<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
REGISTRATION NO. 333-88939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
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> <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
and code, and
telephone number, including area telephone number, including area
code, of code,
registrant's principal executive of agent for service)
offices)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C> <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. [ ]
---------------------
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
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering in the United States and
Canada of common stock (the "U.S. Prospectus"), and one to be used in a
concurrent underwritten public offering outside the United States and Canada of
common stock (the "International Prospectus"). The two prospectuses are
identical except for the front cover page and the section entitled
"Underwriting". Those sections or pages that will appear only in the U.S.
Prospectus are labeled "[U.S.]," and those that will appear only in the
International Prospectus are labeled "[I]." Unless so indicated with a [U.S.] or
[I], the language herein will appear in both Prospectuses. Final forms of each
Prospectus will be filed with the Securities and Exchange Commission under Rule
424(b) under the Securities Act of 1933.
An electronic version U.S. Prospectus will also be made available on
E*OFFERING CORP's Web site, located at www.eoffering.com. E*OFFERING is acting
as an underwriter in connection with the offering of securities registered under
this Registration Statement.
<PAGE> 3
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.
[U.S.]
SUBJECT TO COMPLETION, DATED APRIL 6, 2000
(HEALTHSTREAM LOGO)
5,000,000 SHARES
COMMON STOCK
We are offering 5,000,000 shares of our common stock. This is our initial
public offering and no public market currently exists for our shares. Our common
stock has been approved for listing on the Nasdaq National Market under the
symbol "HSTM." We anticipate that the initial public offering price will be
$9.00 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 750,000 shares of common stock to cover over-allotments.
------------------------------
ROBERTSON STEPHENS
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
E*OFFERING
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 4
[On the top left corner appears the "HealthStream" logo. Below the logo in the
center of the page appears the text "Becoming a leader in online healthcare
training and education by". About one inch below the above text appears the
number "1" with text to its right which reads "amassing one of the largest
libraries of online training and education courses,." About one inch below this
text appears the number "2" with text to its right which reads "managing them in
a Web-based administration system, and" About one inch below this text appears
the number "3" with text to its right which reads "distributing them through
healthcare organizations and our Web-based network of strategic partners."]
[Inside Front Cover]
<PAGE> 5
[On the left side of the page from the top of the page to the bottom are the
following: "Amass.," "Content partners.," a computer screen shot of an
interactive continuing education course with the caption along the bottom of
"This is one of many internal medicine courses from The Cleveland Clinic
Foundation offered exclusively through our distribution network.," "The
Cleveland Clinic Foundation," "Vanderbilt University Medical Center," "Duke
University Medical Center," "Scripps Clinic," "American Health Consultants," "GE
Medical Systems," "Content Statistics." and under that "3,000 Course hours owned
and under license," "1,300 Course hours currently online," and "2,500 Live
seminars listed on our online catalog, cmesearch.com"]
[On the middle of the page from the top of the page to the bottom are the
following: "Manage.", "HealthStream's Web-based systems:," and under that
"enables healthcare organizations to administer training," "attracts recurring
customers with mandated courses," "distributes high quality content to a world
wide audience," "collects and aggregates performance data", screen shot of
online CME programs offered by CMecourses.com, logo for HealthStream.]
[On the right hand of the page from the top of the page to the bottom:
"Distribute.", "Through Healthcare Organizations.", Under that "800 hospitals
are implementing our products to manage education for their employees.", copy of
the m3 logo to the left of "450 hospitals currently use m3 electronic learning
systems. Through our merger, these hospitals are primary candidates for our
online learning services.", copy of the de'MEDICI logo to the left of "150
hospitals utilize the de'MEDICI learning system, a Lippincott Williams and
Wilkins product based on our technology.", copy of the Columbia/HCA logo to the
left of "200 hospital provider network agrees to use our online learning
services."
In the middle of the page "Through Our Web Distribution Network.", screen shot
of Healtheon/WebMD Practice Web page and caption under the graphic of
"HealthStream is the exclusive provider of online education and training
services for all Web sites owned and operated by WebMD." At the bottom of a page
is a list in 3 columns, from top to bottom, left to right "ChannelHealth (IDX)",
"GE Medical Systems," "MedicaLogic," "Medsite," "PointShare," "and over 30
others..."]
[Color Foldout]
<PAGE> 6
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 , 2000, 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........... 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 28
Management.................................................. 44
Transactions with Executive Officers, Directors and More
than Five Percent Shareholders............................ 52
Principal Shareholders...................................... 56
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 62
United States Tax Consequences to Non-U.S. Holders.......... 64
Underwriting................................................ 66
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
Appendix: "Meet the Management" Presentation................ A-1
Iclick here for "Meet the Management" Presentation;
maintained at www.eoffering.comJ
</TABLE>
------------------------------
"HEALTHSTREAM," "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> 7
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. The terms "we," "us," "our"
and "our company" refer to HealthStream, Inc. and its subsidiaries as a combined
entity, except where the context requires otherwise.
OUR BUSINESS
We are pioneering a Web-based solution to meet the training and education
needs of the healthcare industry utilizing our proprietary system. Through
strategic relationships with medical institutions and commercial organizations,
including Vanderbilt University Medical Center, Duke University Medical Center,
The Cleveland Clinic Foundation, Scripps Clinic and American Health Consultants,
we have amassed over 3,000 hours of training and education courses. We currently
distribute over 1,300 hours of these courses online to allied healthcare
professionals, nurses, doctors and other healthcare workers. We will expand
distribution of our courses and services to include two methods. The first
method provides access to our courses and education management software on a
transactional basis over the Internet on an application service provider, or
ASP, basis. We have entered into a four-year agreement with Columbia/HCA
Healthcare Corporation, a provider network with over 200 hospitals, to provide
our courses and education management software using this ASP method. Under the
second method, we deliver our courses through strategic distribution partners,
which we refer to as our Web distribution network. This network currently
consists of over 30 distribution partners including Healtheon/WebMD,
MedicaLogic, GE Medical Systems, Pointshare, Medsite.com, HealthGate and
ChannelHealth (an IDX company). We have entered into a five-year agreement with
Healtheon/WebMD to be the exclusive provider of education and training for
healthcare organizations, healthcare professionals and healthcare workers on Web
sites owned and operated by Healtheon/WebMD.
THE MARKET OPPORTUNITY
We estimate that the healthcare industry spends approximately $6.0 billion
annually on training and education for over an estimated 10 million healthcare
workers and professionals. According to a recent study, a greater percentage of
healthcare workers receive training than workers in any other industry.
Approximately 88% of all healthcare workers receive some kind of formal
work-related training, safety training or continuing education every year.
Training includes safety training mandated by both the Occupational Safety and
Health Administration, or OSHA, and the Joint Commission on Accreditation of
Healthcare Organizations, or JCAHO, for all healthcare workers. Continuing
education includes continuing education units, or CEU, for nurses and continuing
medical education, or CME, for doctors.
The training and education market in the healthcare industry is highly
fragmented, with over 1,000 providers offering a limited selection of programs
on specific topics. Historically healthcare workers and professionals have
received training and education through offline publications such as medical
journals and CD-ROMs and by attending conferences and seminars. Although these
existing approaches satisfy ongoing training and continuing education
requirements, they may be limited in their breadth of offerings, inconvenient
and costly to purchase or attend and result in lost productivity. In addition,
healthcare organization 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. We believe that these
inefficiencies, combined with the time constraints and increased cost pressures
in the healthcare industry, have prompted healthcare organizations and
professionals to seek alternative training methodologies. The emergence of the
Internet enables the delivery of a greater breadth and depth of training and
continuing education programs to healthcare professionals and other healthcare
workers more cost effectively and conveniently than by historical methods.
1
<PAGE> 8
OUR SERVICES
We believe that the combination of our high quality training and education
content, coupled with the reach through our ASP method and our distribution
partners, positions us to be a leading provider of Web-based solutions to meet
the needs of healthcare organizations and professionals. Healthcare
organizations must provide both government mandated and internally required
training to their employees. Most healthcare professionals are individually
responsible for meeting their ongoing training and continuing education
requirements. We believe our Web-based training and education solution allows us
to meet these needs by offering:
- healthcare organizations the ability to administer, assess and track
government and institution-mandated training and education for their
potentially large and geographically dispersed employee populations on a
cost-effective basis;
- healthcare professionals and other healthcare workers a cost-effective,
convenient, efficient and easy to use one-stop shop for meeting their
training and continuing education needs;
- our distribution partners one of the largest online libraries of training
and education courses from premier healthcare organizations and a
predictable source of online traffic due to the recurring nature of
regulated training and continuing education requirements in the
healthcare industry; and
- our content partners one of the largest online distribution channels
targeted to the healthcare industry as well as our experience in
producing interactive educational materials for the healthcare industry.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of Web-based training and
education solutions for the healthcare industry. The following are the key
elements of our growth strategy:
- provide healthcare organizations with Web-based access to our courses and
education management software on an ASP basis;
- expand and enhance our online training and education library;
- increase the number of partners in our Web distribution network;
- expand our sales and marketing efforts that target healthcare
organizations, healthcare professionals and potential content and
distribution partners; and
- generate additional revenue opportunities by aggregating the performance
data collected by our system and offering sponsorship products based on
the attractive demographics of our end users.
We intend to implement our strategy through internal growth, expansion of
strategic relationships with content and distribution partners and the
acquisition of businesses that have complementary content, technology and/or end
users.
OUR HISTORY
We launched our online training and continuing education services in March
1999. We were incorporated in 1990 and in 1996 we began deploying our education
management system as a network and stand-alone product. Our revenues in 1999
increased 49.6% to $2.6 million from $1.7 million in 1998. In 1999, we had a pro
forma as adjusted net loss of $10.1 million on pro forma as adjusted revenues of
$7.2 million and an accumulated deficit on a pro forma as adjusted basis through
December 31, 1999 of $8.9 million. We expect to continue to incur net losses and
negative cash flow for the foreseeable future as we continue to implement our
Web-based solutions.
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> 9
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 5,000,000 shares
Common stock to be outstanding after this
offering................................... 19,483,032 shares, including an estimated
1,111,111 shares which Healtheon/WebMD has
agreed to purchase directly from us in a
separate private sale that will close
concurrently with this offering, or
20,233,032 shares if the underwriters
exercise their over-allotment option in full.
This amount does not include 5,606,223 shares
subject to warrants and outstanding options
issued under our stock option plans or
6,029,075 shares reserved for issuance
pursuant to options we may issue under our
stock option and stock purchase plans.
Use of proceeds.............................. The net proceeds from this offering (without
exercise of the over-allotment option) and
the concurrent private sale are estimated to
be approximately $50.9 million and will be
used for general corporate purposes,
including working capital, sales and
marketing expenses, payments to content and
distribution partners and possible
acquisitions. See "Use of Proceeds."
Risk factors................................. See "Risk Factors" and other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in our common
stock.
Nasdaq National Market symbol................ HSTM
</TABLE>
------------------------------
The number of shares of common stock to be outstanding after the offering
is estimated based on the number of shares outstanding as of April 5, 2000.
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 553,712
shares of our common stock upon completion of this offering;
- reflects the conversion of our outstanding shares of series A, B and C
preferred stock into 7,131,153 shares of our common stock upon completion
of this offering;
- assumes no exercise of the underwriters' over-allotment option;
- reflects a 1.85 for 1 common stock split; and
- assumes the issuance of an estimated 1,111,111 shares of our common stock
to Healtheon/WebMD in a private sale that will close concurrently with
this offering based on an assumed initial public offering price of $9.00
per share. This number will be subject to adjustment based on the actual
initial public offering price.
3
<PAGE> 10
4
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the financial data for our company. We
derived the historical statement of operations data for the three years ended
December 31, 1999 and the historical balance sheet data as of December 31, 1999
from our audited financial statements and related notes, which are included
elsewhere in this prospectus. You should read this information together with the
financial statements and the related notes appearing at the end of this
prospectus, the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information contained elsewhere in this prospectus.
The pro forma as adjusted condensed statement of operations data assumes:
- the acquisition of SilverPlatter Education, Inc., Multimedia Marketing,
Inc. d/b/a m3 the Healthcare Learning Company, Emergency Medicine
Internetwork, Inc., or EMInet, Quick Study, Inc. and KnowledgeReview,
LLC;
- the conversion of our series A, B and C preferred stock into our common
stock;
- the conversion of notes payable-related party into our common stock;
- the issuance of our common stock in this offering as described in "Use of
Proceeds;" and
- the sale by us of an estimated 1,111,111 shares of our common stock to
Healtheon/WebMD in a private sale that will close concurrently with this
offering.
as if each of such transactions had occurred as of January 1, 1999.
The pro forma as adjusted balance sheet data assumes:
- the acquisition of m3 the Healthcare Learning Company, EMInet, Quick
Study and KnowledgeReview;
- the conversion of our series A, B and C preferred stock into our common
stock;
- the issuance of our common stock in this offering as described in "Use of
Proceeds;" and
- the sale by us of an estimated 1,111,111 shares of our common stock to
Healtheon/WebMD in a private sale that will close concurrently with this
offering.
as if each of such transactions had occurred as of December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
PRO FORMA
AS ADJUSTED
1997 1998 1999 1999
------ -------- -------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $1,268 $ 1,716 $ 2,568 $ 7,226
Loss from operations.................................... (771) (1,261) (4,560) (10,141)
Net loss................................................ (960) (1,590) (4,456) (10,082)
Basic and diluted loss per share........................ (0.29) (0.49) (1.19) (0.54)
Weighted average shares used in the calculation of basic
and diluted net loss per share........................ 3,256 3,256 3,757 18,512
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1999
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $13,632 $ 62,121
Working capital............................................. 11,465 59,915
Total assets................................................ 17,455 80,527
Long-term debt and capital leases, net of current portion... 186 202
Shareholders' equity........................................ 14,190 76,223
</TABLE>
5
<PAGE> 11
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. The risks described below
are intended to highlight risks that are specific to us, but are not the only
ones we face. Additional risks and uncertainties, including those generally
affecting the industry in which we operate, risks that we currently deem
immaterial or risks to companies that have recently undertaken initial public
offerings, may also impair our business or the value of your investment.
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 our infrastructure, including additional hardware and software,
customer support, personnel and facilities, to support our business;
- 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; and
- respond effectively to competitive and technological developments.
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 training and continuing education 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. For
example, our agreement with Healtheon/WebMD requires us to pay Healtheon/WebMD
$6.0 million per year for five years to be the exclusive provider of education
and training for healthcare organizations, healthcare professionals and
healthcare workers on Web sites owned and operated by Healtheon/WebMD,
regardless of the level of demand for online training and continuing education
by subscribers on their Web sites. We expect these payments to total $4.5
million in 2000, $6.0 million in each of 2001 through 2004 and $1.5 million in
2005. We cannot assure you that the healthcare community will accept online
training and continuing education as a replacement for, or alternative to,
traditional sources of training and continuing education. Market acceptance of
online training and continuing education depends upon continued growth in the
use of the Internet generally and, in particular, as a source of continuing
education services. If the market for online training and continuing education
fails to develop, develops more slowly than expected or becomes saturated with
competitors, or if 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 more
than doubled between December 31, 1998 and December 31, 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
5
<PAGE> 12
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 we do not adequately manage our potential growth, our business
will suffer.
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 third parties who provide training and continuing
education content for our library and our ability to build new relationships
with other content partners. Most of our agreements with content providers are
for initial terms of one to three years. The content partners may choose not to
renew their agreements with us or may terminate the agreements early if we do
not fulfill our contractual obligations. We have received notice from Challenger
Corporation, from whom we acquired approximately 500 hours of the training and
education courses we distribute, that it does not intend to renew our agreement
on its present terms upon its expiration in December 2000. If a significant
number of our content providers terminate or fail to renew their agreements with
us on acceptable terms, it could result in a reduction in the number of courses
we are able to distribute and decreased revenues. Most of our agreements with
our content partners are also non-exclusive, and our competitors offer, or could
offer, training and continuing education 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 or increase our license fees, 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.
Certain agreements with distribution partners may require guaranteed
royalty payments. Under our agreement with Healtheon/WebMD, we have agreed to
pay Healtheon/WebMD minimum royalties of $6.0 million per year for five years.
Healtheon/WebMD has not guaranteed a minimum amount of revenues we will receive
from the sale of our courses and services on Web sites owned or operated by
Healtheon/WebMD. We cannot assure you that we will be able to generate
sufficient revenues to recoup the minimum payments that we are obligated to pay
to Healtheon/WebMD or to other distribution partners. The failure to do so would
have a material adverse effect on our results of operations.
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 that complement or enhance our business and we
have recently consummated a number of acquisitions involving multiple remote
offices. We do not have substantial experience in completing and integrating
large acquisitions or multiple simultaneous acquisitions. In addition, we do not
have experience operating multiple remote offices. We may have difficulty
integrating the operations and realizing the results of these
6
<PAGE> 13
recently completed acquisitions. We may not be able to identify, complete,
integrate the operations or realize the anticipated results of future
acquisitions. Some of the risks that we may encounter in implementing our
acquisition growth strategy include:
- expenses associated with 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;
- adverse impact on our financial condition due to the timing of the
acquisition; and
- expenses of any undisclosed or potential liabilities of the acquired
company.
If any of these risks are realized, our business could suffer.
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 training and
continuing education 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 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. 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
7
<PAGE> 14
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.
FINANCIAL RISKS
WE MAY NOT BE ABLE TO FORECAST OUR REVENUES ACCURATELY BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
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 operating results may
vary substantially. The actual effect of these factors on the price of our
stock, however, 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.
WE EXPECT NET LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY, WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
In 1999, we had a pro forma as adjusted net loss of approximately $10.1
million. At December 31, 1999, our accumulated deficit on a pro forma as
adjusted basis was $8.9 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 net proceeds of this offering and the concurrent private sale of our
common stock to Healtheon/WebMD, together with our current cash reserves, 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;
- respond to competitive pressures;
- sustain content, distribution and development partner relationships; or
- maintain required infrastructure to support our business.
At December 31, 1999, we had approximately $13.6 million in cash and cash
equivalents, or $62.1 million on a pro forma as adjusted basis. In addition, we
have fixed commitments of $475,000 in 2000 and $187,500 in 2001 and other
variable payments will be due based on revenues and certain milestones related
to agreements with content, distribution and development partners. These
commitments may increase over time as a result of competitive pressures. We
expect to incur approximately $3.0 to $5.0 million of capital expenditures
during 2000 to support our business. In addition, in February 2000 we entered
into a five-year agreement with Healtheon/WebMD. Under the terms of this
agreement, we are required to make minimum royalty payments to Healtheon/WebMD
in the amount of $4.5 million in 2000, $6.0 million in each of the years 2001
through 2004 and $1.5 million in 2005. We expect operating losses and negative
cash flows to continue for the foreseeable future as we plan to significantly
increase our operating expenses to help expand our business.
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
8
<PAGE> 15
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 training and continuing education
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
training and continuing education 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 Web site, 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.
RISKS RELATED TO OPERATIONS
WE MAY BE UNABLE TO ADEQUATELY DEVELOP OUR SYSTEMS, PROCESSES AND SUPPORT IN A
MANNER THAT WILL ENABLE US TO MEET THE DEMAND FOR OUR SERVICES.
We have just recently initiated our online operations and are developing
our ability to provide our courses and education management systems on a
transactional basis over the Internet on an ASP basis. Our future success will
depend on our ability to develop effectively the infrastructure, including
additional hardware and software, and implement the services, including customer
support, necessary to meet the demand for our services. In the event we are not
successful in developing the necessary systems and implementing the necessary
services on a timely basis, our revenues could be adversely affected, which
would have a material adverse effect on our financial condition. In addition, we
have entered into a four-year agreement with Columbia/HCA Healthcare Corporation
to provide our ASP services. Columbia/HCA currently represents the majority of
our ASP business. Columbia/HCA has the right to terminate this agreement if we
fail to deliver the required services under this agreement on a timely basis. A
termination of our agreement with Columbia/HCA would have a material adverse
effect on our business as well as our ability to secure other large customers
for these services.
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
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.
9
<PAGE> 16
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. We have experienced
difficulty in the past hiring qualified personnel in a timely manner for these
positions. The pool of qualified technical personnel, in particular, is limited
in Nashville, Tennessee, which is where our headquarters are located. We will
need to increase the size of our staff to support our anticipated growth,
without compromising the quality of our offerings or customer service. Our
inability to locate, 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. In order to make timely decisions about hardware and
software enhancements, we must be able to accurately forecast the growth in
demand for our services. This growth in demand for our services could be
difficult to forecast and the potential audience for our services is large. 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.
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 did not
experience significant disruptions to our business on or following the
changeover to the Year 2000 and while we obtained assurances from our suppliers
that the products and services they supply 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. As a result of our Year
2000 review, we discovered that the customer data acquired in the acquisition of
SilverPlatter Education and used by our Boston office to manage subscriptions,
billing and
10
<PAGE> 17
order fulfillment is not Year 2000 compliant. While we have put our contingency
plan into effect with respect to this data and have implemented a short-term
solution, we cannot guarantee that we will successfully implement a long-term
solution or that this implementation will not divert resources and management
attention.
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 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
11
<PAGE> 18
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 training and continuing
education 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.
Prior to this offering, our common stock has not been sold in a public
market. After this offering, an active trading market in our common stock may
not develop. If an active trading market develops, it may not continue.
Moreover, if an active market develops, the trading price of our common stock
may fluctuate widely as a result of a number of factors, many of which are
outside our control. In addition, the stock market has recently experienced
extreme price and volume fluctuations that have affected the market prices of
securities of technology companies, particularly Internet-related companies, and
which have often been unrelated to or disproportionate to the operating
performance of these companies. 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 50.0% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering and our concurrent private sale of common stock to
Healtheon/WebMD, executive officers, directors and holders of five percent or
more of our outstanding common stock will, in the aggregate, beneficially own
50.0% 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.
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;
12
<PAGE> 19
- 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.
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE LOWER THAN THE PRICE
YOU PAY.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The price of our common stock that will
prevail in the market after this offering may be higher or lower than the price
you pay.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES.
The assumed 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
$5.79 per share in the pro forma net tangible book value of the common stock
from the assumed initial public offering price, assuming consummation of the
concurrent private sale of an estimated 1,111,111 shares of our common stock to
Healtheon/WebMD at the assumed initial public offering price per share. 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 13,371,921, OR 68.6%, 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. Upon consummation of this offering and the concurrent private sale,
we will have outstanding 19,483,032 shares of common stock. The 5,000,000 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. Pursuant to our agreement with Healtheon/WebMD, one-half of the
estimated 1,111,111 shares to be purchased by Healtheon/WebMD in the private
sale that will close concurrently with this offering will be eligible for sale
one year after the date of this prospectus, and the other half will be eligible
for sale two years after the date of this prospectus. Of the remaining
13,371,921 shares of common stock outstanding after this offering, 11,096,961
shares will be eligible for sale in the public market beginning 181 days after
the date of this prospectus. The remaining 2,274,960 shares will become
available at various times after the 181 days upon the expiration of one-year
holding periods. J.C. Bradford & Co., one of the underwriters in this offering,
has agreed to sign a one-year lock-up agreement regarding 64,236 of its shares
of our common stock. 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 9,000,000 shares of our common stock after
this offering for issuance under our stock option plans and up to 1,000,000
additional shares of our common stock after this offering for issuance under our
employee stock purchase plan.
13
<PAGE> 20
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.
14
<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock in this offering will be approximately $40.9 million, assuming an
initial public offering price of $9.00 per share and after deducting the
underwriting discounts and commissions and estimated offering costs. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds from this offering will be approximately $47.2 million. In
addition, we will receive net proceeds from the concurrent private sale of an
estimated 1,111,111 shares of common stock to Healtheon/WebMD at the initial
public offering price of $10.0 million.
We plan to use the net proceeds of this offering and the concurrent private
sale for general corporate purposes, including for working capital, sales and
marketing initiatives and payments to content and distribution partners,
including Healtheon/WebMD. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." We will also repay
approximately $1.3 million worth of debt assumed in connection with recent
acquisitions. Approximately $1.2 million of this debt bears interest at 13.0%
and is payable in full on April 30, 2002. Of the remaining debt, $62,000 bears
interest at 7.0% and principal and accrued interest are due on July 1, 2000 and
$50,000 bears interest at a variable rate, which was 8.75% at December 31, 1999,
and principal and accrued interest are due on demand. We may use a portion of
the net proceeds to acquire or invest in complementary businesses, technologies,
services, content and distribution relationships or products. We currently have
no agreement or understanding with respect to any such acquisition and we cannot
assure you that future acquisitions will be consummated. As of the date of this
prospectus and other than as described above, 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.
15
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to:
-- the issuance of 818,036 shares of our common stock, the payment of
$600,000 in cash and the assumption of $1.2 million of long-term debt
in connection with the acquisition of m3 the Healthcare Learning
Company;
-- the issuance of 269,902 shares of our common stock and the payment of
$640,000 in cash in connection with the acquisition of EMInet;
-- the issuance of 61,397 shares of our common stock, the payment of
$59,000 in cash and the assumption of $112,000 of long-term debt in
connection with the acquisition of Quick Study; and
-- the issuance of 17,343 shares of our common stock and the payment of
$310,000 in cash in connection with the acquisition of
KnowledgeReview; and
- on a pro forma as adjusted basis to give further effect to:
-- the increase in authorized common shares to 75,000,000 and the
increase in authorized preferred shares to 10,000,000;
-- the conversion of $1,293,000 of notes payable-related party into
129,300 shares of our series B preferred stock and subsequent
conversion into 553,712 shares of our common stock upon completion of
this offering;
-- the conversion of all of our outstanding shares of preferred stock
into 7,131,153 shares of our common stock upon completion of this
offering;
-- the sale of 5,000,000 shares of our common stock in this offering at
an assumed initial public offering price of $9.00 per share and the
application of the net proceeds after deducting underwriting
discounts and commissions and estimated offering costs;
-- the concurrent sale of an estimated 1,111,111 shares of our common
stock that Healtheon/WebMD has agreed to purchase directly from us in
a separate private sale; and
-- the repayment of $1.3 million in debt assumed in connection with the
acquisitions of m3 the Healthcare Learning Company and Quick Study.
16
<PAGE> 23
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $13,632 $12,453 $ 62,121
======= ======= =========
Notes payable, note payable-related party, long-term
debt-related party and capital lease obligations.......... $ 1,582 $ 2,896 $ 326
------- ------- ---------
Shareholders' equity:
Common stock, no par value; authorized 20,000,000 shares
actual, 75,000,000 shares pro forma as adjusted; issued
and outstanding: 4,165,461 shares actual, 5,332,142
shares pro forma and 19,128,115 shares pro forma as
adjusted................................................ 4,009 14,099 85,214
Preferred stock, no par value; authorized 5,000,000 shares
actual, 10,000,000 shares pro forma as adjusted......... -- -- --
Series A convertible preferred stock, issued and
outstanding: 76,000 shares actual, 76,000 shares pro
forma and no shares pro forma as adjusted............. 760 760 --
Series B convertible preferred stock, issued and
outstanding: 1,228,801 shares actual, 1,228,801 shares
pro forma and no shares pro forma as adjusted......... 12,138 12,138 --
Series C convertible preferred stock, issued and
outstanding: 627,406 shares actual, 627,406 shares pro
forma and no shares pro forma as adjusted............. 6,274 6,274 --
Accumulated other comprehensive loss........................ (42) (42) (42)
Accumulated deficit......................................... (8,949) (8,949) (8,949)
------- ------- ---------
Total shareholders' equity................................ 14,190 24,280 76,223
------- ------- ---------
Total capitalization...................................... $15,772 $27,176 $ 76,549
======= ======= =========
</TABLE>
This table excludes the following shares, as of April 5, 2000:
- 3,178,622 shares of common stock issuable upon the exercise of
outstanding stock options with a weighted average exercise price of $5.47
per share;
- 6,029,075 additional shares reserved for issuance under our stock option
and stock purchase plans;
- 245,032 shares of common stock issuable upon the exercise of a warrant
issued to GE Medical Systems; and
- 2,182,568 shares of common stock issuable upon the exercise of a warrant
issued to Columbia Information Systems.
17
<PAGE> 24
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 December 31, 1999, our pro
forma net tangible book value after giving effect to the acquisitions of m3 the
Healthcare Learning Company, EMInet, Quick Study and KnowledgeReview was
approximately $9.4 million, or $1.77 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 December 31, 1999. After giving effect to the conversion
of notes payable-related party into series B preferred stock, the conversion of
all of the shares of our preferred stock into our common stock, the sale of the
5,000,000 shares of common stock offered in this offering, the concurrent
private sale by us of an estimated 1,111,111 shares of common stock to
Healtheon/WebMD, the repayment of debt as described under "Use of Proceeds" and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable, our pro forma net tangible book value as of December
31, 1999 would have been $61.4 million, or $3.21 per share. This represents an
immediate increase in pro forma net tangible book value to existing shareholders
of $1.44 per share and an immediate dilution of $5.79 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 9.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.77
Increase per share attributable to new investors.......... 1.44
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.21
------
Dilution per share to new investors......................... $ 5.79
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 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:
-- existing shareholders;
-- acquisitions funded through issuances of our common stock;
-- shareholders converting the series A, B and C preferred stock into
common stock;
-- new investors purchasing shares in this offering at an assumed
initial public offering price of $9.00 per share, and before
deducting underwriting discounts and commissions and estimated
offering expenses payable by us; and
-- Healtheon/WebMD purchasing shares of our common stock in a
concurrent private sale.
<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...................... 4,165,461 21.8% $ 4,008,991 4.5% $ 0.96
Converting preferred shareholders.......... 7,684,865 40.2 20,465,060 22.8 2.66
Shares issued in connection with
acquisitions............................. 1,166,678 6.1 10,090,200 11.3 8.65
New investors.............................. 5,000,000 26.1 45,000,000 50.2 9.00
Healtheon/WebMD in a concurrent private
sale..................................... 1,111,111 5.8 $10,000,000 11.2 9.00
---------- ---- ----------- ----
Total................................. 19,128,115 100% $89,564,251 100%
========== ==== =========== ====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of April 5,
2000, there were options and warrants outstanding to purchase 5,606,223 shares
of common stock at a weighted average exercise price of $6.07 per share. If any
of these options or warrants are exercised, there may be further dilution to new
investors.
18
<PAGE> 25
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, 1999 and the
balance sheet data at December 31, 1998 and 1999 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, 1996 and the balance sheet data at December 31, 1995 and 1996
are derived from unaudited financial statements that are not included in this
prospectus. The balance sheet data at December 31, 1997 is derived from our
audited balance sheet that is not included in this prospectus. In July 1999, we
acquired SilverPlatter Education. In January 2000, we acquired m3 the Healthcare
Learning Company, EMInet, Quick Study and KnowledgeReview. Please refer to the
pro forma financial statements and the audited financial statements of
SilverPlatter Education and m3 the Healthcare Learning Company included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 91 $ 556 $1,268 $ 1,716 $ 2,568
Operating costs and expenses:
Cost of revenues............................. 204 475 870 1,057 2,119
Product development.......................... 144 142 294 443 2,037
Selling, general and administrative
expenses.................................. 510 675 875 1,477 2,972
------ ------ ------ ------- -------
Total operating costs and
expenses........................... 858 1,292 2,039 2,977 7,128
------ ------ ------ ------- -------
Loss from operations........................... (767) (736) (771) (1,261) (4,560)
Other income (expense)......................... (44) (43) (189) (329) 104
------ ------ ------ ------- -------
Net loss....................................... $ (811) $ (779) $ (960) $(1,590) $(4,456)
====== ====== ====== ======= =======
Net loss per share -- basic and diluted........ $(0.53) $(0.25) $(0.29) $ (0.49) $ (1.19)
====== ====== ====== ======= =======
Weighted average shares of common stock
outstanding -- basic and diluted............. 1,519 3,069 3,256 3,256 3,757
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1995 1996 1997 1998 1999
----- ----- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 17 $ 29 $ 84 $ 51 $13,632
Working capital (deficit)........................... (165) (604) (1,708) (2,854) 11,465
Total assets........................................ 418 540 948 1,153 17,455
Long-term debt and capital leases, net of current
portion........................................... 76 57 36 32 186
Shareholders' equity (deficit)...................... 103 (276) (1,236) (2,285) 14,190
</TABLE>
19
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
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
client server training and administrative software, Training Navigator, 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. The one-time
license fee typically ranges from $20,000 to $100,000 based on the number of
users. Services such as upgrades, training, maintenance and technical support
are provided either based on a fixed fee, estimated usage or actual time
incurred. Online services are provided based on a fee ranging from $5 to $25 per
underlying credit hour. Most courses provide one to three credit hours. Late in
1999, we entered into sponsorship agreements which provide for sponsorship of
online courseware. For the year ended December 31, 1999, our online revenues
approximated $216,000. We expect our future online revenues to significantly
exceed 1999 levels.
Revenues from T.NAV software license fees are recognized when the software
is delivered. Upgrade, maintenance and technical support revenues are 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. Sponsorship
revenue is recognized ratably over the term unless usage exceeds the ratable
portion.
Historically, we have marketed T.NAV directly or licensed it to resellers
to re-brand and distribute under their private label. Our primary reseller
relationship is with Lippincott Williams & Wilkins, a leading medical sciences
publisher. They combine their de'MEDICI line of OSHA and JCAHO training content
with T.NAV and their sales force sells the resulting solution directly into
healthcare organizations. There are currently over 150 healthcare organizations
utilizing this system. We receive 17% of the net revenues recognized from the
sales of these systems.
We plan to generate revenues by marketing our Web-based services to
healthcare workers through healthcare organizations. The services will be
provided via our application service provider, or ASP, agreements. 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 ASP 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 ASP 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 ASP 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.
Currently, revenues from the delivery of our content through our Web-based
distribution network are generated on a transaction fee basis. Healthcare
professionals pay us with a credit card when they 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
20
<PAGE> 27
distributors and costs we incur to develop content or convert content from
traditional media to a Web format.
In July 1999, we acquired selected assets, assumed certain liabilities and
hired all of the employees of SilverPlatter Education, which owned a series of
multimedia continuing medical education, or CME, titles and operated Web sites
which marketed these products and provided other information to physicians. The
consideration paid was $800,000 in cash and 49,202 shares of our common stock.
The SilverPlatter Education business generates one time sales, subscription
revenues and training service revenues. Revenues from sales and services are
recognized when goods are shipped or services are delivered. Revenues from
subscriptions are deferred and recognized ratably over the term of the
subscription.
We acquired the following companies in January 2000:
- KnowledgeReview, which operates a search engine, cmesearch.com, allowing
physicians to locate seminars and purchase educational CD-ROMs and online
courseware, for $310,000 in cash and 17,343 shares of our common stock;
- Quick Study, which owns over 60 web-based hours of nursing and OSHA
content, primarily dialysis-related, for $59,000 in cash, the assumption
of $112,000 in long-term debt and 61,397 shares of our common stock;
- m3 the Healthcare Learning Company, which provides computer-based
training to over 450 hospitals and healthcare facilities, primarily in
the areas of OSHA and regulatory training, for $600,000 in cash, the
assumption of $1.2 million in long-term debt and 818,036 shares of our
common stock; and
- EMInet, which provides Web-based educational content for emergency
medical services personnel, for $640,000 in cash and 269,902 shares of
our common stock.
As we transition m3 the Healthcare Learning Company customers from existing
platforms to the ASP model, we expect that revenues will remain comparable for
the annual maintenance fees with increases related to sales of online
courseware.
In February 2000, we entered into a four year agreement with Columbia/HCA
pursuant to which we will provide online training and education, courseware
development and administrative management and consulting services to
Columbia/HCA and its affiliated and managed healthcare providers. Columbia/HCA
will pay us minimum revenues of $12.0 million over the term of this agreement
for these services.
In February 2000, we entered into an agreement with Healtheon/WebMD
pursuant to which we will be the exclusive provider of education, continuing
education and training services for healthcare organizations, healthcare
professionals and healthcare workers on Web sites owned or operated by
Healtheon/WebMD. Pursuant to this agreement, we will pay Healtheon/WebMD $6.0
million per year for five years on a quarterly basis as guaranteed minimum
royalties. In the first year, $2.0 million of the $6.0 million payment will be
applied toward mutually agreed upon branding and promotion services. We will
receive 100% of any revenues from the sale of our products and services until we
recover all of the payments to Healtheon/WebMD, and after that we will receive
75% and Healtheon/WebMD will receive 25% of any revenues. In connection with the
agreement, Healtheon/WebMD has agreed to purchase $10.0 million of our common
stock at the initial public offering price per share in a concurrent private
sale.
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 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.
21
<PAGE> 28
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
increasingly derived from online services to healthcare organizations and
healthcare professionals. During 1999, the Company revised its focus from
development services to online products and services. While this transition has
only translated into approximately $216,000 of online revenues, we expect these
revenues to grow significantly in the future, in part, due to the Columbia/HCA
agreement. This change in focus has contributed to not only a change in revenue
components, but also a change in expense components as we expect to increase our
production capacity to support planned growth.
Cost of Revenues. Cost of revenues 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, amortization of intangibles, 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 and capital leases. The primary
component of other income is interest income related to interest earned on cash
and cash equivalents.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased $852,000, or 49.6%, from approximately $1.7
million for the year ended December 31, 1998 to approximately $2.6 million for
the year ended December 31, 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 development and content production services. During 1999,
48.9% of revenues related to development services, 24.8% related to T.NAV
licensing fees and related services, 26.3% related to other transactions and
product sales. In 1998, 76.1% of revenues related to development services and
23.9% related to T.NAV licensing fees and related services.
Cost of Revenues. Cost of revenues increased approximately $1.0 million,
or 100.4%, from approximately $1.0 million for the year ended December 31, 1998
to approximately $2.1 million for the year ended December 31, 1999. The increase
was primarily attributable to increased volume of business, including
approximately $800,000 of increases in salaries, labor and related benefits. As
a percentage of revenues, cost of revenues increased from 61.6% for the year
ended December 31, 1998 to 82.5% for the year ended December 31, 1999. This
increase as a percentage of revenues resulted from an increase of approximately
30 service and production personnel during the year, 11 of which were added in
connection with the acquisition of SilverPlatter Education.
Product Development. Product development expenses increased approximately
$1.6 million, or 359.5%, from $443,000 for the year ended December 31, 1998 to
approximately $2.0 million for the year ended December 31, 1999. This increase
in product development expenses was due to approximately
22
<PAGE> 29
$748,000 in distribution expenses related to a warrant granted to GE Medical
Systems in connection with a continuing education and training content
distribution agreement, an increase of approximately $530,000 related to
salaries, labor and related benefits for an increase in our production staff and
approximately $195,000 of royalty expense under contracts with content and
distribution partners. As a percentage of revenues, product development expenses
increased from 25.8% for the year ended December 31, 1998 to 79.3% for the year
ended December 31, 1999. The increase as a percentage of revenues was due to
significant upfront product development expenses incurred to implement our
online services, including salaries and employee benefits associated with
increased content conversion and development and royalties due to content and
distribution partners. We anticipate significant additional product development
expenses in future periods due to salaries and employee benefits associated with
increased content conversion.
Selling, General and Administrative. Selling, general and administrative
expenses increased approximately $1.5 million, or 101.2%, from approximately
$1.5 million for the year ended December 31, 1998 to approximately $3.0 million
for the year ended December 31, 1999. As a percentage of revenues, selling,
general and administrative expenses increased from 86.0% for the year ended
December 31, 1998 to 115.7% for the year ended December 31, 1999. The increase
was primarily due to increased personnel and related benefits costs of
approximately $500,000 associated with new employees, an increase of
approximately $228,000 in advertising, promotional and marketing expenditures,
an increase of approximately $131,000 in professional service fees, an increase
of $213,000 related to amortization of intangible assets, an increase of
approximately $168,000 in travel expenses, and facility and depreciation
expenses of approximately $96,000. 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. In
addition, our selling, general and administrative expenses will increase
significantly as a result of our required minimum royalty payments under our
agreement with Healtheon/WebMD of $4.5 million in 2000, $6.0 million in each of
2001 through 2004 and $1.5 million in 2005.
Other Income/Expense. Other expense decreased $122,000, or 36.9%, from
$331,000 for the year ended December 31, 1998 to $209,000 for the year ended
December 31, 1999. The decrease was primarily due to a conversion by a related
party of approximately $1.6 million of indebtedness into shares of common stock
and series B preferred stock, which was partially offset by an increase in
interest expense on capital leases. In addition, interest and other income
increased from $3,000 for the year ended December 31, 1998 to $312,000 for the
year ended December 31, 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 approximately $2.9 million, or 180.4%, from
approximately $1.6 million for the year ended December 31, 1998 to approximately
$4.5 million for the year ended December 31, 1999 due to the factors described
above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased $448,000, or 35.3%, from approximately $1.3
million in 1997 to approximately $1.7 million in 1998. The increase in revenues
was related to increases in both development services and revenues realized from
the distribution of our T.NAV software. During 1998, 76.1% of revenues related
to development services and 23.9% related to T.NAV licensing fees, related
services and other transactions. During 1997, 87.1% of revenues related to
development services and 12.9% related to T.NAV licensing fees, related services
and other transactions.
Cost of Revenues. Cost of revenues increased $187,000, or 21.5%, from
$870,000 in 1997 to approximately $1.0 million in 1998. The increase was
primarily attributable to increased volume of business, including approximately
$258,000 of salaries, labor and related benefits, which was offset by an $80,000
decrease in materials cost since more development work was performed in-house.
As a percentage of revenues, cost of revenues 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.
23
<PAGE> 30
Product Development. Product development expenses increased $149,000, or
50.9%, 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
addition of production and technology personnel, which resulted in an increase
of $135,000 in salaries, labor and related benefits.
Selling, General and Administrative. Selling, general and administrative
expenses increased $602,000, or 68.7%, from $875,000 in 1997 to approximately
$1.5 million in 1998. As a percentage of revenues, selling, general and
administrative expenses increased from 69.0% in 1997 to 86.0% in 1998. The
increase was primarily due to an expansion of our sales force, client services
staff and senior management, which resulted in an increase of approximately
$440,000 in salaries, labor and related benefits. The remainder of the increase
is primarily related to a $33,000 increase in promotional materials and
advertising expense related to increased marketing and a branding campaign.
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 $630,000, or 65.6%, from $960,000 in 1997 to
approximately $1.6 million in 1998 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations largely through the
private placement of equity securities, loans from related parties and, to a
lesser extent, from revenues generated from custom development fees and product
sales.
Net cash used in operating activities was $872,000 in 1997, $1.2 million in
1998 and $3.3 million in 1999. Cash used in operating activities from January 1,
1997 through December 31, 1999 was attributable to funding net operating losses
and increases in accounts receivable, prepaid expenses and other assets, which
were partially offset by increases in deferred revenues, accrued liabilities,
accounts payable and depreciation, amortization and other non-cash expenses.
Net cash used in investing activities was $240,000 in 1997, $209,000 in
1998 and $1.5 million in 1999. Cash used in investing activities was primarily
for the purchase of property and equipment and the acquisition of SilverPlatter
Education.
Cash provided by financing activities was $1.2 million in 1997, $1.4
million in 1998 and $18.4 million in 1999. Cash provided by financing activities
during 1999 was primarily attributable to the issuance of $18.2 million of
preferred stock. As of December 31, 1999, our primary source of liquidity was
$13.6 million of cash and cash equivalents. We have no bank credit facility.
As of December 31, 1999, we had approximately $13.6 million in cash. As of
January 31, 2000, we had cash of approximately $11.2 million, which reflected
the closing of the acquisitions of m3 the Healthcare Learning Company, EMInet,
Quick Study and KnowledgeReview.
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 or 10.5%. This note is payable in full and
will be converted into 553,712 shares of our common stock upon completion of
this offering.
In connection with our Columbia/HCA agreement, Columbia/HCA will pay us
minimum revenues of $12.0 million over the four year term of the agreement. We
also expect to incur significantly higher costs, particularly content creation
costs and sales and marketing costs, to grow our business. As a result of the
anticipated growth in personnel, development and online transactions, we expect
that our capital expenses will be approximately $3.0 to $5.0 million in 2000.
24
<PAGE> 31
Our strategic alliances have typically provided for payments to
distribution, content and development partners based on revenues, and we expect
to continue similar arrangements in the future. As a result, no significant
fixed payments other than approximately $475,000 in 2000 and $187,500 in 2001,
of which approximately 79% and 100% are nonrefundable, in 2000 and 2001,
respectively. We also have variable commitments of approximately $400,000
related to an agreement under which another company has agreed to provide
content development services for us.
In connection with the Healtheon/WebMD agreement, we will receive $10.0
million in proceeds from Healtheon/WebMD in a private sale that will close
concurrently with this offering. We are obligated to pay Healtheon/WebMD $6.0
million in each of the five years of the agreement. We expect these payments to
total $4.5 million in 2000, $6.0 million in each of 2001 through 2004 and $1.5
million in 2005. In addition, we will receive 100% of any revenues from the sale
of our product and services until we recover all of our payments to
Healtheon/WebMD, and then we will receive 75% and Healtheon/WebMD will receive
25% of any revenues from the sale of our products and services.
We believe that the net proceeds from this offering and proceeds from the
concurrent private sale of shares to Healtheon/WebMD, together with current cash
and cash equivalents, 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 resulted in recognition of other
comprehensive loss of $41,690 in our December 31, 1999 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 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
25
<PAGE> 32
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
We have conducted a comprehensive review of both information technology and
non-information systems to ensure that they are 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 included 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 and experience 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. 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 that may subsequently occur 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.
As of December 31, 1999, we have spent approximately $126,800 on Year 2000
compliance issues and expect to incur approximately an additional $86,000 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.
26
<PAGE> 33
We completed an acquisition during 1999 and are finalizing the integration
of the systems of the acquired business into our operations. Those systems were
included in our Year 2000 review. The customer data acquired in the acquisition
of SilverPlatter Education and used by our Boston office to manage
subscriptions, billing and order fulfillment is not Year 2000 compliant.
Furthermore, it is not possible to update the database in its existing format to
be Year 2000 compliant because the database structure is not standard and has no
documentation. The database contains approximately 2,500 subscriber records,
active and non-active, and represents less than 5% of our pro forma revenues for
1999. We determined that it was necessary to transfer the tables, relationships
and data from the non-compliant database to a similar customer/order management
database program that relies on a compliant database. Since the full migration
was not accomplished by November 15, our contingency plan was put into effect.
The non-compliant database was last used on December 15, 1999. On December 15th,
we moved the entire non-compliant database into a compliant database product.
This provides a short-term solution that allows us to continue customer service,
billing and order fulfillment functions into the first quarter of 2000 while
removing the Year 2000 risk presented through continued use of the current
customer database system. We intend to implement a broader and more permanent
solution by the end of the second quarter of 2000. We are currently evaluating
various vendor applications to identify the best package to meet our existing
and future customer service, management and accounting needs. Once a solution
has been identified, the customer data in the temporary database format will
then be migrated to a new full service system, which will be consolidated as one
solution based in our headquarters.
We believe we have identified all Year 2000 problems that could harm our
business, financial condition or operating results. We have not experienced any
significant problems with regard to Year 2000 issues other than as described
above.
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, 1999, we had both fixed and variable 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, 1999, the fair value of our total fixed rate debt was
estimated to be $13,000 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 $156. The amount was determined by
considering the effect of the hypothetical interest rate decrease on our
borrowing cost at December 31, 1999 borrowing levels.
The Company's weighted average debt outstanding for the years ended
December 31, 1998 and 1999 was $2,423,499 and $2,000,261, respectively. The
effective weighted average interest rate on such debt was 12.5% and 10.1%,
respectively.
At December 31, 1999, we had $13.6 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 $82,000.
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.
27
<PAGE> 34
BUSINESS
OVERVIEW
We are pioneering a Web-based solution to meet the training and education
needs of the healthcare industry utilizing our proprietary system. Through
strategic relationships with medical institutions and commercial organizations,
including Vanderbilt University Medical Center, Duke University Medical Center,
The Cleveland Clinic Foundation, Scripps Clinic and American Health Consultants,
we have amassed over 3,000 hours of training and education courses. We currently
distribute over 1,300 hours of these courses to allied health professionals,
nurses, doctors and other healthcare workers. We will expand distribution of our
courses and services to include two methods. The first method provides access to
our courses and education management software. Under the second method, we
deliver our courses through strategic distribution partners, which we refer to
as our Web distribution network. This network currently consists of over 30
distribution partners including Healtheon/WebMD, MedicaLogic, GE Medical
Systems, Pointshare, Medsite.com, HealthGate and ChannelHealth (an IDX company).
We launched our online training and continuing education 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 client server training and administrative
software that serves as the application for our online training and continuing
education 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 online training and
continuing education content and the reach of our distribution partnerships
positions us to be a leading provider of Web-based solutions to the online
training and continuing education 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. 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.
In addition, to keep abreast of the latest developments and to meet licensing
and certification requirements, healthcare professionals must obtain continuing
education. This training includes safety training mandated by both the
Occupational Safety and Health Administration, or OSHA, and the Joint Commission
on Accreditation of Healthcare Organizations, or JCAHO, for all healthcare
workers. Continuing education includes continuing education units, or CEU, for
nurses and continuing medical education, or CME, for doctors. 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 an estimated 5.0
million allied healthcare professionals, 2.6 million registered nurses, 2.4
million non-clinical healthcare workers and 600,000 active physicians. We
estimate that the healthcare industry spends approximately $6.0 billion annually
on ongoing training and continuing education, including over $3.0 billion on
continuing education for allied healthcare professionals and for nurses and CME
for physicians. According to the 1999 American Society for Training and
Development State of the Industry Report, a greater percentage of healthcare
workers receive training than workers in any other industry, with approximately
88% of all healthcare workers receiving some kind of continuing education or
formal work-related or safety training every year.
Regulations administered by various state and Federal agencies require
ongoing training and continuing education for healthcare professionals and other
healthcare workers. Ongoing training and
28
<PAGE> 35
continuing education typically consists 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 selected
healthcare professionals and physicians to fulfill ongoing training and
continuing education requirements and to certify annually that they have
accumulated a minimum number of continuing education hours to maintain their
licenses. For example physician and nursing licensing boards require up to 20
hours of continuing education 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 OSHA, the Healthcare Financing Administration, or HCFA, and JCAHO
require hospitals and other healthcare providers to provide employees with
various types of workplace safety training.
The ongoing training and continuing education market in the healthcare
industry is highly fragmented, with over 1,000 providers offering a limited
selection of programs on specific topics. For example, 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 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 ongoing training and continuing education 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;
- ongoing training and continuing education 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; and
- 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 ongoing training
and continuing education, 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 worldwide Internet users will increase from approximately 256.4
million in 2000 to approximately 502.4 million by the end of 2003. In addition,
the Internet is being used increasingly for electronic commerce between
businesses. IDC estimates that the volume of electronic commerce among
businesses over the Web throughout the World will increase from $217.8 billion
in 2000 to more than $1.3 trillion in 2003.
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
a greater breadth of content as well as 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
29
<PAGE> 36
manner. As bandwidth 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 45% 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 ongoing training and continuing education 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 training and continuing education 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 Web solution to meet the ongoing training and
continuing education needs of the healthcare community utilizing our proprietary
technology. We bring authors and publishers of training and continuing education
content, including both commercial publishers and educational institutions,
together with end users, which include healthcare professionals, other
healthcare workers and healthcare organizations, through our Web-based
distribution network, including health Web sites, healthcare equipment vendors
and healthcare providers. We are also developing online administrative and
management tools, based on our existing installed software products, which we
will host on an ASP basis. These tools 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 an online training and continuing education solution for
healthcare organizations, end users, distribution partners and content partners.
30
<PAGE> 37
Value to Healthcare Organizations
We offer healthcare organizations the ability to provide access to high
quality content on a cost-effective basis for the ongoing training and
continuing education needs of their employees. Currently, these organizations
often pay for the cost of meeting ongoing training and continuing education
requirements. Our services allow these organizations to contribute to and
enhance the content provided through our services and to configure training to
meet the specific needs of different groups of employees. In addition, we
provide administrators of these organizations the ability to track compliance
with certification requirements and measure the effectiveness and results of
training.
Value to End Users
Comprehensive Training and Continuing Education Offerings. We offer
healthcare professionals and other healthcare workers a centralized location to
satisfy their ongoing training and continuing education needs. We believe we
provide one of the largest online libraries of ongoing training and continuing
education 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, Scripps Clinic,
KnowledgeLinc and American Health Consultants.
Cost-Effective Training and Continuing Education. We believe our online
solution will reduce the cost of meeting ongoing training and continuing
education 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 ongoing training and continuing education. Our end users pay
for our services on a per transaction and/or subscription basis.
Convenient Access and Compelling User Experience. We offer healthcare
professionals and other healthcare workers a convenient, efficient and easy to
use system. Our online services allow our end users the freedom to utilize our
services when it is convenient for them. Users of our services have immediate
access to a broad selection of ongoing training and continuing education
programs and instantaneous and targeted feedback from anywhere there is an
Internet connection. 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. Our online search engine at
cmesearch.com enables physicians to locate and register for traditional
educational seminars as well as purchase training CD-ROMs and online courseware.
In addition, upon completion of each of our online courses 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.
Value to Network Distribution Partners
Comprehensive Training and Continuing Education Solution. We offer our
network distribution partners an online training and continuing education
solution that includes one of the largest libraries of courseware. Most of our
network distribution partners provide online access to continuing education as
an ancillary service to their core businesses. To drive traffic to their Web
sites, our network distribution partners want to provide their online users with
a compelling ongoing training and continuing education experience. Our solution
delivers these services to our network distribution partners without the need to
purchase or create content, maintain customer service for ongoing training and
continuing education, or purchase, install or develop specialized delivery
software. We also create customized programs to meet our partners' specific
needs.
Premier Continuing Education Healthcare Content. We offer our network
distribution partners access to content from premier healthcare organizations
through our established relationships with medical education and professional
institutions and commercial publishers. Our relationships with these
31
<PAGE> 38
organizations will allow our distribution partners to distinguish themselves
from their competitors by providing high quality continuing education and
training content.
Recurring Traffic Opportunity. We believe we will offer our network
distribution partners a predictable source of online traffic due to the
recurring nature of regulated training and continuing education requirements.
Allied healthcare professionals and other healthcare workers may also be
required by their employers or regulatory agencies to complete relevant training
and continuing education annually. Nurses and physicians are required to
complete a certain amount of continuing medical education every year. We believe
these users will visit Web sites that provide a convenient and compelling
experience to meet their ongoing training and continuing education requirements.
Our system enables healthcare professionals to store, track and generate reports
about this completed coursework. We believe this capability creates a compelling
relationship between our Web distribution partners 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 Web Distribution Network. We believe we currently offer our
content partners one of the largest Web networks for the distribution of
training and education for the healthcare community. Through our Web
distribution network, our content partners can realize new product sales by
targeting a broader audience than they could on their own.
Comprehensive Outsourcing Solution. By providing comprehensive conversion
and distribution services, 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 will allow them to refine their materials.
Significant Expertise in Content Conversion. We offer publishers and
authors of training and continuing education 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 Web training and continuing
education solutions for the healthcare community. We plan to achieve this
objective by pursuing the following strategies.
Provide Healthcare Organizations with Web Access to our Administrative
Services and Content Library. Our solution will enable organizations to provide
access to our training and continuing education services over the Internet.
Under this ASP model, our training software is hosted in a central data center
that allows end users Web access to our continuing education and training
services, eliminating the need for onsite installations of software. Our ASP
model also includes a set of administrative and management tools which enable
administrators to configure and modify training materials, track performance and
monitor training expenses. We plan to leverage the existing capabilities of our
training software that is installed at more than 700 hospitals and clinic
locations, including facilities owned and operated by Gambro Healthcare,
Columbia/HCA Healthcare Corporation and The Cleveland Clinic Foundation. In
addition, we have existing preferred vendor arrangements with several hospital
group purchasing organizations, or GPOs, including Premier, Inc. and Voluntary
Hospital Association, or VHA. We believe these arrangements offer us the
opportunity to provide our services to the member hospitals represented by
32
<PAGE> 39
these GPOs with our ASP model. We plan to transition those organizations to our
ASP 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 training
and continuing education solution as a service will accelerate customer purchase
decisions and increase adoption among new customers.
Expand and Enhance Our Training and Continuing Education Library. We plan
to expand our training and continuing education library through proprietary
development and licensing arrangements. We also plan to grow our library through
acquisitions, such as our acquisition of SilverPlatter Education, a provider of
CD-ROM and online continuing medical education for physicians, and our recently
completed acquisitions of Quick Study, a provider of OSHA and nursing training
to hospitals and clinics, m3 the Healthcare Learning Company, a provider of OSHA
and JCAHO training to hospitals, and EMInet, a provider of continuing education
training to emergency medical services personnel. We plan to use our existing
relationships with premier healthcare institutions and quality content providers
to strengthen our position as a leading aggregator of continuing education and
training 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. 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 training and continuing education content.
Increase the Number of Partners in Our Web Distribution Network. We
currently have strategic relationships with a network of over 30 distribution
partners. We plan to increase our distribution reach and market share by
developing additional strategic distribution relationships. We believe that
potential distribution partners will be attracted to the recurring nature of
training and continuing education 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 Web sites that
target healthcare providers, healthcare professionals, and pharmaceutical and
equipment manufacturers.
Expand our Sales and Marketing Efforts. We plan to develop HealthStream as
the leading brand for online training and continuing education 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 by operating sites in partnerships that carry both our brand and our
distribution partners' brands.
Generate Additional Revenue Opportunities. 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 ongoing
training and continuing education products. Through our recent acquisition of
KnowledgeReview, we acquired a search engine, cmesearch.com, which allows us to
sell education and training CD-ROMs and which will allow us to charge
registration fees for the enrollment for traditional CME seminars. 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.
33
<PAGE> 40
HEALTHSTREAM SERVICES
We provide our Web-based ongoing training and continuing education services
to healthcare organizations through our ASP model and individual healthcare
professionals through our Web distribution network.
SERVICES DISTRIBUTED THROUGH ASP MODEL
Healthcare organizations are responsible for providing both government
mandated and internally required training to their employees. We are developing
our ASP model to enable these healthcare organizations to provide, assess and
manage this training process. Under our ASP 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 sales cycle to these customers. In
addition, our hosted ASP service is scalable to enable 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:
Administrative and Management Tools. Our administrative and management
tools will be used by human resources, training and management personnel to
manage curricula and training performance data for the employee population. The
administrator software will be used to configure ongoing training and continuing
education 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 ongoing training and
continuing education. 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 curricula based on their job
profiles. In addition, our system will provide tools for administrative
personnel using our system to manage their employees' training performance data.
Online Courseware. The courseware we provide under our ASP model will
primarily focus on mandated training content. In addition, employers may make
some continuing education content from our library available to their
professional employees. Most end users accessing the ASP 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.
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.
SERVICES PROVIDED THROUGH WEB DISTRIBUTION NETWORK
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
34
<PAGE> 41
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 Web site is targeted to healthcare professionals
and includes primarily accredited continuing education 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 continuing education
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.
Search Engine. Through our acquisition of KnowledgeReview, we acquired a
search engine and several associated domain names through which we offer a
method for physicians and other healthcare professionals to search for both
online and traditional continuing education products. This Web site is currently
located at cmesearch.com. Physicians access the Web site to locate seminars by
specialty and location as well as purchase educational CD-ROMs and online
courseware. In addition, 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.
STRATEGIC RELATIONSHIPS AND ACQUISITIONS
RELATIONSHIPS AND ACQUISITIONS RELATING TO SERVICES DISTRIBUTED THROUGH OUR
ASP MODEL
m3 the Healthcare Learning Company. In January 2000, we acquired the stock
of m3 the Healthcare Learning Company which provides computer-based training to
hospitals and healthcare facilities primarily in the areas of OSHA and
regulatory training. m3 the Healthcare Learning Company provides us with an
established client base of over 450 hospitals and the opportunity to convert
these hospitals to our ASP model. This acquisition also adds experienced
management personnel that will oversee the hospital market for our ASP model as
well as eight additional sales people to serve this market in regional offices
across the country. The purchase price for m3 the Healthcare Learning Company
consisted of $600,000 in cash, the assumption of $1.2 million of long-term debt
and 818,036 shares of our common stock.
EMInet. In January 2000, we acquired the assets of EMInet, a provider of
online continuing education to emergency medical services personnel. EMInet has
sold over 350,000 courses online since 1996. This acquisition expands the
content offering of our online library and the customer base for our services as
well as adds management knowledgable about the emergency medicine market. The
purchase price for EMInet consisted of $640,000 in cash and 269,902 shares of
our common stock.
Quick Study. In January 2000, we acquired the stock of Quick Study, a
provider of over 60 hours of nursing and OSHA content which we have added to our
online library and will deliver to healthcare
35
<PAGE> 42
organizations through our ASP model. This courseware is currently distributed
through over 35 systems installed by Quick Study. The purchase price for Quick
Study consisted of $59,000 in cash, the assumption of $112,000 in long-term debt
and 61,397 shares of our common stock.
Columbia/HCA Healthcare Corporation. In February 2000, we entered into a
four-year Online Education Services Provider Agreement with Columbia Information
Systems, Inc., an affiliate of Columbia/HCA Healthcare Corporation with a
network of over 200 hospitals. Pursuant to the terms of the agreement, we will
provide Columbia/HCA with online training and education services and courseware
for its doctors, nurses and staff on an ASP basis as well as consulting and
support services. Columbia/HCA will pay us minimum revenues of $12.0 million
over the term of this agreement for these services.
RELATIONSHIPS AND ACQUISITIONS RELATING TO SERVICES PROVIDED THROUGH OUR WEB
DISTRIBUTION NETWORK
We have entered into strategic relationships with several content partners
and over 30 distribution partners and continue to aggressively pursue additional
strategic relationships. We believe that these strategic relationships and the
acquisition of complementary businesses will enable us to increase our course
offerings, expand our product distribution and increase our brand awareness. In
addition, our recent acquisitions have expanded our course offerings and
provided us with experienced sales personnel. Selected content and distribution
partners include:
Content
SilverPlatter Education. In July 1999, we acquired the assets of
SilverPlatter Education, a provider of over 100 hours of continuing medical
education programs to physicians on CD-ROM and via the Internet under the names
"SilverPlatter Education," "Physicians' Home Page" and "Core Curriculum," for
total consideration of $800,000 in cash and 49,202 shares of our common stock.
SilverPlatter Education is certified to provide accreditation for CME courses
which allows us to internally develop and certify our own courseware.
Scripps Clinic. In November 1999, we entered into a three-year agreement
with Scripps Clinic, a large multi-specialty medical clinic, to deliver its CME
content for physicians online.
Duke University Medical Center. In October 1999, we entered into a
three-year 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.
American Health Consultants. In September 1999 we entered into a two-year
agreement, and in January 2000 we entered into a one-year agreement with
American Health Consultants, a leading publisher for healthcare professionals,
to deliver over 400 hours of continuing education for nurses and over 800 hours
of continuing medical education for physicians online.
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 we develop with
their assistance.
The Cleveland Clinic Foundation. In June 1999, we entered into a
three-year agreement with The Cleveland Clinic Foundation, a leading research
and medical institution, to license its Intensive Review of 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.
36
<PAGE> 43
Challenger Corporation. In December 1998, we signed an agreement to
convert Challenger's library of accredited CME materials from a CD-ROM to a
Web-enabled format. This agreement also gives us the exclusive right during the
term of the agreement to resell their content on the Internet. Our agreement
with Challenger terminates in December 2000. See "Risk Factors -- We may be
unable to maintain our existing relationships with our content providers or to
build new relationships with other content providers."
e-Vitro. In January 2000, we entered into a one-year agreement with
e-Vitro, a developer of custom interactive content for healthcare providers.
Under the terms of the agreement, e-Vitro will provide content development
services to us. This relationship will create additional capacity for us to
augment our internal content development resources. In connection with this
development agreement, we acquired a warrant to purchase 223,834 shares of
e-Vitro Class B non-voting common stock at an exercise price of $4.47 per share.
Distribution
cmesearch.com. In January 2000, we acquired the assets of KnowledgeReview
which operates cmesearch.com, a healthcare education search engine which allows
physicians and other healthcare professionals to search for online and
traditional continuing education, such as locating seminars and purchasing
educational CD-ROMs and online courseware. cmesearch.com currently provides
listings and information on over 2,000 courses and seminars. We plan to provide
linking between this search engine and our 30 Web distribution partners. The
purchase price for KnowledgeReview consisted of $310,000 in cash and 17,343
shares of our common stock.
Healtheon/WebMD. In February 2000, we entered into a five-year agreement
with Healtheon/WebMD, a leading provider of online services to professionals and
consumers in the healthcare industry. Under the terms of the agreement, we will
be the exclusive provider of education, continuing education and training
services for healthcare organizations, healthcare professionals and healthcare
workers on Web sites owned or operated by Healtheon/WebMD.
MedicaLogic. In February 2000, we entered into a one-year agreement with
MedicaLogic, a leading provider of electronic medical records and related
technology, to distribute our online courseware to their customers.
State Medical Associations. In November 1999, we entered into an agreement
with the Mississippi State Medical Association to distribute CME to its member
physicians. In December 1999, we entered into a similar agreement with the
Medical Association of Georgia to distribute CME to its 6,000 member physicians.
HealthGate. In September 1999, we entered into two two-year 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.
ChannelHealth (an IDX Company). In September 1999, we entered into an
agreement with IDX to be the provider of continuing education on ChannelHealth's
Physician Homebase for a term of three years. ChannelHealth will deliver
comprehensive Internet-based knowledge management services for physicians,
healthcare workers and patients. ChannelHealth's parent company, IDX Systems
Corporation, is a provider of healthcare information solutions at more than
1,650 customer sites, serving 118,000 physicians nationwide.
Pointshare. In July 1999, we entered into a one-year agreement with
Pointshare, a provider of online services and medical intranets for physicians,
hospitals, managed care groups, insurers and laboratories, to offer our online
courseware to Pointshare's customers and sell course sponsorships.
GE Medical Systems. In June 1999, we entered into a two-year 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
37
<PAGE> 44
addition to our content development and online application development services,
we will assist GE Medical Systems in content conversion and will act as a
reseller of their content through our Web 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 May 1999, we entered into a three-year 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.
SALES AND MARKETING
We have a sales force of 16 individuals with an average of over 12 years of
healthcare sales experience. Our sales team continues to focus on selling our
training and continuing education service to hospitals and healthcare networks,
and we are in the process of transitioning these customers to our online
service. Our sales team also targets pharmaceutical and medical equipment
vendors for sponsorship opportunities and courseware development. We plan to
increase our sales and marketing team to focus on marketing our ASP 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 Cohn & Wolfe, an Atlanta-based public relations firm, to
assist our seven 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.
PARTNER RELATIONS
We have four individuals who work exclusively on the implementation and
development of the relationships with our current content and distribution
partners. These personnel coordinate all of our internal departments including
systems, content development, sales and marketing and business development and
act as the central liaison to the partner. This department works to maximize the
effectiveness of these relationships.
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 five 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
38
<PAGE> 45
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.
Educational Management System
Our client-server training and administrative software, T.NAV, has become
the application and foundation for our online training and continuing education
solution. This learning system is a scalable computer managed instruction system
that delivers interactive courses. 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
multiple back up power sources and network connections. 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. 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.
COMPETITION
The market for the provision of online training and continuing education to
the healthcare industry is new and rapidly evolving. We face competitive
pressures from numerous actual and potential competitors, including:
- other online training and continuing education providers;
- 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;
- 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.
39
<PAGE> 46
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. Through December 31, 1999, we did not collect sales,
use or other taxes on the sale of continuing education courses on our Web
sites other than on sales in Tennessee and Massachusetts. However, states
or 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
Allied Disciplines. Various allied health professionals are required to
obtain continuing education to maintain their licenses. For example, emergency
medical services personnel must acquire up to 20 continuing education hours per
year. These requirements vary by state and depend on the classification of the
employee.
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.
Joint Commission on Accreditation of Healthcare Organizations. The JCAHO
imposes continuing education requirements on physicians that relate to each
physician's specific staff appointments. In
40
<PAGE> 47
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.
CEU. The states' 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 continuing education units
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.
CME. State licensing boards, professional organizations and employers
require physicians to certify that they have accumulated a minimum number of
continuing medical education 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 a CME course. 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 credit.
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.
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
41
<PAGE> 48
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 to be 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 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. Some of 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 federal trademark registrations for the marks "HEALTHSTREAM," "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
the laws of the United States, and effective copyright, trademark and trade
secret protection may not be available in those jurisdictions.
We currently hold several domain names. 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, divert 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
42
<PAGE> 49
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 April 5, 2000, we employed approximately 170 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 13,400 square feet at this location expires in 2005. The
lease provides for two five-year renewal options. Rent at this location is
$12,296 per month until April 30, 2000; $11,569 per month from May 1, 2000 to
February 28, 2001; $11,737 per month from March 1, 2001 to February 28, 2004;
and $10,340 per month from March 1, 2004 to April 30, 2005. We are currently
negotiating terms for additional contiguous space at our Nashville headquarters
that will increase our total square footage to approximately 20,000.
As a result of our acquisition of SilverPlatter Education, we are leasing
approximately 2,600 square feet of office space in Boston, Massachusetts until
December 31, 2000. Rent for this space is $6,067 per month. Storage space is
leased on a month-to-month basis at the rate of $687 per month. As a result of
our acquisition of KnowledgeReview, we are leasing approximately 2,000 square
feet of office space in Cherry Hill, New Jersey until March 31, 2000, or at our
option, until March 31, 2001. Rent for this space is $5,000 per month. As a
result of our acquisition of EMInet, we are leasing approximately 2,180 square
feet of office space in Houston, Texas until September 30, 2000, or at our
option, until September 30, 2002. Rent for this space is $2,180 per month. As a
result of our acquisition of m3 the Healthcare Learning Company, we are leasing
three suites of office space in Austin, Texas and approximately 2,300 square
feet of office space in Dallas, Texas. The Austin lease expires on September 1,
2000 and has a monthly rent of $1,386. The Dallas lease expires on September 1,
2002 and has a monthly rent of $2,324.
LEGAL PROCEEDINGS
On April 3, 2000, a complaint was filed in the Chancery Court of Shelby
County, Tennessee against us and two individual officers of the corporation from
which we acquired the domain name "healthstream.com." The complaint seeks a
declaratory judgment that the transaction by which we acquired the domain name
is void, alleging that the defendant officers did not have the authority to bind
the corporation from which we purchased the domain name. We believe the
allegations in the complaint are without merit, intend to defend the litigation
vigorously and do not believe this litigation will have a material adverse
effect on our financial condition or results of operations.
43
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information about our executive officers and
directors.
<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........................ 33 President, Chief Product Officer and Director
Arthur E. Newman.......................... 51 Chief Financial Officer and Senior Vice President
Michael Pote.............................. 38 Senior Vice President
Scott Portis.............................. 33 Vice President of Technology
Stephen Clemens........................... 35 Vice President of Online Content
Robert H. Laird, Jr....................... 32 Vice President, General Counsel and Secretary
Susan A. Brownie.......................... 35 Vice President of Finance and Corporate Controller
Charles N. Martin, Jr..................... 58 Director
Thompson S. Dent.......................... 48 Director
M. Fazle Husain........................... 35 Director
John H. Dayani, Sr., Ph.D................. 53 Director
James F. Daniell, M.D..................... 57 Director
William W. Stead, M.D..................... 51 Director
</TABLE>
Robert A. Frist, Jr., one of our co-founders, 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, one of our co-founders, has served as our president and
as one of our directors since 1990 and as our chief product officer since 1999.
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.
Arthur E. Newman has served as our chief financial officer and senior vice
president since January 2000. From April 1990 to August 1999, Mr. Newman served
as executive vice president overseeing finance, human resources, information
systems and customer service and fulfillment for Lippincott, Williams and
Wilkins, formerly Waverly, Inc., a publicly traded medical sciences publisher.
In May 1998, Waverly was acquired by Wolters Kluwer and merged with Wolters
Kluwer's existing U.S. based medical publisher, Lippincott-Raven Publishers.
From August 1999 to January 2000, Mr. Newman served as the chief technology
officer for Wolters Kluwer's scientific, technical and medical companies
consisting of five separate units. Mr. Newman holds a Bachelor of Science in
chemistry from the University of Miami and a Masters of Business Administration
from Rutgers University.
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 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. Mr.
Portis worked for Electronic Data Systems, a provider of systems integration
services, as an engineering systems engineer in
44
<PAGE> 51
the expert systems and artificial intelligence divisions, from 1990 to 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 and general counsel
since March 1997 and secretary since October 1999. Mr. Laird also served as our
director of finance from March 1997 until November 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. Prior to attending graduate school from 1993 to 1996, Mr. Laird was
employed by CIGNA employee benefits, an insurance organization, in contracts
administration from 1991 to 1993.
Susan A. Brownie has served as our vice president of finance and corporate
controller since November 1999. From August 1986 until 1999, she worked for KPMG
LLP, a public accounting and consulting firm, most recently as a senior manager.
She holds a Bachelor of Business Administration from the College of William and
Mary.
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, a healthcare company. From
January 1992 to January 1997, Mr. Martin served as chairman of the board of
directors, 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.
Thompson S. Dent has served as one of our directors since March 1995. Mr.
Dent is a founder of PhyCor, Inc. He 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., under a purchase
agreement for our preferred stock 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 served as president and chief executive officer of Network
Health Services, Inc. from its inception in May 1996 until he became its
executive chairman in 1999. Dr. Dayani was the founder, president and chief
executive officer of Medifax, Inc. from 1993 to 1995 and served as its
consultant from 1995 to June 1998. He also founded 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 has maintained a private medical practice at Centennial Medical
Center in Nashville since 1984. A founding member of the Society for
Reproductive Surgeons, he served as past president of the International Society
45
<PAGE> 52
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 has served as the associate vice chancellor of Vanderbilt University
Medical Center since 1991. Dr. Stead is also the chief technology officer of
WebEBM, a healthcare information company. 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.
ADVISORY BOARDS
We have a Medical Advisory Board chaired by Dr. Daniell, one of our
directors. This board consists of nine physicians across several medical
specialties who assist us in assessing content and content partners as well as
advise us on recent developments in the healthcare market and accreditation
issues for CME.
We have a Nursing Advisory Board chaired by Colleen Conway Welch, the dean
of nursing at Vanderbilt University. This board consists of 10 individuals who
advise us on nursing issues as they relate to continuing education and
accreditation issues.
During 1999, our Medical Advisory Board and Nursing Advisory Board members
received options to purchase 51,800 shares of our common stock at exercise
prices ranging from $2.34 to $6.49 per share. We recorded expense of
approximately $12,000 in connection with these grants.
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 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 2001. Messrs. Dayani and
McLaren will be Class II directors whose
46
<PAGE> 53
terms will expire at the annual meeting of shareholders in 2002. Messrs. Frist,
Husain and Martin will be Class III directors whose terms will expire at the
annual meeting of shareholders in 2003.
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. Daniell, Dayani and
Husain. 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 2000 Stock
Incentive Plan. During 1998, our non-employee directors each received a grant of
options to purchase 3,700 shares of our common stock at an exercise price of
$2.30 per share. During 1999, each of our non-employee directors received a
grant of options to purchase 14,800 shares of our common stock at an exercise
price of $4.06 per share. Under our 2000 Stock Incentive Plan, upon
effectiveness of the registration statement relating to this offering, each of
our non-employee directors will be granted options to purchase 10,000 shares of
our common stock at the initial public offering price. These options vest
immediately upon grant. Additionally, upon the election of any new member of the
board of directors following the effectiveness of the registration statement
relating to this offering, but prior to the date of the first annual meeting of
the shareholders, that member will be granted an option to purchase 15,000
shares of common stock at the fair market value at the date of grant. These
options will vest in five equal annual installments beginning on the first
anniversary of the date of grant. Each year, immediately following the date of
our annual meeting, assuming enough shares are available under the 2000 plan,
each non-employee director will automatically be granted options to purchase
5,000 shares of our common stock. The exercise price will be equal to the fair
market value on the date of grant, and these options will vest immediately upon
grant.
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.
47
<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1997, 1998 and 1999, by
our chief executive officer and the only executive officer whose aggregate cash
compensation exceeded $100,000 during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION($) OPTIONS(#)
- --------------------------- ----------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert A. Frist, Jr................... 1999 $ 79,167 $ 9,665 -- 83,250
Chief Executive Officer 1998 66,027 2,296 -- 47,915
1997 62,113 6,690 -- --
Michael Pote.......................... 1999 $107,561 $14,692 -- 83,250
Senior Vice President 1998 98,058 7,296 -- 47,915
1997 34,042 5,728 -- --
</TABLE>
STOCK OPTIONS GRANTED DURING FISCAL YEAR 1999
The following table presents all individual grants of stock options during
the year ended December 31, 1999 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................. 83,250 6.0 4.06 9/2/07 138,077 161,571
Michael Pote......... 83,250 6.0 4.06 9/2/07 138,077 161,571
</TABLE>
48
<PAGE> 55
YEAR-END OPTION VALUES
The following table sets forth information about the number and year-end
value of exercisable and unexercisable options held by our executive officers
named in the Summary Compensation Table for the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999(#) AT DECEMBER 31, 1999(1)
--------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE($) UNEXERCISABLE($)
---- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Robert A. Frist, Jr........................ 314,500 131,165 2,651,750 732,010
Michael Pote............................... 27,657 107,208 191,630 571,430
</TABLE>
- ---------------
(1) Based on an assumed initial public offering price of $9.00 per share, minus
the exercise price, multiplied by the number of shares underlying the
option.
416,250 options were exercised during 1999 by our chief executive officer,
and 3,170 options were exercised during 1999 by our president.
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 December 31, 1999, we had options under this plan for the purchase of
2,470,229 shares of common stock outstanding to employees, consultants,
directors and other persons having a business relationship with us. In January
2000, options to purchase 432,245 shares of common stock at prices ranging from
$6.49 to $8.65 per share were granted. In February 2000, we granted options to
purchase 350,575 shares of our common stock at an exercise price of $10.00 per
share. In March and April 2000, we granted options to purchase an aggregate of
335,085 shares of our common stock at an exercise price of $11.89 per share.
2000 Stock Incentive Plan. The 2000 Stock Incentive Plan was adopted by
our board of directors in February 2000, and approved by our shareholders in
March 2000. 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 5,000,000 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.
49
<PAGE> 56
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 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. For a description of awards to non-employee
directors, please 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.
Employee Stock Purchase Plan. Our Employee Stock Purchase Plan was adopted
by our board of directors in February 2000, and approved by our shareholders in
March 2000. A total of 1,000,000 shares of common stock has been reserved for
issuance under the purchase plan. As of the date of this prospectus, no shares
have been issued under the purchase plan.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive offer periods that are generally
twelve months in duration. The offer periods start and end on April 1st and
March 31st of each year, except for the first offer period, which will commence
on the date immediately preceding the first date on which a share of common
stock is quoted on the Nasdaq National Market or a successor quotation system
and will end on March 31, 2001.
50
<PAGE> 57
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week. However, no
employees may be granted a right to purchase shares of our common stock under
the purchase plan (1) to the extent that, immediately after the grant of the
right to purchase shares of our common stock, the employee would own, or be
treated as owning, stock possessing 5% or more of the total combined voting
power or value of all classes of our capital stock or (2) to the extent that his
or her rights to purchase shares of our common stock under all of our employee
stock purchase plans accrues at a rate which exceed $25,000 worth of shares of
our common stock for each calendar year. The purchase plan permits participants
to purchase common stock through payroll deductions of up to 15% of the
participant's base compensation. Base compensation is defined as the
participant's gross base compensation, excluding overtime payments, sales
commissions, incentive compensation, bonuses, expense reimbursements, fringe
benefits and other special payments. The maximum number of shares a participant
may purchase with respect to a single offer period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offer period. The price of stock
purchased under the purchase plan is 85% of the lesser of the fair market value
of our common stock on (1) the first day of the offer period or (2) the last day
of the offer period. Participants may end their participation at any time other
than during the last 15 days of the offer period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
Rights to purchase stock granted under the purchase plan are not
transferable by a participant other than by will, the law of descent and
distribution, or as otherwise provided under the purchase plan. The purchase
plan provides that, in the event of a merger of us with or into another
corporation or a sale of substantially all of our assets, each outstanding right
to purchase shares of our common stock may be assumed or substituted for by the
successor corporation.
Our board of directors has the authority to amend or terminate the purchase
plan. However, no such action by our board may adversely affect any outstanding
rights to purchase stock under the purchase plan, except that our board may
terminate an offer period on any exercise date if the board of directors
determines that the termination of the purchase plan is in our best interests
and our shareholders' best interests.
EMPLOYMENT 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 and our 2000 Stock Incentive 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.
51
<PAGE> 58
TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS
AND MORE THAN FIVE PERCENT SHAREHOLDERS
In April 1999, we issued 428,239 shares of our common stock upon the
conversion of $1.0 million of debt at $2.34 per share to Robert A. Frist, Jr.,
our chief executive officer and chairman.
In July and August 1999, we issued an aggregate of 416,250 shares of our
common stock upon the exercise of options at $0.54 a share to Robert A. Frist,
Jr., our chief executive officer and chairman.
In December 1999, we issued 3,170 shares of our common stock upon the
exercise of options at $0.61 per share to Jeffrey L. McLaren, our president,
chief product officer and one of our directors. Also, in February 2000, we
issued 148,714 shares of our common stock upon the exercise of options at $0.61
per share to Mr. McLaren.
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;
- 20,000 shares to James Frist, brother of Robert A. Frist, Jr., our chief
executive officer and chairman;
- 100,000 shares to GE Capital Equity Investments, Inc., one of our more
than five percent shareholders;
- 5,000 shares to Dr. Scott Portis, father of Scott Portis, our vice
president of technology; and
- 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:
- 30,000 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;
- 5,000 shares to Carol Frist, mother of Robert A. Frist, Jr., our chief
executive officer and chairman;
- 5,000 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;
52
<PAGE> 59
- 4,000 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;
- 4,000 shares to James Frist, brother of Robert A. Frist, Jr., or chief
executive officer and chairman;
- 10,000 shares to Robert A. Frist, Jr., our chief executive officer and
chairman;
- 3,000 shares to John H. Dayani, Sr, Ph.D., one of our directors;
- 2,000 shares to The Seven Partnership. Thompson S. Dent, one of its
partners, is one of our directors;
- 1,000 shares to Dr. Scott Portis, father of Scott Portis, our vice
president of technology;
- 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.
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, chief product officer and one of our directors;
- 4,520 shares to James Frist, brother of Robert A. Frist, Jr., our chief
executive officer and chairman;
- 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. Charles N. Martin, Jr., 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, Sr., 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;
- 7,000 shares to Dan McLaren, father of Jeffrey L. McLaren, our president,
chief product officer and one of our directors;
- 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;
- 2,500 shares to Robert Merriman, father-in-law of Robert A. Frist, Jr.,
our chief executive officer and chairman;
53
<PAGE> 60
- 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
4.28238 shares of common stock upon consummation of this offering. Each share of
series C preferred stock will be converted into 2.46013 shares of common stock
upon consummation of this offering.
In 1998, 1999 and 2000, we granted the following number of options to
purchase shares of our common stock at $2.30, $2.34, $4.06, $6.49 and $10.00 per
share, respectively, to the following directors, executive officers and
shareholders who beneficially own five percent or more of our stock:
- 47,915, 0, 83,250, 0 and 0 to Robert A. Frist, Jr., our chief executive
officer and chairman;
- 47,915, 0, 83,250, 0 and 0 to Jeffrey L. McLaren, our president, chief
product officer and one of our directors;
- 0, 0, 0, 129,500 and 0 to Arthur E. Newman, our senior vice president and
chief financial officer;
- 47,915, 0, 83,250, 0 and 0 to Michael Pote, our senior vice president;
- 47,915, 0, 74,000, 0 and 0 to Scott M. Portis, our vice president of
technology and brother-in-law of Robert Frist, Jr., our chief executive
officer and chairman;
- 23,957, 11,978, 74,000, 0 and 0 to Robert H. Laird, Jr., our vice
president, general counsel and secretary;
- 23,957, 11,978, 74,000, 0 and 0 to Stephen Clemens, our vice president of
interactive development;
- 0, 0, 0, 26,825, and 46,250 to Susan A. Brownie, our vice president of
finance and corporate controller;
- 11,978, 0, 7,400, 0 and 0 to John Dayani, Jr., one of our employees and
son of one of our directors;
- 3,700, 0, 14,800, 0 and 0 to Thompson S. Dent, one of our directors;
- 3,700, 2,775, 14,800, 0 and 0 to James F. Daniell, M.D., one of our
directors;
- 3,700, 0, 14,800, 0 and 0 to John H. Dayani, Sr., Ph.D., one of our
directors;
- 3,700, 0, 14,800, 0 and 0 to William Stead, M.D., one of our directors;
- 0, 0, 14,800, 0 and 0 to M. Fazle Husain, one of our directors; and
- 0, 0, 14,800, 0 and 0 to Charles N. Martin, Jr., one of our directors.
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 or 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 also have an unsecured
long-term promissory note payable to Mr. Frist. The balance of this note was
$12,892 at December 31, 1999. The note requires monthly installments of
principal and interest of $2,224 through May 23, 2000. The note accrues interest
at 12% per annum.
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. On August 23, 1999, the note was converted into
6,000 shares of our series B preferred stock. Interest expense
54
<PAGE> 61
on the loans to Robert A. Frist, Jr. and Scott M. Portis for the years ended
December 31, 1997, 1998 and 1999 totaled $182,708, $328,412 and $193,059,
respectively.
On June 14, 1999, we granted a warrant to purchase 245,032 shares of our
common stock to GE Medical Systems, an affiliate of one of our more than five
percent shareholders.
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.
55
<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of April 5, 2000 and as adjusted to reflect the
sale of the shares of common stock offered in this offering and the concurrent
private sale to Healtheon/WebMD by: (1) each shareholder who owns beneficially
more than five percent 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 13,371,921 shares
outstanding on April 5, 2000, on an as if converted basis, and 19,483,032 shares
outstanding after this offering and the concurrent private sale to
Healtheon/WebMD. Shares of common stock subject to options that are currently
exercisable or that will become exercisable within 60 days after April 5, 2000
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............................ 5,075,349(1) 314,500 38.0% 26.1%
Entities Associated with Morgan Stanley........ 1,138,943(2) -- 8.5 5.8
1221 Avenue of the Americas
New York, New York 10020
Martin Investment Partnership III(3)........... 854,204 -- 6.4 4.4
20 Burton Hills Boulevard
Suite 100
Nashville, Tennessee 37215
HealthStream Partners(4)....................... 738,039 -- 5.5 3.8
900-A, 3319 West End Avenue
Nashville, Tennessee 37203
GE Capital Equity Investments, Inc............. 673,270(5) 245,032 5.0 3.5
120 Long Ridge Rd.
Stamford, CT 06927
Jeffrey L. McLaren............................. 367,776(6) -- 2.8 1.9
Arthur E. Newman............................... -- -- -- --
Michael Pote................................... 88,294(7) -- * *
Scott Portis................................... 489,321(8) 105,242 3.7 2.5
Stephen Clemens................................ 11,978 5,711 * *
Robert H. Laird, Jr............................ 23,957 11,979 * *
Susan A. Brownie............................... -- -- -- --
Charles N. Martin, Jr.......................... 869,004(9) 14,800 6.5 4.5
Thompson S. Dent............................... 73,589(10) 22,200 * *
M. Fazle Husain................................ 1,153,743(11) 14,800 8.6 5.9
John H. Dayani, Sr., Ph.D...................... 103,920 18,500 * *
James F. Daniell, M.D.......................... 53,448 24,975 * *
William Stead, M.D............................. 18,500 14,800 * *
All executive officers and directors as a group
(14 persons)................................. 8,328,879 547,507 62.3 42.7
</TABLE>
- ---------------
* Less than one percent
56
<PAGE> 63
(1) 142,366 of these shares are held by Carol Frist, mother of Robert A. Frist,
Jr., 107,059 of these shares are held by Dr. Robert Frist, father of Robert
A. Frist, Jr. and 35,307 of these shares are held by a family partnership
known as Frist Family Internet Partners.
(2) 999,286 of these shares are held by Morgan Stanley Venture Partners III,
L.P., 95,946 are held by MS Venture Investors III, L.P. and 43,709 of these
shares are held by The Morgan Stanley Venture Partners Entrepreneur Fund,
L.P.
(3) The voting and investment power with respect to shares owned by Martin
Investment Partnership III is exercised by Charles N. Martin, Jr.
(4) The voting and investment power with respect to shares owned by
HealthStream Partners is exercised by Thomas Frist III.
(5) Beneficial ownership of 336,635 of these shares is shared with its parent,
GE Capital Corporation, and GE Medical Systems, a unit of the General
Electric Company. Beneficial ownership of 61,258 of these shares is shared
with GE Medical Systems under a warrant agreement dated June 29, 1999.
(6) 17,221 of these shares are held by Dan McLaren, father of Jeffrey McLaren.
(7) 60,637 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 in those shares.
(8) 28,473 of these shares are held by Dr. Scott Portis, father of Scott
Portis.
(9) 854,204 of these shares are owned by Martin Investment Partnership III, of
which Mr. Martin is managing partner. Mr. Martin disclaims beneficial
ownership of 464,118 of these shares except to the extent of his pecuniary
interest in those shares.
(10) 51,389 of these shares are held by The Seven Partnership of which Mr. Dent
is one of the partners. Mr. Dent disclaims beneficial ownership of 25,695
of these shares except to the extent of his pecuniary interest in those
shares.
(11) 1,138,943 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 in those shares.
57
<PAGE> 64
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. As of April 5, 2000 our authorized capital stock consisted
of 75,000,000 shares of common stock, no par value per share, and 10,000,000
shares of preferred stock, no par value per share. As of April 5, 2000, there
were 5,687,057 shares of common stock outstanding held of record by 43
shareholders, 76,000 shares of series A preferred stock outstanding held of
record by five shareholders, 1,228,801 shares of series B preferred stock
outstanding held of record by 32 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 our common stock are entitled to receive, as, when and if
declared by our 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 our
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 10,000,000 shares of preferred stock, as of
April 5, 2000. Prior to consummation of this offering, there were 76,000 shares
of series A preferred stock, 1,228,801 shares of series B preferred stock and
627,406 shares of series C preferred stock outstanding. All of these shares will
be converted into shares of common stock upon consummation of this 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 and the concurrent private sale of
an estimated 1,111,111 shares of our common stock to Healtheon/WebMD, the
holders of 7,684,864 shares of common stock issuable upon conversion of the
preferred stock, 2,672,632 shares of our common stock issuable upon the exercise
of warrants and an estimated 1,111,111 shares of our common stock issued in the
concurrent private sale to Healtheon/WebMD 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, for registration rights upon the demand of the
holders of at least 30% of the shares of common stock then outstanding that were
issuable upon the conversion of the preferred stock. In addition, pursuant to
that agreement, subject to certain limitations, the holders have rights,
referred to as piggyback registration rights, 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
58
<PAGE> 65
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
13,371,921, or 68.6%, 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."
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
Our 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
Our 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 before the
first anniversary of the date the previous year's annual meeting notice was
provided. 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 by:
- at least 60 days but no more than 90 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.
Our bylaws also specify requirements as to the form and content of a
shareholder'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.
59
<PAGE> 66
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.
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.
60
<PAGE> 67
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 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 in
addition to the indemnification provided in our charter and bylaws. These
agreements, among other things, indemnify our directors 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. 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 SunTrust Bank,
Atlanta. Its address is P.O. Box 4625, Atlanta, Georgia 30302, and its telephone
number at this location is (404) 588-7622.
61
<PAGE> 68
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.
Upon consummation of this offering and the concurrent private sale,
19,483,032 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 5,000,000 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. An estimated 1,111,111 shares of common stock to be
purchased by Healtheon/WebMD in a private sale to occur concurrently with this
offering are subject to contractual restrictions as described below under
"Lock-Up Agreements." The remaining shares of common stock held by existing
shareholders and the estimated 1,111,111 shares to be purchased by
Healtheon/WebMD in a concurrent private sale 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 195,000 shares immediately after this offering and
the concurrent private sale of an estimated 1,111,111 shares of our
common stock to Healtheon/WebMD; 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, directors 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 more than one percent
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
62
<PAGE> 69
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 FleetBoston
Robertson Stephens Inc.
J.C. Bradford & Co., one of the underwriters in this offering, will sign a
lock-up agreement under which it agrees not to transfer or dispose of, directly
or indirectly, any of the 64,236 shares of our common stock received as
compensation for its acting as an investment advisor in connection with the
issuance of our series B preferred stock in April, May and August 1999 for 90
days from the date of this prospectus.
Healtheon/WebMD will sign a lock-up agreement with us under which it agrees
not to transfer or dispose of, directly or indirectly, one-half of the shares of
our common stock purchased by it in the concurrent private sale for one year
from the date of this prospectus and the other one-half of the shares for two
years from the date of this prospectus.
REGISTRATION RIGHTS
Upon completion of this offering and the concurrent private sale, the
holders of 7,684,864 shares of our common stock issuable upon conversion of our
preferred stock, 2,672,632 shares of our common stock issuable upon the exercise
of warrants and an estimated 1,111,111 shares issued to Healtheon/WebMD in the
concurrent private sale will be entitled to rights with respect to the
registration of their shares under the Securities Act. See "Description of
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 up to 9,000,000 shares of common stock
reserved for issuance under our stock option plans and 1,000,000 shares reserved
for issuance under our employee stock purchase plan. As of April 5, 2000,
options to purchase 3,178,622 shares of common stock were issued and
outstanding. When the lock-up agreements described above expire, at least
818,591 shares of common stock will be subject to vested options (based on
options outstanding as of April 5, 2000). 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.
63
<PAGE> 70
UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the ownership and disposition of our common stock to a
non-U.S. Holder. For the purpose of this discussion, a non-U.S. Holder is any
holder that for U.S. federal income tax purposes is not a U.S. person. For
purposes of this discussion, the term U.S. person means:
- a citizen or resident of the U.S.;
- a corporation or other entity taxable as a corporation and created or
organized in the U.S. or under the laws of the U.S. or any political
subdivision thereof;
- an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant in light of a non-U.S. Holder's particular facts
and circumstances, such as being a U.S. expatriate, and does not address any tax
consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect.
Accordingly, each non-U.S. Holder should consult a tax advisor regarding the
specific U.S. federal, state, local and non-U.S. income and other tax
consequences to the non-U.S. Holder as a result of their individual
circumstances related to acquiring, holding and disposing of shares of our
common stock.
DIVIDENDS
We have never paid dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. In the event, however, that
we do pay dividends on our common stock, any dividend paid to a non-U.S Holder
of common stock generally will be subject to U.S. withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. Dividends received by a non-U.S. Holder
that are effectively connected with a U.S. trade or business conducted by the
non-U.S. Holder are exempt from such withholding tax. However, those effectively
connected dividends, net of certain deductions and credits, are taxed at the
same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate non-U.S. Holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. Holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A non-U.S. Holder of common stock that is eligible for a reduced rate of
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. Holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of our common stock
unless:
- the gain is effectively connected with a U.S. trade or business of the
non-U.S. Holder, which gain, in the case of a corporate non-U.S. Holder,
must also be taken into account for branch profits tax purposes;
- the non-U.S. Holder is an individual who holds his or her common stock as
a capital asset, generally, an asset held for investment purposes, and
who is present in the U.S. for a period or
64
<PAGE> 71
periods aggregating 183 days or more during the calendar year in which
the sale or disposition occurs and certain other conditions are met; or
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the holder's holding
period for our common stock. We have determined that we are not and do
not believe that we will become a "United States real property holding
corporation" for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Under tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence.
Dividends paid to a non-U.S. Holder at an address within the U.S. may be
subject to backup withholding at a rate of 31% if the non-U.S. Holder fails to
establish that is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payer. Backup withholding
generally will not apply to dividends paid to non-U.S. Holders at an address
outside the U.S. on or prior to December 31, 2000 unless the payer has knowledge
that the payee is a U.S. person. Under recently finalized Treasury Regulations
regarding withholding and information reporting, payment of dividends to
non-U.S. Holders at an address outside the U.S. after December 31, 2000 may be
subject to backup withholding at a rate of 31% unless such non-U.S. Holder
satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a non-U.S. Holder of common stock outside the U.S. to or through
a foreign office of a broker will not be subject to backup withholding but will
be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holder's non-U.S.
status and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. Holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the U.S. income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
obtained, provided that the required information is furnished to the IRS.
65
<PAGE> 72
[U.S.]
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston 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
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
CIBC World Markets Corp.....................................
J.C. Bradford & Co..........................................
E*OFFERING Corp.............................................
---------
Total........................................ 5,000,000
=========
</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 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 in this document, 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 750,000
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 750,000 shares of common stock, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage 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 in this offering are being sold. We
will be obligated, by the over-allotment option, to 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.
66
<PAGE> 73
The following table summarizes the compensation to be paid by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
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, directors and our more than one-percent
shareholders will agree, for 180 days after the 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 owned as of the date of this prospectus or acquired after the date
of this prospectus directly by those holders or with respect to which they have
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. These lock-up agreements will also cover any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock owned by those holders. However,
FleetBoston 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 FleetBoston Robertson 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
Our common stock has been approved for listing 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 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
67
<PAGE> 74
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.
E*OFFERING Corp. is the exclusive Internet underwriter for this offering.
E*OFFERING Corp. has agreed to allocate a portion of the shares that it
purchases to E*TRADE Securities, Inc. E*OFFERING Corp. and E*TRADE Securities
Inc. will allocate shares to their respective customers in accordance with usual
and customary industry practices. A prospectus in electronic format, from which
you can link to a "Meet the Management" Presentation through an embedded
hyperlink, (click here for "Meet the Management" Presentation), is being made
available on the Web site maintained by E*OFFERING Corp., www.eoffering.com. The
"Meet the Management" presentation, including the accompanying slides included
in the appendix, is part of this prospectus.
Healtheon/WebMD has agreed to purchase directly from us an estimated
1,111,111 shares of our common stock in a separate private sale that will close
concurrently with this offering. The price of these shares will be equal to the
initial public offering price per share in this offering.
We have requested that the underwriters reserve up to 250,000 shares of
common stock to be offered at the initial public offering price to our
employees, friends and family of employees and others. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase the reserved shares. Any reserved shares which
are not purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered by this prospectus.
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. The shares of common stock into which these shares of
series B preferred stock are convertible will be subject to a lock-up agreement
for 90 days from the date of this prospectus, pursuant to which such securities
may not be sold, transferred, assigned, pledged or hypothecated. Including the
shares received by J.C. Bradford & Co. as payment for its acting as our
financial advisor, J.C. Bradford & Co. and affiliates of J.C. Bradford & Co.
collectively own shares of our preferred stock representing 578,010 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.
An aggregate of 46,777 shares of our preferred stock held by affiliates of
J.C. Bradford & Co. have been deemed to constitute underwriters compensation
pursuant to Corporate Financing Rule 2710 of the National Association of
Securities Dealers, Inc. Of the shares of common stock into which these shares
of preferred stock are convertible, 126,053 shares will be subject to a lock-up
agreement for one year from the date of this prospectus, 8,385 shares will be
subject to a lock-up agreement for five years from the date of this prospectus
and 39,348 shares will be subject to a lock-up agreement for six years from the
date of this prospectus. Each of these lockup agreements shall prohibit the
party subject to such agreement from selling, transferring, assigning, pledging
or hypothecating the securities subject to the agreement for the respective time
periods referenced above.
Neither members of the NASD that are acting as underwriters in connection
with this offering, nor associated or affiliated persons of such NASD members,
will receive 10% or more of the net proceeds of this offering in the aggregate.
68
<PAGE> 75
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. Members
of Bass, Berry & Sims PLC beneficially own 56,946 shares of our common stock.
The underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited (1) our financial
statements at December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, and (2) the financial statements of
SilverPlatter Education, Inc. at December 31, 1997 and 1998, and for each of the
two years in the period ended December 31, 1998, as set forth in their reports.
We have included these financial statements in the prospectus and elsewhere in
the registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
Lane, Gorman Trubitt L.L.P., independent auditors, have audited the
financial statements of MultiMedia Marketing, Inc. d/b/a m3 the Healthcare
Learning Company at December 31, 1998 and 1999, and for each of the three years
in the period ended December 31, 1999, as set forth in their report. We have
included these financial statements in the prospectus and elsewhere in the
registration statement in reliance on Lane, Gorman Trubitt L.L.P.'s report,
given on their authority 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.
For more information about us and the common stock being offered, you should
review the registration statement and the related exhibits. 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 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.
69
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF
HEALTHSTREAM, INC.
Unaudited Pro Forma Condensed Balance Sheet as of December
31, 1999.................................................. F-3
Notes to Unaudited Pro Forma Condensed Balance Sheet........ F-4
Unaudited Pro Forma Condensed Statement of Operations for
the Year ended December 31, 1999.......................... F-7
Notes to Unaudited Pro Forma Condensed Statement of
Operations................................................ F-8
AUDITED FINANCIAL STATEMENTS OF HEALTHSTREAM, INC.
Years ended December 31, 1997, 1998 and 1999
Report of Independent Auditors.............................. F-11
Balance Sheets.............................................. F-12
Statements of Operations.................................... F-13
Statements of Shareholders' Equity (Deficit)................ F-14
Statements of Cash Flows.................................... F-15
Notes to Financial Statements............................... F-16
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-29
Balance Sheets.............................................. F-30
Statements of Operations.................................... F-31
Statements of Stockholders' Deficit......................... F-32
Statements of Cash Flows.................................... F-33
Notes to Financial Statements............................... F-34
AUDITED FINANCIAL STATEMENTS OF MULTIMEDIA MARKETING, INC.
D/B/A M3 THE HEALTHCARE LEARNING COMPANY
Years ended December 31, 1997, 1998 and 1999
Report of Independent Certified Public Accountants.......... F-40
Balance Sheets.............................................. F-41
Statements of Operations.................................... F-42
Statements of Stockholders' Deficit......................... F-43
Statements of Cash Flows.................................... F-44
Notes to Financial Statements............................... F-45
</TABLE>
F-1
<PAGE> 77
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On July 23, 1999, we acquired substantially all assets and assumed certain
liabilities of SilverPlatter Education, Inc. from SilverPlatter Information,
Inc. for a combination of cash and shares of our common stock. On January 28,
2000, we acquired all of the assets and liabilities of Multimedia Marketing,
Inc. d/b/a m3 the Healthcare Learning Company for a combination of cash and
shares of our common stock. On January 28, 2000, we acquired substantially all
of the assets of EMInet, Inc. for a combination of cash and shares of our common
stock. On January 11, 2000, we acquired substantially all of the assets and
liabilities of Quick Study, Inc. for a combination of cash and shares of our
common stock. On January 3, 2000, we acquired substantially all of the assets of
KnowledgeReview, LLC for a combination of cash and shares of our common stock.
The acquisitions were accounted for as purchases.
The unaudited pro forma balance sheet gives effect to: (i) the acquisition
of Multimedia Marketing, Inc. d/b/a m3 the Healthcare Learning Company; (ii) the
acquisition of EMInet, Inc.; (iii) the acquisition of Quick Study, Inc.; (iv)
the acquisition of KnowledgeReview, LLC; (v) the conversion of series A, B and C
preferred stock into our common stock; (vi) the conversion of $1,293,000 of
notes payable-related party to series B preferred stock and conversion to our
common stock; (vii) the issuance of our common stock in this offering and the
sale of an estimated 1,111,111 shares of our common stock in a concurrent
private sale to Healtheon/WebMD at an assumed initial offering price of $9.00
per share as described in "Use of Proceeds", net of offering costs of
approximately $4.4 million, of which $295,000 have already been paid; and (viii)
the repayment of $1,276,708 of debt in connection with the acquisition of m3 the
Healthcare Learning Company and Quick Study as if the offering and each of the
other transactions had been completed as of December 31, 1999.
The unaudited pro forma condensed statements of operations give effect to:
(i) the acquisition of SilverPlatter Education, Inc.; (ii) the acquisition of
Multimedia Marketing, Inc. d/b/a m3 the Healthcare Learning Company; (ii) the
acquisition of EMInet, Inc.; (iii) the acquisition of Quick Study, Inc.; (iv)
the acquisition of KnowledgeReview, LLC; (v) the conversion of series A, B and C
preferred stock into our common stock; (vi) the conversion of $1,293,000 of
notes payable-related party to series B preferred stock and conversion to our
common stock; and (vii) the issuance of our common stock in this offering and
the sale of an estimated 1,111,111 shares of our common stock in a concurrent
private sale at an assumed initial offering price of $9.00 per share as
described in "Use of Proceeds," net of offering costs of approximately $4.4
million of which $295,000 have already been paid as if the offerings and each of
the other transactions had been completed as of January 1, 1999.
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 or will institute as a result of these acquisitions. 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> 78
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACQUISITION PRE-OFFERING OFFERING
ACQUIRED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HEALTHSTREAM COMPANIES(1) ADJUSTMENTS(2) CONSOLIDATED ADJUSTMENTS(3) CONSOLIDATED
------------ ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short term investments....... $13,632,144 $ 429,600 $(1,609,000) $12,452,744 $ 49,668,292 $62,121,036
Accounts receivable, less
allowance for doubtful
accounts..................... 544,042 979,426 -- 1,523,468 -- 1,523,468
Accounts
receivable -- unbilled....... 18,877 -- -- 18,877 -- 18,877
Investments.................... 86,063 -- -- 86,063 -- 86,063
Prepaid and other assets....... 263,517 4,424 -- 267,941 -- 267,941
----------- ----------- ----------- ----------- ------------ -----------
Total current assets..... 14,544,643 1,413,450 (1,609,000) 14,349,093 49,668,292 64,017,385
Property and equipment, net..... 1,333,901 111,711 -- 1,445,612 -- 1,445,612
Intangible assets, net.......... 1,134,673 -- 13,714,210 14,848,883 -- 14,848,883
Other assets.................... 441,488 68,190 -- 509,678 (295,000) 214,678
----------- ----------- ----------- ----------- ------------ -----------
Total assets............. $17,454,705 $ 1,593,351 $12,105,210 $31,153,266 $ 49,373,292 $80,526,558
=========== =========== =========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 443,455 $ 212,775 $ -- $ 656,230 $ -- $ 656,230
Accrued liabilities............ 448,727 445,516 -- 894,243 -- 894,243
Deferred revenue............... 791,424 1,635,990 -- 2,427,414 -- 2,427,414
Current portion of notes
payable...................... -- 50,000 -- 50,000 (50,000) --
Notes payable -- related
party........................ 1,293,000 2,247,652 (2,243,309) 1,297,343 (1,293,000) 4,343
Current portion of long-term
debt-related party........... 12,892 62,000 -- 74,892 (62,000) 12,892
Current portion of capital
lease obligation............. 89,881 16,970 -- 106,851 -- 106,851
----------- ----------- ----------- ----------- ------------ -----------
Total current
liabilities............ 3,079,379 4,670,903 (2,243,309) 5,506,973 (1,405,000) 4,101,973
Capital lease obligation, less
current portion................ 185,801 16,059 -- 201,860 -- 201,860
Long-term notes payable, less
current portion................ -- 1,164,708 -- 1,164,708 (1,164,708) --
Shareholders' equity (deficit):
Common stock................... 4,008,991 348,760 10,090,200 14,099,191 20,465,060 85,214,251
(348,760) (295,000)
50,945,000
Additional paid-in capital..... -- 1,959,985 (1,959,985) -- -- --
Preferred stock................ 19,172,060 -- -- 19,172,060 (20,465,060) --
1,293,000
Accumulated other comprehensive
loss......................... (41,690) -- -- (41,690) -- (41,690)
Accumulated deficit............ (8,949,836) (6,567,064) 6,567,064 (8,949,836) -- (8,949,836)
----------- ----------- ----------- ----------- ------------ -----------
Total shareholders' equity
(deficit)...................... 14,189,525 (4,258,319) 14,348,519 24,279,725 51,943,000 76,222,725
----------- ----------- ----------- ----------- ------------ -----------
$17,454,705 $ 1,593,351 $12,105,210 $31,153,266 $ 49,373,292 $80,526,558
=========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
F-3
<PAGE> 79
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(1) Reflects the acquisition of Multimedia Marketing, Inc. d/b/a m3 the
Healthcare Learning Company, EMInet, Inc., Quick Study, Inc. and
KnowledgeReview LLC as if such acquisitions occurred on December 31, 1999 as
summarized below:
<TABLE>
<CAPTION>
M3 THE HEALTHCARE QUICK STUDY, KNOWLEDGE ACQUIRED
LEARNING COMPANY EMINET, INC. INC. REVIEW LLC COMPANIES
----------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short term
investments...................................... $ 404,298 $ 16,708 $ 8,594 $ -- $ 429,600
Accounts receivable, less allowance for doubtful
accounts......................................... 911,765 38,576 28,635 450 979,426
Accounts receivable - unbilled..................... -- -- -- -- --
Prepaid and other assets........................... 4,318 -- 106 -- 4,424
----------- --------- ----------- ------- -----------
Total current assets......................... 1,320,381 55,284 37,335 450 1,413,450
Property and equipment, net......................... 45,544 46,141 20,026 -- 111,711
Intangible assets................................... -- -- -- -- --
Other assets........................................ 62,786 -- 5,404 -- 68,190
----------- --------- ----------- ------- -----------
Total assets................................. $ 1,428,711 $ 101,425 $ 62,765 $ 450 $ 1,593,351
=========== ========= =========== ======= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 60,162 $ 95,998 $ 56,615 $ -- $ 212,775
Accrued liabilities................................ 273,222 163,670 8,624 -- 445,516
Deferred revenue................................... 1,276,505 353,875 5,610 -- 1,635,990
Current portion of notes payable................... -- -- 50,000 -- 50,000
Notes payable - related party...................... -- 64,503 2,178,806 4,343 2,247,652
Current portion of long-term debt - related
party............................................ -- -- 62,000 -- 62,000
Current portion of capital lease obligation........ -- 16,970 -- -- 16,970
----------- --------- ----------- ------- -----------
Total current liabilities.................... 1,609,889 695,016 2,361,655 4,343 4,670,903
Capital lease obligation, less current portion...... -- 16,059 -- -- 16,059
Long-term notes payable, less current portion....... 1,164,708 -- -- -- 1,164,708
Shareholders' equity (deficit):
Common Stock....................................... 52,637 222,223 73,900 -- 348,760
Additional paid-in capital......................... 1,959,985 -- -- -- 1,959,985
Preferred stock.................................... -- -- -- -- --
Accumulated deficit................................ (3,358,508) (831,873) (2,372,790) (3,893) (6,567,064)
----------- --------- ----------- ------- -----------
Total shareholders' equity (deficit)......... (1,345,886) (609,650) (2,298,890) (3,893) (4,258,319)
----------- --------- ----------- ------- -----------
$ 1,428,711 $ 101,425 $ 62,765 $ 450 $ 1,593,351
=========== ========= =========== ======= ===========
</TABLE>
F-4
<PAGE> 80
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET -- (CONTINUED)
(2) Reflects the adjustments to effect the acquisitions of Multimedia Marketing,
Inc. d/b/a m3 the Healthcare Learning Company, EMInet, Inc., Quick Study,
Inc. and KnowledgeReview LLC as if such acquisitions occurred on December
31, 1999 as summarized below:
<TABLE>
<CAPTION>
KNOWLEDGE ACQUISITION
M3 THE HEALTHCARE QUICK STUDY, REVIEW PRO FORMA
LEARNING COMPANY(A) EMINET, INC.(B) INC(C) LLC(D) ADJUSTMENTS
------------------- --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short term
investments.............................. $ (600,000) $ (640,000) $ (59,000) $(310,000) $(1,609,000)
Accounts receivable, less allowance for
doubtful accounts........................ -- -- -- -- --
Accounts receivable - unbilled............. -- -- -- -- --
Prepaid and other assets................... -- -- -- -- --
----------- ----------- ----------- --------- -----------
Total current assets................. (600,000) (640,000) (59,000) (310,000) (1,609,000)
----------- ----------- ----------- --------- -----------
Property and equipment, net................. -- -- -- -- --
Intangible assets........................... 9,020,798 3,519,435 710,084 463,893 13,714,210
Other assets................................ -- -- -- -- --
----------- ----------- ----------- --------- -----------
Total assets......................... $ 8,420,798 $ 2,879,435 $ 651,084 $ 153,893 $12,105,210
=========== =========== =========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........................... $ -- $ -- $ -- $ -- $ --
Accrued liabilities........................ -- -- -- -- --
Deferred revenue........................... -- -- -- -- --
Notes payable - related party.............. -- (64,503) (2,178,806) -- (2,243,309)
Current portion of long-term debt - related
party.................................... -- -- -- -- --
Current portion of capital lease
obligation............................... -- -- -- -- --
----------- ----------- ----------- --------- -----------
Total current liabilities............ -- (64,503) (2,178,806) -- (2,243,309)
Capital lease obligation, less current
portion.................................... -- -- -- -- --
Long-term notes payable, less current
portion.................................... -- -- -- -- --
Shareholders' equity (deficit):
Common stock............................... 7,074,912 2,334,288 531,000 150,000 10,090,200
(52,637) (222,223) (73,900) -- (348,760)
Additional paid-in capital................. (1,959,985) -- -- -- (1,959,985)
Preferred stock............................ -- -- -- -- --
Accumulated deficit........................ 3,358,508 831,873 2,372,790 3,893 6,567,064
----------- ----------- ----------- --------- -----------
Total shareholders' equity
(deficit).......................... 8,420,798 2,943,938 2,829,890 153,893 14,348,519
----------- ----------- ----------- --------- -----------
$ 8,420,798 $ 2,879,435 $ 651,084 $ 153,893 $12,105,210
=========== =========== =========== ========= ===========
</TABLE>
- ---------------
(a) Reflects the elimination of common stock, additional paid-in capital,
accumulated deficit, the payment of $600,000 of cash and issuance of
818,036 shares of our common stock at an assigned value of $7,074,912,
as well as recording of the intangible assets in connection with our
acquisition of m3 the Healthcare Learning Company.
(b) Reflects the elimination of liabilities not assumed, common stock,
additional paid-in capital, accumulated deficit, the payment of
$640,000 of cash and issuance of 269,902 shares of our common stock at
an assigned value of $2,334,288 as well as recording of the intangible
assets in connection with our acquisition of EMInet, Inc.
(c) Reflects the elimination of liabilities not assumed, common stock,
additional paid-in capital, accumulated deficit, and the payment of
$59,000 in cash and issuance of 61,397 shares of our common stock at an
assigned value of $531,000, as well as recording of the intangible
assets in connection with our acquisition of Quick Study, Inc.
(d) Reflects the payment of $310,000 of cash and issuance of 17,343 shares
of our common stock at an assigned value of $150,000, the elimination
of accumulated deficit, as well as recording of the intangible assets
in connection with our acquisition of KnowledgeReview LLC.
F-5
<PAGE> 81
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET -- (CONTINUED)
(3) Reflects the conversion, upon completion of this offering, of 76,000 shares
of Series A Convertible Preferred Stock into 325,461 shares of Common Stock,
1,358,101 shares of Series B Convertible Preferred Stock into 5,815,904
shares of our Common Stock and 627,406 shares of Series C Convertible
Preferred Stock into 1,543,499 shares of our Common Stock. Also reflects the
effects of the sale of 5,000,000 shares of common stock at an assumed
initial public offering price of $9.00 per share and the application of the
estimated net proceeds of $50,945,000 (including the concurrent private sale
of an estimated 1,111,111 shares of common stock and the application of the
estimated proceeds of $10,000,000), the repayment of $1,276,708 of debt
assumed in connection with the acquisition of m3 the Healthcare Learning
Company and Quick Study, and the conversion of $1,293,000 of notes
payable-related party to Series B Convertible Preferred Stock, which are
included in the conversion of the Series B Preferred Stock into Common Stock
above. Recording of proceeds also includes reclassification of offering
costs of $295,000 out of other assets.
F-6
<PAGE> 82
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACQUISITION PRE-OFFERING OFFERING
ACQUIRED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HEALTHSTREAM COMPANIES(A) ADJUSTMENTS(B) CONSOLIDATED ADJUSTMENTS CONSOLIDATED
------------ -------------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 2,567,868 $ 4,657,772 $ -- $ 7,225,640 $ -- $ 7,225,640
Operating costs and
expenses:
Cost of revenues......... 2,119,127 1,870,108 -- 3,989,235 -- 3,989,235
Product development...... 2,037,272 1,277 -- 2,038,549 -- 2,038,549
Selling, general and
administrative
expenses............... 2,971,408 3,735,398 4,631,930 11,338,736 -- 11,338,736
----------- ----------- ----------- ------------ ---------- ------------
Total operating
costs and
expenses......... 7,127,807 5,606,783 4,631,930 17,366,520 -- 17,366,520
----------- ----------- ----------- ------------ ---------- ------------
Loss from operations....... (4,559,939) (949,011) (4,631,930) (10,140,880) -- (10,140,880)
Other income (expense),
net...................... 103,535 (237,939) -- (134,404) 193,059(d) 58,655
----------- ----------- ----------- ------------ ---------- ------------
Net loss................... $(4,456,404) $(1,186,950) $(4,631,930) $(10,275,284) $ 193,059 $(10,082,225)
=========== =========== =========== ============ ========== ============
Net loss per share:
Basic.................... $ (1.19) $ (0.54)
=========== ============
Diluted.................. $ (1.19) $ (0.54)
=========== ============
Weighted average number of
common shares:
Basic.................... 3,756,556 959,499(c) 13,795,975(e) 18,512,030
=========== =========== ========== ============
Diluted.................. 3,756,556 959,499(c) 13,795,975(e) 18,512,030
=========== =========== ========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed statement of operations.
F-7
<PAGE> 83
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999.
(a) Reflects the historical results of SilverPlatter Education for the six
months ended June 30, 1999 and the results of Multimedia Marketing, Inc.
d/b/a m3 the Healthcare Learning Company, KnowledgeReview, EMInet and Quick
Study for the year ended December 31, 1999 summarized as follows:
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SILVERPLATTER M3 THE HEALTHCARE QUICK STUDY, KNOWLEDGE ACQUIRED
EDUCATION LEARNING COMPANY EMINET, INC. INC. REVIEW LLC COMPANIES
------------- ----------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $835,847 $3,330,408 $ 298,991 $ 192,076 $ 450 $ 4,657,772
Operating costs and expenses:
Cost of revenues............ 350,988 1,332,163 109,993 76,964 -- 1,870,108
Product development......... -- -- -- -- 1,277 1,277
Selling, general and
administrative expenses... 504,796 2,331,427 427,904 468,205 3,066 3,735,398
-------- ---------- --------- --------- ------- -----------
Total operating costs
and expenses.......... 855,784 3,663,590 537,897 545,169 4,343 5,606,783
-------- ---------- --------- --------- ------- -----------
Loss from operations............ (19,937) (333,182) (238,906) (353,093) (3,893) (949,011)
Other income (expense), net..... -- (113,716) -- (124,223) -- (237,939)
-------- ---------- --------- --------- ------- -----------
Net loss........................ $(19,937) $ (446,898) $(238,906) $(477,316) $(3,893) $(1,186,950)
======== ========== ========= ========= ======= ===========
</TABLE>
Certain reclassifications have been made to the acquired companies'
historical statements of operations to conform to our presentation.
F-8
<PAGE> 84
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
(b) Reflects the elimination of historical depreciation and recognition of
depreciation of property and equipment and amortization of acquired
technology and other intangible assets as summarized below:
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACQUISITION
SILVERPLATTER M3 THE HEALTHCARE QUICK STUDY, KNOWLEDGE PRO FORMA
EDUCATION LEARNING COMPANY EMINET, INC. INC. REVIEW LLC ADJUSTMENTS
------------- ----------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ -- $ -- $ -- $ -- $ -- $ --
Operating costs and
expenses:
Cost of revenues........ -- -- -- -- -- --
Product development..... -- -- -- -- -- --
Selling, general and (64,574)(1) (117,244)(1) (2,541)(1) (24,523)(1)
administrative
expenses............ 247,067(2) 3,016,041(3) 1,182,373(4) 240,700(5) 154,631(6) 4,631,930
--------- ----------- ----------- --------- --------- -----------
Total operating
costs and
expenses.......... 182,493 2,898,797 1,179,832 216,177 154,631 4,631,930
--------- ----------- ----------- --------- --------- -----------
Loss from operations........ (182,493) (2,898,797) (1,179,832) (216,177) (154,631) (4,631,930)
Other income (expense),
net....................... -- -- -- -- -- --
--------- ----------- ----------- --------- --------- -----------
Net loss.................... $(182,493) $(2,898,797) $(1,179,832) $(216,177) $(154,631) $(4,631,930)
========= =========== =========== ========= ========= ===========
</TABLE>
- ---------------
(1) Reflects the elimination of historical depreciation and amortization for
each entity.
(2) SilverPlatter Education pro forma entries reflect amortization of goodwill
of $1.0 million over a three year life for a half a year, plus amortization
of customer list and noncompete agreement ($300,000) over a two year life
for half a year, and depreciation of fair value of fixed assets of $54,000
over an average five year life.
(3) m3 the Healthcare Learning Company pro forma entries reflect amortization of
goodwill of $9,020,798 over a three year life for a full year and
depreciation of fair value of fixed assets of $45,544 over an average five
year life.
(4) EMInet pro forma entries reflect amortization of goodwill of $3,519,435 over
a three year life for a full year and depreciation of fair value of fixed
assets of $46,141 over an average five year life.
(5) Quick Study pro forma entries reflect amortization of goodwill of $710,084
over a three year life for a full year and depreciation of fair value of
fixed assets of $20,026 over an average five year life.
(6) KnowledgeReview pro forma entries reflect amortization of goodwill of
$463,893 over a three year life for a full year.
F-9
<PAGE> 85
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
(c) Reflects the issuance of 49,202 (results in an additional 24,601 shares
for weighted average shares outstanding) shares of our common stock to
acquire SilverPlatter Education, Inc., the issuance of 818,036 shares
of our common stock to acquire Multimedia Marketing, Inc. d/b/a m3 the
Healthcare Learning Company, the issuance of 61,397 shares of our
common stock to acquire Quick Study, Inc., the issuance of 17,343
shares of our common stock to acquire KnowledgeReview LLC, and the
issuance of 269,902 shares of our common stock to acquire EMInet, Inc.
The number of shares issued have been reduced by 231,780 shares related
to shares placed in escrow in connection with the acquisitions.
(d) Reflects the elimination of the historical interest expense on
related-party debt converted to series B preferred stock upon
completion of this offering (see note (3) of Notes to Unaudited Pro
Forma Condensed Balance Sheet) and on debt assumed in the acquisitions
of m3 the Healthcare Learning Company and Quick Study, which will be
repaid upon completion of this offering.
(e) Reflects (i) the conversion of series A, B and C preferred stock into
7,684,864 shares of our common stock; (ii) the sale of 5,000,000 shares
of our common stock in this offering; and (iii) the concurrent private
sale of an estimated 1,111,111 shares of our common stock.
F-10
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
HealthStream, Inc.
We have audited the accompanying balance sheets of HealthStream, Inc. at
December 31, 1998 and 1999, and the related statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
January 22, 2000, except for
Note 12, as to which the date
is April 5, 2000
F-11
<PAGE> 87
HEALTHSTREAM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 50,823 $13,632,144
Accounts receivable, net of allowance for doubtful
accounts of $36,500 in 1998 and $37,000 in 1999......... 481,316 544,042
Accounts receivable -- unbilled........................... 10,821 18,877
Investments............................................... -- 86,063
Prepaid expenses and other assets......................... 8,358 263,517
----------- -----------
Total current assets............................... 551,318 14,544,643
Property and equipment:
Furniture and fixtures.................................... 114,186 445,172
Equipment................................................. 671,072 1,109,015
Leasehold improvements.................................... 196,405 369,346
----------- -----------
981,663 1,923,533
Less accumulated depreciation and amortization............ (380,134) (589,632)
----------- -----------
601,529 1,333,901
Intangible assets, net of accumulated amortization of $0 in
1998 and $213,031 in 1999................................. -- 1,134,673
Other assets................................................ -- 441,488
----------- -----------
Total assets....................................... $ 1,152,847 $17,454,705
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 119,102 $ 443,455
Accrued liabilities....................................... 94,827 448,727
Deferred revenue.......................................... 322,760 791,424
Notes payable -- related parties.......................... 2,835,000 1,293,000
Current portion of long-term debt -- related party........ 23,585 12,892
Current portion of capital lease obligations.............. 10,539 89,881
----------- -----------
Total current liabilities.......................... 3,405,813 3,079,379
Long-term debt -- related party............................. 12,892 --
Capital lease obligations, less current portion............. 19,076 185,801
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; 20,000,000 shares authorized;
3,256,307 and 4,165,461 shares issued and outstanding at
December 31, 1998 and 1999, respectively................ 1,798,498 4,008,991
Preferred Stock, no par value; 1,000,000 and 5,000,000
shares authorized at December 31, 1998 and 1999,
respectively............................................ -- --
Series A Convertible Preferred Stock; 41,000 and 76,000
shares issued and outstanding at December 31, 1998 and
1999, respectively..................................... 410,000 760,000
Series B Convertible Preferred Stock; no shares and
1,228,801 issued and outstanding at December 31, 1998
and 1999, respectively................................. -- 12,138,000
Series C Convertible Preferred Stock; no shares and
627,406 shares issued and outstanding at December 31,
1998 and 1999, respectively............................ -- 6,274,060
Accumulated other comprehensive loss...................... -- (41,690)
Accumulated deficit....................................... (4,493,432) (8,949,836)
----------- -----------
Total shareholders' equity (deficit)............... (2,284,934) 14,189,525
----------- -----------
Total liabilities and shareholders' equity
(deficit)........................................ $ 1,152,847 $17,454,705
=========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE> 88
HEALTHSTREAM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Revenues................................................. $1,268,352 $ 1,716,094 $ 2,567,868
Operating costs and expenses:
Cost of revenues....................................... 870,061 1,057,453 2,119,127
Product development.................................... 293,706 443,336 2,037,272
Selling, general and administrative expenses........... 875,416 1,476,639 2,971,408
---------- ----------- -----------
Total operating costs and expenses............. 2,039,183 2,977,428 7,127,807
---------- ----------- -----------
Loss from operations..................................... (770,831) (1,261,334) (4,559,939)
Other income (expense):
Interest and other income.............................. 2,226 2,634 312,324
Interest expense -- related parties.................... (182,708) (328,412) (193,059)
Interest expense....................................... -- (2,070) (12,041)
Other expense.......................................... (8,792) (318) (3,689)
---------- ----------- -----------
(189,274) (328,166) 103,535
---------- ----------- -----------
Net loss................................................. $ (960,105) $(1,589,500) $(4,456,404)
========== =========== ===========
Net loss per share:
Basic.................................................. $ (0.29) $ (0.49) $ (1.19)
========== =========== ===========
Diluted................................................ $ (0.29) $ (0.49) $ (1.19)
========== =========== ===========
Weighted average shares of common stock outstanding:
Basic............................................... 3,256,307 3,256,307 3,756,556
========== =========== ===========
Diluted............................................. 3,256,307 3,256,307 3,756,556
========== =========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 89
HEALTHSTREAM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------- ----------------- ----------------------- -------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT
---------- ---------- ------ -------- --------- ----------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996............ 3,256,307 $1,668,166 -- $ -- -- $ -- -- $ -- $(1,943,827)
Net loss............ -- -- -- -- -- -- -- -- (960,105)
---------- ---------- ------ -------- --------- ----------- ------- ---------- -----------
Balance at December
31, 1997............ 3,256,307 1,668,166 -- -- -- -- -- -- (2,903,932)
Net loss............ -- -- -- -- -- -- -- -- (1,589,500)
Issuance of
preferred stock... -- -- 41,000 410,000 -- -- -- -- --
Stock options
granted........... -- 130,332 -- -- -- -- -- -- --
---------- ---------- ------ -------- --------- ----------- ------- ---------- -----------
Balance at December
31, 1998............ 3,256,307 1,798,498 41,000 410,000 -- -- -- -- (4,493,432)
Net loss............ -- -- -- -- -- -- -- -- (4,456,404)
Unrealized loss on
investment, net of
tax............... -- -- -- -- -- -- -- -- --
Comprehensive
loss.............. -- -- -- -- -- -- -- -- --
Issuance of
preferred stock... -- -- 35,000 350,000 1,228,801 12,138,000 627,406 6,274,060 --
Issuance of common
stock............. 855,327 1,231,590 -- -- -- -- -- -- --
Issuance of common
stock in
acquisition....... 49,202 200,000 -- -- -- -- -- -- --
Issuance of stock
options to
advisory boards... -- 11,760 -- -- -- -- -- -- --
Issuance of common
stock for
services.......... 4,625 18,800 -- -- -- -- -- -- --
Issuance of
warrant........... -- 748,343 -- -- -- -- -- -- --
---------- ---------- ------ -------- --------- ----------- ------- ---------- -----------
Balance at December
31, 1999............ 4,165,461 $4,008,991 76,000 $760,000 1,228,801 $12,138,000 627,406 $6,274,060 $(8,949,836)
========== ========== ====== ======== ========= =========== ======= ========== ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS'
LOSS EQUITY (DEFICIT)
------------- ----------------
<S> <C> <C>
Balance at December
31, 1996............ $ -- $ (275,661)
Net loss............ -- (960,105)
-------- -----------
Balance at December
31, 1997............ -- (1,235,766)
Net loss............ -- (1,589,500)
Issuance of
preferred stock... -- 410,000
Stock options
granted........... -- 130,332
-------- -----------
Balance at December
31, 1998............ -- (2,284,934)
Net loss............ -- (4,456,404)
Unrealized loss on
investment, net of
tax............... (41,690) (41,690)
-------- -----------
Comprehensive
loss.............. -- (4,498,094)
-----------
Issuance of
preferred stock... -- 18,762,060
Issuance of common
stock............. -- 1,231,590
Issuance of common
stock in
acquisition....... -- 200,000
Issuance of stock
options to
advisory boards... -- 11,760
Issuance of common
stock for
services.......... -- 18,800
Issuance of
warrant........... -- 748,343
-------- -----------
Balance at December
31, 1999............ $(41,690) $14,189,525
======== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 90
HEALTHSTREAM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(960,105) $(1,589,500) $ (4,456,404)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 100,739 132,267 239,248
Amortization.............................................. 7,775 14,648 213,032
Provision for loss on doubtful accounts................... -- 36,500 500
Loss on disposal of assets................................ 7,624 3,727 3,689
Noncash legal expense..................................... -- 2,100 --
Noncash compensation expense.............................. -- 128,232 30,560
Noncash product development............................... -- -- 748,343
Changes in operating assets and liabilities, excluding
effects of acquisition:
Accounts receivable..................................... (165,126) (232,593) (51,239)
Accounts receivable -- unbilled......................... (63,696) 54,150 (8,056)
Prepaid expenses and other assets....................... (502) (4,409) (225,442)
Other assets............................................ -- -- (440,011)
Accounts payable........................................ (4,936) 71,942 324,353
Accrued liabilities..................................... 29,425 46,676 236,561
Deferred revenue........................................ 177,241 87,005 126,714
--------- ----------- ------------
Net cash used in operating activities................. (871,561) (1,249,255) (3,258,152)
INVESTING ACTIVITIES:
Acquisition of company, net of cash acquired................ -- -- (780,206)
Purchase of property and equipment.......................... (239,939) (208,577) (639,724)
Purchase of investments..................................... -- -- (127,753)
--------- ----------- ------------
Net cash used in investing activities....................... (239,939) (208,577) (1,547,683)
FINANCING ACTIVITIES:
Proceeds from notes payable -- related parties.............. 1,185,000 1,040,000 18,000
Proceeds from issuance of preferred stock................... -- 410,000 18,202,060
Proceeds from exercise of stock options..................... -- -- 231,590
Payments on notes payable -- related parties................ (18,575) (20,931) (23,585)
Payments on capital lease obligations....................... -- (4,779) (40,909)
--------- ----------- ------------
Net cash provided by financing activities................... 1,166,425 1,424,290 18,387,156
--------- ----------- ------------
Net increase (decrease) in cash and cash equivalents........ 54,925 (33,542) 13,581,321
Cash and cash equivalents at beginning of period............ 29,440 84,365 50,823
--------- ----------- ------------
Cash and cash equivalents at end of period.................. $ 84,365 $ 50,823 $ 13,632,144
========= =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 176,708 $ 320,320 $ 225,074
========= =========== ============
Capital lease obligations incurred.......................... $ -- $ 34,394 $ 286,976
========= =========== ============
Conversion of notes payable -- related parties to common
stock..................................................... $ -- $ -- $ 1,000,000
========= =========== ============
Conversion of notes payable -- related parties to Series B
Preferred Stock........................................... $ -- $ -- $ 560,000
========= =========== ============
Issuance of common stock in connection with acquisition of
company................................................... $ -- $ -- $ 200,000
========= =========== ============
Issuance of common stock in exchange for professional
services.................................................. $ -- $ -- $ 18,800
========= =========== ============
Issuance of stock options to advisory boards................ $ -- $ -- $ 11,760
========= =========== ============
</TABLE>
See accompanying notes.
F-15
<PAGE> 91
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
HealthStream, Inc. ("the Company") was incorporated in 1990 and is based in
Nashville, Tennessee. The Company is pioneering a Web-based solution to meet the
ongoing training and continuing education needs of the healthcare community. 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.
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, subscriptions, 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. Revenues from subscriptions
are deferred and recognized ratably over the term of the subscription. 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. The Company also receives a percentage of its resellers'
revenue from the sale of T.NAV(R) software. The Company recognizes a percentage
of revenue from resellers upon notification from the reseller that a sale has
occurred. In March 1999, the Company began providing educational training
services via the Internet. Through December 31, 1999 revenues from these
services have been approximately $216,000.
The Company does not recognize barter transactions unless the value of the
transaction is readily determinable and measurable. Through December 31, 1999,
the Company had not been party to any significant barter transactions and has
not recognized the value of any such transactions in the financial statements.
The Company has recently entered into sponsorship agreements which involve
integration with services and provide for varied sources of revenue to the
Company over the terms of the agreements. In some cases revenues derived from
electronic commerce transactions are shared between the other entity and the
Company, in accordance with the term of the arrangement, as realized. Revenues
from such transactions have been recognized in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition."
NET LOSS PER SHARE
The Company computes net loss per share following Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and 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, B and C Convertible Preferred
Stock, are included in diluted net loss per share to the extent these shares are
dilutive. Common equivalent shares are not included in
F-16
<PAGE> 92
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the computation of diluted net loss per share for the years ended December 31,
1997, 1998 and 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 1997, the Company derived approximately $203,000 of its
revenues from one customer (Mosby, Inc.) During 1998, the Company derived
approximately $560,000 of its revenues from Lippincott, Williams and Wilkins,
formerly Waverly, Inc. and approximately $260,000 of its revenues from Mosby,
Inc. During 1999, the Company derived approximately $380,000 of its revenues
from ActivHealth International, Inc. and approximately $240,000 of its revenues
from Lippincott, Williams and Wilkins, formerly Waverly, Inc. The total amounts
receivable from Lippincott, Williams and Wilkins, formerly Waverly, Inc. and
ActivHealth International, Inc. at December 31, 1999 were approximately
$118,000. The total amounts receivable from Lippincott, Williams and Wilkins,
formerly Waverly, Inc. and Mosby, Inc. at December 31, 1998 were approximately
$126,000.
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 CHARGED TO ALLOWANCE
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
1997........................... $ -- $ -- $ -- $ -- $ --
1998........................... -- 36,500 -- -- 36,500
1999........................... 36,500 6,250 -- 5,750 37,000
</TABLE>
INVESTMENTS
Investments are accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and are classified as
available-for-sale. Available for sale securities are carried at fair value,
which is based on quoted prices, with the unrealized gains and losses excluded
from earnings and reported, net of tax, as a separate component of shareholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary, are included in other income.
F-17
<PAGE> 93
HEALTHSTREAM, 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, except for assets under capital leases which are
amortized over the shorter of the estimated useful life or the lease term.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 5-10
Equipment................................................... 3-5
Leasehold improvements...................................... 15
</TABLE>
INTANGIBLE ASSETS
Intangible assets, which represents the excess of purchase price over fair
value of net tangible assets acquired, customer lists, and non-compete
agreements, are amortized on a straight-line basis over the expected periods to
be benefited, generally three, two and two years, respectively. These intangible
assets relate to the acquisition of certain assets from SilverPlatter Education,
Inc. ("SilverPlatter"). See Note 2.
OTHER ASSETS
Other assets are comprised of licensing fees, offering costs and other long
term items. Licensing fees are amortized based on the lives of the related
agreements, generally 2 years.
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
events or changes in facts and circumstances, both internally and externally,
may indicate that an impairment of long-lived assets held for use are present.
Management periodically evaluates the carrying value of long-lived assets,
including property and equipment and intangible assets and has determined that
there were no indications of impairment as of December 31, 1997, 1998 and 1999.
Should there be an impairment in the future, the Company will recognize the
amount of the impairment based on expected future cash flows from the impaired
assets. The cash flow estimates that will be used will be based on management's
best estimates, using appropriate and customary assumptions and projections at
the time.
ACCOUNTS RECEIVABLE-UNBILLED AND DEFERRED REVENUE
Accounts receivable-unbilled represents revenue earned for contracts
accounted for on the percentage of completion basis for which invoices have not
been generated. Deferred revenue represents the portion of revenue for which the
revenue recognition process is incomplete.
ADVERTISING
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999, was approximately
$8,200, $2,900 and $121,800, respectively.
PRODUCT DEVELOPMENT COSTS
Product 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, 1998 and 1999, the Company has no capitalized computer software
development costs.
F-18
<PAGE> 94
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLAN
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25") "Accounting for Stock
Issued to Employees", and related interpretations in accounting for its options.
As such, compensation expense would generally be recorded on the date of grant
only if the then current market price of the underlying stock exceeded the
exercise price.
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,
accrued liabilities and deferred revenue: The carrying amounts approximate
the fair value because of the short-term nature of such instruments.
Short and long-term debt: The carrying amounts approximate the fair
value based on current financing for similar loans available to the
Company.
Investments: The carrying amounts approximate the fair value based on
quoted prices.
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. As a result of adopting SFAS 130, the Company
F-19
<PAGE> 95
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
has recognized other comprehensive loss of $41,690 for the year ended December
31, 1999 which represents an unrealized loss on an investment.
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.
2. ACQUISITION OF SILVERPLATTER
On July 23, 1999, the Company acquired substantially all of the assets of
SilverPlatter, a Boston-based company which provided CD-ROM and Internet-based
continuing medical education programs to physicians, for $1.0 million, including
$800,000 in cash and 49,202 shares of common stock. The results of operations
are included in the Company's financial statements from July 23, 1999. The
acquisition was accounted for as a purchase. The excess of purchase price over
fair value of net assets acquired of $1.0 million is being amortized on a
straight-line basis over three years.
F-20
<PAGE> 96
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma condensed results give effect to the
acquisition of SilverPlatter as if such transaction had occurred at the
beginning of each year presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Total revenues............................................ $ 4,059,529 $ 3,403,715
Net loss.................................................. (2,156,838) (4,658,834)
Basic net loss per share.................................. $ (0.65) $ (1.23)
Diluted net loss per share................................ $ (0.65) $ (1.23)
</TABLE>
3. NOTES PAYABLE AND LONG-TERM DEBT -- RELATED PARTIES
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Notes payable-related parties............................. $ 2,835,000 $ 1,293,000
=========== ===========
Long-term debt-related party.............................. $ 36,477 $ 12,892
Less current portion...................................... (23,585) (12,892)
----------- -----------
$ 12,892 $ --
=========== ===========
</TABLE>
The Company had a partially secured demand note payable to a vice president
and stockholder of the Company, totaling $60,000 at December 31, 1998 and $0 at
December 31, 1999. The note accrued interest at 12% and was converted into
Series B Convertible Preferred Stock on August 23, 1999.
The Company has notes payable to the Chief Executive Officer ("CEO") and
principal stockholder totaling $2,775,000 at December 31, 1998, and $1,293,000
at December 31, 1999. On April 21, 1999, $1,250,000 of the notes payable were
converted into Common Stock and Series B Convertible Preferred Stock. The
remaining $1,525,000 was converted into a promissory note ("April note") along
with $18,000 of additional indebtedness loaned to the Company by the CEO during
1999. On August 23, 1999, the CEO converted an additional $250,000 of notes
payable into Series B Convertible Preferred Stock. The remaining $1,293,000 was
converted into a new promissory note ("August note") which has identical terms
as the April note. The August 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 August note
matures on October 23, 2006 or the earliest of: (i) the date determined by the
Company's Board of Directors; (ii) the closing of an Initial Public Offering
("IPO") of at least $30 million; (iii) the sale of the Company; or (iv) the
bankruptcy of the Company. The August 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.
The Company has an unsecured long-term promissory note payable to the CEO,
totaling $36,477 at December 31, 1998, and $12,892 at December 31, 1999. The
note requires monthly installments of principal and interest of $2,224 through
May 23, 2000. The note accrues interest at 12%.
The Company's weighted average debt outstanding for the years ended
December 31, 1998 and 1999 was $2,423,499 and $2,000,261, respectively. The
effective interest rate on such debt was 12.5% and 10.1% for the years ended
December 31, 1998 and 1999, respectively.
F-21
<PAGE> 97
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
At December 31, 1999, the Company held 229,500 shares of ARC
Communications, Inc. with a cost of $127,753 and a fair value of $86,063.
5. 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 income taxes includes the effect of recording a net deferred tax
asset and corresponding valuation allowance of $57,287 as a result of the
termination of the S election.
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>
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Tax benefit at the statutory rate.................. $(326,436) $(540,430) $(1,515,177)
State income tax benefit, net of federal benefit... (57,606) (63,335) (177,741)
Other.............................................. 619 2,086 4,382
Tax benefit of losses attributable to shareholders
due to S corporation status prior to October 1,
1998............................................. 326,436 336,301 --
Deferred taxes recorded upon termination of S
corporation status............................... -- 57,287 --
Increase in valuation allowance.................... 56,987 208,091 1,688,536
--------- --------- -----------
$ -- $ -- $ --
========= ========= ===========
</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,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 13,870 $ 13,914
Differences related to business combinations.............. -- 66,726
Accrued liabilities....................................... 5,604 18,841
Deferred revenue.......................................... 122,649 303,351
Difference related to warrants............................ -- 284,370
Net operating loss carryforwards.......................... 271,332 1,418,589
--------- -----------
Total deferred tax assets......................... 413,455 2,105,791
Less: Valuation allowance................................... (380,481) (2,069,017)
--------- -----------
32,974 36,774
Deferred tax liability:
Depreciation.............................................. (32,974) (36,774)
--------- -----------
Net deferred tax asset............................ $ -- $ --
========= ===========
</TABLE>
F-22
<PAGE> 98
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of $3,326,625 and $7,188,395, respectively, expiring in years
2012 through 2019.
The Company has established a valuation allowance for deferred tax assets
at December 31, 1998 and 1999 due to the uncertainty of realizing these assets
in the future. The valuation allowance increased $56,987 during 1997, $208,091
during 1998 and $1,688,536 during 1999. No federal or state income tax payments
were made during the years ended December 31, 1997, 1998, and 1999.
6. STOCK OPTION PLAN
The Company's 1994 Employee Stock Option Plan (the "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
determine the vesting period of each grant. The vesting period of the options
granted ranges from immediate vesting to four years.
The Company accounts for its stock incentive plans in accordance with APB
25. If the alternative method of accounting for stock incentive plans prescribed
by SFAS No. 123 had been followed, the Company's net loss and net loss per share
would have been:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported.................................... $(960,105) $(1,589,500) $(4,456,404)
Pro forma compensation expense.......................... -- 80,849 289,426
--------- ----------- -----------
Pro forma net loss...................................... $(960,105) $(1,670,349) $(4,745,830)
========= =========== ===========
Pro forma basic and diluted net loss per share.......... $ (0.29) $ (0.51) $ (1.26)
========= =========== ===========
</TABLE>
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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
ASSUMPTIONS (WEIGHTED AVERAGE)
Risk-free interest rate..................................... 5.70% 5.70% 6.00%
Expected dividend yield..................................... 0.0% 0.0% 0.0%
Expected life (in years).................................... 5 5 5
</TABLE>
A progression of activity and various other information relative to stock
options is presented in the table below.
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
period.......................... 1,170,639 $0.57 1,170,639 $0.57 1,650,784 $1.07
Granted........................... -- -- 496,332 2.30 1,383,892 4.29
Exercised......................... -- -- -- -- (427,085) 0.54
Forfeited......................... -- -- (16,187) 2.30 (137,362) 3.26
--------- --------- ---------
Outstanding -- end of period...... 1,170,639 0.57 1,650,784 1.07 2,470,229 2.84
========= ========= =========
Exercisable at end of period...... 1,170,639 0.57 1,196,539 0.61 892,477 1.08
========= ========= =========
</TABLE>
F-23
<PAGE> 99
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In July and August 1999, the CEO exercised options granted in 1995 and
purchased 416,250 shares of the Company's Common Stock at an exercise price of
$0.54 per share. In December 1999, the president exercised options granted in
1994 and purchased 3,170 shares of the Company's common stock at an exercise
price of $0.608 per share.
During 1998, the Company modified the terms of an option grant to an
employee leaving the employment of the Company by extending the exercise date of
the options. At the time of the modification, the Company recognized
compensation expense totaling $128,232 for the difference between the fair
market value and the exercise price of the options. During 1999, the Company
issued 51,800 stock options to its medical and nursing advisory boards at
exercise prices ranging from $2.34 to $6.49 with vesting periods ranging from
immediate to four years. The Company recognized $11,760 of expense in connection
with these grants.
Shares of Common Stock available for future grants of options totaled
2,349,216 and 1,102,685 at December 31, 1998 and 1999, respectively. Exercise
prices per share and various other information for options outstanding at
December 31, 1999 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>
$0.54 -- $0.61............ 743,552 $0.59 5.10 743,552 $0.59
$2.34................ 461,277 2.34 5.57 45,325 2.34
$4.06................ 1,109,075 4.06 7.67 103,600 4.06
$6.49................ 156,325 6.48 7.92 -- 6.48
--------- -------
2,470,229 2.84 6.52 892,477 1.08
========= =======
</TABLE>
During January 2000, options to purchase 432,245 shares of common stock at
exercise prices ranging from $6.49 to $8.65 were granted.
7. LEASE COMMITMENTS
The Company leases its office facilities in Nashville, TN and Boston, MA
under agreements that expire before or during May 2005. The Nashville, TN lease
provides for two five-year renewal options. The Company also leases certain
office equipment. Total lease expense under all operating leases was $59,184,
$51,756 and $210,234 for the years ended December 31, 1997, 1998 and 1999,
respectively. The Company also leases certain computer and office equipment and
office furnishings from various third parties accounted for as capital leases.
Future rental payment commitments at December 31, 1999 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>
2000........................................................ $109,303 $234,341
2001........................................................ 88,135 140,512
2002........................................................ 47,638 140,848
2003........................................................ 47,638 140,848
2004........................................................ 28,475 126,873
Thereafter.................................................. -- 41,359
-------- --------
Total minimum lease payments...................... 321,189 $824,781
========
Less amounts representing interest.......................... (45,507)
--------
Present value of net minimum lease payments (including
$89,881 classified as current)............................ $275,682
========
</TABLE>
F-24
<PAGE> 100
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value of assets under capital leases, which are included with
owned assets in the accompanying balance sheets is $0, $29,140 and $275,596 at
December 31, 1997, 1998 and 1999, respectively. Amortization of the assets under
the capital leases is included in depreciation expense.
8. LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss....................................... $(960,105) $(1,589,500) $(4,456,404)
========= =========== ===========
Denominator:
Weighted-average shares outstanding............ 3,256,307 3,256,307 3,756,556
========= =========== ===========
Net loss per share, basic and diluted............ $ (0.29) $ (0.49) $ (1.19)
========= =========== ===========
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, the calculation of
weighted average shares excluded options, warrants and convertible preferred
stock because such items were anti-dilutive. The equivalent common shares
related to such options, warrants and preferred stock were 1,170,639 in 1997,
1,826,362 in 1998 and 9,846,414 in 1999.
9. 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 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.
10. PREFERRED STOCK
The Company is authorized to issue 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.
The Company has authorized the issuance of 76,000 shares of Preferred Stock
designated as Series A Convertible Preferred Stock, 1,436,961 shares designated
as Series B Convertible Preferred Stock. On April 21, 1999, the Company amended
its charter increasing the authorized shares of Preferred Stock to 5 million. On
August 18, 1999, the Company further amended its charter designating 650,000
shares of Preferred Stock as 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.
Each share of Series A and B Convertible Preferred Stock is currently
convertible into the Company's Common Stock at the conversion rate of 4.28238
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 2.46013 shares of Common
Stock per share of Series C Convertible Preferred Stock. These rates are subject
to an antidilution adjustment if the
F-25
<PAGE> 101
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company issues or sells shares of Common Stock at a per share price less than
$2.34 for Series A and B Convertible Preferred Stock and at a per share price
less than $4.06 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 Convertible 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 million
and an offering price per share greater than or equal to $4.86, 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 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
Convertible Preferred Stock for $350,000. In April and May 1999 the Company
received commitments to purchase 1,030,501 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 Convertible Preferred Stock at $10 per
share in August 1999 in exchange for $4,717,500 in cash and the conversion of
$250,000 of notes payable to the Company's CEO and the conversion of $60,000 of
notes payables to a vice president and stockholder. Also, each holder of Series
A and Series B Convertible Preferred Stock had an option to purchase up to an
additional 20% of the number of shares purchased in April, May and August 1999,
at $10 per share. Each investor could 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
expired on October 15, 1999. Through December 31, 1999, investors have exercised
options and purchased 198,300 shares of Series B Convertible Preferred Stock for
cash at $10 per share.
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.
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, B
and C Convertible Preferred Stock shares from time to time. At December 31, 1998
and 1999, the Company reserved and kept available 175,577 and 7,684,866 shares,
respectively, of Common Stock to effect the conversion of the Series A, B and C
Convertible Preferred Stock.
F-26
<PAGE> 102
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STRATEGIC ALLIANCES
The Company periodically enters into strategic alliances with distribution
partners, content partners and development partners. Typically, these
arrangements provide for payments to these partners based on a percentage of
revenues or based on hours of courseware developed. In connection with such
arrangements, the Company has entered into agreements with three entities which
provide for up front payments of approximately $475,000 in 2000 and $187,500 in
2001. Of these amounts, approximately 79% and 100% in 2000 and 2001,
respectively, are nonrefundable. The remaining payments are subject to refund if
certain milestones are not reached. Additional payments may be required upon
delivery of courses or occurrence of certain events.
The Company also entered into a distribution agreement with an investor
during 1999. In connection with the distribution agreement, the investor was
provided with warrants to purchase 245,032 shares of the Company's common stock
at $4.06 per share. The warrants expire in June 2009. The issuance of the
warrants resulted in recognition of $748,343 of expense. No warrants have been
exercised as of December 31, 1999.
The Company also entered into a development agreement in January 2000 with
an entity under which the Company paid $95,000 and committed to pay the entity
at least another $400,000 during 2000 as courses are developed. The fixed
commitments related to this contract are included above. In connection with this
agreement, the Company received a warrant to purchase 223,834 shares of the
entity's common stock at an exercise price of $4.47 per share.
12. SUBSEQUENT EVENTS
Effective January 3, 2000, the Company acquired substantially all of the
assets and liabilities of KnowledgeReview LLC (d/b/a "CMECourses.com") for
$460,000 consisting of $150,000 (17,343 shares) of the Company's Common Stock
and the payment of $310,000 in cash. All of the Common Stock will be placed in
an escrow account for a one year period, subject to any claims. KnowledgeReview
LLC owns and operates an Internet web page which provides a search engine that
helps physicians locate continuing medical education by specialty and
facilitates online registration for such courses. The acquisition will be
accounted for as a purchase.
On January 11, 2000, the Company acquired substantially all of the assets
and liabilities of Quick Study, Inc. for $590,000, consisting of $531,000
(61,397 shares) of the Company's Common Stock and the payment of $59,000 in
cash. In addition, upon achievement of certain future customer revenue levels,
the Company may issue up to 34,687 additional shares of Common Stock. A portion
of the Common Stock will be placed in an escrow account for a one year period,
subject to any claims. In connection with the acquisition, the Company assumed
$112,000 of long-term debt. Quick Study, Inc. is a publisher of CD-ROM and
network-based products in the healthcare industry. The acquisition will be
accounted for as a purchase.
On January 28, 2000, the Company acquired substantially all of the assets
and liabilities of Multimedia Marketing, Inc. d/b/a m3 the Healthcare Learning
Company ("m3") for $7.7 million consisting of $7.1 million (818,036 shares) of
the Company's Common Stock and the payment of $600,000 in cash. m3 provides
interactive, multimedia education and training solutions to hospitals and other
healthcare organizations. A portion of the Common Stock will be placed in an
escrow account for a one year period, subject to any claims. In connection with
the acquisition, the Company assumed $1.2 million of long-term debt. The
acquisition will be accounted for as a purchase.
On January 28, 2000, the Company acquired substantially all of the assets
of EMInet, Inc. for $2.9 million consisting of $2.3 million (269,902 shares) of
the Company's Common Stock and the payment of $640,000 in cash. A portion of the
Common Stock will be placed in an escrow account for a one year period, subject
to any claims. In addition, upon the achievement of short-term revenue targets,
the Company may issue up to 26,097 additional shares of common stock. EMInet,
Inc. sells continuing
F-27
<PAGE> 103
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
medical education to emergency medical technicians, primarily via online
transactions. The acquisition will be accounted for as a purchase.
The following unaudited pro forma results of operations give effect to the
operations of SilverPlatter Education, which was acquired during 1999, and the
following acquisitions which have been consummated in 2000: m3; EMInet, Inc;
Quick Study, Inc. and KnowledgeReview LLC as if the acquisitions had occurred as
of the first day of 1999. The pro forma results of operations do not purport to
represent what the Company's results of operations would have been had such
transactions 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
DECEMBER 31, 1999
-----------------
<S> <C>
Revenue..................................................... $ 7,235,102
Net loss.................................................... (9,973,563)
Net loss per share:
Basic..................................................... $ (2.11)
Diluted................................................... $ (2.11)
</TABLE>
The Company has filed a Form S-1 for an initial public offering of its
common stock with the Securities and Exchange Commission. There can be no
assurances that the IPO will be consummated. In connection with the IPO, related
party debt of $1,293,000 (see Note 3) is expected to be converted to series B
convertible preferred stock, and outstanding preferred stock is to be converted
into common stock.
In February 2000, the Company entered into a four-year Online Education
Services Provider Agreement with Columbia Information Systems, Inc., an
affiliate of Columbia/HCA Healthcare Corporation ("Columbia"). In connection
with the agreement, the Company issued a warrant to Columbia for 2,182,568
shares at an exercise price of $7.18.
In February 2000, the Company entered into a five year agreement with
Healtheon/WebMD. Under this agreement, the Company will be the exclusive
provider of education, continuing education and training services for all
healthcare organizations, healthcare professionals and healthcare workers on all
Web sites owned or operated by Healtheon/WebMD for five years. The Company will
pay Healtheon/WebMD a guaranteed minimum royalty of $6.0 million per year. We
will receive 100% of any revenues from the sale of our products and services
until we recover all of our payments to Healtheon/WebMD, and after that we will
receive 75% and Healtheon/WebMD will receive 25% of any revenues. If the
Company's revenues from this agreement are less than $30.0 million during the
initial five year term the Company can extend the term of the agreement for a
nominal payment. Healtheon/WebMD has committed to purchase $10.0 million of the
Company's common stock in a private sale which will be contemporaneous with the
IPO. Healtheon/WebMD has also agreed to provide certain marketing and
co-branding services to the Company under this agreement.
In February 2000, the Company granted options to purchase 348,725 shares at
$10.00 per share. In February 2000, the Company adopted the HealthStream, Inc.
2000 Stock Incentive Plan. In connection with this plan, 5,000,000 shares have
been reserved for issuance. The terms of the plan are substantially similar to
the 1994 Employee Stock Option Plan. In February 2000, the Company adopted the
Employee Stock Purchase Plan. In connection with this plan, 1,000,000 shares
have been reserved for issuance.
On March 7, 2000 and April 3, 2000 the Compensation Committee approved the
grant of options to purchase 335,085 shares at $11.89 per share.
On April 5, 2000, the Company effected a 1.85 for one common stock split.
All share information, option, share and warrant prices and earnings per share
have been restated to reflect the stock split. Also, on April 5, 2000 the
Company increased the authorized shares outstanding to 75 million common shares
and 10 million preferred shares.
F-28
<PAGE> 104
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 auditing standards generally
accepted in the United States. 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 accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 17, 1999
F-29
<PAGE> 105
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-30
<PAGE> 106
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-31
<PAGE> 107
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-32
<PAGE> 108
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-33
<PAGE> 109
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-34
<PAGE> 110
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-35
<PAGE> 111
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. Management
is unable to estimate what the administrative expenses would have been if the
Company had been on a stand alone basis.
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-36
<PAGE> 112
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
For the tax periods presented, the Company filed income tax returns as part
of a consolidated group. As a result, the current and deferred income tax
amounts were allocated by applying SFAS No. 109 on a separate return basis.
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.
F-37
<PAGE> 113
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-38
<PAGE> 114
SILVERPLATTER EDUCATION, INC., A SUBSIDIARY OF
SILVERPLATTER INFORMATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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-39
<PAGE> 115
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
m3 The Healthcare Learning Company
We have audited the accompanying balance sheets of MultiMedia Marketing,
Inc. d/b/a m3 The Healthcare Learning Company as of December 31, 1998 and 1999
and the related statements of operations, stockholders' deficit, and cash flows
for each of the three years in the period ended December 31, 1999. 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 m3 The Healthcare Learning
Company as of December 31, 1998 and 1999 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ Lane Gorman Trubitt, L.L.P.
Dallas, Texas
January 14, 2000
F-40
<PAGE> 116
M3 THE HEALTHCARE LEARNING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 182,333 $ 208,450
Certificates of deposit................................... 198,627 195,848
Accounts receivable -- less allowance for doubtful
accounts of $0 in 1998 and $14,000 in 1999............. 1,911,751 911,765
Prepaid expenses.......................................... 29,180 4,318
----------- -----------
Total current assets.............................. 2,321,891 1,320,381
Property and equipment -- at cost
Computer equipment........................................ 144,480 147,400
Furniture and fixtures.................................... 22,801 22,802
Capitalized software...................................... 9,245 9,245
----------- -----------
176,526 179,447
Less accumulated depreciation and amortization.............. (107,765) (133,903)
----------- -----------
68,761 45,544
Other assets
Software development costs, net of accumulated
amortization........................................... 127,585 48,339
Debt issue costs and other intangible assets, net of
accumulated amortization of $6,471 in 1998 and $11,303
in 1999................................................ 12,004 14,447
----------- -----------
139,589 62,786
----------- -----------
$ 2,530,241 $ 1,428,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable.......................................... $ 35,694 $ 60,162
Accrued expenses.......................................... 363,469 273,222
Deferred revenue.......................................... 2,377,034 1,276,505
----------- -----------
Total current liabilities......................... 2,776,197 1,609,889
Note payable -- long-term................................... 727,904 1,164,708
Stockholders' deficit
Common stock, $.01 par value; 10,000,000 shares
authorized; issued and outstanding 5,029,176 shares in
1998 and 5,263,740 shares in 1999...................... 50,292 52,637
Additional paid-in capital................................ 1,853,458 1,923,735
Additional paid-in capital -- warrants.................... 34,000 36,250
Accumulated deficit....................................... (2,911,610) (3,358,508)
----------- -----------
(973,860) (1,345,886)
----------- -----------
$ 2,530,241 $ 1,428,711
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 117
M3 THE HEALTHCARE LEARNING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Net revenues.............................................. $ 899,015 $2,565,875 $3,330,408
Costs and expenses
Cost of revenues........................................ 101,896 439,061 237,620
General and administrative expenses..................... 2,023,371 3,042,808 3,425,970
----------- ---------- ----------
Total operating costs and expenses.............. 2,125,267 3,481,869 3,663,590
----------- ---------- ----------
Loss from operations.................................... (1,226,252) (915,994) (333,182)
Other income (expense)
Interest expense.......................................... (76,915) (104,304) (128,703)
Interest income......................................... 20,857 53,168 14,987
----------- ---------- ----------
(56,058) (51,136) (113,716)
----------- ---------- ----------
Net loss.................................................. $(1,282,310) $ (967,130) $ (446,898)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE> 118
M3 THE HEALTHCARE LEARNING COMPANY
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PAID-IN CAPITAL
------------------- --------------------------- ACCUMULATED
SHARES AMOUNT COMMON STOCK WARRANTS DEFICIT TOTAL
--------- ------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997...................... 4,562,509 $45,625 $1,208,125 $ -- $ (662,170) $ 591,580
Sale of common stock........ 66,667 667 149,333 -- -- 150,000
Issuance of warrants to
purchase common stock in
connection with note
payable agreement......... -- -- -- 34,000 -- 34,000
Net loss.................... -- -- -- -- (1,282,310) (1,282,310)
--------- ------- ---------- ------- ----------- -----------
Balance at December 31,
1997...................... 4,629,176 46,292 1,357,458 34,000 (1,944,480) (506,730)
Sale of common stock........ 400,000 4,000 496,000 -- -- 500,000
Net loss.................... -- -- -- -- (967,130) (967,130)
--------- ------- ---------- ------- ----------- -----------
Balance at December 31,
1998...................... 5,029,176 50,292 1,853,458 34,000 (2,911,610) (973,860)
Exercise of stock options... 150,000 1,500 13,500 -- -- 15,000
Exercise of stock options... 84,564 845 -- -- -- 845
Issuance of warrants to
purchase common stock in
connection with note
payable agreement......... -- -- -- 2,250 -- 2,250
Stock option compensation... -- -- 56,777 -- -- 56,777
Net loss.................... -- -- -- -- (446,898) (446,898)
--------- ------- ---------- ------- ----------- -----------
Balance at December 31,
1999...................... 5,263,740 $52,637 $1,923,735 $36,250 $(3,358,508) $(1,345,886)
========= ======= ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 119
M3 THE HEALTHCARE LEARNING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.............................................. $(1,282,310) $ (967,130) $ (446,898)
Adjustments to reconcile net loss to net cash used in
operating activities
Stock option compensation.......................... -- -- 56,777
Issuance of stock warrants......................... -- -- 2,250
Depreciation....................................... 32,257 27,937 26,138
Amortization....................................... 60,892 87,119 91,107
Provision for losses on accounts receivable........ 43,798 111,627 51,001
Changes in assets and liabilities, net:
Accounts receivable.............................. (327,690) (1,193,888) 948,985
Prepaid expenses................................. (51,615) 30,369 24,862
Accounts payable................................. 65,330 (46,646) 24,468
Accrued expenses................................. (181,383) 191,099 (90,247)
Deferred revenue................................. 1,167,523 1,027,968 (1,100,529)
----------- ----------- -----------
Net cash used in operating activities......... (473,198) (731,545) (412,086)
----------- ----------- -----------
Cash flows from investing activities
Purchase of certificates of deposit................... -- (198,627) (291,221)
Maturity of certificates of deposit................... -- -- 294,000
Software development costs and capitalized software... (120,003) (43,081) --
Purchase of equipment................................. (12,414) (28,318) (2,921)
----------- ----------- -----------
Net cash used in investing activities......... (132,417) (270,026) (142)
----------- ----------- -----------
Cash flows from financing activities
Issuance of note payable.............................. 750,000 -- 430,000
Debt issue costs...................................... (18,500) -- (7,500)
Sale of common stock.................................. 150,000 500,000 15,845
----------- ----------- -----------
Net cash provided by financing activities..... 881,500 500,000 438,345
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... 275,885 (501,571) 26,117
Cash and cash equivalents at beginning of year.......... 408,019 683,904 182,333
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 683,904 $ 182,333 $ 208,450
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for interest................ $ 65,000 $ 97,500 $ 116,155
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE> 120
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS ACTIVITY
m3 The Healthcare Learning Company (the "Company") provides interactive,
multimedia education and training solutions to the healthcare industry. The
Company serves clients across the entire healthcare continuum, including
hospitals of all sizes, physician clinics, surgical centers, post-acute care
facilities, MSOs, long-term care centers and public health departments. A
summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains its cash balances at a financial institution located in Dallas, Texas,
which at times may exceed insured limits. Cash in excess of operating
requirements is invested in an income producing money market mutual fund, which
is not insured. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk.
CERTIFICATES OF DEPOSIT
The Company has two certificates of deposit with a financial institution
with original maturities ranging from over three months to less than one year.
These investments are stated at cost, as it is the intent of the Company to hold
these securities until maturity.
ACCOUNTS RECEIVABLE
Accounts receivable consist of uncollateralized receivables from customers
primarily in the healthcare industry. The Company routinely assesses the
financial strength of its customers and believes it is not exposed to any
significant credit risk.
PROPERTY AND EQUIPMENT
Depreciation and amortization is provided in amounts sufficient to relate
the cost of assets to operations over their estimated service lives. Capitalized
software consists of costs to purchase and develop software. Major additions and
betterments are capitalized while replacements and maintenance and repairs that
do not improve or extend the life of the respective assets are expensed. When
property is retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
operations.
Depreciation and amortization is provided using the double declining
balance method over five to seven years. Depreciation and amortization expense
charged to operations was $32,257, $27,937 and $26,138 for the years ended
December 31, 1997, 1998 and 1999, respectively.
DEBT ISSUE COSTS
Debt issue costs represent amounts incurred by the Company to enable it to
enter into the loan agreement described in Note 3. Such amounts are amortized,
on a straight-line basis, over 5 years, which is the term of the note.
Amortization expense charged to operations was $2,775, $3,696 and $4,832 for the
years ended December 31, 1997, 1998 and 1999, respectively. Amortizing debt
issue costs using the effective interest method would not result in a material
difference in annual amortization.
F-45
<PAGE> 121
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized upon the establishment
of technological feasibility for each product or process and capitalization
ceases when the product is available for general release to customers or is put
into service. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future revenues, estimated economic
life and changes in software and hardware technology. Research and development
costs related to software development that has not reached technological
feasibility are expensed as incurred and totaled $34,838, $250,723 and $197,219
for the years ended December 31, 1997, 1998 and 1999, respectively. Software
development costs are amortized utilizing the straight-line method over the
estimated economic lives of the related products not to exceed three years.
Amortization of capitalized software costs charged to operations totaled
$53,017, $76,067 and $79,247 for the years ended December 31, 1997, 1998 and
1999, respectively. Capitalized software development costs were $127,585 and
$48,339 at December 31, 1998 and 1999, respectively, and net of accumulated
amortization of $296,604 and $375,851 at December 31, 1998 and 1999,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue for the sale of software in accordance with
Statement of Position (SOP) 97-2 "Software Revenue Recognition".
The Company records gross revenue for all sales to VHA organizations under
an exclusive product agreement. Fees paid to VHA under this agreement are
recorded as marketing expense.
DEFERRED REVENUE
Deferred revenue represents the portion of revenue for which the revenue
recognition process is incomplete.
USE OF ESTIMATES
The preparation of 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
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising
expense totaled $24,245, $44,318 and $5,301 for the years ended December 31,
1997, 1998 and 1999, 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 events or changes in circumstances
may indicate that an impairment of long-lived assets held for use are present.
If such indications 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 carrying value of its property and
equipment and has determined that there were no indications of impairment as of
December 31, 1998 and 1999.
F-46
<PAGE> 122
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
("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
adoption of SOP 98-1 had no material effect on the Company's financial condition
or results of operations.
In June 1998, the Financial Accounting Standards Board ("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 hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet 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.
2. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between financial statement and tax bases of assets and liabilities as measured
by the currently enacted tax rates. Deferred tax expense or benefit is the
result of the changes in deferred tax assets and liabilities.
Current deferred income taxes result from the differences between financial
statement and tax return recognition of accrued expenses. Noncurrent deferred
income tax results from the use of accelerated methods of depreciation for
income tax purposes, and a net operating loss carryforward. If it is likely that
some portion or all of a deferred tax asset will not be realized, a valuation
allowance is recognized.
The components of deferred taxes in the accompanying balance sheets are
summarized below:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Current................................................... $ 12,582 $ 10,557
Noncurrent................................................ 847,374 1,084,090
--------- -----------
859,956 1,094,647
Valuation allowance....................................... (851,481) (1,084,721)
--------- -----------
Net deferred tax assets................................ 8,475 9,926
--------- -----------
Deferred tax liabilities:
Current................................................... -- --
Noncurrent................................................ 8,475 9,926
--------- -----------
8,475 9,926
--------- -----------
$ -- $ --
========= ===========
</TABLE>
F-47
<PAGE> 123
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net increase in the valuation allowance was $ 421,570, $ 268,005 and
$233,240 for the years ended December 31, 1997, 1998 and 1999, respectively. The
Company has a net operating loss carryforward of approximately $3,188,500 at
December 31, 1999 of which $379,400 will expire in 2010 and $17,400 in 2011, and
$2,791,700 in 2019.
3. NOTE PAYABLE
On April 3, 1997, the Company issued a note payable to a finance company in
the amount of $750,000. On August 4, 1999, the note payable was amended to the
amount of $1,180,000. The note bears interest at 13%, and is collateralized by
substantially all of the Company's assets. Monthly interest payments of $12,783
are payable until April 30, 2002, at which time the outstanding principal
balance, with all accrued interest is due. In connection with this transaction,
the Company issued detachable stock warrants to the finance company and a
portion of the proceeds has been allocated to these detachable stock warrants.
See Note 10 for further discussion of these warrants.
The loan agreement contains various provisions and restrictions including
payment of cash dividends; purchase of insurance coverages; payment of taxes and
assessments; limitations on indebtedness, guarantees and transactions with
affiliates; issuance of stock below fair value; and financial reporting
covenants. In 1998, the Company obtained a waiver for the financial reporting
covenant. In 1999, the Company obtained a waiver for the exercise of stock
options at an exercise price below the current fair value of the common stock.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Compensation................................................ $ 54,922 $ 54,787
Marketing fees.............................................. 131,478 --
Sales tax................................................... 106,628 146,952
Customer advances........................................... 30,730 30,730
Interest.................................................... 6,815 10,309
Consulting fees............................................. 22,000 22,000
Other....................................................... 10,896 8,444
-------- --------
$363,469 $273,222
======== ========
</TABLE>
F-48
<PAGE> 124
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTIONS
The Company has a restricted stock option agreement and a performance-based
agreement. Under the restricted stock option agreement, the exercise price of
each option is greater than or equal to the fair market value of the Company's
stock on the date of the grant and vest over a period of three years. Under the
performance-based agreement, vesting is determined annually, contingent upon
each year's revenue growth, earnings and employee performance, over the three
year period. Vesting for the performance-based agreement is not cumulative.
The following schedule summarizes the changes:
<TABLE>
<CAPTION>
RESTRICTED
PERFORMANCE-BASED STOCK OPTION
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1997............................. -- $ -- 275,000 $0.28
Granted................................................ 250,000 0.01 -- --
Exercised.............................................. -- -- -- --
Expired/forfeit........................................ -- -- -- --
------- --------
Outstanding, December 31, 1997........................... 250,000 0.01 275,000 0.28
Granted................................................ -- -- 294,000 2.50
Exercised.............................................. -- -- -- --
Expired/forfeit........................................ -- -- -- --
------- --------
Outstanding, December 31, 1998........................... 250,000 0.01 569,000 1.43
Granted................................................ -- -- 17,000 2.50
Exercised.............................................. (84,564) 0.01 (150,000) 0.10
Expired/forfeit........................................ -- -- (113,000) 2.06
------- --------
Outstanding, December 31, 1999........................... 165,436 $0.01 323,000 $1.88
======= ========
</TABLE>
Options exercisable at December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
RESTRICTED
PERFORMANCE- STOCK
YEAR ENDING BASED OPTION
- ----------- ------------ ----------
<S> <C> <C>
December 31, 1997........................................... -- 41,667
December 31, 1998........................................... 13,814 83,333
December 31, 1999........................................... -- 171,665
</TABLE>
Following is a summary of the status of options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE FOR
REMAINING LIFE IN YEARS VALUE OF OPTIONS GRANTED
------------------------- -------------------------
RESTRICTED RESTRICTED
PERFORMANCE- STOCK PERFORMANCE- STOCK
YEAR ENDING BASED OPTION BASED OPTION
- ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
December 31, 1997.......................... 2.25 2.00 $0.81 $0.81
December 31, 1998.......................... 1.25 2.80 0.81 0.81
December 31, 1999.......................... 0.25 2.45 0.81 0.81
</TABLE>
100,000 of the Restricted Stock Options are exercisable at $0.50 per share;
the remaining 223,000 are exercisable at $2.50 per share.
In connection with the performance based stock options, $56,777 of
compensation expense was recognized during the year ended December 31, 1999.
F-49
<PAGE> 125
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognizes and measures compensation costs related to stock
options utilizing the intrinsic value-based method. Had compensation expense
been determined on the fair value of awards granted, net loss would have been as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- ---------
<S> <C> <C> <C>
Net loss as reported............................... $(1,282,310) $(967,130) $(446,898)
Pro forma compensation expense, net of taxes (net
of recorded compensation expense in 1999 of
$56,777)......................................... (6,441) (11,100) (40)
----------- --------- ---------
Pro forma net loss................................. $(1,288,751) $(978,230) $(446,938)
=========== ========= =========
</TABLE>
The fair value of each option is estimated with the following assumptions
used for grants: risk free interest rate 5.00%; expected life 3 years; divided
yield 0%. The fair values may not be indicative of the future benefit, if any,
that may be received by the option holder.
6. OPERATING LEASES
The Company conducts its operations from various leased facilities under
long-term lease agreements, classified as operating leases, which expire at
various dates through March 2003. In the normal course of business, operating
leases are generally renewed or replaced by other leases. The Company also
leases certain equipment under operating leases.
The following is a schedule of future minimum lease payments required by
noncancellable operating leases with initial or remaining terms in excess of one
year at December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
- ------------------------ -------
<S> <C>
2000........................................................ $38,840
2001........................................................ 3,192
2002........................................................ 3,192
2003........................................................ 665
Thereafter.................................................. --
-------
$45,889
=======
</TABLE>
Rent expense totaled $35,461, $110,275 and $206,925 which consists of $-0-,
$66,408 and $145,195 paid to a related party and $35,461, $43,867 and $61,730 of
minimum rentals paid to non related parties for the years ended December 31,
1997, 1998 and 1999, respectively. Related party leases are for a term of one
year or less.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan to which both the Company and eligible
employees may contribute. Company contributions are voluntary and at the
discretion of the board of directors. Company contributions totaled $20,013 for
1999. There were no Company contributions for 1997 and 1998.
8. PRODUCT AGREEMENT
In April 1997, the Company entered into an exclusive product agreement with
VHA, Inc. ("VHA") whereby the Company has been selected by VHA to provide
technology-delivered learning to VHA organizations. Under the terms of the
agreement, the Company pays marketing fees to VHA of 20% of certain defined
revenues, subject to certain exceptions and limitations. Marketing expense under
this agreement totaled $26,496, $245,363 and $44,135 for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-50
<PAGE> 126
M3 THE HEALTHCARE LEARNING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. MAJOR CUSTOMERS
A substantial portion of the Company's revenue is derived from three or
fewer clients. During 1997, 1998 and 1999 revenues from these clients aggregated
$441,159, $486,936 and $402,846, respectively. At December 31, 1998 and 1999,
amounts due from those clients included in accounts receivable were $545,361 and
$223,892, respectively.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Fountain View............................................... $ 93,794 $ -- $ --
Integris Health............................................. 131,450 -- --
Marriot..................................................... 215,915 264,250 --
Texas Eng Extension Service................................. -- 222,686 402,846
-------- -------- --------
$441,159 $486,936 $402,846
======== ======== ========
Marriot..................................................... $225,500 $ --
Texas Eng Extension Service................................. 319,861 223,892
-------- --------
$545,361 $223,892
======== ========
</TABLE>
10. WARRANT
In connection with the issuance of the note payable agreement described in
Note 3, $34,000 of the proceeds has been allocated to the detachable stock
warrants. Upon surrender of a warrant, the holder is entitled to purchase one
share of the Company's common stock for $.01 per share. The Company grants to
the holder the right to purchase 138,300 shares of the Company's common stock
(the "Base Amount"), provided that in the event that any portion of the
indebtedness evidenced by the note is outstanding, the Base Amount is increased
13,830 shares per annum, which amount may be accrued on a monthly basis
beginning May 1, 1999 and ending on the date the note is paid in full but in any
event no later than April 30, 2002. The warrant is exercisable at any time until
April 20, 2002.
11. SUBSEQUENT EVENT (UNAUDITED)
In January 2000, the Company was acquired by HealthStream, Inc. for $7.7
million.
F-51
<PAGE> 127
"MEET THE MANAGEMENT" PRESENTATION FOR
HEALTHSTREAM
Prospective investors will be able to log on to a website maintained by
E*OFFERING Corp. at www.eoffering.com, where a prospectus is available for
review. Within designated sections of the prospectus, including the table of
contents and the Underwriting Section of the prospectus, an embedded hyperlink
(click here for "Meet the Management" Presentation) will provide exclusive
access to the "Meet the Management" Presentation. This presentation highlights
selected information contained elsewhere in the prospectus. This presentation
does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" and our financial statements and notes to those
financial statements, before making an investment decision.
VISUAL 1: DISCLAIMER
Imagery: Company logo.
Visual Text: The "Meet the Management" Presentation is part of our
prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.
Script: (Robert Frist) The "Meet the Management" Presentation is part of
our prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.
VISUAL 2: INTRODUCTION
Imagery: Border and Company logo. See description of artwork on the page
titled Inside Front Cover of the Registration Statement for a description of the
image located on the inside front cover of the prospectus.
Script: (Robert Frist) Welcome to the "Meet the Management" Presentation
for HealthStream. I'm Robert Frist, Chairman and CEO. I would like to introduce
Jeff McLaren, our President and Chief Product Officer, and Arthur Newman, our
Chief Financial Officer. We would like to talk to you about HealthStream, a
Web-based solution to meet the training and education needs of the healthcare
industry.
VISUAL 3: MARKET OPPORTUNITY
Imagery: Border and Company logo. There is an arrow connecting the number
of participants in the medical industry to the text highlighting the total
amount of money spent annually on training and continuing education.
Visual Text: Title: Market Opportunity. Table: Allied healthcare
professionals -- 5,000,000; Registered nurses -- 2,600,000; Non-clinical
healthcare workers -- 2,400,000; Active physicians -- 600,000. Arrow points to a
summary box containing the following text: Estimated over $6.0 billion spent
annually on ongoing training and continuing education.
Script: (Robert Frist) (see "Business -- Industry Background -- Continuing
Education in the Healthcare Industry"): Healthcare services in the U.S. are
delivered by over an estimated 5.0 million allied healthcare professionals, 2.6
million registered nurses, 2.4 million non-clinical healthcare workers and
600,000 active physicians. Regulations administered by various state and Federal
agencies require ongoing training and continuing education for healthcare
professionals and other healthcare workers. For example, physician and nursing
licensing boards require up to 20 hours of continuing education per year. Other
agencies, including the Occupational and Safety Health Administration, or OSHA,
the Healthcare
A-1
<PAGE> 128
Financing Administration, or HFCA, 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.
We estimate that the healthcare industry spends over $6.0 billion annually on
ongoing training and continuing education, including over $3.0 billion on
continuing education for allied healthcare professionals and for nurses and
continuing medical education, or CME, for physicians.
VISUAL 4: MARKET CHARACTERISTICS AND ISSUES
Imagery: Border and Company logo. Three arrows on the left of the page
pointing to the right.
Visual Text: Title: Market Characteristics and Issues. Subheading:
"Limitations of existing healthcare training programs." To the right of the
first arrow will appear the caption, "Inconvenient and costly to attend and may
result in lost productivity." To the right of the second arrow will appear the
caption, "Limited in terms of breadth of offering and timeliness and may be
costly to produce on a per user basis." To the right of the third arrow will
appear the caption, "Difficult to review and assess results, track employee
compliance and respond to the effectiveness of programs."
Script: (Robert Frist) (see "Business -- Industry Background -- Continuing
Education in the Healthcare Industry"): 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.
Although these existing approaches satisfy ongoing training and continuing
education 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. In addition, ongoing training and continuing education
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. Furthermore,
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 ongoing training and continuing education, 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.
VISUAL 5: HEALTHSTREAM SOLUTION
Imagery: Border and Company logo. See description of artwork on the page
titled Color Foldout of the Registration Statement for a description of the
image located on the inside front cover of the prospectus.
Script: (Robert Frist) (see "Summary," "Business -- Industry Background --
Convergence of the Internet and Online Healthcare Education Services" and "--
The HealthStream Solution"): We believe the healthcare ongoing training and
continuing education market is particularly well-suited for business-to-business
e-commerce and online services. We bring authors and publishers of training and
continuing education content together with end users through our Web-based
distribution network. We will expand our distribution of courses and services to
include two methods. The first method provides Internet access to our courses
and education management software on a transactional basis over the Internet on
an application services provider, or ASP, basis. Under the second method, we
deliver our courses through strategic distribution partners, which we refer to
as our Web distribution network. This network currently consists of over 30
distribution partners, including Healtheon/WebMD, MedicaLogic, GE Medical
Systems, Pointshare, Medsite.com, HealthGate and ChannelHealth (an IDX company).
VISUAL 6: HEALTHSTREAM SOLUTION
Imagery: Border and Company logo. See description of artwork on the page
titled Color Foldout of the Registration Statement for a description of the
image located on the inside front cover of the prospectus.
Visual Text: Title: HealthStream Solution. Subheading: "Distribution
through ASP Model."
A-2
<PAGE> 129
Script: (Robert Frist) (see "Business -- HealthStream Services -- Services
Distributed Through ASP Model"): Healthcare organizations are responsible for
providing both government mandated and internally required training to their
employees. We are developing our ASP model to enable these healthcare
organizations to provide, assess and manage this training process. Under our ASP
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 sales cycle to these customers. In addition, our hosted ASP service
is scalable to enable healthcare organizations to monitor and administer the
continuing education and training needs of large and geographically dispersed
employee bases.
VISUAL 7: HEALTHSTREAM SOLUTION
Imagery: Border and Company logo. See description of artwork on the
page titled Color Foldout of the Registration Statement for a description of
the image located on the inside front cover of the prospectus.
Visual Text: Title: HealthStream Solution. Subheading: "Distribution
through Web Network."
Script: (Robert Frist) (see "Business -- HealthStream Services -- Services
Provided through Web Distribution Network" and "-- The HealthStream Solution"):
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 partnerships with health Web sites,
academic and medical institutions, pharmaceutical and equipment manufacturers
and healthcare providers. For instance, we have entered into a five-year
agreement with Healtheon/WebMD to be the exclusive provider of education and
training for healthcare organizations, healthcare professionals and healthcare
workers on Web sites owned and operated by Healtheon/WebMD. 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. We believe our services will provide an
online training and continuing education solution for healthcare organizations,
end users, distribution partners and content partners.
VISUAL 8: HEALTHSTREAM VALUE PROPOSITION
Imagery: Border and Company logo. Three arrows on the left of the page
pointing to the right.
Visual Text: Title: HealthStream Value Proposition. Subheading: "Value to
Healthcare Organizations." To the right of the first arrow will appear the
caption, "Access to high quality content on a cost-effective basis." To the
right of the second arrow will appear the caption, "Allows organizations to
contribute to and enhance the content provided." To the right of the third arrow
will appear the caption, "Provides the ability to track compliance and measure
the effectiveness and results of training."
Script: (Robert Frist) (see "Business -- The HealthStream
Solution -- Value to Healthcare Organizations"): We offer healthcare
organizations the ability to provide access to high quality content on a
cost-effective basis for the ongoing training and continuing education needs of
their employees. Our services allow these organizations to contribute to and
enhance the content provided through our services and to configure training to
meet the specific needs of different groups of employees. In addition, we
provide administrators of these organizations the ability to track compliance
with certification requirements and measure the effectiveness and results of
training.
VISUAL 9: HEALTHSTREAM VALUE PROPOSITION
Imagery: Border and Company logo. Three arrows on the left of the page
pointing to the right.
Visual Text: Title: HealthStream Solution. Subheading: "Value to End
Users." To the right of the first arrow will appear the caption, "Comprehensive
training and continuing education offerings." To the
A-3
<PAGE> 130
right of the second arrow will appear the caption, "Cost-effective training and
continuing education." To the right of the third arrow will appear the caption,
"Convenient access and compelling user experience."
Script: (Robert Frist) (see "Summary -- Our Business" and
"Business -- Overview" and "Business -- The HealthStream Solution -- Value to
End Users"): We believe we provide one of the largest online libraries of
ongoing training and continuing education content covering a range of medical
specialties. Through strategic relationships with medical institutions and
commercial organizations, we have amassed over 3,000 hours of training and
education courses and currently distribute over 1,300 hours of these courses
online. 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, Scripps Clinic, KnowledgeLinc and American Health Consultants.
Moreover, by eliminating the need for travel and expensive in-house programs, we
estimate that we can significantly reduce the cost of ongoing training and
continuing education. Our end users pay for our services on a per transaction
and/or subscription basis, eliminating the need for substantial up-front
expenditures. Our online services also allow our end users the freedom to
utilize our services when it is convenient for them.
VISUAL 10: HEALTHSTREAM VALUE PROPOSITION
Imagery: Border and Company logo. Three arrows on the left of the page
pointing to the right.
Visual Text: Title: HealthStream Value Proposition. Subheading: "Value to
Network Distribution Partners." To the right of the first arrow will appear the
caption, "Comprehensive training and continuing education solution." To the
right of the second arrow will appear the caption, "Premier continuing education
healthcare content." To the right of the third arrow will appear the caption,
"Recurring traffic opportunity."
Script: (Robert Frist) (see "Business -- Overview" and "Business -- The
HealthStream Solution -- Value to Network Distribution Partners"): We offer our
network distribution partners an online training and continuing education
solution that includes one of the largest libraries of courseware. Most of our
distribution partners provide online access to continuing education as an
ancillary service to their core businesses. To drive traffic to their Web sites,
our network distribution partners want to provide their online users with a
compelling ongoing training and continuing education experience. Our solution
delivers these services to our network distribution partners. Additionally, we
offer our network distribution partners access to content from premier
healthcare organizations through our established relationships with medical
education and professional institutions and commercial publishers. We believe we
will also offer our network distribution partners a predictable source of online
traffic due to the recurring nature of regulated training and continuing
education requirements. 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.
VISUAL 11: HEALTHSTREAM VALUE PROPOSITION
Imagery: Border and Company logo. Three arrows on the left of the page
pointing to the right.
Visual Text: Title: HealthStream Solution. Subheading: "Value to Content
Partners." To the right of the first arrow will appear the caption, "Compelling
Web distribution network." To the right of the second arrow will appear the
caption, "Comprehensive outsourcing solution." To the right of the third arrow
will appear the caption, "Significant expertise in content conversion."
Script: (Robert Frist) (see "Business -- The HealthStream
Solution -- Value to Content Partners"): We believe we currently offer our
content partners one of the largest Web networks for the distribution of
training and education for the healthcare community. Through our Web
distribution network, our content partners can realize new product sales by
targeting a broader audience than they could on their own. We enable our content
partners to focus on their core competency of producing and authoring content
and to
A-4
<PAGE> 131
reallocate resources that may have used to develop their own delivery systems
and distribution partnerships. We also offer publishers and authors of training
and continuing education 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.
VISUAL 12: HEALTHSTREAM STRATEGY
Imagery: Border and Company logo. HealthStream logo in center of page with
five circles filled with text headings connected to the logo as spokes.
Visual Text: Title: HealthStream Strategy. The following text would be
inserted into the surrounding five circles:
- Provide healthcare organizations with Web-based access to our courses and
education management software on an ASP basis
- Expand and enhance our online training and education library
- Increase the number of partners in our Web distribution network
- Expand our sales and marketing efforts
- Generate additional revenue opportunities
Script: (Robert Frist) (see "Summary -- Our Growth Strategy"): Our
objective is to be the leading provider of Web-based training and education
solutions for the healthcare industry. The following are the key elements of our
growth strategy: First, provide healthcare organizations with Web-based access
to our courses and education management software on an ASP basis. Second, expand
and enhance our online training and education library. Third, increase the
number of partners in our Web distribution network. Fourth, expand our sales and
marketing efforts that target healthcare organizations, healthcare professionals
and potential content and distribution partners. And lastly, generate additional
revenue opportunities by aggregating the performance data collected by our
system and offering sponsorship products based on the attractive demographics of
our end users.
Now I would like to turn it over to Jeff McLaren, our President and Chief
Product Officer, to talk about our products and services.
VISUAL 13: SERVICES
Imagery: Border and Company logo. Company logo with two rectangular boxes
below labeled with the headings, "Services Distributed through ASP Model" and
"Services Provided through Web Distribution Network"
Visual Text: Title: Services. Each rectangle will include captions listing
the following services:
<TABLE>
<CAPTION>
SERVICES DISTRIBUTED THROUGH ASP MODEL SERVICES PROVIDED THROUGH WEB DISTRIBUTION NETWORK
<S> <C>
- - Administrative and management tools - Online courseware
- - Online courseware - Webcast events
- - Content conversion and development - Search engine
</TABLE>
Script: (Jeff McLaren) (see "Business -- HealthStream Services"): Thanks,
Robert. We provide our Web-based ongoing training and continuing education
services to healthcare organizations through our ASP model and individual
healthcare professionals through our Web distribution network. Our services for
healthcare organizations include: administrative and management tools, online
courseware and content conversion and development. 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 courseware we provide under our ASP model will primarily focus on
mandated training content.
A-5
<PAGE> 132
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 services for healthcare professionals include: online courseware,
Webcast events, and a search engine. The online courseware available through our
network of co-branded web sites and our web site is targeted to healthcare
professionals and includes primarily accredited continuing education content. We
also offer both live and pre-recorded Webcasts of medical procedures, the
viewing of which may be credited toward continuing education requirements.
Additionally, through our acquisition of KnowledgeReview we acquired a search
engine and several associated domain names through which we offer a method for
physicians and other healthcare professionals to search for both online and
traditional continuing education products. In addition, 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. Back to you Robert.
VISUAL 14: STRATEGIC RELATIONSHIPS AND ACQUISITIONS
Imagery: Border and Company logo. Four arrows on the left of the page
pointing to the right.
Visual Text: Title: Strategic Relationships and Acquisitions. Subheading:
"Services Distributed through ASP Model." To the right of the first arrow will
appear the caption, "m3 the Healthcare Learning Company." To the right of the
second arrow will appear the caption, "EMInet." To the right of the third arrow
will appear the caption, "Quick Study." To the right of the fourth arrow will
appear the caption, "Columbia/HCA Healthcare Corporation."
Script: (Robert Frist) (see "Business--Strategic Relationships and
Acquisitions -- Services Distributed through ASP Model"): Thanks, Jeff. In
January 2000, we acquired m3 the Healthcare Learning Company which provides us
with an established client base of over 450 hospitals and the opportunity to
convert these hospitals to our ASP model. In January 2000, we also acquired
EMInet, a provider of online continuing education to emergency medical services
personnel. This acquisition expands the content offering of our online library
and customer base for our services. Additionally, in January 2000, we acquired
Quick Study, a provider of over 60 hours of nursing and OSHA content, which we
have added to our online library and will deliver to healthcare organizations
through our ASP model. In February 2000, we entered into a four-year Online
Education Services Provider Agreement pursuant to which we will provide
Columbia/HCA with online training and education services and courseware for its
doctors, nurses and staff on an ASP basis.
VISUAL 15: STRATEGIC RELATIONSHIPS AND ACQUISITIONS
Imagery: Border and Company logo. Two vertical rectangles with the titles
"Content" and "Distribution."
Visual Text: Title: Strategic Relationships and Acquisitions. Subhead:
Services Provided Through Web Distribution Network. Each rectangle will include
captions listing the following names of the Company's strategic relationships
and acquisitions:
<TABLE>
<CAPTION>
CONTENT DISTRIBUTION
- ----------------------------------------- -----------------------------------------
<S> <C>
- - SilverPlatter Education - cmesearch.com
- - Scripps Clinic - Healtheon/WebMD
- - Duke University Medical Center - MedicaLogic
- - American Health Consultants - State Medical Associations
- - Vanderbilt University Medical Center - HealthGate
- - The Cleveland Clinic Foundation - ChannelHealth (an IDX Company)
- - Challenger Corporation - Pointshare
- - e-Vitro - GE Medical Systems
- Medsite.com
</TABLE>
A-6
<PAGE> 133
Script: (Robert Frist) (see "Business -- Strategic Relationships"): We
have entered into strategic relationships with several content partners and 30
distribution partners and continue to aggressively 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 expand our brand awareness. In
addition, our recent acquisitions have expanded our course offerings and
provided us with experienced sales personnel. In July 1999, we acquired
SilverPlatter Education, a provider of over 100 hours of continuing medical
education programs to physicians on CD-ROM and via the Internet. In January
2000, we acquired KnowledgeReview which operates cmesearch.com, a healthcare
education search engine which allows physicians and other healthcare
professionals to search for online and traditional continuing education.
cmesearch.com currently provides listings and information on over 2,000 courses
and seminars. Selected content partners include: SilverPlatter Education,
Scripps Clinic, Duke University Medical Center, American Health Consultants,
Vanderbilt University Medical Center, The Cleveland Clinic Foundation,
Challenger Corporation and e-Vitro. Selected distribution partners include:
cmesearch.com., Healtheon/WebMD, MedicaLogic, State Medical Associations,
HealthGate, ChannelHealth (an IDX Company), Pointshare, GE Medical Systems and
Medsite.com.
VISUAL 16: COMPETITION
Imagery: Border and Company logo. Eight arrows on the left of the page
pointing to the right.
Visual Text: Title: Competition. Subheading "Potential competitors fall
into the following categories:" To the right of the first arrow will appear the
caption, "Other online training and continuing education providers." To the
right of the second arrow will appear the caption, "Web sites targeting medical
professionals." To the right of the third arrow will appear the caption,
"Traditional medical publishers and continuing education providers." To the
right of the fourth arrow will appear the caption, "Academic medical centers."
To the right of the fifth arrow will appear the caption, "Software developers
that bundle their training systems." To the right of the sixth arrow will appear
the caption, "Professional membership organizations." To the right of the
seventh arrow will appear the caption, "Companies that market general-purpose
computer-managed instruction systems." To the right of the eighth arrow will
appear the caption, "Interactive media development companies."
Script: (Robert Frist) (see "Business -- Competition"): The market for the
provision of online training and continuing education to the healthcare industry
is new and rapidly evolving. We face competitive pressures from numerous actual
and potential competitors, including: Other online training and continuing
education providers, 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; 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.
And with that, I will turn it over to Arthur Newman for an overview of our
financial results. Arthur . . .
VISUAL 17: FINANCIAL SUMMARY
Imagery: Border and Company logo. Selected Financial Data.
Visual Text: Title: Financial Summary. "Selected Financial Data" table.
Script: (Arthur Newman) (See "Management's Discussion and Analysis of
Financial Condition -- Overview," "-- Results of Operations" and "-- Year Ended
December 31, 1998 Compared to Year Ended December 31, 1999"): Thanks, Robert.
Revenues currently consist primarily of sales of multimedia development services
for training modules and promotional materials for the healthcare industry.
Revenues also including 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
A-7
<PAGE> 134
the Internet. We expect that revenues in future periods will be increasingly
derived from online services to healthcare organizations and healthcare
professionals.
Revenues increased $852,000 or 49.6% from approximately $1.7 million for
the year ended December 31, 1998 to approximately $2.6 million for the year
ended December 31, 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 development and content production services.
Cost of revenues increased approximately $1.0 million or 100.4% from
approximately $1.0 million for the year ended December 31, 1998 to approximately
$2.1 million for the year ended December 31, 1999. The increase was primarily
attributable to increased volume of business, including approximately $800,000
of increases in salaries, labor and related benefits.
Product development expenses increased approximately $1.6 million, or
359.5%, from $443,000 for the year ended December 31, 1998 to approximately $2.0
million for the year ended December 31, 1999. As a percentage of revenues,
product development expenses increased from 25.8% for the year ended December
31, 1998 to 79.3% for the year ended December 31, 1999. The increase as a
percentage of revenues was due to significant upfront product development
expenses incurred to implement our online services, including salaries and
employee benefits associated with increased content conversion and development
and royalties due to content and distribution partners. We anticipate
significant additional product development expenses in future periods due to
salaries and employee benefits associated with increased content conversion.
Selling, general and administrative expenses increased approximately $1.5
million, or 101.2%, from approximately $1.5 million for the year ended December
31, 1998 to approximately $3.0 million for the year ended December 31, 1999. The
increase was primarily due to increased personnel and related benefits costs of
approximately $500,000 associated with new employees, an increase of
approximately $228,000 in advertising, promotional and marketing expenditures,
an increase of approximately $131,000 in professional service fees, an increase
of $213,000 related to amortization of intangible assets, an increase of
approximately $168,000 in travel expenses and facility and depreciation expenses
of approximately $96,000.
Other expense decreased $122,000 or 36.9% from $331,000 for the year ended
December 31, 1998 to $209,000 for the year ended December 31, 1999.
Net loss increased approximately $2.9 million, or 180.4%, from
approximately $1.6 million for the year ended December 31, 1998 to approximately
$4.5 million for the year ended December 31, 1999 due to the factors described
above.
Robert . . .
VISUAL 18: END OF PRESENTATION
Imagery: Border and company logo. See description of artwork on the page
titled Inside Front Cover of the Registration Statement for a description of the
image located on the inside front cover of the prospectus.
Script: (Robert Frist): We hope that this presentation was helpful in
understanding the business model of HealthStream and the strategy that our
management team intends to execute. We encourage you to refer back to the
prospectus for additional support and disclosure as well as to take a look at
the "Risk Factors" in detail. Again, thank you for your interest in
HealthStream.
A-8
<PAGE> 135
(HEALTHSTREAM LOGO)
<PAGE> 136
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.
[I]
SUBJECT TO COMPLETION, DATED APRIL 6, 2000
(HEALTHSTREAM LOGO)
5,000,000 SHARES
COMMON STOCK
We are offering 5,000,000 shares of our common stock. This is our initial
public offering and no public market currently exists for our shares. Our common
stock has been approved for listing on the Nasdaq National Market under the
symbol "HSTM." We anticipate that the initial public offering price will be
$9.00 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 750,000 shares of common stock to cover over-allotments.
------------------------------
ROBERTSON STEPHENS INTERNATIONAL
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 137
[I]
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston 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
U.S. UNDERWRITERS OF SHARES
- ----------------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
CIBC World Markets Corp.....................................
J.C. Bradford & Co..........................................
E*OFFERING Corp.............................................
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS
- --------------------------
<S> <C>
FleetBoston Robertson Stephens International Limited........
CIBC World Markets plc......................................
J.C. Bradford & Co..........................................
---------
Total........................................ 5,000,000
=========
</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 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 in this document, 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 750,000
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 750,000 shares of common stock, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage 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 in this offering are being sold. We
will be obligated, by the over-allotment option, to 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.
66
<PAGE> 138
The following table summarizes the compensation to be paid by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
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, directors and our more than one-percent
shareholders will agree, for 180 days after the 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 owned as of the date of this prospectus or acquired after the date
of this prospectus directly by those holders or with respect to which they have
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. These lock-up agreements will also cover any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock owned by those holders. However,
FleetBoston 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 FleetBoston Robertson 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
Our common stock has been approved for listing 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 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
67
<PAGE> 139
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.
E*OFFERING Corp. is the exclusive Internet underwriter for this offering.
E*OFFERING Corp. has agreed to allocate a portion of the shares that it
purchases to E*TRADE Securities, Inc. E*OFFERING Corp. and E*TRADE Securities
Inc. will allocate shares to their respective customers in accordance with usual
and customary industry practices. A prospectus in electronic format, from which
you can link to a "Meet the Management" Presentation through an embedded
hyperlink, (click here for "Meet the Management" Presentation), is being made
available on the Web site maintained by E*OFFERING Corp., www.eoffering.com. The
"Meet the Management" presentation, including the accompanying slides included
in the appendix, is part of this prospectus.
Healtheon/WebMD has agreed to purchase directly from us an estimated
1,111,111 shares of our common stock in a separate private sale that will close
concurrently with this offering. The price of these shares will be equal to the
initial public offering price per share in this offering.
We have requested that the underwriters reserve up to 250,000 shares of
common stock to be offered at the initial public offering price to our
employees, friends and family of employees and others. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase the reserved shares. Any reserved shares which
are not purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered by this prospectus.
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. The shares of common stock into which these shares of
series B preferred stock are convertible will be subject to a lock-up agreement
for 90 days from the date of this prospectus, pursuant to which such securities
may not be sold, transferred, assigned, pledged or hypothecated. Including the
shares received by J.C. Bradford & Co. as payment for its acting as our
financial advisor, J.C. Bradford & Co. and affiliates of J.C. Bradford & Co.
collectively own shares of our preferred stock representing 578,010 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.
An aggregate of 46,777 shares of our preferred stock held by affiliates of
J.C. Bradford & Co. have been deemed to constitute underwriters compensation
pursuant to Corporate Financing Rule 2710 of the National Association of
Securities Dealers, Inc. Of the shares of common stock into which these shares
of preferred stock are convertible, 126,053 shares will be subject to a lock-up
agreement for one year from the date of this prospectus, 8,385 shares will be
subject to a lock-up agreement for five years from the date of this prospectus
and 39,348 shares will be subject to a lock-up agreement for six years from the
date of this prospectus. Each of these lockup agreements shall prohibit the
party subject to such agreement from selling, transferring, assigning, pledging
or hypothecating the securities subject to the agreement for the respective time
periods referenced above.
Neither members of the NASD that are acting as underwriters in connection
with this offering, nor associated or affiliated persons of such NASD members,
will receive 10% or more of the net proceeds of this offering in the aggregate.
68
<PAGE> 140
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. Of these estimated expenses, approximately $295,000
were paid prior to the offering.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
----------
<S> <C>
SEC registration fee........................................ $ 20,539
NASD filing fee............................................. 7,975
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving fees and expenses.................... 350,000
Legal fees and expenses..................................... 325,000
Accounting fees and expenses................................ 325,000
Blue sky fees and expenses (including legal fees)........... 5,000
Transfer agent fees......................................... 5,000
Miscellaneous............................................... 66,486
----------
Total............................................. $1,200,000
==========
</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> 141
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, 1997:
- In October and November 1998 and January and February 1999, an aggregate
of 76,000 shares of our series A preferred stock were issued to raise
capital, only to accredited investors in private placements under Rule
506 of the Securities Act at $10.00 per share for total consideration of
$760,000;
- On April 21, 1999, 428,239 shares of our common stock were issued to
Robert A. Frist, Jr. upon conversion of $1 million in debt under Section
3(a)(9) of the Securities Act at $2.34 per share for total consideration
of $1,000,000;
- On July 23, 1999, 49,202 shares of our common stock were issued to
SilverPlatter Information, Inc. for an acquisition of the assets of
SilverPlatter Education, Inc. for an aggregate of $200,000 under Section
4(2) of the Securities Act, in which no public solicitations were made;
- In July and August 1999, Robert A. Frist, Jr. exercised options received
under our written 1994 stock option plan for 416,250 shares of our common
stock under Rule 701 of the Securities Act at $0.54 per share for total
consideration of $225,000;
- On August 9, 1999, 4,625 shares of our common stock were issued to
Richard Schapiro, for $18,800 worth of consulting services, in a private
placement under Section 4(2) of the Securities Act, in which no public
solicitations were made;
- In 1999, an aggregate of 1,157,801 shares of our series B preferred stock
were issued to raise capital, only to accredited investors in private
placements under Rule 506 of the Securities Act at $10.00 per share for
total consideration of $11,578,010;
- In April 1999, 15,000 shares of our series B preferred stock were issued
to J.C. Bradford & Company under Rule 506 of the Securities Act at $10.00
per share for total consideration of $150,000;
- In April and August 1999, 50,000 shares of our series B preferred stock
were issued to Robert A. Frist, Jr. upon conversion of $500,000 in debt
under Section 3(a)(9) of the Securities Act at $10.00 per share;
- In August 1999, 6,000 shares of our series B preferred stock were issued
to Scott Portis upon conversion of $60,000 in debt under Section 3(a)(9)
of the Securities Act at $10.00 per share;
- In August and September 1999, an aggregate of 627,406 shares of our
series C preferred stock were issued to raise capital, only to accredited
investors in private placements under Rule 506 of the Securities Act at
$10.00 per share for total consideration of $6,274,060;
- In December 1999, Jeffrey L. McLaren exercised options received under our
1994 stock option plan for 3,170 shares of our common stock under Rule
701 of the Securities Act at $0.61 per share for total consideration of
$1,928;
- In December 1999, Kelly Stewart exercised options received under our 1994
stock option plan for 7,666 shares of our common stock under Rule 701 of
the Securities Act at $0.61 per share for total consideration of $4,662.
- In January 2000, 17,343 shares of our common stock were issued to the
members of KnowledgeReview, LLC for an acquisition of the assets of
KnowledgeReview, LLC, for an aggregate of $150,000 under Rule 506 of the
Securities Act, in which no public solicitations were made;
II-2
<PAGE> 142
- In January 2000, 61,397 shares of our common stock were issued to the
shareholders of Quick Study, Inc. in connection with the merger of Quick
Study into one of our wholly-owned subsidiaries for an aggregate of
$531,008 under Section 4(2) of the Securities Act, in which no public
solicitations were made;
- In January 2000, 818,036 shares of our common stock were issued to the
shareholders of Multimedia Marketing, Inc. in connection with the merger
of Multimedia into one of our wholly-owned subsidiaries for an aggregate
of $7,074,912 under Rule 506 and Section 4(2) of the Securities Act, in
which no public solicitations were made; and
- In January 2000, 269,902 shares of our common stock were issued to
Emergency Medicine Internetwork, Inc. for an acquisition of the assets of
EMInet for an aggregate of $2,334,288 under Section 4(2) of the
Securities Act, in which no public solicitations were made.
- In February 2000, Jeffrey L. McLaren exercised options received under our
1994 stock option plan for 148,714 shares of our common stock under Rule
701 of the Securities Act at $0.61 per share for total consideration of
$90,434.
- In March 2000, William Stead, M.D. exercised an option received under our
1994 stock option plan for 3,700 shares of our common stock under Rule
701 of the Securities Act at $0.61 per share for total consideration of
$2,250.
- In March 2000, Michael Pote exercised options received under our 1994
stock option plan for 3,700 and 23,958 shares of our common stock under
Rule 701 of the Securities Act at $0.61 and $2.30 per share,
respectively, for total consideration of $2,250 and $55,039,
respectively.
- In March 2000, Robert H. Laird, Jr. exercised an option received under
our 1994 stock option plan for 11,979 shares of our common stock under
Rule 701 of the Securities Act at $2.30 per share for total consideration
of $27,519.
- In March 2000, Kelly Stewart exercised an option received under our 1994
stock option plan for 68,998 shares of our common stock under Rule 701 of
the Securities Act at $0.61 per share for total consideration of $41,958.
- In April 2000, Stephen Clemens exercised an option received under our
1994 stock option plan for 6,268 shares of our common stock under Rule
701 of the Securities Act at $2.30 per share for total consideration of
$14,400.
- In April 2000, Mac Hardcastle exercised an option received under our 1994
stock option plan for 76,035 shares of our common stock under Rule 701 of
the Securities Act at $0.61 per share for total consideration of $46,237.
- In April 2000, Phil Makes exercised an option received under our 1994
stock option plan for 7,862 shares of our common stock under Rule 701 of
the Securities Act at $0.61 per share for total consideration of $4,781.
- In April 2000, J. Page Davidson exercised an option received under our
1994 stock option plan for 3,700 shares of our common stock under Rule
701 of the Securities Act at $2.30 per share for total consideration of
$8,500.
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.
</TABLE>
II-3
<PAGE> 143
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <C> <S>
**2.2 -- Agreement and Plan of Merger, dated January 5, 2000, among
HealthStream, Inc., HealthStream Acquisition I, Inc., Quick
Study, Inc. and each shareholder of Quick Study, Inc.
**2.3 -- Asset Purchase Agreement, dated December 16, 1999, among
KnowledgeReview, LLC, Louis Bucelli and Maksim Repik, and
HealthStream, Inc.
**2.4 -- Agreement and Plan of Merger, dated January 25, 2000 among
HealthStream, Inc., HealthStream Acquisition II, Inc.,
Multimedia Marketing, Inc., and the stockholders of
Multimedia Marketing, Inc.
**2.5 -- Asset Purchase Agreement, dated January 27, 2000, between
Emergency Medicine Internetwork, 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 -- Amended and Restated Investors' Rights Agreement, dated
March 14, 2000, 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
**4.6 -- Warrant to purchase common stock of HealthStream, Inc.,
dated June 14, 1999, held by GE Medical Systems.
**4.7 -- Warrant to purchase common stock of HealthStream, Inc.,
dated February 11, 2000, held by Columbia Information
Systems.
**4.8 -- Common Stock Purchase Agreement between HealthStream, Inc.
and Healtheon/WebMD Corporation
**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 2000 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 HealthStream, Inc. and Duke University Medical
Center
**+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.
**10.19 -- Courseware Development Agreement between HealthStream, Inc.
and e-Vitro, Inc.
**+10.20 -- Software Licensing and Distribution Agreement between
HealthStream, Inc. and Pointshare.
</TABLE>
II-4
<PAGE> 144
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <C> <S>
**+10.21 -- Content Licensing Agreement between HealthStream, Inc. and
American Health Consultants dated September 20, 1999.
**+10.22 -- Content Licensing Agreement between HealthStream, Inc. and
American Health Consultants dated January 6, 2000.
**+10.23 -- Continuing Education Distribution Agreement between
HealthStream, Inc. and the Mississippi State Medical
Association.
**+10.24 -- Joint Marketing and Distribution Agreement between
HealthStream, Inc. and the Medical Association of Georgia.
**+10.25 -- Online Services Agreement between HealthStream, Inc. and
Columbia Information Systems.
**+10.26 -- Software Licensing and Distribution Agreement between
HealthStream, Inc. and MedicaLogic, Inc.
**+10.27 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and Scripps Clinic
**+10.28 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and KnowledgeLinc, Inc.
**10.29 -- Letter of Agreement between HealthStream, Inc. and
Healtheon/WebMD Corporation.
**10.30 -- Form of Employee Stock Purchase Plan
**21.1 -- Subsidiaries of HealthStream, Inc.
*23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5.1)
*23.3 -- Consent of Lane Gorman Trubitt, L.L.P
**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
** Filed previously
+ 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.
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
II-5
<PAGE> 145
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-6
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment number 5 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Nashville, State of Tennessee, on April 6, 2000.
HEALTHSTREAM, INC.
By: /s/ ROBERT A. FRIST, JR.
------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
number 5 to the 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>
* Chief Executive Officer and April 6, 2000
- --------------------------------------------------- Chairman (principal
Robert A. Frist, Jr. executive officer)
* President and Director April 6, 2000
- ---------------------------------------------------
Jeffrey L. McLaren
* Chief Financial Officer and April 6, 2000
- --------------------------------------------------- Senior Vice President
Arthur E. Newman (principal financial and
accounting officer)
* Director April 6, 2000
- ---------------------------------------------------
Charles N. Martin, Jr.
* Director April 6, 2000
- ---------------------------------------------------
Thompson S. Dent
* Director April 6, 2000
- ---------------------------------------------------
M. Fazle Husain
* Director April 6, 2000
- ---------------------------------------------------
John H. Dayani, Sr., Ph.D
* Director April 6, 2000
- ---------------------------------------------------
James F. Daniell, M.D.
* Director April 6, 2000
- ---------------------------------------------------
William Stead, M.D.
*By: /s/ ROBERT A. FRIST, JR. April 6, 2000
-----------------------------------------------
Robert A. Frist, Jr.
Attorney-in-fact
</TABLE>
II-7
<PAGE> 147
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.
**2.2 -- Agreement and Plan of Merger, dated January 5, 2000, among
HealthStream, Inc., HealthStream Acquisition I, Inc., Quick
Study, Inc. and each shareholder of Quick Study, Inc.
**2.3 -- Asset Purchase Agreement, dated December 16, 1999, among
KnowledgeReview, LLC, Louis Bucelli and Maksim Repik, and
HealthStream, Inc.
**2.4 -- Agreement and Plan of Merger, dated January 25, 2000 among
HealthStream, Inc., HealthStream Acquisition II, Inc.,
Multimedia Marketing, Inc., and the stockholders of
Multimedia Marketing, Inc.
**2.5 -- Asset Purchase Agreement, dated January 27, 2000, between
Emergency Medicine Internetwork, 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 -- Amended and Restated Investors' Rights Agreement, dated
March 14, 2000, 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
**4.6 -- Warrant to purchase common stock of HealthStream, Inc.,
dated June 14, 1999, held by GE Medical Systems.
**4.7 -- Warrant to purchase common stock of HealthStream, Inc.,
dated February 11, 2000, held by Columbia Information
Systems.
**4.8 -- Common Stock Purchase Agreement between HealthStream, Inc.
and Healtheon/WebMD Corporation
**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 2000 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 HealthStream, Inc. and Duke University Medical
Center
**+10.11 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and The Cleveland Clinic Center for
Continuing Education
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <C> <S>
**+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.
**10.19 -- Courseware Development Agreement between HealthStream, Inc.
and e-Vitro, Inc.
**+10.20 -- Software Licensing and Distribution Agreement between
HealthStream, Inc. and Pointshare.
**+10.21 -- Content Licensing Agreement between HealthStream, Inc. and
American Health Consultants dated September 20, 1999.
**+10.22 -- Content Licensing Agreement between HealthStream, Inc. and
American Health Consultants dated January 6, 2000.
**+10.23 -- Continuing Education Distribution Agreement between
HealthStream, Inc. and the Mississippi State Medical
Association.
**+10.24 -- Joint Marketing and Distribution Agreement between
HealthStream, Inc. and the Medical Association of Georgia.
**+10.25 -- Online Services Agreement between HealthStream, Inc. and
Columbia Information Systems.
**+10.26 -- Software Licensing and Distribution Agreement between
HealthStream, Inc. and MedicaLogic, Inc.
**+10.27 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and Scripps Clinic
**+10.28 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and KnowledgeLinc, Inc.
**10.29 -- Letter of Agreement between HealthStream, Inc. and
Healtheon/WebMD Corporation.
**10.30 -- Form of Employee Stock Purchase Plan
**21.1 -- Subsidiaries of HealthStream, Inc.
*23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5.1)
*23.3 -- Consent of Lane Gorman Trubitt, L.L.P
**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
** Filed previously
+ 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 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 January 22, 2000, except for Note 12, as to which
the date is April 5, 2000, with respect to the financial statements of
HealthStream, Inc., and (2) our report dated September 17, 1999, with respect to
the financial statements of SilverPlatter Education, Inc., in Amendment No. 5 to
the Registration Statement (Form S-1 No. 333-88939) and related Prospectus of
HealthStream, Inc. for the registration of 5.75 million shares of its common
stock.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
April 5, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF LANE GORMAN TRUBITT, L.L.P.
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 14, 2000, with respect to the financial
statements of MultiMedia Marketing, Inc. d/b/a m3 The Healthcare Learning
Company included in the Registration Statement (Form S-1 No. 333-8839) of
HealthStream, Inc. for the registration of its common stock.
/s/ Lane Gorman Trubitt, L.L.P.
Dallas, Texas
April 3, 2000
