of additional shares of Common Stock that would have
been issued at the lower price per share. If Buyer does not close a round of
financing which secures at least $3 million of proceeds by December 31, 1999,
then the value of the Common Stock shall be reset to $4.32 per share, and Buyer
shall issue to the Shareholder that number of additional shares of Common Stock
which would have been issued at $4.32 per share.
ARTICLE 3. CLOSING; OBLIGATIONS OF THE PARTIES
3.1 CLOSING DATE. The closing (the "Closing") shall take place on July 23, 1999,
at the offices of Buyer, 209 10th Avenue South, Suite 450, Nashville, Tennessee
37203, or at such other time and place as the parties hereto mutually agree (the
"Closing Date").
3.2 OBLIGATIONS OF THE PARTIES AT THE CLOSING.
(a) At the Closing, Buyer shall deliver to Seller (or Seller's agent):
3
<PAGE> 4
(i) the consideration as specified in Section 2.1, as well as
payments for the services set forth in Sections 6.9 through 6.11,
should Buyer choose to request Seller to perform them;
(ii) payment for the pro rata share of July rent and utilities at
50 Beacon Street, Boston, which equals $1,325 and payment for the right
to continue to occupy space at 100 River Ridge Drive, Norwood for the
month following the Closing Date, which equals $5,000;
(iii) a copy of resolutions of the Board of Directors of Buyer,
certified by Buyer's Secretary, authorizing the execution, delivery and
performance of this Agreement and the other documents referred to
herein to be executed by Buyer, and the consummation of the
transactions contemplated hereby;
(iv) a certificate in the form of Exhibit B hereto of Buyer
certifying as to the accuracy of Buyer's representations and warranties
at and as of the Closing and that Buyer has performed or complied with
all of the covenants, agreements, terms, provisions and conditions to
be performed or complied with by Buyer at or before the Closing;
(iv) a copy of the Buyer's Charter, certified by the Tennessee
Secretary of State;
(v) certificates of existence and good standing for the Buyer,
certified by the Secretary of State of Tennessee, dated within ten (10)
business days of Closing:
(vi) the opinion of legal counsel for the Buyer, the terms of which
are substantially as set forth in Section 9.4;
(vii) an executed original of the Trademark License, in the form
attached as Exhibit C;
(viii) a license to the Selling Parties to MD Digests and Internet
Library, in the form attached as Exhibit D; and
(ix) a license to the Selling Parties to use the MD Digests and
Internet Library trademarks, in the form attached as Exhibit E;
(x) an executed copy of the Escrow Agreement, in the form attached
as Exhibit A;
(xi) permission to KnowledgeCite, Inc. to continue to occupy
certain space at 50 Beacon Street, Boston, until July 31, 1999 in the
form of Exhibit G-3; and
(xii) such other certificates and documents as Selling Parties or
their counsel may reasonably request.
(b) At the Closing, Selling Parties will deliver to Buyer:
(i) such bills of sale, assignments, and other good and sufficient
instruments of conveyance and transfer, in form and substance
reasonably satisfactory to Buyer, as shall be effective to vest in
Buyer all of Seller's and the Shareholders' title to and interest in
the Assets, and, simultaneously with such delivery, will take such
steps as may be necessary to put Buyer in actual possession and
operating control of the Assets;
(ii) a certificate of each of the Selling Parties in the form of
Exhibit F hereto certifying as to the accuracy of the Selling Parties
representations and warranties at and as of the Closing and that they
have performed or complied with all of the covenants, agreements,
terms,
4
<PAGE> 5
provisions and conditions to be performed or complied with by each of
them at or before the Closing;
(iii) copy of resolutions of the Board of Directors and
Shareholders of Seller, certified by Seller's Secretary, authorizing
the execution, delivery and performance of this Agreement and the other
documents referred to herein to be executed by Seller, and the
consummation of the transactions contemplated hereby;
(iv) the opinion of legal counsel for the Seller, the terms of
which are substantially as set forth in Section 8.4;
(v) an assignment of the lease for 50 Beacon Street, Boston, in the
form attached as Exhibit G-1, and permission to occupy space at 100
River Ridge Drive, in the form attached as Exhibit G-2;
(vi) fifty percent (50%) of the cash collected prior to the Closing
with respect to Seller's core curriculum seminars, which have a
commencement date following the Closing Date;
(vii) certificates of existence and good standing for the Seller,
certified by the Secretary of State of Massachusetts, dated July 14,
1999;
(viii) a license to Buyer to WebMedLit, in the form attached as
Exhibit H;
(ix) a license to Buyer to use the WebMedLit trademarks, in the
form attached as Exhibit I;
(x) a license to use the Medline database, buildware and SPIRS
software, in the form attached as Exhibit J;
(xi) Selling Parties shall have executed the Non-Competition
Agreement in the form of Exhibit K hereto and of even date herewith;
(xii) Selling Parties shall have executed the Shareholders'
Agreement in the form of Exhibit L hereto and of even date herewith;
(xiii) an executed Drug Information Handbook Database Agreement, in
the form attached as Exhibit M;
(xiv) Selling Parties shall have executed the Voting Agreement in
the form of Exhibit N hereto and of even date herewith;
(xv) Selling Parties shall have executed the Co-Sale Agreement in
the form of Exhibit O hereto and of even date herewith;
(xvi) payment for the right to continue to occupy 50 Beacon Street,
Boston until July 31, 1999, which equals $260.00; and
(xvii) such other certificates and documents as Buyer or its
counsel may reasonably request.
5
<PAGE> 6
ARTICLE 4. REPRESENTATIONS AND WARRANTIES BY SELLING PARTIES
Selling Parties hereby represent and warrant as follows:
4.1 AUTHORIZATION. Seller has full corporate power and authority (including all
necessary approvals of Seller's shareholders) to enter into this Agreement and
perform its obligations hereunder and carry out the transactions contemplated
hereby. The Board of Directors of Seller has taken all action required by law,
its Articles of Incorporation and its Bylaws to authorize the execution and
delivery by Seller of this Agreement and the consummation by Seller of the
transactions contemplated hereby. This Agreement constitutes the valid and
binding agreement of Seller, enforceable against Seller in accordance with its
terms.
4.2 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts. Seller has full corporate power and authority to
transfer the Assets to Buyer, to carry on its business as now conducted and
possesses all governmental and other permits, licenses and other authorizations
to own, lease or operate its assets and properties as now owned, leased and
operated and to carry on its business as presently conducted. Seller is not
licensed or qualified to do business as a foreign corporation in any
jurisdiction and neither the properties owned or leased nor the business
transacted by Seller makes such licensing or qualification to do business as a
foreign corporation necessary, and no other jurisdiction has demanded, requested
or otherwise indicated that (or inquired whether) Seller is required so to
qualify.
4.3 SUBSIDIARIES. Seller neither owns nor has an interest in, directly or
indirectly, any other corporation, partnership, joint venture or other business
organization.
4.4 NO VIOLATION. The execution and delivery of this Agreement by Seller does
not, and the consummation of the transactions contemplated hereby will not, (a)
violate any provision of, or result in the creation of any lien or security
interest under, any agreement, indenture, instrument, lease, security agreement,
mortgage or lien to which Seller is a party or by which any of Seller's assets
or properties are bound; (b) violate any provision of the Articles of
Incorporation or Bylaws of Seller; (c) violate any order, arbitration award,
judgment, writ, injunction, decree, statute, rule or regulation applicable to
Seller; or (d) violate any other contractual or legal obligation or restriction
to which Seller is subject.
4.5 FINANCIAL STATEMENTS. Seller has delivered to Buyer: (a) balance sheets of
Seller as at December 31 in each of the years 1996, 1997, and 1998 and for 1998
the related statements of income, changes in stockholders' equity and cash flow
including the notes thereto (the "Historical Financial Statements") and (b) a
balance sheet of Seller as at June 30, 1999 (the "Interim Balance Sheet") and
related statements of income, changes in shareholder's equity and cash flow for
the six (6) months then ended (collectively the "Interim Financial Statements,"
and together with the Historical Financial Statements, the "Financial
Statements"). The Financial Statements fairly present the assets, liabilities,
financial condition and results of operations of Seller as at the respective
dates thereof and for the periods therein referred to, and, with respect to
1998, in accordance with generally accepted United States accounting principles;
and the Financial Statements reflect the consistent application of such
accounting principles for 1998. The date of the Interim Balance Sheet included
in the Financial Statements is sometimes hereinafter referred to as the Balance
Sheet Date.
4.6 ASSETS. Except for the trademarks referenced in the Trademark Licenses
attached as Exhibits C, E and I hereto, the Assets constitute substantially all
the assets owned, leased or used by Seller which are necessary to the operation
of Seller's business as now being conducted.
6
<PAGE> 7
4.7 TANGIBLE ASSETS. Schedule 1.1(a) contains an accurate list as of December
31, 1998, of all material fixed and other tangible assets and personal property
owned by Seller. All such plants, structures, machinery and equipment are in
good working condition and repair, normal wear and tear excepted, and are
adequate for the operations as currently being conducted by Seller. All such
plants, structures, machinery and equipment conform in all material respects to
applicable health, sanitation, fire, safety and labor laws and ordinances.
Seller does not own or lease any real property.
4.8 TITLE TO PROPERTIES; ENCUMBRANCES. Except as set forth in Schedule 4.8,
Seller has good, valid and marketable title to all Assets, personal, tangible
and intangible, including, without limitation, the Assets reflected in the
Financial Statements (except for inventory sold since the date thereof in the
ordinary course of business and consistent with past practice). None of the
Assets is subject to any mortgage, pledge, lien, security interest, conditional
sale agreement, encumbrance or charge of any kind, except (a) liens shown on the
Financial Statements as securing specified liabilities (with respect to which no
default exists), (b) liens for current taxes not yet due, (c) minor
imperfections of title and encumbrances, if any, which are not substantial in
amount, do not detract from the value of the property subject thereto and do not
impair the use of the property subject thereto or impair the operations of
Seller including, but not limited to, those liens and encumbrances described on
Schedule 4.8.
4.9 TRADEMARKS, PATENTS, ETC. Schedule 4.9 is an accurate and complete list of
all registered patents, trademarks, tradenames, trademark registrations, service
names, service marks, copyrights, formulas and applications therefor owned by
Seller. Schedule 1.1(i) and the trademarks licensed under the Trademark License
and WebMedLit Trademark License are the complete list of trademarks, tradenames,
service names and service marks owned by Selling Parties or their affiliates
used by Seller in the operation of Seller's business, title to each of which is,
except as set forth on Schedule 4.9 hereto, held by Seller free and clear of all
adverse claims, liens, security agreements, restrictions or other encumbrances.
Except for the copyright infringement claim by the American Academy of
Ophthalmology more particularly described in Schedule 4.9 (the "AAO Claim"),
there is no infringement action, lawsuit, claim or complaint which asserts that
Seller's operations violate or infringe the rights or the trade names,
trademarks, trademark registration, service name, service mark or copyright of
others with respect to any apparatus or method of Seller or any adversely held
trademark, trade name, trademark registration, service name, service mark or
copyright, and Seller is not in any way making use of any confidential
information or trade secrets of any person except with the consent of such
person.
4.10 NO UNDISCLOSED LIABILITY. Except as and to the extent of the amounts
specifically reflected or reserved against in the Financial Statements or
disclosed in the notes thereto, Seller does not have any knowledge of any
material liabilities or obligations of any nature, whether or not absolute,
accrued, asserted, liquidated, matured, contingent or otherwise and whether due
or to become due (including, without limitation, liabilities for taxes and
interest, penalties and other charges payable with respect thereto) which alone
or in the aggregate may affect Seller's ability to transfer the Assets hereby
or, from and after Closing, Buyer's right, title and interest in and to the
Assets and Buyer's use and enjoyment thereof.
4.11 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set forth on
Schedule 4.11, since the Balance Sheet Date, Seller has not:
(a) suffered any material adverse change in its working capital,
financial condition, assets, liabilities, business or prospects, experienced any
labor difficulty, or suffered any material casualty loss (whether or not
insured);
7
<PAGE> 8
(b) made any change in its business or operations or in the manner of
conducting its business other than changes in the ordinary course of business;
incurred any obligations or liabilities (whether absolute, accrued, contingent
or otherwise and whether due or to become due), except items incurred in the
ordinary course of business and consistent with past practice, or experienced
any change in any assumptions underlying or methods of calculating any bad debt,
contingency or other reserves;
(c) paid, discharged or satisfied any claim, lien, encumbrance or
liability (whether absolute, accrued, contingent or otherwise and whether due or
to become due), other than claims, encumbrances or liabilities (i) which are
reflected or reserved against in the Financial Statements and which were paid,
discharged or satisfied since the date thereof in the ordinary course of
business and consistent with past practice, or (ii) which were incurred and
paid, discharged or satisfied since the Balance Sheet Date in the ordinary
course of business and consistent with past practice;
(d) written down the value of any inventory, or written off as
uncollectible any notes or accounts receivable or any portion thereof, except
for immaterial write-downs and write-offs made in the ordinary course of
business, consistent with past practice and at a rate no greater than during the
fiscal year ended December 31, 1998;
(e) canceled any other debts or claims, or waived any rights, of
substantial value;
(f) sold, transferred or conveyed any of its properties or assets
(whether real, personal or mixed, tangible or intangible), except in the
ordinary course of business and consistent with past practice;
(g) disposed of or permitted to lapse, or otherwise failed to preserve
the exclusive rights of Seller to use any registered patent, trademark, trade
name, logo or copyright or any such application, or disposed of or permitted to
lapse any license, permit or other form of authorization, or disposed of or
disclosed to any person any trade secret, formula, process or know-how;
(h) granted any increase in the compensation of any officer, director,
employee or agent (including, without limitation, any increase pursuant to any
bonus, pension, profit sharing or other plan or commitment) which is out of the
ordinary course of business, or adopted any such plan or other arrangements; and
no such increase, or the adoption of any such plan or arrangement, is planned or
required;
(i) made any capital expenditures or commitments in excess of $10,000
in the aggregate for replacements or additions to property, plant, equipment or
intangible capital assets;
(j) made any change in any method of accounting or accounting practice;
(k) paid, loaned or advanced any amount to or in respect of, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement, arrangement or
transaction with, any of the Selling Parties or the officers or directors of
Seller, any affiliates or associates of any Selling Party or any of their
respective officers or directors, or any business or entity in which any of such
persons has any direct or material indirect interest, except for compensation to
the officers and employees of Seller at rates not exceeding the rates of
compensation in effect at the Balance Sheet Date and advances to employees in
the ordinary course of business for travel and expense disbursements in
accordance with past practice; or
(l) agreed, whether in writing or otherwise, to take any action
described in this Section 4.11.
4.12 TAX MATTERS. Seller has duly filed all Tax reports and returns required to
be filed by it and has duly paid all Taxes and other charges (whether or not
shown on any Tax return) due or claimed to be due from it by federal, foreign,
state or local taxing authorities; and true and correct copies of all Tax
reports
8
<PAGE> 9
and returns relating to such Taxes and other charges for the period December 31,
1992 to December 31, 1998 have been heretofore delivered to Buyer. The reserves
for Taxes contained in the Financial Statements and carried on the books of
Seller are adequate to cover all Tax liabilities as of the date of this
Agreement. Since the Balance Sheet Date, Seller has not incurred any Tax
liabilities other than in the ordinary course of business; there are no Tax
liens (other than liens for current Taxes not yet due) upon any properties or
assets of Seller (whether real, personal or mixed, tangible or intangible), and,
except as reflected in the Financial Statements, there are no pending or
threatened questions or examinations relating to, or claims asserted for, Taxes
or assessments against Seller, and there is no basis for any such question or
claim. Seller has not granted or been requested to grant any extension of the
limitation period applicable to any claim for Taxes or assessments with respect
to Taxes. For purposes of this Agreement, "Tax" means any federal, state, local,
or foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Section 59A of the Internal Revenue Code of 1986, as
amended ("Code")), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.
4.13 COMPLIANCE WITH APPLICABLE LAW. To Seller's knowledge, Seller has in the
past duly materially complied and is presently duly materially complying, in the
conduct of its business and the ownership of its assets with all applicable
laws, whether statutory or otherwise, rules, regulations, orders, ordinances,
judgments and decrees of all governmental authorities (federal, state, local or
otherwise) (collectively, "Laws"). None of the Selling Parties has received any
notice of, or notice of any investigation of, a possible violation of any
applicable Laws, or any other Law or requirement relating to or affecting the
operations or properties of Seller.
4.14 LITIGATION. Except for the AAO Claim, to the best of the Selling Parties'
knowledge, there are no claims, actions, suits, proceedings or investigations
pending or threatened by or against, or otherwise affecting the Assets or the
Business at law or in equity or before or by any federal, state, municipal or
other governmental department, commission, board, agency, instrumentality or
authority. The Selling Parties do not know or have any reason to know of any
basis for any such claim, action, suit, proceeding or investigation.
4.15 INSURANCE. Seller has not been refused any insurance, nor has its coverage
been limited, by any insurance carrier to which it has applied for insurance or
with which it has carried insurance during the last five years.
4.16 EMPLOYEES AND FRINGE BENEFIT PLANS.
(a) Schedule 4.16 sets forth the names, ages and titles of all
employees of Seller earning in excess of $25,000 per annum, and the annual rate
of compensation (including bonuses) being paid to each such employee as of the
most recent practicable date.
(b) Schedule 4.16 lists each employment, bonus, deferred compensation,
pension, stock option, stock appreciation right, profit-sharing or retirement
plan, arrangement or practice, each medical, vacation, retiree medical,
severance pay plan, and each other agreement or fringe benefit plan, arrangement
or practice, of Seller, whether legally binding or not, which affects one or
more of its employees, (collectively, the "Plans"). Included in the Plans listed
on Schedule 4.16 are all "employee benefit plans" as defined by Section 3(3) of
the Employee Retirement Income Security Act of 1974, as
9
<PAGE> 10
amended ("ERISA"). Seller has delivered to Buyer a copy of the Sanford Herald
401(k) Profit Sharing Plan ("Seller's 401(k) Plan"). Seller maintains no Plans
which are subject to Title IV of ERISA or the minimum funding standards of
Section 412 of the Code.
(c) Seller does not have any commitment, whether formal or informal and
whether legally binding or not, (i) to create any additional such Plan, or (ii)
to modify or change any such Plan so as to provide greater benefits.
(d) To Seller's knowledge, Seller has complied in all material respects
with all applicable federal, state and local laws, rules and regulations
relating to employees' employment and/or employment relationships, including,
without limitation, wage related laws, antidiscrimination laws, employee safety
laws and COBRA (defined herein to mean the requirements of Code Section 4980B,
Proposed Treasury Regulations Section 1.162-26 and Section 54.4980B-1 and Part 6
of Subtitle B of Title I of ERISA).
(e) Seller is not a party to any contract or agreement or requirement
of law which would require Buyer to hire, or subject Buyer to liability if it
did not hire, any employee of Seller or which would require Buyer to pay or
provide, or subject Buyer to liability if it did not pay or provide, any
employee benefits (other than COBRA continuation coverage) to any employee of
Seller for periods prior to or after the Closing Date (including any and all
employee benefits and any compensatory, overtime, vacation, sick or holiday
pay).
(f) None of the Plans which are "welfare benefit plans," within the
meaning of Section 3(l) of ERISA, provide for continuing benefits or coverage
after termination or retirement from employment, except for COBRA rights under
Seller's group medical plan, a "group health plan" as defined in Code Section
4980B(g) and ERISA.
(g) Neither the Seller nor any affiliate of Seller (as defined in
ERISA) has ever participated in or withdrawn from a multi-employer plan as
defined in Section 4001(a)(3) of Title IV of ERISA, and Seller has not incurred
and does not owe any liability as a result of any partial or complete withdrawal
by any employer from such a multi-employer plan as described under Sections
4201, 4203, or 4205 of ERISA.
(h) Seller maintains for its eligible employees the Seller's 401(k)
Plan, a profit sharing plan that permits employee elective deferrals under
Section 401(k) of the Code. Buyer maintains for its eligible employees a profit
sharing plan that permits employee elective deferrals under Section 401(k) of
the Code ("Buyer's 401(k) Plan"). Seller's 401(k) Plan has been determined by
the Internal Revenue Service to be qualified under Section 401(a) of the Code
and the trust related thereto has been determined to be exempt from tax pursuant
to Section 501(a) of the Code. No event has occurred since the date of such
determination, including effective changes in laws or modifications to Seller's
401(k) Plan or arrangement, that would adversely affect such qualification or
tax exempt status, other than the failure to make any required amendments, the
time for adoption of which has not yet expired. Seller has delivered to Buyer
complete copies of the most recent Internal Revenue Service determination letter
with respect to Seller's 401(k) Plan.
4.17 CONTRACTS AND COMMITMENTS. Schedule 4.17 sets forth the list of contracts
included in the Assets. Except as set forth on Schedule 4.17:
(a) The legal enforceability after the Closing of the rights of Seller
under any of its contracts will not be affected in any manner by the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
10
<PAGE> 11
(b) Seller has no sales or purchase commitments which are in excess of
the normal, ordinary and usual capacity or requirements of its business.
(c) Except as described on Schedule 4.16, Seller is not a party to or
bound by (i) any outstanding contracts with officers, employees, agents,
consultants, advisors, salesmen, or sales representatives, that are not
cancelable by Seller on notice of not longer than 30 days and without liability,
penalty or premium, (ii) any agreement or arrangement providing for the payment
of any bonus or commission based on sales or earnings, or (iii) any agreements
that contain any severance or termination pay, liabilities or obligations.
(d) Seller is not a party to any licensing agreement as licensee.
(e) Seller is not restricted or purported to be restricted by agreement
or otherwise from carrying on its business anywhere in the world.
4.18 ACCOUNTS PAYABLE. All accounts and notes payable of Seller, whether
reflected in the Financial Statements or otherwise, with an invoice date prior
to the Closing shall be paid by the Selling Parties.
4.19 ORDERS, COMMITMENTS AND RETURNS. The aggregate of all accepted and unfilled
orders for the sale of merchandise entered into by Seller does not exceed an
amount which can reasonably be expected to be filled in the ordinary course of
business, assuming it is operated following the Closing in a comparable manner
as it is being operated prior to Closing (all of which orders, contracts and
commitments were made in the ordinary course of business). Seller does not know
or have reason to believe that either the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby will
result in any cancellations or withdrawals of accepted and unfilled orders for
the sale of Seller's merchandise.
4.20 SUPPLIERS. Neither of the Selling Parties has received any indication from
any supplier (or otherwise has any reason to believe) that any such supplier
will not continue as a supplier of Buyer after the Closing. Schedule 4.20
contains the name and address of the company which masters and duplicates
Sellers CD-ROMs, and fulfills the Physicians' SilverPlatter CD-ROMs.
4.21 LABOR AND EMPLOYMENT MATTERS. There are no collective bargaining agreements
in effect between Seller and labor unions or organizations representing any of
Seller's employees. During the past seven years, there has been no request for
collective bargaining or for an employee election from any employee, union or
the National Labor Relations Board. Seller is, to its knowledge, in compliance
with all federal, state and local laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and is not
engaged in any unfair labor practice. There is no unfair labor practice
complaint against Seller pending or threatened before the National Labor
Relations Board or the United States Department of Labor or any state or local
governmental body or agency. There is no labor strike, dispute, slowdown or
stoppage in progress or threatened against or involving Seller. No question
concerning representation has been raised or is threatened respecting the
employees of Seller. No grievance or arbitration proceeding is pending and no
claim therefor exists. No private agreement restricts Seller from relocating,
closing or terminating any of its operations or facilities. Seller has not in
the past five years experienced any labor strike, dispute, slowdown, stoppage or
other labor difficulty.
4.22 NO BREACH. Each written contract or agreement referred to in this Agreement
or in any Schedule hereto under which Seller has any right, interest or
obligation is in full force and effect. Except for the AAO Claim, there have
been no threatened cancellations thereof nor outstanding disputes thereunder,
11
<PAGE> 12
and Seller has not breached any provision of, nor does there exist any default
in any material respect under, or event (including the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby)
which is, or with the giving of notice or the passage of time or both would
become, a breach or default in any material respect under the terms of any such
arrangement.
4.23 INVENTORY. All inventory of Seller, whether reflected in the Financial
Statements or otherwise, is of good and merchantable quality and is usable and
saleable in the ordinary course of business, except for items of obsolete
materials and materials of below standard quality, all of which have been
written down in the Financial Statements to realizable market value or for which
adequate reserves have been provided therein. The present quantities of all
inventory of Seller are reasonable in the present circumstances of its business.
Except as set forth in its end-user licenses, Seller is not under any liability
or obligation with respect to the return of inventory or merchandise in the
possession of wholesalers, retailers or other customers.
4.24 PROFESSIONAL FEES. Neither Seller nor any of the Selling Parties has done
anything to cause or incur any liability or obligation for investment banking,
brokerage, finders, agents or other fees, commissions, expenses or charges in
connection with the negotiation, preparation, execution or performance of this
Agreement or the consummation of the transactions contemplated hereby, and
Seller does not know of any claim by anyone for such a fee, commission, expense
or charge.
4.25 CONSENTS AND APPROVALS. Except as set forth in Section 4.17 regarding
Contracts or described in Section 4.29 regarding ACCME Accreditation, Seller has
obtained all consents, approvals, authorizations or orders of third parties,
including governmental authorities, necessary for the authorization, execution
and performance of this Agreement by Seller.
4.26 SHAREHOLDER AUTHORITY. This Agreement constitutes the legal, valid and
binding obligation of Shareholder, enforceable against the Shareholder in
accordance with its terms. Shareholder has the absolute and unrestricted right,
power, authority and capacity to execute and deliver this Agreement and to
perform his or its obligations under this Agreement.
4.27 CORPORATE RECORDS. Seller has delivered or provided to Buyer for its review
true complete and correct copies of the following items, as amended and
presently in effect, for Seller: (a) Articles of Incorporation, (b) Bylaws, (c)
minute books, and (d) stock certificate receipts (all hereinafter referred to as
the "Corporate Records"). The Minute Books contain a record of all shareholder
and director meetings and actions taken without a meeting from December 29, 1992
to the date hereof. The stock certificate receipts reflect all transactions in
Seller's capital stock from the date of its incorporation to the date hereof.
4.28 FULL DISCLOSURE. Neither the information provided by the Selling Parties in
this Agreement, nor any Schedule, exhibit, list, certificate or other instrument
and document furnished by any Selling Party to Buyer pursuant to this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated herein or therein or necessary to make the statements
and information contained herein or therein not misleading. No Selling Party has
withheld from Buyer disclosure of any event, condition or fact which such
Selling Party knows, or has reasonable grounds to know, may materially adversely
affect Seller's assets, prospects or condition (financial or otherwise).
4.29 ACCME ACCREDITATION. To the best of Seller's knowledge, its continuing
medical education ("CME") product line complies with the rules and regulations
of the Accreditation Council for Continuing Medical Education ("ACCME").
Seller's CME product line conforms to the "Essentials and
12
<PAGE> 13
Guidelines" in the form of Exhibit P hereto as articulated by the ACCME. Seller
has no knowledge of any acts or omissions by Seller in its business practices
that would impede continued ACCME accreditation in the near future and Seller
shall, for up to one year following the Closing, use reasonable efforts to
assist Buyer in securing the CME accreditation of Seller's current CME titles
going forward. However, the ACCME operates outside the control of Seller and
Shareholder and therefore there can be no guarantees that ACCME accreditation
will continue into the future.
4.30 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Selling
Parties in reliance upon such Selling Parties' representation to the Buyer,
which by such Selling Parties' execution of this Agreement Selling Parties
hereby confirm, that the Common Stock to be purchased by Selling Parties (the
"Securities") will be acquired for investment for such Selling Parties' own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Selling Parties have no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, Selling Parties further represent that
Selling Parties do not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to any of the Securities.
4.31 RELIANCE UPON SELLING PARTIES' REPRESENTATIONS. Selling Parties understand
that the Common Stock is not registered under the Securities Act on the ground
that the sale provided for in this Agreement and the issuance of securities
hereunder is exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, and that the Buyer's reliance on such exemption is
predicated on the Selling Parties' representations set forth herein.
4.32 RECEIPT OF INFORMATION. Selling Parties believe they have received all the
information Selling Parties consider necessary or appropriate for deciding
whether to purchase the Common Stock. Selling Parties further represent that
they have had an opportunity to ask questions and receive answers from the Buyer
regarding the terms and conditions of the offering of the Common Stock and the
business, properties, prospects, and financial condition of the Buyer and to
obtain additional information (to the extent the Buyer possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to Selling Parties
or to which Selling Parties had access. The foregoing, however, does not limit
or modify the representations and warranties of the Buyer in Section 5 of this
Agreement or the right of the Selling Parties to rely thereon.
4.33 INVESTMENT EXPERIENCE. Selling Parties represent that they are experienced
in evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that Selling
Parties are able to fend for himself, herself or itself, can bear the economic
risk of Selling Parties' investment, and has such knowledge and experience in
financial and business matters that such investor is capable of evaluating the
merits and risks of the investment in the Common Stock. If other than an
individual, Selling Parties also represent that the 100% shareholder of each
Selling Party (each an "Investor Owner") meets the requirements of the preceding
sentence.
4.34 ACCREDITED INVESTOR.
(a) The term "Accredited Investor" as used herein refers to any
corporation not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(b) Shareholder, but not Seller, represents to the Buyer that
Shareholder (and its Investor Owner) is an Accredited Investor.
13
<PAGE> 14
4.35 RESTRICTED SECURITIES. Selling Parties understand that the Common Stock may
not be sold, transferred, or otherwise disposed of without registration under
the Securities Act or an exemption therefrom, and that in the absence of an
effective registration statement covering the Common Stock or an available
exemption from registration under the Securities Act, the Common Stock must be
held indefinitely. In particular, Selling Parties are aware that the Common
Stock may not be sold pursuant to Rule 144 promulgated under the Securities Act
unless all of the conditions of that Rule are met. Among the conditions for use
of Rule 144 may be the availability of current information to the public about
the Buyer. Such information is not now available and the Buyer has no present
plans to make such information available.
4.36 LEGENDS. To the extent applicable, each certificate or other document
evidencing any of the Common Stock shall be endorsed with the legends
substantially in the form set forth below:
(a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE BUYER HAS RECEIVED AN OPINION
OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE BUYER AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend imposed or required by applicable state securities laws.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee
and has full corporate power and authority to enter into this Agreement and to
carry out the transactions contemplated hereby.
5.2 AUTHORIZATION. Buyer has full corporate power and authority (including all
necessary approvals of Buyer's shareholders) to carry on its business as now
conducted and as proposed to be conducted, to enter into this Agreement, issue
the Common Stock to Seller, and perform its obligations hereunder and carry out
the transactions contemplated hereby. The Board of Directors of Buyer has taken
all action required by law, its Articles of Incorporation, its Bylaws and
otherwise to authorize the execution and delivery by Buyer of this Agreement and
the consummation by Buyer of the transactions contemplated hereby.
5.3 VALID AND BINDING AGREEMENT. This Agreement constitutes a valid and binding
agreement of Buyer, enforceable against Buyer in accordance with its terms.
5.4 NO VIOLATION. The execution and delivery of this Agreement by Buyer does
not, and the consummation of the transactions contemplated hereby will not, (a)
violate any provision, or result in the creation of any lien or security
interest under, any agreement, indenture, instrument, lease, security agreement,
mortgage or lien to which Buyer is a party or by which it is bound; (b) violate
any provision
14
<PAGE> 15
of Buyer's Articles of Incorporation or Bylaws; (c) violate any order,
arbitration award, judgment, writ, injunction, decree, statute, rule or
regulation applicable to Buyer; or (d) violate any other contractual or legal
obligation or restriction to which Buyer is subject.
5.5 PROFESSIONAL FEES. Buyer has not done anything to cause or incur any
liability for investment banking, brokerage, finders, agents or other fees,
commissions, expenses or charges in connection with the negotiation,
preparation, execution and performance this Agreement or the consummation of the
transactions contemplated hereby, and Buyer does not know of any claim by anyone
for such a commission or fee.
5.6 CONSENTS AND APPROVALS. Buyer has obtained all consents, approvals,
authorizations or orders of third parties, including governmental authorities,
necessary for the authorization, execution and performance of this Agreement by
Buyer.
5.7 FINANCIAL STATEMENTS. Buyer has delivered to Seller the audited consolidated
balance sheet of the Buyer and its subsidiaries as of the end of December 31,
1998, and the related consolidated statements of income, stockholders' equity
and changes in financial position for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and accompanied by an
opinion of a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the, the last fiscal year, and
the related consolidated statements of income, stockholders' equity and changes
in financial position for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles. These financial statements fairly
present the assets, liabilities, financial condition and results of operations
of Buyer as of December 31, 1998 and for the period therein referred to.
5.8 FULL DISCLOSURE. To the best of Buyer's knowledge, neither the information
provided by the Buyer in this Agreement, nor any Schedule, exhibit, list,
certificate or other instrument and document furnished by Buyer to the Selling
Parties pursuant to this Agreement, contains any untrue statement of a material
fact or omits to state any material fact required to be stated herein or therein
or necessary to make the statements and information contained herein or therein
not misleading. Buyer has not withheld from the Selling Parties disclosure of
any event, condition or fact which Buyer knows, or has reasonable grounds to
know, may materially adversely affect Buyer's assets, prospects or condition
(financial or otherwise).
5.9 LITIGATION. To the best of Buyer's knowledge, there are no claims, actions,
suits, proceedings or investigations pending or threatened by or against, or
otherwise affecting Buyer at law or in equity or before or by any federal,
state, municipal or other governmental department, commission, board, agency,
instrumentality or authority. The Buyer does not know or have any reason to know
of any basis for any such claim, action, suit, proceeding or investigation.
5.10 AUTHORIZED CAPITAL STOCK. The authorized capital stock of the Buyer
consists of (i) 76,000 shares of Series A Convertible Preferred Stock, (ii)
1,436,961 shares of Series B Convertible Preferred Stock, and (iii) 20,000,000
shares of Common Stock, in each case with no par value. Immediately prior to the
Closing, 76,000 shares of the Series A Convertible Preferred Stock, 527,751
shares of the Series B Convertible Preferred Stock, and 1,991,647 shares of the
Common Stock will be validly issued and outstanding, fully paid and
nonassessable. The designations, powers, preferences, rights, qualifications
limitations and restrictions in respect of each class and series of authorized
capital stock of the Buyer are as set forth in the Charter, a copy of which, as
certified by the Secretary of State of Tennessee, is attached as Exhibit Q, and
all such designations, powers, preferences, rights qualifications, limitations
15
<PAGE> 16
and restrictions are valid, binding and enforceable and in accordance with all
applicable laws. All of the outstanding securities of the Buyer were issued in
compliance with all applicable federal and state securities laws.
5.11 BY-LAWS. The current by-laws of the Buyer are attached as Exhibit R.
5.12 ACCOUNTS PAYABLE. All accounts and notes payable relating to the Assets or
the Business, with a due date following the Closing shall be paid by the Buyer.
ARTICLE 6. COVENANTS AND AGREEMENTS OF SELLER
Seller agrees that from the date hereof until the Closing, and
thereafter if so specified, it will, and Shareholder will cause Seller to,
fulfill the following covenants and agreements unless otherwise consented to by
Buyer in writing:
6.1 CONDUCT OF BUSINESS PENDING THE CLOSING.
(a) Seller will take such action as may be necessary to maintain,
preserve, renew and keep in full force and effect the existence, rights and
franchises of Seller, to preserve the business organizations of Seller intact,
and will use good faith efforts to preserve for Buyer the present relationships
of Seller with its employees, suppliers and customers and others having business
relationships with it.
(b) Seller will not do or omit to do any act, or permit any act or
omission to act, which may cause a breach of any contract, commitment or
obligation of Seller, or any breach of any representation, warranty, covenant or
agreement made by Seller herein.
(c) Seller will duly comply with all laws applicable to it and its
respective business and operations and all laws, compliance with which is
required for the valid consummation of the transactions contemplated by this
Agreement.
(d) Seller will not (i) grant any increase in the wages or salary of
any officer, employee or agent of Seller, except normal wage or salary increases
for employees (other than officers and other management employees) in the
ordinary course of business and consistent with past practice; (ii) by means of
any bonus or pursuant to any plan or arrangement or otherwise, increase by any
amount or to any extent the benefits or compensation of any such officer,
employee or agent; (iii) enter into any employment agreement, sales agency or
other contract or arrangement with respect to the performance of personal
services which is not terminable by it without liability on not more than 30
days notice; (iv) enter into or extend any labor contract with any hourly-paid
employees or any union; or (v) agree to take any such action.
(e) Seller will not terminate or modify any lease, license, permit,
contract or other agreement to which it is a party.
(f) Seller will not mortgage, pledge or subject to lien or any other
encumbrance, any of Seller's assets.
(g) Seller will not enter into any transaction involving more than
$10,000 or a commitment extending more than three months.
(h) None of the Selling Parties will directly or indirectly (through a
representative or otherwise) solicit or furnish information to any prospective
acquirors, commence negotiations with any
16
<PAGE> 17
other party or enter into any agreement with any other party concerning the sale
of Seller's capital stock or assets or any part thereof, or involving the
merger, consolidation or combination of or share exchange with any other entity.
(i) Seller will not enter into any transaction outside the ordinary
course of business. For purposes of this Agreement, the term "ordinary course of
business" shall mean the conduct of Seller's business as it has historically
been conducted over the past 24 months.
(j) Selling Parties will not enter into any agreement to do any of the
foregoing.
6.2 ACCESS; FURTHER ASSURANCES.
(a) After the execution of this Agreement and continuing until the
Closing, Selling Parties shall cause Seller to permit Buyer and its counsel,
accountants, engineers and other representatives full access during normal
business hours, upon reasonable notice, to all of the directors, officers,
facilities, properties, books, contracts, commitments and records of or relating
to Seller (including without limitation, the right to conduct any physical count
of inventory of Seller or otherwise be present at or participate in any such
occurrence at any time prior to the Closing) and will furnish Buyer and its
representatives during such period with all such information concerning Seller's
affairs and such copies of such documents relating thereto, as Buyer or its
representatives may reasonably request.
(b) At any time and from time to time after the Closing, at Buyer's
request and without further consideration, Selling Parties will execute and
deliver such other instruments of sale, transfer, conveyance, assignment, and
delivery and confirmation and take such action as the Buyer may reasonably deem
necessary or desirable in order more effectively to transfer, convey and assign
to Buyer and to place Buyer in possession and control of, and to confirm Buyer's
title to, the Assets, and to assist Buyer in exercising all rights and enjoying
all benefits with respect thereto.
6.3 SCHEDULES. Selling Parties shall have, until the Closing, the continuing
obligation to supplement or amend promptly the Schedules being delivered
pursuant to this Agreement with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in these Schedules. Furthermore,
Selling Parties shall have the right, but not the obligation, within 14 days of
the Closing to supplement or amend Exhibit T, the Accrued but untaken Vacation
schedule, and other schedules or exhibits to be accurate as of the Closing Date.
6.4 TAXES. Shareholder or Seller will be responsible for, and hereby agree to
assume and pay, all sales and similar taxes which may be due to any jurisdiction
or governmental body as a result of the sale and transfer of the Assets; except
that Buyer agrees to pay ordinary transfer fees arising by virtue of the
transfer of the Assets hereunder, including fees, if any, for the assignment of
the lease at 50 Beacon Street, Boston.
6.5 CONSENTS AND APPROVALS. Seller shall, in a timely, accurate and complete
manner, take all necessary corporate and other action and use all reasonable
efforts to obtain all consents, approvals, permits, licenses and amendments of
agreements required of Seller to carry out the transactions contemplated in this
Agreement and shall provide to Buyer such information as Buyer may reasonably
require to make such filings and prepare such applications as may be required
for the consummation by Buyer of the transactions contemplated by this
Agreement. Notwithstanding the above, Buyer acknowledges that Seller cannot
assure that ACCME accreditation will continue in the future.
17
<PAGE> 18
6.6 BULK SALES COMPLIANCE. Buyer acknowledges that Seller is not complying with
the provisions of the bulk sales or similar laws of any and all states (the
"Bulk Sales Laws"), and Seller covenants and agrees to pay and discharge when
due all claims, liabilities and related expenses which may be asserted against
Buyer by reason of such noncompliance to the extent that such liabilities are
not part of the Assumed Liabilities.
6.7 SELLER'S 401(K) PLAN. Buyer shall not adopt Seller's 401(k) Plan and the
participants in Seller's 401(k) Plan who become employees of Buyer shall be
entitled to a distribution of their benefits under the terms of Seller's 401(k)
Plan.
6.8 PAYMENTS OF FUTURE CASH RECEIVED. Seller will promptly pay to Buyer any cash
received after the Closing Date for subscriptions, if the cash does not relate
to an account receivable as of the Closing Date. Seller will promptly pay to
Buyer fifty percent (50%) of any cash received after the Closing Date for core
curriculum lectures if the cash relates to a "balance due" on Schedule 1.2(b).
6.9 EMAIL FORWARDING. Until December 31, 1999, Seller shall forward emails sent
to the addresses set forth on Schedule 6.12 to addresses which Buyer shall
provide. Seller shall have absolutely no liability under this provision except
for willful misconduct. Seller agrees to perform email forwarding services for
Buyer set forth on Schedule 6.12 in exchange for $2,000 paid to Seller at
Closing.
6.10 URL REDIRECTING. Until December 31, 1999, Seller shall redirect the URLs
set forth on Schedule 6.13 to the URLs which Buyer shall provide. Seller shall
have absolutely no liability under this provision except for willful misconduct.
Seller agrees to perform URL forwarding services for Buyer set forth on Schedule
6.13 in exchange for $2,000 paid to Seller at Closing.
6.11 ACCOUNTING SERVICES. Until July 31, 1999, Seller shall perform the
accounting services for Buyer set forth on Schedule 6.14. Seller shall have
absolutely no liability under this provision except for willful misconduct.
Seller agrees to perform the accounting services for Buyer set forth on Schedule
6.14 during the month of August, 1999 in exchange for $4,000 paid to Seller at
Closing.
6.12 BONUS. Shareholder has agreed to pay bonuses to Seller's employees and one
contractor for assisting in the transition to Buyer. Shareholder will pay the
bonus to Steve Blinn and Cynthia Bush promptly following the Closing.
Shareholder will not pay bonuses to the other individuals until six (6) months
following the Closing Date, provided, however, that Shareholder will pay the
bonus to these individuals sooner if Buyer terminates the employment of these
individuals prior to six (6) months following the Closing Date. Shareholder will
not pay the bonus to these individuals if the individual voluntarily leaves
employment with the Buyer or if Buyer terminates the individual for cause prior
to six (6) months following the Closing Date.
ARTICLE 7. COVENANTS AND AGREEMENTS OF BUYER
Buyer agrees that from the date hereof until the Closing, and
thereafter if so specified, it will fulfill the following covenants and
agreements unless otherwise consented to by Seller in writing:
7.1 CONFIDENTIALITY. In the event the transactions contemplated by this
Agreement are not consummated, for any reason, Buyer promptly will return to
Seller all records and information provided to Buyer from Selling Parties. Buyer
and Seller have entered into a separate confidentiality agreement
18
<PAGE> 19
dated February 9, 1999 (the "Confidentiality Agreement"), which shall survive
the execution of this Agreement, a copy of which is attached hereto as Exhibit
S. Subject to specific exceptions contained in the Confidentiality Agreement,
Buyer shall not at any time, before or after Closing, disclose the Purchase
Price paid hereby.
7.2 CONSENTS AND APPROVALS. Buyer shall, in a timely, accurate and complete
manner, take all necessary corporate and other action and use all reasonable
efforts to obtain all consents, approvals, permits, licenses and amendments of
agreements required of Buyer to carry out the transactions contemplated in this
Agreement and shall provide to Seller such information as Seller may reasonably
require to make such filings and prepare such applications as may be required
for the consummation by Seller of the transactions contemplated by this
Agreement.
7.3 FULFILLMENT OF UNEXPIRED SUBSCRIPTIONS. Buyer shall fulfill all unexpired
subscriptions set forth on Exhibit T.
7.4 RETENTION OF EMPLOYEES. Buyer agrees to continue to employ all individuals
currently employed by Seller at salaries no less than those currently received
by such employees. Should Buyer terminate any of such employees unless for cause
prior to 12 months following the Closing Date, Buyer shall offer any such
employee one month salary for each full year of employment as an employee of
Seller or Buyer, in the aggregate, up to a maximum of four months salary, plus
any accrued and untaken vacation time, and shall reimburse up to $3,000 in
outplacement fees, if incurred by the employee within 12 months of the date of
termination, all in exchange for such employee's full release of claims against
Buyer and the Selling Parties.
7.5 FINANCIAL STATEMENTS. The Buyer shall furnish to the Seller within one
hundred twenty (120) days after the end of each fiscal year of the Buyer an
audited consolidated balance sheet of the Buyer and its subsidiaries as of the
end of such fiscal year and the related consolidated statements of income,
stockholders' equity and changes in financial position for the fiscal year then
ended, prepared in accordance with generally accepted accounting principles and
accompanied by an opinion of a firm of independent public accountants of
recognized national standing selected by the Board of Directors of the Buyer.
7.6 ASSIGNMENT OF 50 BEACON STREET LEASE. The Buyer shall be responsible for
paying to Shareholder pro rata any rent for July, 1999 which the Shareholder or
an affiliate has already paid to the landlord of 50 Beacon Street.
7.7 ACCOUNTS RECEIVABLE. The Buyer shall promptly pay to Seller any amounts that
it collects on accounts receivable which existed as of the Closing Date. The
Buyer will promptly pay to Seller 50% of any cash received after the Closing
Date for core curriculum lectures if the cash relates to a "balance due" on
Schedule 1.2(b).
7.8 PAYMENT OF ASSUMED LIABILITIES. The Buyer shall pay when due all Assumed
Liabilities.
19
<PAGE> 20
7.9 PAYMENT OF CERTAIN PREPAID ROYALTIES. The Buyer will pay to Seller royalties
for the products shown on Schedule 7.11 up to the amounts shown as "balance" on
Schedule 7.11.
ARTICLE 8. CONDITIONS TO BUYER'S OBLIGATIONS
All obligations of Buyer hereunder are subject to the fulfillment,
prior to or at the Closing, of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by
the Selling Parties in this Agreement and the statements contained on the
Schedules attached hereto or in any instrument, list, certificate or writing
delivered by the Selling Parties pursuant to this Agreement shall be true when
made and at and as of the time of the Closing as though such representations and
warranties were made at and as of the Closing.
8.2 PERFORMANCE BY SELLING PARTIES. Selling Parties shall have performed and
complied in all material respects with all covenants, agreements, obligations
and conditions required by this Agreement, the Non-Competition Agreement and the
Warrant Agreement to be so complied with or performed.
8.3 CERTIFICATES OF SELLING PARTIES. Each of the Selling Parties shall have
delivered to Buyer a certificate in the form of Exhibit F hereto, dated the
Closing Date, certifying as to the fulfillment of the conditions specified in
Sections 8.1 and 8.2.
8.4 OPINION OF COUNSEL FOR SELLING PARTIES. Buyer shall have received an opinion
of the Seller's counsel dated the Closing Date, in form and substance
satisfactory to Buyer's counsel, (a final draft of which shall have been
furnished to Buyer's counsel not less than three days before the Closing), to
the effect that:
(a) Seller is a corporation duly incorporated, validly existing and in
good standing under the laws of the Commonwealth of Massachusetts, and has full
corporate power and authority to enter into this Agreement, to carry out the
transactions contemplated hereby and to carry on its business as presently
conducted.
(b) This Agreement has been duly executed and delivered by each of the
Selling Parties.
(c) Neither the execution nor the delivery of this Agreement nor the
consummation of the transactions contemplated hereby, or compliance with and
fulfillment of the terms and provisions hereof will conflict with or result in
the breach of the terms, conditions or provisions of, or constitute a default
under, the Articles of Incorporation or the Bylaws of Seller or any agreement or
instrument known to such counsel to which any Selling Party is a party or by
which any of them is bound or any laws or regulatory provisions which are known
to such counsel to be applicable to any of them.
(d) To the knowledge of such counsel, except for the AAO Claim, there
are no claims, actions, suits, proceedings or investigations pending or
threatened by or against, or otherwise affecting the Assets or the transactions
contemplated by this Agreement, at law or in equity or before or by any federal,
state, municipal or other governmental department, commission, board, agency,
instrumentality or authority.
(e) Except as set forth in Schedules 4.17 and 4.29 and as set forth in
the Software & Database Licensing Agreement, Selling Parties have obtained all
consents, approvals, authorizations or orders of
20
<PAGE> 21
third parties, including governmental authorities, necessary for the
authorization, execution and delivery of this Agreement and the Non-Compete
Agreements and the consummation of the transactions contemplated hereby.
(f) Such opinion shall also cover such other matters incident to the
transactions contemplated by the Agreement as Buyer may reasonably request.
8.5 CONSENTS AND APPROVALS. Buyer shall have received from the Selling Parties
executed counterparts of the consents referred to in Section 4.25, all of which
consents shall be in form and substance satisfactory to Buyer.
8.6 LITIGATION. On the date of the Closing, there shall be no lawsuits pending
against any of the Selling Parties seeking to enjoin, prohibit, restrain or
otherwise prevent the transactions contemplated hereby or which might adversely
affect Seller's ability to transfer Assets hereby or, from and after Closing,
and except for the AAO Claim, Buyer's right, title or interest in the Assets or
Buyer's use and enjoyment thereof.
ARTICLE 9. CONDITIONS TO SELLING PARTIES' OBLIGATIONS
All obligations of the Selling Parties under this Agreement are subject
to the fulfillment, prior to or at the Closing, of each of the following
conditions:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by
the Buyer in this Agreement shall be true when made and at and as of the time of
the Closing as though such representations and warranties were made at and as of
such date.
9.2 PERFORMANCE. Buyer shall have performed and complied with all agreements,
obligations and conditions required by this Agreement, the Escrow Agreement, the
Non-Competition Agreement and the Warrant Agreement to be so complied with or
performed including payment of the Purchase Price.
9.3 OFFICER'S CERTIFICATE. Buyer shall have delivered to Selling Parties a
Certificate of the President of Buyer in the form as Exhibit B hereto, in his
representative capacity and not individually, dated the Closing Date, certifying
as to the fulfillment of and/or the conditions specified in Sections 9.1 and
9.2.
9.4 OPINION OF COUNSEL FOR BUYER. Seller shall have received opinions of Buyer's
counsel dated the Closing Date, in form and substance satisfactory to Seller's
counsel (a final draft of which shall have been provided to Seller's counsel not
less than three days before the Closing), to the effect that:
(a) Buyer is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Tennessee and has full corporate
power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby.
(b) This Agreement has been duly executed and delivered by Buyer.
(c) This Agreement is a valid and binding obligation of Buyer
enforceable against Buyer and subject to any applicable bankruptcy,
reorganization, insolvency or other laws, now or hereafter in effect, affecting
creditors' rights generally and subject to equitable defenses and to the
discretion of the Court before which any proceeding therefor may be brought.
21
<PAGE> 22
(d) Neither the execution nor the delivery of this nor the consummation
of the transactions contemplated hereby or thereby, nor compliance with and
fulfillment of the terms and provisions hereof or thereof will conflict with or
result in the breach of the terms, conditions or provisions of, or constitute a
default under, the Charter or the Bylaws of Buyer or any agreement or instrument
known to such counsel to which Buyer is a party or by which it is bound.
(e) The authorized capital stock of the Buyer consists of (i) 76,000
shares of Series A Convertible Preferred Stock, (ii) 1,436,961 shares of Series
B Convertible Preferred Stock, and (iii) 20,000,000 shares of Common Stock, in
each case with no par value. Immediately prior to the Closing, 76,000 shares of
the Series A Convertible Preferred Stock, 527,751 shares of the Series B
Convertible Preferred Stock, and 1,991,647 shares of the Common Stock will be
validly issued and outstanding, fully paid and nonassessable. The designations,
powers, preferences, rights, qualifications limitations and restrictions in
respect of each class and series of authorized capital stock of the Buyer are as
set forth in the Charter, a copy of which, as certified by the Secretary of
State of Tennessee, is attached as Exhibit Q, and all such designations, powers,
preferences, rights qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. All of the
outstanding securities of the Buyer were issued in compliance with all
applicable federal and state securities laws.
9.5 LITIGATION. On the date of the Closing, there shall be no lawsuits pending
against the Buyer seeking to enjoin, prohibit, restrain or otherwise prevent the
transactions contemplated hereby.
ARTICLE 10. INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLING PARTIES. Selling Parties, jointly and severally,
hereby agree to defend, indemnify and hold harmless Buyer, the Subsidiaries,
each fiduciary of Buyer's employee benefit plans and each of Buyer's
shareholders, affiliates, officers, directors, employees, agents, successors and
assigns ("Buyer's Indemnified Persons") and shall reimburse Buyer's Indemnified
Persons for, from and against each claim, fine, judgment, oversight cost,
assessment, loss, liability, cost and expense (including without limitation,
interest, penalties, costs of preparation and investigation, and the reasonable
fees, disbursements and expenses of attorneys, accountants and other
professional advisors but excluding consequential damages, including without
limitation, lost profits) (collectively, "Losses"), directly or indirectly
relating to, resulting from or arising out of:
(a) Any untrue representation, misrepresentation, breach of warranty or
nonfulfillment of any covenant, agreement or other obligation by or of any
Selling Party contained herein, any Schedule hereto or in any certificate,
document or instrument delivered to Buyer pursuant hereto.
(b) Any Tax liability of Seller relating to the Assets not previously
paid, or for which adequate reserves have not been established in the balance
sheet included in the Financial Statements, which is successfully asserted or
assessed against it for any event or period prior to the Closing Date
(regardless of whether the possibility of the assertion or assessment of any
such Tax liability shall have been disclosed to Buyer at or prior to the
Closing).
(c) Any obligation or liability of Seller not included in the Assumed
Liabilities, and any and all loss, liability or damage suffered or incurred by
Buyer by reason of the failure by Seller to comply with Bulk Sales Laws.
(d) The AAO Claim;
22
<PAGE> 23
(e) Any other Losses incidental to any of the foregoing.
10.2 EXPIRATION AND LIMITATION. Notwithstanding the foregoing:
(a) The indemnification obligations under this Article 10, or under any
certificate or writing furnished in connection herewith, shall terminate as
follows:
(i) with respect to claims relating to, resulting from or arising
out of Sections 10.1(b) and (c) or the representations and warranties
set forth in Section 4.1 , Section 4.8, Section 4.12 or Section 4.24,
(A) the date that is six (6) months after the expiration of the longest
applicable federal or state statute of limitation (including extensions
thereof), or (B) if there is no applicable statute of limitation, five
(5) years after the Closing Date for any other claim covered by clause
(i) of this Section 10.2(a); or
(ii) with respect to all claims other than those referred to in
clause (i) of this Section 10.2(a), on the date that is 12 months
following the Closing Date.
(b) The aggregate amount of the Selling Parties' liability under this
Article 10 shall not exceed $500,000. There shall be no liability for
indemnification under Section 10.1 unless the aggregate amount of Losses exceeds
$25,000, provided, however, that at such time as the aggregate amount of Losses
exceeds $25,000, the Selling Parties shall be liable for the full amount of the
Losses. The Selling Parties have the right, but not the obligation, to pay its
obligations hereunder by transferring to the Buyer that number of shares of
Common Stock, which for this purpose only shall have the same value as on the
date of issuance.
(c) The Selling Parties' obligations to indemnify hereunder shall not
extend to Losses attributable to Buyer's negligence or willful misconduct.
10.3 INDEMNIFICATION BY BUYER. Buyer hereby agrees to defend, indemnify and hold
harmless the Selling Parties, their respective subsidiaries, each fiduciary of
the Selling Parties' employee benefit plans and each of the Selling Parties'
shareholders, affiliates, officers, directors, employees, agents, successors and
assigns ("Selling Parties' Indemnified Persons") and shall reimburse the Selling
Parties' Indemnified Persons for, from and against each claim, fine, judgment,
oversight cost, assessment, loss, liability, cost and expense (including without
limitation, interest, penalties, costs of preparation and investigation, and the
reasonable fees, disbursements and expenses of attorneys, accountants and other
professional advisors but excluding consequential damages, including without
limitation, lost profits) (collectively, "Losses"), directly or indirectly
relating to, resulting from or arising out of:
(a) Any untrue representation, misrepresentation, breach of warranty or
non-fulfillment of any covenant, agreement or other obligation by or of Buyer
contained herein or in any certificate, document or instrument delivered to
Selling Parties pursuant hereto.
(b) Any Assumed Liabilities.
(c) Any Losses with respect to the operations of Seller following
Closing, other than (i) those Losses which are determined by a court to arise
out of any breach by Seller of any covenant, representation or warranty
contained in this Agreement, or (ii) those Losses that are determined by a court
to be subject to indemnification by Seller under Section 10.1.
(d) Any other Losses incidental to the foregoing.
23
<PAGE> 24
The aggregate amount of the Buyer's liability under this Article 10 shall not
exceed $500,000. In addition, there shall be no liability for indemnification
under this Section 10.3 unless, the aggregate amount of Losses exceeds $25,000,
provided, however, that at such time as the aggregate amount of Losses exceeds
$25,000, the Buyers shall be liable for the full amount of the Losses, provided
that such $25,000 minimum indemnification shall not apply to Losses related to
Assumed Liabilities. For the Assumed Liabilities, Buyer has the obligation to
repay these to the Selling Parties without reaching any minimum.
10.4 PROCEDURE. The indemnified party shall promptly notify the indemnifying
party of any claim, demand, action or proceeding for which indemnification will
be sought under Sections 10.1 or 10.3, and, if such claim, demand, action or
proceeding is a third party claim, demand, action or proceeding, the
indemnifying party will have the right at its expense to assume the defense
thereof using counsel reasonably acceptable to the indemnified party. The
indemnified party shall have the right to participate, at its own expense, with
respect to any such third party claim, demand, action or proceeding. In
connection with any such third party claim, demand, action or proceeding, Buyer
and the Selling Parties shall cooperate with each other and provide each other
with access to relevant books and records in their possession. No such third
party claim, demand, action or proceeding shall be settled without the prior
written consent of the indemnified party. If a firm written offer is made to
settle any such third party claim, demand, action or proceeding, which offer
does not involve any injunctive or non-monetary relief against the indemnified
party, and the indemnifying party proposes to accept such settlement and the
indemnified party refuses to consent to such settlement, then: (i) the
indemnifying party shall be excused from, and the indemnified party shall be
solely responsible for, all further defense of such third party claim, demand,
action or proceeding; and (ii) the maximum liability of the indemnifying party
relating to such third party claim, demand, action or proceeding shall be the
amount of the proposed settlement if the amount thereafter recovered from the
indemnified party on such third party claim, demand, action or proceeding is
greater than the amount of the proposed settlement.
ARTICLE 11. SURVIVAL OF REPRESENTATIONS
11.1 SURVIVAL OF REPRESENTATIONS. All representations, warranties, covenants and
agreements by the parties contained in this Agreement shall survive the Closing
and any investigation at any time made by or on behalf of any party hereto for a
period to one (1) year from the Closing Date; provided, however, that the
representations of Seller contained in Sections 4.1, 4.8, 4.12 and 4.24 shall
survive for the duration of the applicable statute of limitations period.
11.2 REMEDIES CUMULATIVE. The remedies provided herein shall be cumulative and
shall not preclude the assertion by any party hereto of any other rights or the
seeking of any other remedies against the other party hereto.
ARTICLE 12. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time prior to the Closing:
(a) By mutual agreement of Selling Parties and Buyer.
24
<PAGE> 25
(b) By Buyer, upon ten (10) business days' prior written notice to
Selling Parties if (i) there has been a material violation or breach by any of
the Selling Parties of any of the agreements, representations or warranties
contained in this Agreement, or (ii) if any of the conditions set forth in
Article 8 have not been materially satisfied by the Closing and either (i) or
(ii) have not been waived in writing by Buyer or cured within such ten-day
period.
(c) By Selling Parties, upon ten (10) business days' prior written
notice to Buyer if (i) there has been a material violation or breach by the
Buyer of any of the agreements, representations or warranties contained in this
Agreement, or (ii) if any of the conditions set forth in Article 9 have not been
materially satisfied by the Closing and either (i) or (ii) have not been waived
in writing by Seller or cured within such ten-day period.
(d) By either Buyer or Selling Parties if the transactions contemplated
by this Agreement shall not have been consummated on or before July 30, 1999.
(e) By either Buyer or Selling Parties if any of the other makes an
assignment for the benefit of creditors, files a voluntary petition in
bankruptcy or seeks or consents to any reorganization or similar relief under
any present or future bankruptcy act or similar law, or is adjudicated a
bankrupt or insolvent, or if a third party commences any bankruptcy, insolvency,
reorganization or similar proceeding involving the other.
ARTICLE 13. MISCELLANEOUS
13.1 EXPENSES. All fees and expenses incurred by Seller, including without
limitation, legal fees and expenses in connection with this Agreement will be
borne by Seller or the Shareholder as they may determine and all fees and
expenses incurred by Buyer, including without limitation, legal fees and
expenses, in connection with this Agreement will be borne by Buyer.
13.2 ASSIGNABILITY; PARTIES IN INTEREST.
(a) Buyer may assign any or all of its rights hereunder to any
affiliate or any direct or indirect subsidiary of Buyer, and Buyer shall advise
Selling Parties of any such assignment and shall designate such party as the
assignee and transferee of the Assets purchased. Any such assignee shall assume
all of Buyer's duties, obligations and undertakings hereunder, but the Buyer
shall remain liable hereunder.
(b) Seller may not assign, transfer or otherwise dispose of any of its
rights hereunder without the prior written consent of Buyer.
(c) All the terms and provisions of this Agreement shall be binding
upon, shall inure to the benefit of and shall be enforceable by the respective
heirs, successors, assigns and legal or personal representatives of the parties
hereto, provided that the rights and obligations under all licenses of
trademarks hereunder shall under no circumstances be assignable.
13.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price for the Assets shall be
allocated as set forth on Schedule 13.3. The parties agree to follow the
allocation for federal and state income tax purposes.
13.4 KNOWLEDGE. An individual will be deemed to have "knowledge" of a particular
fact or other matter if: (i) such individual is actually aware of such fact or
other matter; or (ii) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of
25
<PAGE> 26
conducting a reasonably comprehensive investigation concerning the existence of
such fact or other matter. A person (other than an individual) will be deemed to
have "knowledge" of a particular fact or other matter if any individual who is
serving, or who has within the last eight months served, as a director, officer
or trustee of such person (or in any similar capacity) has, or at any time had
knowledge of such fact or other matter.
13.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including the exhibits,
Schedules, lists and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, and the Confidentiality
Agreement set forth as Exhibit F contain the entire understanding of the parties
with respect to its subject matter. There are no restrictions, agreements,
promises, warranties, covenants or undertakings other than those expressly set
forth herein or therein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter, except
for the Confidentiality Agreement. This Agreement may be amended only by a
written instrument duly executed by all parties or their respective heirs,
successors, assigns or legal personal representatives. Any condition to a
party's obligations hereunder may be waived but only by a written instrument
signed by the party entitled to the benefits thereof. The failure or delay of
any party at any time or times to require performance of any provision or to
exercise its rights with respect to any provision hereof, shall in no manner
operate as a waiver of or affect such party's right at a later time to enforce
the same.
13.6 HEADINGS. The section and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretations of this Agreement.
13.7 REFERENCES. References to a section or subsection when used without further
attribution shall refer to the particular section or subsection of this
Agreement.
13.8 SEVERABILITY. The invalidity of any term or terms of this Agreement shall
not affect any other term of this Agreement, which shall remain in full force
and effect.
13.9 NOTICES. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed (registered or certified mail, postage prepaid, return
receipt requested) as follows:
If to Selling Parties:
David Mirchin
Vice President and General Counsel
SilverPlatter Information, Inc.
100 River Ridge Drive
Norwood, MA 02062
26
<PAGE> 27
If to Buyer:
Robert H. Laird, Jr.
Vice President and General Counsel
HealthStream, Inc.
209 10th Ave. South
Suite 450
Nashville, TN 37203
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
13.10 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Tennessee, without regard
to its conflict of laws rules.
13.11 COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, with the same effect as if the signatories executing the several
counterparts had executed one counterpart, provided, however, that the several
executed counterparts shall together have been signed by all parties to be bound
hereby. This Agreement shall be binding upon each signatory hereto when one or
more counterparts, as provided above, have been signed by Buyer, Seller and the
Shareholders. All such executed counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
duly authorized officers of Buyer and by each of the Selling Parties on the date
first above written.
BUYER:
HEALTHSTREAM, INC.
209 10th Ave. South
Suite 450
Nashville, TN 37203
By:
--------------------------------
Title:
-----------------------------
SELLER:
SILVERPLATTER EDUCATION, INC.
100 River Ridge Drive
Norwood, MA 02062
By:
--------------------------------
Title:
-----------------------------
SHAREHOLDER:
SILVERPLATTER INFORMATION, INC.
100 River Ridge Drive
Norwood, MA 02062
By:
--------------------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 3.1
FOURTH AMENDED AND RESTATED
CHARTER
OF
HEALTHSTREAM, INC.
To the Secretary of State of the State of Tennessee:
Pursuant to the provisions of Section 48-20-107 of the Tennessee
Business Corporation Act (the "Act"), the undersigned corporation hereby amends
and restates its Third Amended and Restated Charter to supersede the Third
Amended and Restated Charter and any and all prior amendments thereto as
follows:
I. The name of the corporation is HealthStream, Inc.
II. The text of the Fourth Amended and Restated Charter is as follows:
"1. The name of the corporation is HealthStream, Inc.
2. The corporation is for profit.
3. The duration of the corporation is perpetual.
4. The street address and zip code of the corporation's principal
office will be:
209 10th Avenue, Suite 450
Nashville, Tennessee 37203
County of Davidson
5. (a) The name of the corporation's registered agent is
Robert H. Laird, Jr.
(b) The street address, zip code, and county of the
corporation's registered office and registered agent in Tennessee shall be:
209 10th Avenue, Suite 450
Nashville, Tennessee 37203
County of Davidson
6. The corporation is organized to do any and all things and to
exercise any and all powers, rights, and privileges that a corporation may now
or hereafter be organized to do or to exercise under the Tennessee Business
Corporation Act, as amended from time to time.
7. The maximum number of shares of stock the corporation is
authorized to issue is:
a. Seventy-five million (75,000,000) shares of common stock,
no par value per share, which shall be entitled to one vote per share and, upon
dissolution of the corporation, shall be entitled to receive the net assets of
the corporation.
<PAGE> 2
b. Ten million (10,000,000) shares of preferred stock without
par value. Shares of preferred stock may be issued from time to time in one or
more classes or series, each such class or series to be so designated as to
distinguish the shares thereof from the shares of all other classes and series.
The Board of Directors is hereby vested with the authority to divide preferred
stock into classes or series and to fix and determine the relative rights,
preferences, qualifications, and limitations of the shares of any class or
series so established.
8. The shareholders of the corporation shall not have preemptive
rights.
9. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation shall be managed
under the direction of, a Board of Directors. The directors shall be divided
into three classes, designated Class I, Class II, and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. Each class of directors
shall be elected for a three year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting of
shareholders for the year in which his or her term expires and until his or her
successor shall be elected and shall qualify; subject, however, to prior death,
resignation, retirement, disqualification, or removal from office. Any vacancy
on the Board of Directors, including a vacancy that results from an increase in
the number of directors or a vacancy that results from the removal of a director
with cause, may be filled only by the Board of Directors.
Any director may be removed from office but only for cause
and only by the affirmative vote of the holders of a majority of the voting
power of the shares entitled to vote in the election of directors, considered
for this purpose as one class, unless a vote of a special voting group is
otherwise required by law.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies, and other features of such directorships shall be governed by the
terms of this Charter applicable thereto.
Notwithstanding any other provision of this Charter, the
affirmative vote of holders of two-thirds of the voting power of the shares
entitled to vote at an election of directors shall be required to amend, alter,
change or repeal, or to adopt any provisions as part of this Charter or as part
of the corporation's Bylaws inconsistent with the purpose and intent of this
Article 9.
10. To the fullest extent permitted by the Tennessee Business
Corporation Act as in effect on the date hereof, and as hereafter amended from
time to time, a director of the corporation shall not be liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. If the Tennessee Business Corporation Act or any successor
statute is amended after adoption of this provision to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Tennessee Business Corporation Act, as so
amended from time to time, or such successor statute. Any repeal or modification
of this Article 10 by the shareholders of the corporation shall not affect
adversely any right or protection of a director of the corporation existing at
the time of such repeal or modification or with respect to events occurring
prior to such time.
2
<PAGE> 3
11. The corporation shall indemnify every person who is or was a
party or is or was threatened to be made a party to any action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that he or she is or was a director or officer or is or was serving
at the request of the corporation as a director, officer, employee, agent, or
trustee of another corporation or of a partnership, joint venture, trust,
employee benefit plan, or other enterprise, including service on a committee
formed for any purpose (and, in each case, his or her heirs, executors, and
administrators), against all expense, liability, and loss (including counsel
fees, judgments, fines, ERISA excise taxes, penalties, and amounts paid in
settlement) actually and reasonably incurred or suffered in connection with such
action, suit, or proceeding, to the fullest extent permitted by applicable law,
as in effect on the date hereof and as hereafter amended. Such indemnification
may include advancement of expenses in advance of final disposition of such
action, suit, or proceeding, subject to the provision of any applicable statute.
The indemnification and advancement of expenses provisions of
this Article 11 shall not be exclusive of any other right that any person (and
his or her heirs, executors, and administrators) may have or hereafter acquire
under any statute, this Charter, the corporation's Bylaws, resolution adopted by
the shareholders, resolution adopted by the Board of Directors, agreement, or
insurance, purchased by the corporation or otherwise, both as to action in his
or her official capacity and as to action in another capacity. The corporation
is hereby authorized to provide for indemnification and advancement of expenses
through its Bylaws, resolution of shareholders, resolution of the Board of
Directors, or agreement, in addition to that provided by this Charter.
12. The corporation shall hold a special meeting of shareholders
only in the event of a call of the Board of Directors of the corporation or the
officers authorized to do so by the Bylaws of the corporation.
Notwithstanding any other provision of this Charter, the
affirmative vote of holders of two-thirds of the voting power of the shares
entitled to vote at an election of directors shall be required to amend, alter,
change or repeal, or to adopt any provisions as part of this Charter or as part
of the corporation's Bylaws inconsistent with the purpose and intent of this
Article 12."
HEALTHSTREAM, INC.
By:
------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer and Chairman
3
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
HEALTHSTREAM, INC.
(THE "CORPORATION")
ARTICLE I.
OFFICES
The Corporation may have such offices, either within or without the
State of Tennessee, as the Board of Directors may designate or as the business
of the Corporation may require from time to time.
ARTICLE II.
SHAREHOLDERS
2.1 ANNUAL MEETING.
An annual meeting of the shareholders of the Corporation shall be held
on such date as may be determined by the Board of Directors. The business to be
transacted at such meeting shall be the election of directors and such other
business as shall be properly brought before the meeting.
2.2 SPECIAL MEETINGS.
Special meetings of the shareholders, for any purpose or purposes,
unless otherwise prescribed by law, may be called by the Chairman or a majority
of the Board of Directors. Business transacted at all special meetings shall be
confined to the purpose or purposes stated in the notice of meeting.
2.3 PLACE OF MEETINGS.
The Board of Directors may designate any place, either within or
without the State of Tennessee, as the place of meeting for any annual meeting
or for any special meeting. If no place is fixed by the Board of Directors, the
meeting shall be held at the principal office of the Corporation.
<PAGE> 2
2.4 NOTICE OF MEETINGS; WAIVER.
(A) NOTICE. Notice of the date, time and place of each annual
and special shareholders' meeting and, in the case of a special meeting, a
description of the purpose or purposes for which the meeting is called, shall be
given no fewer than ten (10) days nor more than two (2) months before the date
of the meeting. Such notice shall comply with the requirements of Article XI of
these Bylaws.
(B) WAIVER. A shareholder may waive any notice required by
law, the Charter or these Bylaws before or after the date and time stated in
such notice. The waiver must be in writing, be signed by the shareholder
entitled to the notice and be delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. A shareholder's attendance at a
meeting: (1) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting (or promptly
upon his arrival) objects to holding the meeting or transacting business at the
meeting; and (2) waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
2.5 RECORD DATE.
The Board of Directors shall fix as the record date for the
determination of shareholders entitled to notice of a shareholders' meeting, to
vote or to take any other action, a date not more than seventy (70) days before
the meeting or action requiring a determination of shareholders.
A record date fixed for a shareholders' meeting is effective for any
adjournment of such meeting unless the Board of Directors fixes a new record
date, which it must do if the meeting is adjourned to a date more than four (4)
months after the date fixed for the original meeting.
2
<PAGE> 3
2.6 SHAREHOLDERS' LIST.
After the record date for a meeting has been fixed, the Corporation
shall prepare an alphabetical list of the names of all shareholders who are
entitled to notice of a shareholders' meeting. Such list will be arranged by
voting group (and within each voting group by class or series of shares), and
will show the address of and number of shares held by each shareholder. The
shareholders' list will be available for inspection by any shareholder,
beginning two (2) business days after notice of the meeting is given for which
the list was prepared and continuing through the meeting, at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held. A shareholder, his agent or attorney is entitled
on written demand to inspect and, subject to the requirements of the Tennessee
Business Corporation Act (the "Act"), to copy the list, during regular business
hours and at his expense, during the period it is available for inspection.
2.7 VOTING GROUPS; QUORUM; ADJOURNMENT.
All shares entitled to vote and be counted together collectively on a
matter at a meeting of shareholders shall be a "voting group." Shares entitled
to vote as a separate voting group may take action on a matter at a meeting only
if a quorum of those shares exists with respect to that matter. Except as
otherwise required by the Act or provided in the Charter, a majority of the
votes entitled to be cast on a matter by a voting group constitutes a quorum of
that voting group for action on that matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
If a quorum of a voting group shall not be present or represented at
any meeting, the shares entitled to vote thereat shall have power to adjourn the
meeting to a different date, time or place without notice other than
announcement at the meeting of the new time, date or place to which the meeting
is adjourned. At any
3
<PAGE> 4
adjourned meeting at which a quorum of any voting group shall be present or
represented, any business may be transacted by such voting group which might
have been transacted at the meeting as originally called.
2.8 VOTING OF SHARES.
Unless otherwise provided by the Act or the Charter, each outstanding
share is entitled to one (1) vote on each matter voted on at a shareholders'
meeting. Only shares are entitled to vote. Shareholders are not entitled to
cumulative voting for the election of directors.
If a quorum exists, action on a matter (other than the election of
directors) by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
Charter or the Act requires a greater number of affirmative votes. Unless
otherwise provided in the Charter, directors are elected by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present.
2.9 PROXIES.
A shareholder may vote his shares in person or by proxy. A shareholder
may appoint a proxy to vote or otherwise act for him by signing an appointment
either personally or by his attorney-in-fact. An appointment of a proxy is
effective when received by the Secretary or other officer or agent authorized to
tabulate votes. An appointment is valid for eleven (11) months unless another
period is expressly provided in the appointment form. An appointment of a proxy
is revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest.
2.10 ACCEPTANCE OF SHAREHOLDER DOCUMENTS.
If the name signed on a shareholder document (a vote, consent, waiver,
or proxy appointment) corresponds to the name of a shareholder, the Corporation,
if acting in good faith, is entitled to accept such
4
<PAGE> 5
shareholder document and give it effect as the act of the shareholder. If the
name signed on such shareholder document does not correspond to the name of a
shareholder, the Corporation, if acting in good faith, is nevertheless entitled
to accept such shareholder document and to give it effect as the act of the
shareholder if:
(I) the shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity;
(II) the name signed purports to be that of a fiduciary
representing the shareholder and, if the Corporation requests, evidence
of fiduciary status acceptable to the Corporation has been presented
with respect to such shareholder document;
(III) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder, and, if the Corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the shareholder document;
(IV) the name signed purports to be that of a pledgee,
beneficial owner or attorney-in-fact of the shareholder, and, if the
Corporation requests, evidence acceptable to the Corporation of the
signatory's authority to sign for the shareholder has been presented
with respect to such shareholder document; or
(V) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one
(1) of the co-owners and the person signing appears to be acting on
behalf of all the co-owners.
The Corporation is entitled to reject a shareholder document if the
Secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has a reasonable basis for doubt about the validity of the signature on
such shareholder document or about the signatory's authority to sign for the
shareholder.
5
<PAGE> 6
2.11 ACTION WITHOUT MEETING.
Action required or permitted by the Act must be taken at a
shareholders' meeting and may not be taken without a meeting.
2.12 PRESIDING OFFICER AND SECRETARY.
Meetings of the shareholders shall be presided over by the Chairman, or
if he is not present or if the Corporation shall not have a Chairman, by the
Chief Executive Officer or President, or if neither the Chairman nor the Chief
Executive Officer or President is present, by a chairman to be chosen by a
majority of the shareholders entitled to vote at such meeting. The Secretary or,
in his absence, an Assistant Secretary shall act as secretary of every meeting,
but if neither the Secretary nor an Assistant Secretary is present, the
shareholders entitled to vote at such meeting shall choose any person present to
act as secretary of the meeting.
2.13 NOTICE OF NOMINATIONS.
Nominations for the election of directors may be made by the Board of
Directors or a committee appointed by the Board of Directors authorized to make
such nominations or by any shareholder entitled to vote in the election of
directors generally. However, any such shareholder nomination may be made only
if written notice of such nomination has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not later than (a) with respect to an election to be held at an annual meeting
of shareholders, one hundred twenty (120) days prior to the first anniversary of
the date the corporation's notice of annual meeting was provided with respect to
the previous year's annual meeting, and (b) with respect to an election to be
held at a special meeting of shareholders for the election of directors, the
close of business on the tenth day following the date on which notice of such
meeting is first given to shareholders. In the case of any nomination by the
Board of Directors or a committee appointed by the Board
6
<PAGE> 7
of Directors authorized to make such nominations, compliance with the proxy
rules of the Securities and Exchange Commission shall constitute compliance with
the notice provisions of the preceding sentence.
In the case of any nomination by a shareholder, each such notice shall
set forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such shareholder, (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder, (iii) a representation that
the shareholder is a record or beneficial holder of at least one percent (1%) or
$1,000 in market value of stock of the Corporation entitled to vote at such
meeting; has held such stock for at least one year and shall continue to own
such stock through the date of such meeting; and intends to appear in person or
by proxy at the meeting to present the nomination; and (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder. The Chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
2.14 NOTICE OF NEW BUSINESS.
At an annual meeting of the shareholders only such new business shall
be conducted, and only such proposals shall be acted upon, as shall have been
properly brought before the meeting. To be properly brought before the annual
meeting such new business must be (a) specified in the notice of meeting (or any
supplement
7
<PAGE> 8
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For a proposal to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation and the proposal and the shareholder must
comply with Regulation 14A under the Securities Exchange Act of 1934. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than one hundred
twenty (120) calendar days prior to the first anniversary of the date the
Corporation's notice of annual meeting was provided with respect to the previous
year's annual meeting. If the Company did not hold an annual meeting the
previous year, or if the date of the annual meeting has been changed to be more
than thirty (30) calendar days earlier than or sixty (60) calendar days after
that anniversary, then, in order to be timely, a shareholder's notice must be
received at the principal executive offices of the Corporation not more than
ninety (90) calendar days before nor later than the later of sixty (60) days
prior to the date of such annual meeting or the tenth day following the date on
which public announcement of such annual meeting is first made. In no event
shall the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a shareholder's notice as described above.
A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, (d) a representation that the shareholder
is a record or beneficial holder of at least one percent (1%) or $1,000 in
market value of stock of the Corporation entitled to vote at such meeting; has
held such stock for at least one year and shall continue
8
<PAGE> 9
to own such stock through the date of such meeting; and intends to appear in
person or by proxy at the meeting to present the proposal specified in the
notice, and (e) any financial interest of the shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.14. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section 2.14, and if he should so determine, he
shall so declare to the meeting that any such business or proposal not properly
brought before the meeting shall not be acted upon at the meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
2.15 CONDUCT OF MEETINGS.
Meetings of the shareholders generally shall follow accepted rules of
parliamentary procedure, subject to the following:
(A) The Chairman of the meeting shall have absolute authority
over the matters of procedure, and there shall be no appeal from the ruling of
the Chairman. If, in his absolute discretion, the Chairman deems it advisable to
dispense with the rules of parliamentary procedure as to any meeting of
shareholders or part thereof, he shall so state and shall state the rules under
which the meeting or appropriate part thereof shall be conducted.
(B) If disorder should arise which prevents the continuation
of the legitimate business of the meeting, the Chairman may quit the chair and
announce the adjournment of the meeting; and upon so doing, the meeting is
immediately adjourned.
9
<PAGE> 10
(C) The Chairman may ask or require that anyone not a bona
fide shareholder or proxy leave the meeting.
(D) The resolution or motion shall be considered for vote only
if proposed by a shareholder or a duly authorized proxy and seconded by a
shareholder or duly authorized proxy other than the individual who proposed the
resolution or motion.
(E) Except as the Chairman may permit, no matter shall be
presented to the meeting which has not been submitted for inclusion in the
agenda at least thirty (30) days prior to the meeting.
ARTICLE III.
DIRECTORS
3.1 POWERS AND DUTIES.
All corporate powers shall be exercised by or under the authority of
and the business and affairs of the Corporation managed under the direction of
the Board of Directors.
3.2 NUMBER AND TERM.
(A) NUMBER. The Board of Directors shall consist of no fewer
than two (2) nor more than twelve (12) members. The exact number of directors,
within the minimum and maximum, or the range for the size of the Board, or
whether the size of the Board shall be fixed or variable-range may be fixed,
changed or determined from time to time by the Board of Directors.
(B) TERM. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. Each class of directors shall be elected for a
three-year term. At the 2000 annual meeting of shareholders, Class I directors
shall be elected for a three-year term; at the 2001 annual meeting Class II
directors shall be elected for a three-year term; and at the 2002 annual meeting
Class III directors shall be elected for a three-year term. If the number of
directors is changed, any
10
<PAGE> 11
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, and any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
3.3 MEETINGS; NOTICE.
The Board of Directors may hold regular and special meetings either
within or without the State of Tennessee. The Board of Directors may permit any
or all directors to participate in a regular or special meeting by, or conduct
the meeting through the use of, any means of communication by which all
directors participating may simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
(A) REGULAR MEETINGS. Unless the Charter otherwise provides,
regular meetings of the Board of Directors may be held without notice of the
date, time, place or purpose of the meeting.
(B) SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman, the President or any two (2) directors.
Unless the Charter otherwise provides, special meetings must be preceded by at
least twenty-four (24) hours' notice of the date, time and place of the meeting
but need not describe the purpose of such meeting. Such notice shall comply with
the requirements of Article XI of these Bylaws.
(C) ADJOURNED MEETINGS. Notice of an adjourned meeting need
not be given if the time and place to which the meeting is adjourned are fixed
at the meeting at which the adjournment is taken, and if the period of
adjournment does not exceed one (1) month in any one (1) adjournment.
11
<PAGE> 12
(D) WAIVER OF NOTICE. A director may waive any required notice
before or after the date and time stated in the notice. Except as provided in
the next sentence, the waiver must be in writing, signed by the director and
filed with the minutes or corporate records. A director's attendance at or
participation in a meeting waives any required notice to him of such meeting
unless the director at the beginning of the meeting (or promptly upon his
arrival) objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
3.4 QUORUM.
Unless the Charter requires a greater number, a quorum of the Board of
Directors consists of a majority of the fixed number of directors if the
Corporation has a fixed board size or a majority of the number of directors
prescribed, or if no number is prescribed, the number in office immediately
before the meeting begins, if the Corporation has a variable-range board.
3.5 VOTING.
If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the Board of Directors, unless the
Charter or these Bylaws require the vote of a greater number of directors. A
director who is present at a meeting of the Board of Directors when corporate
action is taken is deemed to have assented to such action unless:
(I) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding the meeting or transacting business at
the meeting;
(II) his dissent or abstention from the action taken is
entered in the minutes of the meeting; or
12
<PAGE> 13
(III) he delivers written notice of his dissent or abstention
to the presiding officer of the meeting before its adjournment or to
the Corporation immediately after adjournment of the meeting. The right
of dissent or abstention is not available to a director who votes in
favor of the action taken.
3.6 ACTION WITHOUT MEETING.
Unless the Charter otherwise provides, any action required or permitted
by the Act to be taken at a Board of Directors' meeting may be taken without a
meeting. If all directors consent to taking such action without a meeting, the
affirmative vote of the number of directors that would be necessary to authorize
or take such action at a meeting is the act of the Board of Directors. Such
action must be evidenced by one or more written consents describing the action
taken, signed by each director in one (1) or more counterparts, indicating each
signing director's vote or abstention on the action, which consents shall be
included in the minutes or filed with the corporate records reflecting the
action taken. Action taken by consent is effective when the last director signs
the consent, unless the consent specifies a different effective date.
3.7 COMPENSATION.
Directors, and members of any committee created by the Board of
Directors, shall be entitled to such compensation for their services as
directors and members of such committee as shall be fixed from time to time by
the Board, and shall also be entitled to reimbursement for any reasonable
expenses incurred in attending meetings of the Board or of any such committee
meetings. Any director receiving such compensation shall not be barred from
serving the Corporation in any other capacity and receiving reasonable
compensation for such other services.
13
<PAGE> 14
3.8 RESIGNATION.
A director may resign at any time by delivering written notice to the
Board of Directors, the Chairman, Chief Executive Officer or President, or to
the Corporation. A resignation is effective when the notice is delivered unless
the notice specifies a later effective date.
3.9 VACANCIES.
If a vacancy occurs on the Board of Directors, including a vacancy
resulting from an increase in the number of directors or a vacancy resulting
from the removal of a director, the Board of Directors may fill such vacancy by
an affirmative vote of a majority of the Board of Directors then in office, even
though the directors remaining in office may constitute fewer than a quorum of
the Board of Directors.
3.10 REMOVAL OF DIRECTORS.
Any director may be removed from office, but only for cause, by the
affirmative vote of the holders of a majority of the voting power of the shares
entitled to vote for the election of directors, considered for this purpose as
one class.
A director may be removed by the shareholders only at a meeting called
for the purpose of removing him, and the meeting notice must state that the
purpose, or one of the purposes, of the meeting is removal of directors.
ARTICLE IV.
COMMITTEES
4.1 COMMITTEES.
Unless the Charter otherwise provides, the Board of Directors may
create one (1) or more committees, each consisting of one (1) or more members.
All members of committees of the Board of Directors that exercise powers of the
Board must be members of the Board and serve at the pleasure of the Board.
14
<PAGE> 15
The creation of a committee and appointment of a member or members to
it must be approved by the greater of (i) a majority of all directors in office
when the action is taken or (ii) the number of directors required by the Charter
or these Bylaws to take action.
To the extent specified by the Board of Directors or in the Charter,
each committee may exercise the authority of the Board of Directors. A committee
may not, however:
(I) authorize distributions, except according to a formula or
method prescribed by the Board of Directors;
(II) fill vacancies on the Board or on any of its committees;
(III) adopt, amend or repeal the Bylaws;
(IV) authorize or approve reacquisitions of shares, except
according to a formula or method prescribed by the Board of
Directors; or
(V) authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that
the Board of Directors may authorize such committee (or senior
executive officer of the Corporation) to do so within limits
specifically prescribed by the Board.
All such committees and their members shall be governed by the same
statutory requirements regarding meetings, action without meetings, notice and
waiver of notice, quorum and voting requirements as are applicable to the Board
of Directors and its members.
15
<PAGE> 16
ARTICLE V.
OFFICERS
5.1 NUMBER.
The officers of the Corporation shall be a Chairman and Chief Executive
Officer, a President, one or more Vice-Presidents, a Secretary, a Treasurer and
such other officers as may be from time to time appointed by the Board of
Directors or by the Chief Executive Officer with the approval of the Board. One
person may simultaneously hold more than one office except the President may not
simultaneously hold the office of Secretary.
5.2 APPOINTMENT.
The principal officers shall be appointed annually by the Board at the
first meeting of the Board following the annual meeting of the shareholders, or
as soon thereafter as is conveniently possible. Each officer shall serve at the
pleasure of the Board and until his successor shall have been appointed, or
until his death, resignation or removal.
5.3 RESIGNATION AND REMOVAL.
An officer may resign at any time by delivering notice to the
Corporation. Such resignation is effective when such notice is delivered unless
such notice specifies a later effective date. An officer's resignation does not
affect the Corporation's contract rights, if any, with the officer.
The Board of Directors may remove any officer at any time with or
without cause, but such removal shall not prejudice the contract rights, if any,
of the person so removed.
16
<PAGE> 17
5.4 VACANCIES.
Any vacancy in an office from any cause may be filled for the unexpired
portion of the term by the Board of Directors.
5.5 DUTIES.
(A) CHAIRMAN. The Chairman shall preside at all meetings of
the shareholders and the Board of Directors and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
(B) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the Corporation shall have general supervision over the active management of the
business of the Corporation.
(C) PRESIDENT. The President shall have the general powers and
duties of supervision and management usually vested in the office of the
President of a corporation and shall perform such other duties as the Board of
Directors may from time to time prescribe.
(D) VICE PRESIDENT. The Vice President or Vice Presidents (if
any) shall be active officers of the Corporation, shall assist the Chairman and
the President in the active management of the business, and shall perform such
other duties as the Board of Directors may from time to time prescribe. The
Board may designate a Vice President to be the chief financial officer of the
Corporation, in which event such authority shall preempt the duties and
responsibilities set forth herein for the Secretary and Treasurer.
(E) SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the shareholders and shall prepare and
record all votes and all minutes of all such meetings in a book to be kept for
that purpose; he shall perform like duties for any committee when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the Board of Directors when required, and unless directed
otherwise by the Board of Directors, shall keep a stock record containing the
names of all persons who are shareholders of the Corporation, showing their
place of residence and the number of shares held by them respectively. The
Secretary shall have the responsibility of authenticating records of
17
<PAGE> 18
the Corporation. The Secretary shall perform such other duties as may be
prescribed from time to time by the Board of Directors.
(F) TREASURER. The Treasurer shall have the custody of the
Corporation's funds and securities, shall keep or cause to be kept full and
accurate account of receipts and disbursements in books belonging to the
Corporation, and shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse or cause to be disbursed the funds of the Corporation as required in
the ordinary course of business or as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the Chairman, the President
and directors at the regular meetings of the Board, or whenever they may require
it, an account of all of his transactions as Treasurer and the financial
condition of the Corporation. He shall perform such other duties as may be
incident to his office or as prescribed from time to time by the Board of
Directors. The Treasurer shall give the Corporation a bond, if required by the
Board of Directors, in a sum and with one or more sureties satisfactory to the
Board for the faithful performance of the duties of his office and for the
restoration to the Corporation in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
(G) OTHER OFFICERS. Other officers appointed by the Board of
Directors shall exercise such powers and perform such duties as may be delegated
to them.
(H) DELEGATION OF DUTIES. In case of the absence or disability
of any officer of the Corporation or of any person authorized to act in his
place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any officer, or any director, or any other person whom
it may select, during such period of absence or disability.
18
<PAGE> 19
5.6 INDEMNIFICATION AND INSURANCE.
(A) INDEMNIFICATION. The Corporation shall indemnify and
advance expenses to each present and future director and officer of the
Corporation, or any person who may have served at its request as a director or
officer of another corporation (and, in either case, his heirs, executors and
administrators), to the full extent allowed by the laws of the State of
Tennessee, both as now in effect and as hereafter adopted. The Corporation may
indemnify and advance expenses to any employee or agent of the Corporation who
is not a director or officer (and his heirs, executors and administrators) to
the same extent as to a director or officer, if the Board of Directors
determines that to do so is in the best interests of the Corporation.
(B) NON-EXCLUSIVITY OF RIGHTS. The indemnification and
advancement of expenses provisions of subsection (a) of this Section 5.6 shall
not be exclusive of any other right which any person may have or hereafter
acquire under any statute, provision of the Charter, provision of these Bylaws,
resolution adopted by the shareholders, or resolution adopted by the Board of
Directors providing for such indemnification or advancement of expenses.
(C) INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any individual who is or was a director, officer,
employee or agent of the Corporation, or who, while a director, officer,
employee or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Act.
ARTICLE VI.
SHARES OF STOCK
6.1 SHARES WITH OR WITHOUT CERTIFICATES.
The Board of Directors may authorize that some or all of the shares of
any or all of the Corporation's classes or series of stock be evidenced by a
certificate or certificates of stock. The Board of Directors may also
19
<PAGE> 20
authorize the issue of some or all of the shares of any or all of the
Corporation's classes or series of stock without certificates. The rights and
obligations of shareholders with the same class and/or series of stock shall be
identical whether or not their shares are represented by certificates.
(A) SHARES WITH CERTIFICATES. If the Board of Directors
chooses to issue shares of stock evidenced by a certificate or certificates,
each individual certificate shall include the following on its face: (i) the
Corporation's name, (ii) the fact that the Corporation is organized under the
laws of the State of Tennessee, (iii) the name of the person to whom the
certificate is issued, (iv) the number of shares represented thereby, (v) the
class of shares and the designation of the series, if any, which the certificate
represents, and (vi) such other information as applicable law may require or as
may be lawful.
If the Corporation is authorized to issue different classes of shares
or different series within a class, the designations, relative rights,
preferences and limitations determined for each series (and the authority of the
Board of Directors to determine variations for future series) shall be
summarized on the front or back of each certificate. Alternatively, each
certificate shall state on its front or back that the Corporation will furnish
the shareholder this information in writing, without charge, upon request.
Each certificate of stock issued by the Corporation shall be signed
(either manually or in facsimile) by the Chairman, the President or a Vice
President, and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer. If the person who signed a certificate no longer holds
office when the certificate is issued, the certificate is nonetheless valid.
(B) SHARES WITHOUT CERTIFICATES. If the Board of Directors
chooses to issue shares of stock without certificates, the Corporation, if
required by the Act, shall, within a reasonable time after the issue or transfer
of shares without certificates, send the shareholder a written statement of the
information required on certificates by Section 6.1(a) of these Bylaws and any
other information required by the Act.
20
<PAGE> 21
6.2 SUBSCRIPTIONS FOR SHARES.
Subscriptions for shares of the Corporation shall be valid only if they
are in writing. Unless the subscription agreement provides otherwise,
subscriptions for shares, regardless of the time when they are made, shall be
paid in full at such time, or in such installments and at such periods, as shall
be determined by the Board of Directors. All calls for payment on subscriptions
shall be uniform as to all shares of the same class or of the same series,
unless the subscription agreement specifies otherwise.
6.3 TRANSFERS.
Transfers of shares of the capital stock of the Corporation shall be
made only on the books of the Corporation by (i) the holder of record thereof,
(ii) by his legal representative, who, upon request of the Corporation, shall
furnish proper evidence of authority to transfer, or (iii) his attorney,
authorized by a power of attorney duly executed and filed with the Secretary of
the Corporation or a duly appointed transfer agent. Such transfers shall be made
only upon surrender, if applicable, of the certificate or certificates for such
shares properly endorsed and with all taxes thereon paid.
6.4 LOST, DESTROYED, OR STOLEN CERTIFICATES.
No certificate for shares of stock of the Corporation shall be issued
in place of any certificate alleged to have been lost, destroyed or stolen
except on production of evidence, satisfactory to the Board of Directors or
Transfer Agent for the Corporation's stock, of such loss, destruction or theft,
and, if the Board of Directors or Transfer Agent for the Corporation's stock so
requires, upon the furnishing of an indemnity bond in such amount and with such
terms and such surety as either the Board of Directors or Transfer Agent for the
Corporation's stock may in its discretion require.
21
<PAGE> 22
ARTICLE VII.
CORPORATE ACTIONS
7.1 CONTRACTS.
Unless otherwise required by the Board of Directors, the Chairman, the
Chief Executive Officer, the President or any Vice President shall execute
contracts or other instruments on behalf of and in the name of the Corporation.
The Board of Directors may from time to time authorize any other officer,
assistant officer or agent to enter into any contract or execute any instrument
in the name of and on behalf of the Corporation as it may deem appropriate, and
such authority may be general or confined to specific instances.
7.2 CHECKS, DRAFTS, ETC.
Unless otherwise required by the Board of Directors, all checks,
drafts, bills of exchange and other negotiable instruments of the Corporation
shall be signed by either the Chairman, the Chief Executive Officer, the
President, a Vice President or such other officer, assistant officer or agent of
the Corporation as may be authorized so to do by the Board of Directors, the
Chairman, the Chief Executive Officer, the chief financial officer or the
President. Such authority may be general or confined to specific business, and,
if so directed by the Board of Directors, the Chairman, the Chief Executive
Officer, the chief financial officer or the President, the signatures of two or
more such officers may be required.
7.3 DEPOSITS.
All funds of the Company not otherwise employed shall be deposited from
time to time to the credit of the Corporation in such banks or other
depositories as the Board of Directors may authorize.
22
<PAGE> 23
7.4 VOTING SECURITIES HELD BY THE CORPORATION.
Unless otherwise required by the Board of Directors, the Chairman, the
Chief Executive Officer or the President shall have full power and authority on
behalf of the Corporation to attend any meeting of security holders, or to take
action on written consent as a security holder, of other corporations in which
the Corporation may hold securities. In connection therewith the Chairman, the
Chief Executive Officer or the President shall possess and may exercise any and
all rights and powers incident to the ownership of such securities which the
Corporation possesses. The Board of Directors may, from time to time, confer
like powers upon any other person or persons.
7.5 DIVIDENDS.
The Board of Directors may, from time to time, declare, and the
Corporation may pay, dividends on its outstanding shares of capital stock in the
manner and upon the terms and conditions provided by applicable law. The record
date for the determination of shareholders entitled to receive the payment of
any dividend shall be determined by the Board of Directors, but which in any
event shall not be less than ten (10) days prior to the date of such payment.
ARTICLE VIII.
FISCAL YEAR
The fiscal year of the Corporation shall be determined by the Board of
Directors, and in the absence of such determination, shall be the calendar year.
23
<PAGE> 24
ARTICLE IX.
CORPORATE SEAL
The Corporation shall not have a corporate seal.
ARTICLE X.
AMENDMENT OF BYLAWS
These Bylaws may be altered, amended or repealed, and new Bylaws may be
adopted at any meeting of the shareholders by the affirmative vote of a majority
of the stock represented at such meeting, or by the affirmative vote of a
majority of the members of the Board of Directors who are present at any regular
or special meeting; provided, however, Sections 2.2, 2.11, 3.2(b) and 3.10 of
these Bylaws may only be altered, amended or repealed at a meeting of the
shareholders by the affirmative vote of at least 66 2/3% of the stock
represented at such meeting.
ARTICLE XI.
NOTICE
Unless otherwise provided for in these Bylaws, any notice required
shall be in writing except that oral notice is effective if it is reasonable
under the circumstances and not prohibited by the Charter or these Bylaws.
Notice may be communicated in person; by telephone, telegraph, teletype or other
form of wire or wireless communication; or by mail or private carrier. If these
forms of personal notice are impracticable, notice may be communicated by a
newspaper of general circulation in the area where published; or by radio,
television or other form of public broadcast communication. Written notice to a
domestic or foreign corporation authorized to transact business in Tennessee may
be addressed to its registered agent at its registered office or to the
corporation or its secretary at its principal office as shown in its most recent
annual report or, in the
24
<PAGE> 25
case of a foreign corporation that has not yet delivered an annual report, in
its application for a certificate of authority.
Written notice to shareholders, if in a comprehensible form, is
effective when mailed, if mailed postpaid and correctly addressed to the
shareholder's address shown in the Corporation's current record of shareholders.
Except as provided above, written notice, if in a comprehensible form, is
effective at the earliest of the following: (a) when received, (b) five (5) days
after its deposit in the United States mail, if mailed correctly addressed and
with first class postage affixed thereon; (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested, and
the receipt is signed by or on behalf of the addressee; or (d) twenty (20) days
after its deposit in the United States mail, as evidenced by the postmark if
mailed correctly addressed, and with other than first class, registered or
certified postage affixed. Oral notice is effective when communicated if
communicated in a comprehensible manner.
25
<PAGE> 1
EXHIBIT 4.5
PROMISSORY NOTE
$ 1,293,000.00 NASHVILLE, TENNESSEE
AUGUST 23RD, 1999
FOR VALUE RECEIVED, HealthStream, Inc., a Tennessee corporation
("Maker"), promises to pay to Robert A. Frist, Jr. ("Lender"), the principal sum
of One Million Two Hundred Ninety Three Thousand and 00/100ths Dollars
(US$1,293,000.00), together with interest on the outstanding principal balance
hereof at a variable rate, adjusted as changes occur, equal to the lesser of:
(i) the rate charged to Lender as the then existing margin rate of interest on
his Charles Schwab & Co., Inc. brokerage account (or similar replacement
account); and (ii) ten and one half percent (10.5%); provided that in no event
shall the rate of interest payable in respect of the indebtedness evidenced
hereby exceed the maximum rate of interest from time to time allowed to be
charged by applicable law.
Interest shall be payable monthly during the term hereof commencing
September 23rd, 1999 and on the same day of each month thereafter, and all
principal and any unpaid, accrued interest shall be payable in full upon the
date (the "Due Date") that is the earliest of: (i) the date determined by
Maker's Board of Directors; (ii) the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Maker's
Common Stock in which the gross proceeds are at least $30 million and the per
share price is at least $9.00 (an "IPO"); (iii) the closing of Maker's sale of
all or substantially all of its assets or the acquisition of Maker by another
entity by means of a merger or consolidation resulting in the exchange of the
outstanding shares of Maker's capital stock for securities or consideration
issued, or caused to be issued, by the acquiring entity or its subsidiary (other
than a merger to reincorporate Maker in a different jurisdiction, or a
consolidation or merger in which the outstanding voting capital stock of Maker
immediately prior to such consolidation or merger constitutes a majority of the
voting capital stock of the surviving entity); (iv) the bankruptcy of Maker; or
(v) October 23rd, 2006.
For purposes of this Note, the term "bankruptcy of Maker" shall mean:
(i) the appointment of any receiver, custodian, liquidator, or trustee of Maker
or of any of its real, personal, tangible, intangible or mixed property or
assets ("Property") by the order or decree of any court or agency or supervisory
authority having jurisdiction; (ii) any Property is sequestered by court order;
(iii) an involuntary petition is filed against Maker under any state or federal
bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt,
dissolution, liquidation or receivership law of any jurisdiction, whether now or
hereafter in effect and such petition is not dismissed within 60 days of the
date of filing; (iv) Maker files (or takes affirmative steps to prepare to file)
a voluntary bankruptcy petition or other petition to seek relief under any
provision of any bankruptcy, reorganization, debt arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any jurisdiction or
consents to the filing of any such petition against it under any such law; (v)
Maker makes an assignment for the benefit of its creditors, or admits in writing
its inability to pay its debts generally as they become due, or consents to the
appointment of a receiver, trustee or liquidator of itself or of all or any part
of its Property; or (vi) Maker discontinues substantially all of its usual
businesses or commences to dissolve, wind-up or liquidate itself.
Amounts due under this Note are payable to Lender at 209 10th Avenue
South, Suite 450, Nashville, Tennessee 37203 or at such other place as Lender
may designate in writing from time to time, in lawful money of the United States
of America.
<PAGE> 2
This Note and all amounts due hereunder is convertible into Series B
Convertible Preferred Stock of Maker, at the option of Lender, upon the
occurrence of: (i) Lender's employment with Maker is terminated by the reasons
stated in Sections 9(b), 9(f), 9(g) or 9(h) in the Executive Employment
Agreement of even date herewith executed between Maker and Lender; (ii) any
liquidation, dissolution, winding up, consolidation, sale or merger of Maker as
set forth in paragraph 2 of the Third Amended and Restated Charter of Maker,
dated August 18, 1999 (the "Amended Charter"); or (iii) an IPO. If Lender
exercises such conversion option by giving notice to Maker, Lender shall be
entitled to all rights and payments as a holder of Series B Convertible
Preferred Stock as set forth in the Amended Charter. If such conversion option
is exercised, Lender shall be entitled to receive that number of shares
determined by dividing the total amount of indebtedness hereunder by $10.00.
Prepayments, in whole or in part, may be made at any time at the sole
discretion of Maker, without premium or penalty.
If any amount of principal due under this Note is not paid by the Due
Date, this Note may be declared immediately due and payable, without notice, at
the option of Lender. Default in the payment of interest due under this Note
shall not allow Lender to accelerate and declare the principal amount hereof
payable prior to the Due Date set forth above.
Maker, for itself, its successors and assigns, hereby waives demand,
presentment for payment, notice of dishonor, protest, notice of protest,
diligence and collection, and all other notices or demands whatsoever with
respect to this Note or the enforcement hereof, and consents that the Due Date
may be extended by Lender, but only in writing, all without in any way
modifying, altering, releasing, affecting or limiting the liability of Maker
hereunder. No failure to accelerate the indebtedness evidenced hereby by reason
of default hereunder, acceptance of a past-due installment or other indulgences
granted from time to time shall be construed as a novation of this Note or as a
waiver of any right of acceleration or of the right of Lender thereafter to
insist upon strict compliance with the terms of this Note. This Note may not be
changed orally, but only by a written instrument signed by Maker and Lender.
It is expressly understood and agreed by both Maker and Lender that if
it is necessary to enforce payment of this Note through an attorney or by suit,
Maker shall pay reasonable attorneys fees, court costs and all reasonable costs
of collection incurred by Lender.
This Note is not a "security" as defined in the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.
This Note is intended as a Tennessee contract and is to be so
construed.
This Note replaces and supercedes the previous notes executed between
Maker and Lender dated January 18, 1994, February 23, 1994, March 30, 1994, July
11, 1997, December 31, 1997 and April 21, 1999.
2
<PAGE> 3
IN WITNESS WHEREOF, this Note has been duly executed by the undersigned
on the date set forth above.
HEALTHSTREAM, INC.
By: /s/
-----------------------------------
Title: General Counsel
--------------------------------
<PAGE> 1
EXHIBIT 10.1
HEALTHSTREAM, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this
"Agreement") is made as of the 13th day of October, 1998, by and between
HealthStream, Inc., a Tennessee corporation f/k/a NewOrder Media, Inc. (the
"Company"), and JCB HealthStream Investors, L.L.C., a Tennessee limited
liability company, and any other person or entity designated as an investor on
Schedule A hereto (each an "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State of the
State of Tennessee on or before the Closing (as defined below) an Amended and
Restated Charter in the form attached hereto as Exhibit A (the "Restated
Charter").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Closing and the
Company agrees to sell and issue to each Investor, severally and not jointly, at
the Closing the number of shares of the Company's Series A Convertible Preferred
Stock set forth opposite each Investor's name on Schedule A hereto at a purchase
price of $10.00 per share. The Series A Convertible Preferred Stock will have
the rights, preferences, privileges and restrictions set forth in the Restated
Charter.
1.2 CLOSING.
(a) The purchase and sale of the Series A Convertible Preferred Stock
shall take place at the offices of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, Nashville, Tennessee, at 1:00 p.m., on October 13,
1998, or at such other time and place as the Company and Investors acquiring in
the aggregate more than half the shares of Series A Convertible Preferred Stock
being sold pursuant hereto shall mutually agree, either oral or in writing
(which time and place are designated as the "Closing").
(b) At the Closing, the Company shall deliver to each Investor a
certificate representing the shares of Series A Convertible Preferred Stock that
such Investor is purchasing against payment of the purchase price therefor by
check, wire transfer, or such other form of payment as shall be mutually agreed
upon by such Investor and the Company.
1.3 SUBSEQUENT SALE OF SERIES A CONVERTIBLE PREFERRED STOCK.
If less than all of the authorized number of shares of Series A
Convertible Preferred Stock are sold at the Closing, then, subject to the terms
and conditions of this Agreement, the Investors shall have the right to buy the
balance of the authorized but unissued Series A Convertible Preferred Stock,
which right may be transferred by the Investors to persons reasonably acceptable
to the Company, at the same price per share as the Series A Convertible
Preferred Stock was purchased and sold at the Closing. Any
<PAGE> 2
such sale shall be made upon the same terms and conditions as those contained
herein, and such persons or entities shall become parties to this Agreement and
shall have the rights and obligations of an Investor hereunder and thereunder.
1.4 RESET PROVISION.
The Company and the Investors hereby acknowledge that the investment
called for by this Agreement is being made in connection with the engagement by
the Company of J.C. Bradford & Co., L.L.C. ("Bradford") to act as financial
advisor to the Company. Among other things, Bradford has been retained to assist
the Company in a private placement of equity securities, which may include one
or more additional series of convertible preferred stock of the Company (any
such transaction, if consummated, a "Bradford Placement"). The Company and the
Investors agree that in the event of any Bradford Placement involving
convertible preferred stock of the Company, the rights and preferences of the
Series A Convertible Preferred Stock (but not the purchase price therefor) shall
be automatically amended to be identical to the rights and preferences agreed to
in the Bradford Placement. The Company and the Investors shall cooperate in good
faith to prepare and execute appropriate documentation regarding such amended
rights and preferences, and shall make all necessary filings in connection
therewith. In the event of any Bradford Placement not involving convertible
preferred stock of the Company, the Company and the Investors shall negotiate in
good faith to conform the rights and preferences of the Series A Convertible
Preferred Stock to the rights and preferences agreed to in the Bradford
Placement , and the Company and the Investors shall cooperate in good faith to
prepare and execute appropriate documentation regarding such amended rights and
preferences, and shall make all necessary filings in connection therewith.
2. COVENANTS AND REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby covenants, represents and warrants to each Investor
that as of the date of this Agreement, except as set forth on a Schedule of
Exceptions furnished to each Investor and special counsel for the Investors,
specifically identifying the relevant subparagraph(s) hereof, which exceptions
shall be deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION; GOOD STANDING, QUALIFICATION.
The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Tennessee, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and as presently proposed to be
conducted, to execute and deliver this Agreement and any other agreement to
which the Company is a party the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"), to issue and sell the Series A Convertible
Preferred Stock and the Common Stock issuable upon conversion thereof, and to
carry out the provisions of this Agreement the Restated Charter and any
Ancillary Agreement. The Company is duly qualified and is authorized to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure so to qualify would have material adverse effect on its
business, properties, prospects, or financial condition.
2
<PAGE> 3
2.2 AUTHORIZATION.
All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement and any Ancillary Agreement, the performance of all
obligations of the Company hereunder and thereunder at the Closing and the
authorization, issuance (or reservation for issuance), sale, and delivery of the
Series A Convertible Preferred Stock being sold hereunder and the Common Stock
issuable upon conversion thereof has been taken or will be taken prior to he
Closing, and this Agreement, and any Ancillary Agreement, when executed and
delivered, will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
The Series A Convertible Preferred Stock that is being purchased by the
Investors hereunder, when issued, sold, and delivered in accordance with the
terms of this agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The Common Stock issuable upon
conversion of the Series A Convertible Preferred Stock being purchased under
this Agreement has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Charter, will be duly and
validly issued, fully paid, and nonassessable and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws.
2.4 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of, or
filing with, any local, state, or federal governmental authority is required on
the part of the Company in connection with the Company's valid execution,
delivery, or performance of this Agreement, the offer, sale or issuance of the
Series A Convertible Preferred Stock by the Company or the issuance of Common
Stock upon conversion of the Series A Convertible Preferred Stock, except (i)
the filing of the Restated Charter with the Secretary of State of the State of
Tennessee, and (ii) such filings as have been made prior to the Closing, except
any notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor.
2.5 CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists, or will consist
immediately prior to the Closing, of:
(a) Preferred Stock. 1,000,000 shares of Preferred Stock, no par value,
of which 50,000 shares have been designated as Series A Convertible Preferred
Stock, up to all of which will be sold pursuant to this Agreement. The rights,
privileges and preferences of the Series A Convertible Preferred Stock are as
stated in the Restated Charter.
3
<PAGE> 4
(b) Common Stock. 20,000,000 shares of common stock, no par value
("Common Stock"), of which 1,760,166 shares are issued and outstanding. An
additional 4,000,000 shares of Common Stock are reserved for issuance pursuant
to the Employee Stock Option Plan, dated April 15, 1994 (the "Option Plan"). The
Company has granted options under the Option Plan to acquire a total of 865,276
shares of Common Stock.
(c) The outstanding shares of Common Stock and options granted under
the Option Plan are owned by the stockholders and option holders in the numbers
specified in Exhibit B hereto.
(d) The outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act and any relevant state securities laws or pursuant to valid exemptions
therefrom.
(e) Except for (i) the conversion privileges of the Series A
Convertible Preferred Stock, and (ii) currently outstanding options under the
Option Plan, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements or agreements of any kind for the purchase or acquisition
from the Company of any of its securities. Other than the Stockholder's
Agreement, dated April 15, 1994 (the "Stockholder's Agreement"), the Company is
not a party or subject to any agreement or understanding, and, to the best of
the Company's knowledge, there is no agreement or understanding between any
persons that affects or relates to the Common Stock or the voting or giving of
written consents with respect to any security or the voting by a director of the
Company.
2.6 SUBSIDIARIES.
The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company does not have and is not bound by any contract, agreement,
lease, commitment, or proposed transaction, judgment, order, writ or decree,
written or oral, absolute or contingent, other than (i) contracts for the
purchase of supplies and services that were entered into in the ordinary course
of business and at do not involve more than $50,000, and do not extend for more
than one (1) year beyond the date hereof, (ii) sales contracts entered into in
the ordinary course of business, and (iii) contracts terminable at will by the
Company on no more than thirty (30) days' notice without cost or liability to
the Company and that do not involve any employment or consulting arrangement and
are not material to the conduct of the Company's business. For the purpose of
this paragraph, employment and consulting contracts and contracts with labor
unions, and license agreements and any other agreements relating to the
Company's acquisition or disposition of patent, copyright, trade secret or other
proprietary rights or technology (other than standard end-user license
agreements) shall not be considered to be contracts entered into in the ordinary
course of business.
2.8 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans
4
<PAGE> 5
or extend or guarantee credit) to any of them, other than (i) for payment of
salary for services rendered, (ii) reimbursement for reasonable expenses
incurred on behalf of the Company, and (iii) for other standard employee
benefits made generally available to all employees (including stock option
agreements outstanding under any stock option plan approved by the Board of
Directors of the Company). To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, stockholders, officers, or directors of the Company and members
of their immediate families may own stock in publicly traded companies that may
compete with the Company. To the best of the Company's knowledge, no officer,
director, or stockholder or any member of their immediate families is, directly
or indirectly, interested in any material contract with the Company (other than
such contracts as relate to any such person's ownership of capital stock or
other securities of the Company).
2.9 REGISTRATION RIGHTS.
The Company is presently not under any obligation and has not granted
any rights to register under the Securities Act any of its presently outstanding
securities or any of its securities that may subsequently be issued.
2.10 PERMITS.
The Company has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as presently planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS.
The Company is not in violation or default in any material respect of
any provision of its Restated Charter or Bylaws or in any material respect of
any provision of any mortgage, indenture, agreement, instrument, or contract to
which it is a party or by which it is bound or, to the best of its knowledge, of
any federal or state judgment, order, writ, decree, statute, rule, regulation or
restriction applicable to the Company. The execution, delivery, and performance
by the Company of this Agreement, and any Ancillary Agreement, and the
consummation of the transactions contemplated hereby and thereby, will not
result in any such violation or be in material conflict with or constitute, with
or without the passage of time or giving of notice, either a material default
under any such provision or an event that results in the creation of any
material lien, charge, or encumbrance upon any assets of the Company or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations, or any of its assets or properties.
2.11 LITIGATION.
There is no action, suit, proceeding, or investigation pending or, to
the Company's knowledge, currently threatened against the Company that questions
the validity of this Agreement or any Ancillary Agreement or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any
5
<PAGE> 6
material adverse change in the assets, business, properties, prospects, or
financial condition of the Company, or in any material change in the current
equity ownership of the Company. The foregoing includes, without limitation, any
action, suit, proceeding, or investigation pending or currently threatened
involving the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, their obligations under
any agreements with prior employers, or negotiations by the Company with
potential backers of, or investors in, the Company or its proposed business. The
Company is not a party to or, to the best of its knowledge, named in or subject
to any order, writ, injunction, judgment, or decree of any ours, government
agency, or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company currently
intends to initiate.
2.12 BUSINESS PLAN.
The Business Plan dated July 22, 1998 previously delivered to each
Investor (the "Business Plan") was prepared in good faith by the Company and
does not, to the best of the Company's knowledge after reasonable investigation,
contain any untrue statement of a material fact nor does it omit to state a
material fact necessary to make the statements therein not misleading, except
that with respect to assumptions, projections and expressions of opinion or
predictions contained in the Business Plan, the Company represents only that
such assumptions, projections, expressions of opinion and predictions were made
in good faith and that the Company believes there is a reasonable basis
therefor.
2.13 OFFERING.
Subject in part to the truth and accuracy of each Investor's
representations set forth in this Agreement, the offer, sale and issuance of the
Series A Convertible Preferred Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
2.14 FINANCIAL STATEMENTS.
The Company has delivered to each Investor its financial statements
(balance sheet and profit and loss statement, statement of stockholders' equity
and statement of cash flows including notes thereto) at December 31, 1997 and
for the fiscal year then ended and its unaudited financial statements (balance
sheet and profit and loss statement) as at, and for the six-month period ended
June 30, 1998 (the "Financial Statements"). The Financial Statements have been
consistently prepared and derived from the books and records of the Company. The
Financial Statements fairly present in all material respects the financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein. Except as set forth in the Financial Statements and
to the best of the Company's knowledge, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to June 30, 1998 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in the
Financial Statements, which, in both cases, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
Except as disclosed in the Financial Statements, the Company is not a guarantor
or indemnitor of any indebtedness of any other person, firm, or corporation. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
6
<PAGE> 7
2.15 CHANGES.
To the best of the Company's knowledge, since June 30, 1998, there has
not been:
(a) any change in the assets, liabilities, financial condition, or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company (as such business is presently
conducted and as it is presently proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects, or
financial condition of the Company (as such business is presently conducted and
as it is presently proposed to be conducted);
(e) any material change to a material contract or arrangement by which
the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder other than in the ordinary
course of business;
(g) any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets, or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable or contested by the
Company in good faith;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, stockholders, officers, or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside, or payment of any dividend or other
distribution of the Company's assets in respect of any of the Company's capital
stock, or any direct or indirect redemption, purchase, or other acquisition of
any of such stock by the Company;
(m) to the best of the Company's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects, or financial condition of
7
<PAGE> 8
the Company (as such business is presently conducted and as it is presently
proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of the things
described in this paragraph 2.19.
2.16 INTELLECTUAL PROPERTY.
To the best of its knowledge (but without having conducted any special
investigation or patent search), the Company owns or possesses sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, and proprietary rights and processes necessary
for its business as now conducted without any conflict with, or infringement of
the rights of, others which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company. The
Schedule of Exceptions contains a complete list of patents and pending patent
applications of the Company. Except for agreements with its own employees or
consultants, substantially in the form referenced in paragraph 2.23 below, and
standard end-user license agreements, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses, or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, and proprietary rights and processes of
any other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets, or other proprietary rights or processes of
any other person or entity. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants, or commitments
of any nature) or other agreement, or subject to any judgment, decree, or order
of any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions, or provisions of, or
constitute a default under, any contract, covenant, or instrument under which
any if such employees is now obligated. The Company does not believe it is or
will be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company. The
Company has taken reasonable efforts to identify any possible liabilities,
losses, costs expenses, or other adverse effects it may experience as a result
of the potential inability of computer systems to recognize the "Year 2000"and
has determined that it will have no material loss, cast, liability, or expense.
2.17 MANUFACTURING AND MARKETING RIGHTS.
The Company has not granted rights to manufacture, produce, assemble,
license, market, or sell its products to any other person and is not bound by
any agreement that affects the Company's exclusive right to develop,
manufacture, assemble, distribute, market, or sell its products.
2.18 EMPLOYEES; EMPLOYEE COMPENSATION.
To the best of the Company's knowledge, there is no strike, labor
dispute or union organization activities pending or threatened between it and
its employees. None of the Company's employees belongs to any union or
collective bargaining unit. To the best of its knowledge, the Company has
8
<PAGE> 9
complied in all material respects with all applicable state and federal equal
opportunity and other laws related to employment. To the best of the Company's
knowledge, no employee of the Company is or will be in violation of any
judgment, decree, or order, or any term of any employment contract, patent
disclosure agreement, or other contract or agreement relating to the
relationship of any such employee with the Company, or any other party because
of the nature of the business conducted or presently proposed to be conducted by
the Company or to the use by the employee of his or her best efforts with
respect to such business. Other than the Option Plan, the Company is not a party
to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
Subject to general principles related to wrongful termination of employees, the
employment of each officer and employee of the Company is terminable at the will
of the Company.
2.19 TAX RETURNS, PAYMENTS, AND ELECTIONS.
The Company has timely filed all tax returns and reports (federal,
state and local) as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due and payable, except those contested by it in good faith. The
provision for taxes of the Company as shown in the Financial Statements is
adequate for taxes due or accrued as of the date thereof. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to
be treated as a collapsible corporation pursuant to the Code, nor has it made
any other elections pursuant to the Code (other than its "S corporation"
election or that relate solely to methods of accounting, depreciation, or
amortization) that would have a material effect on the business, properties,
prospects, or financial condition of the Company. The Company has never had any
tax deficiency proposed or assessed against it and has not executed any waiver
of any statute of limitations on the assessment or collection of any tax or
governmental charge. None of the Company's federal income tax returns and none
of its state income or franchise tax or sales or use tax returns has ever been
audited by governmental authorities. Since the date of the Financial Statements,
the Company has made adequate provisions on its books of account for all taxes,
assessments, and governmental charges with respect to its business, properties,
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes, including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
2.20 ENVIRONMENTAL AND SAFETY LAWS.
To the best of its knowledge, the Company is not in violation of any
applicable statute, law, or regulation relating to the environment or
occupational health and safety which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company, and to
the best of its knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law, or regulation.
2.21 SECTION 83(B) ELECTIONS.
To the best of the Company's knowledge, all individuals who have
purchased shares of the Company's Common Stock under agreements that provide for
the vesting of such shares have filed
9
<PAGE> 10
timely elections under Section 83(b) of he Internal Revenue Code and any
analogous provisions of applicable state tax laws.
2.22 MINUTE BOOKS.
The copy of the minute books of the Company provided to the Investors'
special counsel contains minutes of all meetings of directors and stockholders
and all actions by written consent without a meeting by the directors and
stockholders since the date of incorporation and accurately reflects all actions
by the directors (and any committee of directors) and stockholders with respect
to all transactions referred to in such minutes in all material respects.
2.23 REAL PROPERTY HOLDING CORPORATION.
The Company is not a real property holding corporation within the
meaning of Internal Revenue Code Section 897(c)(2) and any regulations
promulgated thereunder.
3. ACKNOWLEDGMENTS, COVENANTS, AND REPRESENTATIONS AND WARRANTIES OF
THE INVESTORS.
The Investors hereby represent and warrant to the Company that as of
the date of this Agreement:
3.1 AUTHORIZATION.
Such Investor has full power and authority to enter into this
Agreement, and that this Agreement, when executed and delivered, will constitute
a valid and legally binding obligation of such Investor enforceable in
accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT.
This Agreement is made with each Investor in reliance upon such
Investor's representation to the Company, which by such Investor's execution of
his Agreement such Investor hereby confirms, that the Series A Convertible
Preferred Stock to be purchased by such Investor and the Common Stock issuable
upon conversion thereof (collectively, the "Securities") will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, each Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
3.3 RELIANCE UPON INVESTORS' REPRESENTATIONS.
Each Investor understands that the Series A Convertible Preferred Stock
is not, and any Common Stock acquired on conversion thereof at the time of
issuance may not be, registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Company's reliance on such exemption is predicated on the
Investors' representations set forth herein. Each Investor realizes that the
basis for the exemption may not be present if, notwithstanding such
10
<PAGE> 11
representations, the Investor has in mind merely acquiring shares of the Series
A Convertible Preferred Stock for a fixed or determinable period in the future,
or for a market rise, or for sale if the market does not rise. No Investor has
any such intention.
3.4 RECEIPT OF INFORMATION.
Each Investor believes such Investor has received all the information
such Investor considers necessary or appropriate for deciding whether to
purchase the Series A Convertible Preferred Stock. Each Investor further
represents that such Investor has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Series A Convertible Preferred Stock and the business,
properties, prospects, and financial condition of the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to such Investor or to which such Investor
had access. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
3.5 INVESTMENT EXPERIENCE.
Each Investor represents that such Investor is experienced in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that such Investor
is able to fend for himself, herself or itself, can bear the economic risk of
such Investor's investment, and has such knowledge and experience in financial
and business matters that such Investor is capable of evaluating the merits and
risks of the investment in the Series A Convertible Preferred Stock. If other
than an individual, Investor also represents that each record or beneficial
owner of any equity interest in Investor (each an "Investor Owner") meets the
requirements of the preceding sentence..
3.6 ACCREDITED INVESTOR.
(a) The term "Accredited Investor" as used herein refers to:
(i) A person or entity who is a director or executive officer
of the Company;
(ii) Any bank as defined in Section 3(a)(2) of the Securities
Act, or any savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934; any insurance company as defined in Section
2(13) of the Securities Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958; any plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
11
<PAGE> 12
(iii) Any private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of the purchase exceeds
$1,000,000;
(vi) Any natural person who had an individual income in excess
of $200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the prospective investment; or
(viii) Any entity in which all of the equity owners are
accredited investors.
As used in this Paragraph 3.6(a), the term "net worth" means the excess
of total assets over total liabilities. For the purpose of determining a
person's net worth, the principal residence owned by an individual should be
valued at fair market value, including the cost of improvements, net of current
encumbrances. As used in this Paragraph 3.6(a), "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, each Investor should consider whether such Investor should add any
or all of the following items to such Investor's adjusted gross income for
income tax purposes in order to reflect more accurately such Investor's actual
economic income: any amounts attributable to tax-exempt income received, losses
claimed as a limited partner in any limited partnership, deductions claimed for
depletion, contributions to an IRA or Keogh retirement plan, and alimony
payments.
(b) Each Investor as to such Investor severally and not jointly further
represents to the Company that except as otherwise disclosed to the Company, in
writing, prior to such Investor's execution hereof, such Investor and each
Investor Owner is an Accredited Investor.
3.7 RESTRICTED SECURITIES.
Each Investor understands that the Series A Convertible Preferred Stock
(and any Common Stock issued on conversion thereof) may not be sold,
transferred, or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Stock (or the Common Stock issued on
conversion thereof) or an available exemption from registration under the
Securities Act, the Series A Convertible Preferred Stock (and any Common Stock
issued on conversion thereof) must be held indefinitely. In particular, each
Investor is aware that the Series A Convertible Preferred Stock (and any Common
Stock issued on conversion thereof) may not be sold pursuant to Rule 144
promulgated under the Securities Act unless all of the conditions of that Rule
are met. Among the conditions for use of Rule 144 may be the availability of
current information to the public about the Company. Such information is not now
available and the Company has no present plans to make such information
available.
12
<PAGE> 13
3.8 LEGENDS.
To the extent applicable, each certificate or other document evidencing
any of the Series A Convertible Preferred Stock or any Common Stock issued upon
conversion thereof shall be endorsed with the legends substantially in the form
set forth below: (a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend imposed or required by the Company's Bylaws or
applicable state securities laws.
3.9 PUBLIC SALE.
Each Investor agrees not to make, without the prior written consent of
the Company, any public offering or sale of the Series A Convertible Preferred
Stock, or any Common Stock issued upon the conversion thereof, although
permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act,
until the earlier of (i) the date on which the Company effects its initial
registered public offering pursuant to the Securities Act or (ii) the date on
which it becomes a registered company pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended, or (iii) three years after the
Closing of the sale of the Series A Convertible Preferred Stock to such Investor
by the Company.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING.
The obligations of each Investor under subparagraph 1.1(b) of this
Agreement are subject to the fulfillment on or before the Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in Section
2 shall be true on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE.
The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing.
13
<PAGE> 14
4.3 COMPLIANCE CERTIFICATE.
The President of the Company shall deliver to each Investor at the
Closing a certificate certifying that the conditions specified in paragraphs
4.1, 4.2, 4.4, and 4.5 have been fulfilled.
4.4 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Series A
Convertible Preferred Stock pursuant to this Agreement shall be duly obtained
and effective as of the Closing.
4.5 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the transactions
contemplated at the Closing and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Investors' special counsel,
which shall have received all such counterpart original and certified or other
copies of such documents as it may reasonably request.
4.6 MINIMUM INVESTMENT.
The Company shall sell an aggregate of at least 10,000 shares of
Series A Convertible Preferred Stock at the Closing.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
The obligations of the Company to each Investor under this Agreement
are subject to the fulfillment on or before the Closing of each of the following
conditions by that Investor.
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each Investor contained in
Section 3 shall be true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
5.2 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Stock pursuant
to this Agreement shall be duly obtained and effective as of the Closing.
5.3 MINIMUM INVESTMENT.
The Investors shall purchase an aggregate of at least 10,000 shares of
Series A Convertible Preferred Stock at the Closing.
14
<PAGE> 15
6. GENERAL PROVISIONS.
6.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute the
entire agreement among the parties and no party shall be liable or bound to any
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein or therein.
6.2 SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and the
Investors contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
6.3 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Series A Convertible Preferred Stock sold hereunder or any Common
Stock issued upon conversion thereof). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.4 GOVERNING LAW.
This Agreement shall be governed by and construed under the laws of the
State of Tennessee as applied to agreements among Tennessee residents entered
into and to be performed entirely within Tennessee.
6.5 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
6.6 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
6.7 NOTICES.
Unless otherwise provided, all notices and other communications
required or permitted under this Agreement shall be in writing and shall be
mailed by United States first class mail, postage prepaid, sent by facsimile or
delivered personally by hand or by a nationally recognized courier addressed to
the party to be notified at the address or facsimile number indicated for such
person on the signature page hereof, or at such other address or facsimile
number as such party may designate by ten (10) days'
15
<PAGE> 16
advance written notice to the other parties hereto. All such notices and other
written communications shall be effective on the date of mailing, confirmed
facsimile transfer or delivery.
6.8 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for any
finder's fee or commission in connection with the purchase by the Investor of
the Series A Convertible Preferred Stock.
Each Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finder's fee
(and the cost and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.
6.9 EXPENSES.
Irrespective of whether the Closing is effected, the Company shall pay
all costs and expenses that it incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement. If the Closing is
effected, the Company shall, at the Closing, reimburse the fees of one special
counsel for the Investors not to exceed $2500.00 and shall in addition, upon
receipt of a bill therefor, reimburse the out-of-pocket expenses of such
counsel.
6.10 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, any Ancillary Agreement or the Restated Charter,
the prevailing party shall be entitled to reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which such party may be
entitled.
6.11 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investors (or their transferees) holding more
than 50% of the Common Stock not previously sold to the public that is issued or
issuable upon conversion of the Series A Convertible Preferred Stock. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities have been
converted), each future holder of all such securities, and the Company.
6.12 SEVERABILITY.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
16
<PAGE> 17
6.13 TENNESSEE SECURITIES LAW.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS
NOT BEEN QUALIFIED WITH THE SECURITIES DIVISION OF THE TENNESSEE DEPARTMENT OF
COMMERCE AND INSURANCE OF THE STATE OF TENNESSEE AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY TENNESSEE LAW. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
6.14 EFFECT OF AMENDMENT OR WAIVER.
Each Investor acknowledges that by the operation of paragraph 6.11
hereof the Investors (or their transferees) holding more than fifty percent
(50%) of the Common Stock not previously sold to the public that is issued or
issuable upon conversion of the Series A Convertible Preferred Stock will have
the right and power to diminish or eliminate all rights of such Investor under
this Agreement.
6.15 RIGHTS OF INVESTORS.
Each holder of Series A Convertible Preferred Stock (and Common Stock
issued upon conversion thereof) shall have the absolute right to exercise or
refrain from exercising any right or rights that such holder may have by reason
of this Agreement or any Series A Convertible Preferred Stock, including without
limitation the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and such holder shall not incur any liability to any other holder
or holders of Series A Convertible Preferred Stock (or Common Stock issued upon
exercise thereof) with respect to exercising or refraining from exercising any
such right or rights.
6.16 EXCULPATION AMONG INVESTORS.
Each Investor acknowledges that such Investor is not relying upon any
person, firm, or corporation, other than the Company and its officers and
directors, in making its investment or decision to invest in the Company. Each
Investor agrees that no Investor nor the respective controlling persons,
officers, directors, partners, agents, or employees of any Investor shall be
liable for any action heretofore or hereafter taken or omitted to be taken by
any of them in connection with the Series A Convertible Preferred Stock (and
Common Stock issued upon conversion thereof).
[SIGNATURES FOLLOW THIS PAGE]
17
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By /s/ Robert A Frist, Jr.
----------------------------------
Robert A Frist, Jr.
Chief Executive Officer
Address: HealthStream
209 10th Ave. South
Suite 450
Nashville, TN 37203
INVESTORS:
JCB HEALTHSTREAM INVESTORS, L.L.C
By: /s/ Jim Graves
---------------------------------
Jim Graves
Title: Chief Manager
Address: c/o J.C. Bradford & Co., L.L.C.
330 Commerce Street
Nashville, Tennessee 37201
18
<PAGE> 19
SCHEDULE A
INVESTORS
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
JCB Healthstream Investors, LLC 11,000
</TABLE>
19
<PAGE> 20
SCHEDULE OF EXCEPTIONS
2.8 RELATED-PARTY TRANSACTIONS.
Indebtedness to Company by Shareholders
MacDonald Hardcastle owes the Company $1,248.03 due to an outstanding balance of
a loan from the Company to purchase shares.
Indebtedness to Shareholders by Company
The Company owes Robert Frist, Jr. $2,773,947.02 for loans made to the Company.
The Company owes Scott Portis $60,000.00 for loans made to the Company.
In addition, Robert Frist, Jr. serves on the Board of Directors of Passport
Health Communications. This firm does not directly compete with the Company, but
it does do business in the Internet healthcare information industry.
2.14 FINANCIAL STATEMENTS.
The Company has retained the services of Ernst & Young to conduct an audit of
its financial statements ending December 31, 1997 and to review its financial
statements ending June 30, 1998. This audit is in process and should be
completed by October 31, 1998.
2.17 MANUFACTURING AND MARKETING RIGHTS.
The Company has relationships with many Value Added Resellers ("VARs"). The most
significant is Lippincott Williams & Wilkins, a large medical publisher based in
Baltimore, Maryland, that sells its regulatory training content bundled with the
Company's Training Navigator. These VARs will continue to play an integral
role in the Company's ongoing business strategy.
20
<PAGE> 1
EXHIBIT 10.2
HEALTHSTREAM, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this
"Agreement") is made as of the 21st day of April, 1999, by and between
HealthStream, Inc., a Tennessee corporation (the "Company"), and the persons and
entities designated as an investor on Schedule A hereto (each an "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State of the
State of Tennessee on or before the First Closing (as hereinafter defined) an
Amended and Restated Charter in the form attached hereto as Exhibit A (the
"Restated Charter").
(b) On or prior to the First Closing, the Company shall have authorized
(i) the sale and issuance to the Investors of the shares of Series B Convertible
Preferred Stock and (ii) the issuance of such shares of Common Stock to be
issued upon conversion of such shares (the "Conversion Shares"). The shares of
Series B Convertible Preferred Stock and the Conversion Shares shall have the
rights, preferences, privileges and restrictions set forth in the Restated
Charter.
(c) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase and the Company agrees
to sell and issue to each Investor, severally and not jointly, the number of
shares of the Company's Series B Convertible Preferred Stock set forth opposite
each Investor's name on Schedule A hereto at a purchase price of $10.00 per
share. The Series B Convertible Preferred Stock will be sold at three closings
as set forth in paragraph 1.2 herein.
(d) In addition to the shares referred to on Schedule A hereto, each
Investor shall be entitled to subscribe for and purchase from the Company at the
price of $10.00 per share ("Option Exercise Price") a number of shares of the
Company's Series B Convertible Preferred Stock equal to up to twenty percent
(20%) of the number of shares set forth opposite each Investor's name on
Schedule A hereto ("Option") at any time prior to the earlier of April 21st,
2000 or upon the date of a subsequent equity financing by the Company with
aggregate gross proceeds of not less than $5,000,000. In the event of a
subsequent equity financing, the Company shall give written notice to the
Investors that a subsequent financing has occurred and each Investor shall then
have thirty (30) days to exercise any or all of its Option in accordance with
paragraph 1.1(d)(i) herein, but in no case shall that date be later than May
21st, 2000. The Options shall vest and become exercisable at the time and in the
same percentage that the funds are delivered to the Company under the closing
schedule outlined in paragraph 1.2 herein.
(i) Method of exercise. Subject to the last sentence of paragraph
1.1(d) above, the rights represented by the Options may be exercised by the
holder in whole at any time or from time to time in part, but not as to a
fractional share of Series B Convertible Preferred Stock by written notice
delivered to the Company, which notice shall state the number of shares with
respect to which the Option is being exercised and shall specify a date not less
than five (5) nor more than ten (10) days after the date
<PAGE> 2
of such notice as the date on which the shares will be taken up and payment made
as provided in paragraph 1.1(d)(ii) hereof.
(ii) The holder may make payment in respect of the exercise of
the Option as follows:
1) Cash Exercise. By payment to the Company of the Option
Exercise Price in cash or by certified or official bank
check for each share purchased;
2) Notes Exercise. By surrender to the Company of any notes or
other obligations issued by the Company with all such notes
or other obligations of the Company so surrendered being
credited against the Option Exercise Price in an amount
equal to the principal amount thereof plus the amount of
any interest accrued thereon to the date of such surrender;
3) Securities Exercise. By delivery to the Company of Series B
Convertible Preferred Stock issued by the Company with such
securities being credited against the Option Exercise Price
in an amount equal to the fair market value thereof;
4) Net Issue Exercise. By an election to receive shares the
aggregate fair market value of which as of the date of
exercise is equal to the fair market value of the Option
(or the portion thereof being exercised) on such date, in
which event the Company, upon receipt of notice of such
election, shall issue to the holder a number of shares of
Series B Convertible Preferred Stock equal to (A) the
number of shares of Series B Convertible Preferred Stock
acquirable upon exercise of all or any portion of the
Option being exercised, as at such date, multiplied by (B)
the balance remaining after deducting (x) the Option
Exercise Price from (y) the fair market value of one share
of Series B Convertible Preferred Stock as at such date and
dividing the result by (C) such fair market value; or
5) Combined Payment Method. By satisfaction of the Option
Exercise Price for each share being acquired in any
combination of the methods described in clauses (1) through
(4) above.
(iii) Definition of Fair Market Value. For the purposes of
paragraph (ii) above, the fair market value of the Series B Convertible
Preferred Stock shall be determined by the Board of Directors of the Company
exclusive of any member of such Board of Directors that directly or indirectly
controls any holder of Options.
1.2 CLOSING.
(a) The purchase and sale of at least one half (1/2) of the number of
shares of Series B Convertible Preferred Stock set forth opposite each
Investor's name on Schedule A hereto shall take place at the offices of the
Company at 10:00 a.m., on April 21st, 1999, or at such other time and place as
the Company and Investors acquiring in the aggregate more than half the shares
of Series B Convertible
2
<PAGE> 3
Preferred Stock being sold pursuant hereto shall mutually agree, either orally
or in writing (the "First Closing").
(b) The purchase and sale of at least one half (1/2) of the number of
those shares of Series B Convertible Preferred Stock exempted from the Minimum
Investment set forth in paragraphs 5.3 and 4.6 herein shall take place at the
offices of the Company within ten (10) business days of the First Closing (the
"Second Closing"). If the parties mentioned in paragraphs 5.3 and 4.6 herein do
not purchase at least one half (1/2) of the number of shares of Series B
Convertible Preferred Stock set forth opposite each Investor's name on Schedule
A hereto at the First Closing or Second Closing, then the Company may increase
the number of shares subscribed by other Investors listed on Schedule A hereto.
Under no circumstance will the total number of shares of Series B Convertible
Preferred Stock issued at the closings exceed the total number set forth on
Schedule A hereto.
(c) The purchase and sale of the remaining number of shares of Series B
Convertible Preferred Stock set forth opposite each Investor's name on Schedule
A hereto shall take place at the offices of the Company within twenty (20)
business days of the Investors receiving a written demand therefor from the
Board of Directors of the Company after the Board of Directors shall have
adopted a resolution approving such purchase and sale provided no such demand be
sent by the Board of Directors after April 30, 2000. The Company covenants not
to raise any additional equity financing prior to April 30, 2000 without calling
pursuant to paragraph 1.2 (c) herein the remaining number of shares of Series B
Convertible Preferred Stock referred to herein.
(d) At each closing, the Company shall deliver to each Investor a
certificate representing the shares of Series B Convertible Preferred Stock that
such Investor is purchasing against payment of the purchase price therefor by
check, wire transfer, or such other form of payment as shall be mutually agreed
upon by such Investor and the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Investor that as of
the date of this Agreement, except as set forth on a Schedule of Exceptions
furnished to each Investor and special counsel for the Investors, specifically
identifying the relevant subparagraph(s) hereof, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION; GOOD STANDING, QUALIFICATION.
The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Tennessee, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and as presently proposed to be
conducted, to execute and deliver this Agreement and any other agreement to
which the Company is a party the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"), to issue and sell the Series B Convertible
Preferred Stock and the Common Stock issuable upon conversion thereof, and to
carry out the provisions of this Agreement, the Restated Charter and any
Ancillary Agreement. The Company is duly qualified and is authorized to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure so to qualify would have material adverse effect on its
business, properties, prospects, or financial condition.
3
<PAGE> 4
2.2 AUTHORIZATION.
All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement and any Ancillary Agreement, the performance of all
obligations of the Company hereunder and thereunder at the First Closing and the
authorization, issuance (or reservation for issuance), sale, and delivery of the
Series B Convertible Preferred Stock being sold hereunder and the Common Stock
issuable upon conversion thereof has been taken or will be taken prior to the
First Closing, and this Agreement, and any Ancillary Agreement, when executed
and delivered, will constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
The Series B Convertible Preferred Stock that is being purchased by the
Investors hereunder, when issued, sold, and delivered in accordance with the
terms of this agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement, any
Ancillary Agreement and under applicable state and federal securities laws. The
Common Stock issuable upon conversion of the Series B Convertible Preferred
Stock being purchased under this Agreement has been duly and validly reserved
for issuance and, upon issuance in accordance with the terms of the Restated
Charter, will be duly and validly issued, fully paid, and nonassessable and will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement, any Ancillary Agreement and under applicable state and federal
securities laws.
2.4 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of, or
filing with, any local, state, or federal governmental authority is required on
the part of the Company in connection with the Company's valid execution,
delivery, or performance of this Agreement, the offer, sale or issuance of the
Series B Convertible Preferred Stock by the Company or the issuance of Common
Stock upon conversion of the Series B Convertible Preferred Stock, except (i)
the filing of the Restated Charter with the Secretary of State of the State of
Tennessee, and (ii) such filings as have been made prior to the First Closing,
except any notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor.
2.5 CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists, or will consist
immediately prior to the Closing, of:
(a) Preferred Stock. 5,000,000 shares of Preferred Stock, no par value,
of which 76,000 shares have been designated as Series A Convertible Preferred
Stock, all of which are outstanding, and 1,376,360 shares have been designated
as Series B Convertible Preferred Stock, none of which are outstanding. The
rights, privileges and preferences of the Series B Convertible Preferred Stock
are as stated in the Restated Charter.
4
<PAGE> 5
(b) Common Stock. 20,000,000 shares of common stock, no par value
("Common Stock"), of which 1,991,647 shares are issued and outstanding. On April
21, 1999, Robert A Frist, Jr. purchased 231,481 shares of Common Stock at a
purchase price of $4.32 per share. An additional 4,000,000 shares of Common
Stock are reserved for issuance pursuant to the Employee Stock Option Plan,
dated April 15, 1994 (the "Option Plan"). The Company has granted options under
the Option Plan to acquire a total of 902,466 shares of Common Stock.
(c) The outstanding shares of Common Stock and options granted under
the Option Plan are owned by the stockholders and option holders in the numbers
specified in Exhibit B hereto.
(d) The outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act and any relevant state securities laws or pursuant to valid exemptions
therefrom.
(e) Except as contemplated herein and in the Ancillary Agreements and
for (i) the conversion privileges of the Series B Convertible Preferred Stock,
and (ii) currently outstanding options under the Option Plan, there are no
outstanding options, rights (including conversion or preemptive rights and
rights of first refusal), proxy or stockholder agreements or agreements of any
kind for the purchase or acquisition from the Company of any of its securities.
Other than the Stockholder's Agreement, dated April 15, 1994 (the "Stockholder's
Agreement"), the Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any persons that affects or relates to the
Common Stock or the voting or giving of written consents with respect to any
security or the voting by a director of the Company.
2.6 SUBSIDIARIES.
The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company does not have and is not bound by any contract, agreement,
lease, commitment, or proposed transaction, judgment, order, writ or decree,
written or oral, absolute or contingent, other than (i) contracts for the
purchase of supplies and services that were entered into in the ordinary course
of business and that do not involve more than $50,000, and do not extend for
more than one (1) year beyond the date hereof, (ii) sales contracts entered into
in the ordinary course of business, and (iii) contracts terminable at will by
the Company on no more than thirty (30) days' notice without cost or liability
to the Company and that do not involve any employment or consulting arrangement
and are not material to the conduct of the Company's business. For the purpose
of this paragraph, employment and consulting contracts and contracts with labor
unions, and license agreements and any other agreements relating to the
Company's acquisition or disposition of patent, copyright, trade secret or other
proprietary rights or technology (other than standard end-user license
agreements) shall not be considered to be contracts entered into in the ordinary
course of business.
2.8 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend
5
<PAGE> 6
or guarantee credit) to any of them, other than (i) for payment of salary for
services rendered, (ii) reimbursement for reasonable expenses incurred on behalf
of the Company, and (iii) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by the Board of Directors of the Company). To the
best of the Company's knowledge, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation that competes with the Company, except that employees, stockholders,
officers, or directors of the Company and members of their immediate families
may own stock in publicly traded companies that may compete or conduct business
with the Company. To the best of the Company's knowledge, no officer, director,
or stockholder or any member of their immediate families is, directly or
indirectly, interested in any material contract with the Company (other than
such contracts as relate to any such person's employment, ownership of capital
stock or other securities of the Company).
2.9 REGISTRATION RIGHTS.
The Company is presently not under any obligation and has not granted
any rights to register under the Securities Act any of its presently outstanding
securities or any of its securities that may subsequently be issued.
2.10 PERMITS.
The Company has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as presently planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS.
The Company is not in violation or default in any material respect of
any provision of its Restated Charter or Bylaws or in any material respect of
any provision of any mortgage, indenture, agreement, instrument, or contract to
which it is a party or by which it is bound or, to the best of its knowledge, of
any federal or state judgment, order, writ, decree, statute, rule, regulation or
restriction applicable to the Company. The execution, delivery, and performance
by the Company of this Agreement, and any Ancillary Agreement, and the
consummation of the transactions contemplated hereby and thereby, will not
result in any such violation or be in material conflict with or constitute, with
or without the passage of time or giving of notice, either a material default
under any such provision or an event that results in the creation of any
material lien, charge, or encumbrance upon any assets of the Company or the
suspension, revocation, impairment, forfeiture, or non-renewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations, or any of its assets or properties.
2.12 LITIGATION.
There is no action, suit, proceeding, or investigation pending or, to
the Company's knowledge, currently threatened against the Company that questions
the validity of this Agreement or any Ancillary Agreement or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any
6
<PAGE> 7
material adverse change in the assets, business, properties, prospects, or
financial condition of the Company, or in any material change in the current
equity ownership of the Company. The foregoing includes, without limitation, any
action, suit, proceeding, or investigation pending or currently threatened
involving the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, their obligations under
any agreements with prior employers, or negotiations by the Company with
potential backers of, or investors in, the Company or its proposed business. The
Company is not a party to or, to the best of its knowledge, named in or subject
to any order, writ, injunction, judgment, or decree of any court, government
agency, or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company currently
intends to initiate.
2.13 OFFERING MEMORANDUM.
The Offering Memorandum previously delivered to each Investor (the
"Offering Memorandum") was prepared in good faith by the Company and does not,
to the best of the Company's knowledge after reasonable investigation, contain
any untrue statement of a material fact nor does it omit to state a material
fact necessary to make the statements therein not misleading, except that with
respect to assumptions, projections and expressions of opinion or predictions
contained in the Offering Memorandum, the Company represents only that such
assumptions, projections, expressions of opinion and predictions were made in
good faith and that the Company believes there is a reasonable basis therefor.
2.14 OFFERING.
Subject in part to the truth and accuracy of each Investor's
representations set forth in this Agreement, the offer, sale and issuance of the
Series B Convertible Preferred Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
2.15 FINANCIAL STATEMENTS.
The Company has delivered to each Investor its financial statements
(balance sheet and profit and loss statement, statement of stockholders' equity
and statement of cash flows including notes thereto) at December 31, 1998 and
for the year then ended (the "Financial Statements"). The Financial Statements
have been consistently prepared and derived from the books and records of the
Company. The Financial Statements fairly present in all material respects the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein. Except as set forth in the Financial
Statements and to the best of the Company's knowledge, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to December 31, 1998 and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, in both cases, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company. Except as disclosed in the Financial Statements, the
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm, or corporation. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
7
<PAGE> 8
2.16 CHANGES.
To the best of the Company's knowledge, since December 31, 1998, there
has not been:
(a) any change in the assets, liabilities, financial condition, or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company (as such business is presently
conducted and as it is presently proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects, or
financial condition of the Company (as such business is presently conducted and
as it is presently proposed to be conducted);
(e) any material change to a material contract or arrangement by which
the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder other than in the ordinary
course of business;
(g) any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets, or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, does not know of the impending resignation or
termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable or contested by the
Company in good faith;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, stockholders, officers, or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside, or payment of any dividend or other
distribution of the Company's assets in respect of any of the Company's capital
stock, or any direct or indirect redemption, purchase, or other acquisition of
any of such stock by the Company;
(m) any other event or condition of any character that might materially
and adversely affect the business, properties, prospects, or financial condition
of the Company (as such business is presently conducted and as it is presently
proposed to be conducted); or
8
<PAGE> 9
(n) any agreement or commitment by the Company to do any of the things
described in this paragraph 2.16.
2.17 INTELLECTUAL PROPERTY.
To the best of its knowledge (but without having conducted any special
investigation or patent search), the Company owns or possesses sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, and proprietary rights and processes necessary
for its business as now conducted without any conflict with, or infringement of
the rights of, others which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company. The
Schedule of Exceptions contains a complete list of patents and pending patent
applications of the Company. Except for agreements with its own employees or
consultants, substantially in the form referenced in paragraph 2.18 below, and
standard end-user license agreements, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses, or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, and proprietary rights and processes of
any other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets, or other proprietary rights or processes of
any other person or entity. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants, or commitments
of any nature) or other agreement, or subject to any judgment, decree, or order
of any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions, or provisions of, or
constitute a default under, any contract, covenant, or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company. The
Company has taken reasonable efforts to identify any possible liabilities,
losses, costs, expenses, or other adverse effects it may experience as a result
of the potential inability of computer systems to recognize the "Year 2000"and
has determined that it will have no material loss, cost, liability, or expense.
2.18 EMPLOYEES; EMPLOYEE COMPENSATION.
To the best of the Company's knowledge, there is no strike, labor
dispute or union organization activities pending or threatened between it and
its employees. None of the Company's employees belongs to any union or
collective bargaining unit. To the best of its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
opportunity and other laws related to employment. The Company has a proprietary
information agreement with each of its employees protecting the Company's
confidential information substantially in the form submitted to the counsel
mentioned in paragraph 6.9 herein. To the best of the Company's knowledge, no
employee of the Company is or will be in violation of any judgment, decree, or
order, or any term of any employment contract, patent disclosure agreement, or
other contract or agreement relating to the relationship of any such employee
with the Company, or any other party because of the nature of the business
conducted or presently proposed to be conducted by the Company or to the use by
the employee of his or her best efforts with respect to such business. Other
than the Option Plan, the Company is not a party to or bound by any currently
effective employment contract, deferred compensation agreement, bonus plan,
incentive
9
<PAGE> 10
plan, profit sharing plan, retirement agreement, or other employee compensation
agreement. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company.
2.19 TAX RETURNS, PAYMENTS, AND ELECTIONS.
The Company has timely filed all tax returns and reports (federal,
state and local) as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due and payable, except those contested by it in good faith. The
provision for taxes of the Company as shown in the Financial Statements is
adequate for taxes due or accrued as of the date thereof. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to
be treated as a collapsible corporation pursuant to the Code, nor has it made
any other elections pursuant to the Code (other than its "S corporation"
election, which election has been revoked effective October 13, 1998, or that
relate solely to methods of accounting, depreciation, or amortization) that
would have a material effect on the business, properties, prospects, or
financial condition of the Company. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute
of limitations on the assessment or collection of any tax or governmental
charge. None of the Company's federal income tax returns and none of its state
income or franchise tax or sales or use tax returns has ever been audited by
governmental authorities. Since the date of the Financial Statements, the
Company has made adequate provisions on its books of account for all taxes,
assessments, and governmental charges with respect to its business, properties,
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes, including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
2.20 ENVIRONMENTAL AND SAFETY LAWS.
To the best of its knowledge, the Company is not in violation of any
applicable statute, law, or regulation relating to the environment or
occupational health and safety which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company, and to
the best of its knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law, or regulation.
2.21 MINUTE BOOKS.
The copy of the minute books of the Company provided to the special
counsel referred to in paragraph 6.9 herein contains minutes of all meetings of
directors and stockholders and all actions by written consent without a meeting
by the directors and stockholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and
stockholders with respect to all transactions referred to in such minutes in all
material respects.
2.22 REAL PROPERTY HOLDING CORPORATION.
The Company is not a real property holding corporation within the
meaning of Internal Revenue Code Section 897(c)(2) and any regulations
promulgated thereunder.
10
<PAGE> 11
2.23 QUALIFIED SMALL BUSINESS.
The Company represents that the shares of Series B Convertible Preferred Stock
are eligible to qualify as "qualified small business stock" as defined in
Section 1202(c) of the Code.
3. ACKNOWLEDGMENTS OF REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
The Investors hereby represent and warrant to the Company that as of
the date of this Agreement:
3.1 AUTHORIZATION.
Such Investor has full power and authority to enter into this
Agreement, and that this Agreement, when executed and delivered, will constitute
a valid and legally binding obligation of such Investor enforceable in
accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT.
This Agreement is made with each Investor in reliance upon such
Investor's representation to the Company, which by such Investor's execution of
his Agreement such Investor hereby confirms, that the Series B Convertible
Preferred Stock to be purchased by such Investor and the Common Stock issuable
upon conversion thereof (collectively, the "Securities") will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, each Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
3.3 RELIANCE UPON INVESTORS' REPRESENTATIONS.
Each Investor understands that the Series B Convertible Preferred Stock
is not, and any Common Stock acquired on conversion thereof at the time of
issuance may not be, registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Company's reliance on such exemption is predicated on the
Investors' representations set forth herein.
3.4 RECEIPT OF INFORMATION.
Each Investor believes such Investor has received all the information
such Investor considers necessary or appropriate for deciding whether to
purchase the Series B Convertible Preferred Stock. Each Investor further
represents that such Investor has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Series B Convertible Preferred Stock and the business,
properties, prospects, and financial condition of the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to such Investor or to which such Investor
had access. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
11
<PAGE> 12
3.5 INVESTMENT EXPERIENCE.
Each Investor represents that such Investor is experienced in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that such Investor
is able to fend for himself, herself or itself, can bear the economic risk of
such Investor's investment, and has such knowledge and experience in financial
and business matters that such Investor is capable of evaluating the merits and
risks of the investment in the Series B Convertible Preferred Stock. If other
than an individual, Investor also represents that each record or beneficial
owner of any equity interest in Investor (each an "Investor Owner") meets the
requirements of the preceding sentence.
3.6 ACCREDITED INVESTOR.
(a) The term "Accredited Investor" as used herein refers to:
(i) A person or entity who is a director or executive officer
of the Company;
(ii) Any bank as defined in Section 3(a)(2) of the Securities
Act, or any savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934; any insurance company as defined in Section
2(13) of the Securities Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958; any plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
(iii) Any private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of the purchase exceeds
$1,000,000;
(vi) Any natural person who had an individual income in excess
of $200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such
12
<PAGE> 13
knowledge and experience in financial and business matters that he or she is
capable of evaluating the merits and risks of the prospective investment; or
(viii) Any entity in which all of the equity owners are
accredited investors.
As used in this Paragraph 3.6(a), the term "net worth" means the excess
of total assets over total liabilities. For the purpose of determining a
person's net worth, the principal residence owned by an individual should be
valued at fair market value, including the cost of improvements, net of current
encumbrances. As used in this Paragraph 3.6(a), "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, each Investor should consider whether such Investor should add any
or all of the following items to such Investor's adjusted gross income for
income tax purposes in order to reflect more accurately such Investor's actual
economic income: any amounts attributable to tax-exempt income received, losses
claimed as a limited partner in any limited partnership, deductions claimed for
depletion, contributions to an IRA or Keogh retirement plan, and alimony
payments.
(b) Each Investor as to such Investor severally and not jointly further
represents to the Company that except as otherwise disclosed to the Company, in
writing, prior to such Investor's execution hereof, such Investor (and each
Investor Owner) is an Accredited Investor.
3.7 RESTRICTED SECURITIES.
Each Investor understands that the Series B Convertible Preferred Stock
(and any Common Stock issued on conversion thereof) may not be sold,
transferred, or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Series B Convertible Preferred Stock (or the
Common Stock issued on conversion thereof) or an available exemption from
registration under the Securities Act, the Series B Convertible Preferred Stock
(and any Common Stock issued on conversion thereof) must be held indefinitely.
In particular, each Investor is aware that the Series B Convertible Preferred
Stock (and any Common Stock issued on conversion thereof) may not be sold
pursuant to Rule 144 promulgated under the Securities Act unless all of the
conditions of that Rule are met. Among the conditions for use of Rule 144 may be
the availability of current information to the public about the Company. Such
information is not now available and the Company has no present plans to make
such information available.
3.8 LEGENDS.
To the extent applicable, each certificate or other document evidencing
any of the Series B Convertible Preferred Stock or any Common Stock issued upon
conversion thereof shall be endorsed with the legends substantially in the form
set forth below: (a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend imposed or required by applicable state securities
laws.
13
<PAGE> 14
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSINGS.
The obligations of each Investor under subparagraphs 1.1(b) and (c) of
this Agreement are subject to the fulfillment on or before each closing of each
of the following conditions, the waiver of which shall not be effective against
any Investor who does not consent in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in Section
2 shall be true on and as of the First Closing and the Second Closing with the
same effect as though such representations and warranties had been made on and
as of the date of the First Closing and the Second Closing.
4.2 PERFORMANCE.
The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the First Closing and the Second
Closing.
4.3 COMPLIANCE CERTIFICATE.
The President of the Company shall deliver to each Investor at the
First Closing and the Second Closing a certificate certifying that the
conditions specified in paragraphs 4.1, 4.2, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 and
4.10 have been fulfilled.
4.4 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Series B
Convertible Preferred Stock pursuant to this Agreement shall be duly obtained
and effective as of the First Closing and the Second Closing.
4.5 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the transactions
contemplated at the First Closing and the Second Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors and their counsel, which shall have received all such counterpart
original and certified or other copies of such documents as it may reasonably
request.
4.6 MINIMUM INVESTMENT.
The Company shall sell an aggregate of at least ninety percent (90%) of
the shares of Series B Convertible Preferred Stock listed on Schedule A which
are scheduled to be purchased at each of the closings other than those that are
scheduled to be purchased by Morgan Stanley and GE Capital.
4.7 BOARD AND COMPENSATION COMMITTEE COMPOSITION.
The Company's Board of Directors shall consist of (i) Charles N.
Martin, (ii) a representative of Morgan Stanley Venture Partners III, L.P.,
(iii) Robert A Frist, Jr., (iv) a senior member of management to be designated
by Robert A Frist, Jr., (v) Thompson Dent, (vi) Dr. William Stead, (vii) Dr,
James Daniell and (viii) Dr. John Dayani, Sr. and the Compensation Committee
shall be made up of the
14
<PAGE> 15
following three non-employee members: Charles N. Martin, Jr., Thompson Dent and
Dr. John Dayani, Sr.
4.8 OBLIGATIONAL AUTHORITY OF MANAGEMENT.
The Company's Board of Directors shall have passed a resolution
requiring all issuances of Company equity and any loan or advance in excess of
an aggregate of $500,000 to any person or entity not wholly-owned by the Company
and any individual matter (or group of related matters) in which the Company
shall be obligated to expend its funds (or the funds of its controlled
subsidiaries or other affiliates) in excess of an aggregate of $500,000 to have
received the prior approval of the Company's Board of Directors and such
resolution shall not have been rescinded or revoked.
4.9 JURISDICTION OF COMPENSATION COMMITTEE.
The Company's Board of Directors shall have passed a resolution
delegating all issuances of options in respect of the Common Stock to the
Company's officers, directors, employees or consultants and all matters related
to the cash and non-cash compensation of the Company's officers to the
Compensation Committee referred to in paragraph 4.7 above and such resolution
shall not have been rescinded or revoked.
4.10 NO MATERIAL ADVERSE CHANGE.
No Material Adverse Change shall have occurred in respect of the
Company since December 31, 1998. For the purposes of this paragraph 4.10, the
term "Material Adverse Change" shall mean a material adverse change in the
assets, results of operations, financial condition or prospects for future
operations of the Company it being understood that (i) the Company anticipates
significant losses (in excess of $4,200,000) for the year ending December 31,
1999 and (ii) a general downturn in the economy or in the part of the economy in
which the Company operates or in the public equity markets generally or in the
part of the public equity markets in which the Company could participate shall
not constitute a Material Adverse Change.
4.11 NOTES.
The Company and the lender shall have cancelled the promissory notes
dated January 18, 1994, February 23, 1994, March 30, 1994, July 11, 1997 and
December 31, 1997 between Robert A. Frist, Jr. ("Frist"), as lender, and the
Company, as borrower, in the aggregate principal amount of $1,735,000. On April
21, 1999 Frist invested $1,000,000 in the Common Stock of the Company. In
addition, Frist shall invest $500,000 in the Series B Convertible Preferred
Stock of the Company according to the funding schedule in section 1.2 herein.
The Company and Frist shall have executed the Promissory Note dated April 21st,
1999 in the principal amount of $1,543,000 in the form of Exhibit C hereto.
4.12 EXECUTIVE EMPLOYMENT AGREEMENT.
The Company and Frist shall have executed the Executive Employment
Agreement in the form of Exhibit D hereto.
15
<PAGE> 16
4.13 LEGAL OPINION.
The Investors shall have received from legal counsel to the Company
(which may be in house counsel) an opinion addressed to each of them, dated as
of each date of closing, in substantially the form attached hereto as Exhibit E.
4.14 STOCKHOLDER AGREEMENT.
The Company, the Investors and the other Company shareholders shall
have executed the Amended and Restated Stockholders' Agreement in the form
attached hereto as Exhibit F.
4.15 FILING OF RESTATED CHARTER.
The Amended and Restated Charter in the form attached hereto as Exhibit
A shall have been filed with the Secretary of State of Tennessee.
4.16 RESERVATION OF CONVERSION SHARES.
The Conversion Shares issuable upon conversion of the shares of Series
B Convertible Preferred Stock shall have been duly authorized and reserved for
issuance upon such conversion.
4.17 INVESTORS' RIGHTS AGREEMENT.
An Investors' Rights Agreement substantially in the form attached
hereto as Exhibit G shall have been executed and delivered by the parties
thereto.
4.18 CO-SALE AGREEMENT.
A Co-Sale Agreement substantially in the form attached hereto as
Exhibit H shall have been executed and delivered by the parties thereto. The
stock certificates representing the shares subject to the Co-Sale Agreement
shall have been delivered to the Secretary of the Company and shall have had
appropriate legends placed upon them to reflect the restrictions on transfer set
forth on the Co-Sale Agreement.
4.19 VOTING AGREEMENT.
A Voting Agreement substantially in the form attached hereto as Exhibit
I shall have been executed and delivered by the parties thereto.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSINGS.
The obligations of the Company to each Investor under this Agreement
are subject to the fulfillment on or before the First Closing and the Second
Closing of each of the following conditions by that Investor.
16
<PAGE> 17
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each Investor contained in
Section 3 shall be true on and as of the First Closing and the Second Closing
with the same effect as though such representations and warranties had been made
on and as of the date of the First Closing and the Second Closing.
5.2 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Stock pursuant
to this Agreement shall be duly obtained and effective as of the First Closing
and the Second Closing.
5.3 MINIMUM INVESTMENT.
The Investors shall purchase an aggregate of at least ninety percent
(90%) of the shares of Series B Convertible Preferred Stock listed on Schedule A
which are scheduled to be purchased at each of the closings other than those
that are scheduled to be purchased by Morgan Stanley and GE Capital.
5.4 STOCKHOLDER AGREEMENT.
The Company, the Investors and the other Company shareholders shall
have executed the Amended and Restated Stockholders' Agreement in the form
attached hereto as Exhibit F.
6. GENERAL PROVISIONS.
6.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute the
entire agreement among the parties and no party shall be liable or bound to any
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein or therein.
6.2 SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and the
Investors contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and each closing.
6.3 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Series B Convertible Preferred Stock sold hereunder or any Common
Stock issued upon conversion thereof). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
17
<PAGE> 18
6.4 GOVERNING LAW.
This Agreement shall be governed by and construed under the laws of the
State of Tennessee as applied to agreements among Tennessee residents entered
into and to be performed entirely within Tennessee.
6.5 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
6.6 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
6.7 NOTICES.
Unless otherwise provided, all notices and other communications
required or permitted under this Agreement shall be in writing and shall be
mailed by United States first class mail, postage prepaid, sent by facsimile or
delivered personally by hand or by a nationally recognized courier addressed to
the party to be notified at the address or facsimile number indicated for such
person on the signature page hereof, or at such other address or facsimile
number as such party may designate by ten (10) days' advance written notice to
the other parties hereto. All such notices and other written communications
shall be effective on the date of mailing, confirmed facsimile transfer or
delivery.
6.8 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for any
finder's fee or commission in connection with the purchase by the Investors of
the Series B Convertible Preferred Stock.
Each Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finder's fee
(and the cost and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.
6.9 EXPENSES.
Irrespective of whether the closings are effected, the Company shall
pay all costs and expenses that it incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement. If the First Closing is
effected, the Company shall, at the First Closing, reimburse the fees of one
special counsel for Martin Investment Partnership III not to exceed $7,500 and
shall in addition, upon receipt of a bill therefor, reimburse the out-of-pocket
expenses of such counsel.
18
<PAGE> 19
6.10 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, any Ancillary Agreement or the Restated Charter,
the prevailing party shall be entitled to reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which such party may be
entitled.
6.11 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investors (or their transferees) holding more
than 66 2/3% of the Common Stock not previously sold to the public that is
issued or issuable upon conversion of the Series B Convertible Preferred Stock.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding (including securities into which such securities have been
converted), each future holder of all such securities, and the Company.
6.12 SEVERABILITY.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
6.13 TENNESSEE SECURITIES LAW.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS
NOT BEEN QUALIFIED WITH THE SECURITIES DIVISION OF THE TENNESSEE DEPARTMENT OF
COMMERCE AND INSURANCE OF THE STATE OF TENNESSEE AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY TENNESSEE LAW. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
6.14 EFFECT OF AMENDMENT OR WAIVER.
Each Investor acknowledges that by the operation of paragraph 6.11
hereof the Investors (or their transferees) holding more than sixty six and two
thirds percent (66 2/3%) of the Common Stock not previously sold to the public
that is issued or issuable upon conversion of the Series B Convertible Preferred
Stock will have the right and power to diminish or eliminate all rights of such
Investor under this Agreement.
6.15 RIGHTS OF INVESTORS.
Each holder of Series B Convertible Preferred Stock (and Common Stock
issued upon conversion thereof) shall have the absolute right to exercise or
refrain from exercising any right or rights that such holder may have by reason
of this Agreement or any Series B Convertible Preferred Stock, including without
limitation the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and such holder shall not incur any liability to any other holder
or holders of Series B Convertible Preferred Stock (or Common Stock issued upon
exercise thereof) with respect to exercising or refraining from exercising any
such right or rights.
19
<PAGE> 20
6.16 QUALIFIED SMALL BUSINESS STOCK.
The Company shall submit to its stockholders (including the Investors)
and to the Internal Revenue Service any reports that may be required in Section
1202(d)(1)(C) of the Code and any related Treasury Regulations. In addition,
within ten (10) days after any Investor has delivered to the Company a written
request therefor, the Company shall deliver to such Investor a written statement
informing the Investor whether such Investor's interest in the Company
constitutes "qualified small business stock" as defined in Section 1202(c) of
the Code. The Company's obligation to furnish a written statement pursuant to
this paragraph 6.16 shall continue notwithstanding the fact that a class of the
Company's stock may be traded on an established securities market.
6.17 EXCULPATION AMONG INVESTORS.
Each Investor acknowledges that such Investor is not relying upon any
person, firm, or corporation, other than the Company and its officers and
directors, in making its investment or decision to invest in the Company. Each
Investor agrees that no Investor nor the respective controlling persons,
officers, directors, partners, agents, or employees of any Investor shall be
liable for any action heretofore or hereafter taken or omitted to be taken by
any of them in connection with the Series B Convertible Preferred Stock (and
Common Stock issued upon conversion thereof).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By /s/ Robert A. Frist, Jr.
----------------------------------
Chief Executive Officer
209 10th Ave. South
Suite 450
Nashville, TN 37203
INVESTORS:
MARTIN INVESTMENT PARTNERSHIP III
By: THE MARTIN COMPANIES, INC.
Managing Partner
By: /s/ Charles N. Martin
---------------------------------
Charles N. Martin, President
20 Burton Hills Blvd.
Suite 100
Nashville, TN 37215
20
<PAGE> 21
COLEMAN SWENSON HOFFMAN BOOTH IV L.P.
By Its General Partner
CSHB Ventures IV L.P.
By Its General Partner
/s/ Jay Hoffman
-----------------------------------
Jay Hoffman
237 Second Ave. South
Franklin, TN 37064-2469
DAUPHIN CAPITAL PARTNERS I, L.P.
By: /s/ James Hoover
-------------------------------
James Hoover, Principal
108 Forest Ave.
Locust Valley, NY 11560
JCB HEALTHSTREAM INVESTORS, L.L.C
By: /s/ James Graves
-------------------------------
James Graves, Chief Manager
330 Commerce St.
Nashville, TN 37201
NELSON CAPITAL PARTNERS III, L.P.
By: /s/ John K. Harrington
-------------------------------
John K. Harrington
3401 West End Ave.
Suite 300
Nashville, TN 37203
J.C. BRADFORD & CO., L.L.C
By: /s/ James Graves
--------------------------------
James Graves, Managing Director
330 Commerce St.
Nashville, TN 37201
21
<PAGE> 22
FCA VENTURE PARTNERS II, L.P.
By: /s/ Stuart McWhorter
---------------------------------
Stuart McWhorter
310 25th Ave. South
Suite 109
Nashville, TN 37203
THE JOEL COMPANY
By: /s/ Robert Gordon
---------------------------------
Robert Gordon
6444 Worchester Dr.
Nashville, TN 37221
CUMBERLAND EQUITY PARTNERS
By: /s/ Fleming Wilt
---------------------------------
Fleming Wilt
201 Fourth Ave. North
Suite 1390
Nashville, TN 37219
SAVVY INVESTMENT PARTNERS
By: /s/ Thompson B. Patterson, Jr.
---------------------------------
Thompson B. Patterson, Jr.
330 Commerce Street
Nashville, TN 37201
22
<PAGE> 23
CHANCERY LANE INVESTMENTS, L.P.
By: /s/ H. Lee Barfield
----------------------------------
H. Lee Barfield, General Partner
2700 First American Ctr.
Nashville, TN 37238-2700
By: /s/ Mary F. Barfield
----------------------------------
Mary F. Barfield, General Partner
c/o H. Lee Barfield
2700 First American Ctr.
Nashville, TN 37238-2700
THE SEVEN PARTNERSHIP
By: /s/ Thompson Dent
----------------------------------
Thompson Dent
30 Burton Hills Boulevard
Suite 500
Nashville, TN 37215
JCB VENTURE PARTNERSHIP IV
By: /s/ Robert Doolittle
----------------------------------
Robert Doolittle, Chief Manager
330 Commerce St.
Nashville, TN 37201
MELKUS PARTNERS, LTD.
By: /s/ Ken Melkus
----------------------------------
Ken Melkus
102 Woodmont Blvd.
Suite 110
Nashville, TN 37205
/s/ Robert A Frist, Jr.
-------------------------------------
Robert A Frist, Jr.
201 Abbott Glen Court
Nashville, TN 37215
/s/ William Frist
-------------------------------------
William Frist
3827 Richland Ave.
Nashville, TN 37205
/s/ Darren Liff
-------------------------------------
Darren Liff
209 10th Ave. South
Suite 432
Nashville, TN 37203
/s/ Scott Portis
-------------------------------------
Scott and Carol Len Portis
6205 Hillsboro Pike
Nashville, TN 37215
23
<PAGE> 24
/s/ James Frist
-------------------------------------
James Frist
420 Elmington Ave.
Apt. 217
Nashville, TN 37205
/s/ Robert S. Doolittle
-------------------------------------
Robert S. Doolittle
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
/s/ David Beard
-------------------------------------
David Beard
888 Collierville-Arlington Rd. North
Collierville, TN 38017
/s/ John Dayani
-------------------------------------
John Dayani
5301 Virginia Way
Suite 250
Brentwood, TN 37027
/s/ S. Douglas Smith
-------------------------------------
S. Douglas Smith
278 Franklin Road
Suite 238
Brentwood, TN 37027
/s/ Dr. Scott Portis
-------------------------------------
Dr. Scott Portis
214 East Main Street
Huntingdon, TN 38344
/s/ Barbara Sampson
-------------------------------------
Barbara Sampson
407 Lyons Head Drive
Knoxville, TN 37919
24
<PAGE> 25
MORGAN STANLEY VENTURE PARTNERS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
----------------------------------------
MORGAN STANLEY VENTURE INVESTORS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
----------------------------------------
THE MORGAN STANLEY VENTURE PARTNERS ENTREPRENUER FUND, L.P.
by: Morgan Stanley Venture Partners, L.L.C
its General Partner
by: Morgan Stanley Venture Capital Fund III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
----------------------------------------
25
<PAGE> 26
PART TWO
SCHEDULE A
INVESTORS
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Morgan Stanley Venture Partners III, L.P. 175,477
Martin Investment Partnership III 150,000
GE Capital Partners 100,000
Coleman Swenson Hoffman Booth IV, L.P. 50,000
Dauphin Capital Partners I, L.P. 50,000
William and Jennifer Frist 50,000
JCB HealthStream Investors, L.L.C. 16,500
Robert A. Frist, Jr. 50,000
Nelson Capital Partners III, L.P. 50,000
Melkus Partners, Ltd. 25,000
Darren Liff 25,000
FCA Venture Partners II, L.P. 25,000
The Joel Company 25,000
Scott and Carol Len Portis 20,000
James Frist 20,000
Cumberland Equity Partners 20,000
Morgan Stanley Venture Investors III, L.P. 16,848
J.C. Bradford & Co., L.L.C. 15,000
Savvy Investment Partners 14,000
Robert Doolittle 10,000
JCB Venture Partnership IV 10,000
David Beard 10,000
Chancery Lane Investments, L.P. 10,000
Dr. John H. Dayani 10,000
The Seven Partnership 9,500
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. 7,675
S. Douglas Smith 5,000
Dr. Scott Portis 5,000
Barbara Sampson 5,000
- --------------------------------------------------------------------------------
SERIES B TOTAL 980,000
</TABLE>
26
<PAGE> 27
SCHEDULE OF EXCEPTIONS
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company has obligations under a lease executed with Cummins Station, LLC
totaling $551,315.00. This lease expires on April 30, 2005. The Company has
options under this lease until April 30, 2015.
2.8 RELATED-PARTY TRANSACTIONS.
Indebtedness to Company by Shareholders
MacDonald Hardcastle owes the Company $1,248.03 due to an outstanding balance of
a loan from the Company to purchase shares.
Indebtedness to Shareholders by Company
The Company owes Robert Frist, Jr. $2,773,947.02 for loans made to the Company.
The Company owes Scott Portis $60,000.00 for loans made to the Company.
Robert A Frist, Jr. has converted $1,000,000 worth of the above indebtedness to
shares of the Company's Common Stock. He shall convert an additional $500,000
worth of the above indebtedness to shares of the Company's Series B Convertible
Preferred Stock at the closings. The remainder of the above indebtedness will be
represented by a new Promissory Note dated April 21st, 1999 which shall be
executed at the First Closing, shall carry an interest rate of the lesser of the
then existing Charles Schwab margin rate and 10.5% per annum. Principal shall
only be paid by the Company according to the terms of the Promissory Note dated
April 21, 1999.
In addition, Robert Frist, Jr. serves on the Board of Directors of Passport
Health Communications. This firm does not directly compete with the Company, but
it does do business in the Internet healthcare information industry.
2.15 FINANCIAL STATEMENTS.
The Company has retained the services of Ernst & Young to conduct an audit of
its financial statements ending December 31, 1997 and December 31, 1998. This
audit is in process and should be completed by June 30, 1999.
2.18 EMPLOYEES; EMPLOYEE COMPENSATION.
At the First Closing, the Company and Robert A Frist, Jr. shall execute the
Executive Employment Agreement in the form of Exhibit D hereto.
6.8 FINDERS FEES
The Company will pay commissions to J.C. Bradford in the form of Series B
Convertible Preferred Stock not to exceed $150,000.
27
<PAGE> 28
HEALTHSTREAM, INC.
AMENDMENT TO
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Amendment executed as of the 10th day of May,1999 amends the
Series B Convertible Preferred Stock Purchase Agreement (the "Agreement")
executed as of the 21st day of April, 1999, by and between HealthStream, Inc., a
Tennessee corporation (the "Company"), and the persons and entities designated
as an investor on Schedule A hereto (each an "Investor").
1. The first sentence of subsection (b) of Section 1.2 entitled "Closing"
shall be amended to read as follows:
The purchase and sale of at least one half (1/2) of the number of those
shares of Series B Convertible Preferred Stock exempted from the Minimum
Investment set forth in paragraphs 5.3 and 4.6 herein shall take place at the
offices of the Company within fourteen (14) business days of the First Closing
(the "Second Closing").
2. Subsection (a) and the last sentence of subsection (b) of Section 2.5
entitled "Capitalization and Voting Rights" shall be amended to read as follows:
(a) Preferred Stock. 5,000,000 shares of Preferred Stock, no par value,
of which 76,000 shares have been designated as Series A Convertible Preferred
Stock, all of which are outstanding, and 1,436,961 shares have been designated
as Series B Convertible Preferred Stock, 452,501 of which are outstanding. The
rights, privileges and preferences of the Series B Convertible Preferred Stock
are as stated in the Restated Charter.
(b) Common Stock.... The Company has granted options under the Option
Plan to acquire a total of 915,616 shares of Common Stock.
3. Section 4.7 entitled "Board and Compensation Committee Composition"
shall be amended as follows:
The Company's Board of Directors shall consist of (i) Charles N.
Martin, (ii) a representative of Morgan Stanley Venture Partners III, L.P.,
(iii) a representative of the General Electric Company or one of its
subsidiaries, (iv) Robert A. Frist, Jr., (v) a senior member of management to be
designated by Robert A Frist, Jr., (vi) Thompson Dent, (vii) Dr. William Stead,
(viii) Dr, James Daniell and (ix) Dr. John Dayani, Sr. and the Compensation
Committee shall be made up of the following three non-employee members: Charles
N. Martin, Jr., Thompson Dent and Dr. John Dayani, Sr.
4. A new Section 4.20 shall be added entitled "Filing of Amended and
Restated Charter" and read as follows:
The Amended and Restated Charter in the form attached hereto as Exhibit
J shall have been approved by the board of directors and the shareholders and
filed with the Secretary of State of Tennessee prior to the Second Closing.
<PAGE> 29
5. A new Section 4.21 shall be added entitled "Amendment to Voting
Agreement" and read as follows:
The Amendment to Voting Agreement in the form attached hereto as
Exhibit K shall have been executed by the shareholders at or prior to the Second
Closing.
6. Schedule A entitled "Investors" shall be amended and restated as
follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Morgan Stanley Venture Partners III, L.P. 175,477
Martin Investment Partnership III 150,000
GE Capital Equity Investments, Inc. 100,000
Coleman Swenson Hoffman Booth IV, L.P. 50,000
Dauphin Capital Partners I, L.P. 50,000
William and Jennifer Frist 50,000
JCB HealthStream Investors, L.L.C. 16,500
Robert A. Frist, Jr. 50,000
Nelson Capital Partners III, L.P. 50,000
Carson/Paul Associates LLC 45,000
Melkus Partners, Ltd. 25,000
Darren Liff 25,000
FCA Venture Partners II, L.P. 25,000
The Joel Company 25,000
Scott and Carol Len Portis 20,000
James Frist 20,000
Cumberland Equity Partners 20,000
Morgan Stanley Venture Investors III, L.P. 16,848
J.C. Bradford & Co., L.L.C. 15,000
Savvy Investment Partners 14,000
Robert Doolittle 10,000
JCB Venture Partnership IV 10,000
David Beard 10,000
Chancery Lane Investments, L.P. 10,000
Dr. John H. Dayani 15,000
The Seven Partnership 10,000
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. 7,675
S. Douglas Smith 5,000
Dr. Scott Portis 5,000
Barbara Sampson 5,000
- -------------------------------------------------------------------------------
SERIES B TOTAL 1,030,500
</TABLE>
7. Exhibit B entitled "Common Stock and Options Plan" shall be amended and
restated as follows:
<TABLE>
<S> <C>
Robert A. Frist, Jr. 1,741,307
Jeffrey L. McLaren 103,400
Scott M. Portis 130,654
Philip J. Makes 2,926
Kelly M. Stewart 1,360
MacDonald K. Hardcastle 12,000
- -------------------------------------------------------------------------------
TOTAL CURRENT 1,991,647
</TABLE>
2
<PAGE> 30
<TABLE>
<CAPTION>
OPTION HOLDER NUMBER OF OPTIONS
<S> <C>
Robert A. Frist, Jr. 420,900
Jeffrey L. McLaren 108,000
Mike Pote 27,900
Scott M. Portis 82,788
Corey Perine 32,500
Robert Laird 19,425
Steve Clemens 19,425
Luther Cale 12,950
Justin Hoagland 6,475
Philip J. Makes 10,725
Kelly M. Stewart 47,915
MacDonald K. Hardcastle 41,100
Joe Warner 6,475
John Dayani 6,475
Spenser Aden 6,475
Jennifer Monohan 3,238
Marvyn Hortman 3,238
Colleen Jones 3,238
Ian Hill 1,325
Edward Smith 1,325
Steven Moore 1,325
Gordon Waddilove 1,325
Denys Cochran 1,325
Charee Macdonald 950
William Rice 950
Christopher Bartley 950
Brooks Harper 950
Jennifer Wells 950
Jennifer Elferdink 950
William Sanford 950
Kari Silka 950
Michael Meredith 950
Robert Bull 950
Michael Galehouse 950
Jonathon Rogers 800
Peter Stringfellow 800
Matthew Montgomery 800
Ivan Kanski 800
Landry Butler 800
Doug Powell 800
Elise Harrelson 800
Tom Dent 4,000
Phil Patton 4,000
James Daniell 5,500
John Dayani, Sr. 2,000
Peter Geis 2,000
Earl Ginn 4,000
Bill Stead 2,000
Page Davidson 2,000
Colleen Conway Welch 1,000
Ted Anderson, M.D. 1,000
Douglas Olsen, M.D. 1,000
</TABLE>
3
<PAGE> 31
<TABLE>
<S> <C>
John Sergent, M.D. 1,000
Martin Sandler, M.D. 1,000
Tony Greco, M.D. 1,000
Lee Limbird, M.D. 1,000
Ron Loeppke, M.D. 1,000
Gerald S. Gotterer, M.D. 1,000
- -------------------------------------------------------------------------------
TOTAL OPTIONS 915,616
TOTAL CURRENT SHARES & OPTIONS 2,907,263
</TABLE>
8. This Amendment shall only be effective only with the written consent of
the Company and the Investors (or their transferees) holding more than 66 2/3%
of the Common Stock not previously sold to the public that is issued or issuable
upon conversion of the Series B Convertible Preferred Stock.
9. This Amendment may be executed in whole or in counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same instrument.
10. This Amendment shall be construed and governed by the laws of the State
of Tennessee.
11. All provisions governing the Agreement as referenced herein not
contradicted by this Amendment shall likewise govern the terms of this
Amendment. All rights and obligations under the Agreement shall likewise apply
to this Amendment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By /s/ Robert A. Frist, Jr.
----------------------------------
Chief Executive Officer
209 10th Ave. South
Suite 450
Nashville, TN 37203
4
<PAGE> 32
INVESTORS:
MARTIN INVESTMENT PARTNERSHIP III
By: THE MARTIN COMPANIES, INC.
Managing Partner
By: /s/ Charles N. Martin
---------------------------------
Charles N. Martin, President
20 Burton Hills Blvd.
Suite 100
Nashville, TN 37215
COLEMAN SWENSON HOFFMAN BOOTH IV L.P.
By Its General Partner
CSHB Ventures IV L.P.
By Its General Partner
/s/ Jay Hoffman
-----------------------------------
Jay Hoffman
237 Second Ave. South
Franklin, TN 37064-2469
DAUPHIN CAPITAL PARTNERS I, L.P.
By: /s/ James Hoover
---------------------------------
James Hoover, Principal
108 Forest Ave.
Locust Valley, NY 11560
JCB HEALTHSTREAM INVESTORS, L.L.C
By: /s/ James Graves
---------------------------------
James Graves, Chief Manager
330 Commerce St.
Nashville, TN 37201
NELSON CAPITAL PARTNERS III, L.P.
By: /s/ John K. Harrington
---------------------------------
John K. Harrington
3401 West End Ave.
Suite 300
Nashville, TN 37203
5
<PAGE> 33
J.C. BRADFORD & CO., L.L.C
By: /s/ Robert S. Doolittle
-----------------------------------------
Robert S. Doolittle, Managing Director
330 Commerce St.
Nashville, TN 37201
FCA VENTURE PARTNERS II, L.P.
By: /s/ Stuart McWhorter
-----------------------------------------
Stuart McWhorter
310 25th Ave. South
Suite 109
Nashville, TN 37203
THE JOEL COMPANY
By: /s/ Robert Gordon
-----------------------------------------
Robert Gordon
6444 Worchester Dr.
Nashville, TN 37221
CUMBERLAND EQUITY PARTNERS
By: /s/ Fleming Wilt
-----------------------------------------
Fleming Wilt
201 Fourth Ave. North
Suite 1390
Nashville, TN 37219
SAVVY INVESTMENT PARTNERS
By: /s/ Thompson B. Patterson, Jr.
-----------------------------------------
Thompson B. Patterson, Jr.
330 Commerce Street
Nashville, TN 37201
CHANCERY LANE INVESTMENTS, L.P.
By: /s/ H. Lee Barfield
-----------------------------------------
H. Lee Barfield, General Partner
2700 First American Ctr.
Nashville, TN 37238-2700
By: /s/ Mary F. Barfield
-----------------------------------------
Mary F. Barfield, General Partner
c/o H. Lee Barfield
2700 First American Ctr.
Nashville, TN 37238-2700
6
<PAGE> 34
THE SEVEN PARTNERSHIP
By: /s/ Thompson Dent
------------------------------------
Thompson Dent
30 Burton Hills Boulevard
Suite 500
Nashville, TN 37215
JCB VENTURE PARTNERSHIP IV
By: /s/ Robert S. Doolittle
------------------------------------
Robert S. Doolittle, Chief Manager
330 Commerce St.
Nashville, TN 37201
MELKUS PARTNERS, LTD.
By: /s/ Ken Melkus
------------------------------------
Ken Melkus
102 Woodmont Blvd.
Suite 110
Nashville, TN 37205
/s/ Robert A Frist, Jr.
---------------------------------------
Robert A Frist, Jr.
201 Abbott Glen Court
Nashville, TN 37215
---------------------------------------
William Frist
3827 Richland Ave.
Nashville, TN 37205
/s/ Darren Liff
---------------------------------------
Darren Liff
209 10th Ave. South
Suite 432
Nashville, TN 37203
/s/ Scott and Carol Len Portis
---------------------------------------
Scott and Carol Len Portis
6205 Hillsboro Pike
Nashville, TN 37215
7
<PAGE> 35
/s/ James Frist
-------------------------------------
James Frist
420 Elmington Ave.
Apt. 217
Nashville, TN 37205
/s/ Robert S. Doolittle
-------------------------------------
Robert S. Doolittle
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
/s/ David Beard
-------------------------------------
David Beard
888 Collierville-Arlington Rd. North
Collierville, TN 38017
/s/ John Dayani
-------------------------------------
John Dayani
5301 Virginia Way
Suite 250
Brentwood, TN 37027
/s/ S. Douglas Smith
-------------------------------------
S. Douglas Smith
278 Franklin Road
Suite 238
Brentwood, TN 37027
/s/ Dr. Scott Portis
-------------------------------------
Dr. Scott Portis
214 East Main Street
Huntingdon, TN 38344
/s/ Barbara Sampson
-------------------------------------
Barbara Sampson
407 Lyons Head Drive
Knoxville, TN 37919
8
<PAGE> 36
MORGAN STANLEY VENTURE PARTNERS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ M. Fazle Husain
---------------------------------------------
MORGAN STANLEY VENTURE INVESTORS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ M. Fazle Husain
----------------------------------------------
THE MORGAN STANLEY VENTURE PARTNERS ENTREPRENUER
FUND, L.P.
by: Morgan Stanley Venture Partners, L.L.C
its General Partner
by: Morgan Stanley Venture Capital Fund III, Inc.
its Institutional Managing Member
By: /s/ M. Fazle Husain
----------------------------------------------
GE CAPITAL EQUITY INVESTMENTS, INC.
By: /s/ Jeffrey T. Soukup
----------------------------------------------
Jeffrey T. Soukup, Vice President
120 Long Ridge Rd.
Samford, CT 06927
CARSON/PAUL ASSOCIATES LLC
By: /s/ Russell L. Carson
----------------------------------------------
Russell L. Carson
Welsh, Carson, Anderson & Stowe
320 Park Ave.
25th Floor
New York, NY 10022
9
<PAGE> 1
EXHIBIT 10.3
HEALTHSTREAM, INC.
SERIES C CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this
"Agreement") is made as of the 18th day of August, 1999, by and between
HealthStream, Inc., a Tennessee corporation (the "Company"), and the persons and
entities designated as an investor on Schedule A, Schedule B and Schedule C
hereto (each an "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State of the
State of Tennessee on or before the First Closing (as hereinafter defined) a
Third Amended and Restated Charter in the form attached hereto as Exhibit A (the
"Restated Charter").
(b) On or prior to the First Closing (as hereinafter defined), the
Company shall have authorized (i) the sale and issuance to the Investors of the
shares of Series C Convertible Preferred Stock and (ii) the issuance of such
shares of Common Stock to be issued upon conversion of such shares (the
"Conversion Shares"). The shares of Series C Convertible Preferred Stock and the
Conversion Shares shall have the rights, preferences, privileges and
restrictions set forth in the Restated Charter.
(c) Subject to the terms and conditions of this Agreement, each
Investor listed on Schedule A hereto (a "Schedule A Investor") agrees, severally
and not jointly, to purchase and the Company agrees to sell and issue to each
Schedule A Investor, severally and not jointly, the number of shares of the
Company's Series C Convertible Preferred Stock set forth opposite such Schedule
A Investor's name on Schedule A hereto at a purchase price of $10.00 per share.
The Series C Convertible Preferred Stock will be sold at the Closings as set
forth in paragraph 1.2 herein.
1.2 CLOSINGS.
(a) The purchase and sale of the number of shares of Series C
Convertible Preferred Stock set forth opposite each Schedule A Investor's name
on Schedule A hereto shall take place at the offices of the Company at 10:00
a.m., on August 18th, 1999, or at such other time and place as the Company and
Investors acquiring in the aggregate more than half the shares of Series C
Convertible Preferred Stock being sold pursuant hereto shall mutually agree,
either orally or in writing (the "First Closing").
(b) The Investors listed on Schedule B hereto ("Schedule B Investors")
shall have the right to purchase up to the number of shares of Series C
Convertible Preferred Stock set forth opposite each Schedule B Investor's name
on Schedule B hereto. Any unpurchased shares shall be allocated to the investors
listed on Schedule C hereto ("Schedule C Investors"). The Schedule C Investors
shall have the right to purchase up to 60,000 shares of Series C Convertible
Preferred Stock. This amount may be increased by the number of shares not
purchased by the Schedule B Investors. The purchase and sale of the total number
of shares of Series C Convertible Preferred Stock listed on Schedule B and
Schedule C hereto shall take place at the offices of the Company within twenty
(20) business days of the First Closing ("Second Closing," together with the
First Closing, the "Closings"). The Company shall determine the
<PAGE> 2
number of shares the individual Schedule C Investors have the right to purchase
at the Second Closing. The Company shall also have the right to add additional
Schedule C Investors until the Second Closing.
(c) At the Closings, the Company shall deliver to each Investor a
certificate representing the shares of Series C Convertible Preferred Stock that
such Investor is purchasing against payment of the purchase price therefor by
check, wire transfer, or such other form of payment as shall be mutually agreed
upon by such Investor and the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Investor that as of
the date of each Closing, except as set forth on a Schedule of Exceptions
furnished to each Investor and special counsel for the Investors, specifically
identifying the relevant subparagraph(s) hereof, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION; GOOD STANDING, QUALIFICATION.
The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Tennessee, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and as presently proposed to be
conducted, to execute and deliver this Agreement and any other agreement to
which the Company is a party the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"), to issue and sell the Series C Convertible
Preferred Stock and the Common Stock issuable upon conversion thereof, and to
carry out the provisions of this Agreement, the Restated Charter and any
Ancillary Agreement. The Company is duly qualified and is authorized to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure so to qualify would have material adverse effect on its
business, properties, prospects, or financial condition.
2.2 AUTHORIZATION.
All action on the part of the Company, its officers, directors and
stockholders necessary for the authorization, execution and delivery of this
Agreement and any Ancillary Agreement, the performance of all obligations of the
Company hereunder and thereunder at the Closings and the authorization, issuance
(or reservation for issuance), sale, and delivery of the Series C Convertible
Preferred Stock being sold hereunder and the Common Stock issuable upon
conversion thereof has been taken or will be taken prior to the Closings, and
this Agreement, and any Ancillary Agreement, when executed and delivered, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
The Series C Convertible Preferred Stock that is being purchased by the
Investors hereunder, when issued, sold, and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement, any
Ancillary Agreement and under applicable state and federal securities laws. The
Common Stock issuable upon conversion of
2
<PAGE> 3
the Series C Convertible Preferred Stock being purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Charter, will be duly and validly issued, fully
paid, and nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, any Ancillary Agreement and under
applicable state and federal securities laws.
2.4 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of, or
filing with, any local, state, or federal governmental authority is required on
the part of the Company in connection with the Company's valid execution,
delivery, or performance of this Agreement, the offer, sale or issuance of the
Series C Convertible Preferred Stock by the Company or the issuance of Common
Stock upon conversion of the Series C Convertible Preferred Stock, except (i)
the filing of the Restated Charter with the Secretary of State of the State of
Tennessee, and (ii) such filings as have been made prior to the Closings, except
any notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor.
2.5 CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists, or will consist
immediately prior to the First Closing, of:
(a) Preferred Stock. 5,000,000 shares of Preferred Stock, no par value,
of which 76,000 shares have been designated as Series A Convertible Preferred
Stock, all of which are outstanding, and 1,436,961 shares have been designated
as Series B Convertible Preferred Stock, 736,801 of which are outstanding. The
rights, privileges and preferences of the Series A and Series B Convertible
Preferred Stock are as stated in the Company's Second Amended and Restated
Charter dated as of May 10, 1999 (the "Second Charter").
(b) Common Stock. 20,000,000 shares of common stock, no par value
("Common Stock"), of which 2,245,743 shares are issued and outstanding. An
additional 4,000,000 shares of Common Stock are reserved for issuance pursuant
to the Employee Stock Option Plan, dated April 15, 1994 (the "Option Plan"). The
Company has granted options under the Option Plan to acquire a total of 823,066
shares of Common Stock.
(c) The outstanding shares of Common Stock and options granted under
the Option Plan are owned by the stockholders and option holders in the numbers
specified in Exhibit B hereto.
(d) The outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act and any relevant state securities laws or pursuant to valid exemptions
therefrom.
(e) Except as contemplated herein and in the Ancillary Agreements and
for (i) the conversion privileges of the Series A, Series B and Series C
Convertible Preferred Stock, and (ii) currently outstanding options under the
Option Plan, there are no outstanding options, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements
or agreements of any kind for the purchase or acquisition from the Company of
any of its securities. Other than the Ancillary Agreements, the Company is not a
party or subject to any agreement or understanding, and, to the best of
3
<PAGE> 4
the Company's knowledge, there is no agreement or understanding between any
persons that affects or relates to the Common Stock or the voting or giving of
written consents with respect to any security or the voting by a director of the
Company.
2.6 SUBSIDIARIES.
The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company does not have and is not bound by any contract, agreement,
lease, commitment, or proposed transaction, judgment, order, writ or decree,
written or oral, absolute or contingent, other than (i) contracts for the
purchase of supplies and services that were entered into in the ordinary course
of business and that do not involve more than $50,000, and do not extend for
more than one (1) year beyond the date hereof, (ii) sales contracts entered into
in the ordinary course of business, and (iii) contracts terminable at will by
the Company on no more than thirty (30) days' notice without cost or liability
to the Company and that do not involve any employment or consulting arrangement
and are not material to the conduct of the Company's business. For the purpose
of this paragraph, employment and consulting contracts and contracts with labor
unions, and license agreements and any other agreements relating to the
Company's acquisition or disposition of patent, copyright, trade secret or other
proprietary rights or technology (other than standard end-user license
agreements) shall not be considered to be contracts entered into in the ordinary
course of business.
2.8 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
them, other than (i) for payment of salary for services rendered, (ii)
reimbursement for reasonable expenses incurred on behalf of the Company, and
(iii) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the Board of Directors of the Company). To the best of the
Company's knowledge, none of such persons has any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation that
competes with the Company, except that employees, stockholders, officers, or
directors of the Company and members of their immediate families may own stock
in publicly traded companies that may compete or conduct business with the
Company. To the best of the Company's knowledge, no officer, director, or
stockholder or any member of their immediate families is, directly or
indirectly, interested in any material contract with the Company (other than
such contracts as relate to any such person's employment, ownership of capital
stock or other securities of the Company).
2.9 PERMITS.
The Company has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as presently planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
4
<PAGE> 5
2.10 COMPLIANCE WITH OTHER INSTRUMENTS.
The Company is not in violation or default in any material respect of
any provision of its Second Charter or Bylaws and no such material violation or
default is anticipated following the Company's execution of the Restated Charter
or Bylaws or in any material respect of any provision of any mortgage,
indenture, agreement, instrument, or contract to which it is a party or by which
it is bound or, to the best of its knowledge, of any federal or state judgment,
order, writ, decree, statute, rule, regulation or restriction applicable to the
Company. The execution, delivery, and performance by the Company of this
Agreement, and any Ancillary Agreement, and the consummation of the transactions
contemplated hereby and thereby, will not result in any such violation or be in
material conflict with or constitute, with or without the passage of time or
giving of notice, either a material default under any such provision or an event
that results in the creation of any material lien, charge, or encumbrance upon
any assets of the Company or the suspension, revocation, impairment, forfeiture,
or non-renewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations, or any of its assets or
properties.
2.11 LITIGATION.
There is no action, suit, proceeding, or investigation pending or, to
the Company's knowledge, currently threatened against the Company that questions
the validity of this Agreement or any Ancillary Agreement or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse change in the assets, business,
properties, prospects, or financial condition of the Company, or in any material
change in the current equity ownership of the Company. The foregoing includes,
without limitation, any action, suit, proceeding, or investigation pending or
currently threatened involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, their obligations under any agreements with prior employers, or
negotiations by the Company with potential backers of, or investors in, the
Company or its proposed business. The Company is not a party to or, to the best
of its knowledge, named in or subject to any order, writ, injunction, judgment,
or decree of any court, government agency, or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
that the Company currently intends to initiate.
2.12 OFFERING.
Subject in part to the truth and accuracy of each Investor's
representations set forth in this Agreement, the offer, sale and issuance of the
Series C Convertible Preferred Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
2.13 FINANCIAL STATEMENTS.
The Company has delivered to each Investor its financial statements
(balance sheet and profit and loss statement, statement of stockholders' equity
and statement of cash flows including notes thereto) at June 30, 1999 and for
the term then ended (the "Financial Statements"). The Financial Statements have
been consistently prepared and derived from the books and records of the
Company. The Financial Statements fairly present in all material respects the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein. Except as set forth in the Financial
Statements and to the best of the Company's knowledge, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to
5
<PAGE> 6
June 30, 1999 and (ii) obligations under contracts and commitments incurred in
the ordinary course of business and not required under generally accepted
accounting principles to be reflected in the Financial Statements, which, in
both cases, individually or in the aggregate, are not material to the financial
condition or operating results of the Company. Except as disclosed in the
Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm, or corporation. The Company maintains
and will continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.14 CHANGES.
To the best of the Company's knowledge, since June 30, 1999, there has
not been:
(a) any change in the assets, liabilities, financial condition, or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company (as such business is presently
conducted and as it is presently proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects, or
financial condition of the Company (as such business is presently conducted and
as it is presently proposed to be conducted);
(e) any material change to a material contract or arrangement by which
the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder other than in the ordinary
course of business;
(g) any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets, or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, does not know of the impending resignation or
termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable or contested by the
Company in good faith;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, stockholders, officers, or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
6
<PAGE> 7
(l) any declaration, setting aside, or payment of any dividend or other
distribution of the Company's assets in respect of any of the Company's capital
stock, or any direct or indirect redemption, purchase, or other acquisition of
any of such stock by the Company;
(m) any other event or condition of any character that might materially
and adversely affect the business, properties, prospects, or financial condition
of the Company (as such business is presently conducted and as it is presently
proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of the things
described in this paragraph 2.14.
2.15 INTELLECTUAL PROPERTY.
To the best of its knowledge (but without having conducted any special
investigation or patent search), the Company owns or possesses sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, and proprietary rights and processes necessary
for its business as now conducted without any conflict with, or infringement of
the rights of, others which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company. The
Schedule of Exceptions contains a complete list of patents and pending patent
applications of the Company. Except for agreements with its own employees or
consultants, substantially in the form referenced in paragraph 2.16 below, and
standard end-user license agreements, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses, or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, and proprietary rights and processes of
any other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets, or other proprietary rights or processes of
any other person or entity. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants, or commitments
of any nature) or other agreement, or subject to any judgment, decree, or order
of any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions, or provisions of, or
constitute a default under, any contract, covenant, or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company. The
Company has taken reasonable efforts to identify any possible liabilities,
losses, costs, expenses, or other adverse effects it may experience as a result
of the potential inability of computer systems to recognize the "Year 2000"and
has determined that it will have no material loss, cost, liability, or expense.
2.16 EMPLOYEES; EMPLOYEE COMPENSATION.
To the best of the Company's knowledge, there is no strike, labor
dispute or union organization activities pending or threatened between it and
its employees. None of the Company's employees belongs to any union or
collective bargaining unit. To the best of its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
opportunity and other laws related to employment. The Company has a proprietary
information agreement with each of its employees protecting the Company's
confidential information. To the best of the Company's knowledge, no employee of
the Company is or will be in violation of any judgment, decree, or order, or any
term of any
7
<PAGE> 8
employment contract, patent disclosure agreement, or other contract or agreement
relating to the relationship of any such employee with the Company, or any other
party because of the nature of the business conducted or presently proposed to
be conducted by the Company or to the use by the employee of his or her best
efforts with respect to such business. Other than the Option Plan, the Company
is not a party to or bound by any currently effective employment contract,
deferred compensation agreement, bonus plan, incentive plan, profit sharing
plan, retirement agreement, or other employee compensation agreement. The
Company is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. Subject to general principles related to wrongful termination of
employees, the employment of each officer and employee of the Company is
terminable at the will of the Company.
2.17 TAX RETURNS, PAYMENTS, AND ELECTIONS.
The Company has timely filed all tax returns and reports (federal,
state and local) as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due and payable, except those contested by it in good faith. The
provision for taxes of the Company as shown in the Financial Statements is
adequate for taxes due or accrued as of the date thereof. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to
be treated as a collapsible corporation pursuant to the Code, nor has it made
any other elections pursuant to the Code (other than its "S corporation"
election, which election has been revoked effective October 13, 1998, or that
relate solely to methods of accounting, depreciation, or amortization) that
would have a material effect on the business, properties, prospects, or
financial condition of the Company. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute
of limitations on the assessment or collection of any tax or governmental
charge. None of the Company's federal income tax returns and none of its state
income or franchise tax or sales or use tax returns has ever been audited by
governmental authorities. Since the date of the Financial Statements, the
Company has made adequate provisions on its books of account for all taxes,
assessments, and governmental charges with respect to its business, properties,
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes, including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
2.18 ENVIRONMENTAL AND SAFETY LAWS.
To the best of its knowledge, the Company is not in violation of any
applicable statute, law, or regulation relating to the environment or
occupational health and safety which would have a material adverse effect on the
business, properties, prospects or financial condition of the Company, and to
the best of its knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law, or regulation.
2.19 MINUTE BOOKS.
The minute books of the Company contain minutes of all meetings of
directors and stockholders and all actions by written consent without a meeting
by the directors and stockholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and
stockholders with respect to all transactions referred to in such minutes in all
material respects.
8
<PAGE> 9
2.20 REAL PROPERTY HOLDING CORPORATION.
The Company is not a real property holding corporation within the
meaning of Internal Revenue Code Section 897(c)(2) and any regulations
promulgated thereunder.
2.21 QUALIFIED SMALL BUSINESS.
The Company represents that the shares of Series C Convertible
Preferred Stock are eligible to qualify as "qualified small business stock" as
defined in Section 1202(c) of the Code.
3. ACKNOWLEDGMENTS OF REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
The Investors hereby represent and warrant to the Company that as of
the date of this Agreement:
3.1 AUTHORIZATION.
Such Investor has full power and authority to enter into this
Agreement, and that this Agreement, when executed and delivered, will constitute
a valid and legally binding obligation of such Investor enforceable in
accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT.
This Agreement is made with each Investor in reliance upon such
Investor's representation to the Company, which by such Investor's execution of
his Agreement such Investor hereby confirms, that the Series C Convertible
Preferred Stock to be purchased by such Investor and the Common Stock issuable
upon conversion thereof (collectively, the "Securities") will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, each Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
3.3 RELIANCE UPON INVESTORS' REPRESENTATIONS.
Each Investor understands that the Series C Convertible Preferred Stock
is not, and any Common Stock acquired on conversion thereof at the time of
issuance may not be, registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Company's reliance on such exemption is predicated on the
Investors' representations set forth herein.
3.4 RECEIPT OF INFORMATION.
Each Investor believes such Investor has received all the information
such Investor considers necessary or appropriate for deciding whether to
purchase the Series C Convertible Preferred Stock. Each Investor further
represents that such Investor has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Series C Convertible Preferred Stock and the business,
properties, prospects, and financial condition of the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it
9
<PAGE> 10
without unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to such Investor or to which such Investor had access. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.5 INVESTMENT EXPERIENCE.
Each Investor represents that such Investor is experienced in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that such Investor
is able to fend for himself, herself or itself, can bear the economic risk of
such Investor's investment, and has such knowledge and experience in financial
and business matters that such Investor is capable of evaluating the merits and
risks of the investment in the Series C Convertible Preferred Stock. If other
than an individual, Investor also represents that each record or beneficial
owner of any equity interest in Investor (each an "Investor Owner") meets the
requirements of the preceding sentence.
3.6 ACCREDITED INVESTOR.
(a) The term "Accredited Investor" as used herein refers to:
(i) A person or entity who is a director or executive officer of
the Company;
(ii) Any bank as defined in Section 3(a)(2) of the Securities Act,
or any savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in Section
2(13) of the Securities Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958; any plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
(iii) Any private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of the purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
10
<PAGE> 11
(vii) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the prospective investment; or
(viii) Any entity in which all of the equity owners are accredited
investors.
As used in this Paragraph 3.6(a), the term "net worth" means the excess
of total assets over total liabilities. For the purpose of determining a
person's net worth, the principal residence owned by an individual should be
valued at fair market value, including the cost of improvements, net of current
encumbrances. As used in this Paragraph 3.6(a), "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, each Investor should consider whether such Investor should add any
or all of the following items to such Investor's adjusted gross income for
income tax purposes in order to reflect more accurately such Investor's actual
economic income: any amounts attributable to tax-exempt income received, losses
claimed as a limited partner in any limited partnership, deductions claimed for
depletion, contributions to an IRA or Keogh retirement plan, and alimony
payments.
(b) Each Investor as to such Investor severally and not jointly further
represents to the Company that except as otherwise disclosed to the Company, in
writing, prior to such Investor's execution hereof, such Investor (and each
Investor Owner) is an Accredited Investor.
3.7 RESTRICTED SECURITIES.
Each Investor understands that the Series C Convertible Preferred Stock
(and any Common Stock issued on conversion thereof) may not be sold,
transferred, or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Series C Convertible Preferred Stock (or the
Common Stock issued on conversion thereof) or an available exemption from
registration under the Securities Act, the Series C Convertible Preferred Stock
(and any Common Stock issued on conversion thereof) must be held indefinitely.
In particular, each Investor is aware that the Series C Convertible Preferred
Stock (and any Common Stock issued on conversion thereof) may not be sold
pursuant to Rule 144 promulgated under the Securities Act unless all of the
conditions of that Rule are met. Among the conditions for use of Rule 144 may be
the availability of current information to the public about the Company. Such
information is not now available and the Company has no present plans to make
such information available.
3.8 LEGENDS.
To the extent applicable, each certificate or other document evidencing
any of the Series C Convertible Preferred Stock or any Common Stock issued upon
conversion thereof shall be endorsed with the legends substantially in the form
set forth below: (a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend imposed or required by applicable state securities laws.
11
<PAGE> 12
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSINGS.
The obligations of each Schedule A Investor under subparagraph 1.1(c)
of this Agreement are subject to the fulfillment on or before the First Closing
of each of the following conditions, the waiver of which shall not be effective
against any Schedule A Investor who does not consent in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in Section
2 shall be true on and as of each of the Closings with the same effect as though
such representations and warranties had been made on and as of the date of each
of the Closings.
4.2 PERFORMANCE.
The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before each of the Closings.
4.3 COMPLIANCE CERTIFICATE.
The President of the Company shall deliver to each Investor at each of
the Closings in which such Investor shall participate a certificate certifying
that the conditions specified in paragraphs 4.1, 4.2, 4.4 and 4.5 have been
fulfilled.
4.4 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Series C
Convertible Preferred Stock pursuant to this Agreement shall be duly obtained
and effective as of each of the Closings.
4.5 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the transactions
contemplated at the Closings and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Investors and their
counsel, which shall have received all such counterpart original and certified
or other copies of such documents as it may reasonably request.
12
<PAGE> 13
4.6 STOCKHOLDER AGREEMENT.
The Company, the Investors and the other Company shareholders
shall have executed the Amended and Restated Stockholders' Agreement in
substantially the form attached hereto as Exhibit C.
4.7 FILING OF RESTATED CHARTER.
The Restated Charter in the form attached hereto as Exhibit A shall
have been filed with the Secretary of State of Tennessee.
4.8 RESERVATION OF CONVERSION SHARES.
The Conversion Shares issuable upon conversion of the shares of Series
C Convertible Preferred Stock shall have been duly authorized and reserved for
issuance upon such conversion.
4.9 INVESTORS' RIGHTS AGREEMENT.
The Investors' Rights Agreement as amended by the Amendment to
Investors' Rights Agreement in substantially the form attached hereto as Exhibit
D shall have been executed and delivered by the parties thereto.
4.10 CO-SALE AGREEMENT.
The Co-Sale Agreement as amended by the Amendment to Co-Sale Agreement
in substantially the form attached hereto as Exhibit E shall have been executed
and delivered by the parties thereto. The stock certificates representing the
shares subject to the Co-Sale Agreement shall have been delivered to the
Secretary of the Company and shall have had appropriate legends placed upon them
to reflect the restrictions on transfer set forth on the Co-Sale Agreement.
4.11 VOTING AGREEMENT.
The Voting Agreement as amended by the Amendment to Voting Agreement in
substantially the form attached hereto as Exhibit F shall have been executed and
delivered by the parties thereto.
4.12 LEGAL OPINION.
The Investors shall have received from legal counsel to the Company (which may
be in house counsel) an opinion addressed to each of them, dated the date of
each Closing, in substantially the form attached hereto as Exhibit G.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSINGS.
The obligations of the Company to each Investor, such obligations being
several and not joint with respect to each Investor, under this Agreement are
subject to the fulfillment on or before each of the Closings of each of the
following conditions with respect to such Investor.
13
<PAGE> 14
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of such Investor contained in
Section 3 shall be true on and as of each of the Closings with the same effect
as though such representations and warranties had been made on and as of the
date of the Closings.
5.2 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Stock pursuant
to this Agreement shall be duly obtained and effective as of each of the
Closings.
5.3 STOCKHOLDER AGREEMENT.
Such Investor shall have executed the Amended and Restated
Stockholders' Agreement in substantially the form attached hereto as Exhibit C.
5.4 CO-SALE AGREEMENT.
A Co-Sale Agreement as amended by the Amendment to Co-Sale Agreement
substantially in the form attached hereto as Exhibit E shall have been executed
and delivered by the parties thereto other than the Company.
5.5 VOTING AGREEMENT.
A Voting Agreement as amended by the Amendment to Voting Agreement
substantially in the form attached hereto as Exhibit F shall have been executed
and delivered by the parties thereto other than the Company.
6. GENERAL PROVISIONS.
6.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute the
entire agreement among the parties and no party shall be liable or bound to any
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein or therein.
6.2 SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and the
Investors contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and each of the Closings.
6.3 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
shares of Series C Convertible Preferred Stock sold hereunder or any Common
Stock issued upon conversion thereof). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights,
14
<PAGE> 15
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.4 GOVERNING LAW.
This Agreement shall be governed by and construed under the laws of the
State of Tennessee as applied to agreements among Tennessee residents entered
into and to be performed entirely within Tennessee.
6.5 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
6.6 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
6.7 NOTICES.
Unless otherwise provided, all notices and other communications
required or permitted under this Agreement shall be in writing and shall be
mailed by United States first class mail, postage prepaid, sent by facsimile or
delivered personally by hand or by a nationally recognized courier addressed to
the party to be notified at the address or facsimile number indicated for such
person on the signature page hereof, or at such other address or facsimile
number as such party may designate by ten (10) days' advance written notice to
the other parties hereto. All such notices and other written communications
shall be effective on the date of mailing, confirmed facsimile transfer or
delivery.
6.8 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for any
finder's fee or commission in connection with the purchase by the Investors of
the Series C Convertible Preferred Stock.
Each Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finder's fee
(and the cost and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.
6.9 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, any Ancillary Agreement or the Restated Charter,
the prevailing party shall be entitled to reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which such party may be
entitled.
15
<PAGE> 16
6.10 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investors (or their transferees) holding more
than 66 2/3% of the Common Stock not previously sold to the public that is
issued or issuable upon conversion of the Series C Convertible Preferred Stock.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding (including securities into which such securities have been
converted), each future holder of all such securities, and the Company.
6.11 SEVERABILITY.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
6.12 TENNESSEE SECURITIES LAW.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS
NOT BEEN QUALIFIED WITH THE SECURITIES DIVISION OF THE TENNESSEE DEPARTMENT OF
COMMERCE AND INSURANCE OF THE STATE OF TENNESSEE AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY TENNESSEE LAW. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
6.13 EFFECT OF AMENDMENT OR WAIVER.
Each Investor acknowledges that by the operation of paragraph 6.10
hereof the Investors (or their transferees) holding more than sixty six and two
thirds percent (66 2/3%) of the Common Stock not previously sold to the public
that is issued or issuable upon conversion of the Series C Convertible Preferred
Stock will have the right and power to diminish or eliminate all rights of such
Investor under this Agreement.
6.14 RIGHTS OF INVESTORS.
Each holder of Series C Convertible Preferred Stock (and Common Stock
issued upon conversion thereof) shall have the absolute right to exercise or
refrain from exercising any right or rights that such holder may have by reason
of this Agreement or any Series C Convertible Preferred Stock, including without
limitation the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and such holder shall not incur any liability to any other holder
or holders of Series C Convertible Preferred Stock (or Common Stock issued upon
exercise thereof) with respect to exercising or refraining from exercising any
such right or rights.
6.15 QUALIFIED SMALL BUSINESS STOCK.
The Company shall submit to its stockholders (including the Investors)
and to the Internal Revenue Service any reports that may be required in Section
1202(d)(1)(C) of the Code and any related
16
<PAGE> 17
Treasury Regulations. In addition, within ten (10) days after any Investor has
delivered to the Company a written request therefor, the Company shall deliver
to such Investor a written statement informing the Investor whether such
Investor's interest in the Company constitutes "qualified small business stock"
as defined in Section 1202(c) of the Code. The Company's obligation to furnish a
written statement pursuant to this paragraph 6.16 shall continue notwithstanding
the fact that a class of the Company's stock may be traded on an established
securities market.
6.16 EXCULPATION AMONG INVESTORS.
Each Investor acknowledges that such Investor is not relying upon any
person, firm, or corporation, other than the Company and its officers and
directors, in making its investment or decision to invest in the Company. Each
Investor agrees that no Investor nor the respective controlling persons,
officers, directors, partners, agents, or employees of any Investor shall be
liable for any action heretofore or hereafter taken or omitted to be taken by
any of them in connection with the Series C Convertible Preferred Stock (and
Common Stock issued upon conversion thereof).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By
----------------------------------
President
209 10th Ave. South
Suite 450
Nashville, TN 37203
INVESTORS:
HEALTHSTREAM PARTNERS
By
----------------------------------
General Partner
900-A, 3319 West End Avenue
Nashville, Tennessee 37203
VANDERBILT UNIVERSITY
By
----------------------------------
17
<PAGE> 18
MARTIN INVESTMENT PARTNERSHIP III
By: THE MARTIN COMPANIES, INC.
Managing Partner
By
----------------------------------
Charles N. Martin, President
20 Burton Hills Blvd.
Suite 100
Nashville, TN 37215
COLEMAN SWENSON HOFFMAN BOOTH IV L.P.
By Its General Partner
CSHB Ventures IV L.P.
By Its General Partner
-----------------------------------
Jay Hoffman
237 Second Ave. South
Franklin, TN 37064-2469
DAUPHIN CAPITAL PARTNERS I, L.P.
By
----------------------------------
James Hoover, Principal
108 Forest Ave.
Locust Valley, NY 11560
JCB HEALTHSTREAM INVESTORS, L.L.C
By
----------------------------------
James Graves, Chief Manager
330 Commerce St.
Nashville, TN 37201
NELSON CAPITAL PARTNERS III, L.P.
By
----------------------------------
John K. Harrington
3401 West End Ave.
Suite 300
Nashville, TN 37203
18
<PAGE> 19
JCB CF HEALTHSTREAM PARTNERS, L.L.C
By
----------------------------------
Robert Doolittle
330 Commerce St.
Nashville, TN 37201
FCA VENTURE PARTNERS II, L.P.
By
----------------------------------
Stuart McWhorter
310 25th Ave. South
Suite 109
Nashville, TN 37203
THE JOEL COMPANY
By
----------------------------------
Robert Gordon
6444 Worchester Dr.
Nashville, TN 37221
CUMBERLAND EQUITY PARTNERS
By
----------------------------------
Fleming Wilt
201 Fourth Ave. NorthSuite 1390
Nashville, TN 37219
SAVVY INVESTMENT PARTNERS
By
----------------------------------
Thompson B. Patterson, Jr.
330 Commerce Street
Nashville, TN 37201
19
<PAGE> 20
CHANCERY LANE INVESTMENTS, L.P.
By
----------------------------------
H. Lee Barfield, General Partner
2700 First American Ctr.
Nashville, TN 37238-2700
By
----------------------------------
Mary F. Barfield, General Partner
c/o H. Lee Barfield
2700 First American Ctr.
Nashville, TN 37238-2700
JCB VENTURE PARTNERSHIP IV
By
----------------------------------
Robert Doolittle, Chief Manager
330 Commerce St.
Nashville, TN 37201
MELKUS PARTNERS, LTD.
By
----------------------------------
Ken Melkus
102 Woodmont Blvd.
Suite 110
Nashville, TN 37205
-------------------------------------
Robert A Frist, Jr.
201 Abbott Glen Court
Nashville, TN 37215
-------------------------------------
William Frist
3827 Richland Ave.
Nashville, TN 37205
-------------------------------------
Darren Liff
209 10th Ave. South
Suite 432
Nashville, TN 37203
20
<PAGE> 21
-------------------------------------
Scott and Carol Len Portis
6205 Hillsboro Pike
Nashville, TN 37215
-------------------------------------
James Frist
420 Elmington Ave.
Apt. 217
Nashville, TN 37205
-------------------------------------
Robert S. Doolittle
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
-------------------------------------
David Beard
888 Collierville-Arlington Rd. North
Collierville, TN 38017
-------------------------------------
John Dayani
5301 Virginia Way
Suite 250
Brentwood, TN 37027
-------------------------------------
S. Douglas Smith
278 Franklin Road
Suite 238
Brentwood, TN 37027
-------------------------------------
Dr. Scott Portis
214 East Main Street
Huntingdon, TN 38344
-------------------------------------
Barbara Sampson
407 Lyons Head Drive
Knoxville, TN 37919
21
<PAGE> 22
MORGAN STANLEY VENTURE
PARTNERS III, L.P.
by: Morgan Stanley Venture
Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture
Capital III, Inc.
its Institutional Managing Member
By
----------------------------------
MORGAN STANLEY VENTURE
INVESTORS III, L.P.
by: Morgan Stanley Venture
Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture
Capital III, Inc.
its Institutional Managing Member
By
----------------------------------
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENUER FUND, L.P.
by: Morgan Stanley Venture
Partners, L.L.C
its General Partner
by: Morgan Stanley Venture Capital
Fund III, Inc.
its Institutional Managing Member
By
----------------------------------
GE CAPITAL PARTNERS
By
----------------------------------
Jeff Soukup
120 Long Ridge Rd.
Samford, CT 06927
-------------------------------------
James & Cassandra Daniell
5935 Post Road
Nashville, TN 37205
-------------------------------------
Carol Frist
1326 Page Road
Nashville, TN 37205
22
<PAGE> 23
FRIST FAMILY INTERNET PARTNERS
By
----------------------------------
Robert A Frist, Sr.
1326 Page Road
Nashville, TN 37205
CARSON/PAUL ASSOCIATES LLC
By
----------------------------------
Russell L. Carson
Welsh, Carson, Anderson & Stowe
320 Park Ave.
25th Floor
New York, NY 10022
BORNEO PARTNERS
By
----------------------------------
Michael Pote, Administrator
8181 Londonberry Road
Nashville, TN 37221
-------------------------------------
Virginia Duncombe
153 Bingham Ave.
Rumson, NJ 07760
-------------------------------------
Stephen and Linda Rogers
601 Foxborough Sq. N.
Brentwood, TN 37027
-------------------------------------
Dan McLaren
212 Deer Park Circle
Nashville, TN 37205
-------------------------------------
Jeffrey and Carrie McLaren
147 Kenner Ave.
Nashville, TN 37205
23
<PAGE> 24
-------------------------------------
Robert F. Merriman
# 14 Nottingham
Amarillo, TX 79124
SC FUND I, L.P.
By
----------------------------------
General Partner
10666 North Torrey Pines Rd.
La Jolla, CA 92037
24
<PAGE> 25
PART TWO
SCHEDULE A
INVESTORS
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ------
<S> <C>
Vanderbilt University 40,000
HealthStream Partners 300,000
TOTAL 340,000
</TABLE>
<PAGE> 26
SCHEDULE B
INVESTORS
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ------
<S> <C>
Scott & Carol Len Portis 4,519
David Beard 2,259
Martin Investment Partnership III 33,891
Coleman Swenson Hoffman Booth IV, L.P. 11,297
Dauphin Capital Partners I, L.P. 11,297
William and Jennifer Frist 11,297
JCB HealthStream Investors, L.L.C 6,213
Robert A. Frist, Jr 11,297
Nelson Capital Partners III, L.P. 11,297
Melkus Partners, Ltd. 5,648
Darren Liff 5,648
FCA Venture Partners II, L.P. 5,648
The Joel Company 5,648
James Frist 4,520
Cumberland Equity Partners 4,520
JCB CF HealthStream Partners, L.L.C 3,389
Savvy Investment Partners 3,163
Robert Doolitle 2,259
JCB Venture Partnership IV 2,259
Chancery Lane Investments, L.P. 2,259
Dr. John H. Dayani 3,389
S. Douglas Smith 1,130
Dr. Scott Portis 1,130
Morgan Stanley Venture Partners III, L.P. 39,647
Morgan Stanley Venture Investors III, L.P. 3,807
Morgan Stanley Venture Partners Entrepenuer Fund, L.P. 1,734
GE Capital Equity Investments, Inc. 22,594
Carson/Paul Associates LLC 10,167
Carol Frist 5,648
James & Sandra Daniell 1,130
Frist Family Internet Partners 5,648
-------
TOTAL 244,352
</TABLE>
<PAGE> 27
SCHEDULE C
INVESTORS
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ------
<S> <C>
Borneo Partners 24,648
SC Fund I, L.P. 20,000
Dan McLaren 7,000
Virginia Duncombe 5,000
Stephen and Linda Rogers 3,500
Jeffery and Carrie McLaren 3,000
Robert Merriman 2,500
TOTAL 65,648
</TABLE>
<PAGE> 28
SCHEDULE OF EXCEPTIONS
2.5 CAPITALIZATION AND VOTING RIGHTS.
The Company entered a distribution agreement with GE Medical Systems ("GE") on
June 14, 1999. In connection with this distribution agreement, the Company
granted GE a warrant to purchase 132,450 shares of the Company's Common Stock at
a purchase price of $7.55 per share. The Company also granted GE registration
rights associated with these shares.
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company has obligations under a lease executed with Cummins Station, LLC
totaling $551,315.00. This lease expires on April 30, 2005. The Company has
options under this lease until April 30, 2015.
On July 23, 1999, the Company acquired substantially all of the assets of
SilverPlatter Education, Inc. for $1,000,000. Twenty percent of the transaction
was paid for with the Company's Common Stock while the remaining eighty percent
was paid with cash.
The Company entered a distribution agreement with GE Medical Systems ("GE") on
June 14, 1999. In connection with this distribution agreement, the Company
granted GE a warrant to purchase 132,450 shares of the Company's Common Stock at
a purchase price of $7.55 per share. The Company also granted GE registration
rights associated with these shares.
The Company and Robert A Frist, Jr. have executed an Executive Employment
Agreement dated April 21, 1999.
<PAGE> 29
2.8 RELATED-PARTY TRANSACTIONS.
Indebtedness to Company by Shareholders
MacDonald Hardcastle owes the Company $1,248.03 due to an outstanding balance of
a loan from the Company to purchase shares.
Indebtedness to Shareholders by Company
The Company owes Robert Frist, Jr. $1,293,000 for loans made to the Company
under a Promissory Note dated August 23rd, 1999 ("Note"). This Note replaces and
supercedes the previous notes executed between Robert Frist, Jr. and the Company
dated January 18, 1994, February 23, 1994, March 30, 1994, July 11, 1997,
December 31, 1997 and April 21, 1999. Robert Frist, Jr. converted $1,000,000
worth of the above indebtedness under the previous notes to shares of the
Company's Common Stock. He converted $500,000 worth of the above indebtedness
under the previous notes to shares of the Company's Series B Convertible
Preferred Stock on April 21, 1999 and an additional $250,000 worth of the above
indebtedness under the previous notes to shares of the Company's Series B
Convertible Preferred Stock on August 23, 1999.
The Company owes Scott Portis $60,000.00 for loans made to the Company.
Robert Frist, Jr. serves on the Board of Directors of Passport Health
Communications. This firm does not directly compete with the Company, but it
does do business in the Internet healthcare information industry.
2.16 EMPLOYEES; EMPLOYEE COMPENSATION.
The Company and Robert A Frist, Jr. have executed an Executive Employment
Agreement dated April 21, 1999.
<PAGE> 1
EXHIBIT 10.4
HEALTHSTREAM INC.
1994 EMPLOYEE STOCK OPTION PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the HealthStream, Inc. 1994 Employee Stock Option Plan
(the "Plan") is to enable HealthStream, Inc. (the "Corporation") to attract,
retain and reward key employees of and consultants to the Corporation, and
strengthen the mutuality of interests between such key employees, consultants
and the Corporation's stockholders, by offering such key employees and
consultants performance-based stock incentives. The creation of the Plan shall
not diminish or prejudice other compensation programs approved from time to time
by the Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Board" means the Board of Directors of the Corporation.
B. "Common Stock" means the Corporation's Common Stock, no par value.
C. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
D. "Corporation" means HealthStream, Inc., a corporation organized
under the laws of the State of Tennessee or any successor corporation.
E. "Disability" means disability as determined under the Corporation's
long-term disability insurance policy or as otherwise determined by the Board
from time to time.
F. "Early Retirement" means retirement, for purposes of this Plan with
the express consent of the Corporation at or before the time of such retirement,
from active employment with the Corporation prior to age 65, in accordance with
any applicable early retirement policy of the Corporation then in effect.
G. "Fair Market Value" means such value as the Committee in good faith
deems appropriate without regard to any restriction other than a restriction
which, by its terms, will never lapse.
H. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
I. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
J. "Normal Retirement" means retirement from active employment with the
Corporation on or after age 65.
K. "Plan" means this HealthStream, Inc. 1994 Employee Stock Option
Plan, as hereinafter amended from time to time.
<PAGE> 2
L. "Retirement" means Normal or Early Retirement.
M. "Stock" means the Common Stock.
N. "Stock Option" or "Option" means any option to purchase shares of
Stock granted pursuant to Section 5 below.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board or a committee thereof
appointed by the Board.
The Board or any committee appointed thereby shall have authority to
grant Stock Options, pursuant to the terms of the Plan, to officers, other key
employees and consultants eligible under Section 4.
In particular, the Board or any committee appointed thereby shall have
the authority, consistent with the terms of the Plan:
(a) to select the officers, directors and other key employees
of and consultants to the Corporation to whom Stock Options may from
time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock
Options and/or Non-Qualified Stock Options, or any combination thereof,
are to be granted hereunder to one or more eligible employees;
(c) to determine the number of shares to be covered by each
such award granted hereunder; and
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including,
but not limited to, the share price and any restriction or limitation,
or any vesting acceleration or waiver of forfeiture restrictions
regarding any Stock Option or other award and/or the shares of Stock
relating thereto, based in each case on such factors as the Board shall
determine, in its sole discretion).
The Board shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Board pursuant to the provisions of the Plan
shall be made in the Board's sole discretion and shall be final and binding on
all persons, including the Corporation and Plan participants.
2
<PAGE> 3
SECTION 3. SHARES OF STOCK SUBJECT TO PLAN.
The aggregate number of shares of Stock reserved and available for
distribution under the Plan shall be 2,000,000 shares.
In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, Stock dividend, Stock split or
other change in corporate structure affecting the Stock, an appropriate
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan, as may be determined to be appropriate by
the Board, in its sole discretion, provided that the number of shares subject to
any award shall always be a whole number.
SECTION 4. ELIGIBILITY.
Officers, directors and other key employees of and consultants to the
Corporation who are responsible for or contribute to the management, growth
and/or profitability of the business of the Corporation are eligible to be
granted awards under the Plan.
SECTION 5. STOCK OPTIONS.
Any Stock Option granted under the Plan shall be in such form as the
Board may from time to time approve. Stock Options granted under the Plan may be
of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options.
Incentive Stock Options may be granted only to individuals who are employees of
the Corporation.
The Board shall have the authority to grant to any optionee (subject to
the limitation set forth in the paragraph above) Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board shall deem desirable.
(a) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Board at
the time of grant but shall be not less than 100% (or, in the case of
any employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation or of
any of its subsidiary or parent corporations, not less than 110%) of
the Fair Market Value of the Stock at grant, in the case of Incentive
Stock Options, and not less than 50% of the Fair Market Value of the
Stock at grant, in the case of Non-Qualified Stock Options.
(b) Option Term. The term of each Stock Option shall be fixed
by the Board, but no Incentive Stock Option shall be exercisable more
than ten years (or, in the case of an employee who owns stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation or any of its subsidiary or parent
corporations, more than five years) after the date the Option is
granted.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Board at or after grant. The
3
<PAGE> 4
Board may provide that a Stock Option shall vest over a period of
future service at a rate specified at the time of grant, or that the
Stock Option is exercisable only in installments. If the Board
provides, in its sole discretion, that any Stock Option is exercisable
only in installments, the Board may waive such installment exercise
provisions at any time at or after grant in whole or in part, based on
such factors as the Board shall determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise restrictions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Corporation specifying the
number of shares to be purchased.
Such notice shall be accompanied by payment in full of the
purchase price, either by check, note or such other instrument as the
Board may accept. As determined by the Board, in its sole discretion,
at or (except in the case of an Incentive Stock Option) after grant.
No shares of Stock shall be issued until full payment therefor
has been made. An optionee shall generally have the rights to dividends
or other rights of a stockholder with respect to shares subject to the
Option when the optionee has given written notice of exercise, has paid
in full for such shares, and, if requested, has given the
representation described in Section 8(a).
(e) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable,
during the optionee's lifetime, only by the optionee.
(f) Bonus for Taxes. In the case of a Non-Qualified Stock
Option, the Board in its discretion may award at the time of grant or
thereafter the right to receive upon exercise of such Stock Option a
cash bonus calculated to pay part or all of the Federal and State, if
any, income tax incurred by the optionee upon such exercise.
(g) Termination by Death. Subject to Section 5(k), if an
optionee's employment by the Corporation terminates by reason of death,
any Stock Option held by such optionee shall thereupon terminate.
(h) Termination by Reason of Disability. Subject to Section
5(k), if an optionee's employment by the Corporation terminates by
reason of Disability, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Board may
determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Board), for a period of three months from the date
of such termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(i) Termination by Reason of Retirement. Subject to Section
5(k), if an optionee's employment by the Corporation terminates by
reason of Normal or Early Retirement, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of such Retirement or (except in the case
of an Incentive Stock Option) on such accelerated basis as the Board
may determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Board), for a period of three months (or such
shorter period as the Board may
4
<PAGE> 5
specify at grant) from the date of such termination of employment or
the expiration of the stated term of such Stock Option, whichever
period is the shorter.
(j) Other Termination. Unless otherwise determined by the
Board (or pursuant to procedures established by the Board) at or
(except in the case of an Incentive Stock Option) after grant, if an
optionee's employment by the Corporation is involuntarily terminated
for any reason other than death, Disability or Normal or Early
Retirement, the Stock Option shall thereupon terminate, except that
such Stock Option may be exercised, to the extent otherwise then
exercisable, for the lesser of three months or the balance of such
Stock Option's term if the involuntary termination is without Cause.
For purposes of this Plan, "Cause" means (i) a felony conviction of a
participant or the failure of a participant to contest prosecution for
a felony, or (ii) a participant's willful misconduct or dishonesty,
which is directly and materially harmful to the business or reputation
of the Corporation. If an optionee voluntarily terminates employment
with the Corporation (except for Disability, Normal or Early
Retirement), the Stock Option shall thereupon terminate; provided,
however, that the Board at grant or (except in the case of an Incentive
Stock Option) thereafter may extend the exercise period in this
situation for the lesser of three months or the balance of such Stock
Option's term.
(k) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as
to disqualify the Plan under Section 422 of the Code, or, without the
consent of the optionee(s) affected, to disqualify any Incentive Stock
Option under such Section 422.
No Incentive Stock Option shall be granted to any participant
under the Plan if such grant would cause the aggregate Fair Market
Value (as of the date the Incentive Stock Option is granted) of the
Stock with respect to which all Incentive Stock Options issued after
December 31, 1986 are exercisable for the first time by such
participant during any calendar year (under all such plans of the
Company and any Subsidiary) to exceed $100,000.
To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement:
(i) if (x) a participant's employment is
terminated by reason of death, Disability or Retirement and
(y) the portion of any Incentive Stock Option that is
otherwise exercisable during the post-termination period
specified under Section 5(g), (h) or (i), applied without
regard to the $100,000 limitation contained in Section 422(d)
of the Code, is greater than the portion of such option that
is immediately exercisable as an "incentive stock option"
during such post-termination period under Section 422, such
excess shall be treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option
is accelerated by reason of a Change in Control, any portion
of such option that is not exercisable as an Incentive Stock
Option by reason of the $100,000 limitation contained in
Section 422(d) of the Code shall be treated as a Non-Qualified
Stock Option.
5
<PAGE> 6
SECTION 6. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Stock Option, theretofore granted, without the
optionee's or participant's consent or which, without the approval of the
Corporation's stockholders, would:
(a) except as expressly provided in this Plan, increase the
total number of shares reserved for the purpose of the Plan;
(b) change the pricing terms of Section 5(a);
(c) change the employees or class of employees eligible to
participate in the Plan; or
(d) extend the term under Section 10 of the Plan.
The Board may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Board may also substitute new Stock Options for previously
granted Stock Options (on a one for one or other basis), including previously
granted Stock Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 7. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Corporation, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Board may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder; provided, however, that, unless the Board otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 8. GENERAL PROVISIONS.
(a) The Board may require each person purchasing shares pursuant to a
Stock Option to represent to and agree with the Corporation in writing that the
optionee or participant is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the Board
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Board may deem advisable under the rules, regulations, and
other requirements of the Commission and any applicable Federal or state
securities law,
6
<PAGE> 7
and the Board may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Corporation any right to continued employment with the Corporation, nor shall it
interfere in any way with the right of the Corporation to terminate the
employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Corporation, or make arrangements satisfactory to the Board regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount.
(e) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Tennessee.
SECTION 9. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of April 15, 1994.
SECTION 10. TERM OF PLAN.
No Stock Option shall be granted pursuant to the Plan on or after the
tenth anniversary of the effective date, but awards granted prior to such tenth
anniversary may be extended beyond that date.
7
<PAGE> 1
EXHIBIT 10.5
HealthStream, Inc.
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the HealthStream, Inc. 1999 Stock Incentive Plan (the
"Plan") is to enable HealthStream, Inc. (the "Corporation") to attract, retain
and reward key employees of and consultants to the Corporation and its
Subsidiaries and Affiliates, and directors who are not also employees of the
Corporation, and to strengthen the mutuality of interests between such key
employees, consultants, and directors by awarding such key employees,
consultants, and directors performance-based stock incentives and/or other
equity interests or equity-based incentives in the Corporation, as well as
performance-based incentives payable in cash. The creation of the Plan shall not
diminish or prejudice other compensation programs approved from time to time by
the Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Affiliate" means any entity other than the Corporation and its
Subsidiaries that is designated by the Board as a participating employer under
the Plan, provided that the Corporation directly or indirectly owns at least 20%
of the combined voting power of all classes of stock of such entity or at least
20% of the ownership interests in such entity.
B. "Board" means the Board of Directors of the Corporation.
C. "Cause" has the meaning provided in Section 5(j) of the Plan.
D. "Change in Control" has the meaning provided in Section 10(b) of
the Plan.
E. "Change in Control Price" has the meaning provided in Section 10(d)
of the Plan.
F. "Common Stock" means the Corporation's Common Stock, no par value
per share.
G. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
H. "Committee" means the Committee referred to in Section 2 of the
Plan.
I. "Corporation" means HealthStream, Inc., a corporation organized
under the laws of the State of Tennessee or any successor corporation.
J. "Disability" means disability as determined under the Corporation's
insurance plans.
<PAGE> 2
K. "Early Retirement" means retirement, for purposes of this Plan with
the express consent of the Corporation at or before the time of such retirement,
from active employment with the Corporation and any Subsidiary or Affiliate
prior to age 65, in accordance with any applicable early retirement policy of
the Corporation then in effect or as may be approved by the Committee.
L. "Effective Date" has the meaning provided in Section 14 of the Plan.
M. "Equity Issuance" means an issuance of Common Stock by the
Corporation following the Effective Date of this Plan in connection with a
public or private offering, including in connection with an acquisition, merger
or similar transaction, but excluding issuances of Common Stock under this Plan
or in any other compensatory transaction with an officer, employee, or director
of, or consultant to, the Corporation or its Subsidiaries or Affiliates.
N. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
O. "Fair Market Value" means with respect to the Common Stock, as of
any given date or dates, unless otherwise determined by the Committee in good
faith, the reported closing price of a share of Common Stock on Nasdaq or such
other market or exchange as is the principal trading market for the Common
Stock, or, if no such sale of a share of Common Stock is reported on Nasdaq or
other exchange or principal trading market on such date, the fair market value
of a share of Common Stock as determined by the Committee in good faith.
P. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
Q. "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include
adoptive relationships.
R. "Nasdaq" means The Nasdaq National Stock Market.
S. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under
the Exchange Act and an outside director within the meaning of Treasury
Regulation Sec. 162-27(e)(3) promulgated under the Code.
T. "Non-Qualified Stock Option" means any stock option that is not an
Incentive Stock Option.
U. "Normal Retirement" means retirement from active employment with the
Corporation and any Subsidiary or Affiliate on or after age 65.
2
<PAGE> 3
V. "Other Stock-Based Award" means an award under Section 8 below that
is valued in whole or in part by reference to, or is otherwise based on, the
Common Stock.
W. "Outside Director" means a member of the Board who is not an officer
or employee of the Corporation or any Subsidiary or Affiliate of the
Corporation.
X. "Outside Director Option" means an award to an Outside Director
under Section 9 below.
Y. "Plan" means this HealthStream, Inc. 1999 Stock Incentive Plan, as
amended from time to time.
Z. "Restricted Stock" means an award of shares of Common Stock that is
subject to restrictions under Section 7 of the Plan.
AA. "Restriction Period" has the meaning provided in Section 7 of the
Plan.
BB. "Retirement" means Normal or Early Retirement.
CC. "Section 162(m) Maximum" has the meaning provided in Section 3(a)
hereof.
DD. "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 below to surrender to the Corporation all (or a portion)
of a Stock Option in exchange for an amount equal to the difference between (i)
the Fair Market Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Common Stock covered by such Stock
Option (or such portion thereof), subject, where applicable, to the pricing
provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of such
Stock Option (or such portion thereof).
EE. "Stock Option" or "Option" means any option to purchase shares of
Common Stock (including Restricted Stock, if the Committee so determines)
granted pursuant to Section 5 below.
FF. "Subsidiary" means any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. The functions of the Committee specified in the
Plan may be exercised by an existing Committee of the Board composed exclusively
of Non-Employee Directors. The initial Committee shall be the
3
<PAGE> 4
Compensation Committee of the Board. In the event there are not at least two
Non-Employee Directors on the Board, the Plan shall be administered by the Board
and all references herein to the Committee shall refer to the Board.
The Committee shall have authority to grant, pursuant to the terms of
the Plan, to officers, other key employees and consultants eligible under
Section 4: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted
Stock, and/or (iv) Other Stock-Based Awards.
In particular, the Committee, or the Board, as the case may be, shall
have the authority, consistent with the terms of the Plan:
(a) to select the officers, key employees of and consultants
to the Corporation and its Subsidiaries and Affiliates to whom Stock
Options, Stock Appreciation Rights, Restricted Stock, and/or Other
Stock-Based Awards may from time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock, and/or Other Stock-Based Awards, or any combination
thereof, are to be granted hereunder to one or more eligible persons;
(c) to determine the number of shares to be covered by each
such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including,
but not limited to, the share price and any restriction or limitation,
or any vesting acceleration or waiver of forfeiture restrictions
regarding any Stock Option or other award and/or the shares of Common
Stock relating thereto, based in each case on such factors as the
Committee shall determine, in its sole discretion); and to amend or
waive any such terms and conditions to the extent permitted by Section
11 hereof;
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash or Restricted Stock under Section 5(m),
as applicable, instead of Common Stock;
(f) to determine whether, to what extent, and under what
circumstances Option grants and/or other awards under the Plan are to
be made, and operate, on a tandem basis vis-a-vis other awards under
the Plan and/or cash awards made outside of the Plan;
(g) to determine whether, to what extent, and under what
circumstances shares of Common Stock and other amounts payable with
respect to an award under this Plan shall be deferred either
automatically or at the election of the participant (including
providing for and
4
<PAGE> 5
determining the amount (if any) of any deemed earnings on any deferred
amount during any deferral period);
(h) to determine whether to require payment of tax withholding
requirements in shares of Common Stock subject to the award; and
(i) to impose any holding period required to satisfy Section
16 under the Exchange Act.
The Committee shall have the authority to adopt, alter, and repeal such
rules, guidelines, and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan; provided, however, that, to
the extent that this Plan otherwise requires the approval of the Board or the
shareholders of the Corporation, all decisions of the Committee shall be subject
to such Board or shareholder approval. Subject to the foregoing, all decisions
made by the Committee pursuant to the provisions of the Plan shall be made in
the Committee's sole discretion and shall be final and binding on all persons,
including the Corporation and Plan participants. Notwithstanding the foregoing,
the Committee shall have no authority to determine terms or conditions of awards
to Outside Directors, which shall be governed solely by Section 9 hereof.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, the aggregate number of shares of Common
Stock that may be issued under the Plan shall be ___________ shares. The shares
of Common Stock issuable under the Plan may consist, in whole or in part, of
authorized and unissued shares or treasury shares. No officer of the Corporation
or other person whose compensation may be subject to the limitations on
deductibility under Section 162(m) of the Code shall be eligible to receive
awards pursuant to this Plan relating to in excess of 200,000 shares of Common
Stock in any fiscal year (the "Section 162(m) Maximum").
(b) If any shares of Common Stock that have been optioned cease to be
subject to a Stock Option, or if any shares of Common Stock that are subject to
any Restricted Stock or Other Stock-Based Award granted hereunder are forfeited
prior to the payment of any dividends, if applicable, with respect to such
shares of Common Stock, or any such award otherwise terminates without a payment
being made to the participant in the form of Common Stock, such shares shall
again be available for distribution in connection with future awards under the
Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure affecting the Common Stock, an appropriate
substitution or adjustment shall be made in the maximum number of shares that
may be awarded under the Plan, in the number and option price
5
<PAGE> 6
of shares subject to outstanding Options granted under the Plan, in the number
of shares underlying Outside Director Options to be granted under Section 9
hereof, the Section 162(m) Maximum and in the number of shares subject to other
outstanding awards granted under the Plan as may be determined to be appropriate
by the Committee, in its sole discretion, provided that the number of shares
subject to any award shall always be a whole number. An adjusted option price
shall also be used to determine the amount payable by the Corporation upon the
exercise of any Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Officers, other key employees and Outside Directors of and consultants
to the Corporation and its Subsidiaries and Affiliates who are responsible for
or contribute to the management, growth and/or profitability of the business of
the Corporation and/or its Subsidiaries and Affiliates are eligible to be
granted awards under the Plan. Outside Directors are eligible to receive awards
pursuant to Section 9 and not pursuant to any other provisions of the Plan.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with
other awards granted under the Plan and/or cash awards made outside of the Plan.
Any Stock Option granted under the Plan shall be in such form as the Committee
may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Corporation or any
Subsidiary of the Corporation.
The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
Options granted to officers, key employees, Outside Directors and
consultants under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee
at the time of grant but shall be not less than 100% (or, in the case
of any employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation or of
any of its Subsidiaries, not less than 110%) of the Fair Market Value
of the Common Stock at grant, in the case of Incentive Stock Options,
and not less than 85% of the Fair Market Value of the Common Stock at
grant, in the case of Non-Qualified Stock Options.
6
<PAGE> 7
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Incentive Stock Option shall be exercisable
more than ten years (or, in the case of an employee who owns stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation or any of its Subsidiaries or
parent corporations, more than five years) after the date the Option is
granted.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant. The Committee may
provide that a Stock Option shall vest over a period of future service
at a rate specified at the time of grant, or that the Stock Option is
exercisable only in installments. If the Committee provides, in its
sole discretion, that any Stock Option is exercisable only in
installments, the Committee may waive such installment exercise
provisions at any time at or after grant, in whole or in part, based on
such factors as the Committee shall determine in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise restrictions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Corporation specifying the
number of shares to be purchased. Such notice shall be accompanied by
payment in full of the purchase price, either by check, note, or such
other instrument as the Committee may accept. As determined by the
Committee, in its sole discretion, at or (except in the case of an
Incentive Stock Option) after grant, payment in full or in part may
also be made in the form of shares of Common Stock already owned by the
optionee or, in the case of a Non-Qualified Stock Option, shares of
Restricted Stock or shares subject to such Option or another award
hereunder (in each case valued at the Fair Market Value of the Common
Stock on the date the Option is exercised). If payment of the exercise
price is made in part or in full with Common Stock, the Committee may
award to the employee a new Stock Option to replace the Common Stock
which was surrendered. If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of
Restricted Stock, such Restricted Stock (and any replacement shares
relating thereto) shall remain (or be) restricted in accordance with
the original terms of the Restricted Stock award in question, and any
additional Common Stock received upon the exercise shall be subject to
the same forfeiture restrictions, unless otherwise determined by the
Committee, in its sole discretion, at or after grant. No shares of
Common Stock shall be issued until full payment therefor has been made.
An optionee shall generally have the rights to dividends or other
rights of a shareholder with respect to shares subject to the Option
when the optionee has given written notice of exercise, has paid in
full for such shares, and, if requested, has given the representation
described in Section 13(a).
(e) Transferability of Options. No Non-Qualified Stock Option
shall be transferable by the optionee without the prior written consent
of the Committee other than (i) transfers by the Optionee to a member
of his or her Immediate Family or a trust for the benefit of the
optionee or a member of his or her Immediate Family, or (ii) transfers
by will
7
<PAGE> 8
or by the laws of descent and distribution. No Incentive Stock Option
shall be transferable by the optionee otherwise than by will or by the
laws of descent and distribution and all Incentive Stock Options shall
be exercisable, during the optionee's lifetime, only by the optionee.
(f) Bonus for Taxes. In the case of a Non-Qualified Stock
Option or an optionee who elects to make a disqualifying disposition
(as defined in Section 422(a)(1) of the Code) of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option, the Committee in
its discretion may award at the time of grant or thereafter the right
to receive upon exercise of such Stock Option a cash bonus calculated
to pay part or all of the federal and state, if any, income tax
incurred by the optionee upon such exercise.
(g) Termination by Death. Subject to Section 5(k), if an
optionee's employment by the Corporation and any Subsidiary or (except
in the case of an Incentive Stock Option) Affiliate terminates by
reason of death, any Stock Option held by such optionee may thereafter
be exercised, to the extent such option was exercisable at the time of
death or (except in the case of an Incentive Stock Option) on such
accelerated basis as the Committee may determine at or after grant (or
except in the case of an Incentive Stock Option, as may be determined
in accordance with procedures established by the Committee) by the
legal representative of the estate or by the legatee of the optionee
under the will of the optionee, for a period of one year (or such other
period as the Committee may specify at or after grant) from the date of
such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) Termination by Reason of Disability. Subject to Section
5(k), if an optionee's employment by the Corporation and any Subsidiary
or (except in the case of an Incentive Stock Option) Affiliate
terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may
determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (i) three years (or such
other period as the Committee may specify at or after grant) from the
date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter, in
the case of a Non-Qualified Stock Option and (ii) one year from the
date of termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is shorter, in the case of
an Incentive Stock Option; provided however, that, if the optionee dies
within the period specified in (i) above (or other such period as the
Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of
death for a period of twelve months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever
period is shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the
8
<PAGE> 9
expiration of the exercise period applicable to Incentive Stock
Options, but before the expiration of any period that would apply if
such Stock Option were a Non-Qualified Stock Option, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
(i) Termination by Reason of Retirement. Subject to Section
5(k), if an optionee's employment by the Corporation and any Subsidiary
or (except in the case of an Incentive Stock Option) Affiliate
terminates by reason of Normal or Early Retirement, any Stock Option
held by such optionee may thereafter be exercised by the optionee, to
the extent it was exercisable at the time of such Retirement or (except
in the case of an Incentive Stock Option) on such accelerated basis as
the Committee may determine at or after grant (or, except in the case
of an Incentive Stock Option, as may be determined in accordance with
procedures established by the Committee), for a period of (i) three
years (or such other period as the Committee may specify at or after
grant) from the date of such termination of employment or the
expiration of the stated term of such Stock Option, whichever period is
the shorter, in the case of a Non-Qualified Stock Option and (ii) three
months from the date of such termination of employment or the
expiration of the stated term of such Stock Option, whichever period is
the shorter, in the event of an Incentive Stock Option; provided
however, that, if the optionee dies within the period specified in (i)
above (or other such period as the Committee shall specify at or after
grant), any unexercised Non-Qualified Stock Option held by such
optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of twelve months from the
date of such death or until the expiration of the stated term of such
Stock Option, whichever period is shorter. In the event of termination
of employment by reason of Retirement, if an Incentive Stock Option is
exercised after the expiration of the exercise period applicable to
Incentive Stock Options, but before the expiration of the period that
would apply if such Stock Option were a Non-Qualified Stock Option, the
option will thereafter be treated as a Non-Qualified Stock Option.
(j) Other Termination. Subject to Section 5(k), unless
otherwise determined by the Committee (or pursuant to procedures
established by the Committee) at or (except in the case of an Incentive
Stock Option) after grant, if an optionee's employment by the
Corporation and any Subsidiary or (except in the case of an Incentive
Stock Option) Affiliate is involuntarily terminated for any reason
other than death, Disability or Normal or Early Retirement, or if
optionee voluntarily terminates employment, the Stock Option shall
thereupon terminate, except that such Stock Option may be exercised, to
the extent otherwise then exercisable, for the lesser of three months
or the balance of such Stock Option's term if the involuntary
termination is without Cause. For purposes of this Plan, "Cause" means
(i) a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or (ii) a
participant's willful misconduct or dishonesty, which is directly and
materially harmful to the business or reputation of the Corporation or
any Subsidiary or Affiliate. If an optionee voluntarily terminates
employment with the Corporation and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate (except for Disability,
Normal or Early Retirement), the Stock Option shall thereupon
terminate;
9
<PAGE> 10
provided, however, that the Committee at grant or (except in the case
of an Incentive Stock Option) thereafter may extend the exercise period
in this situation for the lesser of three months or the balance of such
Stock Option's term.
(k) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as
to disqualify the Plan under Section 422 of the Code, or, without the
consent of the optionee(s) affected, to disqualify any Incentive Stock
Option under such Section 422. No Incentive Stock Option shall be
granted to any participant under the Plan if such grant would cause the
aggregate Fair Market Value (as of the date the Incentive Stock Option
is granted) of the Common Stock with respect to which all Incentive
Stock Options are exercisable for the first time by such participant
during any calendar year (under all such plans of the Company and any
Subsidiary) to exceed $100,000. To the extent permitted under Section
422 of the Code or the applicable regulations thereunder or any
applicable Internal Revenue Service pronouncement:
(i) if (x) a participant's employment is terminated by
reason of death, Disability, or Retirement and (y) the
portion of any Incentive Stock Option that is otherwise
exercisable during the post-termination period specified
under Section 5(g), (h) or (i), applied without regard to
the $100,000 limitation contained in Section 422(d) of the
Code, is greater than the portion of such Option that is
immediately exercisable as an "Incentive Stock Option"
during such post-termination period under Section 422, such
excess shall be treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control, any portion
of such Option that is not exercisable as an Incentive Stock
Option by reason of the $100,000 limitation contained in
Section 422(d) of the Code shall be treated as a Non-Qualified
Stock Option.
(l) Buyout Provisions. The Committee may at any time offer to
buy out for a payment in cash, Common Stock, or Restricted Stock an
Option previously granted, based on such terms and conditions as the
Committee shall establish and communicate to the optionee at the time
that such offer is made.
(m) Settlement Provisions. If the option agreement so provides
at grant or (except in the case of an Incentive Stock Option) is
amended after grant and prior to exercise to so provide (with the
optionee's consent), the Committee may require that all or part of the
shares to be issued with respect to the spread value of an exercised
Option take the form of Restricted Stock, which shall be valued on the
date of exercise on the basis of the Fair Market Value (as determined
by the Committee) of such Restricted Stock determined without regard
to the forfeiture restrictions involved.
10
<PAGE> 11
(n) Performance and Other Conditions. The Committee may
condition the exercise of any Option upon the attainment of specified
performance goals or other factors as the Committee may determine, in
its sole discretion. Unless specifically provided in the option
agreement, any such conditional Option shall vest six months prior to
its expiration if the conditions to exercise have not theretofore been
satisfied.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Grant and Exercise. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option granted
under the Plan. In the case of a Non-Qualified Stock Option, such
rights may be granted either at or after the time of the grant of such
Stock Option. In the case of an Incentive Stock Option, such rights may
be granted only at the time of the grant of such Stock Option. A Stock
Appreciation Right or applicable portion thereof granted with respect
to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject
to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number
of shares covered by a related Stock Option. A Stock Appreciation Right
may be exercised by an optionee, subject to Section 6(b), in accordance
with the procedures established by the Committee for such purpose. Upon
such exercise, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock Options
relating to exercised Stock Appreciation Rights shall no longer be
exercisable to the extent that the related Stock Appreciation Rights
have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the
provisions of the Plan, as shall be determined from time to time by the
Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options
to which they relate shall be exercisable in accordance with
the provisions of Section 5 and this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right,
an optionee shall be entitled to receive an amount in cash
and/or shares of Common Stock equal in value to the excess of
the Fair Market Value of one share of Common Stock over the
option price per share specified in the related Stock Option
multiplied by the number of shares in respect of which the
Stock Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of payment.
When payment is to be made in shares, the number of shares to
be paid shall be calculated on the basis of the Fair Market
Value of the shares on the date of exercise. When payment is
to be made in cash, such amount shall be calculated on the
basis of the Fair Market Value of the Common Stock on the date
of exercise.
11
<PAGE> 12
(iii) Stock Appreciation Rights shall be transferable
only when and to the extent that the underlying Stock Option
would be transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right,
the Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in
Section 3 of the Plan on the number of shares of Common Stock
to be issued under the Plan.
(v) The Committee, in its sole discretion, may also
provide that, in the event of a Change in Control and/or a
Potential Change in Control, the amount to be paid upon the
exercise of a Stock Appreciation Right shall be based on the
Change in Control Price, subject to such terms and conditions
as the Committee may specify at grant.
(vi) The Committee may condition the exercise of any
Stock Appreciation Right upon the attainment of specified
performance goals or other factors as the Committee may
determine, in its sole discretion.
SECTION 7. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued
either alone, in addition to, or in tandem with other awards granted
under the Plan and/or cash awards made outside the Plan. The Committee
shall determine the eligible persons to whom, and the time or times at
which, grants of Restricted Stock will be made, the number of shares of
Restricted Stock to be awarded to any person, the price (if any) to be
paid by the recipient of Restricted Stock (subject to Section 7(b)),
the time or times within which such awards may be subject to
forfeiture, and the other terms, restrictions and conditions of the
awards in addition to those set forth in Section 7(c). The Committee
may condition the grant of Restricted Stock upon the attainment of
specified performance goals or such other factors as the Committee may
determine, in its sole discretion. The provisions of Restricted Stock
awards need not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a
Restricted Stock award shall not have any rights with respect to such
award, unless and until such recipient has executed an agreement
evidencing the award and has delivered a fully executed copy thereof to
the Corporation, and has otherwise complied with the applicable terms
and conditions of such award.
(i) The purchase price for shares of Restricted Stock
shall be established by the Committee and may be zero.
12
<PAGE> 13
(ii) Awards of Restricted Stock must be accepted within
a period of 60 days (or such shorter period as the
Committee may specify at grant) after the award date, by
executing a Restricted Stock Award Agreement and paying
whatever price (if any) is required under Section 7(b)(i).
(iii) Each participant receiving a Restricted Stock
award shall be issued a stock certificate in respect of such
shares of Restricted Stock. Such certificate shall be
registered in the name of such participant (or a transferee
permitted by Section 13(h) hereof), and shall bear an
appropriate legend referring to the terms, conditions, and
restrictions applicable to such award.
(iv) The Committee shall require that the stock
certificates evidencing such shares be held in custody by the
Corporation until the restrictions thereon shall have lapsed,
and that, as a condition of any Restricted Stock award, the
participant shall have delivered a stock power, endorsed in
blank, relating to the shares of Common Stock covered by such
award.
(c) Restrictions and Conditions. The shares of Restricted
Stock awarded pursuant to this Section 7 shall be subject to the
following restrictions and conditions:
(i) In accordance with the provisions of this Plan and
the award agreement, during a period set by the Committee
commencing with the date of such award (the "Restriction
Period"), the participant shall not be permitted to sell,
transfer, pledge, assign, or otherwise encumber shares of
Restricted Stock awarded under the Plan. Within these limits,
the Committee, in its sole discretion, may provide for the
lapse of such restrictions in installments and may accelerate
or waive such restrictions, in whole or in part, based on
service, performance, such other factors or criteria as the
Committee may determine in its sole discretion.
(ii) Except as provided in this paragraph (ii) and
Section 7(c)(i), the participant shall have, with respect to
the shares of Restricted Stock, all of the rights of a
shareholder of the Corporation, including the right to vote
the shares, and the right to receive any cash dividends. The
Committee, in its sole discretion, as determined at the time
of award, may permit or require the payment of cash dividends
to be deferred and, if the Committee so determines,
reinvested, subject to Section 14(e), in additional Restricted
Stock to the extent shares are available under Section 3, or
otherwise reinvested. Pursuant to Section 3 above, stock
dividends issued with respect to Restricted Stock shall be
treated as additional shares of Restricted Stock that are
subject to the same restrictions and other terms and
conditions that apply to the shares with respect to which such
dividends are issued. If the Committee so determines, the
award agreement may also impose restrictions on the right to
vote and the right to receive dividends.
13
<PAGE> 14
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a
participant's employment with the Corporation and any
Subsidiary or Affiliate for any reason during the Restriction
Period, all shares still subject to restriction will vest, or
be forfeited, in accordance with the terms and conditions
established by the Committee at or after grant.
(iv) If and when the Restriction Period expires without
a prior forfeiture of the Restricted Stock subject to such
Restriction Period, certificates for an appropriate number
of unrestricted shares shall be delivered to the participant
(or a transferee permitted by Section 13(h) hereof) promptly.
(d) Minimum Value Provisions. In order to better ensure that
award payments actually reflect the performance of the Corporation and
service of the participant, the Committee may provide, in its sole
discretion, for a tandem performance-based or other award designed to
guarantee a minimum value, payable in cash or Common Stock to the
recipient of a Restricted Stock award, subject to such performance,
future service, deferral, and other terms and conditions as may be
specified by the Committee.
SECTION 8. OTHER STOCK-BASED AWARDS.
(a) Administration. Other Stock-Based Awards, including,
without limitation, performance shares, convertible preferred stock,
convertible debentures, exchangeable securities and Common Stock awards
or options valued by reference to earnings per share or Subsidiary
performance, may be granted either alone, in addition to, or in tandem
with Stock Options, Stock Appreciation Rights, or Restricted Stock
granted under the Plan and cash awards made outside of the Plan;
provided that no such Other Stock-Based Awards may be granted in tandem
with Incentive Stock Options if that would cause such Stock Options not
to qualify as Incentive Stock Options pursuant to Section 422 of the
Code. Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at
which such awards shall be made, the number of shares of Common Stock
to be awarded pursuant to such awards, and all other conditions of the
awards. The Committee may also provide for the grant of Common Stock
upon the completion of a specified performance period. The provisions
of Other Stock-Based Awards need not be the same with respect to each
recipient.
(b) Terms and Conditions. Other Stock-Based Awards made
pursuant to this Section 8 shall be subject to the following terms and
conditions:
(i) Shares subject to awards under this Section 8 and
the award agreement referred to in Section 8(b)(v) below, may
not be sold, assigned, transferred, pledged, or otherwise
encumbered prior to the date on which the shares
14
<PAGE> 15
are issued, or, if later, the date on which any applicable
restriction, performance, or deferral period lapses.
(ii) Subject to the provisions of this Plan and the
award agreement and unless otherwise determined by the
Committee at grant, the recipient of an award under this
Section 8 shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or dividend
equivalents with respect to the number of shares covered by
the award, as determined at the time of the award by the
Committee, in its sole discretion, and the Committee may
provide that such amounts (if any) shall be deemed to have
been reinvested in additional shares of Common Stock or
otherwise reinvested.
(iii) Any award under Section 8 and any shares of Common
Stock covered by any such award shall vest or be forfeited to
the extent so provided in the award agreement, as determined
by the Committee in its sole discretion.
(iv) In the event of the participant's Retirement,
Disability, or death, or in cases of special circumstances,
the Committee may, in its sole discretion, waive in whole or
in part any or all of the remaining limitations imposed
hereunder (if any) with respect to any or all of an award
under this Section 8.
(v) Each award under this Section 8 shall be confirmed
by, and subject to the terms of, an agreement or other
instrument by the Corporation and the participant.
(vi) Common Stock (including securities convertible into
Common Stock) issued on a bonus basis under this Section 8
may be issued for no cash consideration. Common Stock
(including securities convertible into Common Stock) purchased
pursuant to a purchase right awarded under this Section 8
shall be priced at least 85% of the Fair Market Value of the
Common Stock on the date of grant.
SECTION 9. AWARDS TO OUTSIDE DIRECTORS.
(a) The provisions of this Section 9 shall apply only to
awards to Outside Directors in accordance with this Section 9. The
Committee shall have no authority to determine the timing of or the
terms or conditions of any award under this Section 9.
(b) At the date of the Corporation's initial public offering,
each person serving as an Outside Director on such date will receive a
non-qualified stock option to purchase ________ shares of Common Stock
at a per share exercise price equal to the initial public offering
price. Such option shall vest and become exercisable with respect to
all ________ shares immediately.
15
<PAGE> 16
(c) If any person who was not previously a member of the Board
is elected or appointed an Outside Director following the initial
public offering but prior to the date of the Annual Meeting of
Shareholders of the Corporation in the year 2000, such Outside Director
will receive a non-qualified stock option to purchase ________ shares
of Common Stock. The exercise price per share of each option granted
pursuant to this Section 9(c) shall equal the Fair Market Value per
share of Common Stock on the date of grant. Options granted under this
Section 9(c) shall vest and become exercisable in five equal annual
installments beginning on the first anniversary of the date of grant.
(d) On the date of each Annual Meeting of Shareholders of the
Corporation beginning with the Annual Meeting of Shareholders in 2000,
unless this Plan has been previously terminated, each Outside Director
who will continue as a director following such meeting will receive a
non-qualified stock option to purchase ________ shares of Common Stock.
The exercise price per share of each option granted pursuant to this
Section 9(d) shall equal the Fair Market Value per share of Common
Stock on the date of grant. Such option shall vest and become
exercisable with respect to all ________ shares immediately.
(e) No Outside Director Option shall be exercisable prior to
vesting. Each Outside Director Option shall expire, if unexercised, on
the tenth anniversary of the date of grant. The exercise price may be
paid in cash or in shares of Common Stock, including shares of Common
Stock subject to the Outside Director Option.
(f) Outside Director Options shall not be transferable without
the prior written consent of the Board other than (i) transfers by the
optionee to a member of his or her Immediate Family or a trust for the
benefit of the optionee or a member of his or her Immediate Family,
(ii) transfers by will or by the laws of descent and distribution, or
(iii) transfers by the optionee to a fund affiliated with the optionee.
(g) Grantees of Outside Director Options shall enter into a
stock option agreement with the Corporation setting forth the exercise
price and other terms as provided herein.
(h) Upon termination of an Outside Director's service as a
director of the Corporation, (i) all Outside Director Options
theretofore exercisable and held by such Outside Director will remain
vested and exercisable through the expiration date and (ii) all
remaining Outside Director Options held by such Outside Director will
become exercisable and vested and remain so through the expiration date
to the extent of any shares that would have become exercisable and
vested within a period of less than twelve months following the date of
termination of service. Any unvested Outside Director Options held by
the Outside Director on the date of termination of service will be
forfeited to the extent of any shares that would not have become vested
and exercisable until at least twelve months from the date of
termination of service. The Board may, in its sole discretion, elect to
accelerate
16
<PAGE> 17
the vesting of any Outside Director Options in connection with the
termination of service of any individual Outside Director.
(i) Outside Director Options shall be subject to Section 10.
The number of shares and the exercise price per share of each Outside
Director Option theretofore awarded shall be adjusted automatically in
the same manner as the number of shares and the exercise price for
Stock Options under Section 3(c) hereof at any time that Stock Options
are adjusted as provided in Section 3(c). The number of shares
underlying Outside Director Options to be awarded in the future shall
be adjusted automatically in the same manner as the number of shares
underlying outstanding Stock Options are adjusted under Section 3(c)
hereof at any time that Stock Options are adjusted under Section 3(c)
hereof.
(j) The Board, in its sole discretion, may determine to reduce
the size of any Outside Director Option prior to grant or to postpone
the vesting and exercisability of any Outside Director Option prior to
grant.
SECTION 10. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 10(b); or
(2) a "Potential Change in Control" as defined in Section
10(c), but only if and to the extent so determined by the
Committee or the Board at or after grant (subject to any
right of approval expressly reserved by the Committee or the
Board at the time of such determination),
(i) Subject to the limitations set forth below in this
Section 10(a), the following acceleration provisions shall
apply:
(a) Any Stock Appreciation Rights, any Stock Option or
Outside Director Option awarded under the Plan not
previously exercisable and vested shall become fully
exercisable and vested.
(b) The restrictions applicable to any Restricted
Stock and Other Stock-Based Awards, in each case to the
extent not already vested under the Plan, shall lapse and
such shares and awards shall be deemed fully vested.
(ii) Subject to the limitations set forth below in this
Section 10(a), the value of all outstanding Stock Options,
Stock Appreciation Rights, Restricted Stock, Outside Director
Options and Other Stock-Based Awards, in each case to the
extent vested, shall, unless otherwise determined by the Board
or by the Committee in its sole
17
<PAGE> 18
discretion prior to any Change in Control, be cashed out on
the basis of the "Change in Control Price" as defined in
Section 10(d) as of the date such Change in Control or such
Potential Change in Control is determined to have occurred or
such other date as the Board or Committee may determine prior
to the Change in Control.
(iii) The Board or the Committee may impose additional
conditions on the acceleration or valuation of any award in
the award agreement.
(b) Definition of Change in Control. For purposes of Section
10(a), a "Change in Control" means the happening of any of the
following:
(i) any person or entity, including a "group" as defined
in Section 13(d)(3) of the Exchange Act, other than the
Corporation or a wholly-owned subsidiary thereof or any
employee benefit plan of the Corporation or any of its
Subsidiaries, becomes the beneficial owner of the
Corporation's securities having 50% or more of the combined
voting power of the then outstanding securities of the
Corporation that may be cast for the election of directors of
the Corporation (other than as a result of an issuance of
securities initiated by the Corporation in the ordinary course
of business); or
(ii) as the result of, or in connection with, any cash
tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, less than a
majority of the combined voting power of the then outstanding
securities of the Corporation or any successor corporation or
entity entitled to vote generally in the election of the
directors of the Corporation or such other corporation or
entity after such transaction are held in the aggregate by the
holders of the Corporation's securities entitled to vote
generally in the election of directors of the Corporation
immediately prior to such transaction; or
(iii) during any period of two consecutive years,
individuals who at the beginning of any such period constitute
the Board cease for any reason to constitute at least a
majority thereof, unless the election, or the nomination for
election by the Corporation's shareholders, of each director
of the Corporation first elected during such period was
approved by a vote of at least two-thirds of the directors of
the Corporation then still in office who were directors of the
Corporation at the beginning of any such period.
(c) Definition of Potential Change in Control. For purposes of
Section 10(a), a "Potential Change in Control" means the happening of
any one of the following:
(i) The approval by shareholders of an agreement by the
Corporation, the consummation of which would result in a
Change in Control of the Corporation as defined in Section
10(b); or
18
<PAGE> 19
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the
Corporation or a Subsidiary or any Corporation employee
benefit plan (including any trustee of such plan acting as
such trustee)) of securities of the Corporation representing
5% or more of the combined voting power of the Corporation's
outstanding securities and the adoption by the Committee of a
resolution to the effect that a Potential Change in Control of
the Corporation has occurred for purposes of this Plan.
(d) Change in Control Price. For purposes of this Section 10,
"Change in Control Price" means the highest price per share paid in any
transaction reported on Nasdaq or such other exchange or market as is
the principal trading market for the Common Stock, or paid or offered
in any bona fide transaction related to a Potential or actual Change in
Control of the Corporation at any time during the 60 day period
immediately preceding the occurrence of the Change in Control (or,
where applicable, the occurrence of the Potential Change in Control
event), in each case as determined by the Committee except that, in the
case of Incentive Stock Options and Stock Appreciation Rights relating
to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such
Stock Appreciation Rights or, where applicable, the date on which a
cash out occurs under Section 10(a)(ii).
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter or discontinue the Plan;
provided, however, that, without the approval of the Corporation's shareholders,
no amendment or alteration may be made which would (a) increase the maximum
number of shares that may be issued under the Plan or increase the Section
162(m) Maximum, (b) change the provisions governing Incentive Stock Options
except as required or permitted under the provisions governing Incentive Stock
Options under the Code, (c) amend Section 9 hereof so as to increase the size of
any award or otherwise materially increase the benefits to Outside Directors
under Section 9 hereof, or (d) make any change for which applicable law or
regulatory authority (including the regulatory authority of Nasdaq or any other
market or exchange on which the Common Stock is traded) would require
shareholder approval or for which shareholder approval would be required to
secure full deductibility of compensation received under the Plan under Section
162(m) of the Code. No amendment, alteration, or discontinuation shall be made
which would impair the rights of an optionee or participant under a Stock
Option, Stock Appreciation Right, Restricted Stock, Other Stock-Based Award or
Outside Director Option theretofore granted, without the participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute
19
<PAGE> 20
new Stock Options for previously granted Stock Options (on a one for one or
other basis), including previously granted Stock Options having higher option
exercise prices. Solely for purposes of computing the Section 162(m) Maximum, if
any Stock Options or other awards previously granted to a participant are
canceled and new Stock Options or other awards having a lower exercise price or
other more favorable terms for the participant are substituted in their place,
both the initial Stock Options or other awards and the replacement Stock Options
or other awards will be deemed to be outstanding (although the canceled Stock
Options or other awards will not be exercisable or deemed outstanding for any
other purposes).
SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Corporation, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Common Stock or payments in lieu of or with
respect to awards hereunder; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements is consistent with the "unfunded" status of
the Plan.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares
pursuant to a Stock Option or other award under the Plan to represent
to and agree with the Corporation in writing that the optionee or
participant is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which
the Committee deems appropriate to reflect any restrictions on
transfer. All certificates for shares of Common Stock or other
securities delivered under the Plan shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the
Commission, any stock exchange upon which the Common Stock is then
listed, and any applicable Federal or state securities law, and the
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
specific cases.
(c) The adoption of the Plan shall not confer upon any
employee of the Corporation or any Subsidiary or Affiliate any right to
continued employment with the
20
<PAGE> 21
Corporation or a Subsidiary or Affiliate, as the case may be, nor shall
it interfere in any way with the right of the Corporation or a
Subsidiary or Affiliate to terminate the employment of any of its
employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income
tax purposes with respect to any award under the Plan, the participant
shall pay to the Corporation, or make arrangements satisfactory to the
Committee regarding the payment of, any Federal, state, or local taxes
of any kind required by law to be withheld with respect to such amount.
The Committee may require withholding obligations to be settled with
Common Stock, including Common Stock that is part of the award that
gives rise to the withholding requirement. The obligations of the
Corporation under the Plan shall be conditional on such payment or
arrangements and the Corporation and its Subsidiaries or Affiliates
shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the
participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan
awards) at the time of any dividend payment shall only be permissible
if sufficient shares of Common Stock are available under Section 3 for
such reinvestment (taking into account then outstanding Stock Options
and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the
State of Tennessee.
(g) The members of the Committee and the Board shall not be
liable to any employee or other person with respect to any
determination made hereunder in a manner that is not inconsistent with
their legal obligations as members of the Board. In addition to such
other rights of indemnification as they may have as directors or as
members of the Committee, the members of the Committee shall be
indemnified by the Corporation against the reasonable expenses,
including attorneys' fees actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken or failure to act under or in
connection with the Plan or any option granted thereunder, and against
all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the
Corporation) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which
it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the
performance of his duties; provided that within 60 days after
institution of any such action, suit or proceeding, the Committee
member shall in writing offer the Corporation the opportunity, at its
own expense, to handle and defend the same.
21
<PAGE> 22
(h) In addition to any other restrictions on transfer that may
be applicable under the terms of this Plan or the applicable award
agreement, no Stock Option, Stock Appreciation Right, Restricted Stock
award, or Other Stock-Based Award or other right issued under this Plan
is transferable by the participant without the prior written consent of
the Committee, or, in the case of an Outside Director, the Board, other
than (i) transfers by an optionee to a member of his or her Immediate
Family or a trust for the benefit of the optionee or a member of his or
her Immediate Family or (ii) transfers by will or by the laws of
descent and distribution. The designation of a beneficiary will not
constitute a transfer.
(i) The Committee may, at or after grant, condition the
receipt of any payment in respect of any award or the transfer of any
shares subject to an award on the satisfaction of a six-month holding
period, if such holding period is required for compliance with Section
16 under the Exchange Act.
SECTION 14. EFFECTIVE DATE OF PLAN.
The Plan shall be effective upon the date of effectiveness of the
Company's registration statement relating to its initial public offering (the
"Effective Date"), provided that it has been approved by the Board of the
Corporation and by a majority of the votes cast by the holders of the
Corporation's Common Stock.
SECTION 15. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock Award,
Other Stock-Based Award or Outside Director Option award shall be granted
pursuant to the Plan on or after the tenth anniversary of the Effective Date of
the Plan, but awards granted prior to such tenth anniversary may be extended
beyond that date.
22
<PAGE> 1
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into as of the _____ day of
__________, 1999, by and between HealthStream, Inc., a Tennessee corporation
(the "Company"), and the undersigned (the "Indemnitee").
RECITALS
WHEREAS, it is essential to the Company that it attract and retain as
directors the most capable persons available; and
WHEREAS, both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors of public
companies in the current environment; and
WHEREAS, the Indemnitee currently is serving as a director of the
Company, and the Company desires that the Indemnitee continue to serve in such
capacity. The Indemnitee is willing to continue to serve in such capacity if the
Indemnitee is adequately protected against the risks associated with such
service; and
WHEREAS, the Company and the Indemnitee have concluded that the
indemnities available under the Company's Charter, Bylaws and any insurance now
or hereafter in effect need to be supplemented to more fully protect the
Indemnitee against the risks associated with the Indemnitee's service to the
Company; and
WHEREAS, in recognition of Indemnitee's need for additional protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner, and in order to induce Indemnitee to
continue to provide services to the Company as a director thereof, the Company
wishes to provide in this Agreement for the indemnification of Indemnitee to the
fullest extent permitted by law and as set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing, the covenants
contained herein and Indemnitee's continued service to the Company, the Company
and Indemnitee, intending to be legally bound, hereby agree as follows:
Section 1. Definitions. The following terms, as used herein, shall
have the following respective meanings:
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or
<PAGE> 2
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings relative
to the foregoing.
"Change in Control" shall be deemed to have taken place if: (i) any
person or entity, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, other than the Company or a wholly-owned
subsidiary thereof or any employee benefit plan of the Company or any of its
subsidiaries, becomes the beneficial owner of the Company securities having 50%
or more of the combined voting power of the then outstanding securities of the
Company that may be cast for the election of directors of the Company (other
than as a result of an issuance of securities initiated by Company in the
ordinary course of business); or (ii) as the result of, or in connection with,
any cash tender or exchange offer, merger or other business combination, sale of
substantially all of the assets or contested election, or any combination of the
foregoing transactions less than a majority of the combined voting power of the
then-outstanding securities of the Company or any successor corporation or
entity entitled to vote generally in the election of the directors of the
Company or such other corporation or entity after such transaction is held in
the aggregate by the holders of the Company securities entitled to vote
generally in the election of directors of the Company immediately prior to such
transaction; or (iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by the Company's shareholders, of
each director of the Company first elected during such period was approved by a
vote of at least a majority of the directors of the Company then still in office
who were directors of the Company at the beginning of any such period.
"Claim" means (a) any threatened, pending or completed action, suit,
proceeding or arbitration or other alternative dispute resolution mechanism, or
(b) any inquiry, hearing or investigation, whether conducted by the Company or
any other Person, that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or arbitration or other
alternative dispute resolution mechanism, in each case whether civil, criminal,
administrative or other (whether or not the claims or allegations therein are
groundless, false or fraudulent) and includes, without limitation, those brought
by or in the name of the Company or any director or officer of the Company.
"Company Agent" means any director, officer, partner, employee, agent,
trustee or fiduciary of the Company, any Subsidiary or any Other Enterprise.
"Covered Event" means any event or occurrence, whether occurring prior
to or after the date of this Agreement, related to the fact that Indemnitee is
or was a Company Agent or related to anything done or not done by Indemnitee in
any such capacity, and includes, without limitation, any such event or
occurrence (a) arising from performance of the responsibilities, obligations or
duties imposed by ERISA or any similar applicable provisions of state or common
law, or (b) arising from any actual or proposed merger, consolidation or other
business combination involving the Company, any Subsidiary or any Other
Enterprise, including without limitation any sale or
2
<PAGE> 3
other transfer of all or substantially all of the business or assets of the
Company, any Subsidiary or any Other Enterprise.
"D&O Insurance" means the directors' and officers' liability insurance
described on Exhibit l to this Agreement and any replacement or substitute
policies issued by one or more reputable insurers providing in all respects
coverage at least comparable to and in the same amount as that provided under
the insurance described on Exhibit 1.
"Determination" means a determination made by (a) a majority vote of a
quorum of Disinterested Directors; (b) Independent Legal Counsel, in a written
opinion addressed to the Company and Indemnitee; (c) the shareholders of the
Company; or (d) a decision by a court of competent jurisdiction not subject to
further appeal.
"Disinterested Director" shall be a director of the Company who is not
or was not a party to the Claim giving rise to the subject matter of a
Determination.
"Expenses" includes attorneys' fees and all other costs, travel
expenses, fees of experts, transcript costs, filing fees, witness fees,
telephone charges, postage, copying costs, delivery service fees and other
expenses and obligations of any nature whatsoever paid or incurred in connection
with investigating, prosecuting or defending, being a witness in or
participating in (including on appeal), or preparing to prosecute or defend, be
a witness in or participate in any Claim, for which Indemnitee is or becomes
legally obligated to pay.
"Independent Legal Counsel" shall mean a law firm or a member of a law
firm that (a) neither is nor in the past five years has been retained to
represent in any material matter the Company, any Subsidiary, Indemnitee or any
other party to the Claim, (b) under applicable standards of professional conduct
then prevailing would not have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights to
indemnification under this Agreement and (c) is reasonably acceptable to the
Company and Indemnitee.
"Loss" means any amount which Indemnitee is legally obligated to pay as
a result of any Claim, including, without limitation (a) all judgments,
penalties and fines, and amounts paid or to be paid in settlement, (b) all
interest, assessments and other charges paid or payable in connection therewith
and (c) any federal, state, local or foreign taxes imposed (net of the value to
Indemnitee of any tax benefits resulting from tax deductions or otherwise as a
result of the actual or deemed receipt of any payments under this Agreement,
including the creation of the Trust).
"Other Enterprise" means any corporation (other than the Company or any
Subsidiary), partnership, joint venture, association, employee benefit plan,
trust or other enterprise or organization to which Indemnitee renders service at
the request of the Company or any Subsidiary.
3
<PAGE> 4
"Parent" shall have the meaning set forth in the regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as amended;
provided the term "Parent" shall not include the board of directors of a
corporation in its capacity as a board of directors, and provided further that
if the other party to any transaction referred to in Section 12.1.2 has no
Parent as so defined above, "Parent" shall mean such other party.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (or any subdivision, department, commission or agency thereof), and
includes without limitation any "person," as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended.
"Potential Change in Control" shall be deemed to have occurred if (a)
the Company enters into an agreement or arrangement the consummation of which
would result in the occurrence of a Change in Control, (b) any Person (including
the Company) publicly announces an intention to take or to consider taking
actions which if consummated would constitute a Change in Control or (c) the
Board of Directors of the Company adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
"Subsidiary" means any corporation of which more than 50% of the
outstanding stock having ordinary voting power to elect a majority of the board
of directors of such corporation is now or hereafter owned, directly or
indirectly, by the Company.
"Trust" has the meaning set forth in Section 9.2.
"Voting Securities" means any securities of the Company which vote
generally in the election of directors.
Section 2. Indemnification
2.1. General Indemnity Obligation.
2.1.1. Subject to the remaining provisions of this Agreement,
the Company hereby indemnifies and holds Indemnitee harmless for any Losses or
Expenses arising from any Claims relating to (or arising in whole or in part out
of) any Covered Event, including without limitation, any Claim the basis of
which is any actual or alleged breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or attempted by Indemnitee in
the capacity as a Company Agent at the time liability is incurred or at the time
the Claim is initiated.
2.1.2. The obligations of the Company under this Agreement
shall apply to the fullest extent authorized or permitted by the provisions of
applicable law, as presently in effect or as changed after the date of this
Agreement, whether by statute or judicial decision (but, in the case of any
subsequent change, only to the extent that such change permits the Company to
provide broader indemnification than permitted prior to giving effect thereto).
4
<PAGE> 5
2.1.3. Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company, unless the
Company has joined in or consented to the initiation of such Claim; provided,
the provisions of this Section 2.1.3 shall not apply (i) following a Change in
Control to Claims seeking enforcement of this Agreement, the Charter or Bylaws
of the Company or any other agreement now or hereafter in effect relating to
indemnification for Covered Events or (ii) absent a Change in Control, to Claims
seeking enforcement of this Agreement, the Charter or Bylaws of the Company or
any other agreement now or hereafter in effect relating to indemnification for
Covered Events, but only if the Indemnitee is ultimately determined to be
entitled to indemnification.
2.1.4. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the Losses
or Expenses paid with respect to a Claim but not, however, for the total amount
thereof, the Company shall nevertheless indemnify and hold Indemnitee harmless
against the portion thereof to which Indemnitee is entitled.
2.1.5. Notwithstanding any other provision of this Agreement,
to the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating to (or arising in whole or in part out of)
a Covered Event or in defense of any issue or matter therein, including
dismissal without prejudice, the Company shall indemnify and hold Indemnitee
harmless against all Expenses incurred in connection therewith.
2.2. Indemnification for Serving as Witness and Certain Other Claims.
Notwithstanding any other provision of this Agreement, the Company hereby
indemnifies and holds Indemnitee harmless for all Expenses in connection with
(a) the preparation to serve or service as a witness in any Claim in which
Indemnitee is not a party, if such actual or proposed service as a witness arose
by reason of Indemnitee having served as a Company Agent on or after the date of
this Agreement and (b) any Claim initiated by Indemnitee on or after the date of
this Agreement (i) for recovery under any directors' and officers' liability
insurance maintained by the Company or (ii) following a Change in Control, for
enforcement of the indemnification obligations of the Company under this
Agreement, the Charter or Bylaws of the Company or any other agreement now or
hereafter in effect relating to indemnification for Covered Events, regardless
of whether Indemnitee ultimately is determined to be entitled to such insurance
recovery or indemnification, as the case may be; or (iii) absent a Change in
Control for enforcement of this Agreement, the Charter or Bylaws of the Company
or any other agreement now or hereafter in effect relating to indemnification
for Covered Events, but only if the Indemnitee is ultimately determined to be
entitled to indemnification.
Section 3. Limitation on Indemnification.
3.1. Coverage Limitations. No indemnification is available pursuant to
the provisions of this Agreement:
5
<PAGE> 6
3.1.1. If such indemnification is not lawful;
3.1.2. If Indemnitee's conduct giving rise to the Claim with
respect to which indemnification is requested was not in good faith or involved
intentional misconduct or a knowing violation of law;
3.1.3. In respect of any Claim based upon any other proceeding
charging improper personal benefit to the Indemnitee in which the Indemnitee was
adjudged liable on the basis that personal benefit was improperly received by
the Indemnitee;
3.1.4. In respect of any Claim based upon or in connection
with a proceeding by or in the right of the Company in which the director was
adjudged liable to the Company;
3.1.5. In respect of any Claim for an accounting of profits
made from the purchase or sale by Indemnitee of securities of the Company within
the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended;
3.1.6. If Indemnitee's conduct giving rise to the Claim with
respect to which indemnification is requested constituted a breach of the duty
of loyalty to the corporation or its shareholders; or
3.1.7. In respect of any Claim based upon any violation of
Section 48-18-304 of the Tennessee Business Corporation Act, as amended.
3.2. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment otherwise due and payable to the extent
Indemnitee has otherwise actually received payment (whether under the Charter or
the Bylaws of the Company, the D&O Insurance or otherwise) of any amounts
otherwise due and payable under this Agreement.
Section 4. Payments and Determinations.
4.1. Advancement and Reimbursement of Expenses. If requested by
Indemnitee, the Company shall advance to Indemnitee, no later than 10 days
following any such request, any and all Expenses for which indemnification is
available under Section 2. In order to obtain such advancement or reimbursement,
the Indemnitee must also furnish to the Company a written affirmation of
Indemnitee's good faith belief that Indemnitee has acted in good faith and
reasonably believed that: (1) in the case of conduct in Indemnitee's official
capacity with the Company, that Indemnitee's conduct was in its best interest;
and (2) in all other cases, that Indemnitee's conduct was at least not opposed
to its best interests; and (3) in the case of any criminal proceeding,
Indemnitee had no reasonable cause to believe Indemnitee's conduct was unlawful.
In addition, Indemnitee must furnish to the Company a written undertaking,
executed personally or on Indemnitee's behalf, to repay the advance if it is
ultimately determined that Indemnitee is not entitled to indemnification. Upon
any Determination that Indemnitee is not
6
<PAGE> 7
permitted to be indemnified for any Expenses so advanced, Indemnitee hereby
agrees to reimburse the Company (or, as appropriate, any Trust established
pursuant to Section 9.2) for all such amounts previously paid. Such obligation
of reimbursement shall be unsecured and no interest shall be charged thereon.
4.2. Payment and Determination Procedures.
4.2.1. To obtain indemnification under this Agreement,
Indemnitee shall submit to the Company a written request, together with such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Company shall, promptly upon
receipt of such a request for indemnification, advise the Board of Directors in
writing that Indemnitee has requested indemnification.
4.2.2. Upon written request by Indemnitee for indemnification
pursuant to Section 4.2.1, a Determination with respect to Indemnitee's
entitlement thereto shall be made in the specific case (a) if a Change in
Control shall have occurred, as provided in Section 9.1; and (b) if a Change in
Control shall not have occurred, by (i) the Board of Directors by a majority
vote of a quorum of Disinterested Directors, (ii) Independent Legal Counsel, if
either (A) a quorum of Disinterested Directors is not obtainable or (B) a
majority vote of a quorum of Disinterested Directors otherwise so directs or
(iii) the shareholders of the Company (if submitted by the Board of Directors)
but shares of stock owned by or voted under the control of any Indemnitee who is
at the time party to the proceeding may not be voted. If a Determination is made
that Indemnitee is entitled to indemnification, payment to Indemnitee shall be
made within 10 days after such Determination.
4.2.3. If no Determination is made within 60 days after
receipt by the Company of a request for indemnification by Indemnitee pursuant
to Section 4.2.1, a Determination shall be deemed to have been made that
Indemnitee is entitled to the requested indemnification (and the Company shall
pay the related Losses and Expenses no later than 10 days after the expiration
of such 60-day period), except where such indemnification is not lawful;
provided, however, that (a) such 60-day period may be extended for a reasonable
time, not to exceed an additional 30 days, if the Person or Persons making the
Determination in good faith require such additional time for obtaining or
evaluating the documentation and information relating thereto; and (b) the
foregoing provisions of this Section 4.2.3 shall not apply (i) if the
Determination is to be made by the shareholders of the Company and if (A) within
15 days after receipt by the Company of the request by Indemnitee pursuant to
Section 4.2.1 the Board of Directors has resolved to submit such Determination
to the shareholders at an annual meeting of the shareholders to be held within
75 days after such receipt, and such Determination is made at such annual
meeting, or (B) a special meeting of shareholders is called within 15 days after
such receipt for the purpose of making such Determination, such meeting is held
for such purpose within 60 days after having been so called and such
Determination is made at such special meeting, or (ii) if the Determination is
to be made by Independent Legal Counsel.
7
<PAGE> 8
Section 5. D & O Insurance.
5.1. Current Policies. The Company hereby represents and warrants to
Indemnitee that Exhibit 1 contains a complete and accurate description of the
D&O Insurance and that such insurance is in full force and effect.
5.2. Continued Coverage. The Company shall maintain, to the extent
practicable, the D&O Insurance for so long as this Agreement remains in effect.
The Company shall cause the D&O Insurance to cover Indemnitee, in accordance
with its terms and at all times such insurance is in effect, to the maximum
extent of the coverage provided thereby for any director or officer of the
Company.
5.3. Indemnification. In the event of any reduction in, or cancellation
of, the D&O Insurance (whether voluntary or involuntary on behalf of the
Company), the Company shall, and hereby agrees to, indemnify and hold Indemnitee
harmless against any Losses or Expenses which Indemnitee is or becomes obligated
to pay as a result of the Company's failure to maintain the D&O Insurance in
effect in accordance with the provisions of Section 5.2, to the fullest extent
permitted by applicable law, notwithstanding any provision of the Charter or the
Bylaws of the Company, or any other agreement now or hereafter in effect
relating to indemnification for Covered Events. The indemnification available
under this Section 5.3 is in addition to all other obligations of
indemnification of the Company under this Agreement and shall be the only remedy
of Indemnitee for a breach by the Company of its obligations set forth in
Section 5.2.
Section 6. Subrogation. In the event of any payment under this
Agreement to or on behalf of Indemnitee, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee against
any Person other than the Company or Indemnitee in respect of the Claim giving
rise to such payment. Indemnitee shall execute all papers reasonably required
and shall do everything reasonably necessary to secure such rights, including
the execution of such documents reasonably necessary to enable the Company
effectively to bring suit to enforce such rights.
Section 7. Notification and Defense of Claims.
7.1. Notice by Indemnitee. Indemnitee shall give notice in writing to
the Company as soon as practicable after Indemnitee becomes aware of any Claim
with respect to which indemnification will or could be sought under this
Agreement; provided the failure of Indemnitee to give such notice, or any delay
in giving such notice, shall not relieve the Company of its obligations under
this Agreement except to the extent the Company is actually prejudiced to any
such failure or delay.
7.2. Insurance. The Company shall give prompt notice of the
commencement of any Claim relating to Covered Events to the insurers on the D&O
Insurance, if any, in accordance with the procedures set forth in the respective
policies in favor of Indemnitee. The Company shall
8
<PAGE> 9
thereafter take all necessary action to cause such insurers to pay, on behalf of
Indemnitee, all amounts payable as a result of such Claims in accordance with
the terms of such policies.
7.3. Defense.
7.3.1. In the event any Claim relating to Covered Events is by
or in the right of the Company, Indemnitee may, at the option of Indemnitee,
either control the defense thereof or accept the defense provided under the D&O
Insurance; provided, however, that Indemnitee may not control the defense if
such decision would jeopardize the coverage provided by the D&O Insurance, if
any, to the Company or the other directors and officers covered thereby.
7.3.2. In the event any Claim relating to Covered Events is
other than by or in the right of the Company, Indemnitee may, at the option of
Indemnitee, either control the defense thereof, require the Company to defend or
accept the defense provided under the D&O Insurance; provided, however, that
Indemnitee may not control the defense or require the Company to defend if such
decision would jeopardize the coverage provided by the D&O Insurance to the
Company or the other directors and officers covered thereby. In the event that
Indemnitee requires the Company to so defend, or in the event that Indemnitee
proceeds under the D&O Insurance but Indemnitee determines that such insurers
under the D&O Insurance are unable or unwilling to adequately defend Indemnitee
against any such Claim, the Company shall promptly undertake to defend any such
Claim, at the Company's sole cost and expense, utilizing counsel of Indemnitee's
choice who has been approved by the Company. If appropriate, the Company shall
have the right to participate in the defense of any such Claim.
7.3.3. In the event the Company shall fail, as required by any
election by Indemnitee pursuant to Section 7.3.2, timely to defend Indemnitee
against any such Claim, Indemnitee shall have the right to do so, including
without limitation, the right (notwithstanding Section 7.3.4) to make any
settlement thereof, and to recover from the Company, to the extent otherwise
permitted by this Agreement, all Expenses and Losses paid as a result thereof.
7.3.4. The Company shall have no obligation under this
Agreement with respect to any amounts paid or to be paid in settlement of any
Claim without the express prior written consent of the Company to any related
settlement. In no event shall the Company authorize any settlement imposing any
liability or other obligations on Indemnitee without the express prior written
consent of Indemnitee. Neither the Company nor Indemnitee shall unreasonably
withhold consent to any proposed settlement.
9
<PAGE> 10
Section 8. Determinations and Related Matters.
8.1. Presumptions.
8.1.1. If a Change in Control shall have occurred, Indemnitee
shall be entitled to a rebuttable presumption that Indemnitee is entitled to
indemnification under this Agreement and the Company shall have the burden of
proof in rebutting such presumption.
8.1.2. The termination of any claim by judgment, order,
settlement (whether with or without court approval) or conviction, or upon a
plea of nolo contendere or its equivalent, shall not adversely affect either the
right of Indemnitee to indemnification under this Agreement or the presumptions
to which Indemnitee is otherwise entitled pursuant to the provisions of this
Agreement nor create a presumption that Indemnitee did not meet any particular
standard of conduct or that a court has determined that indemnification is not
permitted by applicable law.
8.2. Appeals; Enforcement.
8.2.1. In the event that (a) a Determination is made that
Indemnitee shall not be entitled to indemnification under this Agreement, (b)
any Determination to be made by Independent Legal Counsel is not made within 90
days of receipt by the Company of a request for indemnification pursuant to
Section 4.2.1 or (c) the Company fails to otherwise perform any of its
obligations under this Agreement (including, without limitation, its obligation
to make payments to Indemnitee following any Determination made or deemed to
have been made that such payments are appropriate), Indemnitee shall have the
right to commence a Claim in any court of competent jurisdiction, as
appropriate, to seek a Determination by the court, to challenge or appeal any
Determination which has been made, or to otherwise enforce this Agreement. If a
Change of Control shall have occurred, Indemnitee shall have the option to have
any such Claim conducted by a single arbitrator pursuant to the rules of the
American Arbitration Association. Any such judicial proceeding challenging or
appealing any Determination shall be deemed to be conducted de novo and without
prejudice by reason of any prior Determination to the effect that Indemnitee is
not entitled to indemnification under this Agreement. Any such Claim shall be at
the sole expense of Indemnitee except as provided in Section 9.3.
8.2.2. If a Determination shall have been made or deemed to
have been made pursuant to this Agreement that Indemnitee is entitled to
indemnification, the Company shall be bound by such Determination in any
judicial proceeding or arbitration commenced pursuant to this Section 8.2,
except if such indemnification is unlawful.
8.2.3. The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 8.2 that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement. The
10
<PAGE> 11
Company hereby consents to service of process and to appear in any judicial or
arbitration proceedings and shall not oppose Indemnitee's right to commence any
such proceedings.
8.3. Procedures. Indemnitee shall cooperate with the Company and with
any Person making any Determination with respect to any Claim for which a claim
for indemnification under this Agreement has been made, as the Company may
reasonably require. Indemnitee shall provide to the Company or the Person making
any Determination, upon reasonable advance request, any documentation or
information reasonably available to Indemnitee and necessary to (a) the Company
with respect to any such Claim or (b) the Person making any Determination with
respect thereto.
Section 9. Change in Control Procedures.
9.1. Determinations. If there is a Change in Control, any Determination
to be made under Section 4 shall be made by Independent Legal Counsel selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). The Company shall pay the reasonable fees of the
Independent Legal Counsel and indemnify fully such Independent Legal Counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or the engagement of
Independent Legal Counsel pursuant hereto.
9.2. Establishment of Trust. Following the occurrence of any Potential
Change in Control, the Company, upon receipt of a written request from
Indemnitee, shall create a Trust (the "Trust") for the benefit of Indemnitee,
the trustee of which shall be a bank or similar financial institution with trust
powers chosen by Indemnitee. From time to time, upon the written request of
Indemnitee, the Company shall fund the Trust in amounts sufficient to satisfy
any and all Losses and Expenses reasonably anticipated at the time of each such
request to be incurred by Indemnitee for which indemnification may be available
under this Agreement. The amount or amounts to be deposited in the Trust
pursuant to the foregoing funding obligation shall be determined by mutual
agreement of Indemnitee and the Company or, if the Company and Indemnitee are
unable to reach such an agreement, or, in any event, if a Change in Control has
occurred, by Independent Legal Counsel. The terms of the Trust shall provide
that, except upon the prior written consent of Indemnitee and the Company, (a)
the Trust shall not be revoked or the principal thereof invaded, other than to
make payments to unsatisfied judgment creditors of the Company, (b) the Trust
shall continue to be funded by the Company in accordance with the funding
obligations set forth in this Section, (c) the Trustee shall promptly pay or
advance to Indemnitee any amounts to which Indemnitee shall be entitled pursuant
to this Agreement, and (d) all unexpended funds in the Trust shall revert to the
Company upon a Determination by Independent Legal Counsel (selected pursuant to
Section 9.1) or a court of competent jurisdiction that Indemnitee has been fully
indemnified under the terms of this Agreement. All income earned on the assets
held in the trust shall be reported as income by the Company for federal, state,
local and foreign tax purposes.
11
<PAGE> 12
9.3. Expenses. Following any Change in Control, the Company shall be
liable for, and shall pay the Expenses paid or incurred by Indemnitee in
connection with the making of any Determination (irrespective of the
determination as to Indemnitee's entitlement to indemnification) or the
prosecution of any Claim pursuant to Section 8.2, and the Company hereby agrees
to indemnify and hold Indemnitee harmless therefrom. If requested by counsel for
Indemnitee, the Company shall promptly give such counsel an appropriate written
agreement with respect to the payment of its fees and expenses and such other
matters as may be reasonably requested by such counsel.
Section 10. Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or in the right of the Company, any
Subsidiary, any Other Enterprise or any Affiliate of the Company against
Indemnitee or Indemnitee's spouse, heirs, executors, administrators or personal
or legal representatives after the expiration of two years from the date of
accrual of such cause of action, and any claim or cause of action of the
Company, any Subsidiary, any Other Enterprise or any Affiliate of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such two-year period; provided, however, that if any
shorter period of limitations, whether established by statute or judicial
decision, is otherwise applicable to any such cause of action such shorter
period shall govern.
Section 11. Contribution. If the indemnification provisions of this
Agreement should be unenforceable under applicable law in whole or in part or
insufficient to hold Indemnitee harmless in respect of any Losses and Expenses
incurred by Indemnitee, then for purposes of this Section 11, the Company shall
be treated as if it were, or was threatened to be made, a party defendant to the
subject Claim and the Company shall contribute to the amounts paid or payable by
Indemnitee as a result of such Losses and Expenses incurred by Indemnitee in
such proportion as is appropriate to reflect the relative benefits accruing to
the Company on the one hand and Indemnitee on the other and the relative fault
of the Company on the one hand and Indemnitee on the other in connection with
such Claim, as well as any other relevant equitable considerations. For purposes
of this Section 11 the relative benefit of the Company shall be deemed to be the
benefits accruing to it and to all of its directors, officers, employees and
agents (other than Indemnitee) on the one hand, as a group and treated as one
entity, and the relative benefit of Indemnitee shall be deemed to be an amount
not greater than the Indemnitee's compensation from the Company during the first
year in which the Covered Event forming the basis for the subject Claim was
alleged to have occurred. The relative fault shall be determined by reference
to, among other things, the fault of the Company and all of its directors,
officers, employees and agents (other than Indemnitee) on the one hand, as a
group and treated as one entity, and Indemnitee's and such group's relative
intent, knowledge, access to information and opportunity to have altered or
prevented the Covered Event forming the basis for the subject Claim.
12
<PAGE> 13
Section 12. Miscellaneous Provisions.
12.1. Successors and Assigns, Etc.
12.1.1. This Agreement shall be binding upon and inure to the
benefit of (a) the Company, its successors and assigns (including any direct or
indirect successor by merger, consolidation or operation of law or by transfer
of all or substantially all of its assets) and (b) Indemnitee and the heirs,
personal and legal representatives, executors, administrators or assigns of
Indemnitee.
12.1.2. The Company shall not consummate any consolidation,
merger or other business combination, nor will it transfer 50% or more of its
assets (in one or a series of related transactions), unless the ultimate Parent
of the successor to the business or assets of the Company shall have first
executed an agreement, in form and substance satisfactory to Indemnitee, to
expressly assume all obligations of the Company under this Agreement and agree
to perform this Agreement in accordance with its terms, in the same manner and
to the same extent that the Company would be required to perform this Agreement
if no such transaction had taken place; provided that, if the Parent is not the
Company, the legality of payment of indemnity by the Parent shall be determined
by reference to the fact that such indemnity is to be paid by the Parent rather
than the Company.
12.2. Severability. The provisions of this Agreement are severable. If
any provision of this Agreement shall be held by any court of competent
jurisdiction to be invalid, void or unenforceable, such provision shall be
deemed to be modified to the minimum extent necessary to avoid a violation of
law and, as so modified, such provision and the remaining provisions shall
remain valid and enforceable in accordance with their terms to the fullest
extent permitted by law.
12.3. Rights Not Exclusive; Continuation of Right of Indemnification.
Nothing in this Agreement shall be deemed to diminish or otherwise restrict
Indemnitee's right to indemnification pursuant to any provision of the Charter
or Bylaws of the Company, any agreement, vote of shareholders or Disinterested
Directors, applicable law or otherwise. This Agreement shall be effective as of
the date first above written and continue in effect until no Claims relating to
any Covered Event may be asserted against Indemnitee and until any Claims
commenced prior thereto are finally terminated and resolved, regardless of
whether Indemnitee continues to serve as a director of the Company, any
Subsidiary or any Other Enterprise.
12.4. No Employment Agreement. Nothing contained in this Agreement
shall be construed as giving Indemnitee any right to be retained in the employ
of the Company, any Subsidiary or any Other Enterprise.
12.5. Subsequent Amendment. No amendment, termination or repeal of any
provision of the Charter or Bylaws of the Company, or any respective successors
thereto, or of any relevant provision of any applicable law, shall affect or
diminish in any way the rights of Indemnitee to
13
<PAGE> 14
indemnification, or the obligations of the Company, arising under this
Agreement, whether the alleged actions or conduct of Indemnitee giving rise to
the necessity of such indemnification arose before or after any such amendment,
termination or repeal.
12.6. Notices. Notices required under this Agreement shall be given in
writing and shall be deemed given when delivered in person or sent by certified
or registered mail, return receipt requested, postage prepaid. Notices shall be
directed to the Company at 209 10th Avenue, Suite 450, Nashville, Tennessee
37203, Attention: Chairman of the Board, and to Indemnitee at
______________________________________________________________ (or such other
address as either party may designate in writing to the other).
12.7. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Tennessee applicable to
contracts made and performed in such state without giving effect to the
principles of conflict of laws.
12.8. Headings. The headings of the Sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
12.9. Counterparts. This Agreement may be executed in any number of
counterparts all of which taken together shall constitute one instrument.
12.10. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall constitute, or be deemed to constitute, a waiver of any other provisions
hereof (whether or not similar) nor shall any such waiver constitute a
continuing waiver.
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
HEALTHSTREAM, INC.
By:_________________________________________
Title:______________________________________
INDEMNITEE
__________________________________
______________________
14
<PAGE> 15
EXHIBIT 1
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE POLICY
<PAGE> 1
EXHIBIT 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made and
executed this 21st day of April, 1999, by and between HealthStream, Inc., a
Tennessee corporation (the "Company"), and Robert A. Frist, Jr., an individual
and resident of Nashville, Tennessee ("Executive").
IN CONSIDERATION of the mutual undertakings of the parties set forth in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive hereby
agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
hereby accepts employment with the Company, on the terms and conditions
hereinafter set forth.
2. Term. The initial term of this Agreement shall commence and shall be
effective as of the date set forth above (the "Effective Date") and shall extend
from that date for a period of two years, unless earlier terminated as provided
in this Agreement (the "Employment Term"). The Employment Term shall
automatically be extended for successive one year periods unless on or before a
date that is 90 days prior to the expiration of the Employment Term either the
Company or Executive shall have given written notice to the other of its or his
intention not to further extend the Employment Term, in which case in this
Agreement shall expire and terminate at the end of the initial or extended
Employment Term.
3. Nature of Duties and Responsibilities; Extent of Services. During
the Employment Term, Executive shall be employed by the Company as its President
and Chief Executive Officer, or such other executive position as Executive shall
approve, and shall have such duties, powers and authority as generally inure to
those offices. Executive shall have the principal authority and responsibility
for managing the day-to-day business and affairs of the Company. Executive shall
report to and take direction only from the Board of Directors of the Company.
During the Employment Term, Executive shall devote his full time to the business
of the Company. For purposes of this Agreement, the term "full time" shall mean
an average of 40 hours per work week.
4. Location; Travel. The permanent place of employment of Executive
shall be the corporate headquarters of the Company located in the metropolitan
Nashville, Tennessee area. Executive shall not be required to relocate his place
of employment outside of the metropolitan Nashville, Tennessee area at any time
during the Employment Term without his prior consent, which consent may be
withheld by Executive for any reason he deems appropriate. Executive may be
required to conduct reasonable travel in the course of the performance of his
duties on behalf of the Company.
5. Compensation.
(a) For all services rendered by Executive under this Agreement, the
Company shall compensate Executive at the annual base rate of $85,000,
payable in semi-monthly installments.
(b) The annual rate of compensation provided in Section 5(a) may be
adjusted for each year of the Employment Term by an amount determined
by the Compensation Committee of the Board of Directors of the Company
in its sole discretion; provided, that such annual rate of compensation
shall not at any time be less than the amount specified in Section
5(a).
(c) During the Employment Term, Executive shall be eligible for and
shall participate
<PAGE> 2
in any bonus program, plan or arrangement (whether formal or informal)
generally adopted or made available by the Company with respect to its
officers or senior management personnel, and the participation by
Executive in any such program, plan or arrangement shall be upon terms
and conditions (including without limitation the computation of
amounts) substantially similar to those applicable to any other
participant in such program, plan or arrangement; provided, that the
Company may specify or require performance criteria unique to
Executive. Nothing in this Section 5(c) shall be construed so as to
require the Company to adopt any bonus program, plan or arrangement.
(d) The Company shall continue to pay Executive his
compensation during any period of physical or mental incapacity or
disability until his employment is terminated as provided in Section
9(d); provided, that payments so made to Executive during the period of
disability shall be reduced by the sum of the amounts, if any, actually
received by Executive with respect to such period under disability
benefit plans provided by the Company at its cost or under the Social
Security disability insurance program, and which amounts were not
previously applied to reduce any such payment.
(e) During the Employment Term, the Company shall pay the
reasonable expenses incurred by Executive (based on business
development objectives and within limits that may be established by the
Board of Directors of the Company) in the performance of his duties
under this Agreement (or shall reimburse Executive on account of such
expenses paid directly by Executive) promptly upon the submission to
the Company by Executive of appropriate vouchers prepared in accordance
with applicable regulations of the Internal Revenue Service and all
policies and procedures of the Company.
6. Stock Options. During the Employment Term, Executive shall be
eligible for and shall participate in any stock option or stock purchase plan,
program or arrangement (whether formal or informal) generally adopted or made
available by the Company with respect to its officers or senior management
personnel, and the participation by Executive in any such plan, program or
arrangement shall be upon terms and conditions (including without limitation the
number of shares and the price at which such shares may be purchased) at least
as favorable as those applicable to any other participant in such plan, program
or arrangement.
7. Other Benefits. In addition to the benefits described herein,
Executive shall be entitled to and eligible for group medical and disability
insurance coverage, life insurance coverage, vacation and any other fringe
benefits that generally may from time to time be available to other executive
officers of the Company. Executive shall be eligible to participate in any
pension, profit sharing or other employee benefit plan of the Company or in
which the Company participates. Any and all such benefits provided in this
Section 7 shall terminate on the expiration or earlier termination of this
Agreement, except as otherwise required by law.
8. Tax Withholding. With respect to all forms of compensation and
benefits to be provided by the Company to Executive under the terms of this
Agreement, the Company shall be entitled to deduct and withhold from Executive
all income, employment, payroll and other taxes and similar amounts required by
applicable law, rule or regulation of any appropriate governmental authority.
9. Termination.
(a) Termination for Cause. Prior to the end of the stated or
extended term of this Agreement, the Company may terminate this
Agreement for cause, as provided below. In such
2
<PAGE> 3
event, the Company shall pay to Executive all accrued but unpaid
compensation (excluding any bonus) earned to the effective date of
termination, and the Company shall thereafter have no further liability
hereunder to Executive. The Company may terminate Executive for cause
without notice in the event that Executive (i) has committed any act of
intentional fraud or dishonesty that relates to the business of the
Company; (ii) is convicted of, or enters a plea of nolo contendere with
respect to, any felony at any time hereafter; (iii) willfully fails or
refuses to perform his duties hereunder (other than as a result of
Executive's incapacity due to physical or mental illness) within 30
days after a written demand for substantial performance is delivered to
Executive by the Company specifying with reasonable particularity the
duty or duties which the Company believes Executive has failed or
refused to perform, or (iv) commits any other material breach of this
Agreement which breach is not cured by Executive within 90 days of the
date on which written notice of such breach is provided by the Company
to Executive.
(b) Termination Without Cause. Prior to the end of the stated
or extended term of this Agreement, the Company may terminate this
Agreement, other than as provided in Section 9(a), upon 10 days prior
written notice to Executive. In such event, the Company shall pay to
Executive the amounts required under Section 9(i)).
(c) Death of Executive. In the event Executive's death occurs
during the stated or extended term of this Agreement, Executive's
employment with the Company shall terminate automatically and the
Company shall pay to the estate of Executive all accrued but unpaid
compensation (including any bonus previously declared or determined)
earned to the date of death.
(d) Disability of Executive. In the event that Executive, due
to any physical or mental illness, injury or condition, has been absent
from his duties with the Company for more than 180 days (whether or not
consecutive) during any 12-month period, the Company may terminate this
Agreement immediately upon notice to Executive, in which case the
Company shall pay to Executive or his legal guardian all accrued but
unpaid compensation (including any bonus previously declared or
determined) earned to the date of such termination.
(e) Voluntary Resignation. Executive may, upon 60 days prior
written notice to the Company, voluntarily resign and thereby terminate
this Agreement at any time prior to the expiration of the stated or
extended term of this Agreement. In such event, the Company shall pay
to Executive all accrued but unpaid compensation (excluding any bonus)
earned to the effective date of resignation.
(f) Good Reason; Change of Control. Executive may, upon 30
days prior written notice to the Company, voluntarily resign for Good
Reason at any time following any occurrence of a Change of Control. In
such event, the Company shall pay to Executive the amounts required
under Section 9(i).
For purposes of this Agreement, "Good Reason" shall mean the
occurrence of any one of the following events, unless corrected by the
Company during the 30-day notice period referred to in the first
paragraph of this Section 9(f):
(i) Any change in Executive's title, authorities,
responsibilities (including reporting responsibilities) which,
in Executive's reasonable judgment, represents an adverse
change from his status, title, position or responsibilities
(including reporting responsibilities) which were in effect
immediately prior to the Change in Control or from
3
<PAGE> 4
his status, title, position or responsibilities (including
reporting responsibilities) which were in effect following a
Change in Control pursuant to Executive's consent to accept
any such change; the assignment to him of any duties or work
responsibilities which, in his reasonable judgment, are
inconsistent with such status, title, position or work
responsibilities; or any removal of Executive from, or failure
to reappoint or reelect him to any such positions, except if
any such changes are because of disability, retirement, death
or cause (as defined in Section 9(a));
(ii) Any reduction by the Company in Executive's
annual base salary as in effect on the date hereof or as the
same may be increased from time to time except for
across-the-board salary reductions similarly affecting all
senior executives of the Company and all senior executives of
any Person (as defined below) in control of the Company;
provided, that in no event shall any such reduction reduce
Executive's base salary below $85,000;
(iii) The relocation of Executive's office at which
he is to perform his duties to a location more than 30 miles
from the location at which Executive performed his duties
prior to the Change in Control, except for required travel on
the Company's business to an extent substantially consistent
with his business travel obligations prior to the Change in
Control;
(iv) If the Executive had been based at the Company's
principal executive offices immediately prior to the Change in
Control, the relocation of the Company's principal executive
offices to a location more that 30 miles from the location of
such offices immediately prior to the Change in Control;
(v) The failure by the Company, without Executive's
consent, to pay to Executive any portion of Executive's
current compensation, or to pay to Executive any portion of an
installment of deferred compensation under any deferred
compensation program of the Company, within seven days of the
date such compensation is due;
(vi) The failure by the Company to continue in effect
any stock-based and/or cash annual or long-term incentive
compensation plan in which Executive participates immediately
prior to the Change in Control, unless Executive participates
after the Change in Control in other comparable plans
generally available to senior executives of the Company and
senior executives of any Person in control of the Company;
(vii) The failure by the Company to continue to
provide Executive with benefits substantially similar in value
to Executive in the aggregate to those enjoyed by Executive
under any of the Company's pension, life insurance, medical,
health and accident or disability plans in which Executive was
participating immediately prior to the Change in Control,
unless Executive participates after the Change in Control in
other comparable benefit plans generally available to senior
executives of the Company and senior executives of any Person
in control of the Company; or
(viii) The adverse and substantial alteration of the
nature and quality of the office space within which Executive
performed his duties prior to a Change in Control as well as
in the secretarial and administrative support provided to
Executive, provided, that a reasonable alteration of the
secretarial or administrative support provided to Executive as
a result of reasonable measures implemented by the Company to
effectuate a cost-
4
<PAGE> 5
reduction or consolidation program shall not constitutes Good
Reason hereunder.
For purposes of this Agreement, a "Change in Control" shall
mean the occurrence at any time during the Employment Term of any one
of the following events:
(i) An acquisition (other than directly from the
Company) of any voting securities of the Company (the "Voting
Securities") by any "Person" (as that term is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) other than
Executive, immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of more than 50% of the combined voting
power of the Company's then outstanding Voting Securities;
provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a
Non-Control Acquisition shall not constitute an acquisition
which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by
(A) the Company, or (B) any corporation or other Person of
which a majority of its voting power or its voting equity
securities or equity interest is owned, directly or
indirectly, by the Company or the stockholders of the Company
in substantially the same proportion as their ownership of the
Voting Securities (for purposes of this definition, a
"Subsidiary"), (2) the Company or its Subsidiaries, or (3) any
Person in connection with a Non-Control Transaction (as
hereinafter defined);
(ii) The individuals who, as of the date of this
Agreement, are members of the Board of Directors of the
Company (the "Incumbent Board"), cease for any reason to
constitute at least a majority of the members of the Board of
Directors of the Company; provided, however, that if the
election, or nomination for election by the Company's
stockholders, of any new director was approved by a vote of at
least a majority of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided, further, however,
that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as
a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board of
Directors of the Company (a "Proxy Contest") including by
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(1) A merger, consolidation or
reorganization involving the Company, unless such
merger, consolidation or reorganization is a
Non-Control Transaction. A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
of the Company where the stockholders of the Company,
immediately before such merger, consolidation or
reorganization, own directly or indirectly
immediately following such merger, consolidation or
reorganization, 50% or more of the combined voting
power of the outstanding voting securities of the
corporation or its parent entity resulting from such
merger or consolidation or reorganization in
substantially the same proportion as their ownership
of the Voting Securities immediately before such
merger, consolidation or reorganization;
(2) A complete liquidation or dissolution of
the Company; or
5
<PAGE> 6
(3) An agreement for the sale or other
disposition of all or substantially all of the assets
of the Company to any Person (other than a transfer
to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of the
then outstanding Voting Securities as a result of the acquisition of
Voting Securities by the Company which, by reducing the number of
Voting Securities than outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Voting Securities by the Company, and
after such share acquisition by the Company, the Subject Person becomes
the Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
(g) Change of Duties. Executive may, upon 30 days prior
written notice to the Company, voluntarily resign and thereby terminate
this Agreement at any time after there has been a material reduction in
his duties, powers or authority as an officer or employee of the
Company (a "Material Change") without the express written consent of
Executive and the Company fails to cure such Material Change within 10
days of notice thereof by Executive. In such event, the Company shall
pay to Executive the amounts required under Section 9(i). For purposes
of this Agreement, a Material Change shall be deemed to have occurred
if (i) any person other than Executive is elected by the Board of
Directors of the Company to hold the office of Chief Executive Officer,
(ii) Executive is made subordinate to any other officer or employee of
the Company, or (iii) Executive ceases to be a member of the Board of
Directors of the Company at any time for any reason other than his
resignation or removal by the Board of Directors for cause (as defined
in Section 9(a)).
(h) Material Breach by Company. In the event that the Company
materially breaches this Agreement, which breach is not cured by the
Company within 90 days of the date on which written notice of such
breach is provided by Executive to the Company, Executive may
thereafter voluntarily resign and thereby terminate this Agreement. In
such event, the Company shall pay to Executive the amounts required
under Section 9(i).
(i) Severance Benefits. In the event that (i) the Company
terminates the employment of Executive without cause (as provided in
Section 9(b)), (ii) Executive elects to resign for Good Reason after
the occurrence of a Change in Control (as provided in Section 9(f)),
(iii) Executive elects to resign and terminate this Agreement upon the
occurrence of a Material Change (as provided in Section 9(g)), or (iv)
Executive elects to resign and terminate this Agreement upon the
occurrence of a material breach of this Agreement by the Company (as
provided in Section 9(h)), then, in addition to all accrued but unpaid
compensation earned to the effective date of such termination, the
Company shall pay to Executive a severance benefit computed as provided
in this Section 9(i). If termination occurs during the initial two year
term of this Agreement, the severance benefit shall be the sum of (I)
an amount equal to $290,000 less the cumulative amount of base salary
actually paid to Executive during such two year period through the
effective date of termination pursuant to the provisions of Section
5(a) and (b), and (II) $145,000. If termination occurs during any
extended one year term of this Agreement, the severance benefit shall
be the sum of (III) an amount equal to $145,000 less the cumulative
amount of base salary actually paid to Executive during such one year
period through the effective date of termination pursuant to the
provisions of Section 5(a) and (b), and (IV) $145,000. In the event
that Executive elects to resign for Good Reason after the occurrence of
a Change in Control (as provided in Section 9(f)), then, in
6
<PAGE> 7
addition to the payment of the severance benefit described herein, the
Company shall amend each stock option or stock purchase agreement
between Executive and the Company to provide for the full and immediate
vesting of all options, shares and other benefits provided therein, in
each case effective as of the date of the termination of Executive.
(j) Manner of Payment. The amount of the severance benefit
required under Section 9(i) shall be paid by the Company to Executive
in one lump sum within five days after the effective date of the
termination of Executive; provided, that the $145,000 fixed amount
described in subclauses (II) and (IV) of Section 9(i) shall be paid in
12 equal monthly installments beginning one month after the effective
date of termination.
(k) Effect of Termination. Other than as expressly provided in
this Agreement, all forms of compensation and benefits provided to
Executive herein shall terminate on the expiration or earlier
termination of this Agreement.
(l) Resignation as Chairman. If Executive's employment by the
Company is terminated for any reason, Executive hereby agrees that he
shall simultaneously submit his resignation as the Chairman of the
Board of Directors of the Company, if Executive then serves in such
capacity. If Executive fails to submit such required resignation in
writing, the provisions of this Section 9(l) may be deemed by the
Company to constitute the Executive's written resignation as the
Chairman effective as of the effective date of termination. Nothing in
this Section 9(l) shall require Executive to resign as a member (other
than the Chairman) of the Board of Directors of the Company, and
Executive may continue to serve in a capacity other than as the
Chairman notwithstanding the termination of his employment.
10. Restrictive Covenant.
(a) Executive hereby covenants and agrees that during the
Employment Term and for a period of one year thereafter, Executive
shall not, directly or indirectly: (i) own any interest in, operate,
join, control or participate as a partner, director, principal, officer
or agent of, enter into the employment of, act as a consultant to, or
perform any services for any entity (each a "Competing Entity") which
has material operations which compete with any business in which the
Company is then engaged; (ii) solicit any customer or client of the
Company with respect to any business in which the Company is then
engaged (other than on behalf of the Company); or (iii) induce or
encourage any employee of the Company to leave the employ of the
Company; provided, that Executive may: (1) subject to the provisions of
Section 3, continue his association with each of the entities described
on Exhibit A hereto; (2) subject to the provisions of Section 3,
provide services to any entity primarily engaged in the business of
providing an online healthcare news service; and (3) solely as an
investment, hold not more than 5% of the combined voting securities of
any publicly-traded corporation or other business entity. The foregoing
covenants and agreements of Executive are referred to herein as the
"Restrictive Covenant." Executive represents and warrants to the
Company that each entity listed on Exhibit A is not a Competing Entity
as of the date hereof.
(b) Executive has carefully read and considered the provisions
of the Restrictive Covenant and, having done so, agrees that the
restrictions set forth in this Section 10, including without limitation
the time period of restriction set forth above, are fair and reasonable
and are reasonably required for the protection of the legitimate
business and economic interests of the Company.
(c) Executive acknowledges that the Company's business is and
will be built upon the
7
<PAGE> 8
confidence of those with whom it conducts business and that Executive
will gain acquaintances and develop relationships by using the good
will of the Company. Executive also acknowledges that the Company's
business is and will be built upon the success of the Company in
research, development and marketing, and through the development of
certain business methods and trade secrets, and that Executive's
position will give him confidential knowledge of all aspects of the
Company's business and internal operations. In addition, Executive
acknowledges that the Company's dealings through Executive will give
Executive confidential knowledge that should not be divulged or used
for his own benefit. Executive recognizes and agrees that his violation
of any provision of the Restrictive Covenant will cause irreparable
harm to the Company.
(d) In the event that, notwithstanding the foregoing, any of
the provisions of this Section 10 or any parts hereof shall be held to
be invalid or unenforceable, the remaining provisions or parts hereof
shall nevertheless continue to be valid and enforceable as though the
invalid or unenforceable portions or parts had not been included
herein. In the event that any provision of this Section 10 relating to
the time period and/or the area of restriction and/or related aspects
shall be declared by a court of competent jurisdiction to exceed the
maximum restrictiveness such court deems reasonable and enforceable,
the time period and/or area of restriction and/or related aspects
deemed reasonable and enforceable by such court shall become and
thereafter be the maximum restrictions in such regard, and the
provisions of the Restrictive Covenant shall remain enforceable to the
fullest extent deemed reasonable by such court.
11. Remedies. Executive agrees that in the event of any conduct by
Executive violating any provision of Section 10, the Company shall be entitled,
if it so elects, to institute and prosecute proceedings in any court of
competent jurisdiction, either at law or in equity, to obtain damages for such
conduct, to enforce specific performance of such provision, to enjoin Executive
from such conduct, to obtain an accounting and repayment of all profits,
compensation, commissions, remuneration or other benefits that Executive
directly or indirectly has realized and/or may realize as a result of, growing
out of, or in connection with any such violation, or to obtain any other relief,
or any combination of the foregoing, that the Company may elect to pursue.
Executive shall pay all legal fees and other costs incurred by the Company to
enforce the provisions of Sections 10 and to obtain the remedies provided in
this Section 11.
12. Prohibition on Parachute Payments.
(a) Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit received or to be received by
Executive in connection with a Change in Control or the termination of
Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any
person whose actions result in a Change of Control or any person
affiliated with the Company or such person)(all such payments and
benefits, including, without limitation, base salary and bonus
payments, being hereinafter called "Total Payments"), would not be
deductible (in whole or part) by the Company, an affiliate or any
person making such payment or providing such benefit as a result of
section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), then, to the extent necessary to make such portion of the
Total Payments deductible (and after taking into account any reduction
in the Total Payments provided by reason of section 280G of the Code in
such other plan, arrangement or agreement), (i) the cash portion of the
Total Payments shall first be reduced (if necessary, to zero), and (ii)
all other non-cash payments by the Company to Executive shall next be
reduced (if necessary, to zero). For purposes of this limitation (1) no
portion of the Total Payments the receipt or enjoyment of which
Executive shall have effectively waived in writing prior to the date of
termination shall be taken into account, (2) no portion of the Total
Payments shall be taken into account which in the opinion of tax
counsel selected by
8
<PAGE> 9
the Company's independent auditors and reasonably acceptable to
Executive does not constitute a "parachute payment" within the meaning
of section 280G(b)(2) of the Code, including by reason of section
280G(b)(4)(A) of the Code, (3) such payments shall be reduced only to
the extent necessary so that the Total Payments (other than those
referred to in clauses (1) or (2)) in their entirety constitute
reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4)(B) of the Code or are otherwise not
subject to disallowance as deductions, in the opinion of the tax
counsel referred to in clause (2), and (4) the value of any non-cash
benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Company's independent auditors in
accordance with the principles of sections 280G(d)(3) and (4) of the
Code.
(b) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding that, notwithstanding
the good faith of Executive and the Company in applying the terms of
this Section 12, the aggregate "parachute payments" paid to or for
Executive's benefit are in an amount that would result in any portion
of such "parachute payments" not being deductible by reason of section
280G of the Code, then Executive shall have an obligation to pay to the
Company upon demand an amount equal to the sum of (i) the excess of the
aggregate "parachute payments" paid to or for Executive's benefit over
the aggregate "parachute payments" that could have been paid to or for
Executive's benefit without any portion of such "parachute payments"
not being deductible by reason of section 280G of the Code; and (ii)
interest on the amount set forth in clause (i) of this sentence at the
rate provided in section 1274(b)(2)(B) of the Code from the date of
Executive's receipt of such excess until the date of such payment.
13. Representations.
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a
valid and binding agreement of the Company enforceable against it in
accordance with its terms.
(b) Executive represents and warrants that he is not a party to any
agreement or instrument that would prevent him from entering into or
performing his duties in any way under this Agreement
14. Waiver of Breach. The waiver by either party of a breach of any
provisions of this Agreement by either party shall not operate or be construed
as a waiver of any subsequent breach by either party.
15. Successors. This Agreement shall be binding upon and inure to the
benefit of the heirs, successors and permitted assigns of the parties hereto.
This Agreement may not be assigned by Executive or by the Company without the
prior written consent of the other, except that the Company may assign this
Agreement to any business entity that acquires the Company or its business
operations and thereafter conducts the business of the Company.
16. Construction. This Agreement shall be construed under and enforced
in accordance with the internal laws of the State of Tennessee.
17. Entire Agreement. This Agreement is the entire agreement of the
parties and supersedes all prior agreements and understandings, written or oral.
This Agreement shall not be amended or modified except in writing executed by
both parties.
9
<PAGE> 10
18. Notice. For the purposes of this Agreement, notices shall be deemed
given when mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed in the case of the Company to its
principal executive office; or in the case of Executive to the address shown on
the signature page of this Agreement. Either party may change such address by
giving the other party notice of such change in the aforesaid manner, except
that notices of changes of address shall only be effective upon receipt.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By: /s/ Robert H. Laird, Jr.
---------------------------------
Title: General Counsel
------------------------------
EXECUTIVE:
/s/ Robert A. Frist, Jr.
-------------------------------------
Robert A. Frist, Jr.
Address:
201 Abbott Glen Court
Nashville, Tennessee 37215
<PAGE> 11
EXHIBIT A
Adam Internet Health Software
Passport Health Communications
A to be formed entity named U.S. Medical News, or any substantially similar name
(a company involved in on-line healthcare news)
<PAGE> 1
EXHIBIT 10.8
LEASE AGREEMENT
LANDLORD & TENANT
1. THIS LEASE AGREEMENT, entered into this 27th day of March 1995, by and
between Cummins Station LLC corporation with its principal office and place of
business in Nashville, Tennessee, hereinafter called "Landlord," and NewOrder
Media, Inc. hereinafter called "Tenant."
WITNESSETH:
PREMISES
2. That the Landlord, for and in consideration of the payments hereinafter
stipulated to be made by Tenant, and the covenants and agreements hereinafter
contained to be kept and performed by Tenant, does by these presents hereby
lease unto the Tenant, and Tenant does by these presents hereby lease from
Landlord, the use and occupancy of
See Exhibit "A"
Suite 450
containing approximately 6,954 square feet and being the leased premises as
shown by design attached hereto as Exhibit "A," and incorporated herein, and
being a part of that building known as Cummins Station, situated on ___________
in Nashville, Tennessee, on a tract of land owned by Landlord more particularly
described in a certain warranty deed of record in the office of The County
Recorder.
TERM
3. TO HAVE AND TO HOLD the same for the term of 5 years next ensuing from
and after the 1st day of May, 1995, and ending on the 30th day of April, 2000,
unless the term hereby demised shall be sooner terminated as hereinafter
provided.
RENT
4. Tenant shall pay to Landlord as rent at the office of Landlord in
Nashville, Tennessee, or as may be directed the sum of $52,155.00/yr., years 1 &
2, $59,109.00/year, years 3, 4 & 5 per annum for the original term hereof,
except as noted hereinafter, payable in installments of $4,346.25/month, years 1
& 2, $4,925.75/month years 3, 4 & 5 per month for each and every month during
the original term hereof, the first such installment being on the first day of
the first calendar month of said term, and another such installment being due
and payable on the first day of each and every succeeding calendar month of said
term, in advance, until the full payment of the total sum shall be made. Any
rental not paid when due shall bear interest at the rate of 10 per cent per
annum from the date payment was due until paid.
CONDITIONS
5. This lease is entered into upon the understanding and agreement that the
same shall be subject to the following express terms and conditions and rules
"Exhibit B" attached, each and every one of which the parties hereto covenant
and agree to keep and perform:
FIRST: That Tenant agrees to pay to Landlord the sums herein, specified
during the original and any renewal term hereof without demand, and without
counterclaim, deduction, or set-off, and to comply with the terms and provisions
of this lease.
USE
SECOND: That Tenant will use and occupy said premises for offices for
computer software, design & related services and for no other purpose; that
Tenant will keep said demised premises in good repair and tenantable condition
and shall quit and surrender said premises peaceably at the end of the original
or any renewal term hereof in as good condition as the reasonable use thereof
will permit; and that Tenant will replace at his own expense any and all broken
glass in and about said premises, if due to Tenant's negligence, with glass of
the same size and quality, including all signs thereon. If Tenant fails to make
proper repairs, Landlord, at its option, may make such repairs at Tenant's
expense.
CONDITIONS OF PREMISES
THIRD: That no representations, except as are contained herein or endorsed
hereon, have been made to the Tenant respecting the condition of said premises.
The taking possession of the said premises by the Tenant shall be conclusive
evidence against the Tenant that premises were in good and satisfactory
condition when possession of the same was so taken; and the Tenant will, at the
termination of this lease, by lapse of time or otherwise, return said premises
to the Landlord in as good condition as when received, loss by fire, storm or
other casualty and ordinary wear excepted.
SUBLETTING & ASSIGNMENT
FOURTH: That the Tenant will not assign this lease nor any interest
hereunder; and will not permit any assignment hereof by operation of law; and
will not sublet said premises or any part thereof; and will not permit the use
of said premises by desk tenants or any parties other than the Tenant, and the
agents and servants of the Tenant, without first obtaining the written consent
of the Landlord, which shall not be unreasonably withheld. Landlord may assign
his lease or any part thereof or right thereunder.
ALTERATIONS & IMPROVEMENTS
FIFTH: No alterations, additions or improvement to the leased premises,
except such as may be provided for in this lease, shall be made without first
having the consent, in writing, of the Landlord, and any improvements, additions
or alterations made by the Tenant after such consent shall have been given,
including any and all fixtures installed, excepting trade fixtures, shall at
Landlord's option remain on the premises as the property of the Landlord,
without compensation to Tenant, or shall be removed therefrom and the premises
restored to their original condition at cost to Tenant, at the expiration or
sooner termination of this lease. The Tenant shall at his own cost repair any
damage caused by the removal of trade fixtures restoring the premises to their
original condition at his own expense. The Tenant agrees to save Landlord
harmless on account of claims for mechanics, materialmen or other liens in
connection with any alterations, additions, or improvements to which Landlord
may give its consent in connection with the leased premises, and Tenant will, if
required by Landlord, furnish such waiver or waivers of lien or bond in form and
with surety satisfactory to Landlord, as Landlord may require before starting
any work in connection with alterations, additions or improvements to the leased
premises.
LIMITS OF USE & PEACEFUL ENJOYMENT
SIXTH: That the Tenant will not use or permit upon said premises anything
that will invalidate any policies of insurance now or hereafter carried on said
building or that will increase the rate of insurance on said demised premises or
on the building of which said demised premises are a part; that the Tenant will
not use or permit upon said demised premises anything that may be dangerous to
life or limb; the Tenant will not in any manner deface or injure said building
or any part thereof, or overload the floors of said premises, it being mutually
agreed that in no event shall any weight placed upon said floors exceed
seventy-five pounds per square foot of floor space covered; that the Tenant will
not permit any objectionable noise or odor to escape or be emitted from said
premises in any way tending to create a nuisance,
<PAGE> 2
or tending to disturb any other tenant in said building or the occupants of
neighboring property, or tending to injure the reputation of the said building:
the Tenant will comply with all governmental, health and police requirements and
regulations respecting said premises.
PERSONAL OR PROPERTY RISKS
SEVENTH: Landlord shall not be held responsible for and is hereby expressly
relieved from all liability by reason of any injury, loss or damage to any
person or property in or about the leased premises, unless caused by negligence
of Landlord, whether the loss, injury, or damage be to the person or property of
the Tenant or any other person. This provision shall apply especially (but not
exclusively) to damage caused by water, snow, frost, steam, sewage, illuminating
gas, sewer gas, or odors, or by the bursting or leaking of pipes or plumbing
works, and shall apply equally whether such damage be caused by the act or
neglect of other tenants, occupants or janitors of said building or of any other
persons, and whether such damage be caused or occasioned by anything above
mentioned or referred to, or by any other thing or circumstance, whether of a
like nature, or of a wholly different nature. If any such damage shall be caused
by the acts of neglect of the Tenant, the Landlord may, at its option, repair
such damage, whether caused to the building or the tenants thereof, and the
Tenant shall thereupon reimburse the Landlord the total cost of such damage both
to the building and to the tenants thereof. The Tenant further agrees that all
personal property upon the demised premises shall be at risk of the Tenant only
and that the Landlord shall not be liable for any damage thereto or theft
thereof. Nor shall the landlord be liable for the stoppage or interruption of
water, light, heat, air conditioning, janitor or elevator service, caused by
riot, strike, accident, or to make needful repairs, or by any cause over which
the Landlord has no control. Nor shall the Landlord be liable for any act or
neglect of the janitors or other employees not authorized by the Landlord. And
such failure, delay or default of the janitors or employees shall not be
construed or considered as an actual or constructive eviction of the Tenant nor
shall it in any way operate to release the Tenant from the punctual performance
of each and all of the other covenants herein contained by the Tenant to be
performed.
RIGHTS OF LANDLORD ON DEFAULT
EIGHTH: That if default shall at any time be made by said Tenant in the
payment of the rent hereby reserved, or any installment thereof, or if default
shall be made in any of the other covenants herein contained, to be kept,
observed and performed by the Tenant, or if the leasehold interest shall be
levied on under execution, or in the event of the insolvency or bankruptcy of
the Tenant, or the filing of any petition under the bankruptcy statute,
voluntarily or involuntarily and whether or not resulting in an adjudication in
bankruptcy, or in the event of a partial or general assignment for the benefit
of a creditor, then, and in any of said cases, the Landlord may, at its option,
at once, without notice to the Tenant, terminate this lease; and upon the
termination of said lease at the option of the Landlord as aforesaid, or at the
expiration by lapse of time of the term hereby demised, the Tenant will at once
surrender possession of said premises to the Landlord, and remove all effects
therefrom, and if such possession be not immediately surrendered, the Landlord
may forthwith re-enter said premises and repossess itself thereof as of its
former estate and remove all persons and effects therefrom, using such force as
may be necessary, without being deemed guilty of any manner of trespass or
forcible entry and detainer. And the Tenant expressly waives the service of any
notice of intention to terminate this lease or to re-enter said premises, and
waives the service of any demand for payment of rent or for possessions, and
waives the service of any and every other notice or demand prescribed by any
statute or other law, and agrees that the simple breach of any of the said
covenants shall, of itself, without the service of any notice or demand
whatever, constitute a forcible detainer by the Tenant of said premises, within
the meaning of the statutes, of the State of Tennessee. No receipt of moneys by
the Landlord from the Tenant, after the termination in any way of this lease, or
after giving of any notice, shall reinstate, continue or extend the term of this
lease or affect any notice given to the Tenant prior to the receipt of such
money, it being agreed that after the service of notice of the commencement of a
suit, or after final judgment for possession of said premises, the Landlord may
receive and collect any rent due, and the payment of said rent shall not waive
or affect said notice, said suit or said judgment. If the tenant shall not
remove all effects from said premises as above agreed, the Landlord may, at its
option, remove the same in any manner that the Landlord shall choose and store
the same without liability to the Tenant for loss thereof, and the Tenant will
pay the Landlord, on request, any and all expense incurred in such removal and
also storage on said effects for any length of time during which the same shall
be in the Landlord's possession; or the Landlord may at its option, without
notice, sell the said effects or any of the same for such price as the Landlord
may deem best and apply the proceeds of such sale upon any amounts due under
this lease from the Tenant to the Landlord, including the expenses of the
removal and sale.
RIGHTS OF LANDLORD ON ABANDONMENT
NINTH: That in event the Tenant shall vacate said premises or abandon the
same during the life of this lease, the Landlord may, at its option, without
terminating this lease, but the Landlord shall not be under any obligation to do
so, enter into said premises, remove the Tenant's signs therefrom, and relet the
same for the account of the Tenant, for such rent and upon terms as shall be
satisfactory to the Landlord, without such re-entry working a forfeiture of the
rents to be paid and the covenants to be performed by the Tenant during the full
term of this lease; and for the purpose of such re-letting the Landlord is
authorized to make any repairs, changes, alterations or additions in or to said
demised premises that may be necessary or convenient, and if a sufficient sum
shall not be realized monthly from such re-letting, after paying all of the
costs and expenses of such re-letting the collection of the rent accruing
therefrom each month to satisfy the monthly rent above provided to be paid by
the Tenant, then the Tenant will pay and satisfy such deficiency each month upon
demand therefor.
LOSS OR DAMAGE TO PREMISES
TENTH: Should the building upon the demised premises be totally destroyed
by fire or other cause, or so damaged that rebuilding or repairs cannot be
completed within one hundred and eighty (180) days from date of fire, or other
cause of damage, this lease shall terminate and the Tenant shall be allowed an
abatement of rent from the date of such damage or destruction. However, if the
damage is such that rebuilding or repairs can be completed within 180 days, the
Landlord covenants and agrees to make such repairs with reasonable promptness
and dispatch, and to allow Tenant an abatement in the rent for such time as the
building is untenantable, or proportionately for such portion of the leased
premises as shall be untenantable and the Tenant covenants and agrees that the
terms of this lease shall not otherwise be affected.
CONDEMNATION
ELEVENTH: If the whole of the demised premises shall be taken or condemned
by any competent authority for public or quasi public use or purpose, then, and
in that event, the term of this lease shall cease and terminate when the
possession of the demised premises so taken shall be required for such use or
purpose and without apportionment of the award. If any part, less than the
whole, of the demised premises shall be so taken or condemned, then, and in that
event, the Landlord shall have the option exercisable by notice in writing to
the Tenant within sixty (60) days from the notice to Landlord of the taking or
condemnation, to terminate this lease; and in the event Landlord does not
exercise its option reserved herein to so terminate this lease, it shall
continue with reference to the portion of the demised premises not taken or
condemned unless the same is rendered untenantable by such taking and
condemnation or cannot be made tenantable by repairs to be conducted by Landlord
at its expense. In either event, the entire award for the taking and
condemnation of the premises shall belong to Landlord, and Tenant shall have no
interest therein; and in the event this lease continues with reference to the
portion of the demised premises not taken, the rental specified hereunder shall
be prorated and adjusted on a square footage basis. In the event that this lease
terminates by a taking or condemnation of the whole of the demised premises or
by the election on the part of Landlord as provided herein, the current rental
shall in either case be apportioned to the date of termination of the lease.
REDECORATION
TWELFTH: That if the Tenant shall move from said premises at any time prior
to the termination of this lease, the Landlord shall have the right to enter
upon said premises for the purpose of decorating the same or making alterations
or changes therein, without such entry in any manner affecting the obligation of
the Tenant hereunder.
<PAGE> 3
MOVING TENANT
THIRTEENTH: Landlord reserves the right to move Tenant to other space in
said building on thirty days' notice. Tenant to have the option within ten days
from the date of said notice to agree with Landlord upon new space. In case
Landlord and Tenant do not agree within said ten days upon terms of removal,
then this lease to become null and void and of no further effect, after thirty
days from the date of above notice. Landlord agrees to pay expenses of moving
Tenant to the new space agreed upon.
RIGHTS OF LANDLORD
FOURTEENTH: The right of the Landlord to terminate this lease as herein set
forth is in addition to and not in exhaustion of such other rights that the
Landlord has, or causes of action that may accrue to the Landlord because of the
Tenant's failure to fulfill, perform or observe the obligations, agreements or
covenants of this lease, and the exercise or pursuit by the Landlord of any of
the rights or causes of action accruing hereunder shall not be an exhaustion of
such other rights or causes of action that the Landlord might otherwise have.
WAIVERS
FIFTEENTH: No waiver of any condition expressed in this lease shall be
implied by any neglect of the Landlord to declare a forfeiture on account of the
violation of such condition if such violation be repeated or continued
subsequently and no express waiver shall affect any condition other than the one
specified in such waiver, and that one only for the time and in the manner
specifically stated.
ATTORNEYS
SIXTEENTH: That the Tenant will pay all reasonable attorney's fees and
expenses the Landlord incurs in enforcing any of the obligations of the Tenant
under this lease, or in any litigation or negotiation in which the Landlord
shall without its fault, become involved through or on account of this lease.
LIENS
SEVENTEENTH: A first lien is hereby expressly reserved by the Landlord and
granted by the Tenant upon the term of this lease and upon all interest of the
Tenant in this leasehold for the payment of rent and also for the satisfaction
of any cause of action which may accrue to the Landlord by the provisions of
this instrument. A first lien is also expressly reserved by the Landlord and
granted by the Tenant upon all personal property, fixtures, improvements and all
other fixtures erected or put in place or that may be erected or put in place
upon the premises by or through the Tenant or other occupants for the payment of
rent and also for the satisfaction of any causes of action which may accrue to
the Landlord by the provisions of this instrument.
HOLD OVER
EIGHTEENTH: That the Tenant will pay to the Landlord, as liquidated
damages, double rent for all the time the Tenant shall retain possession of said
premises or any part thereof after the termination of this lease, whether by
lapse of time or otherwise; but the provisions of this clause shall not operate
as a waiver by the Landlord of any right of re-entry hereinbefore provided; nor
shall any waiver by the Landlord of its right to terminate this lease for breach
of covenant affect its right to terminate this lease for any later breach of the
same or another covenant.
AIR RIGHTS
NINETEENTH: It is understood and agreed that this lease does not grant any
rights to light and air over property except public streets adjoining the land
on which said building is situated.
HOLD HARMLESS
TWENTIETH: Tenant covenants to save and hold the Landlord harmless from
violations of the laws of the United States, of the State in which the demised
premises are located, and the ordinances and laws of the city in which the
demised premises are located.
EXTRA USE OF PREMISES
TWENTY-FIRST: That in consideration of the execution of this lease by the
Landlord, the Tenant shall not use said premises for any purpose except that
which is above specified, and in particular will not expose nor offer for sale
on said premises, any alcoholic or other liquors, tobacco, drugs, flowers,
candies, confections nor any other thing or things whether of a like or of a
wholly different nature, without the written consent of the Landlord, the right
being hereby reserved to the Landlord to grant to any person, firm or
corporation the exclusive right and privilege to conduct any particular business
in said building, and such exclusive right and privilege so granted shall be
binding upon the Tenant hereunder the same as though specifically incorporated
in this lease.
ELECTRICAL & MECHANICAL IMPROVEMENTS
TWENTY-SECOND: Tenant shall not install or connect any air conditioning
equipment, electric-driven motor or any electrical, gas or water appliance or
equipment, without first submitting the same to Landlord and securing its
written consent. If such consent is obtained, Tenant shall each month promptly
pay the prevailing City or utility district in which the demised premises are
located, rates for the gas, electricity and/or water used by the Tenant for the
operation of such appliances, in addition to the rent provided for in Section
FIRST of this lease. With respect to air conditioning or any other electrical,
gas or water appliance or equipment installed by or under Tenant, Landlord shall
have the right to require that the premises be restored to the condition
existing prior to the installation of said appliance, including the removal of
any or all ducts, wiring, piping, etc., and the repair and replacement of all
damage caused by such removal, or, at Landlord's option, the right to retain all
ducts, wiring, piping, etc., and the right to require the delivery of demised
premises in the condition as changed as the result of the installation of such
ducts, wiring, piping, etc. Unless parties agree to the contrary, nothing herein
shall, however, prevent Tenant from removing the air conditioning or other
electrical units installed by or under Tenant, provided Tenant is not then in
default hereunder.
STORAGE
TWENTY-THIRD: If Tenant shall fail to remove all effects from said premises
upon termination of this lease for any cause whatsoever, Landlord may at its
option remove the same in any manner that Landlord shall choose and store said
effects without liability to Landlord for loss thereof, and Tenant agrees to pay
Landlord on demand any and all expenses incurred in such removal, including
court costs and attorney's fees and storage charge on such effects for any
length of time the same shall be in Landlord's possession, or Landlord may at
its option without notice sell said effects or any part of the same at private
sale and without legal process for such price as Landlord may obtain and apply
the proceeds of such sale upon any amounts due under this lease from Tenant to
Landlord and upon the expense incident to the removal and sale of said effects.
DEFECTS
TWENTY-FOURTH: Said Tenant shall give to said Landlord or its agent prompt
written notice of any accident to or defects in the water pipes, gas pipes, air
conditioning apparatus, to be remedied by said Landlord with due diligence from
and after its receipt of any such notice.
SUBORDINATION
TWENTY-FIFTH: This lease is subject and subordinate to all present
mortgages affecting the real estate and improvements thereon of which the
demised premises form a part, and to all renewals and extension thereof, and to
any mortgage which may hereafter be executed affecting the same.
LIQUIDATED DAMAGES
TWENTY-SIXTH: It is agreed between the parties hereto that if the rent
stipulated herein at any time shall not be paid when due, then all subsequent
installments of rent, remaining unpaid, shall forthwith become due and payable
at the option of Landlord with notice to Tenant, and in case the said Tenant is
declared bankrupt or voluntarily offers to creditors terms of composition, or in
case a receiver is appointed to take charge of and conduct the affairs of
Tenant, such claim for further unpaid installments of rent due under this lease
shall be considered liquidated damages and shall constitute a debt provable in
bankruptcy or receivership.
REMEDIES
TWENTY-SEVENTH: No act or thing done by Landlord or its agents during the
term hereby granted shall be deemed an acceptance of a surrender of said
premises, and no agreement to accept a surrender of said premises shall be valid
unless the same be made in writing and subscribed by Landlord. The provision in
this lease of any particular remedy shall not preclude Landlord from any other
remedy Landlord might have, either in law or in equity, nor shall the waiver of
or redress for any violation of any covenant or condition in this lease
contained or any of the rules and regulations set forth herein in Exhibit "B" or
hereafter adopted by Landlord, prevent a subsequent act, which would have
originally constituted a violation, from having all the force and effect of an
original violation. In case it should be necessary or
<PAGE> 4
proper for Landlord to bring any action under this lease or to consult or place
said lease, for any amount payable by Tenant thereunder, with an attorney
concerning or for the enforcement of any of Landlord's rights hereunder, then
Tenant agrees in each and any such case to pay to Landlord a reasonable
attorney's fee. The receipt by Landlord of rent with knowledge of the breach of
any covenant in this lease contained, shall not be deemed a waiver of such
breach. The failure of Landlord to enforce any of the rules and regulations set
forth in Exhibit "B," or hereafter adopted, against the Tenant and/or any other
tenant in the building shall not be deemed a waiver of such rules and
regulations. The receipt by Landlord of rent from any assignee, under-tenant or
occupant of said premises shall not be deemed a waiver of the covenant in this
lease contained, against assignment, and underletting or an acceptance of the
assignee, under-tenant or occupant as Tenant, or a release of Tenant from the
further observance or performance by Tenant of the covenant in this lease
contained, on the part of the Tenant to be observed and performed. No provision
of this lease shall be deemed to have been waived by Landlord unless such waiver
be in writing signed by Landlord. In case of termination of this lease by
Landlord under any option herein provided for, Landlord may re-enter the
premises without notice or demand, and in that event rent shall become due and
be apportioned and paid up to and including the day of such entry.
COMPLETION OF PREMISES
TWENTY-EIGHTH: The parties hereto agree that if, through no fault of
Tenant, the demised premises shall not be ready for occupancy at the date upon
which the term hereby demised is to begin, the rent under this lease shall not
commence until the said demised premises are ready for occupancy, where-upon
this lease and all the covenants, conditions and agreements herein contained
shall be given full force and effect, and the allowance of rent herein provided
to be paid by Tenant for such period prior to delivery of the demised premises
to said Tenant for occupancy, shall be in full settlement of all claims which
Tenant might otherwise have by reason of said demised premises not being ready
for occupancy on the date of the beginning of the term as set forth herein. The
certificate of the architect or company in charge of the construction of said
building shall control conclusively the date upon which the demised premises are
ready for occupancy. The parties also agree that for the purpose of completing
or of making repairs or alterations in any portion of said building. Landlord
may use one or more of the street entrances, the halls, passageways and
elevators of said building; provided, however, that there shall be no
unnecessary obstruction of the right of entry to the demised premises while the
same are occupied.
ESCALATION
TWENTY-NINTH: Intentionally omitted.
<PAGE> 5
THIRTIETH: The Landlord covenants that the Tenant upon paying the rent
and complying with the terms, covenants and conditions aforesaid shall and may
peaceably and quietly have, hold, and enjoy the leased premises for the term
aforesaid.
Further, the Landlord and Tenant covenant with each other:
(a) That all rights and remedies of the Landlord under this lease shall be
cumulative, and none shall exclude any other rights and remedies allowed by law.
(b) That the word "Landlord" and "Tenant" wherever used herein shall be
construed to mean Landlords and Tenants in all cases where there is more than
one Landlord or Tenant, and the necessary grammatical changes required to make
the provisions hereof apply either to corporations or individuals, men or women,
shall in all cases be assumed as though in each case fully expressed.
(c) Tenant hereby waives and renounces any and all homestead exemption
rights he may have now, or hereafter, under or by virtue of the constitution and
laws of the State in which the demised premises are located, or of any other
state, or of the United States, as against the payment of said rental or any
portion thereof, or any other obligation or damage that may accrue under the
terms of this agreement.
(d) It is understood and agreed between the parties hereto that notice from
the Landlord mailed or delivered to the premises leased thereunder shall
constitute sufficient notice to the Tenant to comply with the terms of this
contract.
(e) It is further understood and agreed between the parties hereto that any
charges against the Tenant by the Landlord for supplies, services, or work done
on the premises by order of the Tenant, or otherwise accruing under this
contract, shall be considered as rent due and shall be included in any lien for
rent due and unpaid.
(f) That all covenants, conditions, agreements and undertakings in this
lease shall extend to, and be binding on, the respective heirs, executors,
administrators, successors and assigns of the respective parties hereto the same
as if they were in every case named.
(g) That this lease embodies the entire agreement of the parties hereto and
that the same may not be altered, changed, or amended except by an instrument in
writing executed by both parties.
(h) That this lease shall be interpreted in accordance with the laws of the
State of Tennessee. If any clause or provision hereof should be determined to
be illegal, invalid or unenforceable under present or future laws effective
during the term of this lease or any renewal term hereof, then and in that
event, it is the express intention of the parties hereto that the remainder of
this lease shall not be affected thereby, and it is also the express intention
of the parties hereto that in lieu of each clause or provision of this lease
which may be determined to be illegal, invalid or unenforceable, there may be
added as a part of this lease a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
THIRTY-FIRST: Periodical replacement of fluorescent tubes and bulbs will be
provided by Landlord, but the cost of such replacement tubes or bulbs will be
borne by Tenant.
ADDENDA TO LEASE
THIRTY-SECOND:
See attached
IN WITNESS WHEREOF, the parties hereto have, on the day and year first above
written, executed this lease agreement in duplicate, one copy to be retained by
each of the parties and each such copy to be considered as an original for all
purposes.
ATTEST: CUMMINS STATION LLC
/s/ Buist Richardson By /s/ Landlord
- ---------------------------------- ----------------------------------
Landlord, Chief Member
-------------------------------------
ATTEST OR WITNESS: NEWORDER MEDIA, INC.
/s/ Buist Richardson By /s/ Jeff McLaren
- ---------------------------------- ----------------------------------
Tenant, President
<PAGE> 6
EXHIBIT "B"
RULES AND REGULATIONS
Rule 1. No sign, picture, advertisement, or notice shall be displayed,
inscribed, painted or affixed, on any part of the outside or inside of said
building, or on or about the premises hereby demised, except on the glass of the
doors and windows of said premises and on the Directory Board of the building,
and then only of such color, size, style and materials as shall be first
specified by the Landlord in writing on this lease. No "For Rent" signs shall be
displayed by the Tenant, and no showcases, or obstructions, signs, flags, barber
poles, statuary, or any advertising device of any kind whatever shall be placed
in front of said building or in the passageways, halls, lobbies, or corridors
thereof by the Tenant; and the Landlord reserves the right to remove all such
showcases, obstructions, signs, flags, barber poles, statuary or advertising
devices and all signs other than those provided for, without notice to the
Tenant and at his expense.
Rule 2. The Tenant shall not, without the Landlord's written consent, put
up or operate any steam engine, boiler, machinery or stove upon the premises, or
carry on any mechanical business thereon, or do any cooking thereon, or use or
allow to be used upon the demised premises oil, burning fluids, camphene,
kerosene for heating, warming or lighting, or anything (except gas or
incandescent electric lights, and those only of such company or companies as may
be supplying the building) for illuminating said premises. No article deemed
extra hazardous on account of fire and no explosives shall be brought into said
premises.
Rule 3. No additional locks shall be placed upon any doors of the premises.
Upon the termination of the lease the Tenant shall surrender to the Landlord all
keys of the premises.
Rule 4. Safes, furniture, boxes or other bulky articles shall be carried
into the premises only with written consent of the Landlord first obtained, and
then only by means of the elevators, by the stairways or through the windows of
said building as the Landlord may in writing direct, and at such times and in
such manner and by such persons as the Landlord may direct. Safes and other
heavy articles shall be placed by the Tenant in such places only as may be first
specified in writing by the Landlord, and any damage done to the building or to
tenants or to other persons taking a safe or other heavy article in or out of
the demised premises, from overloading a floor, or in any other manner shall be
paid for by the Tenant causing such damage.
Rule 5. Elevator service and/or self-service elevator will be furnished by
the Landlord daily whenever said service shall, in the Landlord's judgement, be
required for the proper occupation and use of said premises.
Any person employed by the Tenant to do janitor work, shall, while in said
building and outside of said demised premises, be subject to and under the
control and direction of the Superintendent of said building (but not as agent
or servant of said Superintendent or of the Landlord).
The Landlord may retain a pass key to the premises and be allowed
admittance thereto at all times to enable its representatives to examine said
premises from time to time.
Rule 7. The Landlord and its agents shall have the right to enter the
demised premises at all reasonable hours for the purpose of examining or
exhibiting the same.
Rule 8. The Landlord, and its agents, shall have the right to enter the
demised premises at all reasonable hours for the purpose of making any repairs,
alterations, or additions which it or they shall deem necessary for the safety,
preservation, or improvement of said premises of said building, and the Landlord
shall be allowed to take all material into and upon said premises that may be
required to make such repairs, improvements and additions, or any alterations
for the benefit of the Tenant without in any way being deemed or held guilty of
an eviction of the Tenant; and the rent reserved shall in no wise abate while
said repairs, alterations, or additions are being made; and the Tenant shall not
be entitled to maintain a set-off or counter-claim for damages against the
Landlord by reason of loss or interruption to the business of the Tenant because
of the prosecution of any such work. All such repairs, decorations, alterations,
additions, and improvements shall be done during ordinary business hours.
Rule 9. If the Tenant desires telegraphic or telephonic connections, or the
installation of any other electrical wiring, the Landlord will, upon receiving a
written request from the Tenant, direct the electricians as to where and how the
wires are to be introduced and run, and without such directions no boring,
cutting or installations of wires will be permitted.
Rule 10. The Tenant shall not allow anything to be placed against or near
the glass in the partitions, between the premises leased and the halls or
corridors of the building, which shall diminish the light in, or prove unsightly
from the halls or corridors.
Rule 11. No electric current, intended for light or power purposes, shall
be used by the tenants, excepting that furnished or approved by the Landlord;
nor shall electric or other wires be brought into the premises, except upon the
written consent and approval of the Landlord.
Rule 12. The Tenant, when closing his office for business at any time,
shall see that all windows are closed, thus avoiding possible damage from fire,
storm, rain or freezing.
Rule 13. The Tenant shall not allow anything to be placed on the outside
window ledges of the premises, nor shall anything be thrown by the Tenant, or
his employees, out of the windows of the building; nor shall they undertake to
regulate the thermostats, if any, which control the heat or air conditioning.
Rule 14. The water and wash closets and other plumbing fixtures shall not
be used for any purposes other than those for which they were constructed, and
no sweepings, rubbish, rags, or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by the Tenant
who, or whose servants, employees, agents, visitors or licensees, shall have
caused the same.
Rule 15. No bicycle or other vehicle, and no animal shall be brought into
the offices, halls, corridors, elevators or any other parts of said building, by
the Tenant, his agents or employees.
Rule 16. No person shall disturb the occupants of this or any adjoining
building premises by the use of any musical instruments, unseemly noises,
whistling, singing or in any other way.
Rule 17. The premises leased shall not be used for lodging or sleeping, nor
for any immoral or illegal purposes or for any purpose that will damage the
premises.
Rule 18. The entrances, corridors, passages, stairways and elevators shall
be under the exclusive control of the Landlord and shall not be obstructed, or
used by the Tenant for any other purpose than ingress and egress to and from the
leased premises.
Rule 19. Canvassing, soliciting and peddling in the building is prohibited
and each Tenant shall co-operate to prevent the same.
Rule 20. All office or other equipment of any electrical or mechanical
nature shall be placed by Tenant in demised premises in approved settings to
absorb or prevent any vibration, noise or annoyance.
Rule 21. No water cooler, air conditioning unit or system or other
apparatus shall be installed or used by any Tenant without the written consent
of Landlord.
Rule 22. There shall not be used in any space, or in the public halls of
said building, either by any tenant or by jobbers or others, in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and side guards.
Rule 23. The Landlord reserves the right to make such other and further
reasonable rules and regulations as in its judgment may from time to time be
needful for the safety, care and cleanliness of the premises, and for the
preservation of good order therein, and any such other or further rules and
regulations shall be binding upon the parties hereto with the same force and
effect as if they had been inserted herein at the time of the execution hereof.
<PAGE> 7
EXHIBIT A
Map with layout of floor plan of 4th floor, Suite 450, of 209 10th Avenue
South with hand drawn heavy outline of leased space.
<PAGE> 8
ADDENDUM TO LEASE
This Addendum To Lease, entered into as of this 12 day of March, 1995, by
and between NewOrder Media, Inc., a Tennessee corporation, ("Tenant") and
Cummins Station LLC, a Tennessee corporation ("Landlord"), supplements and is
hereby made a part of the Lease Agreement ("Lease") entered into between Tenant
and Landlord on the 27 day of March, 1995.
Section 3 of the Lease is hereby modified and amended to provide Tenant
with two (2) options to renew the Lease for additional terms of five (5) years
each. Rent during the first renewal term (May 1, 2000 - April 30, 2005) shall be
at the lessor of the then-current market base rent for comparable space in the
building or $7.00 per square foot. Rent during the second renewal term (May 1,
2005 - April 30, 2010) shall be at the lessor of the then-current market base
rent for comparable space in the building or $9.00 per square foot.
The following provisions of section 5 of the Lease enumerated below are
hereby modified and amended as follows:
Paragraph THIRD. Prior to the semicolon in the fourth line, insert
"provided, however, that the foregoing shall not apply as against Tenant with
respect to any defects that would not be obvious upon a general inspection of
the premises".
Paragraph FIFTH. Landlord hereby approves and consents to the preliminary
plans for leasehold improvements attached to this Addendum To Lease as Exhibit
A-1. Landlord's consent to the final plans substantially conforming to the
attached preliminary plans shall not be unreasonably withheld. Any provisions to
the Lease to the contrary notwithstanding, Tenant shall not be required by to
remove any improvements, additions or alterations that have been approved by
Landlord. Any provisions to the Lease to the contrary notwithstanding, Tenant
shall have at its option the right to remove the following items upon expiration
of the Lease: front receptionist's desk, kitchen cabinetry, installed kitchen
appliances, copy room cabinetry and lighting fixtures. In addition to the
aforesaid, Tenant shall have at its option the right to remove any Tenant
installed doors and door frames, provided that building standard doors and door
frames are installed as replacements at Tenant expense, and Tenant shall have
the right to remove any Tenant installed windows and window frames, provided
that building standard, finished walls are installed as replacements at Tenant
expense.
Paragraph SIXTH. Tenant shall in no way be responsible for the physical
condition of the premises to be in compliance with any requirements and
regulations mentioned in this paragraph. Compliance with such regulations shall
be the exclusive responsibility of Landlord (including, but not limited to,
compliance with federal and state environmental laws and the Americans With
Disabilities Act).
Paragraph SEVENTH. Any provisions to the Lease to the contrary
notwithstanding, in the event of any stoppage or interruption of water, light,
heat, air conditioning, janitor or elevator services, or any such condition that
shall render the premises or a portion thereof untenantable and should such
condition exist or continue for more than 72 hours, such condition shall
constitute a constructive eviction.
Landlord by TP
-----
-1 of 4-
Tenant by JM
-----
<PAGE> 9
Paragraph EIGHTH. All waivers of notice set forth in this paragraph or
elsewhere in the Lease are hereby deleted therefrom. In the event of a default
by Tenant under the Lease, Landlord shall give Tenant written notice thereof and
a reasonable period to cure any alleged default, but in no case less than 10
days for a default that can be cured by money and 30 days for a non-monetary
default. In addition to the aforesaid, the filing of an involuntary bankruptcy
petition against Tenant shall not be an event of default unless such a petition
is not dismissed within 60 days from the filing thereof.
Paragraph TENTH. This paragraph is to amended and modified to state
that in the event of any interruption of Tenant's business, due to damage by
fire or other act of God on the building upon the demised premises, lasting
longer in an uncorrected and unrepaired state for more than 96 hours, such
condition shall constitute a constructive eviction.
Paragraph ELEVENTH. Any provision to the Lease to the contrary
notwithstanding, in the event that the whole of the demised premises or a
portion thereof shall be taken or condemned by any competent authority for
public or quasi-public use, such an event shall be considered a constructive
eviction.
Paragraph THIRTEENTH. In the event that Landlord exercises its right to
move Tenant to another space in the building, such space shall be comparable to
Tenant's existing space in all material aspects including views from the space
and number of windows, and Landlord shall, at Landlord's sole cost and expense,
provide leasehold improvements to the new space comparable to Tenant's existing
space and reimburse Tenant for any and all costs incurred with the change of
location within the building.
Paragraph SIXTEENTH. This paragraph is hereby amended to delete the
phrase "or in any litigation in which Landlord shall, without its fault, become
involved through or on account of this lease."
Paragraph TWENTIETH. This section is deleted in its entirety and
replaced with the following: "Tenant and Landlord each covenants to save and
hold the other harmless from any costs or liabilities, including, but not
limited to, attorney's fees, arising from or related to any neglect act or
omission of the other."
Paragraph TWENTY-FIRST. Landlord and Tenant hereby stipulate and agree
that the purpose of this paragraph is to allow Landlord to control the nature
and extent of vending of the items mentioned in this paragraph within the
building.
Paragraph TWENTY-SECOND. This paragraph is amended by inserting, at
the beginning thereof, the following: "Except as otherwise provided in this
Lease or in the plans attached hereto,". Landlord agrees that there shall be no
separate metering for any utilities other than electrical and natural gas
service. Furthermore, Tenant shall not be required to remove any leasehold
improvements, additions or modifications installed in accordance with the terms
of the Lease, but Tenant shall be permitted to remove various installed
improvements as mentioned in section 5, paragraph fifth hereinabove. Landlord
and Tenant agree that Landlord shall be responsible for, and shall timely
undertake or cause to be undertaken, repairs and maintenance as necessary from
time to time in or to any of the common areas or parking areas; in particular,
without limiting the forgoing, Landlord shall be responsible for any leaks into
the premises, whether from outside the building or
Landlord by: TP
-2 of 4- -----
Tenant by: JM
-----
<PAGE> 10
from other tenant premises within the building. Landlord shall also be
responsible for building security and for ensuring that the common areas and
facilities are clean, comfortable and operational.
Paragraph TWENTY-FIFTH. This paragraph is amended by adding the
following to the end thereof. "Provided, however, that in the event the building
is sold at foreclosure or by deed in lieu of foreclosure, this Lease shall
continue in full force and effect as if such purchaser were the original
landlord, except that such purchaser shall not be liable for any act or omission
of any prior landlord and shall not be subject to any offsets or defenses which
Tenant might have against such prior landlord, and Tenant shall attorn to such
purchaser and recognize the same as Landlord hereunder, provided that such
purchaser agrees in writing not to disturb Tenant's possession of the premises."
Rule 8. in Exhibit "B" Rules And Regulations of the Lease is hereby
modified and amended to ensure that any repairs described in this paragraph must
not cause the business of Tenant to be unreasonably impaired, and Landlord
hereby agrees that any repairs that would cause aforesaid unreasonable
impairment must be performed after standard business hours.
The following additional terms are hereby made a part of the Lease:
LEASEHOLD IMPROVEMENTS. Tenant shall be responsible for its own
leasehold improvements made to the premises. An amount of sixty-one thousand
dollars ($61,000.00) of Tenant furnished leasehold improvements shall be paid by
Landlord, provided that Tenant furnishes Landlord with appropriate construction
invoices and lien waivers for construction. Landlord payment of the
abovementioned moneys is recognized and included in the rents due under section
4 of this Lease.
Landlord shall provide the secondary entrance into the demised space
and install the exterior, insulated walls demising the premises in such a
manner that said walls are ready-to-paint. Further, Landlord shall install four
(4) absent windows to the exterior of the building, located on the northern end
of Tenant premises, and shall install building standard storm windows on the
older exterior windows, located on the east and west ends of Tenant premises.
Landlord shall further demolish the brick and structure of the old freight
elevator currently occupying a portion of the premises and cause any piping
structures obscuring the window behind aforesaid freight elevator to be
relocated near the closest building support post. Landlord shall make all
abovementioned improvements in such a manner that Tenant's occupancy of the
premises and installation of leasehold improvements are not hindered.
CONSTRUCTIVE EVICTION. Any constructive eviction (as mentioned in
section 5 hereinabove) shall give Tenant the option to terminate the Lease, or,
at Tenant's election, an equitable adjustment or abatement of rent for the
period. In addition to the aforesaid, a constructive eviction that results in a
termination of the Lease shall also entitle Tenant to an award based on the loss
of the unamortized portion of the value of any improvements constructed or
placed by Tenant on the premises and any loss based on the interruption of
occupancy. Should any event that would cause a constructive eviction not result
in a termination of the Lease, Tenant is entitled, to any costs resulting from
any alterations or restorations that were necessitated by the said event.
PARKING. Landlord shall provide for Tenant and its invitees twenty (20)
parking spaces: eight (8) spaces to be located in the lot across from the main
entrance to the building on 10th Avenue South ("Lot A") and twelve (12) spaces
to be located in the lot at the south end of the
Landlord by: TP
-----
-3 of 4-
Tenant by: JM
-----
<PAGE> 11
building ("Lot B"). Further, Tenant shall have the right to lease up to and
including eight (8) additional spaces in Lot B at the rate of $40.00 per space
per month. Guests of Tenant shall be allowed to park in Lot A for thirty (30)
minutes without cost.
RIGHT OF FIRST REFUSAL. During the term of this Lease and provided that
Tenant is not in default of this Lease, Landlord agrees that prior to leasing to
a third party any part of the spaces immediately contiguous to Tenant's premises
("First Refusal Space"), Landlord shall notify Tenant in writing of Landlord's
intent to enter into negotiations with a third party to lease the First Refusal
Space. On or before the fifth (5th) business day after the receipt of such
notice, Tenant shall have the right to send to Landlord a notice stating that
Tenant elects to lease the First Refusal Space under the same terms, covenants
and conditions as the Lease except as outlined below.
The rents payable for the First Refusal Space shall be the prevailing
market rent, and Tenant shall provide any leasehold improvements to the First
Refusal Space. Landlord's consent to the aforesaid leasehold improvements shall
not be unreasonably withheld.
The First Refusal Space shall be added to Tenant's premises for the
remaining term of the Lease (including any extension term(s), if any). The First
Refusal Space shall become a part of Tenant's premises for all purposes of this
Lease, and any reference in this Lease to the term "Tenant premises" or
"premises" shall be deemed to refer to and include the First Refusal Space.
Tenant's obligation to pay any increased rents due to the addition of the First
Refusal Space shall commence with the date the First Refusal Space is made
usable by Tenant; said date shall be after a reasonable allowance of time that
shall be granted for Tenant to make any leasehold improvements to the First
Refusal Space.
Tenant's Right of First Refusal described herein is subordinate to any
rights of other tenants which exist as of the execution date of this Lease.
Promptly after Tenant's exercise of the Right of First Refusal, Landlord shall
prepare an amendment to the Lease to reflect changes in the size of Tenant
premises, rents due, and any other appropriate terms due to the addition of the
First Refusal Space. Tenant shall execute and return such an amendment to the
Lease within ten (10) days after its submission to Tenant.
This Right of First Refusal shall remain in effect during the term of
the Lease and shall be exercisable at any such time that Landlord seeks to lease
the First Refusal Space. This Right of First Refusal shall not be assignable.
REAL ESTATE BROKERAGE COMMISSION. Landlord shall pay Centennial, Inc.
a six percent (6%) commission based on the gross rent of $5.50 per square foot
for years one and two, $6.50 per square foot for years three, four and five.
Landlord by: TP
-----
-4 of 4-
Tenant by: JM
-----
<PAGE> 12
L E A S E A M E N D M E N T A G R E E M E N T
NO. 1
This is to amend the Lease Agreement dated 3/27/95 between CUMMINS
STATION, L.L.C. Lessor and NEWORDER MEDIA, INC. Lessee for Suite 450 located on
the 4th level of Cummins Station as follows:
Rental Amounts Changed as follows:
5/1/95 -- 4/30/97 $50,447.04/yr. or $4,203.92/mo.
5/1/97 -- 4/30/2000 $57,401.04/yr. or $4,783.42/mo.
ALL OTHER TERMS, CONDITIONS AND AGREEMENTS OF THE ORIGINAL LEASE AGREEMENT SHALL
REMAIN IN FULL FORCE AND EFFECT.
CUMMINS STATION, L.L.C. NEWORDER MEDIA, INC.
BY: /s/ Lessor BY: /s/ Jeff McLaren
- -------------------------------- ----------------------------
LESSOR Chief Member LESSEE
6/6/95
- -------------------------------- ----------------------------
DATE DATE
<PAGE> 13
L E A S E A M E N D M E N T A G R E E M E N T
No. 2
This is to amend the Lease Agreement dated 3/27/95 and Lease
Amendment Agreement No. 1 dated 6/6/95 between CUMMINS STATION, L.L.C. Lessor
and NEWORDER MEDIA, INC. Lessee for Suite 450 located on the 4th level of
CUMMINS STATION as follows: Effective March 1, 1999, Lessee rents additional
space on the 5th Floor, Suite 547, consisting of approximately 6,500 square feet
at the following rental rates:
3/1/99 -- 2/28/2001 $90,155.00/yr. or $7,512.92/mo.
3/1/2001 -- 2/28/2004 $92,170.00/yr. or $7,680.83/mo.
3/1/2004 -- 4/30/2005 $75,400.00/yr. or $6,283.33/mo. (no longer amortized)
Lessee shall take possession of said premises on August 1, 1998.
Twenty-four (24) parking permits included with this amendment (l4 in A Lot and
10 at the Shed). Optional parking spaces: $75 per month each, rate good for 6
years. This would be over and above the 8 optional spaces currently available at
$40 per month. Lessor to provide hole for interior stairwell. Lessee extends
term of original lease and amendment on Suite 450 from 4/30/2000 to 4/30/2005.
Rental rates for total leased area of 13,454 square feet are as follows:
3/1/99 - 4/30/2000 $147,556.00/yr. or $12,296.33/mo.
5/1/2000 - 2/28/2001 $138,833.00/yr. or $11,569.42/mo.
3/1/2001 - 2/28/2004 $140,848.00/yr. or $11,737.33/mo. (no longer amortized)
3/1/2004 - 4/30/2005 $124,078.00/yr. or $10,339.83/mo.
Dates to be determined.
Tenant shall have option to lease current MPL space and 2,200 square foot space
currently occupied. This option shall run concurrently with existing lease.
Option must be exercised within 5 days of notice.
Tenant shall have option to renew lease for two additional five year periods.
Rate for first five year option shall be $11.60/sq. ft. Rates for second five
year option shall be: 2 years at $13.00/sq. ft. and 3 years at $14.00/sq. ft.
Lessor shall amortize up to $83,850.00 on leasehold improvements on Suite 547.
Lessor's payment of this amount shall be recognized and included in the amounts
stated above. ALL OTHER TERMS, CONDITIONS AND AGREEMENTS OF THE ORIGINAL LEASE
AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT.
CUMMINS STATION, L.L.C. NEWORDER MEDIA, INC.
BY: /s/ LESSOR BY: /s/ Robert A. Frist, Jr.
- ------------------------------- -------------------------------
LESSOR Chief Member LESSEE
9/22/98 9/22/98
- ------------------------------- -------------------------------
DATE DATE
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of (1) our report dated September 24, 1999, with respect to the financial
statements of HealthStream, Inc., and (2) of our report dated September 17, 1999
with respect to the financial statements of SilverPlatter Education, Inc., in
the Registration Statement (Form S-1) and related Prospectus of HealthStream,
Inc. dated October 13, 1999.
/s/ Ernst & Young LLP
Nashville, Tennessee
October 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHSTREAM, INC. FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 50,823
<SECURITIES> 0
<RECEIVABLES> 528,637
<ALLOWANCES> 36,500
<INVENTORY> 0
<CURRENT-ASSETS> 551,318
<PP&E> 981,663
<DEPRECIATION> 380,134
<TOTAL-ASSETS> 1,152,847
<CURRENT-LIABILITIES> 3,405,813
<BONDS> 31,968
0
410,000
<COMMON> 1,798,498
<OTHER-SE> (4,493,432)
<TOTAL-LIABILITY-AND-EQUITY> 1,152,847
<SALES> 1,716,094
<TOTAL-REVENUES> 1,716,094
<CGS> 1,057,453
<TOTAL-COSTS> 1,057,453
<OTHER-EXPENSES> 443,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330,482
<INCOME-PRETAX> (1,589,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,589,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,589,500)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHSTREAM, INC. FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,967,456
<SECURITIES> 0
<RECEIVABLES> 563,548
<ALLOWANCES> 38,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,514,458
<PP&E> 1,219,206
<DEPRECIATION> 470,850
<TOTAL-ASSETS> 5,296,814
<CURRENT-LIABILITIES> 2,260,069
<BONDS> 64,165
0
5,887,500
<COMMON> 3,056,776
<OTHER-SE> (5,971,696)
<TOTAL-LIABILITY-AND-EQUITY> 5,296,814
<SALES> 1,112,519
<TOTAL-REVENUES> 1,112,519
<CGS> 790,911
<TOTAL-COSTS> 790,911
<OTHER-EXPENSES> 764,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,052
<INCOME-PRETAX> (1,478,264)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,478,264)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,478,264)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
