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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION NO. 333-8839
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
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TENNESSEE 8299 62-1443555
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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, and (Name, address, including zip code, and
telephone number, including area telephone number, including area code,
code, of of agent for service)
registrant's principal executive
offices)
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Copies to:
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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
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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. [ ]
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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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT TO PROPOSED PROPOSED
TITLE OF EACH CLASS OF BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE(1)(2)
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Common Stock, no par
value 5,750,000 $11.00 $63,250,000 $16,698
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(1) Determined pursuant to Rule 457(a) promulgated under the Securities Act of
1933.
(2) $15,985 of this fee was paid with our previous filing on October 13, 1999.
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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.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2000
(HEALTHSTREAM LOGO)
HEALTHSTREAM, INC.
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. We have
made application for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "HSTM." We anticipate that the initial public
offering price will be between $9.00 and $11.00 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to HealthStream, Inc............................... $ $
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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.
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ROBERTSON STEPHENS
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
E*OFFERING
THE DATE OF THIS PROSPECTUS IS , 2000.
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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.
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TABLE OF CONTENTS
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Summary..................................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 26
Management.................................................. 42
Transactions with Executive Officers, Directors and More
than Five Percent Shareholders............................ 49
Principal Shareholders...................................... 52
Description of Capital Stock................................ 54
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find More Information......................... 63
Index to Financial Statements............................... F-1
Appendix: "Meet the Management" Presentation................ A-1
{click here for "Meet the Management" Presentation}
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"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.
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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, Challenger Corporation and
American Health Consultants, we have amassed over 3,000 hours of training and
education courses. We currently distribute approximately 1,000 hours of these
courses online 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 Internet access to our courses
and education management software that will enable healthcare administrators to
configure, assess and manage training for employees in their organizations. This
method of providing access to and usage of our courses and software on a
transactional basis over the Internet is commonly referred to as providing
services 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 30 distribution
partners including MedicaLogic, GE Medical Systems, Pointshare, Medsite.com,
HealthGate and ChannelHealth (an IDX company). These distribution partners reach
our target audience directly through a variety of Web-based offerings.
THE MARKET OPPORTUNITY
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.
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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 net loss of $10.0 million on pro forma revenues of $7.2 million and an
accumulated deficit on a pro forma 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.
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THE OFFERING
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Common stock offered......................... 5,000,000 shares
Common stock to be outstanding after the
offering................................... 18,017,004 shares, or 18,767,004 shares if
the underwriters exercise their
over-allotment option in full. These shares
do not include 686,117 shares reserved for
issuance pursuant to options we may issue
under our stock option plans or 5,314,396
shares subject to warrants and outstanding
options issued under our stock option plans.
Use of proceeds.............................. The net proceeds from this offering (without
exercise of the over-allotment option) are
estimated to be approximately $46.3 million
and will be used for general corporate
purposes, including working capital, sales
and marketing expenses 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.
Proposed Nasdaq National Market symbol....... HSTM
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The number of shares of common stock to be outstanding after the offering
is estimated based on the number of shares outstanding as of January 31, 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; and
- reflects a 1.85 for 1 common stock split to be effected immediately prior
to the effective date of the registration statement of which this
prospectus is a part.
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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; and
- the issuance of our common stock in this offering as described in "Use of
Proceeds"
as if each of such transactions had occurred as of January 1, 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; and
- the issuance of our common stock in this offering as described in "Use of
Proceeds"
as if each of such transactions had occurred as of December 31, 1999.
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YEAR ENDED DECEMBER 31,
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PRO FORMA
AS ADJUSTED
1997 1998 1999 1999
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STATEMENT OF OPERATIONS DATA:
Revenues................................................ $1,268 $ 1,716 $ 2,568 $ 7,235
Loss from operations.................................... (771) (1,261) (4,560) (9,839)
Net loss................................................ (960) (1,590) (4,456) (9,781)
Basic and diluted loss per share........................ (0.29) (0.49) (1.19) (0.55)
Weighted average shares used in the calculation of basic
and diluted net loss per share........................ 3,256 3,256 3,757 17,633
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AS OF DECEMBER 31,
1999
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PRO FORMA
ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $13,632 $57,435
Working capital............................................. 11,465 55,439
Total assets................................................ 17,455 75,599
Long-term debt and capital leases, net of current portion... 186 186
Shareholders' equity........................................ 14,190 71,528
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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 and introduce desirable services and compelling content;
- establish and maintain strategic relationships with content and
distribution partners;
- establish and maintain relationships with sponsors and advertisers;
- respond effectively to competitive and technological developments; and
- further develop our infrastructure, including additional hardware and
software, customer support, personnel and facilities, to support our
business.
WE ARE COMPETING IN A NEW MARKET WHICH MAY NOT DEVELOP OR IN WHICH WE MAY FAIL
TO GAIN MARKET ACCEPTANCE.
The market for online 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. 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 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.
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WE MAY BE UNABLE TO MAINTAIN OUR EXISTING RELATIONSHIPS WITH OUR CONTENT
PROVIDERS OR TO BUILD NEW RELATIONSHIPS WITH OTHER CONTENT PROVIDERS.
Our success depends significantly on our ability to maintain our existing
relationships with the publishers and authors who provide training and
continuing education content for our library and our ability to build new
relationships with other content partners. Most of our agreements with
publishers and authors are 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, 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.
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. 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 our 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
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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 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 net loss of approximately $10.0 million. At
December 31, 1999, our accumulated deficit 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.
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As a result, we may never achieve or sustain profitability and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
WE MAY NOT BE ABLE TO MEET OUR STRATEGIC BUSINESS OBJECTIVES UNLESS WE OBTAIN
ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS OR AT
ALL.
The proceeds of this offering, 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 $12.5 million on a pro forma 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 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 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.
8
<PAGE> 12
RISKS RELATED TO OPERATIONS
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO INTEGRATE, OUR MANAGEMENT TEAM.
Our future performance will be substantially dependent on the continued
services of our management team and our ability to retain and motivate them. The
loss of the services of any of our officers or senior managers could harm our
business, as we may not be able to find suitable replacements. We do not have
long-term employment agreements with any of our key personnel, other than our
chief executive officer, and we do not maintain any "key person" life insurance
policies, except on our chief executive officer.
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.
9
<PAGE> 13
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS.
The risks posed by the Year 2000 problem could adversely affect our
business in a number of significant ways. We rely on third parties to provide
much of our software, hardware and Internet access. We have limited or no
control over the actions of these third-party suppliers. While we 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 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.
10
<PAGE> 14
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 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 54.1% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, beneficially own
54.1% of our outstanding common stock. These shareholders will be able to
significantly influence all matters requiring approval by our shareholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of our company and may
make some transactions more difficult or impossible to complete without the
support of these shareholders.
11
<PAGE> 15
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Tennessee corporate law and our charter and bylaws contain provisions that
could delay, defer or prevent a change in control of our company or our
management. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock. These
provisions:
- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors, without
prior shareholder approval, with rights senior to those of common stock;
- provide for a staggered board of directors, so that no more than three
directors could be replaced each year and it would take three successive
annual meetings to replace all directors;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
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
$6.84 per share in the pro forma net tangible book value of the common stock
from the assumed initial public offering price. If additional shares are sold by
the underwriters following exercise of their over-allotment option, or if
outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution. As a result of this dilution, common
shareholders purchasing stock in this offering may receive significantly less
than the full purchase price that they paid for the shares purchased in this
offering in the event of a liquidation.
APPROXIMATELY 13,017,004, OR 72.2%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, we will have outstanding 18,017,004 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. Of the remaining 13,017,004
shares of common stock outstanding after this offering, 10,731,204 shares will
be eligible for sale in the public market beginning 181 days after the date of
this prospectus. The remaining 2,285,800 shares will become available at various
times after the 181 days upon the expiration of one-year holding periods. For a
more complete discussion regarding when shares of our common stock will become
eligible for sale, see "Shares Eligible for Future Sale." We also plan to
register up to additional shares of our common stock after this
offering for issuance under our equity plans.
12
<PAGE> 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
13
<PAGE> 17
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock in this offering will be approximately $46.3 million, assuming an
initial public offering price of $10.00 per share (the midpoint of the range set
forth on the cover of this prospectus) 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
will be approximately $53.2 million.
We plan to use the net proceeds of this offering for general corporate
purposes, including for working capital and sales and marketing initiatives. We
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 $62,000 and
$50,000, interest is payable at 7.0% and a variable rate, which was 8.75% at
December 31, 1999, and are due on July 1, 2000 and on demand, respectively. We
may use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, services, content 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, we cannot specify with certainty
the particular uses for the net proceeds to be received upon the completion of
the offering. Accordingly, our management will have broad discretion in applying
the net proceeds.
Pending such uses of the net proceeds as discussed above, we plan to invest
the net proceeds of this offering in short-term, interest-bearing, investment
grade securities, certificates of deposit or direct or guaranteed obligations of
the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently plan to retain future earnings, if any, to finance the growth and
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. We may incur indebtedness in the future which may
prohibit or effectively restrict the payment of dividends, although we have no
current plans to do so. Any future determination to pay cash dividends will be
at the discretion of our board of directors.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to (1) the issuance of 818,036 shares
of 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; (2) the issuance of 269,902 shares of
common stock and the payment of $640,000 in cash in connection with the
acquisition of EMInet; (3) the issuance of 61,397 shares of 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 (4)
the issuance of 17,343 shares of 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 (1) the
conversion of $1,293,000 of notes payable-related party into 129,300
shares of series B preferred stock and subsequent conversion into 553,712
shares of common stock upon completion of this offering; (2) the
conversion of outstanding shares of preferred stock into 7,131,153 shares
of common stock upon completion of this offering; (3) the sale of
5,000,000 shares of common stock in this offering at an assumed initial
public offering price of $10.00 per share (the midpoint of the range set
forth on the cover of this prospectus) and the application of the net
proceeds after deducting underwriting discounts and commissions and
estimated offering costs; and (4) the repayment of $1.3 million in debt
assumed in connection with the acquisitions of m3 the Healthcare Learning
Company and Quick Study.
<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 $12,461 $ 57,435
======= ======= ========
Notes payable, note payable-related party, long-term
debt-related party and capital lease obligations.......... $ 1,582 $ 2,874 $ 304
------- ------- --------
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized;
issued and outstanding: 4,165,461 shares, actual,
5,332,142 shares pro forma and 18,017,004 shares pro
forma as adjusted...................................... 4,009 14,099 80,519
Preferred stock, no par value; 5,000,000 shares
authorized............................................. -- -- --
Series A convertible preferred stock, issued and
outstanding: 76,000 shares actual, 76,000 shares pro
forma and 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 71,528
------- ------- --------
Total capitalization...................................... $15,772 $27,154 $ 71,832
======= ======= ========
</TABLE>
This table excludes the following shares, as of February 11, 2000:
- 2,886,795 shares of common stock issuable upon the exercise of
outstanding stock options with a weighted average exercise price of $3.62
per share;
- 686,117 additional shares reserved for issuance under our stock option
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.
15
<PAGE> 19
DILUTION
Purchasers of the common stock offered by this prospectus will suffer an
immediate and substantial dilution in the net tangible book value per share.
Dilution is the amount by which the initial public offering price paid by the
purchasers of the shares of common stock will exceed the net tangible book value
per share of common stock after the offering. As of 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 $9.7 million, or $1.81 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 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 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 $56.9 million,
or $3.16 per share. This represents an immediate increase in pro forma net
tangible book value to existing shareholders of $1.35 per share and an immediate
dilution of $6.84 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.81
Increase per share attributable to new investors.......... 1.35
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.16
------
Dilution per share to new investors......................... $ 6.84
======
</TABLE>
The following table summarizes, on a pro forma basis as adjusted 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, and
-- new investors purchasing shares in this offering at an assumed
initial offering price of $10.00 per share (the midpoint of the
range set forth on the cover of this prospectus), and before
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED
OR CONVERTED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 4,165,461 23.12% $ 4,008,991 4.74% $ 0.96
Converting preferred shareholders.......... 7,684,865 42.65 20,465,060 24.20 2.66
Shares issued in connection with
acquisitions............................. 1,166,678 6.48 10,090,200 11.93 8.65
New investors.............................. 5,000,000 27.75 50,000,000 59.13 10.00
---------- ----- ----------- -----
Total................................. 18,017,004 100% $84,564,251 100%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of February 11,
2000, there were options and warrants outstanding to purchase 5,314,396 shares
of common stock at a weighted average exercise price of $5.10 per share. If any
of these options or warrants are exercised, there may be further dilution to new
investors.
16
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus. The selected statement of operations data
presented below for the three-year period ended December 31, 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 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, m3 the Healthcare Learning Company and Quick Study 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>
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<PAGE> 21
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 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 percent 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
18
<PAGE> 22
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
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;
- Quick Study, which owns over 60 web-based hours of nursing and OSHA
content, primarily dialysis-related;
- 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; and
- EMInet, which provides Web-based educational content for emergency
medical services personnel.
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.
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.
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. 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.
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<PAGE> 23
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.
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 $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.
20
<PAGE> 24
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.
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 a related party and, to a
lesser extent, from revenues generated from custom development fees and product
sales.
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<PAGE> 25
Net cash used in operating activities was $872,000, $1.2 million and $3.3
million for the years ended December 31, 1997, 1998 and 1999, respectively. 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, $209,000 and $1.5
million for the years ended December 31, 1997, 1998 and 1999, respectively. 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, $1.4 million and
$18.4 million for the years ended December 31, 1997, 1998 and 1999,
respectively. 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.
We 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 more than double during 2000.
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.
We believe that the net proceeds from this offering, 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.
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<PAGE> 26
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 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.
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<PAGE> 27
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.
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
24
<PAGE> 28
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.
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<PAGE> 29
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, Challenger Corporation and
American Health Consultants, we have amassed over 3,000 hours of training and
education courses. We currently distribute approximately 1,000 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 Internet access to our courses and education
management software that will enable healthcare organization administrators to
configure, assess and manage training for employees in their organizations.
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 30 distribution partners including MedicaLogic, GE Medical
Systems, Pointshare, Medsite.com, HealthGate and ChannelHealth (an IDX company).
These distribution partners reach our target audience directly through a variety
of Web-based offerings.
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. The
healthcare industry spends approximately $6.0 billion annually on ongoing
training and continuing education, including over $3.0 billion on CEU for nurses
and CME for physicians. According to a recent study, 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.
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Regulations administered by various state and Federal agencies require
ongoing training and continuing education for healthcare professionals and other
healthcare workers. Ongoing training and 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
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alternative to traditional broadcast and print media, enabling content providers
to aggregate vast amounts of information and to organize and deliver that
information in a personalized, easy-to-use and cost-effective manner. As
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.
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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, Challenger Corporation 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 such as Vanderbilt University Medical
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Center, Duke University Medical Center, The Cleveland Clinic Foundation, Scripps
Clinic, KnowledgeLinc, Challenger Corporation and American Health Consultants.
Our relationships with these organizations will allow our distribution partners
to distinguish themselves from their competitors by providing high quality
continuing education and training content.
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. 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
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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 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 recently completed acquisition of SilverPlatter
Education, a provider of CD-ROM and online continuing medical education for
physicians, 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 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 as well as 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.
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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
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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 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.
EMInet. In January 2000, we acquired 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.
Quick Study. 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. This
courseware is currently distributed through 35 systems installed by QuickStudy.
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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.
RELATIONSHIPS AND ACQUISITIONS RELATING TO SERVICES PROVIDED THROUGH OUR WEB
DISTRIBUTION NETWORK
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 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 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 49,203 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.
Challenger Corporation. In December 1998, we signed a two-year 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.
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
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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 $4.47 per share.
Distribution
cmesearch.com. 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, 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.
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 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
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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 three person marketing team in building brand awareness, especially
via concept advertisements aimed at larger healthcare organizations. The
campaign will consist of advertising in trade journals and industry
publications, Web advertising, direct mail, trade show attendance and new
marketing materials. In keeping with our existing strategy, we will focus on
leveraging our marketing efforts through co-branding arrangements with our
distribution partners.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe our ability to establish and maintain long-term customer
relationships and high adoption and recurrence rates in part depends upon the
strength of our customer service and operations team. Our customer service team
consists of two customer service managers located in our headquarters. We
provide customer support to end users through our toll-free phone line. In
addition, we provide live chat support to end users through a third-party online
technical support and sales service. A representative of this outsourced service
is available 24 hours a day to provide technical support to end users who are
registering for or taking online continuing education courses. By providing live
chat support we reach those customers who, while connected to the Internet,
cannot place a support call on their one phone line. These representatives are
trained to understand our philosophy and corporate culture and our specific
sales, marketing and support issues.
TECHNOLOGY INFRASTRUCTURE
Our technology infrastructure is based on an open architecture designed to
be secure, reliable and expandable. Our software is a combination of proprietary
applications, third party database software and operating systems that supports
acquisition and conversion of content, management of that content, publication
of our Web sites, downloads of courseware, registration and tracking of users
and reporting of information for both internal and external use. We have
designed this infrastructure to allow each component to be independently scaled,
usually by purchasing additional readily-available hardware and software
components.
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.
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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.
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.
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- 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 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
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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 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.
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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. 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 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 February 14, 2000, we employed approximately 140 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
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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
We are not a party to any material legal proceedings.
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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
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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 January 2000. 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 April 1991 to August 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
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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 2000. Messrs. Dayani and
McLaren will be Class II directors whose
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terms will expire at the annual meeting of shareholders in 2001. Messrs. Frist,
Husain and Martin will be Class III directors whose terms will expire at the
annual meeting of shareholders in 2002.
BOARD COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee will review accounting practices and procedures and the
scope of the audit and will recommend the appointment of the independent
auditors. The members of the audit committee are Messrs. 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.
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.
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 other 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>
45
<PAGE> 49
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>
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 2,966,250 863,175
Michael Pote............................... 3,700 131,165 34,750 863,175
</TABLE>
- ---------------
(1) Based on an assumed initial public offering price of $10.00 per share (the
mid-point of the range set forth on the cover of this prospectus), 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 one of our other executive
officers.
STOCK PLANS
1994 Stock Option Plan. We adopted the 1994 Stock Option Plan in April
1994. The purpose of the plan is to attract, retain and reward our directors,
officers, key employees and consultants by offering performance-based equity
interests in our company. The plan provides for grants of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and non-qualified stock options. Our board of directors and
shareholders authorized a total of 4,000,000 shares of common stock for issuance
under this plan. Upon completion of this offering, no further awards of stock
options will be granted under the 1994 plan.
46
<PAGE> 50
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.
2000 Stock Incentive Plan. The 2000 Stock Incentive Plan was adopted by
our board of directors on , 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 shares of common stock.
However, no individual may receive options to purchase more than 200,000 shares
of common stock in any fiscal year. Whenever a share of common stock underlying
a stock option is no longer subject to that option, that share of common stock
shall again be available for distribution under the plan.
This plan will be administered by the compensation committee of the board
of directors. The compensation committee will have the authority to:
- select the individuals who may receive the grant for the options;
- determine the number of shares to be covered by each option or other
awards to be granted; and
- determine the terms and conditions of the option, including the exercise
price, vesting schedule and any restrictions or limitations on the
options.
Grants under the plan may consist of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, non-qualified stock options that are not
intended to so qualify, stock appreciation rights, restricted stock or other
stock-based awards. Grants can be made to any key employee, consultant and
non-employee director. Incentive stock options may only be granted to our
employees.
The option price for each share of common stock underlying an incentive
stock option shall be at least 100% of the fair market value of the stock at the
date of grant. The option price for non-qualified 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
47
<PAGE> 51
of restricted stock can be issued alone, in addition to or with other awards
granted under the plan. The committee can place limitations on the sale or
transfer of the restricted stock. Other stock-based awards can be granted by the
committee in its discretion. Except for specific grants set forth in the plan,
outside directors are not entitled to any awards under the plan. See
"Management -- Director Compensation."
The compensation committee can adjust the number of shares reserved for
issuance under the plan if there is a merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure. If there is a change in control, any
awarded option shall become fully exercisable and vested. This change of control
can occur if any person or entity acquires more than 50% of the voting power of
our capital stock or if our existing shareholders hold less than fifty percent
of our outstanding securities after a cash tender or exchange offer, merger or
other business combination, sale of assets or contested election of directors.
EMPLOYMENT 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.
48
<PAGE> 52
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.
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;
- 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;
- 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;
49
<PAGE> 53
- 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;
- 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.
50
<PAGE> 54
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 and $6.49 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 and 0 to Robert A. Frist, Jr., our chief executive
officer and chairman;
- 47,915, 0, 83,250 and 0 to Jeffrey L. McLaren, our president, chief
product officer and one of our directors;
- 0, 0, 0, and 129,500 to Arthur E. Newman, our senior vice president and
chief financial officer;
- 47,915, 0, 83,250 and 0 to Michael Pote, our senior vice president;
- 47,915, 0, 74,000 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 and 0 to Robert H. Laird, Jr., our vice president,
general counsel and secretary;
- 23,957, 11,978, 74,000 and 0 to Stephen Clemens, our vice president of
interactive development;
- 0, 0, 0, and 26,825 to Susan A. Brownie, our vice president of finance
and corporate controller;
- 11,978, 0, 7,400 and 0 to John Dayani, Jr., one of our employees and son
of one of our directors;
- 3,700, 0, 14,800 and 0 to Thompson S. Dent, one of our directors;
- 3,700, 2,775, 14,800 and 0 to James F. Daniell, M.D., one of our
directors;
- 3,700, 0, 14,800 and 0 to John H. Dayani, Sr., Ph.D., one of our
directors;
- 3,700, 0, 14,800 and 0 to William Stead, M.D., one of our directors;
- 0, 0, 14,800 and 0 to M. Fazle Husain, one of our directors; and
- 0, 0, 14,800 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 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.
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.
51
<PAGE> 55
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of January 31, 2000 and as adjusted to reflect
the sale of the shares of common stock offered in this offering by: (1) each
shareholder who owns beneficially more than 5% of our common stock, (2) each of
our executive officers and directors and (3) all of our executive officers and
directors as a group. The address of all the beneficial owners, unless otherwise
stated, is 209 10th Avenue South, Suite 450, Nashville, Tennessee 37203.
The ownership percentage in the table below is based on 13,017,004 shares
outstanding on January 31, 2000, on an as if converted basis, and 18,017,004
shares outstanding after this offering. Shares of common stock subject to
options that are currently exercisable or that will become exercisable within 60
days after January 31, 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 38.99% 28.17%
Entities Associated with Morgan Stanley........ 1,138,943(2) -- 8.75 6.32
1221 Avenue of the Americas
New York, New York 10020
Martin Investment Partnership III(3)........... 854,204 -- 6.56 4.74
20 Burton Hills Boulevard
Suite 100
Nashville, Tennessee 37215
HealthStream Partners(4)....................... 738,039 -- 5.67 4.10
900-A, 3319 West End Avenue
Nashville, Tennessee 37203
Entities associated with The General Electric
Company...................................... 673,270 245,032 5.17 3.74
120 Long Ridge Rd.
Stamford, CT 06927
Jeffrey L. McLaren............................. 367,776(5) 148,714 2.83 2.04
Arthur E. Newman............................... -- -- -- --
Michael Pote................................... 88,294(6) 27,657 * *
Scott Portis................................... 489,321(7) 105,242 3.76 2.72
Stephen Clemens................................ 11,978 11,978 * *
Robert H. Laird, Jr............................ 23,957 23,957 * *
Susan A. Brownie............................... -- -- -- --
Charles N. Martin, Jr.......................... 869,004(8) 14,800 6.68 4.82
Thompson S. Dent............................... 73,589(9) 22,200 * *
M. Fazle Husain................................ 1,153,743(10) 14,800 8.86 6.40
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 18,500 * *
All executive officers and directors as a group
(14 persons)................................. 8,328,883 745,825 63.98 46.23
</TABLE>
- ---------------
* Less than one percent
52
<PAGE> 56
(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) 17,221 of these shares are held by Dan McLaren, father of Jeffrey McLaren.
(6) 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.
(7) 28,473 of these shares are held by Dr. Scott Portis, father of Scott
Portis.
(8) 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.
(9) 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.
(10) 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.
53
<PAGE> 57
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 February 11, 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 December 31,
1999, there were 4,165,461 shares of common stock outstanding held of record by
eight shareholders, 76,000 shares of series A preferred stock outstanding held
of record by five shareholders, 1,228,801 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 the common stock are entitled to receive, as, when and if
declared by the board of directors, dividends and other distributions in cash,
stock or property from our assets or funds legally available for those purposes
subject to any dividend preferences that may be attributable to preferred stock.
Holders of common stock are entitled to one vote for each share held of record
on all matters on which shareholders may vote. Holders of common stock are not
entitled to cumulative voting for the election of directors. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution.
PREFERRED STOCK
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 10,000,000 shares of preferred stock, as of
February 11, 2000. Prior to consummation of this offering, there were 1,932,207
shares of preferred stock outstanding. All of these shares will be converted
into shares of common stock upon consummation of the offering. Currently, we
have no plans to issue a new series of preferred stock. Our board of directors
may, without shareholder approval, issue preferred stock with dividend rates,
redemption prices, preferences on liquidation or dissolution, conversion rights,
voting rights and any other preferences, which rights and preferences could
adversely affect the voting power of the holders of common stock. Issuances of
preferred stock could make it harder for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
common stock.
REGISTRATION RIGHTS
After the consummation of the offering, the holders of 7,684,864 shares of
common stock issuable upon conversion of the preferred stock will have
registration rights with respect to those securities. These rights are described
in an investors rights agreement between us and the holders of those securities.
The agreement provides, in some instances, 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 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 13,017,004,
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<PAGE> 58
or 72.2%, 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
The charter states that shareholders may not take action by written
consent, but only at duly called annual or special meetings of shareholders. The
charter also provides that special meetings of shareholders may be called only
by the chairman of the board of directors or a majority of the board of
directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The bylaws provide that shareholders who want to bring business before an
annual meeting of shareholders, or to nominate candidates for election as
directors at an annual meeting of shareholders, must provide timely notice in
writing. To be timely, a shareholders's notice must be delivered to or mailed
and received at our principal executive offices at least 120 days 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.
The 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.
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<PAGE> 59
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.
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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 and
officers in addition to the indemnification provided in our charter and bylaws.
These agreements, among other things, indemnify our directors and officers for
some expenses, including attorneys' fees and associated legal expenses,
judgments and fines and amounts paid in settlement, actually and reasonably
incurred by any of these persons in any action, suit or proceeding arising out
of the person's services as our director or officer. We believe that these
provisions and agreements are necessary to attract and retain qualified
directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is SunTrust Bank,
Atlanta. Its address is P.O. Box 4625, Atlanta, Georgia 30302, and its telephone
number at this location is (414) 588-7622.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering, 18,017,004 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. The remaining shares of common
stock held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares of common stock
are aggregated, including persons who may be deemed our affiliates, who has
beneficially owned shares of our common stock for at least one year is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 180,000 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, is entitled to
sell the shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants, 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 shareholders will sign lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of FleetBoston Robertson Stephens Inc.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 7,684,864 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. See "Description of
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Capital Stock -- Registration Rights" for a description of these registration
rights. After the registration, these shares will become freely tradable without
restriction under the Securities Act. Any sales of securities by these
shareholders could have a material adverse effect on the trading price of our
common stock.
STOCK OPTIONS
Immediately after this offering we plan to file a registration statement
under the Securities Act covering shares of common stock reserved for
issuance under our stock option plans. As of January 31, 2000, options to
purchase 2,886,795 shares of common stock were issued and outstanding. When the
lock-up agreements described above expire, at least 1,452,231 shares of common
stock will be subject to vested options (based on options outstanding as of
January 31, 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.
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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 OF
UNDERWRITERS 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 of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of the proceeds to be received by us as
set forth on the cover page of this prospectus. The common stock is offered by
the underwriters as stated 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.
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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 shareholders will agree, for
180 days after the effective date of this prospectus, subject to specified
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock
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
We have made application to list our common stock on the Nasdaq National
Market under the symbol "HSTM."
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or purchase
of common stock on behalf of the underwriters 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
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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.
Other than the prospectus in electronic format, the information that is
identified as being a part of the prospectus and any other information that
references HealthStream, the information on E*OFFERING Corp.'s Web site and any
information provided in any other Web site maintained by E*OFFERING Corp. is not
part of this prospectus and has not been approved or endorsed by HealthStream
and should not be relied upon by prospectus investors.
J.C. Bradford & Co., one of the underwriters, acted as our financial
advisor in connection with the issuance of our series B preferred stock in
April, May and August 1999. J.C. Bradford & Co. received customary fees and
expenses in connection with these private placements paid in the form of our
series B preferred stock. Including the shares received by J.C. Bradford & Co.
as payment for its acting as our financial advisor, J.C. Bradford & Co. and
affiliates of J.C. Bradford & Co. collectively own shares of our preferred stock
representing 435,641 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.
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LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. The
underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
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, (2) the financial statements of Quick Study,
Inc. at December 31, 1998 and 1999, and for each of the two years in the period
ended December 31, 1999, and (3) 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've
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've
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.
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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 QUICK STUDY, INC.
Years ended December 31, 1998 and 1999
Report of Independent Auditors.............................. 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
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-50
Balance Sheets.............................................. F-51
Statements of Operations.................................... F-52
Statements of Stockholders' Deficit......................... F-53
Statements of Cash Flows.................................... F-54
Notes to Financial Statements............................... F-55
</TABLE>
F-1
<PAGE> 68
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; and (vii) the issuance of our common stock in this offering at an
assumed initial offering price of $10.00 per share as described in "Use of
Proceeds", net of offering costs of approximately $4.0 million of which $295,000
have already been paid; and (viii) the repayment of $1,276,708 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 at an
assumed initial offering price of $10.00 per share as described in "Use of
Proceeds," net of offering costs of approximately $4.0 million as if the
offering 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> 69
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 $ 438,156 $(1,609,000) $12,461,300 $ 44,973,292 $57,434,592
Accounts receivable, less
allowance for doubtful
accounts..................... 544,042 973,139 -- 1,517,181 -- 1,517,181
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 1,415,719 (1,609,000) 14,351,362 44,973,292 59,324,654
Property and equipment, net..... 1,333,901 115,905 -- 1,449,806 -- 1,449,806
Intangible assets, net.......... 1,134,673 -- 13,475,030 14,609,703 -- 14,609,703
Other assets.................... 441,488 68,190 -- 509,678 (295,000) 214,678
----------- ----------- ----------- ----------- ------------ -----------
Total assets............. $17,454,705 $ 1,599,814 $11,866,030 $30,920,549 $ 44,678,292 $75,598,841
=========== =========== =========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 443,455 $ 151,491 $ -- $ 594,946 $ -- $ 594,946
Accrued liabilities............ 448,727 281,846 -- 730,573 -- 730,573
Deferred revenue............... 791,424 1,650,187 -- 2,441,611 -- 2,441,611
Current portion of notes
payable...................... -- 50,000 -- 50,000 (50,000) --
Notes payable -- related
party........................ 1,293,000 2,194,218 (2,178,806) 1,308,412 (1,293,000) 15,412
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 -- -- 89,881 -- 89,881
----------- ----------- ----------- ----------- ------------ -----------
Total current
liabilities............ 3,079,379 4,389,742 (2,178,806) 5,290,315 (1,405,000) 3,885,315
Capital lease obligation, less
current portion................ 185,801 -- -- 185,801 -- 185,801
Long-term notes payable, less
current portion................ -- 1,164,708 -- 1,164,708 (1,164,708) --
Shareholders' equity (deficit):
Common stock................... 4,008,991 429,096 10,090,200 14,099,191 20,465,060 80,519,251
(429,096) (295,000)
46,250,000
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) (6,343,717) 6,343,717 (8,949,836) -- (8,949,836)
----------- ----------- ----------- ----------- ------------ -----------
Total shareholders' equity
(deficit)...................... 14,189,525 (3,954,636) 14,044,836 24,279,725 47,248,000 71,527,725
----------- ----------- ----------- ----------- ------------ -----------
$17,454,705 $ 1,599,814 $11,866,030 $30,920,549 $ 44,678,292 $75,598,841
=========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
F-3
<PAGE> 70
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 $ 25,264 $ 8,594 $ -- $ 438,156
Accounts receivable, less allowance for doubtful
accounts......................................... 911,765 32,289 28,635 450 973,139
Accounts receivable - unbilled..................... -- -- -- -- --
Prepaid and other assets........................... 4,318 -- 106 -- 4,424
----------- --------- ----------- ------- -----------
Total current assets......................... 1,320,381 57,553 37,335 450 1,415,719
Property and equipment, net......................... 45,544 50,335 20,026 -- 115,905
Intangible assets................................... -- -- -- -- --
Other assets........................................ 62,786 -- 5,404 -- 68,190
----------- --------- ----------- ------- -----------
Total assets................................. $ 1,428,711 $ 107,888 $ 62,765 $ 450 $ 1,599,814
=========== ========= =========== ======= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 60,162 $ 34,714 $ 56,615 $ -- $ 151,491
Accrued liabilities................................ 273,222 -- 8,624 -- 281,846
Deferred revenue................................... 1,276,505 368,072 5,610 -- 1,650,187
Current portion of notes payable................... -- -- 50,000 -- 50,000
Notes payable - related party...................... -- 11,069 2,178,806 4,343 2,194,218
Current portion of long-term debt - related
party............................................ -- -- 62,000 -- 62,000
Current portion of capital lease obligation........ -- -- -- -- --
----------- --------- ----------- ------- -----------
Total current liabilities.................... 1,609,889 413,855 2,361,655 4,343 4,389,742
Capital lease obligation, less current portion...... -- -- -- -- --
Long-term notes payable, less current portion....... 1,164,708 -- -- -- 1,164,708
Shareholders' equity (deficit):
Common Stock....................................... 52,637 302,559 73,900 -- 429,096
Additional paid-in capital......................... 1,959,985 -- -- -- 1,959,985
Preferred stock.................................... -- -- -- -- --
Accumulated deficit................................ (3,358,508) (608,526) (2,372,790) (3,893) (6,343,717)
----------- --------- ----------- ------- -----------
Total shareholders' equity (deficit)......... (1,345,886) (305,967) (2,298,890) (3,893) (3,954,636)
----------- --------- ----------- ------- -----------
$ 1,428,711 $ 107,888 $ 62,765 $ 450 $ 1,599,814
=========== ========= =========== ======= ===========
</TABLE>
F-4
<PAGE> 71
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 3,280,255 710,084 463,893 13,475,030
Other assets................................ -- -- -- -- --
----------- ----------- ----------- --------- -----------
Total assets......................... $ 8,420,798 $ 2,640,255 $ 651,084 $ 153,893 $11,866,030
=========== =========== =========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........................... $ -- $ -- $ -- $ -- $ --
Accrued liabilities........................ -- -- -- -- --
Deferred revenue........................... -- -- -- -- --
Notes payable - related party.............. -- -- (2,178,806) -- (2,178,806)
Current portion of long-term debt - related
party.................................... -- -- -- -- --
Current portion of capital lease
obligation............................... -- -- -- -- --
----------- ----------- ----------- --------- -----------
Total current liabilities............ -- -- (2,178,806) -- (2,178,806)
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) (302,559) (73,900) -- (429,096)
Additional paid-in capital................. (1,959,985) -- -- -- (1,959,985)
Preferred stock............................ -- -- -- -- --
Accumulated deficit........................ 3,358,508 608,526 2,372,790 3,893 6,343,717
----------- ----------- ----------- --------- -----------
Total shareholders' equity
(deficit).......................... 8,420,798 2,640,255 2,829,890 153,893 14,044,836
----------- ----------- ----------- --------- -----------
$ 8,420,798 $ 2,640,255 $ 651,084 $ 153,893 $11,866,030
=========== =========== =========== ========= ===========
</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.
(b) Reflects the elimination of 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> 72
HEALTHSTREAM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET -- (CONTINUED)
(3) Reflects the conversion, upon completion of the 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 $10.00 per share and the application of the
estimated net proceeds of $46,250,000, 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> 73
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 $4,667,234 $ -- $ 7,235,102 $ -- $ 7,235,102
Operating costs and
expenses:
Cost of revenues.......... 2,119,127 784,270 -- 2,903,397 -- 2,903,397
Product development....... 2,037,272 1,277 -- 2,038,549 -- 2,038,549
Selling, general and
administrative
expenses................ 2,971,408 4,607,865 4,553,042 12,132,315 -- 12,132,315
----------- ---------- ----------- ------------ ---------- ------------
Total operating
costs and
expenses.......... 7,127,807 5,393,412 4,553,042 17,074,261 -- 17,074,261
----------- ---------- ----------- ------------ ---------- ------------
Loss from operations........ (4,559,939) (726,178) (4,553,042) (9,839,159) -- (9,839,159)
Other income (expense),
net....................... 103,535 (237,939) -- (134,404) 193,059(d) 58,655
----------- ---------- ----------- ------------ ---------- ------------
Net loss.................... $(4,456,404) $ (964,117) $(4,553,042) $ (9,973,563) $ 193,059 $ (9,780,504)
=========== ========== =========== ============ ========== ============
Net loss per share:
Basic..................... $ (1.19) $ (2.02) $ (0.55)
=========== ============ ============
Diluted................... $ (1.19) $ (2.02) $ (0.55)
=========== ============ ============
Weighted average number of
common shares:
Basic..................... 3,756,556 1,191,279(c) 4,947,835 12,684,864(e) 17,632,699
=========== =========== ============ ========== ============
Diluted................... 3,756,556 1,191,279(c) 4,947,835 12,684,864(e) 17,632,699
=========== =========== ============ ========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed statement of operations.
F-7
<PAGE> 74
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 LLC, EMInet, Inc.
and Quick Study, Inc., 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 $308,453 $ 192,076 $ 450 $4,667,234
Operating costs and expenses:
Cost of revenues............. 350,988 237,620 181,347 14,315 -- 784,270
Product development.......... -- -- -- -- 1,277 1,277
Selling, general and
administrative expenses.... 504,796 3,425,970 143,179 530,854 3,066 4,607,865
-------- ---------- -------- --------- ------- ----------
Total operating costs and
expenses............... 855,784 3,663,590 324,526 545,169 4,343 5,393,412
-------- ---------- -------- --------- ------- ----------
Loss from operations............. (19,937) (333,182) (16,073) (353,093) (3,893) (726,178)
Other income (expense), net...... -- (113,716) -- (124,223) -- (237,939)
-------- ---------- -------- --------- ------- ----------
Net loss......................... $(19,937) $ (446,898) $(16,073) $(477,316) $(3,893) $ (964,117)
======== ========== ======== ========= ======= ==========
</TABLE>
F-8
<PAGE> 75
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) 1,103,485 (4) 240,700 (5) 154,631(6) 4,553,042
--------- ----------- ----------- --------- --------- -----------
Total operating
costs and
expenses.......... 182,493 2,898,797 1,100,944 216,177 154,631 4,553,042
--------- ----------- ----------- --------- --------- -----------
Loss from operations........ (182,493) (2,898,797) (1,100,944) (216,177) (154,631) (4,553,042)
Other income (expense),
net....................... -- -- -- -- -- --
--------- ----------- ----------- --------- --------- -----------
Net loss.................... $(182,493) $(2,898,797) $(1,100,944) $(216,177) $(154,631) $(4,553,042)
========= =========== =========== ========= ========= ===========
</TABLE>
- ---------------
(1) Reflects the elimination of historical depreciation and amortization for
each entity.
(2) SilverPlatter 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 5 year life.
(3) m3 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 5 year life.
(4) EMInet pro forma entries reflect amortization of goodwill of $3,280,255 over
a three year life for a full year and depreciation of fair value of fixed
assets of $50,335 over an average 5 year life.
(5) Quick Study, Inc. 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 5 year life.
(6) KnowledgeReview LLC pro forma entries reflect amortization of goodwill of
$463,893 over a three year life for a full year.
F-9
<PAGE> 76
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.
(d) Reflects the elimination of the historical interest expense on
related-party debt converted to series B preferred stock upon
completion of the 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 the offering.
(e) Reflects (i) the conversion of series A, B and C preferred stock into
7,684,864 shares of our common stock; and (ii) the sale of 5,000,000
shares of our common stock in this offering.
F-10
<PAGE> 77
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 February 11, 2000
F-11
<PAGE> 78
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>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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 2.85
========= ========= =========
Exercisable at end of period...... 1,170,639 0.57 1,196,539 0.61 892,477 1.08
========= ========= =========
</TABLE>
F-23
<PAGE> 90
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 2.85 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> 91
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
F-25
<PAGE> 92
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-26
<PAGE> 93
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively, of Common Stock to effect the conversion of the Series A, B and C
Convertible Preferred Stock.
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. 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. 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 $3.2 million consisting of $2.3 million (269,902 shares) of
the Company's Common Stock and the payment of
F-27
<PAGE> 94
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$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 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..................................................... $ (2.02)
Diluted................................................... $ (2.02)
</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 increased the authorized common shares
outstanding to 75 million shares and the preferred shares to 10 million. In
addition, the Board approved 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.
F-28
<PAGE> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Quick Study, Inc.,
We have audited the accompanying balance sheets of Quick Study, Inc., as of
December 31, 1998 and 1999, 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 Quick Study, Inc. at
December 31, 1998 and 1999, 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
January 22, 2000
F-40
<PAGE> 107
QUICK STUDY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,676 $ 8,594
Accounts receivable, less allowance for doubtful accounts
of $0 in 1998 and 1999................................. 19,631 28,635
Other current assets...................................... 106 106
----------- -----------
Total current assets.............................. 23,413 37,335
Property and equipment:
Equipment................................................. 87,058 87,198
Furniture and fixtures.................................... 27,653 25,979
----------- -----------
114,711 113,177
Less accumulated depreciation............................. 69,712 93,151
----------- -----------
44,999 20,026
Other assets.............................................. 5,404 5,404
----------- -----------
Total assets...................................... $ 73,816 $ 62,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit............................................ 50,000 50,000
Accounts payable and accrued liabilities.................. 50,163 56,615
Deferred revenue.......................................... -- 5,610
Accrued interest -- related parties....................... 4,284 8,624
Due to shareholders and other related parties............. 1,728,943 2,178,806
Note payable -- related parties........................... 62,000 62,000
----------- -----------
Total current liabilities......................... 1,895,390 2,361,655
Stockholders' deficit:
Common stock, no par value;
750,000 and 12,000,000 shares authorized at December
31, 1998 and 1999, respectively, 677,340 shares issued
and outstanding at December 31, 1998 and 1999......... 73,900 73,900
Accumulated deficit....................................... (1,895,474) (2,372,790)
----------- -----------
Total stockholders' deficit....................... (1,821,574) (2,298,890)
----------- -----------
Total liabilities and stockholders' deficit....... $ 73,816 $ 62,765
=========== ===========
</TABLE>
See accompanying notes.
F-41
<PAGE> 108
QUICK STUDY, INC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Revenues.................................................... $ 173,556 $ 192,076
Operating costs and expenses:
Cost of revenue........................................... 26,951 14,315
Selling, general and administrative expenses.............. 769,180 530,854
--------- ---------
Total operating costs and expenses................ 796,131 545,169
--------- ---------
Loss from operations...................................... (622,575) (353,093)
Interest expense:
Interest expense -- related parties and shareholders...... 140,128 118,057
Interest expense.......................................... 6,166 6,166
--------- ---------
146,294 124,223
--------- ---------
Net loss.................................................... $(768,869) $(477,316)
========= =========
</TABLE>
See accompanying notes.
F-42
<PAGE> 109
QUICK STUDY, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997....................... 607,500 $66,212 $(1,126,605) $(1,060,393)
Repurchase of common stock....................... (5,160) (562) -- (562)
Exercise of stock options........................ 75,000 8,250 -- 8,250
Net loss......................................... -- -- (768,869) (768,869)
------- ------- ----------- -----------
Balance at December 31, 1998....................... 677,340 73,900 (1,895,474) (1,821,574)
Net loss......................................... -- -- (477,316) (477,316)
------- ------- ----------- -----------
Balance at December 31, 1999....................... 677,340 $73,900 $(2,372,790) $(2,298,890)
======= ======= =========== ===========
</TABLE>
See accompanying notes.
F-43
<PAGE> 110
QUICK STUDY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(768,869) $(477,316)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 27,005 24,523
Loss on disposal of property and equipment................ -- 590
Deferred salary to shareholders........................... 217,800 195,600
Changes in operating assets and liabilities:
Accounts receivable.................................... 9,825 (9,004)
Other current assets................................... (106) --
Other assets........................................... (579) --
Accounts payable and accrued liabilities............... 39,282 6,452
Deferred revenue....................................... -- 5,610
Accrued interest -- related parties.................... 2,448 4,340
Accrued interest on due to shareholders................ 99,333 142,920
--------- ---------
Net cash used in operating activities............. (373,861) (106,285)
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (25,989) (140)
--------- ---------
Net cash used in investing activities....................... (25,989) (140)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................... 8,250 --
Cash paid for stock repurchase.............................. (562) --
Proceeds from note payable -- related parties............... 27,000 --
Proceeds from shareholders loans............................ 366,569 111,343
--------- ---------
Net cash provided by financing activities................... 401,257 111,343
--------- ---------
Net increase in cash........................................ 1,407 4,918
Cash at beginning of period................................. 2,269 3,676
--------- ---------
Cash at end of period....................................... $ 3,676 $ 8,594
========= =========
</TABLE>
See accompanying notes.
F-44
<PAGE> 111
QUICK STUDY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Quick Study, Inc. (the "Company") was incorporated as an S-corporation on
May 24, 1994 and is a publisher of CD-ROM and network-based products and
services in the healthcare industry. The Company is based in Portola Valley,
California. The Company primarily focuses on the use of multimedia for
continuing medical education. The Company's products and services are offered
throughout the United States. Quick Study is accredited by the California State
Board of Nursing.
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 software products. Revenue is recognized upon delivery and
installation of the software. As a part of the license agreement, maintenance
and telephone support are provided if necessary over the one year license term.
Cost for providing maintenance and telephone support have been insignificant.
DEFERRED REVENUE
Deferred revenue represents the portion of revenue for which the revenue
recognition process is incomplete.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable.
The Company sells its products 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 1998 and 1999, the Company derived approximately $79,735 and
$79,960, respectively, of its revenues from Santa Rosa Memorial Hospital. The
Company had no receivables outstanding as of December 31, 1998 and 1999 from
Santa Rosa Memorial Hospital.
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-term nature of such instruments.
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>
Equipment................................................... 3
Furniture and fixtures...................................... 5
</TABLE>
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.
F-45
<PAGE> 112
QUICK STUDY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management periodically evaluates the ongoing value of property and equipment
and has determined that there were no indications of impairment as of December
31, 1998 and 1999.
ADVERTISING
The Company expenses the costs of advertising as incurred. During 1998 and
1999, advertising expense was approximately $43,000 and $18,000, 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.
INCOME TAXES
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. The Subchapter S election was not available for California corporate
income tax. As a result, such taxes have been provided in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes."
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.
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. Management does not expect the adoption of SOP
98-9 to have a material effect on the Company's financial condition or results
of operations.
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
F-46
<PAGE> 113
QUICK STUDY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. LEASE COMMITMENTS
Minimum rental commitments under operating leases having an initial or
remaining noncancelable term of more than one year are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 49,338
2001........................................................ 49,338
2002........................................................ 14,330
Thereafter.................................................. --
--------
113,006
Less: Sublease rental payments.............................. 48,263
--------
$ 64,743
========
</TABLE>
Total rent expense under all operating leases was approximately $45,000 and
$4,000 for 1998 and 1999, respectively. In February 1999, the Company began
subleasing the office space for an amount equal to the Company's monthly rental
payments of approximately $3,700. The sublease rental payments received by the
Company have been recorded as a reduction in rental expense.
3. INCOME TAXES
Deferred 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:
Cash to accrual adjustment................................ $ 10,140 $ 12,994
Research and development credits.......................... 4,733 7,233
Net operating loss carryforwards.......................... 16,794 20,985
-------- --------
Total deferred tax assets......................... 31,667 41,212
Less: Valuation allowance................................... (31,667) (41,212)
-------- --------
Net deferred tax asset............................ $ -- $ --
======== ========
</TABLE>
As of December 31, 1999, the Company has state net operating loss
carryforwards of $1,399,028, expiring in years 2002 through 2004.
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
F-47
<PAGE> 114
QUICK STUDY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$14,035 and $9,545 during 1998 and 1999, respectively. No state income tax
payments were made during the years ended December 31, 1998 or 1999.
4. STOCK OPTION PLAN
The Company's 1997 Equity Incentive Plan (the "Plan") authorizes the grant
of options to employees, officers and directors for up to 150,000 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 five years.
The Company accounts for its stock incentive plans in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company has not
recognized compensation expense for stock options, because the exercise price of
the options equals the market price of the underlying stock on the date of
grant, which is the measurement date. If the alternative method of accounting
for stock incentive plans prescribed by SFAS No. 123 had been followed, the
Company's net loss for the years ended December 31, 1998 and 1999 would have
increased by $1,300 and $400, respectively. The resulting pro forma disclosures
may not be representative of amounts to be expected in future years. The
weighted average fair value of options granted was determined using the minimum
value option pricing model with the indicated assumptions:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSUMPTIONS (WEIGHTED AVERAGE)
Risk-free interest rate..................................... 5.7% 5.7%
Expected dividend yield..................................... 0.0% 0.0%
Expected life (in years).................................... 5 5
</TABLE>
A progression of activity and various other information relative to stock
options is presented in the table below.
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year................ -- $ -- 37,500 $0.11
Granted......................................... 142,500 0.11 -- --
Exercised....................................... (75,000) 0.11 -- --
Forfeited....................................... (30,000) 0.11 (15,000) 0.11
------- ----- ------- -----
Outstanding -- end of year...................... 37,500 0.11 22,500 0.11
======= ===== ======= =====
Exercisable at end of year...................... 3,750 $0.11 11,250 $0.11
======= ===== ======= =====
</TABLE>
Shares of Common Stock available for future grants of options totaled
37,500 at December 31, 1998 and 52,500 at December 31, 1999. Upon the
acquisition of the Company by HealthStream, Inc., (see Note 8) the stock options
lapsed.
5. LINE OF CREDIT AND NOTE PAYABLE -- RELATED PARTIES
The Company has an unsecured line of credit agreement with a financial
institution with a maximum credit line of $50,000. The line of credit accrues
interest at the bank reference rate plus 3.375%, which was 8.75% at December 31,
1999, and is payable monthly. The line of credit matures July 1, 2000. At
December 31, 1999, the balance outstanding under the line of credit was $50,000.
F-48
<PAGE> 115
QUICK STUDY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has an unsecured demand note payable to family members of two
of the Company's shareholders. The note payable accrues interest at 7%. Accrued
interest totaled $4,284 and $8,624 at December 31, 1998 and 1999, respectively.
6. DUE TO SHAREHOLDERS
Due to shareholders consists of (1) loans made to the Company for working
capital use, (2) deferred salaries related to shareholders' service to the
Company, and (3) accrued interest on the loans and deferred salaries at 7%
annually. Due to shareholders was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred salaries........................................... $ 641,300 $ 836,900
Loans....................................................... 891,352 1,002,695
Accrued interest............................................ 196,291 339,211
---------- ----------
$1,728,943 $2,178,806
========== ==========
</TABLE>
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company did not experience any software failures or interruption of
business as a result of Year 2000 issues. Total cost incurred related to Year
2000 issues was approximately $5,000.
8. SUBSEQUENT EVENT
On January 11, 2000, HealthStream, Inc. acquired substantially all the
assets and assumed $112,000 of liabilities of the Company. The purchase price
was $590,000 consisting of a cash payment of $59,000 and issuance of shares of
HealthStream's Common Stock. The shareholders can receive an additional payment
of up to $300,000 in shares of Common Stock upon the achievement of revenue
goals.
F-49
<PAGE> 116
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-50
<PAGE> 117
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-51
<PAGE> 118
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-52
<PAGE> 119
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-53
<PAGE> 120
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-54
<PAGE> 121
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.
F-55
<PAGE> 122
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-56
<PAGE> 123
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-57
<PAGE> 124
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-58
<PAGE> 125
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 contingent upon the Company's revenue
growth, earnings and employee performance over a period of three years.
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-59
<PAGE> 126
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-60
<PAGE> 127
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-61
<PAGE> 128
"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
Iclick here for "Meet the Management" PresentationJ 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 page 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: 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
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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.
The healthcare industry spends over $6.0 billion annually on ongoing training
and continuing education, including over $3.0 billion on continuing education
units, or CEU, 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 page 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 that enables healthcare
administrators to configure, assess and manage training for employees in their
organizations. This method of providing access to and usage of our courses and
software on a transactional basis over the Internet is commonly referred to
providing services 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 30 distribution partners, including 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 page 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."
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<PAGE> 130
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 page 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. 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
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<PAGE> 131
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 approximately 1,000 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, Challenger
Corporation 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, "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 have the
exclusive right to distribute some of these institutions' content online. 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
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<PAGE> 132
enable our content partners to focus on their core competency of producing and
authoring content and to 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
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<PAGE> 133
data. The courseware we provide under our ASP model will primarily focus on
mandated training content. 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, "Columbia/HCA Healthcare Corporation." To the right of the
second arrow will appear the caption, "m3 the Healthcare Learning Company." To
the right of the third arrow will appear the caption, "EMInet." To the right of
the fourth arrow will appear the caption, "Quick Study."
Script: (Robert Frist) (see "Business--Strategic Relationships and
Acquisitions -- Services Distributed through ASP Model"): Thanks, Jeff. 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. 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, which 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.
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>
- - Vanderbilt University Medical Center - ChannelHealth (an IDX Company)
- - Duke University Medical Center - GE Medical Systems
- - The Cleveland Clinic Foundation - Pointshare
- - Challenger Corporation - Medsite.com
- - American Health Consultants - MedicaLogic
- - e-Vitro - State Medical Associations
- - SilverPlatter Education - HealthGate
- cmesearch.com
</TABLE>
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<PAGE> 134
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: Vanderbilt University Medical
Center, Duke University Medical Center, The Cleveland Clinic Foundation,
Challenger Corporation, American Health Consultants, e-Vitro and SilverPlatter
Education. Selected distribution partners include: ChannelHealth (an IDX
Company), GE Medical Systems, Pointshare, Medsite.com, MedicaLogic, State
Medical Associations, HealthGate and cmesearch.com.
VISUAL 17: 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 18: 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> 135
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 19: END OF PRESENTATION
Imagery: Border and company logo. See description of artwork on page 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> 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.
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2000
(HEALTHSTREAM LOGO)
HEALTHSTREAM, INC.
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. We have
made application for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "HSTM." We anticipate that the initial public
offering price will be between $9.00 and $11.00 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
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........................................ $ 16,698
NASD filing fee............................................. 6,250
Nasdaq National Market listing fee.......................... 5,000
Printing and engraving fees and expenses.................... 150,000
Legal fees and expenses..................................... 175,000
Accounting fees and expenses................................ 175,000
Blue sky fees and expenses (including legal fees)........... 5,000
Transfer agent fees......................................... 5,000
Miscellaneous............................................... 7,052
--------
Total............................................. $545,000
========
</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> 138
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> 139
- 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.
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.
*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 -- Investors' Rights Agreement, dated April 21, 1999, as
amended August 11, 1999, between HealthStream, Inc. and some
of its shareholders
**4.5 -- Promissory note, dated August 23, 1999, between
HealthStream, Inc., as maker, and Robert A. Frist, Jr., as
lender
*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.
*5.1 -- Opinion of Bass, Berry & Sims PLC as to the legality of the
common stock being offered
**10.1 -- Series A Convertible Preferred Stock Purchase Agreement
**10.2 -- Series B Convertible Preferred Stock Purchase Agreement
**10.3 -- Series C Convertible Preferred Stock Purchase Agreement
**10.4 -- 1994 Employee Stock Option Plan, effective as of April 15,
1994
**10.5 -- Form of 1999 Stock Incentive Plan
**10.6 -- Form of Indemnification Agreement
**10.7 -- Executive Employment Agreement, dated April 21, 1999,
between HealthStream, Inc. and Robert A. Frist, Jr.
**10.8 -- Lease dated March 27, 1995, as amended June 6, 1995 and
September 22, 1998, between Cummins Station LLC, as
landlord, and NewOrder Media, Inc., as tenant
</TABLE>
II-3
<PAGE> 140
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
+10.9 -- Continuing Education Agreement between HealthStream, Inc.
and Vanderbilt University
+10.10 -- Interactive Content Development and Licensing Agreement
between NewOrder Media, Inc. d/b/a HealthStream, Inc. and
Duke University
+10.11 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and The Cleveland Clinic Center for
Continuing Education
+10.12 -- Strategic Alliance Agreement between HealthStream, Inc. and
Challenger Corporation
+10.13 -- Development and Distribution Agreement between HealthStream,
Inc. and GE Medical Systems
+10.14 -- Agreement between HealthStream, Inc. and Medsite.Com, Inc.
+10.15 -- Web Site Linking Agreement between HealthStream, Inc. and
IDX Systems Corporation
+10.16 -- Agreement between HealthStream, Inc. and Phycor, Inc.
+10.17 -- Marketing Services Agreement between HealthStream, Inc. and
HealthGate Data Corp.
+10.18 -- Continuing Education Services Agreement between
HealthStream, Inc. and HealthGate Data Corp.
*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 31, 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.
*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
II-4
<PAGE> 141
in Item 14, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(3) The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; (ii) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment number 1 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 February 14, 2000.
HEALTHSTREAM, INC.
By: /s/ ROBERT A. FRIST, JR.
------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
hereby constitutes and appoints Robert A. Frist, Jr. and Robert H. Laird, Jr.,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and any registration
statement relating to the same offering as this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this amendment
number 1 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 February 14, 2000
- --------------------------------------------------- Chairman (principal
Robert A. Frist, Jr. executive officer)
* President and Director February 14, 2000
- ---------------------------------------------------
Jeffrey L. McLaren
/s/ ARTHUR E. NEWMAN Chief Financial Officer and February 14, 2000
- --------------------------------------------------- Senior Vice President
Arthur E. Newman (principal financial and
accounting officer)
* Director February 14, 2000
- ---------------------------------------------------
Charles N. Martin, Jr.
* Director February 14, 2000
- ---------------------------------------------------
Thompson S. Dent
/s/ M. FAZLE HUSAIN Director February 14, 2000
- ---------------------------------------------------
M. Fazle Husain
* Director February 14, 2000
- ---------------------------------------------------
John H. Dayani, Sr., Ph.D
</TABLE>
II-6
<PAGE> 143
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
* Director February 14, 2000
- ---------------------------------------------------
James F. Daniell, M.D.
* Director February 14, 2000
- ---------------------------------------------------
William Stead, M.D.
*By: /s/ ROBERT A. FRIST, JR. February 14, 2000
-----------------------------------------------
Robert A. Frist, Jr.
Attorney-in-fact
</TABLE>
II-7
<PAGE> 144
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 -- Investors' Rights Agreement, dated April 21, 1999, as
amended August 11, 1999, between HealthStream, Inc. and some
of its shareholders
**4.5 -- Promissory note, dated August 23, 1999, between
HealthStream, Inc., as maker, and Robert A. Frist, Jr., as
lender
*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.
*5.1 -- Opinion of Bass, Berry & Sims PLC as to the legality of the
common stock being offered
**10.1 -- Series A Convertible Preferred Stock Purchase Agreement
**10.2 -- Series B Convertible Preferred Stock Purchase Agreement
**10.3 -- Series C Convertible Preferred Stock Purchase Agreement
**10.4 -- 1994 Employee Stock Option Plan, effective as of April 15,
1994
**10.5 -- Form of 1999 Stock Incentive Plan
**10.6 -- Form of Indemnification Agreement
**10.7 -- Executive Employment Agreement, dated April 21, 1999,
between HealthStream, Inc. and Robert A. Frist, Jr.
**10.8 -- Lease dated March 27, 1995, as amended June 6, 1995 and
September 22, 1998, between Cummins Station LLC, as
landlord, and NewOrder Media, Inc., as tenant
+10.9 -- Continuing Education Agreement between HealthStream, Inc.
and Vanderbilt University
+10.10 -- Interactive Content Development and Licensing Agreement
between NewOrder Media, Inc. d/b/a HealthStream, Inc. and
Duke University
+10.11 -- Joint Marketing and Licensing Agreement between
HealthStream, Inc. and The Cleveland Clinic Center for
Continuing Education
+10.12 -- Strategic Alliance Agreement between HealthStream, Inc. and
Challenger Corporation
+10.13 -- Development and Distribution Agreement between HealthStream,
Inc. and GE Medical Systems
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
+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 31, 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.
*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 2.2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is executed as
of the 5th day of January, 2000, by and among HealthStream, Inc., a Tennessee
corporation ("HealthStream"), HealthStream Acquisition I, Inc., a newly formed
Tennessee corporation and wholly owned subsidiary of HealthStream ("Merger
Sub"), Quick Study, Inc., a California corporation ("QS"), and each shareholder
of QS (individually, a "QS Shareholder," and, collectively, the "QS
Shareholders").
RECITALS
WHEREAS, the Boards of Directors of HealthStream, Merger Sub, and QS
each have determined that a business combination between HealthStream, Merger
Sub, and QS is in the best interests of their respective companies and
shareholders and presents an opportunity for their respective companies to
achieve long-term strategic and financial benefits, and accordingly have agreed
to effect the merger provided for herein upon the terms and subject to the
conditions set forth herein.
WHEREAS, for federal income tax purposes, it is intended that the
merger provided for herein shall qualify as a reorganization within the meaning
of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the
"Code").
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1.
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), QS shall be
merged with and into Merger Sub in accordance with this Agreement and the
separate corporate existence of QS shall thereupon cease (the "Merger"). Merger
Sub shall be the surviving corporation in the Merger (sometimes hereinafter
referred to as the "Surviving Corporation") and shall be a wholly owned
subsidiary of HealthStream. The Merger shall have the effects specified in
Section 48-21-108 of the Tennessee Business Corporation Act ("TBCA").
1.2. The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of HealthStream, 209 10th Ave. South, Suite 450, Nashville, Tennessee,
at 11:00 a.m., local time, on the first business day immediately following the
day on which the last to be fulfilled or waived of the conditions set forth in
Article 7 herein shall be fulfilled or waived in accordance herewith or at such
other time, date, or place as HealthStream and QS may agree. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth
in Article 7 herein shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated as provided in Article 8
herein, the parties hereto shall cause Articles of Merger, substantially in the
form attached hereto as Exhibit A, to be properly executed and filed in
accordance with the applicable provisions of the TBCA and the California
General Corporation Law on the Closing Date. The Merger shall become effective
at the time of filing of the Articles of Merger with the Tennessee Secretary of
State and the California Secretary of State or at such later time that the
parties hereto shall have agreed upon and designated in such filing as the
effective time of the Merger (the "Effective Time").
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<PAGE> 2
ARTICLE 2.
CHARTER, BYLAWS,
AND OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
2.1. Charter. The Charter of Merger Sub in effect immediately
prior to the Effective Time shall, except as amended immediately following the
Effective Time in accordance with the Articles of Merger attached as Exhibit A,
be the Charter of the Surviving Corporation.
2.2. Bylaws. The Bylaws of Merger Sub in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation.
2.3. Directors. The directors of Merger Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation as of
the Effective Time.
2.4. Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time.
ARTICLE 3.
MERGER CONSIDERATION
3.1. Conversion of QS Shares in the Merger. At the Effective Time,
by virtue of the Merger and without any action on the part of the QS
Shareholders, the outstanding shares of common stock, no par value, of QS
outstanding immediately prior to the Effective Time (the "QS Common Stock")
shall be converted into, and become exchangeable for, the right to receive
33,188 shares of validly issued, fully paid, and nonassessable common stock, no
par value, of HealthStream (the "HealthStream Common Stock"). The 33,188 shares
of HealthStream Common Stock issuable in connection with the Merger are
sometimes referred to herein as the "Consideration Shares." The Consideration
Shares, the Earn Out Shares defined in Section 3.2 and the Cash Consideration
defined in Section 3.6 herein shall be collectively referred to as the "Merger
Consideration."
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<PAGE> 3
3.2. Earn Out Shares. The QS Shareholders shall also be eligible
to receive (up to an aggregate of 18,750 shares of HealthStream Common Stock)
as additional consideration (i) one (1) share of HealthStream Common Stock for
each sixteen dollars (US$16.00) of gross revenue recognized from existing QS
customers within 180 days after the Closing Date; plus (ii) one (1) share of
HealthStream Common Stock for each sixteen dollars (US$16.00) of gross revenue
recognized by Merger Sub or HealthStream from QS branded products sold or
licensed to any customer other than the entities listed in Exhibit B attached
hereto within 180 days after the Closing Date; plus (iii) one (1) share of
HealthStream Common Stock for each thirty-two dollars (US$32.00) of gross
revenue recognized by Merger Sub or HealthStream from QS branded products sold
or licensed to any of the entities listed in Exhibit B attached hereto within
180 days after the Closing Date (collectively, the "Earn Out Shares"). The Earn
Out Shares shall constitute a portion of the Merger Consideration for all
purposes and have been calculated (along with the Consideration Shares and the
Cash Consideration) to provide the QS Shareholders with the agreed upon value
of the QS Common Stock. The Earn Out Shares shall be allocated among the QS
Shareholders in the same proportion as the Consideration Shares. On or before
the day that is 210 days after the Closing Date, HealthStream will prepare and
deliver to the QS Shareholders a statement of the revenue recognized by
HealthStream and Merger Sub according to (i) through (iii) above during the 180
day period following the Closing Date, prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied, provided that
gross revenue recognized from the licensing of QS branded CD-ROMs shall be
recognized upon receipt of a purchase order by Merger Sub or HealthStream from
a customer. The Earn Out Shares, if any, due based on such revenue in
accordance with this Section 3.2 shall be placed in the Escrow Fund as
described in Section 3.3 herein.
3.3. Escrow. At the Closing, pursuant to an Escrow Agreement,
substantially in the form attached hereto as Exhibit C (the "Escrow
Agreement"), the parties shall establish an escrow (the "Escrow Fund")
comprised of fifty percent (50%) of the Consideration Shares issued to the QS
Shareholders pursuant to Section 3.1 above and all of the Earn Out Shares, if
any, issuable to the QS Shareholders pursuant to Section 3.2 above
(collectively the "Escrow Shares"). The Escrow Shares will be maintained in
escrow for sole purpose of satisfying claims by HealthStream for
indemnification under Article 9 below.
3.4. Fractional Shares. In lieu of the issuance of fractional
shares of HealthStream Common Stock, each QS Shareholder, upon surrender of a
certificate which immediately prior to the Effective Time represented QS Common
Stock, shall be entitled to receive a cash payment (without interest) equal to
the value of any fraction of a share of HealthStream Common Stock (based on a
value of $16.00 per share) to which such holder would be entitled under
Sections 3.1 and 3.2 herein, but for this provision.
3.5. Adjustments of HealthStream Common Stock. In the event
HealthStream changes the number of shares of HealthStream Common Stock issued
and outstanding following the date of this Agreement but prior to the Effective
Time as a result of a stock split, stock dividend, recapitalization,
reorganization, or any other transaction in which any security of HealthStream
or any other entity or cash is issued or paid in respect of the outstanding
shares of HealthStream Common Stock and the record date therefor is after the
date of this Agreement and prior to the Effective Time, the Consideration
Shares and Earn Out Shares shall be proportionately adjusted.
3.6. Cash Consideration. For purposes of this Agreement, the "Cash
Consideration" shall be fifty nine thousand dollars (US$59,000), less any fees
of accountants and attorneys for QS, which will be payable at the Closing. The
Cash Consideration shall be paid to the QS Shareholders in proportion to their
ownership in cash at Closing in immediately available funds.
3.7. Consent to Merger; Waiver of Dissenters' Rights. By their
execution of this Agreement each QS Shareholder (a) consents to the terms of
the Merger and to the taking of shareholder action to approve the
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<PAGE> 4
Merger without a meeting, (b) acknowledges that he or she is aware of his or
her rights to dissent to the Merger and demand payment for his or her shares of
QS Common Stock in accordance with Section 1300 of the California Corporations
Code, and (c) waives such rights to dissent and demand payment.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF QS AND THE
PRINCIPAL SHAREHOLDERS
Except as set forth in the disclosure letter delivered prior to the
execution hereof to HealthStream (the "QS Disclosure Letter"), QS and the QS
Shareholders, jointly and severally, represent, warrant, and agree as follows:
4.1. Existence; Good Standing; Corporate Power and Authority. QS
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of California. QS is qualified to do business as a
foreign corporation and is in good standing under the laws of any state of the
United States in which the character of the properties owned or leased by them
therein or in which the transaction of business makes such qualification
necessary, except where the failure to be so qualified would not have a
material adverse effect on the business, results of operations, financial
condition or prospects of QS (a "QS Material Adverse Effect"). QS has all
requisite corporate power and authority to own, operate, and lease its
respective properties and to carry on its respective business as now conducted.
QS has provided to HealthStream complete and correct copies of its articles of
incorporation and bylaws, each of which is in full force and effect.
4.2. Authorization, Validity, and Effect of Agreements. QS has the
full corporate power and authority to execute and deliver this Agreement and
all agreements and documents contemplated hereby. This Agreement and the Merger
have been approved by the Board of Directors of QS and the QS Shareholders and
the consummation by QS of the transactions contemplated hereby has been duly
authorized by all requisite corporate action. This Agreement constitutes, and
all agreements and documents contemplated hereby (when executed and delivered
pursuant hereto) will constitute, the valid and legally binding obligations of
QS and the QS Shareholders, enforceable in accordance with their respective
terms.
4.3. Capitalization. The authorized capital stock of QS consists
of 750,000 shares of QS Common Stock, 677,340 shares of which are issued and
outstanding as of the date of this Agreement and owned beneficially and of
record by the QS Shareholders as set forth in the QS Disclosure Letter. QS has
no outstanding capital stock, bonds, debentures, notes, or other obligations
the holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the shareholders of
QS on any matter. All issued and outstanding shares of QS Common Stock are duly
authorized, validly issued, fully paid, nonassessable, and free of preemptive
rights. There are no options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements, or commitments that obligate QS to
issue, transfer, or sell any shares of its capital stock. None of the
outstanding shares of QS Common Stock are subject to any voting trust
agreement, lien, encumbrance, security interest, restriction, or claim.
4.4. Other Interests. QS does not own, directly or indirectly, or
have any obligation to acquire any interest or investment in any corporation,
partnership, joint venture, business, trust, or other entity.
4.5. No Violation. Neither the execution and delivery by QS and
the QS Shareholders of this Agreement nor the consummation by QS and the QS
Shareholders of the transactions contemplated hereby in accordance with the
terms hereof, will: (i) conflict with or result in a breach of any provisions
of the articles of
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<PAGE> 5
incorporation or bylaws of QS; (ii) conflict with, result in a breach of any
provision of or the modification or termination of, constitute a default under,
or result in the creation or imposition of any lien, security interest, charge,
or encumbrance upon any of the assets of QS or any QS Shareholder pursuant to
any material commitment, lease, contract, or other material agreement or
instrument to which QS or any QS Shareholder is a party (including, without
limitation, "Material Contracts" as defined in Section 4.21 below); or (iii)
violate or result in a change in any rights or obligations under any
governmental permit or license or any order, arbitration award, judgment, writ,
injunction, decree, statute, rule, or regulation applicable to QS or any QS
Shareholder.
4.6. Regulatory Consents. No consent, approval, order, or
authorization of, or registration, declaration, or filing with, any
governmental entity, is required by or with respect to QS or any QS Shareholder
in connection with the execution and delivery of this Agreement by QS or any QS
Shareholder, or the consummation by QS or any QS Shareholder of the
transactions contemplated hereby, which the failure to obtain would have a QS
Material Adverse Effect.
4.7. Financial Statements. Prior to the date hereof, QS has
delivered to HealthStream its audited financial statements for the nine months
ended September 30, 1999 and its audited financial statements for the years
ended December 31, 1997 and 1998. Each of the balance sheets provided to
HealthStream by QS (including the related notes and schedules) fairly presents
the financial position of QS as of their respective dates and each of the
statements of income, shareholders' equity, and cash flows provided to
HealthStream by QS (including any related notes and schedules) fairly presents
the results of operations, shareholders' equity, and cash flows of QS for the
periods set forth therein (subject, in the case of interim statements, to
normal year-end audit adjustments, none of which will be material in amount or
effect), in each case in accordance with GAAP consistently applied. Such
financial statements have been prepared from the books and records of QS which
accurately and fairly reflect the transactions and the acquisitions and
dispositions of the assets of QS. QS does not have any liabilities, contingent
or otherwise, whether due or to become due, known or unknown, other than as
reflected on the September 30, 1999 balance sheet or the QS Disclosure Letter.
4.8. No Material Adverse Changes. Since September 30, 1999, there
has not been (i) any material adverse change in the financial condition,
results of operations, business, assets, or liabilities (contingent or
otherwise, whether due or to become due, known or unknown) of QS; (ii) any
dividend declared or paid or distribution made on the capital stock of QS, or
any capital stock thereof redeemed or repurchased; (iii) any incurrence by QS
of long term debt; (iv) any salary, bonus, or compensation increases to any
officers, employees, or agents of QS; (v) any pending or threatened labor
disputes or other labor problems against or potentially affecting QS; or (vi)
any other transaction entered into by QS except in the ordinary course of
business and consistent with past practice.
- 5 -
<PAGE> 6
4.9. Tax Matters.
4.9.1. For purposes of this Agreement, (i) "Tax" means any
federal, state, local, or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Section 59A of
the Code), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration,
value added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not, and (ii) "Tax Return" means any
return, report, information return, or other document (including any
related or supporting information) filed or required to be filed with
any taxing authority in connection with its determination, assessment,
collection, administration, or imposition of any Tax.
4.9.2. QS has duly and timely filed all Tax Returns and has
duly and timely paid all material Taxes (whether or not shown on any
Tax Return) due to any federal, foreign, state, or local taxing
authorities prior to the Effective Time or has set up an adequate
reserve for all material Taxes payable. True and correct copies of all
Tax Returns relating to federal Taxes and state income and sales Taxes
for the period from organization through September 30, 1999 have been
heretofore delivered to HealthStream. The accruals and reserves for
Taxes contained in the financial statements and carried on the books
of QS (other than any reserve for deferred taxes established to
reflect timing differences between book and tax income) are adequate
to cover all material Tax liabilities. Since September 30, 1999, QS
has not incurred any material Tax liabilities other than in the
ordinary course of business. There are no Tax liens (other than liens
for current Taxes not yet due) upon any properties or assets of QS
(whether real, personal, or mixed, tangible or intangible), and,
except as reflected in the financial statements, there are no pending
or, to QS's knowledge, threatened audits or examinations relating to,
or claims asserted for, Taxes or assessments against QS and QS is
aware of no basis for any such claims. QS has not granted or been
requested to grant any extension of the limitation period applicable
to any claim for Taxes or assessments with respect to Taxes. QS is not
a party to any Tax allocation or sharing agreement. QS has no
liability for the Taxes of any Affiliated Group under Treasury
Regulation 1.1502-6 (or any similar provision of state, local, or
foreign law). QS has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, or shareholder.
4.9.3. The QS Disclosure Letter lists each jurisdiction in
which QS files Tax Returns for each period or portion thereof ending
on or before the Closing Date. Except as set forth in the QS
Disclosure Letter, there is no claim outstanding against QS by any
taxing authority in a jurisdiction where QS does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction.
4.9.4. All material elections with respect to Taxes affecting
QS as of the date hereof are set forth in the QS Disclosure Letter.
4.9.5. All joint ventures, partnerships, or other
arrangements or contracts to which QS is a party and that could be
treated as a partnership for federal income tax purposes are set forth
in the QS Disclosure Letter.
4.9.6. QS has not (i) filed a consent pursuant to Section
341(f) of the Code nor agreed to have Section 341(f)(2) apply to any
disposition of a subsection (f) asset (as such term is defined in
Section 341(f) of the Code) owned by QS; (ii) agreed, or is required
to agree, to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise that will
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<PAGE> 7
affect the liability of QS for Taxes; (iii) made an election, or is
required to make an election, to treat any asset of QS as owned by
another person pursuant to the provisions of former Section 168(f)(8)
of the Code or as tax-exempt bond financed property or tax-exempt use
property within the meaning of Section 168 of the Code; and (iv) made
any of the foregoing elections or is required to apply any of the
foregoing rules under any comparable state or local tax provision.
4.9.7. As soon as practicable following the Effective Time,
the QS Shareholders shall, on behalf of QS, timely file all Tax
Returns for, and pay all Taxes due with respect to the period ending
December 31, 1999 as well as the short period beginning January 1,
2000 and ending on the Closing Date. The QS Shareholders shall close
QS's books on the Closing Date and shall report on QS's federal
corporate income Tax Return for the short period ending on the Closing
Date all items of income, loss, deduction, and credit arising during
the short period under QS's method of accounting.
4.10. Employees and Fringe Benefit Plans.
4.10.1. The QS Disclosure Letter sets forth the names, ages,
and titles of all members of the Board of Directors and officers of QS
and all employees of QS earning in excess of $30,000 per year, and the
annual rate of compensation (including bonuses) being paid to each
such officer and employee as of the most recent practicable date.
4.10.2. The QS Disclosure Letter lists each employment,
bonus, deferred compensation, pension, stock option, stock
appreciation right, profit-sharing or retirement plan, arrangement, or
practice, each medical, vacation, retiree medical, severance pay plan,
and each other agreement or fringe benefit plan, arrangement, or
practice, of QS, whether legally binding or not, that affects one or
more of QS's employees, including all "employee benefit plans" as
defined by Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") (collectively, the "Plans"). QS neither
has nor sponsors, nor participates in any Plan that is subject to
Title IV of ERISA or the minimum funding standards of Section 412 of
the Code.
4.10.3. For each Plan that is an "employee benefit plan"
under Section 3(3) of ERISA, QS has delivered to HealthStream correct
and complete copies of the plan documents and summary plan
descriptions, the most recent determination letter received from the
Internal Revenue Service, the most recent Form 5500 Annual Report, and
all related trust agreements, insurance contracts, and funding
agreements that implement each such Plan.
4.10.4. QS does not have any commitment, whether formal or
informal and whether legally binding or not, (i) to create any
additional Plan; (ii) to modify or change any Plan; or (iii) to
maintain for any period of time any Plan. The QS Disclosure Letter
contains an accurate and complete description of the funding policies
(and commitments, if any) with respect to each existing Plan.
4.10.5. QS does not have any unfunded past service liability
in respect of any Plans; QS, nor any Plan nor any trustee,
administrator, fiduciary, or sponsor of any Plan has engaged in any
prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code for which there is no statutory exemption in Section
408 of ERISA or Section 4975 of the Code; all filings, reports, and
descriptions as to such Plans (including Form 5500 Annual Reports,
summary plan descriptions, and summary annual reports) required to
have been made or distributed to participants, the Internal Revenue
Service, the United States Department of Labor, and other governmental
agencies have been made in a timely manner or will be made on or prior
to the Closing Date; there is no material litigation, disputed claim,
governmental proceeding, or investigation pending or
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<PAGE> 8
threatened with respect to any of the Plans, the related trusts, or
any fiduciary, trustee, administrator, or sponsor of the Plans; the
Plans have been established, maintained, and administered in all
material respects in accordance with their governing documents and
applicable provisions of ERISA and the Code and Treasury Regulations
promulgated thereunder; and each Plan that is intended to be a
qualified plan under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service with
respect to the current terms of the Plan.
4.10.6. Except where failure to do so would not have a QS
Material Adverse Effect, QS has complied in all respects with all
applicable federal, state, and local laws, rules, and regulations
relating to employees' employment and employment relationships,
including, without limitation, wage related laws, anti-discrimination
laws, employee safety laws, and COBRA (defined herein to mean the
requirements of Code Section 4980B, Proposed Treasury Regulation
Section 1.162-26 and Part 6 of Subtitle B of Title I of ERISA).
4.10.7. The consummation of the transactions contemplated by
this Agreement will not (i) result in the payment or series of
payments by QS to any employee or other person of an "excess parachute
payment" within the meaning of Section 280G of the Code; (ii) entitle
any employee or former employee of QS to severance pay, unemployment
compensation, or any other payment; or (iii) accelerate the time of
payment or vesting of any stock option, stock appreciation right,
deferred compensation, or other employee benefits under any Plan
(including vacation and sick pay).
4.10.8. None of the Plans that are "welfare benefit plans,"
within the meaning of Section 3(1) of ERISA, provide for continuing
benefits or coverage after termination or retirement from employment,
except for COBRA rights under a "group health plan" as defined in Code
Section 4980B(g) and ERISA Section 607.
4.10.9. Neither QS nor any member in a "controlled group"
with QS (as defined in ERISA) has ever contributed to, participated
in, or withdrawn from a multi-employer plan as defined in Section
4001(a)(3) of Title IV of ERISA, and QS has not incurred or owes any
liability as a result of any partial or complete withdrawal by any
employer from such a multi-employer plan as described under Section
4201, 4203, or 4205 of ERISA.
4.11. Assets. QS owns the assets reflected in the September 30, 1999
balance sheet, including the leasehold estates, with good and marketable title,
free and clear of any and all claims, liens, mortgages, security interests, or
encumbrances whatsoever, and, to the best of QS's knowledge, free and clear of
any rights or privileges capable of becoming claims, liens, mortgages,
securities interests, or encumbrances. The buildings, plants, structures, and
equipment owned or leased by QS are in good operating condition and repair, and
are adequate for the uses for which they are being put, and none of such
buildings, plants, structures, or equipment is in need of maintenance or
repairs except for ordinary and routine maintenance and repairs that are not
material in nature or cost. The assets of the business of QS reflected in the
September 30, 1999 balance sheet are sufficient for the continued conduct of
the business of QS after the Closing Date in substantially the same manner as
conducted prior to the Closing Date.
4.12. Accounts Receivable. All accounts receivable of QS that are
reflected on the balance sheet dated September 30, 1999 and on the accounting
records of QS as of the Closing Date (collectively, the "Accounts Receivable")
represent or will represent valid obligations arising from sales actually made
or services actually performed in the ordinary course of business. Unless paid
prior to the Closing Date, the Accounts Receivable are or will be as of the
Closing Date current and collectible net of the respective reserves shown on
the balance sheet dated September 30, 1999, or on the accounting records of QS
as of the Closing
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<PAGE> 9
Date (which reserves are adequate and calculated consistent with past practice
and, in the case of the reserve as of the Closing Date, will not represent a
greater percentage of the Accounts Receivable as of the Closing Date than the
reserve reflected in the balance sheet dated September 30, 1999, and will not
represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, to the best of QS's
knowledge, each of the Accounts Receivable either has been or will be collected
in full, without any set-off, within one hundred and twenty (120) days after
the day on which it first becomes due and payable. There is no contest, claim,
or right of set-off with any maker of an Accounts Receivable relating to the
amount or validity of such Accounts Receivable.
4.13. Lawful Operations. QS has been and currently is conducting its
business, and each of the premises leased or owned by QS has been and now is
being used and operated, in compliance with all statutes, regulations, orders,
covenants, restrictions, and plans of federal, state, regional, county, or
municipal authorities, agencies, or boards applicable to the same, except where
the failure to so comply would not have a QS Material Adverse Effect.
4.14. Litigation. There is no suit, action, or proceeding pending
or, to the knowledge of QS or any of the QS Shareholders, threatened against or
affecting QS. QS is not subject to any currently existing order, writ,
injunction, or decree relating to its respective operations.
4.15. Corporate Records; Other Information. The minute books of QS,
copies of which have been provided to HealthStream, reflect all meetings of the
boards of directors, committees of the boards of directors, and the
shareholders thereof. All documents and other written information as to
existing facts relating to QS and its respective assets and liabilities which
have been provided to HealthStream in connection with this Agreement are true,
correct, and complete in all material respects except to the extent that any
such documents or other written information were later specifically
supplemented or corrected prior to the date of this Agreement with additional
documents or written information that were provided to HealthStream.
4.16. Intellectual Property Rights. QS owns or possesses the right
to use all trademarks, service marks, trade names, slogans, copyrights in
published and unpublished works, patents, patent applications, inventions and
discoveries that may be patentable, rights in mask works, and all trade
secrets, it currently uses without any conflict or alleged conflict with the
rights of others, except where any such conflict would not have a QS Material
Adverse Effect. All copyrights have been registered and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any maintenance fees, taxes, or actions falling due within
ninety days after the Closing Date. To the best of QS's knowledge, no copyright
is infringed or has been challenged or threatened in any way. To the best of
QS's knowledge, none of the subject matter of any copyright infringes or is
alleged to infringe any copyright of any third party or is a derivative work
based on the work of a third party. All works encompassed by a copyright have
been marked with the proper copyright notice.
4.17. Certain Business Practices and Regulations. Neither QS, nor
to QS's knowledge, any of its executive officers, directors, or employees, has
(i) made or agreed to make any contribution, payment, or gift to any customer,
supplier, landlord, political candidate, governmental official, employee, or
agent where either the contribution, payment, or gift or the purpose thereof
was illegal under any law or regulation; (ii) established or maintained any
unrecorded fund or asset for any purpose or made any false entries on its
respective books and records for any reason; (iii) made or agreed to make any
contribution, or reimbursed any political gift or contribution made by any
other person, to any candidate for federal, state, or local public office in
violation of any law or regulation; or (iv) submitted any claim for services
rendered or reimbursement for expenses to any person where the services were
not actually rendered or the expenses were not actually incurred.
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<PAGE> 10
4.18. Insurance. All policies and binders of insurance for
professional liability, directors and officers, fire, liability, workers'
compensation, and other customary matters held by or on behalf of QS
("Insurance Policies") are described in the QS Disclosure Letter and have been
made available to HealthStream. The Insurance Policies (which term shall
include any insurance policy entered into after the date of this Agreement in
replacement of an Insurance Policy provided that such replacement policy shall
insure against risks and liabilities, and in amounts and under terms and
conditions, substantially the same as those provided in such replaced policy or
binder) are in full force and effect. QS is not in default with respect to any
material provision contained in any Insurance Policy. QS has not failed to give
any notice of any claim under any Insurance Policy in due and timely fashion,
nor has any coverage for current claims been denied.
4.19. No Brokers. Other than fees to be paid by QS to Dave Evans, QS
has not entered into any contract, arrangement, or understanding with any
person or firm that may result in the obligation of QS or HealthStream to pay
any finder's fees, brokerage or agent's commissions, or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.20. HealthStream Stock Ownership; Investment Intent.
4.20.1. The shares of HealthStream Common Stock issuable in
the Merger are being acquired by the QS Shareholders for investment
and not with a view to the distribution thereof, and each of the QS
Shareholders acknowledges and understands that the certificate(s)
representing such shares of HealthStream Common Stock will bear a
legend in substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SUCH ACTS OR UNLESS EXEMPTIONS
FROM REGISTRATION ARE AVAILABLE.
THE TRANSFERABILITY OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS
RESTRICTED BY THE PROVISIONS OF A SHAREHOLDERS' AGREEMENT ENTERED INTO
BETWEEN THE HOLDER OF THIS CERTIFICATE AND THE COMPANY. A COPY OF THE
SHAREHOLDERS' AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND MAY BE REVIEWED AT SUCH OFFICE UPON REQUEST.
4.20.2. Each QS Shareholder, severally and not jointly,
represents, warrants, and agrees as follows:
(i) Each of the QS Shareholders confirms that
HealthStream has made available to him or her to his or her
representatives the opportunity to ask questions of
HealthStream's officers and directors and to acquire such
information about the shares of HealthStream Common Stock and
the business and financial condition of HealthStream as the
QS Shareholders have requested, which additional information
has been received.
(ii) In deciding to acquire shares of HealthStream
Common Stock pursuant to the Merger, the QS Shareholders have
consulted with their legal, financial, and tax advisers with
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<PAGE> 11
respect to the Merger and the nature of the investment
together with additional information concerning HealthStream
provided under subsection (i) above.
(iii) Each QS Shareholder has adequate means of
providing for his or her current needs and personal
contingencies and has no need for liquidity in his or her
investment in HealthStream. Each of the QS Shareholders,
either alone or with his or her representatives, has such
knowledge and experience in financial and business matters
that he or she is capable of evaluating the merits and risks
of an investment in HealthStream.
(iv) Each QS Shareholder has discussed with counsel,
to the extent such QS Shareholder felt necessary, the
requirements, limitations, and restrictions on his or her
ability to sell, transfer, or otherwise dispose of the
HealthStream Common Stock to be received in the Merger, and
fully understands the requirements, limitations, and
restrictions on his or her ability to transfer, sell, or
otherwise dispose of the HealthStream Common Stock.
(v) Until the earlier of (i) the Effective Time or
(ii) the termination of this Agreement, each QS Shareholder
will not sell, transfer, or otherwise dispose of, or reduce
such person's interest in or risk relating to, any QS Common
Stock or any instrument exercisable for or convertible into
QS Common Stock currently owned by the QS Shareholder.
4.21. Contracts; No Defaults. The QS Disclosure Letter contains a
complete and accurate list, and QS has previously delivered to HealthStream
complete copies of, all contracts and agreements for the performance of
services on the purchase or leasing of property by QS of an amount or value in
excess of ten thousand dollars (US$10,000) ("Material Contracts"). To the best
of QS's knowledge, each of the Material Contracts is in full force and effect
and is valid and enforceable in accordance with its terms, and QS, and to the
best of QS's knowledge, each other person that has or had any obligation or
liability under a Material Contract are in full compliance with all applicable
terms and requirements thereof. No event has occurred or circumstance exists
that (with or without notice or lapse of time) may contravene, conflict with,
or result in a violation or breach of, or give any person the right to declare
a default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Material Contract.
There are no renegotiations of, attempts to renegotiate, or outstanding rights
to renegotiate any material amounts paid or payable to QS under any Material
Contract with any person, including any governmental authority, having the
contractual or statutory right to demand or require such renegotiation.
4.22. Affiliate Transactions. None of the QS Shareholders has any
interest in any property (whether real, personal, or mixed, tangible or
intangible) used in or pertaining to QS business. No QS Shareholder owns, of
record or beneficially, any equity or other financial or profit interest in any
entity that has had business dealings with QS or that has engaged in
competition with QS.
4.23. Full Disclosure. All of the information provided by QS and
its representatives herein or in the QS Disclosure Letter is true, correct, and
complete in all material respects, and no representation, warranty, or
statement made by QS or the QS Shareholders in or pursuant to this Agreement or
the QS Disclosure Letter contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary to
make such representation, warranty, or statement not misleading.
4.24. Accreditation. QS' continuing education product line complies
with the rules and regulations of California State Board of Nursing. QS has no
knowledge of any acts or omissions by QS in its business practices that would
impede continued accreditation in the nearfuture and QS Shareholders shall, for
up to one
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<PAGE> 12
year following the Closing Date, use reasonable efforts to assist Merger Sub in
securing the accreditation of QS' current titles in California going forward.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF HEALTHSTREAM AND MERGER SUB
Except as set forth in the disclosure letter delivered at or prior to
the execution hereof to QS and the QS Shareholders (the "HealthStream
Disclosure Letter"), HealthStream and Merger Sub, jointly and severally,
represent, warrant, and agree as follows:
5.1. Existence; Good Standing; Corporate Authority. HealthStream is
duly incorporated, validly existing, and in good standing under the laws of the
State of Tennessee. Merger Sub is duly incorporated, validly existing, and in
good standing under the laws of the State of Tennessee. HealthStream is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where
the failure to be so qualified would not have a material adverse effect on the
business, results of operations, or financial condition of HealthStream, taken
as a whole (a "HealthStream Material Adverse Effect"). HealthStream has all
requisite corporate power and authority to own, operate, and lease its
properties and carry on its business as now conducted.
5.2. Authorization, Validity, and Effect of Agreements. Each of
HealthStream and Merger Sub has the requisite corporate power and authority to
execute and deliver this Agreement and all agreements and documents
contemplated hereby. The consummation by HealthStream and Merger Sub of the
transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto) will
constitute, the valid and legally binding obligations of HealthStream and
Merger Sub, enforceable in accordance with their respective terms. The issuance
and delivery by HealthStream of shares of HealthStream Common Stock in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary corporate action on the part of HealthStream. The
shares of HealthStream Common Stock to be issued in connection with the Merger
and this Agreement, when issued in accordance with the terms of this Agreement,
will be validly issued, fully paid, and nonassessable.
5.3. Capitalization. The authorized capital stock of HealthStream
consists of 20,000,000 shares of Common Stock, no par value, 2,245,743 of which
are issued and outstanding, and 5,000,000 shares of Preferred Stock, no par
value, of which 76,000 shares have been designated as Series A Convertible
Preferred Stock, 1,376,360 shares have been designated as Series B Convertible
Preferred Stock, no par value, and 650,000 shares have been designated as
Series C Convertible Preferred Stock, no par value. The outstanding shares of
Common Stock and Convertible Preferred Stock have been duly authorized and
validly issued and are fully paid and nonassessable.
5.4. Subsidiaries. The HealthStream Disclosure Letter sets forth
the outstanding capital stock of Merger Sub and each corporation, partnership,
or other entity of which at least a majority of the voting interest is owned
directly or indirectly by HealthStream (a "HealthStream Subsidiary"). Merger
Sub has not engaged in any activity other than in connection with the
transactions contemplated by this Agreement.
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<PAGE> 13
5.5. No Violation. Neither the execution and delivery by
HealthStream and Merger Sub of this Agreement, nor the consummation by
HealthStream and Merger Sub of the transactions contemplated hereby in
accordance with the terms hereof, will: (i) conflict with or result in a breach
of any provisions of the charter or bylaws of HealthStream or Merger Sub; (ii)
conflict with, result in a breach of any provision of or the modification or
termination of, constitute a default under, or result in the creation or
imposition of any lien, security interest, charge, or encumbrance upon any of
the assets of HealthStream or Merger Sub pursuant to any material commitment,
lease, contract, or other material agreement or instrument to which
HealthStream or Merger Sub is a party; or (iii) violate or result in a change
in any rights or obligations, under any governmental permit or license or any
order, arbitration award, judgment, writ, injunction, decree, statute, rule, or
regulation applicable to HealthStream or Merger Sub.
5.6. Litigation. As of the date of this Agreement, there is no
action, suit, or proceeding pending against HealthStream or any HealthStream
Subsidiary or, to the knowledge of HealthStream or any HealthStream Subsidiary,
threatened against or affecting HealthStream or any HealthStream Subsidiary, at
law or in equity, or before or by any federal or state commission, board,
bureau, agency, or instrumentality, that is reasonably likely to have a
HealthStream Material Adverse Effect.
5.7. Absence of Certain Changes. Since September 30, 1999, there
has not been any material adverse change in the financial condition, results of
operations, business, assets or liabilities (contingent or otherwise, whether
due or to become due, known or unknown), of HealthStream, except for changes in
the ordinary course of business.
5.8. No Brokers. HealthStream has not entered into any contract,
arrangement, or understanding with any person or firm that may result in the
obligation of HealthStream to pay any finder's fees, brokerage or agent's
commissions, or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
HealthStream is not aware of any claim for payment of any finder's fees,
brokerage or agent's commissions, or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
ARTICLE 6.
COVENANTS
6.1. Covenants of HealthStream and QS. During the period from the
date hereof and continuing until the Effective Time (except as expressly
contemplated or permitted hereby, or to the extent that the other parties shall
otherwise specifically consent in writing) each of HealthStream and QS
covenants with the other that, insofar as the obligations relate to it:
6.1.1. Each of HealthStream and QS shall carry on their
respective businesses in the usual, regular, and ordinary course in
substantially the same manner as heretofore conducted and shall use
all reasonable efforts to preserve intact their present business
organizations, maintain their rights and franchises, and preserve
their relationships with customers, suppliers, and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall not be impaired in any material respect.
6.1.2. Each of HealthStream and QS shall allow all designated
officers, attorneys, accountants, and other representatives of the
other access at all reasonable times during regular
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<PAGE> 14
business hours to the records and files, correspondence, audits, and
properties, as well as to all information relating to commitments,
contracts, titles, and financial position, or otherwise pertaining to
the business and affairs, of HealthStream and QS.
6.1.3. Each of HealthStream and QS will promptly file or
submit and diligently prosecute any and all applications or notices
with public authorities, federal, state, or local, domestic or
foreign, and all other requests for approvals of any private persons,
the filing or granting of which is necessary or appropriate, or is
deemed necessary or appropriate by any party hereto, for the
consummation of the transactions contemplated hereby.
6.1.4. Except as and to the extent required by law, each of
HealthStream and QS hereby agrees not to disclose or use, and each
shall cause its representatives not to disclose or use, any
confidential information with respect to any other party hereto
furnished, or to be furnished, by such other party or its
representatives in connection herewith at any time or in any manner
other than in connection with their respective evaluations of the
Merger. Neither QS nor any of the QS Shareholders or representatives
shall make any public statements regarding the Merger or this
Agreement without the prior written approval of HealthStream.
6.2. Covenants of QS and the QS Shareholders. QS and the QS
Shareholders covenant and agree as follows:
6.2.1. (i) they shall, and shall direct and use their best
efforts to cause QS's directors, officers, employees, advisors,
accountants, and attorneys (the "Representatives"), not to, initiate,
solicit, or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer with respect to a
merger, acquisition, consolidation, or similar transaction involving,
or any purchase of all or any significant portion of the assets or any
equity securities of QS (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or
data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to
make or implement an Acquisition Proposal; (ii) they will immediately
cease and cause to be terminated any existing activities, discussions,
or negotiations with any parties conducted heretofore with respect to
any of the foregoing and will take the necessary steps to inform the
individuals or entities referred to above of the obligations
undertaken in this Section 6.2.1; and (iii) they will notify
HealthStream immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued
with, it.
6.2.2. QS will make all normal and customary repairs,
replacements, and improvements to its facilities, properties, and
equipment and, without limiting the generality of the covenants set
forth in Section 6.1.1, will not:
(i) change its articles of incorporation, bylaws,
or capitalization or merge or consolidate with or into or
otherwise acquire any interest in any entity;
(ii) declare, set aside, or pay any cash dividend or
other distribution on or in respect of shares of its capital
stock, or any redemption, retirement, or purchase with
respect to its capital stock or issue any additional shares
or rights or options or agreements to acquire shares of its
capital stock;
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<PAGE> 15
(iii) discharge or satisfy any lien, charge,
encumbrance, or indebtedness outside the ordinary course of
business, except those required to be discharged or
satisfied;
(iv) authorize, guarantee, or incur any indebtedness;
(v) make any capital expenditures or capital
additions or betterments, or commitments therefor,
aggregating in excess of ten thousand dollars (US$10,000);
(vi) loan funds to any person;
(vii) institute, settle, or agree to settle any
litigation, action, or proceeding before any court or
governmental body;
(viii) sell, lease, mortgage, pledge, or subject to
any other encumbrance or otherwise dispose of any of its
property or assets, tangible or intangible, other than in the
ordinary course of business;
(ix) except in the ordinary course of business
consistent with past practice, authorize any compensation
increases of any kind whatsoever for any employee (provided
QS shall pay owing or accrued deferred compensation) or adopt
or amend any existing severance plan or other Plan;
(x) make any new elections with respect to Taxes, or
any changes in current elections with respect to Taxes; or
(xi) enter into any contract, agreement, commitment,
or arrangement to do any of the foregoing.
6.2.3. neither QS nor the QS Shareholders shall take any
action that would cause or tend to cause the conditions upon the
obligations of the parties hereto to effect the transactions
contemplated hereby not to be fulfilled including, without limitation,
taking, causing to be taken, or permitting or suffering to be taken or
to exist any action, condition, or thing that would cause the
representations and warranties made by them herein not to be true,
correct, complete, and accurate as of the Closing Date.
6.2.4. QS shall promptly provide to HealthStream monthly and
quarterly unaudited financial statements of QS for periods from and
after September 30, 1999, prepared in accordance with generally
accepted accounting principles consistently applied.
6.2.5. QS shall not (i) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification
of the Merger as a reorganization within the meaning of Section
368(a)(2)(D) of the Code; or (ii) enter into any contract, agreement,
commitment, or arrangement with respect to either of the foregoing.
6.2.6. QS shall cooperate with HealthStream's audit firm for
any purpose that HealthStream deems reasonably necessary to effectuate
the terms of this Agreement, including, but not limited to providing
assistance with generating work papers and executing necessary
representation letters.
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<PAGE> 16
6.3. Covenants of HealthStream. HealthStream covenants and agrees
that HealthStream shall not (i) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a)(2)(D) of the Code, or (ii)
enter into any contract, agreement, commitment, or arrangement with respect to
either of the foregoing.
ARTICLE 7.
CONDITIONS
7.1. Conditions to Each Party's Obligations to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date of the following conditions:
7.1.1. No action or proceeding shall have been instituted
before a court or other governmental body by any governmental agency
or public authority to restrain or prohibit the transactions
contemplated by this Agreement or to obtain an amount of damages or
other material relief in connection with the execution of the
Agreement or the related agreements or the consummation of the Merger;
and no governmental agency shall have given notice to any party hereto
to the effect that consummation of the transactions contemplated by
this Agreement would constitute a violation of any law or that it
intends to commence proceedings to restrain consummation of the
Merger.
7.1.2. All consents, authorizations, orders, and approvals of
(or filings or registrations with) any governmental commission, board,
or other regulatory body required in connection with the execution,
delivery, and performance of this Agreement shall have been obtained
or made, except for filings in connection with the Merger and any
other documents required to be filed after the Effective Time, and
except where the failure to have obtained or made any such consent,
authorization, order, approval, filing, or registration would not have
a material adverse effect on the business of HealthStream and QS,
taken as a whole, following the Effective Time.
7.1.3. HealthStream shall have received from QS copies of all
resolutions adopted by the Board of Directors and shareholders of QS
in connection with this Agreement and the transactions contemplated
hereby. QS shall have received from HealthStream and Merger Sub copies
of all resolutions adopted by the Board of Directors and shareholders
of each respective company in connection with this Agreement and the
transactions contemplated hereby.
7.2. Conditions to Obligations of QS and the QS Shareholders to
Effect the Merger. The obligations of QS and the QS Shareholders to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following conditions:
7.2.1. HealthStream shall have performed its agreements
contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of
HealthStream and Merger Sub contained in this Agreement and in any
document delivered in connection herewith shall be true and correct as
of the Closing Date, and QS shall have received a certificate of the
President or the Chief Financial Officer of HealthStream, dated the
Closing Date, certifying to such effect.
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<PAGE> 17
7.2.2. From the date of this Agreement through the Effective
Time, there shall not have occurred any change in the financial
condition, business, or operations of HealthStream, that would have or
would be reasonably likely to have a HealthStream Material Adverse
Effect.
7.2.3. QS and the QS Shareholders shall have received a
written opinion, dated as of the Closing Date, from counsel for
HealthStream substantially in the form of Exhibit D attached hereto.
7.2.4. HealthStream and Merger Sub shall have executed the
Tax Representation Certificate, substantially in the form of Exhibit L
attached hereto.
7.3. Conditions to Obligations of HealthStream and Merger Sub to
Effect the Merger. The obligations of HealthStream and Merger Sub to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following conditions:
7.3.1. QS and the QS Shareholders shall have performed their
respective agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of QS and the QS Shareholders contained in this Agreement
and in any document delivered in connection herewith shall be true and
correct as of the Closing Date to the same extent as if made on the
Closing Date, and HealthStream shall have received a certificate of
the President of QS dated the Closing Date, certifying to such effect.
7.3.2. From the date of this Agreement through the Effective
Time, there shall not have occurred any change in the financial
condition, business, operations, or prospects of QS, that would have
or would be reasonably likely to have a QS Material Adverse Effect.
7.3.3. HealthStream shall have received a written opinion,
dated as of the Closing Date, from counsel for QS, substantially in
the form of Exhibit E attached hereto.
7.3.4. Janet Bostrom shall have executed an Employment
Agreement, substantially in the form of Exhibit F attached hereto.
7.3.5. QS shall have complied with all reasonable requests of
HealthStream's audit firm and provided all the information required to
complete audits for the years ending December 31, 1996, 1997 and 1998.
7.3.6. Thomas Hewett shall have executed a Consulting
Agreement, substantially in the form of Exhibit G attached hereto.
7.3.7. The QS Shareholders shall have executed a
Shareholders' Agreement, substantially in the form of Exhibit H
attached hereto.
7.3.8. The QS Shareholders shall have executed a Co-Sale
Agreement, substantially in the form of Exhibit I attached hereto.
7.3.9. The QS Shareholders shall have executed a Voting
Agreement, substantially in the form of Exhibit J attached hereto.
7.3.10. QS shall not have more than one hundred twenty
thousand dollars (US$120,000) in total debt.
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<PAGE> 18
7.3.11. QS Shareholders shall only be Janet Bostrom and
Thomas Hewett.
7.3.12. QS shall have executed the Tax Representation
Certificate, substantially in the form of Exhibit K attached hereto.
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ARTICLE 8.
TERMINATION
8.1. Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, by the mutual written consent of HealthStream and QS.
8.2. Termination by Either HealthStream or QS. This Agreement may
be terminated and the Merger may be abandoned by action of the Board of
Directors of either HealthStream or QS if (a) the Merger shall not have been
consummated by January 15, 2000 or (b) a United States federal or state court
of competent jurisdiction or United States federal or state governmental,
regulatory, or administrative agency or commission shall have issued an order,
decree, or ruling or taken any other action permanently restraining, enjoining,
or otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree, ruling, or other action shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause (b) shall have used all reasonable efforts to remove
such injunction, order, or decree.
8.3. Termination by QS. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of QS, if (a) there has been a breach by HealthStream or
Merger Sub of any representation or warranty contained in this Agreement which
would have or would be reasonably likely to have an HealthStream Material
Adverse Effect, or (b) there has been a material breach of any of the covenants
or agreements set forth in this Agreement on the part of HealthStream, which
breach is not curable or, if curable, is not cured within thirty (30) days
after written notice of such breach is given by QS to HealthStream.
8.4. Termination by HealthStream. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, by
action of the Board of Directors of HealthStream, if (a) there has been a
breach by QS or the QS Shareholders of any representation or warranty contained
in this Agreement which would have or would be reasonably likely to have a QS
Material Adverse Effect, or (b) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of QS or the QS
Shareholders, which breach is not curable or, if curable, is not cured within
thirty (30) days after written notice of such breach is given by HealthStream
to QS.
8.5. Effect of Termination and Abandonment. Upon termination of
this Agreement pursuant to this Article 8, this Agreement shall be void and of
no other effect, and there shall be no liability by reason of this Agreement or
the termination thereof on the part of any party hereto (other than for breach
of a covenant contained herein), or on the part of the respective directors,
officers, employees, agents, or shareholders of any of them.
8.6. Extension; Waiver. At any time prior to the Effective Time,
any party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
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ARTICLE 9.
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
9.1. Survival of Representations and Warranties. The
representatives and warranties of the parties contained in Articles 4 and 5 of
this Agreement shall survive the Merger for a period expiring on the first
anniversary of the Closing Date.
9.2. Indemnity Obligations of the QS Shareholders. Subject to the
provisions of this Article 9 and the Escrow Agreement, the QS Shareholders,
jointly and severally, in accordance with the Escrow Agreement, agree to
indemnify and hold HealthStream and Merger Sub harmless from, and to reimburse
HealthStream and Merger Sub for, any losses, costs, expenses, obligations,
liabilities, damages, remedies and penalties, including interest, and
attorneys' fees and expenses actually incurred (collectively "Losses") arising
in connection with or attributable to the inaccuracy or breach of any
representation, warranty, or covenant made by QS or the QS Shareholders in this
Agreement.
9.3 Limitation on Source and Amount of Payment of Indemnity Claims
by QS Shareholders. The parties agree that the sole source for payment of the
indemnity obligations of the QS Shareholders under Section 9.2 above will be
the Consideration Shares and the Earn Out Shares. For the purposes of this
Article 9, the Consideration Shares and the Earn Out Shares will be valued at
Fair Market Value, but in no case less than $16.00 per share. In no event will
the total aggregate liability of the QS Shareholders under this Article 9
exceed the total aggregate value of the Consideration Shares and the Earn Out
Shares, so calculated. "Fair Market Value" of a share of HealthStream Common
Stock as of that date shall mean:
(a) If traded on a securities exchange or the Nasdaq National
Market, the Fair Market Value shall be deemed to be the average of the
closing prices of the Common Stock of the Company on such exchange or
market over the 5 business days ending immediately prior to the
applicable date of valuation;
(b) If actively traded over-the-counter, the Fair Market
Value shall be deemed to be the average of the closing bid prices over
the 30-day period ending immediately prior to the applicable date of
valuation; and
(c) If there is no active public market, the Fair Market
Value shall be the value thereof, as agreed upon by HealthStream and
the QS Shareholders; provided, however, that if HealthStream and the
QS Shareholders cannot agree on such value, such value shall be
determined by an independent valuation firm experienced in valuing
businesses such as HealthStream and jointly selected in good faith by
HealthStream and the QS Shareholders. Fees and expenses of the
valuation firm shall be paid for by HealthStream.
9.4. Indemnification by HealthStream. Subject to the provisions of
this Article 9, HealthStream will indemnify, defend, and hold harmless the QS
Shareholders from, and reimburse the QS Shareholders for, any Losses arising in
connection with or attributable to the inaccuracy or breach of any
representation, warranty, or covenant made by HealthStream or Merger Sub in
this Agreement.
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<PAGE> 21
ARTICLE 10.
GENERAL PROVISIONS
10.1. Notices. Any notice required to be given hereunder shall be
sufficient if in writing, by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and
first-class postage prepaid), addressed as follows:
If to HealthStream or Merger Sub:
Robert H. Laird, Jr.
Vice President and General Counsel
209 10th Ave. South
Suite 450
Nashville, TN 37203
If to QS or QS Shareholders:
Janet Bostrom
Chief Executive Officer
Quick Study, Inc.
30 Buckeye
Portola Valley, CA 94028
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
personally delivered or mailed.
10.2. Assignment; Binding Effect; Benefit. Neither this Agreement
nor any of the rights, interests, or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns.
10.3. Entire Agreement. This Agreement, the Exhibits, the QS
Disclosure Letter, the HealthStream Disclosure Letter, and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior and contemporaneous agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
10.4. Amendment. This Agreement may be amended by the parties
hereto by action taken by their respective Boards of Directors, if applicable.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
10.5. Governing Law. The validity of this Agreement, the
construction of its terms and the determination of the rights and duties of the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Tennessee applicable to contracts made and to be performed
wholly within such state.
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<PAGE> 22
10.6. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
10.7. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants, or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
10.8. Incorporation of Exhibits. The QS Disclosure Letter, the
HealthStream Disclosure Letter, and the Exhibits attached hereto and referred
to herein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
10.9. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
10.10. Expenses. Each party to this Agreement shall bear its own
expenses in connection with the Merger and the transactions contemplated
hereby; provided, however, that all expenses of QS in connection with the
negotiation, execution, delivery, and performance of this Agreement (except
audit expenses) shall be borne by the QS Shareholders.
10.11. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled by contract, at law, or in equity.
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<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf to be effective as of the day and
year first written above.
HEALTHSTREAM, INC.
By:
-----------------------------------
Title:
--------------------------------
HEALTHSTREAM 1 ACQUISITION, INC.
By:
-----------------------------------
Title:
--------------------------------
QUICK STUDY, INC.
By:
-----------------------------------
Title:
--------------------------------
THE QS SHAREHOLDERS:
- --------------------------------------
Janet Bostrom
- --------------------------------------
Thomas Hewett
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<PAGE> 24
ATTACHMENTS AND EXHIBITS
QS Disclosure Letter
HealthStream Disclosure Letter
Exhibit A - Articles of Merger
Exhibit B - Fifty Percent Earn out Customers
Exhibit C - Form of Escrow Agreement
Exhibit D - Form of HealthStream Counsel Legal Opinion
Exhibit E - Form of QS Counsel Legal Opinion
Exhibit F - Form of Employment Agreement
Exhibit G - Form of Consulting Agreement
Exhibit H - HealthStream Shareholders' Agreement
Exhibit I - HealthStream Co-Sale Agreement
Exhibit J - HealthStream Voting Agreement
Exhibit K - QS Tax Representation Certificate
Exhibit L - HealthStream and Merger Sub Tax Representation Certificate
<PAGE> 1
EXHIBIT 2.3
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into this 15th day of December 1999, among KnowledgeReview LLC, a New Jersey
Limited Liability Company ("Seller"), Louis Bucelli and Maksim Repik
("Members"), and HealthStream, Inc., a Tennessee corporation ("Buyer"). Seller
and Members are sometimes hereinafter collectively referred to as the "Selling
Parties."
RECITAL:
WHEREAS, Seller desires to sell to Buyer at the Closing (as hereinafter
defined), and Buyer desires to purchase from Seller substantially all of its
assets (the "Business"), as more fully described herein, upon and subject to the
terms and conditions contained in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the premises and of the mutual
representations, warranties and covenants that are made and to be performed by
the respective parties, it is agreed as follows:
ARTICLE 1. PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions of this
Agreement, on the Closing Date (as hereinafter defined), Seller shall sell,
transfer, convey, assign and deliver to Buyer and Buyer shall purchase, acquire
and accept from Seller, effective as of midnight on the Closing Date, all of
Seller's right, title and interest in and to the following described assets to
the extent used exclusively in the Business, wherever located (collectively, the
"Assets"):
(a) all fixed assets, machinery and equipment, software, tools, dies,
fixtures, furniture, furnishings, plant and office equipment identified on
Schedule 1.1(a);
(b) all engineering and production designs, drawings, formulae, technology,
source code, trade secrets, know-how and other similar data of Seller including,
but not limited to, any and all technology and source code behind any of its Web
commerce Web sites;
(c) all URLs of Seller listed in Schedule 1.1(d);
(d) all trademarks listed in Schedule 1.1(e), trade names, service marks,
registered user entries, copyrights and all of Seller's right, title and
interest in any application for any of the foregoing, and all claims and causes
of action relating to any of the foregoing, including claims and causes of
action for past infringement; and all rights under permits, licenses, franchises
and similar authorizations used by Seller in its business to the extent
transferable; and
(i) the goodwill of the business conducted by Seller.
1.2 EXCLUDED ASSETS. Notwithstanding anything else contained herein, the
following assets are excluded from the Assets being acquired by or transferred
to Buyer on the Closing Date (collectively, the "Excluded Assets"):
(a) all cash of Seller;
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(b) all minute books and corporate records, tax returns and litigation files
of Seller; and
(c) any right, title or interest of Seller in any Federal, state, local or
foreign tax refunds (and any income with respect thereto) and tax benefits.
1.3 ASSUMPTION OF LIABILITIES. Buyer will not assume any debts, liabilities,
obligations, expenses, taxes, contracts or commitments of Seller of any kind,
character or description, whether accrued, absolute, contingent or otherwise, no
matter whether arising before or after the Closing, and whether or not reflected
or reserved against in Seller's financial statements, books of accounts or
records. The Selling Parties will indemnify pursuant to Article 10 herein Buyer
against and hold it harmless from any such obligations and liabilities not
assumed by Buyer.
1.4 ASSIGNMENT OF CONTRACTS. Anything in this Agreement to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign, and
the Assets shall not include, any claim, contract, instrument, agreement,
license, lease, commitment, sales order, purchase order or any claim or right,
or any benefit arising thereunder or resulting therefrom, if an attempted
assignment thereof, without the consent of a third party thereto, would
constitute a breach thereof or in any way affect the rights of Buyer or Seller
thereunder. Seller will use good faith efforts to obtain the consent of any and
all third parties to the assignment of any such contract or agreement. Seller
shall be responsible for the payment of any transfer or assignment fees required
by any third party to effect the assignment of any such contracts or agreements.
If such consent is not obtained, or if an attempted assignment thereof would be
ineffective or would affect such rights, Seller will cooperate with Buyer (but
shall not be obligated to incur any expenses in such efforts) in any arrangement
designed to provide for Buyer the benefits under any such claims, contracts,
instruments, agreements, licenses, leases, commitments, sales orders or purchase
orders, including, without limitation, enforcement for the benefit of Buyer of
any and all rights of Buyer or Seller against a third party thereto arising out
of a breach or cancellation by such third party or otherwise; and any transfer
or assignment to Buyer of any property or property rights or any contract or
agreement which shall require the consent or approval of any third party shall
be made subject to such consent or approval being obtained.
ARTICLE 2. CONSIDERATION
2.1 PURCHASE PRICE. The purchase price for the Assets shall be $310,000 in the
form of cash paid to Seller at Closing and 9,375 shares of Buyer's Common Stock
paid into the Escrow Fund described in Section 2.2 herein at Closing ("Escrow
Shares"). The cash and Common Stock shall be collectively referred to as the
"Purchase Price."
2.2 ESCROW. (a) At the Closing, pursuant to an Indemnity and Escrow Agreement,
substantially in the form attached hereto as Exhibit A (the "Escrow Agreement"),
the parties shall establish an escrow (the "Escrow Fund") comprised of the
Escrow Shares. The Escrow Shares shall be maintained in escrow for the purposes
of satisfying any claims by Buyer for indemnification under Article 10 herein,
the Escrow Agreement and the Consulting Agreement until January 3, 2001 (the
"Escrow Period").
(b) Upon expiration of the Escrow Period, and subject to the
terms of Section 2.2(c) herein, Article 10 herein and the Escrow Agreement, the
escrow agent under the Escrow Agreement (the "Escrow Agent") shall deliver or
cause to be delivered to each Member a certificate representing the number of
shares of Buyer's Common Stock comprising such Member's portion of the Escrow
Shares determined pro rata in proportion to the Purchase Price received by such
Member under this Agreement (the "Pro Rata Portion").
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(c) If, upon expiration of the Escrow Period, Buyer shall have
asserted a claim for indemnity in accordance with the Escrow Agreement and such
claim is pending or unresolved at the time of such expiration, the Escrow Agent
shall retain in escrow, and withhold from delivery to each Member, each Member's
Pro Rata Portion of the value of the asserted amount of the claim until such
matter is finally resolved. If it is finally determined that Buyer is entitled
to recover on account of such claim, the Escrow Agent shall deliver or cause to
be delivered to Buyer the amount due and payable with respect to such claim
(applied against each Shareholder's Pro Rata Portion). The remainder of each
Shareholder's Pro Rata Portion, if any, following such delivery to Buyer in
accordance with this Section 2.2(c) and the Escrow Agreement, shall be delivered
to each Member pursuant to this Agreement, without interest. For purposes of
this Section 2.2(c), a claim will be deemed to have been finally resolved only
as provided in the Escrow Agreement.
(d) The right to receive the Escrow Shares upon expiration of
the Escrow Period is an integral part of the Purchase Price, and shall not be
transferable or assignable by, but shall inure to the benefit of the heirs,
representatives, or estate of, any Member.
ARTICLE 3. CLOSING; OBLIGATIONS OF THE PARTIES
3.1 CLOSING DATE. The closing (the "Closing") shall take place on January 3,
2000, at the offices of Buyer, 209 10th Avenue South, Suite 450, Nashville,
Tennessee 37203, or at such other time and place as the parties hereto mutually
agree (the "Closing Date").
3.2 OBLIGATIONS OF THE PARTIES AT THE CLOSING.
(a) At the Closing, Buyer shall deliver to Seller (or Seller's agent):
(i) the consideration as specified in Section 2.1 herein;
(ii) a copy of resolutions of the Board of Directors of Buyer, certified
by Buyer's Secretary, authorizing the execution, delivery and performance of
this Agreement and the other documents referred to herein to be executed by
Buyer, and the consummation of the transactions contemplated hereby;
(iii) a certificate in the form of Exhibit B hereto of Buyer certifying
as to the accuracy of Buyer's representations and warranties at and as of
the Closing and that Buyer has performed or complied with all of the
covenants, agreements, terms, provisions and conditions to be performed or
complied with by Buyer at or before the Closing;
(iv) a copy of the Buyer's Charter, certified by the Tennessee Secretary
of State;
(v) certificates of existence and good standing for the Buyer, certified
by the Secretary of State of Tennessee; and
(vi) such other certificates and documents as Selling Parties or their
counsel may reasonably request.
(b) At the Closing, Selling Parties will deliver to Buyer:
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(i) such bills of sale, assignments, and other good and sufficient
instruments of conveyance and transfer, in form and substance reasonably
satisfactory to Buyer, as shall be effective to vest in Buyer all of
Seller's and the Members' title to and interest in the Assets, and,
simultaneously with such delivery, will take such steps as may be necessary
to put Buyer in actual possession and operating control of the Assets;
(ii) a certificate of each of the Selling Parties in the form of Exhibit
C hereto certifying as to the accuracy of the Selling Parties
representations and warranties at and as of the Closing and that they have
performed or complied with all of the covenants, agreements, terms,
provisions and conditions to be performed or complied with by each of them
at or before the Closing;
(iii) copy of resolutions of the Members of Seller, certified by
Seller's Secretary, authorizing the execution, delivery and performance of
this Agreement and the other documents referred to herein to be executed by
Seller, and the consummation of the transactions contemplated hereby;
(iv) certificates of existence and good standing for the Seller,
certified by the Secretary of State of New Jersey, dated December __, 1999;
(v) Selling Parties shall have executed the Non-Competition Agreements
in the form of Exhibit D hereto;
(vi) Selling Parties shall have executed the Shareholders' Agreement in
the form of Exhibit E hereto;
(vii) Selling Parties shall have executed the Voting Agreement in the
form of Exhibit F hereto;
(viii) Selling Parties shall have executed the Co-Sale Agreement in the
form of Exhibit G hereto;
(ix) certificates evidencing the transfers of the URLs listed in
Schedule 1.1(g) to Seller;
(x) Maksim Repik shall have executed the Consulting Agreement in the
form of Exhibit K hereto;
(xi) a lease for 1916 Old Cuthbert Road, Suite B-13, Cherry Hill, NJ
08034, in the form attached as Exhibit J hereto; and
(xii) such other certificates and documents as Buyer or its counsel may
reasonably request.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES BY SELLING PARTIES
Selling Parties hereby represent and warrant as follows:
4.1 AUTHORIZATION. Seller has full corporate power and authority (including all
necessary approvals
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of Seller's Members) to enter into this Agreement and perform its obligations
hereunder and carry out the transactions contemplated hereby. The Board of
Directors of Seller has taken all action required by law, its Certificate of
Formation and its Operating Agreement to authorize the execution and delivery by
Seller of this Agreement and the consummation by Seller of the transactions
contemplated hereby. This Agreement constitutes the valid and binding agreement
of Seller, enforceable against Seller in accordance with its terms.
4.2 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey. Seller has full corporate power and authority to transfer the Assets
to Buyer, to carry on its business as now conducted and possesses all
governmental and other permits, licenses and other authorizations to own, lease
or operate its assets and properties as now owned, leased and operated and to
carry on its business as presently conducted. Seller is not licensed or
qualified to do business as a foreign corporation in any jurisdiction and
neither the properties owned or leased nor the business transacted by Seller
makes such licensing or qualification to do business as a foreign corporation
necessary, and no other jurisdiction has demanded, requested or otherwise
indicated that (or inquired whether) Seller is required so to qualify.
4.3 SUBSIDIARIES. Seller neither owns nor has an interest in, directly or
indirectly, any other corporation, partnership, joint venture or other business
organization.
4.4 NO VIOLATION. The execution and delivery of this Agreement by Seller does
not, and the consummation of the transactions contemplated hereby will not, (a)
violate any provision of, or result in the creation of any lien or security
interest under, any agreement, indenture, instrument, lease, security agreement,
mortgage or lien to which Seller is a party or by which any of Seller's assets
or properties are bound; (b) violate any provision of the Certificate of
Formation or Operating Agreement of Seller; (c) violate any order, arbitration
award, judgment, writ, injunction, decree, statute, rule or regulation
applicable to Seller; or (d) violate any other contractual or legal obligation
or restriction to which Seller is subject.
4.5 ASSETS. The Assets constitute substantially all the assets owned by Seller.
4.6 TANGIBLE ASSETS. Schedule 1.1(a) contains an accurate list as of December 1,
1999, of all material fixed and other tangible assets and personal property
owned by Seller. Seller does not own or lease any real property.
4.7 TITLE TO PROPERTIES; ENCUMBRANCES. None of the Assets is subject to any
mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge of any kind.
4.8 TRADEMARKS, PATENTS, ETC. Schedule 4.8 is an accurate and complete list of
all registered patents, trademarks, tradenames, trademark registrations, service
names, service marks, copyrights, formulas and applications therefor owned by
Seller. Schedule 1.1(e) is the complete list of trademarks, tradenames, service
names and service marks owned by Selling Parties or their affiliates used by
Seller in the operation of Seller's business, title to each of which is, except
as set forth on Schedule 4.9 hereto, to Seller's knowledge, held by Seller free
and clear of all adverse claims, liens, security agreements, restrictions or
other encumbrances. There is no infringement action, lawsuit, claim or complaint
which asserts that Seller's operations violate or infringe the rights or the
trade names, trademarks, trademark registration, service name, service mark or
copyright of others with respect to any apparatus or method of Seller or any
adversely held trademark, trade name, trademark registration, service name,
service mark or copyright, and Seller is not in any way making use of any
confidential information or trade secrets of any person except with the consent
of such person.
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4.9 NO UNDISCLOSED LIABILITY. Seller does not have any knowledge of any material
liabilities or obligations of any nature, whether or not absolute, accrued,
asserted, liquidated, matured, contingent or otherwise and whether due or to
become due (including, without limitation, liabilities for taxes and interest,
penalties and other charges payable with respect thereto) which alone or in the
aggregate may affect Seller's ability to transfer the Assets hereby or, from and
after Closing, Buyer's right, title and interest in and to the Assets and
Buyer's use and enjoyment thereof.
4.10 TAX MATTERS. Seller has duly filed all Tax reports and returns required to
be filed by it and has duly paid all Taxes and other charges (whether or not
shown on any Tax return) due or claimed to be due from it by federal, foreign,
state or local taxing authorities. The reserves for Taxes contained in the
Financial Statements and carried on the books of Seller are adequate to cover
all Tax liabilities as of the date of this Agreement. Seller has not incurred
any Tax liabilities other than in the ordinary course of business; there are no
Tax liens (other than liens for current Taxes not yet due) upon any properties
or assets of Seller (whether real, personal or mixed, tangible or intangible),
and, except as reflected in the Financial Statements, there are no pending or to
its knowledge threatened questions or examinations relating to, or claims
asserted for, Taxes or assessments against Seller, and to its knowledge there is
no basis for any such question or claim. Seller has not granted or been
requested to grant any extension of the limitation period applicable to any
claim for Taxes or assessments with respect to Taxes. For purposes of this
Agreement, "Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Section 59A of
the Internal Revenue Code of 1986, as amended ("Code")), customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
4.11 COMPLIANCE WITH APPLICABLE LAW. To Seller's knowledge, Seller has in the
past duly materially complied and is presently duly materially complying, in the
conduct of its business and the ownership of its assets with all applicable
laws, whether statutory or otherwise, rules, regulations, orders, ordinances,
judgments and decrees of all governmental authorities (federal, state, local or
otherwise) (collectively, "Laws"). None of the Selling Parties has received any
notice of, or notice of any investigation of, a possible violation of any
applicable Laws, or any other Law or requirement relating to or affecting the
operations or properties of Seller.
4.12 LITIGATION. To the best of the Selling Parties' knowledge, there are no
claims, actions, suits, proceedings or investigations pending or threatened by
or against, or otherwise affecting the Assets or the Business at law or in
equity or before or by any federal, state, municipal or other governmental
department, commission, board, agency, instrumentality or authority. The Selling
Parties do not know or have any reason to know of any basis for any such claim,
action, suit, proceeding or investigation.
4.13 INSURANCE. Seller has not been refused any insurance, nor has its coverage
been limited, by any insurance carrier to which it has applied for insurance or
with which it has carried insurance during the last five years.
4.14 EMPLOYEES AND FRINGE BENEFIT PLANS. Seller has no employees.
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4.15 CONTRACTS AND COMMITMENTS. Seller is not a party to any contracts.
4.16 ACCOUNTS PAYABLE. Seller has no accounts payable or notes payable.
4.17 PROFESSIONAL FEES. Neither Seller nor any of the Selling Parties has done
anything to cause or incur any liability or obligation for investment banking,
brokerage, finders, agents or other fees, commissions, expenses or charges in
connection with the negotiation, preparation, execution or performance of this
Agreement or the consummation of the transactions contemplated hereby, and
Seller does not know of any claim by anyone for such a fee, commission, expense
or charge.
4.18 CONSENTS AND APPROVALS. There are no consents, approvals, authorizations or
orders of third parties, including governmental authorities, necessary for the
authorization, execution and performance of this Agreement by Seller.
4.19 MEMBERS AUTHORITY. This Agreement constitutes the legal, valid and binding
obligation of the Members, enforceable against the Members in accordance with
its terms. The Members have the absolute and unrestricted right, power,
authority and capacity to execute and deliver this Agreement and to perform his
or its obligations under this Agreement.
4.20 CORPORATE RECORDS. Seller has delivered or provided to Buyer for its review
true complete and correct copies of the following items, as amended and
presently in effect, for Seller: (a) Certificate of Formation, and (b) Operating
Agreement, (all hereinafter referred to as the "Corporate Records").
4.21 FULL DISCLOSURE. Neither the information provided by the Selling Parties in
this Agreement, nor any Schedule, exhibit, list, certificate or other instrument
and document furnished by any Selling Party to Buyer pursuant to this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated herein or therein or necessary to make the statements
and information contained herein or therein not misleading. No Selling Party has
withheld from Buyer disclosure of any event, condition or fact which such
Selling Party knows, or has reasonable grounds to know, may materially adversely
affect Seller's assets, prospects or condition (financial or otherwise).
4.22 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Selling
Parties in reliance upon such Selling Parties' representation to the Buyer,
which by such Selling Parties' execution of this Agreement Selling Parties
hereby confirm, that the Common Stock to be purchased by Selling Parties (the
"Securities") will be acquired for investment for such Selling Parties' own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Selling Parties have no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, Selling Parties further represent that
Selling Parties do not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to any of the Securities.
4.23 RELIANCE UPON SELLING PARTIES' REPRESENTATIONS. Selling Parties understand
that the Common Stock is not registered under the Securities Act on the ground
that the sale provided for in this Agreement and the issuance of securities
hereunder is exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, and that the Buyer's reliance on such exemption is
predicated on the Selling Parties' representations set forth herein.
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4.24 RECEIPT OF INFORMATION. Selling Parties believe they have received all the
information Selling Parties consider necessary or appropriate for deciding
whether to purchase the Common Stock. Selling Parties further represent that
they have had an opportunity to ask questions and receive answers from the Buyer
regarding the terms and conditions of the offering of the Common Stock and the
business, properties, prospects, and financial condition of the Buyer and to
obtain additional information (to the extent the Buyer possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to Selling Parties
or to which Selling Parties had access. The foregoing, however, does not limit
or modify the representations and warranties of the Buyer in Section 5 of this
Agreement or the right of the Selling Parties to rely thereon.
4.25 INVESTMENT EXPERIENCE. Selling Parties represent that they are experienced
in evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that Selling
Parties are able to fend for himself, herself or itself, can bear the economic
risk of Selling Parties' investment, and has such knowledge and experience in
financial and business matters that such investor is capable of evaluating the
merits and risks of the investment in the Common Stock. If other than an
individual, Selling Parties also represent that the 100% members of each Selling
Party (each an "Investor Owner") meets the requirements of the preceding
sentence.
4.26 ACCREDITED INVESTORS.
Each Member, severally and not jointly, represents, warrants, and agrees as
follows:
(a) Each of the Members is an "accredited investor" as defined under Rule
501 of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act").
(b) Each of the Members confirms that Buyer has made available to him or
her to his or her representatives the opportunity to ask questions of Buyer's
officers and directors and to acquire such information about the shares of
Buyer's Common Stock and the business and financial condition of Buyer as the
Members have requested, which additional information has been received.
(c) In deciding to acquire shares of Buyer's Common Stock pursuant to this
Agreement, the Members have consulted with their legal, financial, and tax
advisers with respect to this Agreement and the nature of the investment
together with additional information concerning Buyer provided under subsection
(b) above.
(d) Each Member has adequate means of providing for his or her current
needs and personal contingencies and has no need for liquidity in his or her
investment in Buyer. Each of the Members, either alone or with his or her
representatives, has such knowledge and experience in financial and business
matters that he or she is capable of evaluating the merits and risks of an
investment in Buyer.
(e) Each Member has discussed with counsel, to the extent such Member felt
necessary, the requirements, limitations, and restrictions on his or her ability
to sell, transfer, or otherwise dispose of the Buyer Common Stock to be received
under this Agreement, and fully understands the requirements, limitations, and
restrictions on his or her ability to transfer, sell, or otherwise dispose of
Buyer's Common Stock.
4.27 RESTRICTED SECURITIES. Selling Parties understand that the Common Stock may
not be sold, transferred, or otherwise disposed of without registration under
the Securities Act or an exemption
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therefrom, and that in the absence of an effective registration statement
covering the Common Stock or an available exemption from registration under the
Securities Act, the Common Stock must be held indefinitely. In particular,
Selling Parties are aware that the Common Stock may not be sold pursuant to Rule
144 promulgated under the Securities Act unless all of the conditions of that
Rule are met. Among the conditions for use of Rule 144 may be the availability
of current information to the public about the Buyer. Such information is not
now available.
4.28 LEGENDS. To the extent applicable, each certificate or other document
evidencing any of the Common Stock shall be endorsed with the legends
substantially in the form set forth below:
(a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH
ACT, OR UNLESS THE BUYER HAS RECEIVED AN OPINION OF COUNSEL OR OTHER
EVIDENCE, SATISFACTORY TO THE BUYER AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED."
(b) Any legend imposed or required by applicable state securities laws.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee
and has full corporate power and authority to enter into this Agreement and to
carry out the transactions contemplated hereby.
5.2 AUTHORIZATION. Buyer has full corporate power and authority (including all
necessary approvals of Buyer's shareholders) to carry on its business as now
conducted and as proposed to be conducted, to enter into this Agreement, issue
the Common Stock to Seller, and perform its obligations hereunder and carry out
the transactions contemplated hereby. The Board of Directors of Buyer has taken
all action required by law, its Charter, its Bylaws and otherwise to authorize
the execution and delivery by Buyer of this Agreement and the consummation by
Buyer of the transactions contemplated hereby.
5.3 VALID AND BINDING AGREEMENT. This Agreement constitutes a valid and binding
agreement of Buyer, enforceable against Buyer in accordance with its terms.
5.4 NO VIOLATION. The execution and delivery of this Agreement by Buyer does
not, and the consummation of the transactions contemplated hereby will not, (a)
violate any provision, or result in the creation of any lien or security
interest under, any agreement, indenture, instrument, lease, security agreement,
mortgage or lien to which Buyer is a party or by which it is bound; (b) violate
any provision of Buyer's Charter or Bylaws; (c) violate any order, arbitration
award, judgment, writ, injunction, decree, statute, rule or regulation
applicable to Buyer; or (d) violate any other contractual or legal obligation or
restriction to which Buyer is subject.
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5.5 PROFESSIONAL FEES. Buyer has not done anything to cause or incur any
liability for investment banking, brokerage, finders, agents or other fees,
commissions, expenses or charges in connection with the negotiation,
preparation, execution and performance this Agreement or the consummation of the
transactions contemplated hereby, and Buyer does not know of any claim by anyone
for such a commission or fee.
5.6 CONSENTS AND APPROVALS. Buyer has obtained all consents, approvals,
authorizations or orders of third parties, including governmental authorities,
necessary for the authorization, execution and performance of this Agreement by
Buyer.
5.7 FINANCIAL STATEMENTS. Buyer has delivered to Seller the audited consolidated
balance sheet of the Buyer and its subsidiaries as of the end of December 31,
1998, and the related consolidated statements of income, stockholders' equity
and changes in financial position for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and accompanied by an
opinion of a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the, the last fiscal year, and
the related consolidated statements of income, stockholders' equity and changes
in financial position for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles. These financial statements fairly
present the assets, liabilities, financial condition and results of operations
of Buyer as of December 31, 1998 and for the period therein referred to.
5.8 FULL DISCLOSURE. To the best of Buyer's knowledge, neither the information
provided by the Buyer in this Agreement, nor any Schedule, exhibit, list,
certificate or other instrument and document furnished by Buyer to the Selling
Parties pursuant to this Agreement, contains any untrue statement of a material
fact or omits to state any material fact required to be stated herein or therein
or necessary to make the statements and information contained herein or therein
not misleading. Buyer has not withheld from the Selling Parties disclosure of
any event, condition or fact which Buyer knows, or has reasonable grounds to
know, may materially adversely affect Buyer's assets, prospects or condition
(financial or otherwise).
5.9 LITIGATION. To the best of Buyer's knowledge, there are no claims, actions,
suits, proceedings or investigations pending or threatened by or against, or
otherwise affecting Buyer at law or in equity or before or by any federal,
state, municipal or other governmental department, commission, board, agency,
instrumentality or authority. The Buyer does not know or have any reason to know
of any basis for any such claim, action, suit, proceeding or investigation.
5.10 AUTHORIZED CAPITAL STOCK. The authorized capital stock of the Buyer
consists of (i) 76,000 shares of Series A Convertible Preferred Stock, (ii)
1,436,961 shares of Series B Convertible Preferred Stock, (iii) 650,000 shares
Series C Convertible Preferred Stock and (iv) of 20,000,000 shares of Common
Stock, in each case with no par value. Immediately prior to the Closing, 76,000
shares of the Series A Convertible Preferred Stock, 1,228,801 shares of the
Series B Convertible Preferred Stock, 627,406 shares of Series C Convertible
Preferred Stock and 2,249,887 shares of the Common Stock will be validly issued
and outstanding, fully paid and nonassessable. The designations, powers,
preferences, rights, qualifications limitations and restrictions in respect of
each class and series of authorized capital stock of the Buyer are as set forth
in the Charter, a copy of which, as certified by the Secretary of State of
Tennessee, is attached as Exhibit H, and all such designations, powers,
preferences, rights qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. All of the
outstanding securities of the Buyer were issued in compliance with all
applicable federal and state securities laws. The Common Stock to be delivered
as part of the Purchase Price pursuant to
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Section 2.1 above have been duly authorized and, when issued, will be fully paid
for and non-assessable and shall be free and clear of all liens and
encumbrances, and such issuance will not be in violation of any preemptive or
similar rights of any person.
5.11 BY-LAWS. The current by-laws of the Buyer are attached as Exhibit I.
ARTICLE 6. COVENANTS AND AGREEMENTS OF SELLER
Seller agrees that from the date hereof until the Closing, and
thereafter if so specified, it will, and the Members will cause Seller to,
fulfill the following covenants and agreements unless otherwise consented to by
Buyer in writing:
6.1 CONDUCT OF BUSINESS PENDING THE CLOSING.
(a) Seller will not do or omit to do any act, or permit any act or omission
to act, which may cause a material breach of any contract, commitment or
obligation of Seller, or any breach of any representation, warranty, covenant or
agreement made by Seller herein.
(b) Seller will duly comply with all material laws applicable to it and its
respective business and operations and all laws, compliance with which is
required for the valid consummation of the transactions contemplated by this
Agreement.
(c) Seller will not (i) enter into any employment agreement, sales agency
or other contract or arrangement with respect to the performance of personal
services which is not terminable by it without liability on not more than 30
days notice; (ii) enter into or extend any labor contract with any hourly-paid
employees or any union; or (iii) agree to take any such action.
(d) Seller will not mortgage, pledge or subject to lien or any other
encumbrance, any of Seller's assets.
(e) Seller will not enter into any transaction involving more than $10,000
or a commitment extending more than three months.
(f) None of the Selling Parties will directly or indirectly (through a
representative or otherwise) solicit or furnish information to any prospective
acquirers, commence negotiations with any other party or enter into any
agreement with any other party concerning the sale of Seller's capital stock or
assets or any part thereof, or involving the merger, consolidation or
combination of or share exchange with any other entity.
(g) Seller will not enter into any transaction outside the ordinary course
of business. For purposes of this Agreement, the term "ordinary course of
business" shall mean the conduct of Seller's business as it has historically
been conducted since its inception.
(h) Selling Parties will not enter into any agreement to do any of the
foregoing.
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6.2 ACCESS; FURTHER ASSURANCES.
(a) After the execution of this Agreement and continuing until the Closing,
Selling Parties shall cause Seller to permit Buyer and its counsel, accountants,
engineers and other representatives full access during normal business hours,
upon reasonable notice, to all of the directors, officers, facilities,
properties, books, contracts, commitments and records of or relating to Seller
(including without limitation, the right to conduct any physical count of
inventory of Seller or otherwise be present at or participate in any such
occurrence at any time prior to the Closing) and will furnish Buyer and its
representatives during such period with all such information concerning Seller's
affairs and such copies of such documents relating thereto, as Buyer or its
representatives may reasonably request.
(b) At any time and from time to time after the Closing, at Buyer's request
and without further consideration, Selling Parties will execute and deliver such
other instruments of sale, transfer, conveyance, assignment, and delivery and
confirmation and take such action as the Buyer may reasonably deem necessary or
desirable in order more effectively to transfer, convey and assign to Buyer and
to place Buyer in possession and control of, and to confirm Buyer's title to,
the Assets, and to assist Buyer in exercising all rights and enjoying all
benefits with respect thereto.
6.3 SCHEDULES. Selling Parties shall have, until the Closing, the continuing
obligation to supplement or amend promptly the Schedules being delivered
pursuant to this Agreement with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in these Schedules.
6.4 TAXES. Seller will be responsible for, and hereby agree to assume and pay,
all sales and similar taxes that may be due to any jurisdiction or governmental
body as a result of the sale and transfer of the Assets.
6.5 CONSENTS AND APPROVALS. Seller shall, in a timely, accurate and complete
manner, take all necessary corporate and other action and use all reasonable
efforts to obtain all consents, approvals, permits, licenses and amendments of
agreements required of Seller to carry out the transactions contemplated in this
Agreement and shall provide to Buyer such information as Buyer may reasonably
require to make such filings and prepare such applications as may be required
for the consummation by Buyer of the transactions contemplated by this
Agreement.
6.6 BULK SALES COMPLIANCE. Buyer acknowledges that Seller is not complying with
the provisions of the bulk sales or similar laws of any and all states (the
"Bulk Sales Laws"), and Seller covenants and agrees to pay and discharge when
due all claims, liabilities and related expenses which may be asserted against
Buyer by reason of such noncompliance.
ARTICLE 7. COVENANTS AND AGREEMENTS OF BUYER
Buyer agrees that from the date hereof until the Closing, and thereafter if
so specified, it will fulfill the following covenants and agreements unless
otherwise consented to by Seller in writing:
7.1 CONFIDENTIALITY. In the event the transactions contemplated by this
Agreement are not consummated, for any reason, Buyer promptly will return to
Seller all records and information provided to Buyer from Selling Parties. Buyer
shall not at any time, before or after Closing, disclose the Purchase Price paid
hereby unless required to do so by law.
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7.2 CONSENTS AND APPROVALS. Buyer shall, in a timely, accurate and complete
manner, take all necessary corporate and other action and use all reasonable
efforts to obtain all consents, approvals, permits, licenses and amendments of
agreements required of Buyer to carry out the transactions contemplated in this
Agreement and shall provide to Seller such information as Seller may reasonably
require to make such filings and prepare such applications as may be required
for the consummation by Seller of the transactions contemplated by this
Agreement.
ARTICLE 8. CONDITIONS TO BUYER'S OBLIGATIONS
All obligations of Buyer hereunder are subject to the fulfillment,
prior to or at the Closing, of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by
the Selling Parties in this Agreement and the statements contained on the
Schedules attached hereto or in any instrument, list, certificate or writing
delivered by the Selling Parties pursuant to this Agreement shall be true when
made and at and as of the time of the Closing as though such representations and
warranties were made at and as of the Closing.
8.2 PERFORMANCE BY SELLING PARTIES. Selling Parties shall have performed and
complied in all material respects with all covenants, agreements, obligations
and conditions required by this Agreement and the exhibits hereto to be so
complied with or performed.
8.3 CERTIFICATES OF SELLING PARTIES. Each of the Selling Parties shall have
delivered to Buyer a certificate in the form of Exhibit C hereto, dated the
Closing Date, certifying as to the fulfillment of the conditions specified in
Sections 8.1 and 8.2.
8.4 LITIGATION. On the date of the Closing, there shall be no lawsuits pending
against any of the Selling Parties seeking to enjoin, prohibit, restrain or
otherwise prevent the transactions contemplated hereby or which might adversely
affect Seller's ability to transfer Assets hereby or, from and after Closing,
Buyer's right, title or interest in the Assets or Buyer's use and enjoyment
thereof.
ARTICLE 9. CONDITIONS TO SELLING PARTIES' OBLIGATIONS
All obligations of the Selling Parties under this Agreement are subject
to the fulfillment, prior to or at the Closing, of each of the following
conditions:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by
the Buyer in this Agreement shall be true when made and at and as of the time of
the Closing as though such representations and warranties were made at and as of
such date.
9.2 PERFORMANCE. Buyer shall have performed and complied with all agreements,
obligations and conditions required by this Agreement and the exhibits hereto to
be so complied with or performed including payment of the Purchase Price
according to Article 2 herein.
9.3 OFFICER'S CERTIFICATE. Buyer shall have delivered to Selling Parties a
Certificate of the
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President of Buyer in the form as Exhibit B hereto, in his representative
capacity and not individually, dated the Closing Date, certifying as to the
fulfillment of and/or the conditions specified in Sections 9.1 and 9.2.
9.4 LITIGATION. On the date of the Closing, there shall be no lawsuits pending
against the Buyer seeking to enjoin, prohibit, restrain or otherwise prevent the
transactions contemplated hereby.
ARTICLE 10. INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLING PARTIES. Selling Parties, jointly and severally,
hereby agree to defend, indemnify and hold harmless Buyer, its subsidiaries,
each fiduciary of Buyer's employee benefit plans and each of Buyer's
shareholders, affiliates, officers, directors, employees, agents, successors and
assigns ("Buyer's Indemnified Persons") and shall reimburse Buyer's Indemnified
Persons for, from and against each claim, fine, judgment, oversight cost,
assessment, loss, liability, cost and expense (including without limitation,
interest, penalties, costs of preparation and investigation, and the reasonable
fees, disbursements and expenses of attorneys, accountants and other
professional advisors but excluding consequential damages, including without
limitation, lost profits) (collectively, "Losses"), directly or indirectly
relating to, resulting from or arising out of:
(a) Any untrue representation, misrepresentation, breach of warranty or
non-fulfillment of any covenant, agreement or other obligation by or of any
Selling Party contained herein, any Schedule hereto or in any certificate,
document or instrument delivered to Buyer pursuant hereto.
(b) Any Tax liability of Seller relating to the Assets not previously paid,
which is successfully asserted or assessed against it for any event or period
prior to the Closing Date (regardless of whether the possibility of the
assertion or assessment of any such Tax liability shall have been disclosed to
Buyer at or prior to the Closing).
(c) Any obligation or liability of Seller, and any and all loss, liability
or damage suffered or incurred by Buyer by reason of the failure by Seller to
comply with Bulk Sales Laws.
(d) Any other Losses incidental to any of the foregoing.
10.2 EXPIRATION AND LIMITATION. Notwithstanding the foregoing:
(a) The indemnification obligations under this Article 10, or under any
certificate or writing furnished in connection herewith, shall terminate as
follows:
(i) with respect to claims relating to, resulting from or arising out
of Sections 10.1(b) and (c) or the representations and warranties set forth
in Section 4.1 , Section 4.7, Section 4.10, Section 4.22, Section 5.2 or
Section 5.10 (A) the date that is six (6) months after the expiration of
the longest applicable federal or state statute of limitation (including
extensions thereof), or (B) if there is no applicable statute of
limitation, five (5) years after the Closing Date for any other claim
covered by clause (i) of this Section 10.2(a); or
(ii) with respect to all claims other than those referred to in clause
(i) of this Section 10.2(a), on the date that is 12 months following the
Closing Date.
(b) The aggregate amount of the Selling Parties' liability under this
Article 10 shall not
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exceed $230,000. There shall be no liability for indemnification under Section
10.1 unless the aggregate amount of Losses exceeds $10,000, provided, however,
that at such time as the aggregate amount of Losses exceeds $10,000, the Selling
Parties shall be liable for the full amount of the Losses. The Selling Parties
have the right, but not the obligation, to pay its obligations hereunder by
transferring to the Buyer that number of shares of Common Stock, which for this
purpose only shall have the same value as on the date of issuance.
(c) The Selling Parties' obligations to indemnify hereunder shall not
extend to Losses attributable to Buyer's negligence or willful misconduct.
10.3 INDEMNIFICATION BY BUYER. Buyer hereby agrees to defend, indemnify and hold
harmless the Selling Parties, their respective subsidiaries, each fiduciary of
the Selling Parties' employee benefit plans and each of the Selling Parties'
members, affiliates, officers, directors, employees, agents, successors and
assigns ("Selling Parties' Indemnified Persons") and shall reimburse the Selling
Parties' Indemnified Persons for, from and against each claim, fine, judgment,
oversight cost, assessment, loss, liability, cost and expense (including without
limitation, interest, penalties, costs of preparation and investigation, and the
reasonable fees, disbursements and expenses of attorneys, accountants and other
professional advisors but excluding consequential damages, including without
limitation, lost profits) (collectively, "Losses"), directly or indirectly
relating to, resulting from or arising out of:
(a) Any untrue representation, misrepresentation, breach of warranty or
non-fulfillment of any covenant, agreement or other obligation by or of Buyer
contained herein or in any certificate, document or instrument delivered to
Selling Parties pursuant hereto.
(b) Any Losses with respect to the operations of Seller following Closing,
other than (i) those Losses which are determined by a court to arise out of any
breach by Seller of any covenant, representation or warranty contained in this
Agreement, or (ii) those Losses that are determined by a court to be subject to
indemnification by Seller under Section 10.1 herein.
(c) Any other Losses incidental to the foregoing.
The aggregate amount of the Buyer's liability under this Article 10 shall not
exceed $230,000. In addition, there shall be no liability for indemnification
under this Section 10.3 unless, the aggregate amount of Losses exceeds $10,000,
provided, however, that at such time as the aggregate amount of Losses exceeds
$10,000, the Buyers shall be liable for the full amount of the Losses.
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10.4 PROCEDURE. The indemnified party shall promptly notify the indemnifying
party of any claim, demand, action or proceeding for which indemnification will
be sought under Sections 10.1 or 10.3, and, if such claim, demand, action or
proceeding is a third party claim, demand, action or proceeding, the
indemnifying party will have the right at its expense to assume the defense
thereof using counsel reasonably acceptable to the indemnified party. The
indemnified party shall have the right to participate, at its own expense, with
respect to any such third party claim, demand, action or proceeding. In
connection with any such third party claim, demand, action or proceeding, Buyer
and the Selling Parties shall cooperate with each other and provide each other
with access to relevant books and records in their possession. No such third
party claim, demand, action or proceeding shall be settled without the prior
written consent of the indemnified party. If a firm written offer is made to
settle any such third party claim, demand, action or proceeding, which offer
does not involve any injunctive or non-monetary relief against the indemnified
party, and the indemnifying party proposes to accept such settlement and the
indemnified party refuses to consent to such settlement, then: (i) the
indemnifying party shall be excused from, and the indemnified party shall be
solely responsible for, all further defense of such third party claim, demand,
action or proceeding; and (ii) the maximum liability of the indemnifying party
relating to such third party claim, demand, action or proceeding shall be the
amount of the proposed settlement if the amount thereafter recovered from the
indemnified party on such third party claim, demand, action or proceeding is
greater than the amount of the proposed settlement.
ARTICLE 11. SURVIVAL OF REPRESENTATIONS
11.1 SURVIVAL OF REPRESENTATIONS. All representations, warranties, covenants and
agreements by the parties contained in this Agreement shall survive the Closing
and any investigation at any time made by or on behalf of any party hereto for a
period to one (1) year from the Closing Date; provided, however, that the
representations of Seller contained in Sections 4.1, 4.7, 4.10, 4.22, 5.2 and
5.10 shall survive for the duration of the applicable statute of limitations
period.
11.2 REMEDIES CUMULATIVE. The remedies provided herein shall be cumulative and
shall not preclude the assertion by any party hereto of any other rights or the
seeking of any other remedies against the other party hereto.
ARTICLE 12. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time prior to the Closing:
(a) By mutual agreement of Selling Parties and Buyer.
(b) By either Buyer or Selling Parties if any of the other makes an
assignment for the benefit of creditors, files a voluntary petition in
bankruptcy or seeks or consents to any reorganization or similar relief under
any present or future bankruptcy act or similar law, or is adjudicated a
bankrupt or insolvent, or if a third party commences any bankruptcy, insolvency,
reorganization or similar proceeding involving the other.
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ARTICLE 13. MISCELLANEOUS
13.1 EXPENSES. All fees and expenses incurred by Seller, including without
limitation, legal fees and expenses in connection with this Agreement will be
borne by Seller or the Members as they may determine and all fees and expenses
incurred by Buyer, including without limitation, legal fees and expenses, in
connection with this Agreement will be borne by Buyer.
13.2 ASSIGNABILITY; PARTIES IN INTEREST.
(a) Buyer may assign any or all of its rights hereunder to any affiliate or
any direct or indirect subsidiary of Buyer, and Buyer shall advise Selling
Parties of any such assignment and shall designate such party as the assignee
and transferee of the Assets purchased. Any such assignee shall assume all of
Buyer's duties, obligations and undertakings hereunder, but the Buyer shall
remain liable hereunder.
(b) Seller may not assign, transfer or otherwise dispose of any of its
rights hereunder without the prior written consent of Buyer.
(c) All the terms and provisions of this Agreement shall be binding upon,
shall inure to the benefit of and shall be enforceable by the respective heirs,
successors, assigns and legal or personal representatives of the parties hereto,
provided that the rights and obligations under all licenses of trademarks
hereunder shall under no circumstances be assignable.
13.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price for the Assets shall be
allocated as set forth on Schedule 13.3. The parties agree to follow the
allocation for federal and state income tax purposes.
13.4 KNOWLEDGE. An individual will be deemed to have "knowledge" of a particular
fact or other matter if: (i) such individual is actually aware of such fact or
other matter; or (ii) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation concerning the existence of such fact
or other matter. A person (other than an individual) will be deemed to have
"knowledge" of a particular fact or other matter if any individual who is
serving, or who has within the last eight months served, as a director, officer
or trustee of such person (or in any similar capacity) has, or at any time had
knowledge of such fact or other matter.
13.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including the exhibits,
Schedules, lists and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, and the Confidentiality
Agreement set forth as Exhibit J contain the entire understanding of the parties
with respect to its subject matter. There are no restrictions, agreements,
promises, warranties, covenants or undertakings other than those expressly set
forth herein or therein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter, except
for the Confidentiality Agreement. This Agreement may be amended only by a
written instrument duly executed by all parties or their respective heirs,
successors, assigns or legal personal representatives. Any condition to a
party's obligations hereunder may be waived but only by a written instrument
signed by the party entitled to the benefits thereof. The failure or delay of
any party at any time or times to require performance of any provision or to
exercise its rights with respect to any provision hereof, shall in no manner
operate as a waiver of or affect such party's right at a later time to enforce
the same.
13.6 HEADINGS. The section and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretations of this Agreement.
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13.7 REFERENCES. References to a section or subsection when used without further
attribution shall refer to the particular section or subsection of this
Agreement.
13.8 SEVERABILITY. The invalidity of any term or terms of this Agreement shall
not affect any other term of this Agreement, which shall remain in full force
and effect.
13.9 NOTICES. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed (registered or certified mail, postage prepaid, return
receipt requested) as follows:
If to Selling Parties:
Louis Bucelli and Maksim Repik
1916 Old Cuthbert Road, Suite B-13
Cherry Hill, NJ 08034
If to Buyer:
Robert H. Laird, Jr.
Vice President and General Counsel
HealthStream, Inc.
209 10th Ave. South
Suite 450
Nashville, TN 37203
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
13.10 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Tennessee, without regard
to its conflict of laws rules.
13.11 COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, with the same effect as if the signatories executing the several
counterparts had executed one counterpart, provided, however, that the several
executed counterparts shall together have been signed by all parties to be bound
hereby. This Agreement shall be binding upon each signatory hereto when one or
more counterparts, as provided above, have been signed by Buyer, Seller and the
Members. All such executed counterparts shall together constitute one and the
same instrument.
13.12 TIME. Both parties recognize that time is of the essence and will use best
efforts to execute the terms of this Agreement and all of the attached exhibits
on the Closing Date.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
duly authorized officers of Buyer and by each of the Selling Parties on the date
first above written.
BUYER:
HEALTHSTREAM, INC.
209 10th Ave. South
Suite 450
Nashville, TN 37203
By: /s/ Robert A. Frist, Jr.
-----------------------------
Title: Chief Executive Officer
--------------------------
SELLER:
KNOWLEDGEREVIEW, LLC
1916 Old Cuthbert Road, Suite B-13
Cherry Hill, NJ 08034
By: /s/ Louis Bucelli
-----------------------------
Title: Member
--------------------------
MEMBERS:
Louis Bucelli
/s/ Louis Bucelli
--------------------------------
Maksim Repik
/s/ Maksim Repik
--------------------------------
19
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EXHIBITS:
EXHIBIT A ESCROW AGREEMENT
EXHIBIT B BUYER'S COMPLIANCE CERTIFICATE
EXHIBIT C SELLING PARTIES' COMPLIANCE CERTIFICATE
EXHIBIT D NON-COMPETITION AGREEMENTS
EXHIBIT E SHAREHOLDERS' AGREEMENT
EXHIBIT F VOTING AGREEMENT
EXHIBIT G CO-SALE AGREEMENT
EXHIBIT H CHARTER OF BUYER
EXHIBIT I BY-LAWS OF BUYER
EXHIBIT J LEASE FOR 1916 OLD CUTHBERT ROAD, SUITE B-13, CHERRY HILL, NJ 08034
EXHIBIT K CONSULTING AGREEMENT
<PAGE> 1
EXHIBIT 2.4
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement"), is executed as of
the 25th day of January 2000, by and among HealthStream, Inc., a Tennessee
corporation ("HealthStream"), HealthStream Acquisition II, Inc., a newly formed
Tennessee corporation and wholly owned subsidiary of HealthStream ("Merger
Sub"), Multimedia Marketing, Inc., a Texas corporation d/b/a m3 The Healthcare
Learning Company ("M3"), and each of the stockholders of M3 as identified on the
signature pages hereto (individually, a "Principal Stockholder," and,
collectively, the "Principal Stockholders").
RECITALS
WHEREAS, the Boards of Directors of HealthStream, Merger Sub, and M3
each have determined that a business combination between HealthStream, Merger
Sub, and M3 is in the best interests of their respective companies and
stockholders and presents an opportunity for their respective companies to
achieve long-term strategic and financial benefits, and accordingly have agreed
to effect the merger provided for herein upon the terms and subject to the
conditions set forth herein.
WHEREAS, for federal income tax purposes, it is intended that the
merger provided for herein shall qualify as a reorganization within the meaning
of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
ARTICLE 1.
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.3), M3 shall be merged with and
into Merger Sub in accordance with this Agreement and the separate corporate
existence of M3 shall thereupon cease (the "Merger"). Merger Sub shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall be a wholly owned subsidiary of HealthStream.
The Merger shall have the effects specified in Section 48-21-108 of the
Tennessee Business Corporation Act ("TBCA") and Section 5.06 of the Texas
Business Corporation Act ("Texas Act").
1.2. The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of HealthStream, 209 10th Ave. South, Suite 450, Nashville, Tennessee,
at 11:00 a.m., local time, on the first business day immediately following the
day on which the last to be fulfilled or waived of the conditions set forth in
Article 7 herein shall be fulfilled or waived in accordance herewith or at such
other time, date, or place as HealthStream and M3 may agree. HealthStream shall
provide M3 with 5 days prior notice of the proposed date of Closing. The date on
which the Closing occurs is hereinafter referred to as the "Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth in
Article 7 herein shall have been fulfilled or waived in accordance herewith and
this Agreement shall not have been terminated as
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provided in Article 8 herein, the parties hereto shall cause Articles of Merger,
in the forms attached hereto as Exhibits A-1 and A-2, to be properly executed
and filed in accordance with the applicable provisions of the TBCA and the Texas
Act on the Closing Date. The Merger shall become effective at the time agreed
upon and designated in the Articles of Merger filed with the Secretaries of
State of Tennessee and Texas as the effective time of the Merger (the "Effective
Time").
ARTICLE 2.
CHARTER, BYLAWS,
AND OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
2.1. Charter. The Charter of Merger Sub in effect immediately prior to
the Effective Time shall, except as amended immediately following the Effective
Time in accordance with the Articles of Merger attached as Exhibit A, be the
Charter of the Surviving Corporation.
2.2. Bylaws. The Bylaws of Merger Sub in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation.
2.3. Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time.
2.4. Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time.
ARTICLE 3.
MERGER CONSIDERATION
3.1. Conversion of M3 Shares in the Merger. At the Effective Time, by
virtue of the Merger and without any action on the part of the M3 stockholders
("M3 Stockholders"), the outstanding shares of common stock, $0.01 par value, of
M3 (the "M3 Common Stock") shall be converted into, and become exchangeable for,
the right to receive 442,182 shares of validly issued, fully paid, and
nonassessable common stock, no par value, of HealthStream (the "HealthStream
Common Stock"). The 442,182 shares of HealthStream Common Stock issuable in
connection with the Merger are sometimes referred to herein as the
"Consideration Shares." The Consideration Shares and the Cash Consideration
defined in Section 3.5 herein shall be collectively referred to as the "Merger
Consideration." 7,162 of the Consideration Shares shall be issued to the
Principal Stockholders at the Closing. 36,818 of the Consideration Shares issued
to the Principal Stockholders under this Agreement shall be placed in the Escrow
Fund described in Section 3.2.1 below. The remaining 131,932 Consideration
Shares issued to the Principal Stockholders under this Agreement shall be
subject to a Stock Vesting Agreement, substantially in the form of Exhibit I
attached hereto. The Merger Consideration shall be issued to the remaining M3
Stockholders according to the schedule attached as Exhibit L hereto.
3.2. Escrow Shares.
3.2.1. At the Closing, pursuant to an Escrow Agreement,
substantially in the form attached hereto as Exhibit B (the "Escrow
Agreement"), the parties shall establish an escrow (the "Escrow Fund")
comprised of 36,818 of the Consideration Shares issuable to the
Principal Stockholders pursuant to Section 3.1 (the "Escrow Shares").
The Escrow Shares shall be maintained in escrow for
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the purposes of satisfying claims by HealthStream for indemnification
under Article 9 herein and the Escrow Agreement until the first
anniversary of the Closing Date (the "Escrow Period").
3.2.2. The right to receive Escrow Shares upon expiration of the
Escrow Period is an integral part of the Merger Consideration, and
shall not be transferable or assignable by, but shall inure to the
benefit of the heirs, representatives, or estate of, any Principal
Stockholder.
3.4. Fractional Shares. In lieu of the issuance of fractional shares of
HealthStream Common Stock, each M3 Stockholder, upon surrender of a certificate
which immediately prior to the Effective Time represented M3 Common Stock, shall
be entitled to receive a cash payment (without interest) equal to $16.00 per
share of any fraction of a share of HealthStream Common Stock to which such
holder would be entitled under Section 3.1 herein, but for this provision.
3.5. Adjustments of HealthStream Common Stock. In the event
HealthStream changes the number of shares of HealthStream Common Stock issued
and outstanding following the date of this Agreement but prior to the Effective
Time as a result of a stock split, stock dividend, recapitalization, conversion,
reorganization, or any other transaction in which any security of HealthStream
or any other entity or cash is issued or paid in respect of the outstanding
shares of HealthStream Common Stock and the record date therefor is after the
date of this Agreement and prior to the Effective Time, the Consideration Shares
shall be proportionately adjusted.
3.6. Cash Consideration. For purposes of this Agreement, the "Cash
Consideration" shall be six hundred thousand dollars (US$600,000). The Cash
Consideration shall be paid to the M3 Stockholders in accordance with Exhibit L
attached hereto in cash at Closing in immediately available funds.
3.7. Merger Sub Shares. Each share of capital stock of Merger Sub
issued and outstanding immediately before the Effective Time shall not be
converted or exchanged by virtue of the Merger and shall remain outstanding as
one share of capital stock of the surviving corporation.
3.8. Reservation of Shares. Simultaneously with the date of this
Agreement, the Board of Directors of HealthStream shall reserve for issuance a
sufficient number of shares of HealthStream Common Stock for the purpose of
issuing its shares to the M3 Stockholders in accordance herewith.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF M3 AND THE
PRINCIPAL STOCKHOLDERS
Except as set forth in the disclosure letter delivered prior to the
execution hereof to HealthStream (the "M3 Disclosure Letter"), M3 and the
Principal Stockholders, severally and not jointly, represent, warrant, and agree
as follows:
4.1. Existence; Good Standing; Corporate Power and Authority. M3 is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas. M3 is qualified to do business as a foreign
corporation and is in good standing under the laws of any state of the United
States in which the character of the properties owned or leased by them therein
or in which the transaction of business makes such qualification necessary,
except where the failure to be so qualified would not have a Material Adverse
Effect as defined in Section 10.15.3 herein. M3 has all requisite corporate
power and authority to own, operate, and lease its respective properties and to
carry on its respective business as now conducted.
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M3 has provided to HealthStream in the M3 Disclosure Letter complete and correct
copies of its articles of incorporation and bylaws each of which is in full
force and effect.
4.2. Authorization, Validity, and Effect of Agreements. M3 has the full
corporate power and authority to execute and deliver this Agreement and all
agreements and documents contemplated hereby. This Agreement and the Merger have
been approved by the Board of Directors of M3 and, upon the approval of the M3
Stockholders, the consummation by M3 of the transactions contemplated hereby
will have been duly authorized by all requisite corporate action. Subject to the
approval of the M3 Stockholders, this Agreement constitutes, and all agreements
and documents contemplated hereby (when executed and delivered pursuant hereto)
will constitute, the valid and legally binding obligations of M3 and the
Principal Stockholders, enforceable in accordance with their respective terms
subject to the effect of bankruptcy, insolvency, reorganization, moratorium and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
4.3. Capitalization. The authorized capital stock of M3 consists of
10,000,000 shares of M3 Common Stock, 5,313,740 shares of which are issued and
outstanding as of the date of this Agreement and owned beneficially and of
record by the M3 Stockholders as set forth in the M3 Disclosure Letter. M3 has
no outstanding capital stock, bonds, debentures, notes, or other obligations the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of M3
on any matter. All issued and outstanding shares of M3 Common Stock are duly
authorized, validly issued, fully paid, nonassessable, and free of preemptive
rights. There are no options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements, or commitments that obligate M3 to
issue, transfer, or sell any shares of its capital stock. To M3's or the
Principal Stockholders' Knowledge, as defined in Section 10.15.2 herein, none of
the outstanding shares of M3 Common Stock are subject to any voting trust
agreement, lien, encumbrance, security interest, restriction, or claim.
4.4. Other Interests. M3 does not own, directly or indirectly, or have
any obligation to acquire any interest or investment in any corporation,
partnership, joint venture, business, trust, or other entity.
4.5. No Violation. Subject to the approval of the M3 Stockholders,
neither the execution and delivery by M3 and the Principal Stockholders of this
Agreement nor the consummation by M3 and the Principal Stockholders of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a violation of any provisions of the Articles of
Incorporation or bylaws of M3; (ii) conflict with, result in a breach of any
provision of or the modification or termination of, constitute a default under,
or result in the creation or imposition of any lien, security interest, charge,
or encumbrance upon any of the assets of M3 or any Principal Stockholder
pursuant to any material commitment, lease, contract, or other material
agreement or instrument to which M3 or any Principal Stockholder is a party
(including, without limitation, "Material Contracts" as defined in Section 4.21
below and which could cause a Material Adverse Effect); or (iii) violate or
result in a change in any rights or obligations under any governmental permit or
license or any order, arbitration award, judgment, writ, injunction, decree,
statute, rule, or regulation applicable to M3 or any Principal Stockholder.
4.6. Regulatory Consents. No consent, approval, order, or authorization
of, or registration, declaration, or filing with, any governmental entity, is
required by or with respect to M3 or any Principal Stockholder in connection
with the execution and delivery of this Agreement by M3 or any Principal
Stockholder, or the consummation by M3 or any Principal Stockholder of the
transactions contemplated hereby, which the failure to obtain would have a
Material Adverse Effect.
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4.7. Financial Statements. M3 has delivered to HealthStream in the M3
Disclosure Letter its audited financial statements for the years ended December
31, 1997, 1998 and 1999. Each of the balance sheets provided, or to be provided
pursuant to Section 6.6 herein, to HealthStream by M3 (including the related
notes and schedules) fairly presents the financial condition of M3 as of their
respective dates and each of the statements of income, stockholders' equity, and
cash flows provided, or to be provided pursuant to Section 6.6 herein, to
HealthStream by M3 (including any related notes and schedules) fairly presents
the results of operations, stockholders' equity, and cash flows of M3 for the
periods set forth therein (subject, in the case of interim statements, to normal
year-end audit adjustments, none of which will constitute a Material Adverse
Effect), in each case in accordance with generally accepted accounting
principals consistently applied ("GAAP"). Such financial statements have been
prepared from the books and records of M3 which accurately and fairly reflect
the transactions and the acquisitions and dispositions of the assets of M3 in
all material respects. M3 does not have any liabilities, contingent or
otherwise, whether due or to become due, known or unknown, other than as
reflected in the December 31, 1999 financial statements or the M3 Disclosure
Letter, or those liabilities incurred in the ordinary course of business since
December 31, 1999.
4.8. No Material Adverse Changes. Since December 31, 1999, there has
not been (i) any material adverse change in the financial condition, results of
operations, business, assets, or liabilities (contingent or otherwise, whether
due or to become due, known or unknown) of M3; (ii) any dividend declared or
paid or distribution made on the capital stock of M3, or any capital stock
thereof redeemed or repurchased; (iii) any incurrence by M3 of long term debt;
(iv) any material salary, bonus, or compensation increases to any officers,
employees, or agents of M3 except for annual bonuses or raises which are
consistent with past practices of M3; (v) any pending or threatened labor
disputes or other labor problems against or potentially affecting M3 that could
cause a Material Adverse Effect; or (vi) any other transaction entered into by
M3 except in the ordinary course of business and consistent with past practice
excluding the incurrence of expenses in connection with this Agreement and the
transactions contemplated hereby.
4.9. Tax Matters.
4.9.1. For purposes of this Agreement, (i) "Tax" means any
federal, state, local, or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Section 59A of
the Code, customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration,
value added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not, and (ii) "Tax Return" means any
return, report, information return, or other document (including any
related or supporting information) filed or required to be filed with
any taxing authority in connection with its determination, assessment,
collection, administration, or imposition of any Tax.
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4.9.2. M3 has duly and timely filed all Tax Returns and has duly
and timely paid all Taxes and other charges (whether or not shown on
any Tax Return) due or claimed to be due from any of them by federal,
foreign, state, or local taxing authorities or has set up an adequate
reserve for all Taxes payable. True and correct copies of all Tax
Returns relating to federal taxes and state income and sales taxes and
other charges for the period from organization through December 31,
1999 have been heretofore delivered to HealthStream. The accruals and
reserves for Taxes contained in the financial statements and carried on
the books of M3 (other than any reserve for deferred taxes established
to reflect timing differences between book and tax income) are adequate
to cover all material Tax liabilities. Since December 31, 1999, M3 has
not incurred any Tax liabilities other than in the ordinary course of
business. There are no Tax liens (other than liens for current Taxes
not yet due) upon any properties or assets of M3 (whether real,
personal, or mixed, tangible or intangible), and, except as reflected
in the financial statements, there are no pending or, to M3's
Knowledge, threatened audits or examinations relating to, or claims
asserted for, Taxes or assessments against M3 and M3 has no Knowledge
of any basis for any such claims. M3 has not granted or been requested
to grant any extension of the limitation period applicable to any claim
for Taxes or assessments with respect to Taxes. M3 is not a party to
any Tax allocation or sharing agreement. M3 has no liability for the
Taxes of any Affiliated Group under Treasury Regulation 1.1502-6 (or
any similar provision of state, local, or foreign law). M3 has withheld
and paid all material Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, or stockholder.
4.9.3. The M3 Disclosure Letter lists each jurisdiction in which
M3 files Tax Returns for each period or portion thereof ending on or
before the date of this Agreement. Except as set forth in the M3
Disclosure Letter, to M3's or the Principal Stockholders' Knowledge,
there is no claim outstanding against M3 by any taxing authority in a
jurisdiction where M3 does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction.
4.9.4. All material elections with respect to Taxes affecting M3
as of the date hereof are set forth in the M3 Disclosure Letter.
4.9.5. All joint ventures, partnerships, or other arrangements or
contracts to which M3 is a party and that could be treated as a
partnership for federal income tax purposes are set forth in the M3
Disclosure Letter.
4.9.6. M3 has not (i) filed a consent pursuant to Section 341(f)
of the Code nor agreed to have Section 341(f)(2) apply to any
disposition of a subsection (f) asset (as such term is defined in
Section 341(f) of the Code) owned by M3; (ii) agreed, or is required to
agree, to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise that will affect
the liability of M3 for Taxes; (iii) made an election, or is required
to make an election, to treat any asset of M3 as owned by another
person pursuant to the provisions of former Section 168(f)(8) of the
Code or as tax-exempt bond financed property or tax-exempt use property
within the meaning of Section 168 of the Code; and (iv) made any of the
foregoing elections or is required to apply any of the foregoing rules
under any comparable state or local tax provision.
4.9.7. As soon as practicable following the Effective Time, the
Principal Stockholders shall, on behalf of M3, timely file all Tax
Returns for, and pay all Taxes due with respect to, the period ending
December 31, 1999 and the short period beginning on January 1, 2000 and
ending on the Closing Date. The Principal Stockholders shall close M3's
books on the Closing Date and shall report on M3's federal corporate
income Tax Return for the short period ending on the Closing Date
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all items of income, loss, deduction, and credit arising during the
short period under M3's method of accounting.
4.10. Employees and Fringe Benefit Plans.
4.10.1. The M3 Disclosure Letter sets forth the names, ages, and
titles of all members of the Board of Directors and officers of M3 and
all employees of M3 earning in excess of $30,000 per year, and the
annual rate of compensation (including bonuses) being paid to each such
officer and employee as of the most recent practicable date.
4.10.2. The M3 Disclosure Letter lists each employment, bonus,
deferred compensation, pension, stock option, stock appreciation right,
profit-sharing or retirement plan, arrangement, or practice, each
medical, vacation, retiree medical, severance pay plan, and each other
agreement or fringe benefit plan, arrangement, or practice, of M3,
whether legally binding or not, that affects one or more of M3's
employees, including all "employee benefit plans" as defined by Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (collectively, the "Plans"). M3 neither has nor sponsors, nor
participates in any Plan that is subject to Title IV of ERISA or the
minimum funding standards of Section 412 of the Code.
4.10.3. For each Plan that is an "employee benefit plan" under
Section 3(3) of ERISA, M3 has delivered to HealthStream correct and
complete copies of the plan documents and summary plan descriptions,
the most recent determination letter received from the Internal Revenue
Service, the most recent Form 5500 Annual Report, and all related trust
agreements, insurance contracts, and funding agreements that implement
each such Plan.
4.10.4. M3 does not have any commitment, whether formal or
informal and whether legally binding or not, (i) to create any
additional Plan; (ii) to modify or change any Plan; or (iii) to
maintain for any period of time any Plan. The M3 Disclosure Letter
contains an accurate and complete description of the funding policies
(and commitments, if any) with respect to each existing Plan.
4.10.5. Except where failure to do so would not have a Material
Adverse Effect, M3 does not have any unfunded past service liability in
respect of any Plans; M3, nor any Plan nor any trustee, administrator,
fiduciary, or sponsor of any Plan has engaged in any prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the
Code for which there is no statutory exemption in Section 408 of ERISA
or Section 4975 of the Code; all filings, reports, and descriptions as
to such Plans (including Form 5500 Annual Reports, summary plan
descriptions, and summary annual reports) required to have been made or
distributed to participants, the Internal Revenue Service, the United
States Department of Labor, and other governmental agencies have been
made in a timely manner or will be made on or prior to the Closing
Date; there is no material litigation, disputed claim, governmental
proceeding, or investigation pending or to the best of M3's or the
Principal Stockholders' Knowledge, threatened with respect to any of
the Plans, the related trusts, or any fiduciary, trustee,
administrator, or sponsor of the Plans; the Plans have been
established, maintained, and administered in all material respects in
accordance with their governing documents and applicable provisions of
ERISA and the Code and Treasury Regulations promulgated thereunder; and
each Plan that is intended to be a qualified plan under Section 401(a)
of the Code has received a favorable determination letter from the
Internal Revenue Service with respect to the current terms of the Plan.
4.10.6. Except where failure to do so would not have a Material
Adverse Effect, M3 has to M3's or the Principal Stockholders'
Knowledge, complied in all respects with all applicable federal,
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state, and local laws, rules, and regulations relating to employees'
employment and employment relationships, including, without limitation,
wage related laws, anti-discrimination laws, employee safety laws, and
COBRA (defined herein to mean the requirements of Code Section 4980B,
Proposed Treasury Regulation Section 1.162-26 and Part 6 of Subtitle B
of Title I of ERISA).
4.10.7. The consummation of the transactions contemplated by this
Agreement will not (i) result in the payment or series of payments by
M3 to any employee or other person of an "excess parachute payment"
within the meaning of Section 280G of the Code; (ii) entitle any
employee or former employee of M3 to severance pay, unemployment
compensation, or any other payment; or (iii) accelerate the time of
payment or vesting of any stock option, stock appreciation right,
deferred compensation, or other employee benefits under any Plan
(including vacation and sick pay).
4.10.8. None of the Plans that are "welfare benefit plans," within
the meaning of Section 3(1) of ERISA, provide for continuing benefits
or coverage after termination or retirement from employment, except for
COBRA rights under a "group health plan" as defined in Code Section
4980B(g) and ERISA Section 607.
4.10.9. Neither M3 nor any member in a "controlled group" with M3
(as defined in ERISA) has ever contributed to, participated in, or
withdrawn from a multi-employer plan as defined in Section 4001(a)(3)
of Title IV of ERISA, and M3 has not incurred or owes any liability as
a result of any partial or complete withdrawal by any employer from
such a multi-employer plan as described under Section 4201, 4203, or
4205 of ERISA.
4.11. Assets. M3 owns the assets reflected in the December 31, 1999
balance sheet, including the leasehold estates, with good and indefeasible
title, free and clear of any and all claims, liens, mortgages, security
interests, or encumbrances whatsoever, and free and clear of any rights or
privileges capable of becoming claims, liens, mortgages, securities interests,
or encumbrances. The buildings, plants, structures, and equipment owned or
leased by M3 are in good operating condition and repair, and are adequate for
the uses for which they are being put, and none of such buildings, plants,
structures, or equipment is in need of maintenance or repairs except for
ordinary and routine maintenance and repairs that are not material in nature or
cost. The assets of the business of M3 reflected in the December 31, 1999
balance sheet are sufficient for the continued conduct of the business of M3
after the Closing Date in substantially the same manner as conducted prior to
the Closing Date.
4.12. Accounts Receivable. All accounts receivable of M3 that are
reflected on the balance sheet dated December 31, 1999 and on the accounting
records of M3 as of the Closing Date (collectively, the "Accounts Receivable")
represent or will represent valid obligations arising from sales actually made
or services actually performed in the ordinary course of business. Unless paid
prior to the Closing Date, the Accounts Receivable are or will be as of the
Closing Date current and collectible net of the respective reserves shown on the
balance sheet dated December 31, 1999, or on the accounting records of M3 as of
the Closing Date (which reserves are adequate and calculated consistent with
past practice and, in the case of the reserve as of the Closing Date, will not
represent a greater percentage of the Accounts Receivable as of the Closing Date
than the reserve reflected in the balance sheet dated December 31, 1999, and
will not represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, each of the Accounts
Receivable either has been or will be collected in full, without any set-off, on
or before the first anniversary of the Closing Date. There is no contest, claim,
or right of set-off with any maker of an Accounts Receivable relating to the
amount or validity of such Accounts Receivable.
4.13. Lawful Operations. To M3's or the Principal Stockholders'
Knowledge, M3 has been and currently is conducting its respective business, and
each of the premises leased or owned by M3 have been
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and now are being used and operated, in compliance with all statutes,
regulations, orders, covenants, restrictions, and plans of federal, state,
regional, county, or municipal authorities, agencies, or boards applicable to
the same, except where the failure to so comply would not have a Material
Adverse Effect.
4.14. Litigation. There is no suit, action, or proceeding pending or,
to the Knowledge of M3 or any of the Principal Stockholders, threatened against
or affecting M3. M3 is not subject to any currently existing order, writ,
injunction, or decree relating to its respective operations.
4.15. Corporate Records; Other Information. The minute books of M3,
copies of which have been provided to HealthStream, reflect all meetings of the
boards of directors, committees of the boards of directors, and the stockholders
thereof.
4.16. Intellectual Property Rights. M3 owns or possesses the right to
use all trademarks, service marks, trade names, slogans, copyrights in published
and unpublished works, patents, patent applications, rights in mask works, and
all trade secrets, it currently uses without any material conflict or alleged
conflict with the rights of others, except where any such conflict would not
have a Material Adverse Effect. All copyrights are valid and enforceable, and
are not subject to any maintenance fees, taxes, or actions falling due within
ninety days after the date of this Agreement. No copyright is infringed or has
been challenged or threatened in any way. None of the subject matter of any
copyright infringes or is alleged to infringe any copyright of any third party
or is a derivative work based on the work of a third party. All works
encompassed by a copyright from a third party have been marked with the proper
copyright notice.
4.17. Certain Business Practices and Regulations. Since 1996, neither
M3, nor to M3's Knowledge, any of its executive officers, directors, or
employees, has (i) made or agreed to make any contribution, payment, or gift to
any customer, supplier, landlord, political candidate, governmental official,
employee, or agent where either the contribution, payment, or gift or the
purpose thereof was illegal under any law or regulation; (ii) established or
maintained any unrecorded fund or asset for any purpose or made any false
entries on its respective books and records for any reason; (iii) made or agreed
to make any contribution, or reimbursed any political gift or contribution made
by any other person, to any candidate for federal, state, or local public office
in violation of any law or regulation; or (iv) submitted any claim for services
rendered or reimbursement for expenses to any person where the services were not
actually rendered or the expenses were not actually incurred.
4.18. Insurance. All policies and binders of insurance for professional
liability, directors and officers, fire, liability, workers' compensation, and
other customary matters held by or on behalf of M3 ("Insurance Policies") are
described in the M3 Disclosure Letter and copies of which have been made
available to HealthStream. The Insurance Policies (which term shall include any
insurance policy entered into after the date of this Agreement in replacement of
an Insurance Policy provided that such replacement policy shall insure against
risks and liabilities, and in amounts and under terms and conditions,
substantially the same as those provided in such replaced policy or binder) are
in full force and effect. M3 is not in default with respect to any material
provision contained in any Insurance Policy. M3 has not failed to give any
notice of any claim under any Insurance Policy in due and timely fashion, nor
has any coverage for current claims been denied which failure or denial could
cause a Material Adverse Effect.
4.19. No Brokers. M3 has not entered into any contract, arrangement, or
understanding with any person or firm that may result in the obligation of M3 or
HealthStream to pay any finder's fees, brokerage or agent's commissions, or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
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4.20. HealthStream Stock Ownership; Investment Intent. The Principal
Stockholders and M3 shall, at the Closing, cause the all of the M3 Stockholders
to, jointly and severally, represent, warrant, and agree as follows:
4.20.1. The shares of HealthStream Common Stock issuable in the
Merger are being acquired by the M3 Stockholders for investment and not
with a view to the distribution thereof, and each of the M3
Stockholders acknowledges and understands that the certificate(s)
representing such shares of HealthStream Common Stock will bear a
legend in substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SUCH ACTS OR UNLESS EXEMPTIONS FROM
REGISTRATION ARE AVAILABLE.
THE TRANSFERABILITY OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS
RESTRICTED BY THE PROVISIONS OF A STOCKHOLDERS' AGREEMENT ENTERED INTO
BETWEEN THE HOLDER OF THIS CERTIFICATE AND THE COMPANY. A COPY OF THE
STOCKHOLDERS' AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND MAY BE REVIEWED AT SUCH OFFICE UPON REQUEST.
4.20.2. (i) Each of the M3 Stockholders is an "accredited
investor" as defined under Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended (the "Securities Act") or each
of the M3 Stockholders has such knowledge and experience in financial
and business matters that they will be able to understand information
concerning HealthStream and to evaluate the risks in any investment in
HealthStream Common Stock.
(ii) Each of the M3 Stockholders confirms that
HealthStream has made available to him or her to his or her
representatives the opportunity to ask questions of HealthStream's
officers and directors and to acquire such information about the
shares of HealthStream Common Stock and the business and financial
condition of HealthStream as the M3 Stockholders have requested,
which additional information has been received.
(iii) In deciding to acquire shares of HealthStream Common
Stock pursuant to the Merger, the M3 Stockholders have consulted
with their legal, financial, and tax advisers with respect to the
Merger and the nature of the investment together with additional
information concerning HealthStream provided under subsection (ii)
above.
(iv) Each M3 Stockholder has adequate means of providing
for his or her current needs and personal contingencies and has no
need for liquidity in his or her investment in HealthStream. Each
of the M3 Stockholders, either alone or with his or her
representatives, has such knowledge and experience in financial
and business matters that he or she is capable of evaluating the
merits and risks of an investment in HealthStream.
(v) Each M3 Stockholder has discussed with counsel, to the
extent such M3 Stockholder felt necessary, the requirements,
limitations, and restrictions on his or her ability to sell,
transfer, or otherwise dispose of the HealthStream Common Stock to
be received in the Merger, and fully understands the requirements,
limitations, and restrictions on his or her ability to transfer,
sell, or otherwise dispose of the HealthStream Common Stock.
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(vi) Until the earlier of (i) the Effective Time or (ii)
the termination of this Agreement, each M3 Stockholder will not
sell, transfer, or otherwise dispose of, or reduce such person's
interest in or risk relating to, any M3 Common Stock or any
instrument exercisable for or convertible into M3 Common Stock
currently owned by the M3 Stockholder.
4.21. Contracts; No Defaults. The M3 Disclosure Letter contains a
complete and accurate list, and M3 has previously delivered to HealthStream
complete copies of, all contracts and agreements for the performance of services
or the purchase or leasing of property by M3 of an amount or value in excess of
ten thousand dollars (US$10,000) ("Material Contracts"). To the extent it
applies to M3, each of the Material Contracts is in full force and effect and is
valid and enforceable in accordance with its terms subject to the effect of
bankruptcy, insolvency, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles, and M3 is in full compliance with all applicable terms and
requirements thereof. No event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Material Contract. There are no
renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate
any material amounts paid or payable to M3 under any Material Contract with any
person, including any governmental authority, having the contractual or
statutory right to demand or require such renegotiation.
4.22. Affiliate Transactions. None of the M3 Stockholders has any
interest in any property (whether real, personal, or mixed, tangible or
intangible) used in or pertaining to M3 business. No M3 Stockholder owns, of
record or beneficially, any equity or other financial or profit interest in any
entity that has had business dealings with M3 (other than business dealings of
transactions conducted in the ordinary course of business with M3 at
substantially prevailing market prices and on substantially prevailing market
terms) or that has engaged in competition with M3.
4.23. Full Disclosure. All of the information provided by M3 and its
representatives herein or in the M3 Disclosure Letter is true, correct, and
complete in all material respects, and no representation, warranty, or statement
made by M3 or the Principal Stockholders in or pursuant to this Agreement or the
M3 Disclosure Letter contains any untrue statement of a material fact or omits
to state any material fact necessary to make such representation, warranty, or
statement, in light of the circumstances in which they were made, not
misleading.
4.24 Section 368 Representations.
4.24.1. The fair market value of the HealthStream Common Stock and
other consideration received by each M3 Stockholder will be
approximately equal to the fair market value of the M3 Common Stock
surrenders in the Merger.
4.24.2. There is no plan or intention by the M3 Stockholders to
sell, exchange or otherwise dispose of a number of shares of
HealthStream Common Stock received in the transaction that would reduce
the M3 Stockholders' ownership of HealthStream Common Stock to a number
of shares having a value, as of the date of the transaction, of less
than 50 percent (50%) of the value of all of the formerly outstanding
stock of M3 as of the same date. For purposes of this representation,
shares of M3 Common Stock exchanged for cash or other property,
surrendered by dissenters or exchanged for cash in lieu of fractional
shares of HealthStream Common Stock will be treated as outstanding
HealthStream Common Stock on the date of the transaction, moreover,
shares of HealthStream
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Common Stock and shares of HealthStream Common Stock held by the M3
Stockholders and otherwise sold, redeemed or disposed of prior or
subsequent to the transaction will be considered in making this
representation.
4.24.3. M3 has provided to HealthStream true and correct copies of
statements ("Section 368 Certificates") received from each M3
Stockholder with respect to his plan or intention to sell or otherwise
dispose of the HealthStream Common Stock to be received pursuant to the
Merger.
4.24.4. Merger Sub will acquire at least 90 percent (90%) of the
fair market value of the net assets and at least 70 percent (70%) of
the fair market value of the gross assets held by M3 immediately prior
to the transaction. For purposes of this representation, amounts paid
by M3 to dissenters, amounts paid by M3 to M3 Stockholders who receive
cash or other property, M3 assets used to pay its reorganization
expenses, and all redemptions and distributions (except for regular,
normal dividends) made by M3 immediately preceding the transfer, will
be included as assets of M3 held immediately prior to the transaction.
4.24.5. Neither HealthStream nor Merger Sub will assume any debts
or obligations of the holders of the M3 Common Stock as part of the
Merger.
4.24.6. Except as set forth in the M3 Disclosure Letter, there
have not been any sales or redemptions of M3's capital stock in
contemplation of the Merger. The M3 Disclosure Letter sets forth all
transactions in the capital stock of M3 Stockholders since January 1,
1999.
4.24.7. The liabilities of M3 assumed by Merger Sub and the
liabilities to which the transferred assets of M3 are subject were
incurred by M3 in the ordinary course of its business.
4.24.8. M3 and the M3 Stockholders will pay their respective
expenses, if any, which are incurred in connection with the Merger.
4.24.9. M3 has not disposed of any assets (either as a dividend or
otherwise) constituting more than ten percent (10%) of the fair market
value of all of its assets (ignoring any liabilities) at any time
either during the past twelve months or in contemplation of the Merger.
4.24.10. M3 is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
4.24.11. M3 is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
4.24.12. The fair market value of the assets of M3 transferred to
Merger Sub will equal or exceed the sum of the liabilities assumed by
Merger Sub, plus the amount of liabilities, if any, to which the
transferred assets are subject.
4.24.13. M3 has a valid business purpose for entering into the
Merger.
4.24.14. Any compensation paid or to be paid to any M3 Stockholder
who will be an employee of, or perform advisory services for,
HealthStream or any affiliate thereof after the Merger will be in
consideration for services rendered or to be rendered, and such
compensation will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services and has been bargained
for independently of negotiations regarding consideration to be paid
for M3
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shares outstanding. None of the shares of HealthStream Common Stock
received by any M3 Stockholder is or will be separate consideration
for, or allocable to, any employment, consulting or other arrangement
which may be entered into between HealthStream or any affiliate thereof
and such shareholder for services rendered or to be rendered by any
shareholder.
4.24.15. No indebtedness between HealthStream or any of its
subsidiaries, on the one hand, and M3 or any of its subsidiaries, on
the other hand, exists or will exist prior to the Merger that (a) was
issued or acquired at a discount, or (b) will be settled, as a result
of the Merger, at a discount. No "installment obligation" (as the
quoted term is defined for purposes of Section 453B of the Code)
between HealthStream or any of its subsidiaries, on the one hand, and
M3 or any of its subsidiaries, on the other hand, exists or will exist
prior to the Merger that will be extinguished as a result of the
Merger.
4.25 NO WARRANTY OF CONDITION. The assets and properties of M3 are to
be taken as a part of the Merger AS IS, WHERE IS, AND WITH ALL FAULTS, AND
WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED,
WRITTEN OR ORAL, EXCEPT SOLELY AS EXPRESSLY SET FORTH IN THIS AGREEMENT; IT
BEING THE INTENTION OF HEALTHSTREAM, M3 AND THE PRINCIPAL STOCKHOLDERS TO
EXPRESSLY REVOKE, RELEASE, NEGATE AND EXCLUDE ALL EXPRESS AND IMPLIED
REPRESENTATIONS AND WARRANTIES (EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT)
AS TO (I) THE CONDITION OF M3'S ASSETS OR ANY ASPECT THEREOF, INCLUDING, WITHOUT
LIMITATION, ANY AND ALL EXPRESS OR IMPLIED REPRESENTATIONS AND WARRANTIES
RELATED TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE; (II) THE
NATURE OR QUALITY OF CONSTRUCTION, STRUCTURAL DESIGN OR ENGINEERING OF THE
PROPERTIES OR ASSETS, INCLUDING ANY LATENT OR PATENT DEFECTS, IF ANY; (III) THE
QUALITY OF THE LABOR OR MATERIALS INCLUDED IN THE PROPERTIES OR ASSETS,
INCLUDING ANY LATENT OR PATENT DEFECTS; (IV) ANY FEATURES OR CONDITIONS,
INCLUDING ANY LATENT OR PATENT DEFECTS, AT OR WHICH AFFECT THE PROPERTIES OR
ASSETS WITH RESPECT TO ANY PARTICULAR PURPOSE, USE, POTENTIAL OR OTHERWISE; (V)
THE SIZE, SHAPE, CONFIGURATION, CAPACITY, QUANTITY, QUALITY, CASH FLOW,
EXPENSES, VALUE, MAKE, MODEL OR CONDITION OF THE PROPERTIES OR ASSETS; (VI) ALL
EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES CREATED BY ANY AFFIRMATION OF
FACT OR PROMISE OR BY ANY DESCRIPTION OF THE PROPERTIES OR ASSETS; (VII) ANY
ENVIRONMENTAL, STRUCTURAL OR OTHER CONDITION OR HAZARD OR THE ABSENCE THEREOF
HERETOFORE, NOW, OR HEREAFTER AFFECTING IN ANY MANNER ANY OF THE PROPERTIES OR
ASSETS; AND (VIII) ALL OTHER EXPRESS OR IMPLIED WARRANTIES AND REPRESENTATIONS
BY M3 OR THE PRINCIPAL STOCKHOLDERS WHATSOEVER, EXCEPT AS EXPRESSLY SET FORTH IN
THIS AGREEMENT. FURTHERMORE, NEITHER M3 NOR THE PRINCIPAL STOCKHOLDERS MAKE ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE FUTURE
PROFITABILITY, FUTURE CASH FLOW OR VIABILITY OF M3, ALL OF WHICH HEALTHSTREAM
MUST DETERMINE FROM ITS INVESTIGATION OF THE BOOKS AND RECORDS OF M3 AND
HEALTHSTREAM'S OWN BUSINESS ACUMEN. HEALTHSTREAM ACKNOWLEDGES AND AGREES THAT
THE DOCUMENTATION AND INFORMATION PROVIDED BY M3 OR THE PRINCIPAL STOCKHOLDERS
TO HEALTHSTREAM ARE NOT THE SOLE SOURCE OF INFORMATION UPON WHICH ITS DECISION
TO ENTER INTO THIS AGREEMENT WAS BASED.
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ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF HEALTHSTREAM AND MERGER SUB
Except as set forth in the disclosure letter delivered at or prior to
the execution hereof to M3 and the Principal Stockholders (the "HealthStream
Disclosure Letter"), HealthStream and Merger Sub, jointly and severally,
represent, warrant, and agree as follows:
5.1. Existence; Good Standing; Corporate Authority. HealthStream is
duly incorporated, validly existing, and in good standing under the laws of the
State of Tennessee. Merger Sub is duly incorporated, validly existing, and in
good standing under the laws of the State of Tennessee. HealthStream is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect.
HealthStream and Merger Sub each have all requisite corporate power and
authority to own, operate, and lease their respective properties and carry on
their businesses as now conducted.
5.2. Authorization, Validity, and Effect of Agreements. Each of
HealthStream and Merger Sub has the requisite corporate power and authority to
execute and deliver this Agreement and all agreements and documents contemplated
hereby. This Agreement, the Merger and the transactions contemplated herein have
been approved by the Boards of Directors of HealthStream and Merger Sub and by
the shareholder of Merger Sub. The consummation by HealthStream and Merger Sub
of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. This Agreement constitutes, and all agreements and
documents contemplated hereby (when executed and delivered pursuant hereto) will
constitute, the valid and legally binding obligations of HealthStream and Merger
Sub, enforceable in accordance with their respective terms. The issuance and
delivery by HealthStream of shares of HealthStream Common Stock in connection
with the Merger and this Agreement have been duly and validly authorized by all
necessary corporate action on the part of HealthStream. The shares of
HealthStream Common Stock to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid, and nonassessable. Upon delivery of the HealthStream
Common Stock in exchange for the M3 Common Stock in accordance with the terms of
this Agreement, the holders of the HealthStream Common Stock will be the owners
of the HealthStream Common Stock.
5.3. Capitalization. The authorized capital stock of HealthStream
consists of 20,000,000 shares of Common Stock, no par value, 2,294,163 of which
are issued and outstanding, and 5,000,000 shares of Preferred Stock, no par
value, of which 76,000 shares have been designated as Series A Convertible
Preferred Stock, 1,376,360 shares have been designated as Series B Convertible
Preferred Stock, no par value, and 650,000 shares have been designated as Series
C Convertible Preferred Stock, no par value. The outstanding shares of Common
Stock and Convertible Preferred Stock have been duly authorized and validly
issued and are fully paid and nonassessable. All of the shareholders of the
capital stock of HealthStream are a party to the Shareholders' Agreement
attached as Exhibit F, the Co-Sale Agreement attached as Exhibit G, the Voting
Agreement attached as Exhibit H (collectively referred to herein as the
"Investor Agreements"). A true and complete copy of each of the Investor
Agreements with their amendments have been provided to M3 and the Principal
Stockholders. Each of the Investor Agreements is in full force and effect and is
valid and enforceable in accordance with its terms and HealthStream and each
stockholder or other person that has or had any obligation or liability under
the Investor Agreements are in full compliance with all applicable terms and
requirements thereof. No event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with or result in a
violation or breach of, or give any person the right to declare a breach or
default or exercise any remedy under, or to cancel, terminate, or modify any
Investor
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Agreement. Except for the Investor Agreements, none of the outstanding shares of
capital stock are subject to any voting agreement, stockholder agreement,
co-sale agreement, registration rights agreement (except those registration
rights granted pursuant to the Investor Rights Agreement dated April 21, 1999
and amended August 11, 1999), voting trust agreement, buy-sell agreement or any
lien encumbrance, security interest, restriction, or claim.
5.4. Subsidiaries. The HealthStream Disclosure Letter sets forth the
outstanding capital stock of Merger Sub and each corporation, partnership, or
other entity of which at least a majority of the voting interest is owned
directly or indirectly by HealthStream (a "HealthStream Subsidiary"). Merger Sub
has not engaged in any activity other than in connection with the transactions
contemplated by this Agreement.
5.5. No Violation. Neither the execution and delivery by HealthStream
and Merger Sub of this Agreement, nor the consummation by HealthStream and
Merger Sub of the transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach of any provisions of the
charter or bylaws of HealthStream or Merger Sub; (ii) conflict with, result in a
breach of any provision of or the modification or termination of, constitute a
default under, or result in the creation or imposition of any lien, security
interest, charge, or encumbrance upon any of the assets of HealthStream or
Merger Sub pursuant to any material commitment, lease, contract, or other
material agreement or instrument to which HealthStream or Merger Sub is a party;
or (iii) violate or result in a change in any rights or obligations, under any
governmental permit or license or any order, arbitration award, judgment, writ,
injunction, decree, statute, rule, or regulation applicable to HealthStream or
Merger Sub.
5.6. Litigation. There is no action, suit, or proceeding pending
against HealthStream or any HealthStream subsidiary (including, but not limited
to, Merger Sub) or, to the Knowledge of HealthStream or any HealthStream
subsidiary, threatened against or affecting HealthStream or any HealthStream
subsidiary, at law or in equity, or before or by any federal or state
commission, board, bureau, agency, or instrumentality, that is reasonably likely
to have a Material Adverse Effect. HealthStream is not subject to any currently
existing order, writ, injunction or decree relating to its operations or those
of its subsidiaries.
5.7. Absence of Certain Changes. Since December 31, 1999, there has not
been any material adverse change in the financial condition, results of
operations, business, assets or liabilities (contingent or otherwise, whether
due or to become due, known or unknown), of HealthStream, except for changes in
the ordinary course of business.
5.8. No Brokers. HealthStream has not entered into any contract,
arrangement, or understanding with any person or firm that may result in the
obligation of HealthStream to pay any finder's fees, brokerage or agent's
commissions, or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
HealthStream is not aware of any claim for payment of any finder's fees,
brokerage or agent's commissions, or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
5.9. Regulatory Consents. No consent, approval, order, or authorization
of, or registration, declaration, or filing with, any governmental entity, is
required by or with respect to HealthStream or Merger Sub in connection with the
execution and delivery of this Agreement by HealthStream or Merger Sub, or the
consummation by HealthStream or Merger Sub of the transactions contemplated
hereby, which the failure to obtain would have a Material Adverse Effect.
5.10. Full Disclosure. All of the information provided by HealthStream
and its representatives herein or in the HealthStream Disclosure Letter is true,
correct, and complete in all material respects, and no representation, warranty,
or statement made by HealthStream or Merger Sub in or pursuant to this Agreement
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<PAGE> 16
or the HealthStream Disclosure Letter contains any untrue statement of a
material fact or omits to state any material fact necessary to make such
representation, warranty, or statement, in light of the circumstances in which
they were made, not misleading.
5.11. Securities Documents. HealthStream has previously delivered to M3
an accurate and complete copy of HealthStream's Registration Statement on Form
S-1 and related exhibits that it filed with the Securities and Exchange
Commission ("SEC") and a copy of Amendment No. 1 to such Form S-1 that it
intends to file. The information contained in that Form S-1 was true, complete
and correct in all material respects on the date it was filed and the
information contained in the Amendment No. 1 to such Form S-1 is true, complete
and correct in all material respects. HealthStream has timely filed with the SEC
and the National Association of Securities Dealers all Securities Documents as
defined in Section 10.15.4 herein required by the Securities Laws as defined in
Section 10.15.5 herein and such Securities Documents complied in all material
respects with the Securities Laws and, as of their respective dates, did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.12. Financial Statements.
5.12.1. HealthStream has previously delivered or made available to
M3 accurate and complete copies of HealthStream's financial statements,
which are accompanied by the audit reports of Ernst & Young LLP,
independent certified public accountants with respect to HealthStream.
The HealthStream financial statements fairly present the consolidated
financial condition of HealthStream as of the respective dates set
forth therein, and the consolidated income, changes in stockholders
equity and cash flows of HealthStream for the respective periods or as
of the respective dates set forth therein.
5.12.2. Each of HealthStream's financial statements referred to in
Section 5.12(a) has been prepared in accordance with GAAP during the
periods involved, except as stated therein. The audits of HealthStream
have been conducted in all material respects in accordance with GAAP.
The books and records of HealthStream and it subsidiaries are being
maintained in material compliance with applicable legal and accounting
requirements, and all such books and records accurately reflect in all
material respects all dealings and transactions in respect of the
business, assets, liabilities and affairs of HealthStream and its
subsidiaries.
5.12.3. Except to the extent (i) reflected, disclosed or provided
for in the consolidated balance sheets of HealthStream as of December
31, 1999 (including related notes), (ii) of liabilities incurred since
December 31, 1999 in the ordinary course of business and (iii) of
liabilities incurred in connection with consummation of the
transactions contemplated by this Agreement, neither HealthStream nor
its subsidiaries have any liabilities, whether absolute, accrued,
contingent or otherwise, material to the financial condition, results
of operations or business of HealthStream on a consolidated basis.
5.13. Financial Resources. HealthStream has the financial wherewithal
and has, or will have prior to the Effective Time, sufficient funds to perform
its obligations under this Agreement.
5.14. Section 368 Representations.
5.14.1. Prior to the Merger, HealthStream will be in control of
Merger Sub within the meaning of Section 368(c)(1) of the Code.
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5.14.2. Following the Merger, Merger Sub will not issue additional
shares of its stock that would result in HealthStream losing control of
Merger Sub within the meaning of Section 368(c)(1) of the Code.
5.14.3. HealthStream has no plan or intention to reacquire any of
the HealthStream Common Stock issued in the Merger.
5.14.4. HealthStream has no plan or intention to liquidate Merger
Sub; to merge Merger Sub with and into another corporation; to sell or
otherwise dispose of the stock of Merger Sub; or to cause Merger Sub to
sell or otherwise dispose of any of the assets of the M3 acquired in
the transaction, except for dispositions made in the ordinary course of
business or transfers described in Section 368(a)(2)(C) of the Code.
5.14.5. Following the Merger, Merger Sub will continue the
historic business of M3 or use a significant portion of the M3 business
assets in a business.
5.14.6. HealthStream and Merger Sub will pay their respective
expenses, if any, incurred in connection with the Merger.
5.14.7. HealthStream and Merger Sub are not investment companies
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
5.14.8. No stock of Merger Sub will be issued in the Merger.
5.14.9. HealthStream has a valid business purpose for entering
into the Merger.
5.14.10. Any compensation paid or to be paid to any M3 Stockholder
who will be an employee of, or perform advisory services for,
HealthStream or any affiliate thereof after the Merger and such
compensation will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services and consideration to be
paid for M3 shares outstanding. None of the shares of HealthStream
Common Stock received by any M3 Stockholder is or will be separate
consideration for, or allocable to, any employment, consulting or other
arrangement which may be entered into between HealthStream or any
affiliate thereof and such shareholder for services rendered or to be
rendered by any shareholder.
5.14.11. No indebtedness between HealthStream or any of its
subsidiaries, on the one hand, and M3 or any of its subsidiaries, on
the other hand, exists or will exist prior to the Merger that (a) was
issued or acquired at a discount, or (b) will be settled, as a result
of the Merger, at a discount. No "installment obligation" (as the
quoted term is defined for purposes of Section 453B of the Code)
between HealthStream or any of its subsidiaries, on the one hand, and
M3 or any of its subsidiaries, on the other hand, exists or will exist
prior to the Merger that will be extinguished as a result of the
Merger.
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ARTICLE 6.
COVENANTS
6.1. Covenants of HealthStream and M3. During the period from the date
hereof and continuing until the Effective Time (except as expressly contemplated
or permitted hereby, or to the extent that the other parties shall otherwise
specifically consent in writing) each of HealthStream and M3 covenants with the
other that, insofar as the obligations relate to it:
6.1.1. Each of HealthStream and M3 shall carry on their respective
businesses in the usual, regular, and ordinary course in substantially
the same manner as heretofore conducted and shall use all reasonable
efforts to preserve intact their present business organizations,
maintain their rights and franchises, and preserve their relationships
with customers, suppliers, and others having business dealings with
them to the end that their goodwill and ongoing businesses shall not be
impaired in any material respect.
6.1.2. Each of HealthStream and M3 shall allow all designated
officers, attorneys, accountants, and other representatives of the
other access at all reasonable times during regular business hours to
the records and files, correspondence, audits, and properties, as well
as to all information relating to commitments, contracts, titles, and
financial position, or otherwise pertaining to the business and
affairs, of HealthStream and M3.
6.1.3. Each of HealthStream and M3 will promptly file or submit
and diligently prosecute any and all applications or notices with
public authorities, federal, state, or local, domestic or foreign, and
all other requests for approvals of any private persons, the filing or
granting of which is necessary or appropriate, or is deemed necessary
or appropriate by any party hereto, for the consummation of the
transactions contemplated hereby.
6.1.4. Except as and to the extent required by law, each of
HealthStream and M3 hereby agrees not to disclose or use, and each
shall cause its representatives not to disclose or use, any
confidential information with respect to any other party hereto
furnished, or to be furnished, by such other party or its
representatives in connection herewith at any time or in any manner
other than in connection with their respective evaluations of the
Merger.
6.2. Covenants of M3 and the Principal Stockholders. M3 and the
Principal Stockholders covenant and agree as follows:
6.2.1. (i) they shall, and shall direct and use their Best Efforts
to cause M3's directors, officers, employees, advisors, accountants,
and attorneys (the "Representatives"), not to, initiate, solicit, or
encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer with respect to a merger,
acquisition, consolidation, or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of M3 (any such proposal or offer being hereinafter referred
to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have
any discussions with, any person relating to an Acquisition Proposal,
or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; provided, however, that the Board of Directors of
M3 may furnish such information or participate in such negotiations or
discussions if such Board of Directors, after having consulted with and
considered the advice of outside counsel, has determined that the
failure to do the same may cause the members of such Board of Directors
to breach their fiduciary duties under applicable law; (ii) they will
immediately cease and discontinue any existing activities, discussions,
or negotiations with any parties conducted heretofore with
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respect to any of the foregoing and will take the necessary steps to
inform the individuals or entities referred to above of the obligations
undertaken in this Section 6.2.1; and (iii) they will notify
HealthStream immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued
with, it.
6.2.2. M3 will make all normal and customary repairs,
replacements, and improvements to its facilities, properties, and
equipment and, without limiting the generality of the covenants set
forth in Section 6.1.1, will not:
(i) change its certificate of incorporation, bylaws, or
capitalization or merge or consolidate with or into or otherwise
acquire any interest in any entity except as provided herein;
(ii) declare, set aside, or pay any cash dividend or other
distribution on or in respect of shares of its capital stock, or
any redemption, retirement, or purchase with respect to its
capital stock or issue any additional shares or rights or options
or agreements to acquire shares of its capital stock, or reprice
any outstanding stock options;
(iii) discharge or satisfy any lien, charge, encumbrance,
or indebtedness outside the ordinary course of business, except
those required to be discharged or satisfied;
(iv) authorize, guarantee, or incur any indebtedness;
(v) make any capital expenditures or capital additions or
betterments, or commitments therefor, aggregating in excess of ten
thousand dollars (US$10,000);
(vi) loan funds to any person;
(vii) institute, settle, or agree to settle any
litigation, action, or proceeding before any court or governmental
body in an amount in excess of $10,000 in the aggregate;
(viii) sell, lease, mortgage, pledge, or subject to any
other encumbrance or otherwise dispose of any of its property or
assets, tangible or intangible, other than in the ordinary course
of business;
(ix) except in the ordinary course of business consistent
with past practice, authorize any compensation increases of any
kind whatsoever for any employee (provided M3 shall pay owing or
accrued deferred compensation) or adopt or amend any existing
severance plan or other Plan;
(x) make any new elections with respect to Taxes, or any
changes in current elections with respect to Taxes; or
(xi) enter into any contract, agreement, commitment, or
arrangement to do any of the foregoing.
6.2.3. neither M3 nor the Principal Stockholders shall take any
action that would cause or tend to cause the conditions upon the
obligations of the parties hereto to effect the transactions
contemplated hereby not to be fulfilled including, without limitation,
taking, causing to be taken, or
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permitting or suffering to be taken or to exist any action, condition,
or thing that would cause the representations and warranties made by
them herein not to be true, correct, complete, and accurate as of the
Closing Date.
6.2.4. M3 shall not (i) knowingly take any action, or knowingly
fail to take any action, that would jeopardize qualification of the
Merger as a reorganization within the meaning of Section 368(a)(2)(D)
of the Code; or (ii) enter into any contract, agreement, commitment, or
arrangement with respect to either of the foregoing.
6.2.5. M3 shall cooperate with HealthStream's audit firm for any
purpose that HealthStream deems reasonably necessary to effectuate the
terms of this Agreement, including, but not limited to providing
assistance with generating work papers and executing necessary
representation letters.
6.2.6. M3 shall comply with all reasonable requests of
HealthStream's audit firm and provide all the information required to
complete an audit for the year ending December 31, 1999 as soon as
possible.
6.3. Covenants of HealthStream. HealthStream covenants and agrees that:
6.3.1. HealthStream shall not (i) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification
of the Merger as a reorganization within the meaning of Section
368(a)(2)(D) of the Code, or (ii) enter into any contract, agreement,
commitment, or arrangement with respect to either of the foregoing.
6.3.2. HealthStream shall not take any action that would cause or
tend to cause the conditions upon the obligations of the parties hereto
to effect the transactions contemplated hereby not to be fulfilled
including, without limitation, taking, causing to be taken, or
permitting or suffering to be taken or to exist any action, condition,
or thing that would cause the representations and warranties made by
them herein not to be true, correct, complete, and accurate as of the
Closing Date.
6.3.3. It is the intention of HealthStream that within a
reasonable period of time following the Effective Time (a) it will
provide former full time employees of M3 who remain employed by Merger
Sub following the Effective Time with employee benefit plans
substantially similar in the aggregate to those provided to similarly
situated employees of HealthStream (b) any such employees will receive
credit for years of service with M3 prior to the Effective Time for the
purpose of eligibility to the extent applicable (but not for the
purpose of accrual of benefits or allocation of employer contributions)
and (c) HealthStream shall cause any and all pre-existing condition
limitations and eligibility waiting periods under group health plans to
be waived with respect to participants and their eligible dependents
who have been continuously insured (either through M3 or a prior
employer) for twelve (12) months prior to the Closing Date.
6.3.4. Subject to the advice of underwriters, counsel and
accountants as well as then existing market conditions and alternative
means of raising capital that may better suit its needs, HealthStream
shall use all commercially reasonable efforts to cause its common stock
to be registered under the Securities Laws as promptly as possible and
to have such common stock to be approved for listing on the NASDAQ
Stock Market (or such other national securities exchange or stock
market on which such securities shall then be traded).
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<PAGE> 21
6.3.5. HealthStream shall grant employees of M3 an option to
purchase the number of shares of HealthStream Common Stock designated
on Exhibit K attached hereto and an additional number of shares to make
the total grant to each such employee commensurate with similarly
situated current HealthStream employees.
6.3.6. HealthStream agrees to permit M3 to obtain a director's
and officer's liability policy and extended reporting period (otherwise
known as "tail coverage"); provided, however, that the premium expense
for such coverages shall not exceed $15,000.
ARTICLE 7.
CONDITIONS
7.1. Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
7.1.1. No action or proceeding shall have been instituted before a
court or other governmental body by any governmental agency or public
authority to restrain or prohibit the transactions contemplated by this
Agreement or to obtain an amount of damages or other material relief in
connection with the execution of the Agreement or the related
agreements or the consummation of the Merger; and no governmental
agency shall have given notice to any party hereto to the effect that
consummation of the transactions contemplated by this Agreement would
constitute a violation of any law or that it intends to commence
proceedings to restrain consummation of the Merger.
7.1.2. All consents, authorizations, orders, and approvals of (or
filings or registrations with) any governmental commission, board, or
other regulatory body required in connection with the execution,
delivery, and performance of this Agreement shall have been obtained or
made, except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time, and except
where the failure to have obtained or made any such consent,
authorization, order, approval, filing, or registration would not have
a Material Adverse Effect on the business of HealthStream or M3
following the Effective Time.
7.1.3. HealthStream shall have received from M3 copies of all
resolutions adopted by the Board of Directors and stockholders of M3 in
connection with this Agreement and the transactions contemplated
hereby. M3 shall have received from HealthStream and Merger Sub copies
of all resolutions adopted by the Board of Directors and stockholders
of each respective company in connection with this Agreement and the
transactions contemplated hereby.
7.1.4. Each M3 Stockholder shall have signed a form of consent
which (a) consents to the terms of the Merger and to the taking of
stockholder action to approve the Merger without a meeting, (b)
acknowledges that he or she is aware of his or her rights to dissent to
the Merger and demand payment for his or her shares of M3 Common Stock
in accordance with the Texas Act, and (c) waives such rights to dissent
and demand payment.
7.2. Conditions to Obligations of M3 and the Principal Stockholders to
Effect the Merger. The obligations of M3 and the Principal Stockholders to
effect the Merger shall be subject to the fulfillment at or prior to the Closing
Date of the following conditions:
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7.2.1. HealthStream shall have performed its agreements contained
in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of HealthStream and Merger
Sub contained in this Agreement and in any document delivered in
connection herewith shall be true and correct as of the Closing Date,
and M3 shall have received a certificate of the President or the Chief
Financial Officer of HealthStream, dated the Closing Date, certifying
to such effect.
7.2.2. From the date of this Agreement through the Effective Time,
there shall not have occurred any change in the financial condition,
business, or operations of HealthStream, that would have or would be
reasonably likely to have a HealthStream Material Adverse Effect.
7.2.3. M3 and the Principal Stockholders shall have received a
written opinion, dated as of the Closing Date, from counsel for
HealthStream substantially in the form of Exhibit C attached hereto.
7.2.4. HealthStream shall have executed Employment Agreements with
Robert Smith and William Hyche, substantially in the form of Exhibit E
attached hereto.
7.2.5. M3 shall have received an opinion of counsel satisfactory
to it that the Merger will qualify as a reorganization under Section
368(a) of the Code.
7.2.6. HealthStream shall have executed Stock Vesting Agreements
with Robert Smith and William Hyche, substantially in the form of
Exhibit I attached hereto.
7.2.7. HealthStream shall have granted either Robert Smith or
William Hyche visitation rights to its Board of Directors and shall
have executed the Visitation Rights Letter substantially in the form of
Exhibit J attached hereto.
7.3. Conditions to Obligations of HealthStream and Merger Sub to Effect
the Merger. The obligations of HealthStream and Merger Sub to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions:
7.3.1. M3 and the Principal Stockholders shall have performed
their respective agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of M3 and the Principal Stockholders contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date to the same extent as if made
on the Closing Date, and HealthStream shall have received a certificate
of the Chief Executive Officer of M3 and each of the Principal
Stockholders dated the Closing Date, certifying to such effect.
7.3.2. From the date of this Agreement through the Effective Time,
there shall not have occurred any change in the financial condition,
business, operations, or prospects of M3, that would have or would be
reasonably likely to have a M3 Material Adverse Effect.
7.3.3 HealthStream shall have received a written opinion, dated as
of the Closing Date, from counsel for M3, substantially in the form of
Exhibit D attached hereto.
7.3.4. Robert Smith and William Hyche shall have executed
Employment Agreements, substantially in the form of Exhibit E attached
hereto.
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7.3.5. M3 Stockholders shall have executed a Shareholders'
Agreement, substantially in the form of Exhibit F attached hereto.
7.3.6. M3 Stockholders shall have executed a Co-Sale Agreement,
substantially in the form of Exhibit G attached hereto.
7.3.7. M3 Stockholders shall have executed a Voting Agreement,
substantially in the form of Exhibit H attached hereto.
7.3.8. Robert Smith and William Hyche shall have executed Stock
Vesting Agreements, substantially in the form of Exhibit I attached
hereto.
7.3.9. M3 shall not have more than one million two hundred
thousand dollars (US$1,200,000) in total debt excluding accounts
payable and other short term indebtedness incurred in the ordinary
course of business.
7.3.10. M3 Stockholders shall have approved the execution of this
Agreement.
7.4. Failure to Fulfill Conditions. In the event that either of the
parties hereto determines that a condition to its respective obligations to
consummate the transactions contemplated may not be fulfilled on or prior to the
termination of this Agreement, it will promptly notify the other party. Each
party will promptly inform the other party of any facts applicable to it that
would be likely to prevent or materially delay approval of the Merger or any of
the other transactions contemplated hereby by any Governmental Entity or third
party or which would otherwise prevent or materially delay consummation of such
transactions. Each party will promptly give notice to the other party of the
occurrence of any event or the failure of any event to occur that results in a
breach of any representation or warranty by that party contained herein or a
failure by that party to comply with any covenant, condition or agreement
contained herein.
ARTICLE 8.
TERMINATION
8.1. Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, by the
mutual written consent of HealthStream and M3.
8.2. Termination by Either HealthStream or M3. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either HealthStream or M3 if (a) the Merger shall not have been consummated
by January 31, 2000 or (b) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory, or
administrative agency or commission shall have issued an order, decree, or
ruling or taken any other action permanently restraining, enjoining, or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling, or other action shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause (b) shall have used all reasonable efforts to remove
such injunction, order, or decree.
8.3. Termination by M3. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time by action of the Board
of Directors of M3, if (a) there has been a breach by HealthStream or Merger Sub
of any representation or warranty contained in this Agreement which would have
or would be reasonably likely to have an HealthStream Material Adverse Effect,
or (b) there has
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been a material breach of any of the covenants or agreements set forth in this
Agreement on the part of HealthStream, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice of such
breach is given by M3 to HealthStream.
8.4. Termination by HealthStream. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, by action
of the Board of Directors of HealthStream, if (a) there has been a breach by M3
or the Principal Stockholders of any representation or warranty contained in
this Agreement which would have or would be reasonably likely to have a M3
Material Adverse Effect, or (b) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of M3 or the
Principal Stockholders, which breach is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by
HealthStream to M3.
8.5. Effect of Termination and Abandonment. Upon termination of this
Agreement pursuant to this Article 8, other than the provisions of Sections
10.10 and 10.12, this Agreement shall be void and of no other effect, and there
shall be no liability by reason of this Agreement or the termination thereof on
the part of any party hereto (other than for breach of a covenant contained
herein), or on the part of the respective directors, officers, employees,
agents, or stockholders of any of them.
8.6. Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE 9.
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
9.1. Survival of Representations and Warranties. The representatives
and warranties of the parties contained in Articles 4 and 5 of this Agreement
shall survive the Merger for a period expiring on the first anniversary of the
Closing Date. Except as and to the extent set forth in Article 4 hereof, neither
M3 nor the Principal Stockholders makes any representations or warranties
whatsoever and disclaims all liability and responsibility for any other
representation, warranty, statement or information made or communicated (orally
or in writing) to HealthStream and Merger Sub (including, but not limited to,
any opinion, information or advice which may have been provided to HealthStream
or Merger Sub by any officer, stockholder, director, employee, agent,
consultant, attorney or representative of M3, its Principal Stockholders or any
of their affiliates). HealthStream and Merger Sub acknowledge and affirm that
they have had full access to the audited financial statements and other
information regarding M3 and that HealthStream and Merger Sub have made their
own independent investigation, analysis, evaluation and verification of M3, its
business, assets, properties, operations and its financial condition.
9.2. Indemnity Obligations of the Principal Stockholders. Subject to
the provisions of this Article 9 and the Escrow Agreement, the Principal
Stockholders, severally and not jointly, in accordance with the Escrow
Agreement, agree to indemnify and hold HealthStream and Merger Sub harmless
from, and to reimburse HealthStream and Merger Sub for, any losses, costs,
expenses, obligations, liabilities, damages, remedies and penalties, including
interest, and reasonable attorneys' fees and expenses actually incurred
(collectively "Losses") arising in connection with or attributable to the
inaccuracy or breach of any
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representation, warranty, or covenant made by M3 or the Principal Stockholders
in this Agreement as of the date of this Agreement and as of the Closing Date.
With regard to the representation and warranty regarding Accounts Receivable in
Section 4.12 herein, any Accounts Receivable that exists as of the Closing Date
that has not been collected in full, without any set-off, at the end of the
Escrow Period shall be included in the Retained Portion under the Escrow
Agreement and such accounts receivable shall be assigned to the Principal
Stockholders.
9.3. Indemnification by HealthStream. Subject to the provisions of this
Article 9, HealthStream and Merger Sub, jointly and severally, will indemnify,
defend, and hold harmless the Principal Stockholders and the other M3
Stockholders from, and reimburse the Principal Stockholders and the other M3
Stockholders for, any Losses arising in connection with or attributable to the
inaccuracy or breach of any representation, warranty, or covenant made by
HealthStream or Merger Sub in this Agreement as of the date of this Agreement
and as of the Closing Date.
9.4 Limitation on Liability. Notwithstanding the provisions of this
Agreement, neither M3, the Principal Stockholders nor any M3 Stockholder shall
be liable to HealthStream or any person under this Agreement or otherwise for
any Losses which are less than $10,000 in the aggregate. The maximum liability
of M3 for any Losses under this Agreement or any related document or instrument
shall not exceed $250,000. The maximum liability of each of the Principal
Stockholders for any Losses under this Agreement or any related document or
instrument shall not exceed $1,250,000. The parties agree that the sole source
for payment of the indemnity obligations of the Principal Stockholders under
this Agreement or otherwise will be the Merger Consideration paid to the
Principal Stockholders under this Agreement. For the purposes of this Article 9,
the Consideration Shares will be valued at $16.00 per share.
9.5 Notice; Procedure. If a claim in respect to this Article 9 is to be
made against an indemnifying party under this Section, the party to be
indemnified shall promptly notify the indemnifying party in writing of such
claim on or before the first anniversary of the Closing Date. In no case shall
an indemnifying party be liable under this Agreement with respect to any Loss or
settlement unless the indemnifying party shall have been notified in writing by
the indemnified party seeking indemnification, of the assertion or filing of the
claim or action giving rise to such Loss or settlement promptly after such
indemnified party shall have been advised of, or otherwise shall have received
information as to, the assertion or filing of such claim or action. In case any
action is brought against any indemnified party, and such indemnified party
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it or he may
wish, jointly with all other indemnifying parties, similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded, based upon advice of its counsel, that there may be
legal defenses available to it or he and/or any other indemnified party which
are different from or additional to those available to the indemnifying party,
the indemnified party shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such action
on behalf of such indemnified party. Upon receipt of notice from the
indemnifying party to such Indemnified Party of its election to assume the
defense of such action and approval by the Indemnified Party of counsel, the
indemnifying party will not be liable to such Indemnified Party under this
Section for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with defense thereof unless:
(i) the Indemnified Party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the
proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of
more than one separate counsel);
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(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party within a reasonable time after notice or commencement
of the action; or
(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.
ARTICLE 10.
GENERAL PROVISIONS
10.1. Notices. Any notice required to be given hereunder shall be
sufficient if in writing, by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and
first-class postage prepaid), addressed as follows:
If to HealthStream or Merger Sub:
Robert H. Laird, Jr.
Vice President and General Counsel
209 10th Ave. South
Suite 450
Nashville, TN 37203
If to M3 or Principal Stockholders:
Robert Smith
Chief Executive Officer
Multimedia Marketing, Inc.
1230 Riverbend, Suite 218
Dallas, TX 75247
and
William Hyche
801 Ranch Road 6205
Suite 100B
Austin, TX 78738
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
personally delivered or mailed.
10.2. Assignment; Binding Effect; Benefit. Neither this Agreement nor
any of the rights, interests, or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
10.3. Entire Agreement. This Agreement, the Exhibits, the M3 Disclosure
Letter, the HealthStream Disclosure Letter, and any documents delivered by the
parties in connection herewith
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constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous term sheets,
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
10.4. Amendment. This Agreement may be amended by the parties hereto by
action taken by their respective Boards of Directors, if applicable. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
10.5. Governing Law. THE VALIDITY OF THIS AGREEMENT, THE CONSTRUCTION
OF ITS TERMS AND THE DETERMINATION OF THE RIGHTS AND DUTIES OF THE PARTIES
HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TENNESSEE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
10.6. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
10.7. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants, or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other provision
hereunder.
10.8. Incorporation of Exhibits. The M3 Disclosure Letter, the
HealthStream Disclosure Letter, and the Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part hereof for all purposes as
if fully set forth herein.
10.9. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.10. Expenses. Each party to this Agreement shall bear its own
expenses in connection with the Merger and the transactions contemplated hereby.
10.11. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled by contract, at law, or in equity.
10.12 Arbitration. Any controversy or claim arising out of this
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the rules of the American Arbitration Association, and
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judgment upon the award rendered by the arbitration may be entered in any court
having jurisdiction thereof. The arbitration agreement set forth herein shall
not limit a court from granting a temporary restraining order or preliminary
injunction in order to preserve the status quo of the parties pending
arbitration. Further, the arbitrator(s) shall have power to enter such orders by
way of interim award, and they shall be enforceable in court. The place of such
arbitration shall be in Davidson County, Tennessee.
10.13 Delivery by Facsimile. This Agreement shall become effective upon
execution and delivery hereof by all the parties hereto; delivery of this
Agreement may be made by facsimile to the parties with original copies promptly
to follow by overnight courier.
10.14 Guarantee. HealthStream guarantees all of the obligations of
Merger Sub under this Agreement.
10.15 Certain Definitions. The following terms shall have the meanings
ascribed to them for all purposes of this Agreement:
10.15.1. "Best Efforts" shall mean the taking of all reasonable
steps to cause or prevent any event or condition which would have been
taken in similar circumstances by a reasonably prudent business person
engaged in a similar business for the advancement or protection of his
own economic interest in light of the consequences of failure to cause
or prevent the occurrence of such event or condition.
10.15.2. "Knowledge" or "known" shall mean that an individual
shall be deemed to have "knowledge" of or to have "known" a particular
fact or other matter if (i) such individual is actually aware of such
fact or other matter or (ii) a prudent individual possessing the
requisite knowledge and experience could be expected to discover or
otherwise become aware of such fact or other matter in the course of
conducting a reasonably comprehensive investigation concerning the
truth or existence of such fact or other matter. A corporation shall be
deemed to have "knowledge" of or to have "known" a particular fact or
other matter if any individual who is serving, or who has at any time
served, as a director or officer (or in any similar capacity) of the
corporation, has, or at any time had, knowledge of such fact or other
matter. Neither party is understood to have undertaken a separate
investigation in connection with the transactions contemplated hereby
to determine the existence or absence of facts or other matters in the
statement qualified as "known" by, or the "knowledge" of such party.
10.15.3. "Material Adverse Effect" shall mean, with respect to any
party, any effect that is material and adverse to the financial
condition, results of operations or business of that party and its
subsidiaries taken as whole, or that materially impairs the ability of
any party to consummate the Merger, or any of the other transactions
contemplated by this Agreement. Material Adverse Effect shall not,
however, be deemed to include the impact of (a) changes in laws and
regulations or interpretations thereof that are generally applicable to
the healthcare industry, (b) changes in GAAP that are generally
applicable to the healthcare industry, (c) expenses incurred in
connection with the transactions contemplated hereby, (d) actions or
omissions of a party (or any of its subsidiaries) taken with the prior
informed written consent of the other party or parties in contemplation
of the transactions contemplated hereby, or (e) changes attributable to
or resulting from changes in general economic conditions.
10.15.4. "Securities Documents" shall mean all reports, offering
circulars, proxy statements, registration statements and all similar
documents filed, or required to be filed, pursuant to the Securities
Laws.
-28-
<PAGE> 29
10.15.5. "Securities Laws" shall mean the Securities Act; the
Exchange Act; the Investment Company Act of 1940, as amended; the
Investment Advisers Act of 1940, as amended; the Trust Indenture Act of
1939, as amended, and the rules and regulations of the SEC promulgated
thereunder.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.
-29-
<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same
to be duly delivered on their behalf to be effective as of the day and year
first written above.
HEALTHSTREAM, INC.
By:
-------------------------------
Title:
-----------------------------
HEALTHSTREAM ACQUISITION II, INC.
By:
-------------------------------
Title:
-----------------------------
MULTIMEDIA MARKETING, INC.
By:
-------------------------------
Title:
-----------------------------
THE PRINCIPAL STOCKHOLDERS:
- -----------------------------------
Robert Smith
- -----------------------------------
William Hyche
-30-
<PAGE> 31
ATTACHMENTS AND EXHIBITS
M3 Disclosure Letter
HealthStream Disclosure Letter
Exhibit A - Articles of Merger
Exhibit B - Form of Escrow Agreement
Exhibit C - Form of HealthStream Counsel Legal Opinion
Exhibit D - Form of M3 Counsel Legal Opinion
Exhibit E - Form of Employment Agreement
Exhibit F - HealthStream Shareholders' Agreement
Exhibit G - HealthStream Co-Sale Agreement
Exhibit H - HealthStream Voting Agreement
Exhibit I - Stock Vesting Agreement
Exhibit J - Visitation Rights Letter
Exhibit K - M3 Employee Stock Options
Exhibit L - Merger Consideration Allocation
<PAGE> 32
M3 OFFICER CERTIFICATE
The undersigned hereby certifies that Multimedia Marketing, Inc. ("M3")
and its Principal Stockholders have performed their respective agreements
contained in the Merger Agreement and the representations and warranties of M3
and the Principal Stockholders contained in the Merger Agreement and in any
document delivered in connection therewith are true and correct to the same
extent as if made on this date.
IN WITNESS WHEREOF, the undersigned has set his hand this the ___ day
of January 2000.
MULTIMEDIA MARKETING, INC.
By:
-----------------------------------
Title:
--------------------------------
<PAGE> 33
HEALTHSTREAM DISCLOSURE LETTER
5.4 HEALTHSTREAM SUBSIDIARIES.
1. Merger Sub. The outstanding capital stock of Merger Sub is
1,000 shares, all of which are owned by HealthStream.
2. HealthStream Acquisition I, Inc. d/b/a Quick Study, Inc. The
outstanding capital stock of Quick Study is 1,000 shares, all
of which are owned by HealthStream.
<PAGE> 34
EXHIBIT A
ARTICLES OF MERGER
In accordance with the provisions of Sections 48-21-107 and 48-21-109
of the Tennessee Business Corporation Act ("TBCA") and Section 5.04 of the Texas
Business Corporation Act ("Texas Act"), Multimedia Marketing, Inc., a Texas
corporation d/b/a m3 The Healthcare Learning Company ("M3"), and HealthStream
Acquisition II, Inc., a Tennessee corporation ("Merger Sub"), collectively
referred to as the "Merging Corporations," adopt the following Articles of
Merger for the purpose of merging M3 with and into Merger Sub.
1. The Plan of Merger that has been approved by each of the Merging
Corporations in the manner prescribed by TBCA and the Texas Act is set forth in
Appendix A attached hereto and is incorporated for all purposes into these
Articles of Merger.
2. Approval of the Plan of Merger by the shareholders of M3 and Merger
Sub is required by TBCA and the Texas Act.
3. The Plan of Merger was approved upon action by written consent of
the shareholders of M3 on January __, 2000 and upon action by written consent of
the shareholders of Merger Sub on January __, 2000.
4. The Plan of Merger was approved upon action by written consent of
the Board of Directors of M3 on January __, 2000, and by all action required by
the Board of Directors of Merger Sub on January __, 2000.
5. The effective time of the Merger shall be 12:00 a.m. Central
Standard Time on January __, 2000.
Dated as of January __, 2000.
HEALTHSTREAM ACQUISITION II, INC.
a Tennessee corporation
By:
-----------------------------------
Title:
--------------------------------
MULTIMEDIA MARKETING, INC.
a Texas corporation
By:
-----------------------------------
Title:
--------------------------------
<PAGE> 35
EXHIBIT B
FORM OF ESCROW AGREEMENT
<PAGE> 36
EXHIBIT C
FORM OF HEALTHSTREAM COUNSEL LEGAL OPINION
<PAGE> 37
EXHIBIT D
FORM OF M3 COUNSEL LEGAL OPINION
<PAGE> 38
EXHIBIT E
FORM OF EMPLOYMENT AGREEMENT
<PAGE> 39
EXHIBIT F
HEALTHSTREAM SHAREHOLDERS' AGREEMENT
<PAGE> 40
EXHIBIT G
HEALTHSTREAM CO-SALE AGREEMENT
<PAGE> 41
EXHIBIT H
HEALTHSTREAM VOTING AGREEMENT
<PAGE> 42
EXHIBIT I
STOCK VESTING AGREEMENT
<PAGE> 43
EXHIBIT J
VISITATION RIGHTS LETTER
<PAGE> 44
EXHIBIT K
M3 EMPLOYEE STOCK OPTIONS
<TABLE>
<CAPTION>
HEALTHSTREAM
EMPLOYEE OPTION SHARES
<S> <C>
Ralph Westbrook 4,143
Mike Embry 12,643
Mike Dewey 12,643
Steve Price 2,071
John Haugen 829
Ernest Burger 829
Kathy Smith 414
Meloney Tucker 414
Thomas Sumners 166
Steve Gordan 166
Mike Brumley 166
Martha Smith 166
Karen Stewart 166
Evan Esnard 166
Eric Gray 166
Eddie Kim 166
Judy Bettes 166
Chris Alderman 166
- ------------------------------------------------
TOTAL 18,643
</TABLE>
The shares under the above options shall have a strike price of $16.00 per share
and shall vest and become exercisable on the first anniversary of the Closing
Date except that 8,500 of the shares issued to each of Mike Embry and Mike Dewey
under the above options shall vest and become exercisable upon the Closing. In
the event any of the above employees are terminated without cause during the
twelve (12) month period following the Closing Date, any portion of the
terminated employee's option granted under this Exhibit K not previously
exercisable and vested shall become fully exercisable and vested.
<PAGE> 45
EXHIBIT L
MERGER CONSIDERATION ALLOCATION
<TABLE>
<CAPTION>
TRANSACTION CONSIDERATION
M3 SHARES CASH HS SHARES
<S> <C> <C> <C>
M3 STOCKHOLDERS
Paul Johnson 702,034 77,093 56,833
Rhodes Partnership 647,737 22,171 55,497
VHA 400,000 43,926 32,382
Bert Rawald 201,231 22,098 16,291
Joe Hinton 187,500 20,590 15,179
JKTS Corp. 184,500 63,461 12,236
Steve Price 150,000 16,472 12,143
Commerce Capital 148,373 16,293 12,011
Joseph C. Sparks 102,500 3,576 8,778
Justin S. Sparks Trust 102,500 3,576 8,778
Jason C. Sparks Trust 102,500 3,576 8,778
Charles Wise 62,500 6,863 5,060
Joanne H. Morton 56,136 6,165 4,544
Gail H. Tarlow 56,136 6,165 4,544
W. Jeffrey Sparks 41,000 14,102 2,719
Kevin D. Sparks 41,000 14,102 2,719
C. Todd Sparks 41,000 14,102 2,719
Laurie Platt Cromwell 15,625 1,716 1,265
Linda Allen Platt 15,625 1,716 1,265
Coley R. Platt, Jr 15,625 1,716 1,265
Jordan Mark Etier Trust 7,813 858 632
Corinthian Platt Trust 7,812 858 632
</TABLE>
This table does not reflect the HealthStream Common Stock issued to the
Principal Stockholders nor the $238,805 in cash paid to the Principal
Stockholders.
<PAGE> 1
EXHIBIT 2.5
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
EMERGENCY MEDICINE INTERNETWORK, INC.
AND
HEALTHSTREAM, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE HEADING PAGE
- ------- ------- ----
<S> <C> <C>
ARTICLE 1......................................................................1
CERTAIN DEFINITIONS.......................................................1
ARTICLE 2......................................................................3
PURCHASE AND SALE OF ASSETS...............................................3
2.1. Purchase and Sale of Assets...................................3
2.2. Assignment of Leases, Contracts and Other Acquired Assets.....5
2.3. Excluded Assets...............................................5
2.4. No Assumption of Liabilities..................................6
2.5. Assignment of Contracts.......................................6
ARTICLE 3......................................................................6
CONSIDERATION.............................................................6
3.1. Purchase Price................................................6
3.2. Earn Out Shares...............................................7
3.3. Escrow........................................................7
3.4. Allocation of Purchase Price..................................8
ARTICLE 4......................................................................8
CLOSING; OBLIGATIONS OF THE PARTIES.......................................8
4.1. Closing Date..................................................8
4.2. Obligations of the Parties at the Closing.....................8
ARTICLE 5.....................................................................10
REPRESENTATIONS AND WARRANTIES BY SELLER.................................10
5.1. Authorization................................................10
5.2. Organization, Good Standing and Qualification................10
5.3. Subsidiaries.................................................10
5.4. No Violation.................................................10
5.5. Financial Statements.........................................10
5.6. Acquired Assets..............................................11
5.7. Title to Properties; Encumbrances............................11
5.8. Real Property Owned or Leased................................11
5.9. Fixed Assets and Other Personal Property Leases..............11
5.10. Intellectual Property........................................11
5.11. No Undisclosed Liability.....................................12
5.12. Absence of Certain Changes...................................12
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE HEADING PAGE
- ------- ------- ----
<S> <C> <C>
5.13. Tax Matters..................................................13
5.14. Compliance with Applicable Law...............................14
5.15. Litigation...................................................14
5.16. Insurance....................................................14
5.17. Employee Benefit Plans.......................................14
5.18. Contracts and Commitments....................................16
5.19. Accounts Receivable..........................................16
5.20. Accounts Payable.............................................16
5.21. Customers and Suppliers......................................16
5.22. Labor Matters................................................16
5.23. No Breach....................................................16
5.24. Professional Fees............................................17
5.25. Consents and Approvals.......................................17
5.26. Purchase Entirely for Own Account............................17
5.27. Reliance Upon Seller's Representation........................17
5.28. Restricted Securities........................................17
5.29. Legends......................................................18
ARTICLE 6.....................................................................18
REPRESENTATIONS AND WARRANTIES BY BUYER..................................18
6.1. Organization and Good Standing...............................18
6.2. Authorization................................................18
6.3. Valid and Binding Agreement..................................19
6.4. No Violation.................................................19
6.5. Professional Fees............................................19
6.6. Consents and Approvals.......................................19
ARTICLE 7.....................................................................19
COVENANTS AND AGREEMENTS OF THE PARTIES..................................19
7.1. Conduct of Business Pending the Closing......................19
7.2. Access; Further Assurances...................................20
7.3. Disclosure Letter............................................21
7.4. Confidentiality..............................................21
7.5. Public Statements and Press Releases.........................21
7.6. Taxes........................................................21
7.7. Consents and Approvals.......................................22
7.8. Bulk Sales Compliance........................................22
ARTICLE 8.....................................................................22
CONDITIONS TO BUYER'S OBLIGATIONS........................................22
8.1. Representations and Warranties...............................22
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE HEADING PAGE
- ------- ------- ----
<S> <C> <C>
8.2. Performance by Seller........................................22
8.3. Certificates of Seller.......................................22
8.4. Opinion of Counsel for Seller................................22
8.5. Consents and Approvals.......................................22
8.6. Resolutions..................................................22
8.7. Litigation...................................................23
8.8. No Material Adverse Change; Due Diligence Review.............23
8.9. Non-Competition Agreement....................................23
8.10. Audit........................................................23
8.11. Agreement....................................................23
8.12. Payroll Taxes................................................23
ARTICLE 9.....................................................................23
CONDITIONS TO SELLER'S OBLIGATIONS.......................................23
9.1. Representations and Warranties...............................23
9.2. Performance..................................................24
9.3. Officer's Certificate........................................24
9.4. Opinion of Counsel for Buyer.................................24
9.5. Resolutions..................................................24
ARTICLE 10....................................................................24
INDEMNIFICATION..........................................................24
10.1. Indemnification by Seller....................................24
10.2. Indemnification by Buyer.....................................25
10.3. Procedure....................................................25
ARTICLE 11....................................................................26
SURVIVAL OF REPRESENTATIONS..............................................26
11.1. Survival of Representations..................................26
11.2. Statements as Representations................................26
11.3. Remedies Cumulative..........................................27
ARTICLE 12....................................................................27
TERMINATION OF AGREEMENT.................................................27
ARTICLE 13....................................................................27
MISCELLANEOUS............................................................27
13.1. Expenses.....................................................27
13.2. Assignability; Parties in Interest...........................28
13.3. Entire Agreement; Amendments.................................28
13.4. Headings.....................................................28
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
ARTICLE HEADING PAGE
- ------- ------- ----
<S> <C> <C>
13.5. Severability.............................................28
13.6. Notices..................................................28
13.7. Governing Law............................................29
13.8. Counterparts.............................................29
Schedule 3.2 Organizations Qualifying for Earn Out...........................31
Exhibit A.....................................................................32
Exhibit B.....................................................................33
Exhibit C.....................................................................34
Exhibit D.....................................................................35
Exhibit E.....................................................................36
Exhibit F.....................................................................37
Exhibit G.....................................................................38
</TABLE>
iv
<PAGE> 6
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and entered
into this 27th day of January, 2000 between Emergency Medicine Internetwork,
Inc., a Texas corporation ("Seller") and HealthStream, Inc., a Tennessee
corporation ("Buyer").
RECITALS
WHEREAS, Seller desires to sell to Buyer at the Closing, as hereinafter
defined, and Buyer desires to purchase from Seller substantially all of its
assets, as more fully described herein, upon and subject to the terms and
conditions contained in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the premises and of the mutual
representations, warranties and covenants which are made and to be performed by
the respective parties, it is agreed as follows:
ARTICLE 1.
CERTAIN DEFINITIONS
Unless otherwise defined herein, terms used herein shall have the
meanings set forth below:
"Accounts Payable" means accounts payable, trade accounts payable and
other payables of the Business.
"Acquired Assets" means the assets sold, assigned, transferred and
delivered to Buyer hereunder as set forth in Sections 2.1 and 2.2 hereof.
"Affiliate" of any person shall mean any corporation, proprietorship,
partnership or business entity which, directly or indirectly, owns or controls,
is under common ownership or control with, or is owned or controlled by, such
person and directors, officers or any 5% or more owners of such person.
"Agreement" means this Asset Purchase Agreement (including the exhibits
and schedules hereto and the Disclosure Letter).
"Bulk Sales Laws" shall mean the Uniform Commercial Code Bulk Transfer
provisions of any jurisdiction relating to bulk sales which are applicable to
the sale of the Acquired Assets by Seller hereunder.
"Business" means the business and operations conducted by Seller at the
date of this Agreement and/or the Closing Date and such business and operations
relating to the Acquired Assets.
"Buyer" as defined in the first paragraph of this Agreement means
HealthStream, Inc.
<PAGE> 7
"Claim" means any claim, lawsuit, demand, suit, inquiry made, hearing,
investigation, notice of violation, litigation, proceeding, arbitration, or
other dispute, whether civil, criminal, administrative or otherwise.
"Code" means the United States Internal Revenue Code of 1986, as
amended.
"Contract" means any agreement, contract, commitment, or other binding
arrangement or understanding, whether written or oral.
"Disclosure Letter" means the disclosure letter delivered by Seller to
Buyer prior to the execution and delivery of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law. Any reference to this Agreement
to a particular section or provision of ERISA shall be deemed to refer to the
corresponding section or provision of any successor law.
"GAAP" means generally accepted United States accounting principles,
applied on a basis consistent with the accounting principles used in the
preparation of the Audited Financial Statements.
"Governmental Authority" means any local, state, provincial, federal,
or international governmental authority or agency which has had or now has
jurisdiction over any portion of the subject of this Agreement or the Business.
"Material" means any Claim, circumstance or state of facts which
results in, or would reasonably be expected to result in, Losses or the
expenditure or commitment of $25,000 or more, or which results in any material
limitation or restriction on the ability of Seller to conduct the Business prior
to Closing, or Buyer to conduct the Business after Closing.
"Material Adverse Effect" means any circumstances, developments,
occurrences, states of fact or matters which have, or would reasonably be
expected to have, a material adverse effect in respect of the operations,
financial condition or results, or prospects in respect of the Business or the
Acquired Assets.
"Order" means any decree, order, injunction, rule, judgment, consent of
or by a Governmental Authority.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Permits" means any licenses, permits, variances, interim permits,
permit applications, approvals or other authorizations under any Regulation
applicable to the Business.
2
<PAGE> 8
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, joint venture, governmental entity or other entity.
"Plan" means any "employee benefit plan," as defined in Section 3(3) of
ERISA, that covers any employee or former employee of Seller.
"Proceeding" means any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding and any informal proceeding), prosecution, contest,
hearing, inquiry, inquest, audit, examination, investigation, challenge,
controversy or dispute commenced, brought, conducted or heard by or before, or
otherwise involving, any Governmental Body or any arbitrator.
"Regulation" means any law, statute, regulation, ruling, rule, Order or
Permit, of, administered or enforced by or on behalf of any Governmental
Authority.
"Seller" as defined in the first paragraph of this Agreement means
Emergency Medicine Internetwork, Inc. and each corporation, partnership, joint
venture or other business organization in which Seller owns directly, any
capital stock or other equity interest, or with respect to which Seller or a
subsidiary thereof, alone or in combination with others, is in a control
position.
"Taxes" mean all taxes, charges, fees, duties, levies or other
assessments, including, without limitation, income, gross receipts, net
proceeds, ad valorem, turnover, real and personal property (tangible and
intangible), sales, use, franchise, excise, valued added, license, payroll,
unemployment, environmental, customs duties, capital stock, disability, stamp,
leasing, lease, user, transfer, fuel, excess profits, occupational and interest
equalization, windfall profits, severance and employees' income withholding and
social security taxes imposed by the United States or any foreign country or by
any state, municipality, subdivision or instrumentality of the United States or
of any foreign country or by any other tax authority, including all applicable
penalties and interest, and such term shall include any interest, penalties or
additions to tax attributable to such Taxes.
"Tax Return" means any report, return or other information required to
be supplied to a taxing authority in connection with Taxes.
ARTICLE 2.
PURCHASE AND SALE OF ASSETS
2.1. PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions
of this Agreement and except as set forth in Section 2.3 hereof, at the Closing,
Seller shall sell, transfer, convey, assign and deliver to Buyer and Buyer shall
purchase, acquire and accept from Seller all of the assets owned by Seller
(wherever located) related to, or used in conjunction with, the Business and all
of Seller's right, title and interest therein and thereto. All of the assets
sold, assigned, transferred and delivered to Buyer hereunder are referred to
collectively herein as the "Acquired
3
<PAGE> 9
Assets." The Acquired Assets include, but not by way of limitation, any and all
of Seller's right, title and interest in and to the following assets:
(a) Fixed Assets. Any and all of the machinery, equipment,
installations, furniture, furnishings, office equipment, maintenance equipment
and supplies, materials and other items of leasehold improvements or personal
property of every kind and description, including those items described in
Section 2.1(a) of the Disclosure Letter (the "Fixed Assets");
(b) Cash. Any cash or cash equivalents in excess of the $25,000 to be
retained by Seller;
(c) URLs. Any and all of the URLs of Seller, as described in Section
2.1(b) of the Disclosure Letter (the "URLs");
(d) Inventories. Any and all of the inventories, including all raw
materials, work in process, supplies and finished goods inventories, wherever
located (the "Inventories");
(e) Prepaid Assets. All prepaid rent, prepaid property taxes, prepaid
supplies, advances and other prepaid expenses and all deposits and deferred
charges attributable to any contracts, commitments, understandings, leases or
agreements of the Business (the "Prepaid Assets");
(f) Information and Records. Any and all computer software, production
records, product files, technical information, confidential information, price
lists, marketing plans and strategies, sales records, advertising materials,
product development techniques or plans, supplier lists, customer lists and
files (including customer credit and collection information), details of client
or consultant contracts, and other proprietary information, together with the
following papers and records in Seller's care, custody or control or otherwise
available to it: all personnel and labor relations records and all worker's
compensation loss records and insurance claims (the "Information and Records");
(g) Intellectual Property. Any and all United States and foreign
patents, patent applications, patent licenses, service names, service marks,
trade names, trademarks, trade name and trademark registrations (and
applications therefor), copyrights and copyright registrations (and applications
therefor), drawings, trade secrets, inventions, processes, engineering and
production designs, formulae, technology, source code, developmental products,
processes and applications, and all derivatives thereof, including but not
limited to all rights in respect of the names "EMINet" and "Emergency Medicine
Internetwork," and all predecessor names, including those items described in
Sections 2.1(f) of the Disclosure Letter (the "Intellectual Property");
(h) Accounts Receivable. Any and all accounts receivable, trade
receivables and other receivables (the "Receivables");
4
<PAGE> 10
(i) Other Rights. Any and all claims, deposits to third parties,
prepayments, refunds, causes of action, causes in action, rights of recovery,
rights of set-off, and rights of recoupment (including any such item relating to
the payment of taxes in connection with the Business) and permits and licenses
used in the operation of the Business; and
(j) Other Assets. Any and all other tangible or intangible property,
including goodwill, located at or used in connection with the Business (the
"Other Assets").
2.2. ASSIGNMENT OF LEASES, CONTRACTS AND OTHER ACQUIRED ASSETS. Subject
to the terms and conditions set forth in this Agreement, Seller will assign and
transfer to Buyer, effective as of the Closing, all of Seller's right, title and
interest in and to, and Buyer will take assignment of and assume, the following
rights, interests and obligations that are used or arise in connection with or
relate to the operation of the Business (and all of the following shall be
deemed included in the term "Acquired Assets" as used herein):
(a) Real Property Leases. Leases of real property listed in Section
2.2(a) of the Disclosure Letter (the "Real Property Leases");
(b) Fixed Assets and Other Personal Property Leases. Leases of
equipment, machinery, installations and other personal property listed in
Section 2.2(b) of the Disclosure Letter (the "Fixed Assets and Other Personal
Property Leases");
(c) Other Contracts. (i) All other contracts listed in Sections 2.2(c)
of the Disclosure Letter and (ii) such other contracts or agreements as shall be
(A) entered into between the date hereof and the Closing in the ordinary course
of business and in accordance with the provisions of this Agreement, (B)
expressly accepted and approved in writing by Buyer prior to the Closing and (C)
listed in Section 2.2(c) of the Disclosure Letter as of the Closing
(collectively, the "Other Contracts"); and
(d) Permits and Licenses. Permits and licenses used in the operation of
the Business listed in Section 2.2(d) of the Disclosure Letter.
2.3. EXCLUDED ASSETS. The following assets of Seller shall be retained
by Seller and are not being sold or assigned to Buyer hereunder (all of the
following are referred to collectively as the "Excluded Assets"):
(a) $25,000 worth of cash, bank balances, monies in possession of any
banks and similar cash equivalents;
(b) any asset or property associated with an pension plan of Seller;
(c) all minute books and corporate records, tax returns and litigation
files of Seller; and
5
<PAGE> 11
(d) any of the rights of Seller under this Agreement.
2.4. NO ASSUMPTION OF LIABILITIES. Buyer shall not assume, and shall
not be deemed to have assumed, any debt, claim, obligation, liability, expenses
or Taxes of Seller of any kind, character or description, whether accrued,
absolute, contingent or otherwise, no matter whether arising before or after the
Closing, and whether or not reflected or reserved against in Seller's financial
statements, books of accounts or records, including but not by way of limitation
the following (collectively, the "Excluded Liabilities"):
(a) any debt, claim, obligation or liability relating to employees or
former employees of Seller (or its predecessors) relating to incidents or causes
of action that accrue prior to Closing;
(b) any debt, claim, obligation or liability relating to any Plan;
(c) any debt, claim, obligation or liability relating to any Taxes of
Seller;
(d) any debt, claim, obligation or liability relating to any lawsuits
or insurance claims of Seller in respect of the Business which arise out of or
are based on facts in existence prior to the Closing.
2.5. ASSIGNMENT OF CONTRACTS. Anything in this Agreement to the
contrary notwithstanding, this Agreement shall not constitute an agreement to
assign, and the Acquired Assets shall not include, any claim, contract,
instrument, agreement, license, lease, commitment, sales order, purchase order
or any claim or right, or any benefit arising thereunder or resulting therefrom,
if an attempted assignment thereof, without the consent of a third party
thereto, would constitute a breach thereof or in any way affect the rights of
Buyer or Seller thereunder. Seller shall be responsible for the payment of any
transfer or assignment fees required by any third party to effect the assignment
of any such contracts or agreements. If such consent is not obtained, or if an
attempted assignment thereof would be ineffective or would affect such rights,
Seller will cooperate with Buyer, at no cost to Buyer, in any arrangement
designed to provide for Buyer the benefits under any such claims, contracts,
instruments, agreements, licenses, leases, commitments, sales orders or purchase
orders, including, without limitation, enforcement for the benefit of Buyer of
any and all rights of Buyer or Seller against a third party thereto arising out
of a breach or cancellation by such third party or otherwise; and any transfer
or assignment to Buyer of any property or property rights or any contract or
agreement which shall require the consent or approval of any third party shall
be made subject to such consent or approval being obtained.
ARTICLE 3.
CONSIDERATION
3.1. PURCHASE PRICE. The purchase price ("Purchase Price") for the
Acquired Assets shall be:
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(a) $640,000 in cash paid Seller at Closing by certified or cashier's
check or wire transfer of Federal or other immediately available funds as
follows:
(i) $125,000 of this shall be held by Buyer until the exact
amount owed to the Internal Revenue Service for past due payroll taxes
and interest and penalties thereon is known and then shall be paid
directly to the Internal Revenue Service, with any remainder paid to
Seller;
(ii) $124,000 shall be paid directly to Polaris Group; and
(iii) $391,000 of this shall be paid directly to Seller.
(b) 145,893 shares of Buyer's common stock (the "Consideration Shares")
(83,393 of which will be delivered to Seller at Closing, and 62,500 of which
will be paid to the Escrow Fund described in Section 3.3 herein at Closing).
3.2. EARN OUT SHARES. Seller shall also be eligible to receive (up to
an aggregate of 14,107 shares of Buyer's common stock) as additional
consideration, one (1) share of Buyer's common stock for each sixteen dollars
($16) of contract value from contracts signed by Seller between January 1, 2000
and March 31, 2000 with the organizations listed on Schedule 3.2 attached hereto
(the "Earn Out Shares"). Any Earn Out shares earned pursuant to this Section 3.2
hereof shall be distributed to Seller no later than June 30, 2000.
3.3. ESCROW. (a) At the Closing, pursuant to an Escrow Agreement,
substantially in the form attached hereto as Exhibit A (the "Escrow Agreement"),
the parties shall establish an escrow (the "Escrow Fund") comprised of 62,500 of
the Consideration Shares (the "Escrow Shares"). The Escrow Shares shall be
maintained in escrow for the purposes of satisfying any claims by Buyer for
indemnification under Article 10 and the Escrow Agreement until the expiration
of one year from the Closing Date (the "Escrow Period").
(b) Upon expiration of the Escrow Period, and subject to the terms of
Section 3.3(c) herein, Article 10 herein and the Escrow Agreement, the escrow
agent under the Escrow Agreement (the "Escrow Agent") shall deliver or cause to
be delivered to Seller a certificate representing the number of shares of
Buyer's Common Stock comprising the Escrow Shares.
(c) If upon expiration of the Escrow Period, Buyer shall have asserted
a claim for indemnity in accordance with the Escrow Agreement and such claim is
pending or unresolved at the time of such expiration, the Escrow Agent shall
retain in escrow, and withhold from delivery to Seller the value of the asserted
amount of the claim until such matter is finally resolved. If it is finally
determined that Buyer is entitled to recover on account of such claim, the
Escrow Agent shall deliver or cause to be delivered to Buyer Escrow Shares in
the amount due and payable with respect to such claim. The remainder of the
Escrow Shares, if any, following such delivery to Buyer in accordance with this
Section 3.3(c) and the Escrow Agreement, shall be delivered to Seller pursuant
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to this Agreement. For purposes of this Section 3.3(c), a claim will be deemed
to have been finally resolved only as provided in the Escrow Agreement.
(d) The right to receive the Escrow Shares upon expiration of the
Escrow Period is an integral part of the Purchase Price, and shall not be
transferable or assignable by, but shall inure to the benefit of the successors,
representatives, or estate of, Seller.
3.4. ALLOCATION OF PURCHASE PRICE. The parties hereto will agree to an
allocation of the Purchase Price among the Acquired Assets for Federal and State
income tax purposes.
ARTICLE 4.
CLOSING; OBLIGATIONS OF THE PARTIES
4.1. CLOSING DATE. The closing (the "Closing") shall take place and be
effective for all purposes immediately after all of the conditions to Closing in
Articles 8 and 9 hereof have been met at the offices of Bass, Berry & Sims PLC,
2700 First American Center, Nashville, Tennessee 37238, or at such other time
and place as the parties hereto mutually agree (the "Closing Date").
4.2. OBLIGATIONS OF THE PARTIES AT THE CLOSING.
(a) At the Closing, Buyer shall deliver to Seller (or Seller's agent):
(i) the consideration as specified in Section 3.1;
(ii) copy of resolutions of the Board of Directors of Buyer,
certified by Buyer's Secretary, authorizing the execution,
delivery and performance of this Agreement and the other
documents referred to herein to be executed by Buyer, and the
consummation of the transactions contemplated hereby;
(iii) a certificate of Buyer certifying as to the accuracy
of Buyer's representations and warranties at and as of the
Closing and that Buyer has performed or complied with all of the
covenants, agreements, terms, provisions and conditions to be
performed or complied with by Buyer at or before the Closing;
(iv) the opinion of Bass, Berry & Sims PLC, legal counsel
for Buyer, the terms of which are substantially as set forth in
Exhibit D;
(v) an executed copy of the Escrow Agreement, in the form
attached as Exhibit A; and
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(vi) such other certificates and documents as Seller or its
counsel may reasonably request.
(b) At the Closing, Seller will deliver to Buyer:
(i) such bills of sale, endorsements, assignments, and other
good and sufficient instruments of conveyance and transfer, in
form and substance reasonably satisfactory to Buyer, as shall be
effective to vest in Buyer all of Seller's title to and interest
in the Acquired Assets, all of Seller's contracts and
commitments, books, records and other data relating to the
Acquired Assets and the Business (except minute and stock books
and similar corporate records and any other documents and records
which Seller is required by law to retain in its possession),
and, simultaneously with such delivery, will take such steps as
may be necessary to put Buyer in actual possession and operating
control of the Acquired Assets and the Business;
(ii) copy of resolutions of the Board of Directors and
Shareholders of Seller, certified by Seller's Secretary,
authorizing the execution, delivery and performance of this
Agreement and the other documents referred to herein to be
executed by Seller, and the consummation of the transactions
contemplated hereby;
(iii) a certificate of Seller certifying as to the accuracy
of its representations and warranties at and as of the Closing
and that Seller has performed or complied with all of the
covenants, agreements, terms, provisions and conditions to be
performed or complied with by it at or before the Closing;
(iv) the opinion of Bill Zweifel, legal counsel for Seller,
the terms of which are substantially as set forth in Exhibit C;
(v) executed copies of the Non-Competition Agreement by the
employees of Seller, in substantially the form of Exhibit B
hereto;
(vi) an executed copy of the Shareholders' Agreement in the
form of Exhibit E hereto;
(vii) an executed copy of the Voting Agreement in form of
Exhibit F hereto;
(viii) an executed copy of the Co-Sale Agreement in the form
of Exhibit G hereto;
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(ix) certificates evidencing the transfers of the URLs
listed in Section 2.1(b) of the Disclosure Letter; and
(x) such other certificates and documents as Buyer or its
counsel may reasonably request.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES BY SELLER
Seller hereby represents and warrants as follows:
5.1. AUTHORIZATION. Seller has full corporate power and authority to
enter into this Agreement and perform its obligations hereunder and carry out
the transactions contemplated hereby. The Board of Directors and Shareholders of
Seller have taken all action required by law, its Articles of Incorporation and
Bylaws and otherwise to authorize the execution and delivery by Seller of this
Agreement and the consummation by Seller of the transactions contemplated
hereby. This Agreement constitutes the valid and binding agreement of Seller,
enforceable against it in accordance with its terms.
5.2. ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. Seller has full corporate power and authority to carry on
its business as now conducted and possesses all governmental and other permits,
licenses and other authorizations to own, lease or operate its assets and
properties as now owned, leased and operated and to carry on its business as
presently conducted. Seller is not licensed or qualified to do business as a
foreign corporation in any jurisdiction and neither the properties owned or
leased nor the business transacted by it makes such licensing or qualification
to do business as a foreign corporation necessary, and no other jurisdiction has
demanded, requested or otherwise indicated that (or inquired whether) Seller is
required so to qualify.
5.3. SUBSIDIARIES. Seller neither owns nor has an interest in, directly
or indirectly, any other corporation, partnership, joint venture or other
business organization.
5.4. NO VIOLATION. The execution and delivery of this Agreement by
Seller does not, and the consummation of the transactions contemplated hereby
will not, (a) violate any provision of, or result in the creation of any lien or
security interest under, any agreement, indenture, instrument, lease, security
agreement, mortgage or lien to which it is a party or by which its assets or
properties bound; (b) violate any provision of its Articles of Incorporation or
Bylaws; (c) violate any order, arbitration award, judgment, writ, injunction,
decree, statute, rule or regulation applicable to it; or (d) violate any other
contractual or legal obligation or restriction to which it is subject.
5.5. FINANCIAL STATEMENTS. Seller has delivered to Buyer: (a) balance
sheets of Seller as at December 31 in each of the years 1997, 1998 and 1999 (the
"Balance Sheet"), and the related
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statements of income and cash flows for the fiscal year ended December 31, 1999,
including the notes thereto (the "Financial Statements"). The Financial
Statements fairly present the assets, liabilities, financial condition and
results of operations of Seller as at the respective dates thereof and for the
periods therein referred to, all in accordance with GAAP ; the Financial
Statements reflect the consistent application of such accounting principles
throughout the periods involved.
5.6. ACQUIRED ASSETS. The Acquired Assets comprise all the properties
and assets employed by Seller in connection with the Business and which are
necessary for the conduct of such Business, as currently conducted.
5.7. TITLE TO PROPERTIES; ENCUMBRANCES. Seller has good, valid and
marketable title to, or valid leasehold interests in, all of the Acquired Assets
constituting real property or tangible or intangible personal property and
Seller has full right to sell, convey, transfer, assign and deliver any and all
of its right, title and interest in and to such Acquired Assets, free and clear
of any mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge of any kind.
5.8. REAL PROPERTY OWNED OR LEASED. Section 5.8 of the Disclosure
Letter sets forth a complete and accurate list and legal description of all real
property included in the Acquired Assets (including a specific identification of
any such fixtures not owned by Seller) which Seller owns or leases, to the
extent related to the Business. True copies of all such leases for real property
have been delivered to Buyer prior to the date hereof. Except as set forth in
Section 5.8 of the Disclosure Letter, no consent to the consummation of the
transactions contemplated by this Agreement is required from the lessor of any
such real property. Seller holds valid leasehold interests in and to the leases
listed in Section 5.8 of the Disclosure Letter, free and clear of any mortgage,
pledge, lien, security interest, lease, encumbrances or charge of any kind,
other than mortgages, pledges, liens, security interests, leases, encumbrances
and charges granted by or in respect of the interests of lessors or other third
parties, which do not Materially impact the rights of Seller.
5.9. FIXED ASSETS AND OTHER PERSONAL PROPERTY LEASES. Section 5.9 of
the Disclosure Letter sets forth a correct and complete list of all of the Fixed
Assets other than items acquired by Seller in the ordinary course of business
from the date hereof through the Closing Date (which Seller will identify in
writing to Buyer, prior to the Closing, in the Disclosure Letter). The Fixed
Assets and Other Personal Property Leases listed in Section 2.2(b) of the
Disclosure Letter hereto include all leases by Seller of any item of personal
property used by Seller in connection with the operation of the Business. Except
as disclosed in Section 5.9 of the Disclosure Letter, all of the equipment and
personal property leased by Seller under the Fixed Assets and Other Personal
Property Leases is currently used by Seller in the ordinary course of the
Business. Seller has delivered to Buyer correct and complete copies of all Fixed
Assets and Other Personal Property Leases.
5.10. INTELLECTUAL PROPERTY. Section 5.10 of the Disclosure Letter is
an accurate and complete list of all patents, patent licenses, trademarks, trade
names, trademark registrations, service names, service marks, copyrights,
website domain names, formulas and applications therefor owned
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by Seller or used or required by Seller in the operation of the Business, title
to all of which is held by Seller free and clear of all adverse claims, liens,
security agreements, restrictions or other encumbrances. There is no
infringement action, lawsuit, claim or complaint which asserts that Seller's
operations violate or infringe the patent rights or the trademarks, trade names,
trademark registration, service names, service marks or copyrights of others
with respect to any apparatus or method of Seller used in the operation of the
Business or any adversely held patent, trademark, trade name, trademark
registration, service names, service marks or copyrights, and, Seller is not in
any way making use of any confidential information or trade secrets of any
person except with the consent of such person.
5.11. NO UNDISCLOSED LIABILITY. Seller does not have any liabilities or
obligations of any nature, whether absolute, accrued, contingent or otherwise
and whether due or to become due (including, without limitation, liabilities for
Taxes and interest, penalties and other charges payable with respect thereto)
which alone or in the aggregate may affect Seller's ability to transfer the
Acquired Assets hereby or, from and after Closing, Buyer's right, title and
interest in and to the Acquired Assets and Buyer's use and enjoyment thereof.
The reserves reflected in the Financial Statements are adequate, appropriate and
reasonable in accordance with GAAP. Furthermore, Seller does not know or have
reason to know of any basis for the assertion against Seller of any such
liability or obligation of any nature not fully reflected or reserved against in
the Financial Statements.
5.12. ABSENCE OF CERTAIN CHANGES. Except as and to the extent set forth
in Section 5.12 of the Disclosure Letter, since December 31, 1999, Seller has
not:
(a) suffered any Material change in its working capital, financial
condition, assets, liabilities, business or prospects, experienced any labor
difficulty, or suffered any Material casualty loss (whether or not insured);
(b) made any change in the Business or operations or in the manner of
conducting the Business other than changes in the ordinary course of business;
(c) incurred any obligations or liabilities (whether absolute, accrued,
contingent or otherwise and whether due or to become due), except items incurred
in the ordinary course of business and consistent with past practice, or
experienced any change in any assumptions underlying or methods of calculating
any bad debt, contingency or other reserves;
(d) paid, discharged or satisfied any claim, lien, encumbrance or
liability (whether absolute, accrued, contingent or otherwise and whether due or
to become due), other than claims, encumbrances or liabilities (i) which are
reflected or reserved against in the Financial Statements and which were paid,
discharged or satisfied since the date thereof in the ordinary course of
business and consistent with past practice, or (ii) which were incurred and
paid, discharged or satisfied since December 31, 1999 in the ordinary course of
business and consistent with past practice;
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(e) written off as uncollectible any Receivables or any portion
thereof, except for immaterial write-offs made in the ordinary course of
business, consistent with past practice and at a rate no greater than during the
twelve (12) months ended December 31, 1999;
(f) canceled any other debts or claims, or waived any rights, of
substantial value;
(g) sold, transferred or conveyed any of its properties or assets
(whether real, personal or moved, tangible or intangible), except in the
ordinary course of business and consistent with past practice;
(h) disposed of or permitted to lapse, or otherwise failed to preserve
the exclusive rights of the Business to use any patent, trademark, trade name,
logo or copyright or any such application, or disposed of or permitted to lapse
any license, permit or other form of authorization, or disposed of or disclosed
to any person any trade secret, formula, process or know-how;
(i) granted any increase in the compensation of any officer, director,
employee or agent (including, without limitation, any increase pursuant to any
bonus, pension, profit sharing or other plan or commitment), or adopted any such
plan or other arrangements; and no such increase, or the adoption of any such
plan or arrangement, is planned or required;
(j) made any change in any method of accounting or accounting practice;
(k) made any capital expenditures or commitments in excess of $10,000
in the aggregate for replacements or additions to property, plant, equipment or
intangible capital assets;
(l) paid, loaned or advanced any amount to or in respect of, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement, arrangement or
transaction with, any of the officers or directors of Seller, any affiliates or
associates of Seller or any of their respective officers or directors, or any
business or entity in which any of such persons has any direct or Material
indirect interest, except for compensation to the officers and employees of
Seller at rates not exceeding the rates of compensation in effect at December
31, 1999 and advances to employees in the ordinary course of business for travel
and expense disbursements in accordance with past practice, but not in excess of
$1,000 at any one time outstanding; or
(m) agreed, whether in writing or otherwise, to take any action
described in this Section 5.12.
5.13. TAX MATTERS. Seller has duly filed all Tax Returns required to be
filed by it and has duly paid all Taxes and other charges due or claimed to be
due by Governmental Authorities. The reserves for Taxes contained in the
Financial Statements and carried on the books of Seller are adequate to cover
all tax liabilities as of the date of this Agreement. Seller has not incurred
any Taxes other than in the ordinary course of business; there are no tax liens
(other than liens for current
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Taxes not yet due) upon any properties or assets of Seller (whether real,
personal or mixed, tangible or intangible), and, except as reflected in the
Financial Statements, there are no pending or threatened questions or
examinations relating to, or claims asserted for, Taxes or assessments against
Seller, and there is no basis for any such question or claim. Seller has not
granted or been requested to grant any extension of the limitation period
applicable to any claim for Taxes or assessments of the Business with respect to
Taxes.
5.14. COMPLIANCE WITH APPLICABLE LAW. Seller has in the past duly
complied and is presently duly complying, in the conduct of its business and the
ownership of the Acquired Assets with all applicable laws, whether statutory or
otherwise, rules, regulations, orders, ordinances, judgments and decrees of all
Governmental Authorities (collectively, "Laws"). Seller has not received any
notice of, or notice of any investigation of, a possible violation of any
applicable Laws, or any other Law or requirement relating to or affecting the
operations or properties of Seller.
5.15. LITIGATION. Except as set forth in Section 5.15 of the Disclosure
Letter, there are no Claims pending or threatened by or against, or otherwise
affecting the Business at law or in equity or before or by any Governmental
Authority. Seller does not know or have any reason to know of any basis for any
such Claim. No Claim set forth in Section 5.14 of the Disclosure Letter, could,
if adversely decided, have a Material Adverse Effect on the condition (financial
or otherwise), liabilities, earnings or prospects of Seller.
5.16. INSURANCE. Section 5.16 of the Disclosure Letter hereto sets
forth a complete and accurate list and brief description (including policy
numbers, deductibles, carriers and effective and termination dates) of all
policies of fire, liability, workmen's compensation, health, title and other
forms of insurance presently in effect with respect to Seller. All such policies
are valid, outstanding and enforceable policies; and will remain in full force
and effect at least through the respective dates set forth in Section 5.16 of
the Disclosure Letter without the payment of additional premiums; and will not
in any way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement. Seller has not been refused any insurance nor
has its coverage been limited, by any insurance carrier to which it has applied
for insurance or with which it has carried insurance during the last five years.
5.17. EMPLOYEE BENEFIT PLANS.
(a) Except as disclosed in Section 5.17 of the Disclosure Letter hereto
and made a part hereof, Seller does not maintain any retirement or deferred
compensation plan, savings, incentive, stock option or stock purchase plan,
unemployment compensation plan, vacation pay, severance pay, bonus or benefit
arrangement, group medical plan, insurance or hospitalization program or any
other fringe benefit arrangements, including all Plans for any employee,
consultant or agent of Seller, whether pursuant to contract, arrangement, custom
or informal understanding in the operation of the Business.
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(b) Except as disclosed in Section 5.17 of the Disclosure Letter,
Seller does not have any commitment, whether formal or informal and whether
legally binding or not, (i) to create any additional such Plan; (ii) to modify
or change any such Plan; or (iii) to maintain for any period of time any such
Plan. Section 5.17 of the Disclosure Letter contains an accurate and complete
description of the funding policies (and commitments, if any) of Seller with
respect to each such existing Plan.
(c) None of the Plans listed in Section 5.17 of the Disclosure Letter
provide for continuing benefits or coverage after termination or retirement from
employment, except with respect to any "group health plan" as defined in Code
Section 4980B(g) and ERISA Section 607. With respect to any Plan which is a
"group health plan," as so defined, Seller warrants that in all "qualified
events" (including those resulting from the transaction contemplated by this
Agreement) occurring prior to or on the Closing Date, Seller has or will cause
to be offered to Seller's eligible employees and their "qualified beneficiaries"
the opportunity to elect continuation coverage under ERISA Section 602 to the
extent required by ERISA Sections 601-607 and will provide that coverage, if
elected, at no expense to Buyer or Seller.
(d) Neither Seller nor any "affiliate" of Seller (as defined in ERISA)
has ever participated in or withdrawn from a multi-employer plan as defined in
Section 4001(a)(3) of Title IV of ERISA, and Seller has not incurred and does
not owe any liability as a result of any partial or complete withdrawal by any
employer from such a multi-employer plan as described under Sections 4201, 4203,
or 4205 of ERISA.
(e) Except as disclosed in Section 5.17 of the Disclosure Letter, (i)
Seller has no unfunded past service liability in respect of any of its Plans;
(ii) the actuarially computed value of vested benefits under any such Plan does
not exceed the fair market value of the fund assets relating to such Plan; (iii)
neither Seller nor any Plan nor any trustee, administrator, fiduciary or sponsor
of any Plan has engaged in any prohibited transactions as defined in ERISA, or
the Code; (iv) all filings and reports as to such Plans required to have been
made on or prior to the Closing Date to the Internal Revenue Service, the United
States Department of Labor or other governmental agencies have been or will be
made on or prior to the Closing Date; (v) there is no Material litigation,
disputed Claim or Proceeding pending or threatened with respect to any of such
Plans, the related trusts, or any fiduciary, trustee, administrator or sponsor
of such Plans; (vi) such Plans have been established, maintained and
administered in all Material respects in accordance with their governing
documents and applicable provisions of ERISA and the Code and Treasury
Regulations promulgated thereunder; and (vii) there has been no "Reportable
Event" as defined in Section 4043 of ERISA with respect to any Employee Benefit
Plan subject to Subtitle B of Title IV of ERISA that has not been waived by the
PBGC.
(f) Seller has complied in all Material respects with all applicable
federal, state and local laws, rules and regulations relating to employees'
employment and/or employment relationships, including, without limitation, wage
related laws, anti-discrimination laws and employee safety laws in the operation
of the Business.
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(g) Except as disclosed in Section 5.17 of the Disclosure Letter or
otherwise set forth in the Agreement, Seller is not a party to any contract or
agreement or requirement of law which would require Buyer to hire, or subject
Buyer to liability if it did not hire, any employee of the Business or which
would require Buyer to pay or provide, or subject Buyer to liability if it did
not pay or provide, any employee benefits to any employee of the Business for
periods prior to or after the Closing Date (including any and all employee
benefits and any compensatory, over-time, vacation, sick or holiday pay).
5.18. CONTRACTS AND COMMITMENTS. Section 5.18 of the Disclosure Letter
is a list of contracts relating to the Business and the Acquired Assets. Seller
has delivered to Buyer correct and complete copies of each listed document.
Section 5.18 and Sections 2.2(a)-(d) of the Disclosure Letter together include
all the contracts to which Seller is a party or by which it is bound and which
relate to the Business or the operation thereof and the Acquired Assets.
5.19. ACCOUNTS RECEIVABLE. All Receivables, whether reflected in the
Financial Statements or otherwise, represent sales actually made in the ordinary
course of business; none of such Receivables is subject to any counterclaim or
set-off other than normal sales adjustments or allowances consistent with past
practice; and all such Receivables are current and collectible in accordance
with their respective terms, net of any reserve reflected in the Financial
Statements.
5.20. ACCOUNTS PAYABLE. All accounts and notes payable of Seller,
whether reflected in the Financial Statements, or otherwise, with an invoice
date prior to Closing shall be paid by Seller.
5.21. CUSTOMERS AND SUPPLIERS. Seller has not received any indication
from any customer or supplier (or otherwise has any reason to believe) that such
customer or supplier will not continue as a customer or supplier of Buyer after
the Closing.
5.22. LABOR MATTERS. There are no collective bargaining agreements in
effect between Seller and labor unions or organizations representing any
employees of Seller. During the past seven years, there has been no request for
collective bargaining or for an employee election from any employee, union or
the National Labor Relations Board. Seller is in compliance with all federal,
state and local laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any unfair
labor practice. There is no unfair labor practice complaint against Seller
pending or threatened before the National Labor Relations Board or the United
States Department of Labor. There is no labor strike, dispute, slowdown or
stoppage in progress or threatened against or involving Seller. No question
concerning representation has been raised or is threatened respecting the
employees of Seller. No grievance or arbitration proceeding is pending and no
claim therefor exists. No private agreement restricts Seller from relocating,
closing or terminating any of its operations or facilities. Seller has not in
the past five years experienced any labor strike, dispute, slowdown, stoppage or
other labor difficulty.
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5.23. NO BREACH. Each arrangement (whether evidenced by a written
document or otherwise and of whatever type) referred to in this Agreement, the
Disclosure Letter or in any Schedule hereto under which Seller has any right,
interest or obligation is in full force and effect; there have been no
threatened cancellations thereof nor outstanding disputes thereunder, and Seller
has not breached any provision of, nor does there exist any default in any
Material respect under, or event (including the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby) which
is, or with the giving of notice or the passage of time or both would become, a
breach or default in any Material respect under the terms of any such
arrangement.
5.24. PROFESSIONAL FEES. Except as set forth in Section 5.24 of the
Disclosure Letter, Seller has not done anything to cause or incur any liability
or obligation for investment banking, brokerage, finders, agents or other fees,
commissions, expenses or charges in connection with the negotiation,
preparation, execution or performance of this Agreement or the consummation of
the transactions contemplated hereby, and Seller does not know of any claim by
anyone for such a fee, commission, expense or charge.
5.25. CONSENTS AND APPROVALS. Seller has obtained or will have obtained
on or before the Closing all consents, approvals, authorizations or orders of
third parties, including Governmental Authorities, necessary for the
authorization, execution and performance of this Agreement by Seller.
5.26. PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
Seller in reliance upon Seller's representation to Buyer, which by Seller's
execution of this Agreement Seller hereby confirms, that the Common Stock to be
purchased by Seller (the "Securities") will be acquired for investment for
Seller's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that Seller has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, Seller further represents that it does
not have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities. Seller has had the opportunity to ask
questions of Buyer's officers and directors and to acquire such information
about shares of Buyer's common stock and its business and financial condition as
it has requested.
5.27. RELIANCE UPON SELLER'S REPRESENTATION. Seller understands that
the Common Stock is not registered under the Securities Act on the ground that
the sale provided for in this Agreement and the issuance of securities hereunder
is exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Buyer's reliance on such exemption is predicated on the
Seller's representations.
5.28. RESTRICTED SECURITIES. Seller understands that the Common Stock
may not be sold, transferred, or otherwise disposed of without registration
under the Securities Act and any applicable state securities laws or any
exemptions therefrom, and that in the absence of an effective registration
statement covering the Common Stock or an available exemption from registration
under
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the Securities Act and any applicable state securities laws, the Common Stock
must be held indefinitely. In particular, Seller is aware that the Common Stock
may not be sold pursuant to Rule 144 promulgated under the Securities Act unless
all of the conditions of that Rule are met and Seller receives an opinion of
counsel that such conditions have been met. Among the conditions for use of Rule
144 may be the availability of current information to the public about the
Buyer. Such information is not now available. Further any stock that is
transferred pursuant to the restrictions in this Section 5.28, and distributed
to Kevin Rittger, M.D., or other key employees of Seller, shall be subject to
restrictions from sale for two years from the date of Closing. These
restrictions shall lift after one year from Closing on 75% of the shares held by
these people, and on the remaining 25% of the shares two years from Closing.
5.29. LEGENDS. To the extent applicable, each certificate or other
document evidencing any of the Common Stock shall be endorsed with the legends
substantially in the form set forth below:
(a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT, OR UNLESS THE BUYER HAS RECEIVED AN OPINION OF COUNSEL OR
OTHER EVIDENCE, SATISFACTORY TO THE BUYER AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
and the following legend:
THE TRANSFERABILITY OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS
RESTRICTED BY THE PROVISIONS OF A SHAREHOLDERS' AGREEMENT ENTERED INTO
BETWEEN THE HOLDER OF THIS CERTIFICATE AND THE COMPANY. A COPY OF THE
SHAREHOLDERS' AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND MAY BE REVIEWED AT SUCH OFFICE UPON REQUEST.
(b) Any legend imposed or required by applicable state securities laws.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Seller as follows:
6.1. ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee and has full corporate
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power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby.
6.2. AUTHORIZATION. The Board of Directors of Buyer has taken, or will
take prior to Closing, all action required by law, its Charter, its Bylaws and
otherwise to authorize the execution and delivery by Buyer of this Agreement and
the consummation by Buyer of the transactions contemplated hereby.
6.3. VALID AND BINDING AGREEMENT. This Agreement constitutes a valid
and binding agreement of Buyer, enforceable against Buyer in accordance with its
terms.
6.4. NO VIOLATION. The execution and delivery of this Agreement by
Buyer does not, and the consummation of the transactions contemplated hereby
will not, (a) violate any provision, or result in the creation of any lien or
security interest under, any agreement, indenture, instrument, lease, security
agreement, mortgage or lien to which Buyer is a party or by which it is bound;
(b) violate any provision of Buyer's Charter or Bylaws; (c) violate any order,
arbitration award, judgment, writ, injunction, decree, statute, rule or
regulation applicable to Buyer; or (d) violate any other contractual or legal
obligation or restriction to which Buyer is subject.
6.5. PROFESSIONAL FEES. Buyer has not done anything to cause or incur
any liability for investment banking, brokerage, finders, agents or other fees,
commissions, expenses or charges in connection with the negotiation,
preparation, execution and performance of this Agreement or the consummation of
the transactions contemplated hereby, and Buyer does not know of any claim by
anyone for such a commission or fee.
6.6. CONSENTS AND APPROVALS. Buyer has obtained or will have obtained
prior to the Closing all consents, approvals, authorizations or orders of third
parties, including Governmental Authorities, necessary for the authorization,
execution and performance of this Agreement by Buyer.
ARTICLE 7.
COVENANTS AND AGREEMENTS OF THE PARTIES
7.1. CONDUCT OF BUSINESS PENDING THE CLOSING.
(a) Seller will take such action as may be necessary to maintain,
preserve, renew and keep in full force and effect the existence, rights and
franchises of Seller, to preserve the business organizations of Seller intact,
to keep available to Buyer Seller's officers and employees, and to preserve for
Buyer the present relationships of Seller with its suppliers and customers and
others having business relationships with respect to the Business.
(b) Seller will not do or omit to do any act, or permit any act or
omission to act, which may cause a breach of any Contract of Seller, or any
breach of any representation, warranty, covenant or agreement made by Seller
herein.
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(c) Seller will duly comply with all laws applicable to it and its
business and operations and all Laws, compliance with which is required for the
valid consummation of the transactions contemplated by this Agreement.
(d) Seller will not (i) grant any increase in the wages or salary of
any officer, employee or agent of Seller, except normal wage or salary increases
for employees (other than officers and other management employees) in the
ordinary course of business and consistent with past practice; (ii) by means of
any bonus or pursuant to any plan or arrangement or otherwise, increase by any
amount or to any extent the benefits or compensation of any such officer,
employee or agent; (iii) enter into any employment agreement, sales agency or
other contract or arrangement with respect to the performance of personal
services which is not terminable by it without liability on not more than 30
days notice; (iv) enter into or extend any labor contract with any hourly-paid
employees or any union; or (v) agree to take any such action.
(e) Seller will not terminate or modify any lease, license, permit,
contract or other agreement to which it is a party.
(f) Seller will not mortgage, pledge or subject to lien or any other
encumbrance, any of the Acquired Assets.
(g) Seller will not enter into any transaction involving more than
$10,000 or a commitment extending more than six months.
(h) Seller will not directly or indirectly (through a representative or
otherwise) solicit or furnish information to any prospective acquirers, commence
negotiations with any other party or enter into any agreement with any other
party concerning the sale of Seller's capital stock or assets or any part
thereof, or involving the merger, consolidation, liquidation, dissolution,
acquisition or combination of or share exchange with any other entity.
(i) Seller will not make any cash distributions to its Shareholders.
(j) Seller will not enter into any transaction outside the ordinary
course of business.
(k) Seller will not enter into any agreement to do any of the
foregoing.
7.2. ACCESS; FURTHER ASSURANCES.
(a) After the execution of this Agreement and continuing until the
Closing, Seller shall permit Buyer and its counsel, accountants, engineers and
other representatives full access during normal business hours to all of the
directors, officers, facilities, properties, books, contracts, commitments and
records of or relating to Seller and will furnish Buyer and its representatives
during such period with all such information concerning the affairs of Seller
and such copies of such documents relating thereto, as Buyer or its
representatives may request.
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(b) At any time and from time to time after the Closing, at Buyer's
request and without further consideration, Seller will execute and deliver such
other instruments of sale, transfer, conveyance, assignment, and delivery and
confirmation and take such action as the Buyer may reasonably deem necessary or
desirable in order more effectively to transfer, convey and assign to Buyer and
to place Buyer in possession and control of, and to confirm Buyer's title to,
the Acquired Assets, and to assist Buyer in exercising all rights and enjoying
all benefits with respect thereto.
7.3. DISCLOSURE LETTER. Seller shall have the continuing obligation to
supplement or amend promptly the Disclosure Letter being delivered pursuant to
this Agreement with respect to any matter hereafter arising or discovered which,
if existing or known at the date of this Agreement, would have been required to
be set forth or described in the Disclosure Letter.
7.4. CONFIDENTIALITY. Subject to Section 7.5, whether or not the
Closing occurs, each of the parties will treat in confidence all documents,
materials and other information (including without limitation information
relating to supply and sales agreements and relationships with third parties)
disclosed by any other party, whether during the course of the negotiations
leading to the execution of this Agreement or thereafter, in its investigation
of the other parties and in the preparation of agreements, schedules and other
documents relating to the consummation of the transactions contemplated hereby.
If this Agreement is terminated, each of the parties will use its best efforts
to return to the other party all originals and copies of nonpublic documents and
materials, including summaries and compilations thereof, of the type provided
for in this Section 7.4 which have been furnished in connection with this
Agreement.
7.5. PUBLIC STATEMENTS AND PRESS RELEASES. Prior to the Closing, no
party will issue or cause the publication of any press release, public
announcement, statement, acknowledgment or other public revelation (including
any announcement to employees or customers of, or others having business
dealings with, Seller, Buyer or any of them) with respect to this Agreement or
the transactions contemplated hereby (a "Public Statement") without the prior
consent of the other party to such Public Statement and its contents, which
consent will not be unreasonably withheld; provided, however, that nothing
herein will prohibit:
(a) any party from issuing or causing publication of any Public
Statement to the extent that such party determines such action to be required by
applicable law, in which event the party making such determination will use
reasonable efforts to allow the other party reasonable time to comment on such
Public Statement in advance of its issuance, or
(b) Buyer from engaging in discussions with customers, suppliers,
employees, distributors and others engaging in business with Seller, provided
that such discussions relate to Buyer's due diligence review or Buyer's conduct
of the Business after Closing, and are not intended to result in general public
statements or disclosures (or are not reasonably likely to have such effect).
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7.6. TAXES. Seller will be responsible for, and hereby agrees to assume
and pay, all sales and similar Taxes which may be due to any jurisdiction or
governmental body as a result of the sale and transfer of the Acquired Assets.
7.7. CONSENTS AND APPROVALS. The parties shall, in a timely, accurate
and complete manner, take all necessary corporate and other action and use all
reasonable efforts to obtain all consents, approvals, permits, licenses and
amendments of agreements required by such party to carry out the transactions
contemplated in this Agreement.
7.8. BULK SALES COMPLIANCE. Buyer hereby waives compliance by Seller
with the provisions of the Bulk Sales Laws of any and all states, and Seller
covenants and agrees to pay and discharge when due all claims, liabilities and
related expenses which may be asserted against Buyer by reason of such
noncompliance.
ARTICLE 8.
CONDITIONS TO BUYER'S OBLIGATIONS
All obligations of Buyer hereunder are subject to the fulfillment,
prior to or at the Closing, of each of the following conditions:
8.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Seller in this Agreement and the statements contained in the Disclosure
Letter or in any instrument, list, certificate or writing delivered by Seller
pursuant to this Agreement shall be true when made and at and as of the time of
the Closing as though such representations and warranties were made at and as of
the Closing.
8.2. PERFORMANCE BY SELLER. Seller shall have performed and complied
with all covenants, agreements, obligations and conditions required by this
Agreement to be so complied with or performed.
8.3. CERTIFICATES OF SELLER. Seller shall have delivered to Buyer a
certificate, dated the Closing Date, certifying as to the fulfillment of the
conditions specified in Sections 8.1 and 8.2 hereof.
8.4. OPINION OF COUNSEL FOR SELLER. Buyer shall have received an
opinion of the Seller's counsel, Bill Zweifel, dated the Closing Date, in form
and substance satisfactory to Buyer's counsel, Bass, Berry & Sims PLC, to the
effect set forth in Exhibit C hereto.
8.5. CONSENTS AND APPROVALS. Buyer shall have received from Seller
executed counterparts of the consents referred to in Section 5.25 hereof, and
all other consents required, for the consummation of the transactions
contemplated hereby, all of which consents shall be in form and substance
satisfactory to Buyer.
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8.6. RESOLUTIONS. Buyer shall have received from Seller copies of the
resolutions of the Board of Directors and Shareholders of Seller authorizing the
execution, delivery and performance of this Agreement and the other documents
referred to herein to be executed by Seller, and the consummation of the
transactions contemplated hereby.
8.7. LITIGATION. On the date of the Closing, Seller shall not be a
party to, nor will there otherwise be pending or threatened, any judicial,
administrative, or other action, proceeding or investigation which, if adversely
determined might, in the opinion of Buyer, have a Material Adverse Effect upon
the Business, the Acquired Assets, Buyer or the transactions contemplated
hereby; and there shall be no Claim pending against Seller or Buyer seeking to
enjoin, prohibit, restrain or otherwise prevent the transactions contemplated
hereby.
8.8. NO MATERIAL ADVERSE CHANGE; DUE DILIGENCE REVIEW. Since the date
of this Agreement, there shall not have been any Material Adverse Effect.
Because Buyer has not had an opportunity to review fully the Business as at the
date of this Agreement, Buyer shall have a period of five (5) days from the date
hereof in which to conduct a business financial and legal due diligence review
of the properties, assets, results, operations, condition, suppliers, customers
and prospects of Seller. In the event during such review, Buyer in good faith
reasonably determines that such review has revealed information which either had
not been previously fully disclosed to or known by Buyer (whether or not such
disclosure was required by this Agreement), and would, if known to Seller as of
the date of this Agreement, constitute a breach of this Agreement, or would
otherwise have a Material Adverse Effect, then Buyer may terminate this
Agreement by written notice thereof to Seller, in which case, no party will have
any further obligations or liabilities in respect of this Agreement.
8.9. NON-COMPETITION AGREEMENT. Key employees of Seller, including
Kevin Rittger, M.D., shall have entered into a non-competition agreement with
Buyer on substantially the terms and conditions set forth on Exhibit B hereto
(the "Non-Competition Agreement").
8.10. AUDIT. Seller's financial statement for the past three (3) fiscal
years shall have been audited by a certified public accountant and to the
satisfaction of Buyer and its auditors.
8.11. AGREEMENT. Seller shall have entered into the Shareholders'
Agreement, Voting Agreement and Co-Sale Agreement attached hereto as Exhibits E,
F and G, respectively.
8.12. PAYROLL TAXES. Seller shall have received notification from the
Internal Revenue Service stating the exact amount owed by Seller for past due
payroll taxes and interest and penalties thereon.
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ARTICLE 9.
CONDITIONS TO SELLER'S OBLIGATIONS
All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions:
9.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by the Buyer in this Agreement shall be true when made and at and as of the
time of the Closing as though such representations and warranties were made at
and as of such date.
9.2. PERFORMANCE. Buyer shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be so
complied with or performed.
9.3. OFFICER'S CERTIFICATE. Buyer shall have delivered to Seller a
Certificate of the Chief Executive Officer of Buyer, dated the Closing Date,
certifying as to the fulfillment of the conditions specified in Sections 9.1 and
9.2 hereof.
9.4. OPINION OF COUNSEL FOR BUYER. Seller shall have received an
opinion of Buyer's counsel, Bass, Berry & Sims PLC, dated the Closing Date, in
form and substance satisfactory to Seller's counsel, Bill Zweifel, to the effect
set forth on Exhibit D hereto.
9.5. RESOLUTIONS. Seller shall have received from Buyer a copy of the
resolutions of the Board of Directors of Buyer authorizing the execution,
delivery and performance of this Agreement and the other documents referred to
herein to be executed by Buyer, and the consummation of the transactions
contemplated hereby.
ARTICLE 10.
INDEMNIFICATION
10.1. INDEMNIFICATION BY SELLER. Seller hereby agrees to defend,
indemnify and hold harmless Buyer, each fiduciary of Buyer's employee benefit
plans and each of Buyer's shareholders, affiliates, officers, directors,
employees, agents, successors and assigns ("Buyer's Indemnified Persons") and
shall reimburse Buyer's Indemnified Persons for, from and against each claim,
loss, liability, cost and reasonable expense (including interest, penalties,
costs of preparation and investigation, and the reasonable fees, disbursements
and expenses of attorneys, accountants and other professional advisors)
(collectively, "Losses"), directly or indirectly relating to, resulting from or
arising out of:
(a) Any untrue representation, misrepresentation, breach of warranty or
nonfulfillment of any covenant, agreement or other obligation by or of Seller
contained herein, any Schedule hereto, the Disclosure Letter or in any
certificate, document or instrument delivered to Buyer pursuant hereto.
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(b) Any Tax liability of Seller relating to the Assets, the Business or
employees of Seller, not previously paid, which is successfully asserted or
assessed against it for any event or period prior to the Closing Date
(regardless of whether the possibility of the assertion or assessment of any
such Tax liability shall have been disclosed to Buyer at or prior to the
Closing).
(c) Any Losses suffered or incurred by Buyer by reason of the failure
by Seller to comply with Bulk Sales Laws.
(d) Any other Loss related to any of the foregoing.
10.2. INDEMNIFICATION BY BUYER. Buyer hereby agrees to defend,
indemnify and hold harmless Seller, and shall reimburse Seller for, from and
against Losses directly or indirectly relating to, resulting from or arising out
of:
(a) Any untrue representation, misrepresentation, breach of warranty or
nonfulfillment of any covenant, agreement or other obligation by Buyer contained
herein or in any certificate, document or instrument delivered to Seller
pursuant hereto.
(b) Any other Loss related to the foregoing.
10.3. PROCEDURE.
(a) The indemnified party shall promptly notify the indemnifying party
of any Claim, demand, action or Proceeding for which indemnification will be
sought under Sections 10.1 or 10.2 of this Agreement, and, if such Claim,
demand, action or Proceeding is a third party Claim, demand, action or
Proceeding, the indemnifying party will have the right at its expense to assume
the defense thereof using counsel reasonably acceptable to the indemnified
party. The failure to provide such prompt notice shall not affect the
indemnification provided hereunder except to the extent, if any, the
indemnifying party shall have been actually prejudiced as a result of such delay
or failure. Should the indemnifying party assume the defense of such a third
party Claim, demand, action or Proceeding or should the indemnified party
unreasonably withhold its consent to the assumption by the indemnifying party of
the defense of any Claim, the indemnifying party shall not be liable to the
indemnified party for legal expenses subsequently incurred by the indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to participate, at its own expense, with respect to any such third
party Claim, demand, action or Proceeding, it being understood that the
indemnifying party shall control any defense assumed by the indemnifying party.
In connection with any such third party Claim, demand, action or Proceeding,
Buyer and Seller shall cooperate with each other and provide each other with
access to and retain all relevant books and records in their possession. No such
third party Claim, demand, action or Proceeding shall be settled without the
prior written consent of the indemnified party. If a firm written offer is made
to settle any such third party Claim, demand, action or Proceeding and the
indemnifying party proposes to accept such settlement and the indemnified party
refuses to consent to such settlement, then: (i) the indemnifying party shall be
excused from, and the indemnified party shall be solely responsible for,
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all further defense of such third party Claim, demand, action or Proceeding; and
(ii) the maximum liability of the indemnifying party relating to such third
party Claim, demand, action or Proceeding shall be the amount of the proposed
settlement if the amount thereafter recovered from the indemnified party on such
third party Claim, demand, action or Proceeding is greater than the amount of
the proposed settlement. Whether or not the indemnifying party shall have
assumed the defense of any such third party Claim, action, demand or Proceeding,
no indemnified party shall admit any liability with respect to, or settle,
compromise or discharge any such Claim, demand, action or Proceeding without the
indemnifying party's prior written consent, which shall not be unreasonably
withheld.
Buyer and Seller shall cooperate with each other with respect to
resolving any claim or liability with respect to which one party is obligated to
indemnify any other person hereunder, including by making commercially
reasonable efforts to mitigate or resolve any such claim or liability. In the
event that Buyer or Seller shall fail to make such commercially reasonable
efforts to mitigate or resolve any claim or liability, then notwithstanding
anything else to the contrary herein, the other party shall not be required to
indemnify any person for any Losses that could reasonably be expected to have
been avoided if Buyer or Seller, as the case may be, had made such efforts.
(b) Except as hereafter set forth, (i) neither Seller nor Buyer shall
have any liability under this Article 10 unless the aggregate of all Losses to
which the party who shall be entitled to indemnification exceeds, on a per claim
or per liability basis, an amount equal to $10,000 (exclusive of legal and other
expenses) in which event the indemnifying party shall be liable for all Losses
in excess of $10,000; (ii) in no event shall the aggregate liability of Seller
or Buyer under this Article 10 exceed $1,000,000, except for Losses incurred by
Buyer resulting from a breach by Seller of its representations made pursuant to
Section 5.13 or from any Claim made by a Governmental Authority or other third
party relating to Seller's operation of the Business prior to the Closing Date.
(c) Indemnification claims shall be reduced by and to the extent (i)
that an indemnitee shall actually receive proceeds under insurance policies,
risk sharing pools, or similar arrangements specifically as a result of, and in
compensation for, the subject matter of an indemnification claim by such
indemnitee, and (ii) indemnitee's available net tax benefits directly
attributable to Losses incurred in connection with any such claim.
(d) Entitlement to indemnification pursuant to this Article 10 shall be
conditioned upon claims in respect thereof being submitted, if at all, to the
party from whom indemnification is sought within 12 months from and after the
Closing Date, except that Buyer may give notice of and may make a claim relating
to (i) a breach by Seller of its representations made pursuant to Section 5.13
hereof at any time prior to 90 days after the expiration of the appropriate
statute of limitations with respect thereto, (ii) any Claim made by a
Governmental Authority or other third party relating to Seller's operation of
the Business prior to the Closing Date at any time, and (iii) Seller's ownership
of the Acquired Assets at any time.
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ARTICLE 11.
SURVIVAL OF REPRESENTATIONS
11.1. SURVIVAL OF REPRESENTATIONS. All representations, warranties,
covenants and agreements by the parties contained in this Agreement shall
survive the Closing for a period of two years.
11.2. STATEMENTS AS REPRESENTATIONS. All statements contained in the
Disclosure Letter or in any certificate, Schedule, list, document or other
writing delivered pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed representations and warranties for all
purposes of this Agreement.
11.3. REMEDIES CUMULATIVE. The remedies provided herein shall be
cumulative and shall not preclude the assertion by any party hereto of any other
rights or the seeking of any other remedies against the other party hereto.
ARTICLE 12.
TERMINATION OF AGREEMENT
This Agreement may be terminated at any time prior to the Closing:
(a) By mutual agreement of Seller and Buyer.
(b) By Buyer, upon ten (10) days' prior written notice to Seller if
there has been a Material violation or breach by the Seller of any of the
agreements, representations or warranties contained in this Agreement which has
not been waived in writing, or if any of the conditions set forth in Article 8
hereof have not been satisfied by the Closing or have not been waived in writing
by Buyer.
(c) By Seller, upon ten (10) days' prior written notice to Buyer if
there has been a Material violation or breach by the Buyer of any of the
agreements, representations or warranties contained in this Agreement which has
not been waived in writing, or if any of the conditions set forth in Article 9
hereof have not been satisfied by the Closing or have not been waived in writing
by Seller.
(d) By Buyer pursuant to Section 8.7 hereto.
(e) By either Buyer or Seller if the transactions contemplated by this
Agreement shall not have been consummated on or before February 29, 2000.
(f) By either Buyer or Seller if the other makes an assignment for the
benefit of creditors, files a voluntary petition in bankruptcy or seeks or
consents to any reorganization or similar relief under any present or future
bankruptcy act or similar law, or is adjudicated a bankrupt
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or insolvent, or if a third party commences any bankruptcy, insolvency,
reorganization or similar proceeding involving the other.
ARTICLE 13.
MISCELLANEOUS
13.1. EXPENSES. All fees and expenses incurred by Seller, including
without limitation legal fees and expenses, in connection with this Agreement
will be borne by Seller and all fees and expenses incurred by Buyer, including
without limitation, legal fees and expenses, in connection with this Agreement
will be borne by Buyer. If this transaction is not consummated, all expenses
relating to the audit of Seller shall be borne by Seller.
13.2. ASSIGNABILITY; PARTIES IN INTEREST.
(a) Buyer may assign any or all of its rights hereunder to any
affiliate or any direct or indirect subsidiary of Buyer, and Buyer shall advise
Seller of any such assignment and shall designate such party as the assignee and
transferee of the Assets purchased. Any such assignee shall assume all of
Buyer's duties, obligations and undertakings hereunder, but the assignor shall
remain liable hereunder.
(b) Seller may not assign, transfer or otherwise dispose of any of its
rights hereunder without the prior written consent of Buyer.
(c) All the terms and provisions of this Agreement shall be binding
upon, shall inure to the benefit of and shall be enforceable by the respective
heirs, successors, assigns and legal or personal representatives of the parties
hereto, provided that the rights and obligations under all licenses and
trademarks hereunder shall under no circumstances be assignable.
13.3. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including the
Disclosure Letter, exhibits, Schedules, lists and other documents and writings
referred to herein or delivered pursuant hereto, which form a part hereof,
contains the entire understanding of the parties with respect to its subject
matter. There are no restrictions, agreements, promises, warranties, covenants
or undertakings other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be amended only by a
written instrument duly executed by all parties or their respective heirs,
successors, assigns or legal personal representatives. Any condition to a
party's obligations hereunder may be waived but only by a written instrument
signed by the party entitled to the benefits thereof. The failure or delay of
any party at any time or times to require performance of any provision or to
exercise its rights with respect to any provision hereof, shall in no manner
operate as a waiver of or affect such party's right at a later time to enforce
the same.
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13.4. HEADINGS. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretations of this Agreement.
13.5. SEVERABILITY. The invalidity of any term or terms of this
Agreement shall not affect any other term of this Agreement, which shall remain
in full force and effect.
13.6. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person, by electronic facsimile transmission, cable
telegram, telex, or other standard form of telecommunications or mailed (by
overnight courier or registered or certified mail, postage prepaid, return
receipt requested) as follows:
If to Seller:
Emergency Medicine Internetwork, Inc.
1301 Regents Park Road, Suite 204
Houston, TX 77058
Attn: Kevin Rittger, M.D.
Facsimile: (281) 280-0285
with a copy to:
William R. Zweifel, Esq.
One Greenway Plaza
Suite 100
Houston, TX 77046
Facsimile: (713) 627-2498
If to Buyer:
HealthStream, Inc.
209 10th Avenue South, Suite 450
Nashville, TN 37203
Attn: Aaron Broad
Facsimile: (615) 301-3200
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Attn: Laura R. Brothers, Esq.
Facsimile: (615) 742-6818
29
<PAGE> 35
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
13.7. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Tennessee, without
regard to its conflict of laws rules.
13.8. COUNTERPARTS. This Agreement may be executed simultaneously in
one or more counterparts, with the same effect as if the signatories executing
the several counterparts had executed one counterpart, provided, however, that
the several executed counterparts shall together have been signed by Buyer and
Seller. All such executed counterparts shall together constitute one and the
same instrument.
30
<PAGE> 36
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of Buyer and by Seller on the date first above
written.
BUYER:
HEALTHSTREAM, INC.
By: /s/ Robert A. Frist, Jr.
--------------------------------
Title: Chief Executive Officer
------------------------------
SELLER:
EMERGENCY MEDICINE INTERNETWORK, INC.
By: /s/ Kevin Rittger
--------------------------------
Title: President
------------------------------
31
<PAGE> 37
SCHEDULE 3.2
ORGANIZATIONS QUALIFYING FOR EARN OUT
<TABLE>
<CAPTION>
ORGANIZATION CONTRACT VALUE
- --------------------------------------------------------------------------------
<S> <C>
Lennoway Community Ambulance $ 27,000
Lansing Fire Department $ 22,500
City of Baytown $ 8,342
GPU $ 26,730
Trans Ocean Offshore $ 22,500
Compaq $ 8,464
Austin City EMS $ 85,050
Rural Metro North Texas $ 25,125
---------
TOTAL $225,711
</TABLE>
32
<PAGE> 38
EXHIBIT A
Escrow Agreement
<PAGE> 39
EXHIBIT B
Non-Competition Agreement
<PAGE> 40
EXHIBIT C
Opinion of Seller's Counsel
<PAGE> 41
EXHIBIT D
Opinion of Buyer's Counsel
<PAGE> 42
EXHIBIT E
Shareholders' Agreement
<PAGE> 43
EXHIBIT F
Voting Agreement
<PAGE> 44
EXHIBIT G
Co-Sale Agreement
<PAGE> 1
EXHIBIT 4.4
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT is made as of the 21st day of April,
1999 by and between HealthStream, Inc., a Tennessee corporation (the "Company")
and the investors listed on Schedule A hereto, each of which is herein referred
to as an "Investor."
RECITALS
WHEREAS, the Company and the Investors are parties to the Series B
Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Series B Convertible Agreement");
WHEREAS, in order to induce the Company to enter into the Series B
Convertible Agreement and to induce the Investors to invest funds in the Company
pursuant to the Series B Convertible Agreement, the Investors and the Company
hereby agree that this Agreement shall govern the rights of the Investors to
cause the Company to register shares of Common Stock issuable to the Investors
and certain other matters as set forth herein;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.12 hereof.
(c) The term "1934 Act" shall mean the Securities Exchange Act
of 1934, as amended.
(d) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration
statement or document.
(e) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Series A or Series B
Convertible Preferred Stock, and (ii) any Common Stock of the
Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in
replacement of the shares referenced in (i) above, excluding in all
cases, however, any Registrable Securities sold by a person in a
transaction in which his rights under this Section 1 are not
assigned.
(f) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common
Stock outstanding which are Registrable Securities , and the number
of shares of Common Stock issuable pursuant to then exercisable or
convertible securities which are Registrable Securities.
<PAGE> 2
(g) The term "SEC" shall mean the Securities and Exchange
Commission.
1.2 Demand Registration.
(a) At any time after the Company shall have consummated a firm
commitment underwritten public offering of the Common Stock of the
Company under the Act, the holders of Registrable Securities (i)
constituting at least 30% of the total shares of Registrable
Securities then outstanding and (ii) having a minimum anticipated
offering price of $5,000,000 may request the Company to register
under the Act all or any portion of the shares of Registrable
Securities held by such requesting Holder or Holders for sale on
Form S-1 in the manner specified in such notice. Notwithstanding
anything to the contrary contained herein, the Company shall not be
obligated to effect, or to take any action to effect, any such
registration pursuant to this Section 1.2:
(i) during the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred eighty (180) days after the
effective date of, a Company-initiated registration (but in any
event no greater than three hundred sixty (360) days after a
request is made under this Section 1.2); provided that the
Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become
effective;
(ii) if the requesting Holders do not request that such
offering be firmly underwritten by underwriters reasonably
acceptable to the Company;
(iii) if the Company and the requesting Holders are unable
to obtain the commitment of the underwriter described in clause
(ii) above to firmly underwrite the offering; or
(iv) if in the good faith judgment of the Board of Directors
of the Company, such registration would be seriously detrimental
to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing
of such registration statement at such time, in which case the
Company shall furnish to such Holders a certificate signed by
the President of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such registration
statement to be filed in the near future and that it is,
therefore, essential to defer the filing of such registration
statement, then the Company shall have the right to defer such
filing for a period of not more than 180 days after receipt of
the request of the requesting holders, and, provided further,
that the Company shall not defer its obligation in this manner
more than once in any eighteen-month period.
(b) Following receipt of any notice under this Section 1.2, the
Company shall immediately notify all holders of Registrable
Securities from whom notice has not been received and shall use its
best efforts to register under the Act, for public sale in
accordance with the method of disposition specified in such notice
from requesting holders, the number of shares of Registrable
Securities specified in such notice (and in all notices received by
the Company from other holders within 15 days after the giving of
2
<PAGE> 3
such notice by the Company). If such method of disposition shall be
an underwritten public offering, the holders of a majority of the
shares of Registrable Securities to be sold in such offering may
designate the managing underwriter of such offering, subject to the
approval of the Company which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register
Registrable Securities pursuant to this Section 1.2 on two occasions
only; provided, however, that such obligation shall be deemed
satisfied only when a registration statement covering all shares of
Registrable Securities specified in notices received and not
rescinded as aforesaid, for sale in accordance with the method of
disposition specified by the requesting Holders, shall have become
effective and, if such method of disposition is a firm commitment
underwritten public offering, all such shares shall have been sold
pursuant thereto.
(c) The Company and any other holders of Common Stock which the
Company shall permit to participate shall be entitled to include in
any registration statement referred to in this Section 1.2, for sale
in accordance with the method of disposition specified by the
requesting Holders, provided the Company and any such holder accept
the terms of any underwriting agreed by the initiating Holders,
shares of Common Stock to be sold by the Company or such other
holders for their own account, except as and to the extent that, in
the sole discretion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such
inclusion would adversely affect the success of the offering of the
Registrable Securities to be sold. Except for registration
statements on Form S-4, S-8 or any successor thereto, the Company
will not file with the SEC any other registration statement with
respect to its Common Stock, whether for its own account or that of
other stockholders, from the date of receipt of a notice from
requesting holders pursuant to this Section 1.2, until the
completion of the period of distribution of the registration
contemplated thereby.
1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the
Holders) any of its stock or other equity securities under the Act in
connection with the public offering of such securities solely for cash
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on Form S-4 or any
other form which does not include substantially the same information as
would be required to be included in a registration statement covering
the sale of the Registrable Securities or a registration in which the
only Common Stock being registered is Common Stock issuable upon
conversion of debt securities which are also being registered), the
Company shall, at such time, promptly give each Holder written notice
of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 3.5, the Company shall, subject to the
provisions of Section 1.7, cause to be registered under the Act all of
the Registrable Securities that each such Holder has requested to be
registered.
1.4 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable
efforts to cause such registration statement to become effective,
and upon the request of the Holders of a majority of the
3
<PAGE> 4
Registrable Securities, keep such registration statement effective
for a period of up to sixty (60) days or, if earlier, until the
Holder of Holders have completed the distribution related thereto.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used
in connection with such registration statement as may be necessary
to comply with the provisions of the Act and as may be necessary to
keep such registration statement effective for a period of up to 60
days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of
Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter of such
offering. Each Holder participating in such underwriting shall also
enter into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening
of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities in each case not later than the
effective date of such registration.
(i) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that
the registration statement with respect to such securities becomes
effective, (i) an opinion, dated as of such date, of the counsel
representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders requesting registration,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated as of
such date, from the independent certified public accountants of the
Company, in form and substance as is customarily
4
<PAGE> 5
given by independent certified public accountants to underwriters in
an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders requesting registration,
addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting
registration of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section
1 with respect to the Registrable Securities of any selling Holder that
such Holder shall furnish to the Company such information regarding
itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be required to effect the
registration of such Holder's Registrable Securities.
1.6 Expenses of Company Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the
registrations pursuant to Sections 1.2, 1.3 or 1.11 for each Holder
(which right may be assigned as provided in Section 1.12), including
(without limitation) all registration, filing, and qualification fees,
printers and accounting fees relating or apportionable thereto and the
fees and disbursements of counsel for the Company and the reasonable
fees and disbursements of one counsel for the selling Holders selected
by them, but excluding underwriting discounts and selling commissions
relating to Registrable Securities.
1.7 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the
Holders' securities in such underwriting unless they accept the terms
of the underwriting as agreed upon between the Company and the
underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of
the offering by the Company. If the total amount of securities,
including Registrable Securities, requested by shareholders to be
included in such offering exceeds the amount of securities sold other
than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the
Company shall be required to include in the offering only that number
of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned
pro rata among the selling shareholders according to the total amount
of securities entitled to be included therein owned by each selling
shareholder or in such other proportions as shall mutually be agreed to
by such selling shareholders) but in no event shall the amount of
securities of the selling Holders included in the offering be reduced
below thirty percent (30%) of the total amount of securities included
in such offering, unless such offering is the initial public offering
of the Company's securities in which case the selling shareholders may
be excluded if the underwriters make the determination described above
and no other shareholder's securities are included. For purposes of the
preceding parenthetical concerning apportionment, for any selling
shareholder which is a holder of Registrable Securities and which is a
partnership or corporation, the partners, retired partners and
shareholders of such holder, or the estates and family members of any
such partners and retired partners and any trusts for the benefit of
any of the foregoing persons shall be deemed to be a single "selling
shareholder", and any pro-rata reduction with respect to such "selling
shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals
included in such "selling shareholder," as defined in this sentence.
5
<PAGE> 6
1.8 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with
respect to the interpretation or implementation of this Section 1.
1.9 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the
Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Act or the 1934 Act,
against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, the 1934
Act, or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of
or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or
alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make
the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act,
the 1934 Act or any state securities law; and the Company will pay
to each such Holder, underwriter or controlling person, as incurred,
any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 1.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance
upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the
Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages, or
liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act, or other federal
or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder under
an instrument duly executed by such Holder and stated to be
specifically for use in connection with such registration; and each
such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified
pursuant to this subsection 1.9(b), in connection with investigating
or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this
subsection 1.9(b) shall not apply to amounts paid in settlement of
any such loss, claim, damage,
6
<PAGE> 7
liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this
subsection 1.9(b) exceed the proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.9 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 1.9, deliver to the indemnifying party a written notice
of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an
indemnified party (together with all other indemnified parties which
may be represented without conflict by one counsel) shall have the
right to retain one separate counsel, with the fees and expenses to
be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under
this Section 1.9, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section
1.9.
(d) If the indemnification provided for in this Section 1.9 is
held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim,
damage, or expense referred to therein, then the indemnifying party,
in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party
as a result of such loss, liability, claim, damage, or expense in
such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party
on the other in connection with the statements or omissions that
resulted in such loss, liability, claim, damage, or expense as well
as any other relevant equitable considerations. The relative fault
of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission provided that in no
event shall any contribution by a Holder hereunder exceed the
proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this
Section 1.9 shall survive the completion of any offering of
Registrable Securities in a registration statement under this
Section 1, and otherwise. No indemnifying party, in the defense of
any such claim or litigation, shall, except with the consent of each
indemnified party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified
party of a release from all liability in respect to such claim or
litigation.
7
<PAGE> 8
1.10 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at
any time permit a Holder to sell securities of the Company to the
public without registration, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration
statement filed by the Company for the offering of its securities to
the general public;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary
to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as
practicable after the end of the fiscal year in which the first
registration statement filed by the Company for the offering of its
securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement filed
by the Company), the Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), or that it qualifies
as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
1.11 Form S-3 Registration. In case the Company shall receive from
any Holder or Holders a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities
owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in
such request as are specified in a written request given within 15
days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this
section 1.11: (1) if Form S-3 is not available for such offering by
the Holders; (2) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such
registration,
8
<PAGE> 9
propose to sell Registrable Securities and such other securities (if
any) at an aggregate price to the public (net of any underwriters'
discounts or commissions) of less than $1,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the
President of the Company stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after
receipt of the request of the Holder or Holders under this Section
1.11; provided, however, that the Company shall not utilize this
right more than once in any twelve month period; (4) if the Company
has within the twelve (12) month period preceding the date of such
request, already effected two registrations on Form S-3 for the
Holders pursuant to this Section 1.11; or (5) in any particular
jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Holders. All
expenses incurred in connection with a registration requested
pursuant to Section 1.11, including (without limitation) all
registration, filing, qualification, printer's and accounting fees
and the reasonable fees and disbursements of counsel for the selling
Holder or Holders and counsel for the Company, but excluding any
underwriters' discounts or commissions associated with Registrable
Securities, shall be borne pro rata by the Holder or Holders
participating in the Form S-3 Registration. Registrations effected
pursuant to this Section 1.11 shall not be counted as registrations
effected pursuant to Section 1.3.
1.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1
may be assigned (but only with all related obligations) by a Holder to
a transferee or assignee of such securities, provided: (a) the Company
is, within a reasonable time after such transfer, furnished with
written notice of the name and address of such transferee or assignee
and the securities with respect to which such registration rights are
being assigned; (b) such transferee or assignee agrees in writing to be
bound by and subject to the terms and conditions of this Agreement,
including without limitation the provisions of Section 1.13 below; and
(c) such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Act.
1.13 "Market Stand-Off" Agreement. Each Investor hereby agrees that,
during the period of duration specified by the Company and an
underwriter of common stock or other securities of the Company,
following the date of the first sale to the public pursuant to a
registration statement of the Company filed under the Act, it shall
not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it
at any time during such period except common stock included in such
registration; provided, however, that:
9
<PAGE> 10
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers common stock (or
other securities) to be sold on its behalf to the public in an
underwritten offering;
(b) all officers and directors of the Company and all other
persons with registration rights (whether or not pursuant to this
Agreement) enter into similar agreements; and
(c) such market stand-off time period shall not exceed (180)
days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities
of each Investor (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.13 shall not apply to a registration relating solely to
employee benefit plans on Form S-8 or similar forms which may be
promulgated in the future, or a registration relating solely to an SEC
Rule 145 transaction on Form S-4 or similar form which may be
promulgated in the future.
1.14 Limitation on Subsequent Registration Rights. After the date of
this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the Registrable Securities,
enter into any agreement with any holder or prospective holder of any
securities of the Company that would grant such holder registration
rights senior to those granted to the Holders hereunder.
1.15 Termination of Registration Rights.
(a) No Holder shall be entitled to exercise any right provided
for in this Section 1 after five (5) years following the
consummation of the sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the
initial firm commitment underwritten offering of its securities to
the general public (the "Special Termination Date") provided the
Special Termination Date shall be extended as to any Holder or
Holders who have, prior to the Special Termination Date, filed a
request pursuant to Section 1.2(a) or Section 1.11(b) and such
request is being deferred by the Company pursuant to the provisions
of Section 1.2(a)(i), Section 1.2(a)(iv) or Section 1.11(b)(3).
(b) In addition, the right of any Holder to request registration
or inclusion in any registration pursuant to this Section 1 shall
terminate on such date after the closing of the first
Company-initiated registered public offering of Common Stock of the
Company as all shares of Registrable Securities held or entitled to
be held upon conversion by such Holder may immediately be sold under
Rule 144 during any 90-day period.
10
<PAGE> 11
2. COVENANTS OF THE COMPANY.
2.1 Delivery of Financial Statements. The Company shall deliver to
each Investor:
(a) as soon as practicable, but in any event within one hundred
and twenty (120) days after the end of each fiscal year of the
Company, commencing with the fiscal year ended December 31, 1998
(provided fiscal 1998 financial statements may be delivered
subsequent to April 30, 1999 but shall be delivered no later than
June 30, 1999), an income statement for such fiscal year, a balance
sheet of the Company and statement of shareholder's equity as of the
end of such year, and a schedule as to the sources and applications
of funds for such year, such year-end financial reports to be in
reasonable detail, prepared in accordance with generally accepted
accounting principles consistently applied ("GAAP"), and audited and
certified by independent public accountants of nationally recognized
standing selected by the Company's Board of Directors;
(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss
statement, schedule as to the sources and application of funds for
such fiscal quarter and a statement showing the number of shares of
each class and series of capital stock and securities convertible
into or exercisable for shares of capital stock outstanding at the
end of the period, the number of common shares issuable upon
conversion or exercise of any outstanding securities convertible or
exercisable for common shares and the exchange ratio or exercise
price applicable thereto, all in sufficient detail as to permit the
Investor to calculate its percentage equity ownership in the
Company;
(c) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and business plan for
the next fiscal year, prepared on a monthly basis, including balance
sheets and sources and applications of funds statements for such
months and, as soon as prepared, any other budgets or revised
budgets prepared by the Company;
(d) with respect to the financial statements called for in
subsections (b) of this Section 2.1, an instrument executed by the
Chief Financial Officer or President of the Company and certifying
that such financials were prepared in accordance with GAAP
consistently applied with prior practice for earlier periods (with
the exception of footnotes that may be required by GAAP) and fairly
present the financial condition of the Company and its results of
operation for the period specified, subject to year-end audit
adjustment; and
(e) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the
Investor or any assignee of the Investor may from time to time
request, provided, however, that the Company shall not be obligated
under this subsection (e) or any other subsection of Section 2.1 to
provide information which it deems in good faith to be a trade
secret or similar confidential information.
11
<PAGE> 12
2.2 Inspection. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties, to
examine its books of account and records and to discuss the Company's
affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by' the Investor; provided,
however, that the Company shall not be obligated pursuant to this
Section 2.2 to provide access to any information which it reasonably
considers to be a trade secret or similar confidential information.
2.3 Proprietary Information Agreement. The Company shall require all
new employees of the Company to continue to execute and deliver a
proprietary information agreement substantially in the form referred to
in Section 2.19 of the Series B Convertible Preferred Stock Purchase
Agreement
2.4 Frist Note. The Company shall not fail to make any monthly
payments of interest due Robert A. Frist, Jr. ("Frist") as lender under
that certain Promissory Note dated April 21st, 1999, in the principal
amount of $1,543,000.00.
2.5 Termination of Covenants. The covenants set forth in Sections
2.1, 2.2 and Section 2.7 shall terminate and be of no further force or
effect when the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the firm
commitment underwritten offering of its securities to the general
public is consummated in which the gross proceeds are at least $30
million and the per share price is at least $9.00.
2.6 IRC Section 305. So long as any shares of Series B Convertible
Preferred Stock remain outstanding, the Company will not, without
approval of holders of a majority of the Series B Convertible Preferred
Stock then outstanding, do any act or thing which would result in
taxation of the holders of shares of the Series B Convertible Preferred
Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
2.7 C Corporation Status. The Company shall remain a C corporation.
3. MISCELLANEOUS.
3.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the
parties (including transferees of any shares of Registrable
Securities). Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
3.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Tennessee applicable to contracts made
and to be performed wholly within such state.
3.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
12
<PAGE> 13
3.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon personal delivery to the party to be
notified or upon deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party on the
signature page hereof, or at such other address as such party may
designate by ten (10) days' advance written notice to the other
parties.
3.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party
shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may
be entitled.
3.7 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and the
holders of at least 66 2/3% of the Registrable Securities then
outstanding. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any Registrable
Securities then outstanding, each future holder of all such Registrable
Securities, and the Company.
3.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
3.9 Aggregation of Stock. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights
under this Agreement.
3.10 Entire Agreement. This Agreement (including the Exhibits
hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and
thereof.
13
<PAGE> 14
IN WITNESS WHEREOF the parties have executed this Agreement as of the
date first above written.
HEALTHSTREAM, INC.
By: /s/ Robert A. Frist, Jr.
---------------------------------
President
209 10th Ave. South
Suite 450
Nashville, TN 37203
INVESTORS:
MARTIN INVESTMENT PARTNERSHIP III
By: THE MARTIN COMPANIES, INC.
Managing Partner
By: /s/ Charles N. Martin
---------------------------------
Charles N. Martin, President
20 Burton Hills Blvd.
Suite 100
Nashville, TN 37215
COLEMAN SWENSON HOFFMAN BOOTH IV L.P.
By Its General Partner
CSHB Ventures IV L.P.
By Its General Partner
/s/ Jay Hoffman
-----------------------------------
Jay Hoffman
237 Second Ave. South
Franklin, TN 37064-2469
DAUPHIN CAPITAL PARTNERS I, L.P.
By: /s/ James Hoover
---------------------------------
James Hoover, Principal
108 Forest Ave.
Locust Valley, NY 11560
14
<PAGE> 15
JCB HEALTHSTREAM INVESTORS, L.L.C
By: /s/ James Graves
-------------------------------------
James Graves, Chief Manager
330 Commerce St.
Nashville, TN 37201
NELSON CAPITAL PARTNERS III, L.P.
By: /s/ John K. Harrington
-------------------------------------
John K. Harrington
3401 West End Ave.
Suite 300
Nashville, TN 37203
J.C. BRADFORD & CO., L.L.C
By: /s/ James Graves
-------------------------------------
James Graves, Managing Director
330 Commerce St.
Nashville, TN 37201
FCA VENTURE PARTNERS II, L.P.
By: /s/ Stuart C. McWhorter
-------------------------------------
Stuart C. McWhorter
310 25th Ave. South
Suite 109
Nashville, TN 37203
THE JOEL COMPANY
By: /s/ Robert A. Gordon
-------------------------------------
Robert A. Gordon
6444 Worchester Dr.
Nashville, TN 37221
CUMBERLAND EQUITY PARTNERS
By: /s/ Fleming Wilt
-------------------------------------
Fleming Wilt
201 Fourth Ave. North
Suite 1390
Nashville, TN 37219
15
<PAGE> 16
SAVVY INVESTMENT PARTNERS
By: /s/ Thompson B. Patterson, Jr.
-------------------------------------
Thompson B. Patterson, Jr.
330 Commerce Street
Nashville, TN 37201
CHANCERY LANE INVESTMENTS, L.P.
By: /s/ H. Lee Barfield
-------------------------------------
H. Lee Barfield, General Partner
2700 First American Ctr.
Nashville, TN 37238-2700
By: /s/ Mary F. Barfield
-------------------------------------
Mary F. Barfield, General Partner
c/o H. Lee Barfield
2700 First American Ctr.
Nashville, TN 37238-2700
THE SEVEN PARTNERSHIP
By: /s/ Thompson Dent
-------------------------------------
Thompson Dent
30 Burton Hills Boulevard
Suite 500
Nashville, TN 37215
JCB VENTURE PARTNERSHIP IV
By: /s/ Robert Doolittle
-------------------------------------
Robert Doolittle, Chief Manager
330 Commerce St.
Nashville, TN 37201
MELKUS PARTNERS, LTD.
By: /s/ Ken Melkus
-------------------------------------
Ken Melkus
102 Woodmont Blvd.
Suite 110
Nashville, TN 37205
16
<PAGE> 17
/s/ Robert A Frist, Jr.
-----------------------------------------
Robert A Frist, Jr.
201 Abbott Glen Court
Nashville, TN 37215
/s/ William R. Frist
-----------------------------------------
William R. Frist
3827 Richland Ave.
Nashville, TN 37205
/s/ Darren Liff
-----------------------------------------
Darren Liff
209 10th Ave. South
Suite 432
Nashville, TN 37203
/s/ Scott Portis
-----------------------------------------
Scott and Carol Len Portis
6205 Hillsboro Pike
Nashville, TN 37215
/s/ James Frist
-----------------------------------------
James Frist
420 Elmington Ave.
Apt. 217
Nashville, TN 37205
/s/ Robert S. Doolittle
-----------------------------------------
Robert S. Doolittle
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
/s/ David Beard
-----------------------------------------
David Beard
888 Collierville-Arlington Rd. North
Collierville, TN 38017
/s/ John Dayani
-----------------------------------------
John Dayani
5301 Virginia Way
Suite 250
Brentwood, TN 37027
/s/ S. Douglas Smith
-----------------------------------------
S. Douglas Smith
278 Franklin Road
Suite 238
Brentwood, TN 37027
17
<PAGE> 18
/s/ Dr. Scott Portis
-----------------------------------------
Dr. Scott Portis
214 East Main Street
Huntingdon, TN 38344
/s/ Barbara Sampson
-----------------------------------------
Barbara Sampson
407 Lyons Head Drive
Knoxville, TN 37919
MORGAN STANLEY VENTURE PARTNERS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
---------------------------------------------
MORGAN STANLEY VENTURE INVESTORS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
---------------------------------------------
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENUER FUND, L.P.
by: Morgan Stanley Venture Partners, L.L.C
its General Partner
by: Morgan Stanley Venture Capital Fund III, Inc.
its Institutional Managing Member
By: /s/ Debra Abramovitz
---------------------------------------------
18
<PAGE> 19
GE CAPITAL EQUITY INVESTMENTS, INC.
By: /s/ Jeffrey T. Soukup
---------------------------------------------
Jeffrey T. Soukup, Vice President
120 Long Ridge Rd.
Samford, CT 06927
CARSON/PAUL ASSOCIATES LLC
By: /s/ Russell L. Carson
---------------------------------------------
Russell L. Carson, Managing Member
Welsh, Carson, Anderson & Stowe
320 Park Ave.
25th Floor
New York, NY 10022
19
<PAGE> 20
HEALTHSTREAM, INC.
AMENDMENT TO
INVESTOR RIGHTS AGREEMENT
This Amendment to Investor Rights Agreement executed as of the 11th day
of August, 1999 amends the Investor Rights Agreement (the "Agreement") executed
as of the 21st day of April, 1999, by and between HealthStream, Inc., a
Tennessee corporation (the "Company"), and the investors listed on Schedule A of
the Agreement, and is entered into among the Company, GE Medical Systems, a
division of the General Electric Company, a New York corporation ("GEMS"), and
those persons who purchase shares of the Company's Series C Convertible
Preferred Stock pursuant to the Series C Convertible Preferred Stock Purchase
Agreement (the "Series C Purchasers") (GEMS, the Series C Purchasers and the
investors listed on Schedule A of the Agreement are hereinafter referred to as
an "Investor" and collectively as the "Investors").
WHEREAS, the Series C Purchasers are acquiring an aggregate of up to
650,000 shares of the Series C Convertible Preferred Stock of the Company;
WHEREAS, the signatories hereto which are also signatories to the
Agreement are the holders of at least 66 2/3% of the Registrable Securities
presently outstanding;
WHEREAS, the Company and GEMS are parties to a Rights Agreement
executed as of the 14th day of June, 1999 ("Rights Agreement") in connection
with the Company's grant to GEMS of certain rights to acquire shares of the
Common Stock of the Company (the "Warrants") pursuant to a Warrant Agreement of
even date with the Rights Agreement (the "Warrant Agreement");
WHEREAS, it is a condition of the investment of the Series C Purchasers
that the Company, GEMS and the Series C Purchasers enter into this Amendment
amending certain of the terms and conditions of the Agreement and terminating
the Rights Agreement;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Subsection (e) of Section 1.1 entitled "Registrable Securities" shall be
amended to read as follows:
"(e) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Series A, Series B and Series C
Convertible Preferred Stock, (ii) any Common Stock of the Company issued or to
be issued upon conversion or exercise of the Warrants (or upon conversion of any
securities issued upon conversion or exercise of the Warrants) and (iii) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of
the shares referenced in (i) and (ii) above, excluding in all cases, however,
any Registrable Securities sold by a person in a transaction in which his rights
under this Section 1 are not assigned."
2. This Amendment shall be effective upon the written consent of the Company and
the holders of at least 66 2/3% of the Registrable Securities then outstanding.
<PAGE> 21
3. This Amendment, and the rights of the parties hereto, shall be governed by
and construed in accordance with the laws of the State of Tennessee, without
regard to such state's conflict of laws provisions.
4. This Amendment may be executed in one or more counterparts, each of which
will be deemed an original but all of which together shall constitute one and
the same instrument.
5. All other terms and provisions of the Agreement shall remain unchanged and
are in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
HEALTHSTREAM, INC.
By: /s/ Robert A. Frist, Jr.
---------------------------------
President
209 10th Ave. South
Suite 450
Nashville, TN 37203
INVESTORS:
MARTIN INVESTMENT PARTNERSHIP III
By: THE MARTIN COMPANIES, INC.
Managing Partner
By: /s/ Charles N. Martin
---------------------------------
Charles N. Martin, President
20 Burton Hills Blvd.
Suite 100
Nashville, TN 37215
COLEMAN SWENSON HOFFMAN BOOTH IV L.P.
By Its General Partner
CSHB Ventures IV L.P.
By Its General Partner
/s/ Jay Hoffman
-----------------------------------
Jay Hoffman
237 Second Ave. South
Franklin, TN 37064-2469
2
<PAGE> 22
DAUPHIN CAPITAL PARTNERS I, L.P.
By: /s/ James Hoover
-------------------------------------
James Hoover, Principal
108 Forest Ave.
Locust Valley, NY 11560
JCB HEALTHSTREAM INVESTORS, L.L.C
By: /s/ James Graves
-------------------------------------
James Graves, Chief Manager
330 Commerce St.
Nashville, TN 37201
NELSON CAPITAL PARTNERS III, L.P.
By: /s/ John K. Harrington
-------------------------------------
John K. Harrington
3401 West End Ave.
Suite 300
Nashville, TN 37203
J.C. BRADFORD & CO., L.L.C
By: /s/ James Graves
-------------------------------------
James Graves, Managing Director
330 Commerce St.
Nashville, TN 37201
FCA VENTURE PARTNERS II, L.P.
By: /s/ Stuart C. McWhorter
-------------------------------------
Stuart C. McWhorter
310 25th Ave. SouthSuite 109
Nashville, TN 37203
THE JOEL COMPANY
By: /s/ Robert Gordon
-------------------------------------
Robert Gordon
6444 Worchester Dr.
Nashville, TN 37221
3
<PAGE> 23
CUMBERLAND EQUITY PARTNERS
By: /s/ Fleming Wilt
-------------------------------------
Fleming Wilt
201 Fourth Ave. North
Suite 1390
Nashville, TN 37219
SAVVY INVESTMENT PARTNERS
By: /s/ Thompson B. Patterson, Jr.
-------------------------------------
Thompson B. Patterson, Jr.
330 Commerce Street
Nashville, TN 37201
CHANCERY LANE INVESTMENTS, L.P.
By: /s/ H. Lee Barfield
-------------------------------------
H. Lee Barfield, General Partner
2700 First American Ctr.
Nashville, TN 37238-2700
By: /s/ Mary F. Barfield
-------------------------------------
Mary F. Barfield, General Partner
c/o H. Lee Barfield
2700 First American Ctr.
Nashville, TN 37238-2700
THE SEVEN PARTNERSHIP
By: /s/ John K. Crawford
-------------------------------------
John K. Crawford
30 Burton Hills Boulevard
Suite 500
Nashville, TN 37215
JCB VENTURE PARTNERSHIP IV
By: /s/ Robert Doolittle
-------------------------------------
Robert Doolittle, Chief Manager
330 Commerce St.
Nashville, TN 37201
4
<PAGE> 24
MELKUS PARTNERS, LTD.
By: /s/ Ken Melkus
-------------------------------------
Ken Melkus
102 Woodmont Blvd.
Suite 110
Nashville, TN 37205
/s/ Robert A Frist, Jr.
-----------------------------------------
Robert A Frist, Jr.
201 Abbott Glen Court
Nashville, TN 37215
/s/ William R. Frist
-----------------------------------------
William R. Frist
3827 Richland Ave.
Nashville, TN 37205
/s/ Darren Liff
-----------------------------------------
Darren Liff
209 10th Ave. South
Suite 432
Nashville, TN 37203
/s/ Scott Portis
-----------------------------------------
Scott and Carol Len Portis
6205 Hillsboro Pike
Nashville, TN 37215
/s/ James Frist
-----------------------------------------
James Frist
420 Elmington Ave.
Apt. 217
Nashville, TN 37205
/s/ Robert S. Doolittle
-----------------------------------------
Robert S. Doolittle
J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
5
<PAGE> 25
/s/ David Beard
-----------------------------------------
David Beard
888 Collierville-Arlington Rd. North
Collierville, TN 38017
/s/ John Dayani
-----------------------------------------
John Dayani
5301 Virginia Way
Suite 250
Brentwood, TN 37027
/s/ S. Douglas Smith
-----------------------------------------
S. Douglas Smith
278 Franklin Road
Suite 238
Brentwood, TN 37027
/s/ Dr. Scott Portis
-----------------------------------------
Dr. Scott Portis
214 East Main Street
Huntingdon, TN 38344
/s/ Barbara Sampson
-----------------------------------------
Barbara Sampson
407 Lyons Head Drive
Knoxville, TN 37919
MORGAN STANLEY VENTURE PARTNERS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Fazle Husain
---------------------------------------------
MORGAN STANLEY VENTURE INVESTORS III, L.P.
by: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
by: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
By: /s/ Fazle Husain
---------------------------------------------
6
<PAGE> 26
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENUER FUND, L.P.
by: Morgan Stanley Venture Partners, L.L.C
its General Partner
by: Morgan Stanley Venture Capital Fund III, Inc.
its Institutional Managing Member
By: /s/ Fazle Husain
---------------------------------------------
GE CAPITAL EQUITY INVESTMENTS, INC.
By: /s/ Michael E. Aspinwall
-------------------------------------
Michael E. Aspinwall,
Senior Vice President
120 Long Ridge Rd.
Samford, CT 06927
CARSON/PAUL ASSOCIATES LLC
By: /s/ Russell L. Carson
-------------------------------------
Russell L. Carson
Welsh, Carson, Anderson & Stowe
320 Park Ave.
25th Floor
New York, NY 10022
GE MEDICAL SYSTEMS
By: /s/ Steve Kellet
-------------------------------------
3000 North Grandview Boulevard
Waukesha, WI 53188
7
<PAGE> 27
/s/ James & Cassandra Daniell
-----------------------------------------
James & Cassandra Daniell
5935 Post Road
Nashville, TN 37205
/s/ Carol Frist
-----------------------------------------
Carol Frist
1326 Page Road
Nashville, TN 37205
/s/ Robert A Frist, Sr.
-----------------------------------------
Robert A Frist, Sr.
1326 Page Road
Nashville, TN 37205
/s/
-----------------------------------------
Earl & Judith Ginn
713 Summerwind Circle
Nashville, TN 37215
HEALTHSTREAM PARTNERS
By: /s/ Thomas F. Frist III
-------------------------------------
General Partner
900-A, 3319 West End Avenue
Nashville, Tennessee 37203
VANDERBILT UNIVERSITY
By: /s/ Harry R. Jacobson
-------------------------------------
BORNEO PARTNERS
By: /s/ Michael Pote
-------------------------------------
Michael Pote, Administrator
8181 Londonberry Road
Nashville, TN 37221
/s/ Virginia Duncombe
-----------------------------------------
Virginia Duncombe
153 Bingham Ave.
Rumson, NJ 07760
/s/ Stephen F. Rogers
-----------------------------------------
Stephen and Linda Rogers
601 Foxborough Sq. N.
Brentwood, TN 37027
/s/ Dan McLaren
-----------------------------------------
Dan McLaren
212 Deer Park Circle
Nashville, TN 37205
/s/ Carrie C. McLaren
-----------------------------------------
Jeffrey and Carrie McLaren
147 Kenner Ave.
Nashville, TN 37205
/s/ Robert F. Merriman
-----------------------------------------
Robert F. Merriman
# 14 Nottingham
Amarillo, TX 79124
SC FUND I, L.P.
By: /s/ James Collins
-------------------------------------
General Partner
10666 North Torrey Pines Rd.
La Jolla, CA 92037
Scripps Clinic Management
Services Organization, Inc.
FRIST FAMILY INTERNET PARTNERS
By: /s/ Robert A. Frist, Sr.
-------------------------------------
Robert A Frist, Sr.
1326 Page Road
Nashville, TN 37205
8
<PAGE> 1
EXHIBIT 4.6
JUNE 14, 1999
WARRANT
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD,
OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION
UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL,
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT
THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii)
THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE
COMMISSION RULE 144.
WARRANT TO PURCHASE COMMON STOCK OF
HEALTHSTREAM, INC.
(Subject to Adjustment)
NO. __
THIS CERTIFIES THAT, for value received, GE Medical Systems, a
division of General Electric Company, a New York corporation (including its
affiliates and permitted assigns, GE" or Holder"), is entitled, subject to the
terms and conditions of this Warrant, at any time or from time to time after
the date hereof (the "Effective Date"), and before 5:00 p.m. New York City time
on the date that is ten (10) years from the date hereof (the "Expiration
Date"), to purchase from HealthStream, Inc., a Tennessee corporation (the
"Company") 132,450 shares of Common Stock of the Company at a price per share
equal to the lesser of (i) $7.55 or (ii) the price as determined in good faith
by the Company's Board of Directors at a meeting held on or about June 24, 1999
(the "Purchase Price"). Both the number of shares of Common Stock purchasable
upon exercise of this Warrant and the Purchase Price are subject to adjustment
and change as provided herein.
1. CERTAIN DEFINITIONS. As used in this Warrant the
following terms shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock of the Company, no par
value, and any other securities at any time receivable or issuable upon
exercise of this Warrant.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
"Fair Market Value" of a share of Common Stock as of a particular date
shall mean:
<PAGE> 2
(a) If traded on a securities exchange or the Nasdaq National Market,
the Fair Market Value shall be deemed to be the average of the closing prices
of the Common Stock of the Company on such exchange or market over the 5
business days ending immediately prior to the applicable date of valuation;
(b) If actively traded over-the-counter, the Fair Market Value shall
be deemed to be the average of the closing bid prices over the 30-day period
ending immediately prior to the applicable date of valuation; and
(c) If there is no active public market, the Fair Market Value shall
be the value thereof, as agreed upon by the Company and the Holder; provided,
however, that if the Company and the Holder cannot agree on such value, such
value shall be determined by an independent valuation firm experienced in
valuing businesses such as the Company and jointly selected in good faith by
the Company and the Holder. Fees and expenses of the valuation firm shall be
paid for by the Company.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended from time to time.
"IPO" shall mean the Company's first firm commitment underwritten
public offering of the Company's Common Stock pursuant to a registration
statement filed with the Commission.
"Registered Holder" shall mean any Holder in whose name this Warrant
is registered upon the books and records maintained by the Company.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrant" as used herein, shall include this Warrant and any warrant
delivered in substitution or exchange therefor as provided herein.
2. EXERCISE OF WARRANT
2.1. Payment. Subject to compliance with the terms and conditions
of this Warrant and applicable securities laws, this Warrant may be exercised,
in whole or in part at any time or from time to time, on or before the
Expiration Date by the delivery (including, without limitation, delivery by
facsimile) of the form of Notice of Exercise attached hereto as Exhibit 1 (the
"Notice of Exercise"), duly executed by the Holder, at the principal office of
the Company, and as soon as practicable after such date, surrendering (a) this
Warrant at the principal office of the Company, and (b) payment in cash (by
check) or by wire transfer of an amount equal to the product obtained by
multiplying the number of shares of Common Stock being purchased upon such
exercise by the then effective Purchase Price (the "Exercise Amount"), except
that if Holder is subject to HSR Act Restrictions (as defined in Section 2.3
below), the Exercise Amount shall be paid to the Company within five (5)
business days of the termination of all HSR Act Restrictions.
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<PAGE> 3
2.2. Stock Certificates; Fractional Shares. As soon as practicable
on or after such date, the Company shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of whole shares of Common Stock issuable upon such exercise, together
with cash in lieu of any fraction of a share equal to such fraction of the
current Fair Market Value of one whole share of Common Stock as of the date of
exercise of this Warrant. No fractional shares or scrip representing fractional
shares shall be issued upon an exercise of this Warrant. Such certificate or
certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Common Stock as of the date of delivery of the Notice of Exercise.
2.3. HSR Act. If the filing by the Company under the HSR Act
should be required at the time of any exercise of this Warrant by a Holder, in
the reasonable opinion of counsel for Holder, the Company will promptly make
any such filing with the appropriate government agency. The Company hereby
acknowledges that exercise of this Warrant by Holder may subject the Company
and/or the Holder to the filing requirements of the HSR Act and that Holder may
be prevented from exercising this Warrant until the expiration or early
termination of all waiting periods imposed by the HSR Act ("HSR Act
Restrictions"). If on or before the Expiration Date Holder has sent the Notice
of Exercise to Company and Holder has not been able to complete the exercise of
this Warrant prior to the Expiration Date because of HSR Act Restrictions, the
Holder shall be entitled to complete the process of exercising this Warrant in
accordance with the procedures contained herein notwithstanding the fact that
completion of the exercise of this Warrant would take place after the
Expiration Date.
2.4. Partial Exercise; Effective Date of Exercise. In case of any
partial exercise of this Warrant, the Company shall cancel this Warrant upon
surrender hereof and shall execute and deliver a new Warrant of like tenor and
date for the balance of the shares of Common Stock purchasable hereunder. This
Warrant shall be deemed to have been exercised immediately prior to the close
of business on the date of its surrender for exercise as provided above.
However, if Holder is subject to HSR Act filing requirements this Warrant shall
be deemed to have been exercised on the date immediately following the date of
the expiration of all HSR Act Restrictions. The person entitled to receive the
shares of Common Stock issuable upon exercise of this Warrant shall be treated
for all purposes as the holder of record of such shares as of the close of
business on the date the Holder is deemed to have exercised this Warrant.
2.5. Net Issue Exercise. In lieu of the payment methods set forth
in Section 2.1 above, the Holder may elect to exchange all or some of the
Warrant for shares of Common Stock equal to the value of the amount of the
Warrant being exchanged on the date of exchange. If Holder elects to exchange
this Warrant as provided in this Section 2.5, Holder shall tender to the
Company the Warrant for the amount being exchanged, along with written notice
of Holder's election to exchange some or all of the Warrant, and the Company
shall issue to Holder the number of shares of the Common Stock computed using
the following formula:
3
<PAGE> 4
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued
to Holder.
Y = the number of shares of Common Stock purchasable under
the Warrant being exchanged (as adjusted to the date of such
calculation).
A = the Fair Market Value of one share of the Company's
Common Stock.
B = the Purchase Price (as adjusted to the date of such
calculation).
All references herein to an "exercise" of the Warrant shall
include an exchange pursuant to this Section 2.5. Upon receipt of a written
notice of the Company's intention to raise capital by selling shares of Common
Stock in an IPO (the "IPO Notice"), which notice shall be delivered to Holder
at least forty-five (45) but not more than ninety (90) days before the
anticipated date of the filing with the Securities and Exchange Commission of
the registration statement associated with the IPO, the Holder shall promptly
notify the Company whether or not the Holder will exercise this Warrant
pursuant to this Section 2.5 prior to consummation of the IPO. Notwithstanding
whether or not an IPO Notice has been delivered to Holder or any other
provision of this Warrant to the contrary, if Holder decides to exercise this
Warrant while a registration statement is on file with the Securities and
Exchange Commission (the "SEC") in connection with the IPO, this Warrant shall
be deemed exercised on the consummation of the IPO and the Fair Market Value of
a share of Common Stock will be the price at which one share of Common Stock
was sold to the public in the IPO. If Holder has elected to exercise this
Warrant pursuant to this Section 2.5 while a registration statement is on file
with the Securities and Exchange Commission in connection with an IPO and the
IPO is not consummated, then Holder's exercise of this Warrant shall not be
effective unless Holder confirms in writing Holder's intention to go forward
with the exercise of this Warrant.
2.6. "Easy Sale" Exercise. In lieu of the payment methods set
forth in Section 2.1 and 2.5 above, when permitted by law and applicable
regulations (including Nasdaq and NASD rules), the Holder may pay the Purchase
Price through a "same day sale" commitment from the Holder (and if applicable a
broker-dealer that is a member of the National Association of Securities
Dealers (a "NASD Dealer")), whereby the Holder irrevocably elects to exercise
this Warrant and to sell a portion of the Shares so purchased to pay for the
Purchase Price and the Holder (or, if applicable, the NASD Dealer) commits upon
sale (or, in the case of the NASD Dealer, upon receipt) of such Shares to
forward the Purchase Price directly to the Company.
3. VALID ISSUANCE: TAXES. All shares of Common Stock issued
upon the exercise of this Warrant shall be validly issued, fully paid and
non-assessable, and the Company shall pay all taxes and other governmental
charges that may be imposed in respect of the issue or delivery thereof. The
Company shall not be required to pay any tax or other charge imposed in
connection with any transfer involved in the issuance of any certificate for
shares of Common Stock in any name other than that of the Registered Holder of
this Warrant, and in such case the Company shall not be required to issue or
deliver any stock certificate or security until such tax
4
<PAGE> 5
or other charge has been paid, or it has been established to the Company's
reasonable satisfaction that no tax or other charge is due.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The
number of shares of Common Stock issuable upon exercise of this Warrant (or any
shares of stock or other securities or property receivable or issuable upon
exercise of this Warrant) and the Purchase Price are subject to adjustment upon
occurrence of the following events:
4.1. Adjustment for Stock Splits, Stock Subdivisions or
Combinations of Shares. The Purchase Price of this Warrant shall be
proportionally decreased and the number of shares of Common Stock issuable upon
exercise of this Warrant (or any shares of stock or other securities at the
time issuable upon exercise of this Warrant) shall be proportionally increased
to reflect any stock split or subdivision of the Company's Common Stock. The
Purchase Price of this Warrant shall be proportionally increased and the number
of shares of Common Stock issuable upon exercise of this Warrant (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant) shall be proportionally decreased to reflect any combination of the
Company's Common Stock.
4.2. Adjustment for Dividends or Distributions of Stock or Other
Securities or Property. In case the Company shall make or issue, or shall fix a
record date for the determination of eligible holders entitled to receive, a
dividend or other distribution with respect to the Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of the Warrant)
payable in (a) securities of the Company or (b) assets (excluding cash
dividends paid or payable solely out of retained earnings), then, in each such
case, the Holder of this Warrant on exercise hereof at any time after the
consummation, effective date or record date of such dividend or other
distribution, shall receive, in addition to the shares of Common Stock (or such
other stock or securities) issuable on such exercise prior to such date, and
without the payment of additional consideration therefor, the securities or
such other assets of the Company to which such Holder would have been entitled
upon such date if such Holder had exercised this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional stock
available by it as aforesaid during such period giving effect to all
adjustments called for by this Section 4.
4.3. Reclassification. If the Company, by reclassification of
securities or otherwise, shall change any of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to
such reclassification or other change and the Purchase Price therefore shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 4. No adjustment shall be made pursuant to this Section 4.3 upon any
conversion or redemption of the Common Stock which is the subject of Section
4.5.
5
<PAGE> 6
4.4. Adjustment for Capital Reorganization, Merger or
Consolidation. In case of any capital reorganization of the capital stock of
the Company (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), or any merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all the assets of the Company then, and in each such case,
as a part of such reorganization, merger, consolidation, sale or transfer,
lawful provision shall be made so that the Holder of this Warrant shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Purchase Price then in effect,
the number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation, sale or
transfer that a holder of the shares deliverable upon exercise of this Warrant
would have been entitled to receive in such reorganization, consolidation,
merger, sale or transfer if this Warrant had been exercised immediately before
such reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 4. The foregoing provisions of
this Section 4.4 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Warrant. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder after the transaction, to the end
that the provisions of this Warrant shall be applicable after that event, as
near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
4.5. Conversion of Common Stock. In case all or any portion of the
authorized and outstanding shares of Common Stock of the Company are redeemed
or converted or reclassified into other securities or property pursuant to the
Company's Charter or otherwise, or the Common Stock otherwise ceases to exist,
then, in such case, the Holder of this Warrant, upon exercise hereof at any
time after the date on which the Common Stock is so redeemed or converted,
reclassified or ceases to exist (the "Termination Date"), shall receive, in
lieu of the number of shares of Common Stock that would have been issuable upon
such exercise immediately prior to the Termination Date, the securities or
property that would have been received if this Warrant had been exercised in
full and the Common Stock received thereupon had been simultaneously converted
immediately prior to the Termination Date, all subject to further adjustment as
provided in this Warrant. Additionally, the Purchase Price shall be immediately
adjusted to equal the quotient obtained by dividing (x) the aggregate Purchase
Price of the maximum number of shares of Common Stock for which this Warrant
was exercisable immediately prior to the Termination Date by (y) the number of
shares of Common Stock of the Company for which this Warrant is exercisable
immediately after the Termination Date, all subject to further adjustment as
provided herein.
4.6. Adjustment for Certain Issuances of Additional Shares of
Common Stock. In the event of an Equity Sale Event (as hereinafter defined),
then forthwith upon such Equity Sale
6
<PAGE> 7
Event the Purchase Price in effect immediately prior to the time of such Equity
Sale Event shall be adjusted to equal the price per share of the Common Stock
issued or to be issued in such Equity Sale Event. For purposes of this Section
4.6, an Equity Sale Event shall mean any sale by the Company occurring on or
before the date that is 12 months from the Effective Date of Common Stock, or
any right or option to purchase Common Stock or other stock convertible into
Common Stock, or any obligation or any share of stock convertible into or
exchangeable for Common Stock for a price per share that is less than the
Purchase Price in effect immediately prior to the time of such sale and that
results in aggregate gross cash proceeds to the company of at least two million
dollars ($2,000,000). The provisions of this Section 4.6 shall be void and of
no further force or effect in the event that an Equity Sale Event shall not
have occurred prior to the date that is 12 months from the Effective Date.
5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment
in the Purchase Price, number or type of shares issuable upon exercise of this
Warrant or otherwise pursuant to Section 4, the Chief Financial Officer or
Controller of the Company shall compute such adjustment in accordance with the
terms of this Warrant and prepare a certificate setting forth such adjustment
and showing in detail the facts upon which such adjustment is based, including
a statement of the adjusted Purchase Price. The Company shall promptly send (by
facsimile and by either first class mail, postage prepaid or overnight
delivery) a copy of each such certificate to the Holder.
6. LOSS OR MUTILATION. Upon receipt of evidence reasonably
satisfactory to the Company of the ownership of and the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to it, and (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will execute and deliver in lieu
thereof a new Warrant of like tenor as the lost, stolen, destroyed or mutilated
Warrant.
7. RESERVATION OF COMMON STOCK. The Company hereby covenants
that at all times there shall be reserved for issuance and delivery upon
exercise of this Warrant such number of shares of Common Stock or other shares
of capital stock of the Company as are from time to time issuable upon exercise
of this Warrant and, from time to time, will take all steps necessary to amend
its Charter or other similar organizational document to provide sufficient
reserves of shares of Common Stock issuable upon exercise of this Warrant (and
shares of its Common Stock for issuance on conversion of such Common Stock).
All such shares shall be duly authorized, and when issued upon such exercise,
shall be validly issued, fully paid and non-assessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale and free and clear of all preemptive rights, except encumbrances or
restrictions arising under federal or state securities laws. Issuance of this
Warrant shall constitute full authority to the Company's officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock and Common Stock upon the
exercise of this Warrant.
8. TRANSFER AND EXCHANGE. Subject to the terms and conditions
of this Warrant and compliance with all applicable securities laws, this
Warrant and all rights hereunder may be transferred to any stockholder in the
Company or a Permitted Transferee as defined in
7
<PAGE> 8
the Company's Amended and Restated Stockholders' Agreement dated April 21,
1999, in whole or in part, without the Company's consent, provided that the
transferee agrees in writing to comply with all of the terms and conditions of
this Warrant, on the books of the Company maintained for such purpose at the
principal office of the Company referred to above, by the Registered Holder
hereof in person, or by duly authorized attorney, upon surrender of this
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge imposed upon such transfer. Upon any permitted
partial transfer, the Company will issue and deliver to the Registered Holder a
new Warrant or Warrants with respect to the shares of Common Stock not so
transferred. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that when this Warrant shall have been so endorsed,
the person in possession of this Warrant may be treated by the Company, and all
other persons dealing with this Warrant, as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding; provided, however that until a
transfer of this Warrant is duly registered on the books of the Company, the
Company may treat the Registered Holder hereof as the owner for all purposes.
9. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof,
agrees that, absent an effective registration statement filed with the SEC
under the Securities Act, covering the disposition or sale of this Warrant or
the Common Stock issued or issuable upon exercise hereof or the Common Stock
issuable upon conversion thereof, as the case may be, and registration or
qualification under applicable state securities laws, such Holder will not
sell, transfer, pledge, or hypothecate any or all such Warrants or Common
Stock, as the case may be, unless either (i) the Company has received an
opinion of counsel, in form and substance reasonably satisfactory to the
Company, to the effect that such registration is not required in connection
with such disposition or (ii) the sale of such securities is made pursuant to
SEC Rule 144.
10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this
Warrant, the holder hereby represents, warrants and covenants that any shares
of stock purchased upon exercise of this Warrant or acquired upon conversion
thereof shall be acquired for investment only and not with a view to, or for
sale in connection with, any distribution thereof; that the Holder has had such
opportunity as such Holder has deemed adequate to obtain from representatives
of the Company such information as is necessary to permit the Holder to
evaluate the merits and risks of its investment in the company; that the Holder
is able to bear the economic risk of holding such shares as may be acquired
pursuant to the exercise of this Warrant for an indefinite period; that the
Holder understands that the shares of stock acquired pursuant to the exercise
of this Warrant or acquired upon conversion thereof will not be registered
under the Securities Act (unless otherwise required pursuant to exercise by the
Holder of the registration rights, if any, previously granted to the registered
Holder) and will be "restricted securities" within the meaning of Rule 144
under the Securities Act and that the exemption from registration under Rule
144 will not be available for at least one year from the date of exercise of
this Warrant, and even then will not be available unless a public market then
exists for the stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are
complied with; and that all stock certificates representing shares
8
<PAGE> 9
of stock issued to the Holder upon exercise of this Warrant or upon conversion
of such shares may have affixed thereto a legend substantially in the following
form (which legend the Company agrees to remove when such restrictions are no
applicable):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE
IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant
shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company. In the absence of affirmative action by such Holder
to purchase Common Stock by exercise of this Warrant, no provisions of this
Warrant, and no enumeration herein of the rights or privileges of the Holder
hereof shall cause such Holder hereof to be a stockholder of the Company for
any purpose.
12. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Holder that:
12.1. Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee and has all requisite corporate power and
authority to own its properties and assets and to carry on its business as now
conducted and as presently proposed to be conducted. The Company is qualified
to do business as a foreign corporation in each jurisdiction where failure to
be so qualified would have a material adverse effect on its financial
condition, business, prospects or operations.
12.2. Capitalization. The authorized capital stock of the Company
consists of the following:
(a) Preferred Stock. 5,000,000 shares of Preferred Stock, no par
value, of which 76,000 shares have been designated as Series A Convertible
Preferred Stock, all of which are outstanding, and 1,436,961 shares have been
designated as Series B Convertible Preferred Stock, 452,501 of which are
outstanding. The rights, privileges and preferences of the Series B Convertible
Preferred Stock are as stated in the Restated Charter of the Company.
(b) Common Stock. 20,000,000 shares of common stock., no par value
("Common Stock"), of which 1,991,647 shares are issued and outstanding. An
additional 4,000,000 shares
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<PAGE> 10
of Common Stock are reserved for issuance pursuant to the Employee Stock Option
Plan, dated April 15, 1994 (the "Option Plan"). The Company has granted options
under the Option Plan to acquire a total of 915,616 shares of Common Stock.
12.3. Due Authorization; Consents. All corporate action on the part
of the Company, its officers, directors and shareholders necessary for (a) the
authorization, execution and delivery of, and the performance of all
obligations of the Company under this Warrant, and (b) the authorization,
issuance, reservation for issuance and delivery of all of the equity securities
issuable upon exercise of this Warrant (and, if applicable, the Common Stock
issuable upon conversion thereof) has been taken. This Warrant constitutes a
valid and binding obligation of the Company enforceable in accordance with its
terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles. All consents, approvals
and authorizations of, and registrations, qualifications and filings with, any
federal or state governmental agency, authority or body, or any third party,
required in connection with the execution, delivery and performance of this
Warrant and the consummation of the transactions contemplated hereby and
thereby have been obtained.
13. INTENTIONALLY DELETED
14. INTENTIONALLY DELETED
15. INTENTIONALLY DELETED
16. NOTICES. Except as may be otherwise provided herein, all
notices, requests, waivers and other communications made pursuant to this
Agreement shall be in writing and shall be conclusively deemed to have been
duly given (a) when hand delivered to the other party; (b) when received when
sent by facsimile at the address and number set forth below; (c) three business
days after deposit in the U.S. mail with first class or certified mail receipt
requested postage prepaid and addressed to the other party as set forth below;
or (d) the next business day after deposit with a national overnight delivery
service, postage prepaid, addressed to the parties as set forth below with
next-business-day delivery guaranteed, provided that the sending party receives
a confirmation of delivery from the delivery service provider.
<TABLE>
<S> <C>
GE MEDICAL SYSTEMS HEALTHSTREAM, INC.
3000 North Grandview Boulevard 2098 10th Avenue South
Waukesha, WI 53188 Suite 450
Telephone: 414 544 3599 Nashville, TN 37203
Fax: 414 544 3930 Telephone: (615) 248-4848
Attention: Michael Jones Fax: (615) 248-6833
Attention: Robert Laird, Vice
President and General Counsel
</TABLE>
Each person making a communication hereunder by facsimile shall
promptly confirm by telephone to the person to whom such communication was
addressed each communication made by it by facsimile pursuant hereto but the
absence of such confirmation shall not affect the
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<PAGE> 11
validity of any such communication. A party may change or supplement the
addresses given above, or designate additional addresses, for purposes of this
Section 16 by giving the other party written notice of the new address in the
manner set forth above.
17. HEADINGS. The headings in this Agreement are for purposes of
convenience in reference only and shall not be deemed to constitute a part
hereof.
18. LAW GOVERNING. This Agreement and each Warrant Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Tennessee and for all purposes shall be construed in accordance with
the internal laws of said State.
19. NO IMPAIRMENT. The Company will not, by amendment of its
Charter or bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Registered
Holder of this Warrant against impairment. Without limiting the generality of
the foregoing, the Company (a) will not increase the par value of any shares of
stock issuable upon the exercise of this Warrant above the amount payable
therefor upon such exercise, and (b) will take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares of Common Stock upon exercise of
this Warrant.
20. NOTICES OF RECORD DATE. In case:
20.1. the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
this Warrant), for the purpose of entitling them to receive any dividend or
other distribution, or any right to subscribe for or purchase any shares of
stock of any class or any other securities or to receive any other right; or
20.2. of any consolidation or merger of the Company with or into
another corporation, any capital reorganization of the Company, any
reclassification of the Capital Stock of the Company, or any conveyance of all
or substantially all of the assets of the Company to another corporation in
which holders of the Company's stock are to receive stock, securities or
property of another corporation; or
20.3. of any voluntary dissolution, liquidation or winding-up of
the Company; or
20.4. of any redemption or conversion of all outstanding Common
Stock;
then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the
case may be, (i) the date on which a record is to be taken for the purpose of
such dividend, distribution or right, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation, winding-up, redemption or conversion is to take
place, and the time, if any is to be fixed, as of which the holders of record
of Common Stock or (such stock or securities as at the
11
<PAGE> 12
time are receivable upon the exercise of this Warrant), shall be entitled to
exchange their shares of Common Stock (or such other stock or securities), for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation
or winding-up. Such notice shall be delivered at least thirty (30) days prior
to the date therein specified.
21. SEVERABILITY. If application of any one or more of the
provisions of this Warrant shall be unlawful under applicable law, then the
parties will attempt in good faith to make such alternative arrangements as may
be legally permissible and which carry out as nearly as practicable the terms
of this Warrant. Should any portion of this Warrant be deemed unenforceable by
a court of competent jurisdiction, the remaining portion thereof shall remain
unaffected and be interpreted as if such unenforceable portions were initially
deleted.
22. COUNTERPARTS. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
23. NO INCONSISTENT AGREEMENTS. The Company will not on or after
the date of this Warrant enter into any agreement with respect to its
securities which is inconsistent with the rights granted to the Holders of this
Warrant or otherwise conflicts with the provisions hereof. The rights granted
to the Holders hereunder do not in any way conflict with and are not
inconsistent with the rights granted to holders of the Company's securities
under any other agreements, except rights that have been waived.
24. SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls
on a Saturday, Sunday or legal holiday, the Expiration Date shall automatically
be extended until 5:00 p.m. the next business day.
25. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time
to time take all commercially reasonable action which may be necessary so that
the shares of Common Stock issuable upon the exercise of this Warrant,
immediately upon their issuance, will be listed on the principal securities
exchanges and markets within the United States of America, if any, on which
other shares of Common Stock are then listed.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as
of the Effective Date.
GE MEDICAL SYSTEMS, A DIVISION HEALTHSTREAM, INC.
OF GENERAL ELECTRIC COMPANY
By: By:
---------------------------- --------------------------------
Name: Name:
Title: Title:
13
<PAGE> 14
EXHIBIT 1
NOTICE OF EXERCISE
(To be executed upon exercise of Warrant)
HEALTHSTREAM, INC. WARRANT NO. ___
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, the securities of HEALTHSTREAM, INC., as provided for therein, and
Tenders herewith payment of the exercise price in full in the form of cash or a
certified or official bank check in same-day funds in the amount of
$____________ for _________ such securities.
Please issue a certificate or certificates for such securities in the
name of, and pay any cash for any fractional share to (please print name,
address and social security number):
Name: ________________________________
Address: _____________________________
Signature: ___________________________
Note: The above signature should correspond exactly with the name on
the first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
If said number of shares shall not be all the shares purchasable under
the within Warrant Certificate, a new Warrant Certificate is to be issued in
the name of said undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher whole number of shares.
<PAGE> 15
EXHIBIT 2
ASSIGNMENT
(To be executed only upon assignment of Warrant WARRANT NO. ___
Certificate)
For value received, the undersigned hereby sells, assigns and
transfers unto ________________________ the within Warrant, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
NAME(S) OF ASSIGNEE(S) ADDRESS # OF WARRANTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
And if said number of Warrants shall not be all the Warrants
represented by the Warrant Certificate, a new Warrant Certificate is to be
issued in the name of said undersigned for the balance remaining of the
Warrants registered by said Warrant Certificate.
Dated:_______________________________
Signature:___________________________
Notice: The signature to the foregoing Assignment must correspond to
the name as written upon the face of this security in every particular, without
alteration or any change whatsoever; signature(s) must be guaranteed by an
eligible guarantor institution (banks, stock brokers, savings and loan
associations and credit unions with membership in an approved signature
guarantee medallion program) pursuant to Securities and Exchange Commission
Rule 17Ad-15.
<PAGE> 1
EXHIBIT 4.7
WARRANT
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT
UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION
RULE 144.
WARRANT TO PURCHASE COMMON STOCK OF
HEALTHSTREAM, INC.
(Subject to Adjustment)
THIS CERTIFIES THAT, for value received, CIS Holdings, Inc., a Nevada
corporation, or its permitted registered assigns ("HOLDER"), is entitled,
subject to the terms and conditions of this Warrant, at any time or from time to
time after February 10, 2000 (the "EFFECTIVE DATE"), and before 5:00 p.m.
Eastern Daylight Time on February 10, 2008 (the "EXPIRATION DATE"), to purchase
from HealthStream Inc., a Tennessee corporation (the "Company") 1,179,767 shares
of Common Stock of the Company subject to adjustment in accordance with Section
4 herein. The initial exercise price per share (the "Initial Warrant Price") is
$13.28 per share subject to adjustment in accordance with Section 4 herein. This
Warrant shall not be exercisable prior to March 31, 2000 except in the event of
the completion of the Company's initial public offering, a Private Placement, or
immediately prior to consummation of a Company Sale. Twenty five percent (25%)
of the shares granted under this Warrant, or 294,942 shares, shall be
exercisable March 31, 2000 subject to earlier vesting as set forth in this
Section. An additional twenty five percent (25%) of the shares granted under
this Warrant, or 294,942 shares, shall vest and be exercisable on the first
anniversary of the Effective Date. An additional twenty five percent (25%) of
the shares granted under this Warrant, or 294,942 shares, shall vest and be
exercisable on the second anniversary of the Effective Date. The remaining
twenty five percent (25%) of the shares granted under this Warrant, or 294,941
shares, shall vest and be exercisable on the third anniversary of the Effective
Date.
1. CERTAIN DEFINITIONS. As used in this Warrant the following terms shall have
the following respective meanings:
"CHANGE OF CONTROL" shall mean any transaction or series of related transactions
pursuant to which any entity or person (including without limitation any of
their respective affiliates) other than an existing stockholder of the Company
or an existing stockholder's affiliate first acquires after the effective date
of this Agreement, directly or indirectly, an aggregate amount of fifty percent
(50%) or more voting control or fifty percent (50%) or more of the equity
securities ("Control") of the Company (or of any entity directly or indirectly
having Control of the Company) or by contract or otherwise obtains the right to
elect or appoint at least fifty percent (50%) of the Board of Directors of the
Company (or any entity directly or indirectly having Control of the Company).
<PAGE> 2
"COMMON STOCK DEEMED OUTSTANDING" shall mean, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock issuable at such time upon convertible securities then
outstanding, plus the number of shares of Common Stock issuable at any time upon
exercise of all then outstanding options, warrants or similar rights.
"COMPANY SALE" shall mean any Change of Control of the Company effected by
issuance of an equity interest (not to include a registered public offering or
Private Placement), a capital reorganization, reclassification, consolidation,
merger or sale of all or substantially all of the Company's assets.
"COMPANY SALE PRICE" shall mean the per share common equivalent price paid (or
implied by the consideration received) for the Company in the event of a Company
Sale.
"FAIR MARKET VALUE" of a share of Common Stock (or any other security as
applicable) as of a particular date shall mean: (a) If traded on a securities
exchange or the Nasdaq National Market, the Fair Market Value shall be deemed to
be the average of the closing prices of the Common Stock of the Company on such
exchange or market over the five (5) business days ending immediately prior to
the applicable date of valuation; (b) If actively traded over-the-counter, the
Fair Market Value shall be deemed to be the average of the closing bid prices
over the 30-day period ending immediately prior to the applicable date of
valuation; and (c) If there is no active public market, the Fair Market Value
shall be the value thereof, as agreed upon by the Company and the Holder;
provided, however, that if the Company and the Holder cannot agree on such
value, such value shall be determined by an independent valuation firm
experienced in valuing businesses such as the Company and jointly selected in
good faith by the Company and the Holder. Fees and expenses of the valuation
firm shall be paid for equally by the Company and the Purchaser.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
"INITIAL WARRANT PRICE" is defined in the introduction to this Warrant.
"PERSON" shall mean any individual, firm, corporation, partnership or other
entity, and shall include any successor (by merger or otherwise) of such entity.
"PRIVATE PLACEMENT" shall mean a private placement of equity securities with
aggregate proceeds of greater than $10.0 million.
"PURCHASE PRICE" shall mean the Initial Warrant Price, as adjusted pursuant to
Section 4.
"REGISTERED HOLDER" shall mean any Holder in whose name this Warrant is
registered upon the books and records maintained by the Company.
"WARRANT" as used herein, shall include this Warrant and any warrant delivered
in substitution or exchange therefor as provided herein.
"COMMON STOCK" shall mean the Common Stock of the Company and any other
securities at any time receivable or issuable upon exercise of this Warrant.
2
<PAGE> 3
2. EXERCISE OF WARRANT
2.1. PAYMENT. Subject to compliance with the terms and conditions of this
Warrant and applicable securities laws, this Warrant may be exercised, in whole
or in part at any time or from time to time, on or before the Expiration Date by
the delivery (including, without limitation, delivery by facsimile) of the form
of Notice of Exercise attached hereto as EXHIBIT 1 (the "Notice of Exercise"),
duly executed by the Holder, at the principal office of the Company, and as soon
as practicable after such date, surrendering (a) this Warrant at the principal
office of the Company, and (b) payment, in cash (by check) or by wire transfer,
of an amount equal to the product obtained by multiplying the number of shares
of Common Stock being purchased upon such exercise by the then effective
Purchase Price (the "Exercise Amount"), provided that if Holder is subject to
HSR Act Restrictions (as defined in Section 2.3 below), the Exercise Amount
shall be paid to the Company within five (5) business days of the termination of
all HSR Act Restrictions.
2.2. STOCK CERTIFICATES; FRACTIONAL SHARES. As soon as practicable on or
after the date a person or persons are entitled to receive certificates for
shares of Common Stock, the Company shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of whole shares of Common Stock issuable upon such exercise, together
with cash in lieu of any fraction of a share equal to such fraction of the
current Fair Market Value of one whole share of Common Stock as of the date of
exercise of this Warrant. No fractional shares or scrip representing fractional
shares shall be issued upon an exercise of this Warrant.
2.3. HSR ACT. The Company hereby acknowledges that exercise of this Warrant
by Holder may subject the Company and/or the Holder to the filing requirements
of the HSR Act and that Holder may be prevented from exercising this Warrant
until the expiration or early termination of all waiting periods imposed by the
HSR Act ("HSR Act Restrictions"). If on or before the Expiration Date Holder has
sent the Notice of Exercise to Company and Holder has not been able to complete
the exercise of this Warrant prior to the Expiration Date because of HSR Act
Restrictions, the Holder shall be entitled to complete the process of exercising
this Warrant in accordance with the procedures contained herein notwithstanding
the fact that completion of the exercise of this Warrant would take place after
the Expiration Date.
2.4. PARTIAL EXERCISE; EFFECTIVE DATE OF EXERCISE. In case of any partial
exercise of this Warrant, the Company shall cancel this Warrant upon surrender
hereof and shall execute and deliver a new Warrant of like tenor and date for
the balance of the shares of Common Stock purchasable hereunder. This Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above. However,
if Holder is subject to HSR Act filing requirements, this Warrant shall be
deemed to have been exercised on the date immediately following the date of the
expiration of all HSR Act Restrictions. The person entitled to receive the
shares of Common Stock issuable upon exercise of this Warrant shall be treated
for all purposes as the holder of record of such shares as of the close of
business on the date the Holder is deemed to have exercised this Warrant.
2.5. EXERCISE SUBJECT TO UNDERWRITER LOCKUP AGREEMENTS. In the case of an
underwritten public offering of the equity securities of the Company, the
Purchaser shall be required to execute "lockup" agreements prohibiting the sale
of the common shares underlying the Warrant, provided that the execution of such
agreements are requested by the underwriters, and provided further that the
prohibition on sale and exercise be the shorter of the lockup period applicable
to executive officers, directors and greater than 5% beneficial owners of the
Company's Common Stock (other than investment companies that purchased their
shares at or after the Company's initial public offering) and 180 days.
3
<PAGE> 4
2.6. EXERCISE IN CONNECTION WITH A COMPANY SALE. Upon receipt of a written
notice of a Company Sale pursuant to Section 4.8(c) hereof (a "Company Sale
Notice"), in addition to any rights that the Holder may have in connection with
a Company Sale constituting an Organic Change (as defined in Section 4.4
herein), the Holder shall promptly notify the Company whether or not the Holder
will exercise this Warrant in connection with the consummation of the Company
Sale. If Holder has elected to exercise this Warrant in connection with such
Company Sale and such Company Sale is not consummated, then Holder's exercise of
this Warrant shall not be effective unless Holder confirms in writing Holder's
intention to go forward with the exercise of this Warrant, in which case the
Purchase Price will be whatever price was in effect without regard to the
Company Sale.
2.7. NET ISSUE EXERCISE. In lieu of the payment methods set forth in
Section 2.1 above, the Holder may elect to exchange all or some of the Warrant
for shares of Common Stock equal to the value of the amount of the Warrant being
exchanged on the date of exchange. If Holder elects to exchange this Warrant as
provided in this Section 2.7, Holder shall tender to the Company the Warrant for
the amount being exchanged, along with written notice of Holder's election to
exchange some or all of the Warrant, and the Company shall issue to Holder the
number of shares of the Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to
Holder.
Y = the number of shares of Common Stock purchasable under the
Warrant being exchanged (as adjusted to the date of such
calculation).
A = the Fair Market Value of one share of the Company's Common Stock.
B = the Purchase Price (as adjusted to the date of such calculation).
All references herein to an "exercise" of the Warrant shall include an exchange
pursuant to this Section 2.7.
3. VALID ISSUANCE: CHARGES, TAXES AND EXPENSES. All shares of Common Stock
issued upon the exercise of this Warrant shall be validly issued, fully paid and
non-assessable. Issuance of certificates for shares of Common Stock upon the
exercise of this Warrant shall be made without charge to the Registered Holder
for any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company.
4. ADJUSTMENT OF PURCHASE PRICE, TERMS AND NUMBER OF SHARES. The number of
shares of Common Stock issuable upon exercise of this Warrant (or any shares of
stock or other securities or property receivable or issuable upon exercise of
this Warrant) and the Purchase Price are subject to adjustment in accordance
with the following:
4.1. ADJUSTMENT OF PURCHASE PRICE. Before the Company's initial public
offering of Common Stock, the following provisions in Sections 4.1 and 4.2 shall
apply:
(a) In order to prevent dilution of the rights granted hereunder,
the Purchase Price and number of shares of Common Stock for which this Warrant
is exercisable will be subject to adjustment from time to time pursuant to this
Section 4.1; provided, however, that notwithstanding the foregoing, no
adjustment to the Purchase Price will be made or considered under this Section
4.1 with respect to the
4
<PAGE> 5
issuance of shares of Common Stock upon the exercise of convertible securities,
options, warrants and other rights that were outstanding on the Effective Date
or that may subsequently be issued under employee benefit plans approved by the
Company's Board of Directors.
(b) If and whenever after the Effective Date the Company issues or
sells, or in accordance with Article 4 is deemed to have issued or sold, any
share of Common Stock for a consideration per share less than the Purchase Price
in effect immediately prior to such time, except as provided in Section 4.1(a)
herein, then forthwith upon such issue or sale the Purchase Price will be
reduced by multiplying the Purchase Price in effect immediately prior to such
issue or sale by a fraction, the numerator of which shall be equal to the sum
of:
(1) the number of shares of Common Stock deemed outstanding
immediately prior to such issue or sale, plus
(2) the number of shares of Common Stock which would have
been issued in exchange for the aggregate consideration
received by the Company upon such issue or sale if such
shares had been issued or sold at the Purchase Price,
and
the denominator of which shall be the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. In addition, the number of
shares for which this Warrant is exercisable shall be adjusted to equal the
quotient of:
(1) the aggregate Purchase Price for purchase of all shares
of Common Stock for which the Warrant was exercisable
immediately prior to such issue or sale, divided by
(2) the new Purchase Price as adjusted pursuant to the
terms hereof.
4.2. EFFECT ON PURCHASE PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Purchase Price under Section 4.1 herein, the following
will be applicable:
(a) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner
grants any right, warrant or option to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities"), and the price per share for which Common Stock is issuable upon
the exercise of any such Options or upon conversion or exchange of any such
Convertible Securities is less than the Purchase Price in effect immediately
prior to the time of the granting of such Option, then the total maximum number
of shares of Common Stock issuable upon the exercise of such Option or upon
conversion or exchange of the total maximum amount of such Convertible Security
issuable upon the exercise of such Option will be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of this Section 4.2(a), the "price per share for which Common Stock is
issuable" will be determined by dividing:
(1) the total amount, if any, received or receivable by the
Company as consideration for the granting of such
Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon
exercise of such Options, plus in the case of such
Options which are related to Convertible Securities,
the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by
5
<PAGE> 6
(2) the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options.
No further adjustment of the Purchase Price will be made upon the actual
issuance of such Common Stock or of such Convertible Security upon the exercise
of such Options or upon the actual issuance of such Common Stock upon conversion
or exchange of such Convertible Security.
(b) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Purchase Price in effect immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale the Purchase Price will be reduced
as set forth in Section 4.1(b) herein. For purposes of determining the new
Purchase Price, the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities will be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of this subparagraph 4.2(b), the "price per share for which
Common Stock is issuable" will be determined by dividing:
(1) the total amount received or receivable by the Company
as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to
the Company upon the conversion or exchange thereof, by
(2) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such
Convertible Securities.
No further adjustment of the Purchase Price will be made upon the actual
issuance of Common Stock upon conversion or exchange of such Convertible
Securities, and if any such issuance or sale of such Convertible Securities is
made upon exercise of any Options for which adjustments of the Purchase Price
had been or are to be made pursuant to other provisions of this Article 4, no
further adjustment of the Purchase Price will be made by reason of such issuance
or sale.
(c) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase
price provided for in any Options, the additional consideration (if any) payable
upon the issue, conversion or exchange of any Convertible Securities, or the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock change at any time, the Purchase Price in effect at the time of
such change will be readjusted to the Purchase Price which would have been in
effect at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or charged
conversion rate, as the case may be, at the time initially granted, issued or
sold.
(d) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
SECURITIES. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Purchase Price then in effect hereunder will be adjusted to
the Purchase Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Security, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
(e) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefore will be deemed to be the
gross amount received by the Company
6
<PAGE> 7
therefor. In case any Common Stock, Option or Convertible Security is issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Company will be the fair value (as defined below) of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the Fair
Market Value thereof as of the date of receipt. If any Common Stock, Option or
Convertible Security is issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration therefor will
be deemed to be the fair value of such portion of the net assets and business of
the non-surviving corporation as is attributable to such Common Stock, Option or
Convertible Security, as the case may be. The fair value of any consideration
other than cash and securities will be determined in good faith jointly by the
Company and the holder of the Warrant. If such parties are unable to reach
agreement within a reasonable period of time, the fair value of such
consideration will be determined by an independent appraiser jointly selected by
the Company and the holder of the Warrant.
(f) INTEGRATED TRANSACTIONS. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Option by the parties thereto, the Option will be deemed to
have been issued for a consideration to be determined pursuant to the procedures
set forth in Section 4.2(e).
(g) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held will be considered an issue or sale of Common Stock.
(h) RECORD DATE. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (i) to receive a dividend or
other distribution payable in Common Stock, Options or Convertible Securities or
(ii) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or upon the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be; provided that if such dividend, distribution or subscription is not
ultimately consummated, no adjustment will be made to the Purchase Price
hereunder or, if so made, such adjustment will be rescinded.
4.3. SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at anytime
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Purchase Price in effect immediately prior to such
subdivision will be proportionately reduced, and if the Company at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Purchase
Price in effect immediately prior to such combination will be proportionately
increased. In addition, the number of shares of Common Stock into which the
Warrant is exercisable shall be adjusted proportionately in accordance with
Section 4.1(a) herein.
4.4. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
capital reorganization, reclassification, consolidation, merger or sale of all
or substantially all of the Company's assets to another Person which is effected
in such a way that holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets (other
than, or in addition to, cash) with respect to or in exchange for Common Stock
is referred to herein as an "Organic Change". Prior to consummation of any
Organic Change, the Company will make appropriate provisions (in form and
substance satisfactory to the holder of the Warrant) to ensure that the holder
of the Warrant will thereafter have the right to acquire and receive, in lieu of
or in addition to the shares of Common
7
<PAGE> 8
Stock immediately theretofore acquirable and receivable upon the exercise of
such holder's Warrant, such shares of stock, securities or assets as such holder
would have received in connection with such Company Sale if such holder had
converted his or her Warrant immediately prior to such Organic Change. In any
such case, the Company will make appropriate provisions (in form and substance
satisfactory to the holder of the Warrant) to ensure that the provisions of this
Article 4 and Article 5 will thereafter be applicable to the Warrant (including,
in the case of any such consolidation, merger or sale in which the successor
corporation or purchasing corporation is other than the Company, an immediate
adjustment of the Purchase Price to the value for the Common Stock reflected by
the terms of such consolidation, merger or sale, and a corresponding immediate
adjustment in the number of shares of Common Stock acquirable and receivable
upon exercise of the Warrant, if the value so reflected is less than the
Purchase Price in effect immediately prior to such consolidation, merger or
sale). The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor corporation (if other
than the Company) resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form reasonably
satisfactory to the holder of the Warrant), the obligation to deliver to each
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
4.5. ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS OF STOCK OR OTHER SECURITIES
OR PROPERTY. In case the Company shall make or issue, or shall fix a record date
for the determination of eligible holders entitled to receive, a dividend or
other distribution with respect to the Common Stock (or any shares of stock or
other securities at the time issuable upon exercise of the Warrant) payable in
(a) securities of the Company or (b) assets (excluding cash dividends paid or
payable solely out of retained earnings), then, in each such case, the Holder of
this Warrant on exercise hereof at any time after the consummation, effective
date or record date of such dividend or other distribution, shall receive, in
addition to the shares of Common Stock (or such other stock or securities)
issuable on such exercise prior to such date, and without the payment of
additional consideration therefor, the securities or such other assets of the
Company to which such Holder would have been entitled upon such date if such
Holder had exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such exercise,
retained such shares and/or all other additional stock available by it as
aforesaid during such period giving effect to all adjustments called for by this
Article 4.
4.6. CERTAIN EVENTS. If any event occurs of the type contemplated by the
provisions of this Article 4 but not expressly provided for by such provisions,
then the Company's Board of Directors will make an appropriate adjustment in the
Purchase Price and the number of shares of Common Stock issuable upon exercise
of this Warrant so as to protect the rights of the holder of the Warrant;
provided that no such adjustment will increase the Purchase Price as otherwise
determined pursuant to this Article 4 or decrease the number of shares of Common
Stock issuable upon exercise of the Warrant.
4.7. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment
or readjustment pursuant to this Section 4, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to the Registered Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written
request, at any time, of the Registered Holder, furnish or cause to be furnished
to such Registered Holder, a like certificate setting forth: (i) such
adjustments and readjustments; (ii) the Exercise Price; and (iii) the number of
shares of Common Stock and the amount, if any, of other property that at the
time should be received upon the exercise of the Warrant.
8
<PAGE> 9
4.8. NOTICES.
(a) Within five business days of any adjustment of the Purchase
Price, the number or type of shares issuable upon exercise of this Warrant or
otherwise pursuant to Article 4 hereof, the Company will give written notice
thereof to the holder of the Warrant setting forth such adjustment and showing
in detail the facts upon which such adjustment is based; provided that this
provision shall not be construed to create a presumption that the Holder has
conceded its right to challenge the Company's adjustment if it believes it was
not done in accordance with the terms of this Agreement.
(b) The Company will give written notice to the holder of the
Warrant at least 20 days prior to the date on which the Company closes its books
or takes a record (i) with respect to any dividend or distribution upon Common
Stock, (ii) with respect to any pro rata subscription offer to holders of Common
Stock or (iii) for determining rights to vote with respect to any Company Sale,
Organic Change, dissolution or liquidation.
(c) The Company will also give written notice to the holder of the
Warrant at least 20 days prior to the date on which any Company Sale or Organic
Change will take place.
5. PURCHASE RIGHTS. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the holder of the Warrant will be
entitled to acquire at the time of exercise of the Warrant by such holder (based
on the number of shares of Common Stock issued upon such exercise), upon the
terms applicable to such Purchase Rights, the aggregate Purchase Rights which
such holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon exercise of such holder's Warrant immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights; provided, however, that holder of the Warrant shall not
be entitled to any Purchase Rights under this Article 5 if such holders have
received an adjustment in the Purchase Price of the Warrant under Article 4 with
respect to the issuance of such Purchase Rights.
6. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the Company
(an affidavit of the registered holder will be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of the Warrant, and in the case
of any such loss, theft or destruction, upon receipt of indemnity satisfactory
to the Company (provided that if the holder is an institutional investor its own
agreement will be satisfactory), or, in the case of any such mutilation upon
surrender of such mutilated warrant, the Company will (at the holder's expense)
execute and deliver in lieu of such warrant a new warrant of identical tenor
representing the warrant represented by such lost, stolen, destroyed or
mutilated warrant and dated the date of such lost, stolen, destroyed or
mutilated warrant.
7. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company as are from time to time issuable upon exercise of this Warrant and,
from time to time, will take all steps necessary to amend its Charter to provide
sufficient reserves of shares of Common Stock issuable upon exercise of this
Warrant. All such shares shall be duly authorized, and when issued upon such
exercise, shall be validly issued, fully paid and non-assessable, free and clear
of all liens, security interests, charges and other encumbrances or restrictions
on sale and free and clear of all preemptive rights, except encumbrances or
restrictions arising under federal or state securities laws. Issuance of this
Warrant shall constitute full authority to the Company's officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock and Common Stock upon the
exercise of this Warrant.
9
<PAGE> 10
8. TRANSFER AND EXCHANGE. Subject to Article 9, this Warrant and all rights
hereunder may be freely transferred in whole or in part, on the books of the
Company maintained for such purpose at the principal office of the Company
referred to above, by the Registered Holder hereof in person, or by duly
authorized attorney, upon surrender of this Warrant properly endorsed and upon
payment of any necessary transfer tax or other governmental charge imposed upon
such transfer. Upon any partial transfer, the Company will issue and deliver to
the Registered Holder a new Warrant or Warrants with respect to the shares of
Common Stock not so transferred. Each taker and holder of this Warrant, by
taking or holding the same, consents and agrees that when this Warrant shall
have been so endorsed, the person in possession of this Warrant may be treated
by the Company, and all other persons dealing with this Warrant, as the absolute
owner hereof for any purpose and as the person entitled to exercise the rights
represented hereby, any notice to the contrary notwithstanding; provided,
however that until a transfer of this Warrant is duly registered on the books of
the Company, the Company may treat the Registered Holder hereof as the owner for
all purposes.
9. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees that,
absent an effective registration statement filed with the SEC under the
Securities Act of 1933, as amended (the "Act"), covering the disposition or sale
of this Warrant or the Common Stock issued or issuable upon exercise hereof, as
the case may be, and registration or qualification under applicable state
securities laws, such Holder will not sell, transfer, pledge, or hypothecate any
or all such Warrants or Common Stock, as the case may be, unless either (i) the
Company has received an opinion of counsel, in form and substance reasonably
satisfactory to the Company, to the effect that such registration is not
required in connection with such disposition or (ii) the sale of such securities
is made pursuant to Rule 144 promulgated under the Act.
10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the holder
hereby represents, warrants and covenants that any shares of stock purchased
upon exercise of this Warrant shall be acquired for investment only and not with
a view to, or for sale in connection with, any distribution thereof; that the
Holder has had such opportunity as such Holder has deemed adequate to obtain
from representatives of the Company such information as is necessary to permit
the Holder to evaluate the merits and risks of its investment in the Company;
that the Holder is able to bear the economic risk of holding such shares as may
be acquired pursuant to the exercise of this Warrant for an indefinite period;
that the Holder understands that the shares of stock acquired pursuant to the
exercise of this Warrant will not be registered under the Act (unless otherwise
required pursuant to exercise by the Holder of the registration rights, if any,
previously granted to the registered Holder) and will be "restricted securities"
within the meaning of Rule 144 under the Act and that the exemption from
registration under Rule 144 will not be available for at least one year from the
date of exercise of this Warrant, subject to any special treatment by the SEC
for exercise of this Warrant pursuant to Section 2.2, and even then will not be
available unless a public market then exists for the stock, adequate information
concerning the Company is then available to the public, and other terms and
conditions of Rule 144 are complied with; and that all stock certificates
representing shares of stock issued to the Holder upon exercise of this Warrant
may have affixed thereto a legend substantially in the following form: THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE ACT, OR UNDER
THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR
10
<PAGE> 11
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the
Holder to any voting rights or other rights as a stockholder of the Company. In
the absence of affirmative action by such Holder to purchase Common Stock by
exercise of this Warrant, no provisions of this Warrant, and no enumeration
herein of the rights or privileges of the Holder hereof shall cause such Holder
hereof to be a stockholder of the Company for any purpose.
12. REPRESENTATIONS. The Company hereby represents and warrants as follows:
12.1. AUTHORIZATION. The Company has full power and authority to enter into
and to perform this Warrant in accordance with its terms.
12.2. AUTHORIZED STOCK. On the Effective Date, the Company's authorized
capital stock consists of 20,000,000 shares of Common Stock no par value and
5,000,000 shares of preferred stock no par value. The Company's authorized
capital stock will be increased upon the filing of a Restated Charter in
connection with the Company's initial public offering of Common Stock.
12.3. OUTSTANDING STOCK. Immediately prior to the Effective Date, the
Company's issued and outstanding stock consists of 2,882,240 shares of Common
Stock and 1,932,207 shares of preferred stock convertible into 3,854,678 shares
of Common Stock. Additionally, the Company has issued options and warrants for
the purchase of 1,692,880 shares of Common Stock.
13. NOTICES. All notices required hereunder shall be in writing and shall be
deemed to have been duly given upon receipt, and shall be either delivered in
person, by registered or certified mail, postage prepaid, return receipt
requested, or by overnight delivery service with proof of delivery, and
addressed as follows:
To HealthStream:
Attn: Robert Laird, General Counsel
HealthStream Inc.
209 10th Ave South, Suite 450
Nashville, Tennessee 37203
To the Holder:
Attn: President, CIS Holdings, Inc.
2555 Park Plaza
Nashville, Tennessee 37203
with a copy to:
General Counsel
Columbia/HCA Healthcare Corporation
One Park Plaza
Nashville, Tennessee 37203
14. HEADINGS. The headings in this Warrant are for purposes of convenience in
reference only, and shall not be deemed to constitute a part hereof.
15. LAW GOVERNING. This Warrant shall be construed and enforced in accordance
with, and governed by, the laws of the State of Tennessee.
11
<PAGE> 12
16. NO IMPAIRMENT. The Company will not, by amendment of its Charter or bylaws,
or through any reorganization, consolidation, merger, dissolution, issue or sale
of securities, sale or transfer of assets or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Registered Holder of this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock issuable
upon the exercise of this Warrant above the amount payable therefor upon such
exercise, and (b) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
non-assessable shares of Common Stock upon exercise of this Warrant.
17. SEVERABILITY. If any term, provision, covenant or restriction of this
Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated and the parties will attempt in
good faith to make such alternative arrangements as may be legally permissible
and which carry out as nearly as practicable the terms of this Warrant.
18. NO INCONSISTENT AGREEMENTS. The Company will not on or after the date of
this Warrant enter into any agreement with respect to its securities which is
inconsistent with the rights granted to the Holders of this Warrant or otherwise
conflicts with the provisions hereof. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to holders of the Company's securities under any other
agreements, except rights that have been waived.
19. SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls on a Saturday,
Sunday or legal holiday, the Expiration Date shall automatically be extended
until 5:00 p.m. the next business day.
20. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time take
all commercially reasonable actions following its initial public offering which
may be necessary so that the shares of Common Stock issuable upon exercise of
the Warrant will be listed on the principal securities exchanges or markets on
which other shares of Common Stock are then listed.
21. REMEDIES. The Company stipulates that the remedies at law of the holder of
this Warrant in the event of any default or threatened default by the Company in
the performance of or compliance with any of the terms of this Warrant are not
adequate and may be enforced by a decree for the specific performance of any
agreement contained herein or by an injunction against a violation of any of the
terms hereof or otherwise.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the Effective
Date.
HEALTHSTREAM, INC.
By: /s/ Jeffrey L. McLaren
-----------------------
Title: President
12
<PAGE> 1
EXHIBIT 5.1
B A S S, B E R R Y & S I M S P L C
A PROFESSIONAL LIMITED LIABILITY COMPANY
ATTORNEYS AT LAW
KNOXVILLE OFFICE: MEMPHIS OFFICE:
1700 RIVERVIEW TOWER 2700 FIRST AMERICAN CENTER 119 S. MAIN STREET,
KNOXVILLE, TN 37901-1509 NASHVILLE, TENNESSEE 37238-2700 SUITE 500
(423) 521-6200 (615) 742-6200 MEMPHIS, TN 38103
www.bassberry.com (901)-312-9100
December ______, 1999
HealthStream, Inc.
209 10th Avenue, Suite 450
Nashville, Tennessee 37203
Re: Registration Statement on Form S-1 (File No. 333-8839)
Dear Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-1 (the "Registration Statement") filed by you
with the Securities and Exchange Commission, covering _______ shares of Common
Stock, no par value (the "Common Stock"), of HealthStream, Inc., a Tennessee
corporation (the "Company"),to be offered by the Company.
In connection with this opinion, we have examined and relied upon such
records, documents and other instruments as in our judgment are necessary or
appropriate in order to express the opinions hereinafter set forth and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
Based on the foregoing and such other matters as we have deemed
relevant, we are of the opinion that the shares of Common Stock to be offered
by the Company, when and as described in the Registration Statement (after the
Registration Statement is declared effective), will be validly issued, fully
paid and nonassessable.
We hereby consent to the reference to our law firm in the Registration
Statement under the caption "Legal Matters" and to the use of this opinion as
an exhibit to the Registration Statement.
Sincerely,
/s/ Bass, Berry & Sims PLC
Bass, Berry & Sims PLC
<PAGE> 1
EXHIBIT 10.19
COURSEWARE DEVELOPMENT AGREEMENT
This Courseware Development Agreement ("Agreement"), is entered into as
of January __, 2000 ("Effective Date") between e-Vitro, Inc., a Colorado
corporation, with its principal place of business at 507 Canyon Boulevard, Suite
200, Boulder, Colorado 80302 ("Developer") and HealthStream, Inc., a Tennessee
corporation, with its principal place of business at 209 10th Avenue South,
Suite 450, Nashville, Tennessee 37203 ("HealthStream").
WHEREAS, HealthStream wishes to engage the services of Developer to
develop browser-based interactive training modules;
WHEREAS, HealthStream and Developer wish to provide appropriate
consideration for those efforts that each party has agreed to undertake;
WHEREAS, as part of the consideration for those efforts, Developer and
HealthStream have agreed to enter into a certain Warrant to Purchase Common
Stock of Developer of even date herewith (the "Warrant");
WHEREAS, HealthStream and Developer each acknowledge the sufficiency
and adequacy of the value, concessions, and recitations set forth herein;
NOW THEREFORE, HealthStream and Developer agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings assigned below:
A. "Content" shall mean the material and knowledge components to be
contributed by HealthStream and other entities as determined by HealthStream
("HealthStream's Content Partners") necessary for the development of the
modules. Content includes the procedural sequences, standard operating
procedures, photographs, videos, instruction manuals and screen images supplied
by HealthStream and HealthStream's Content Partners to Developer for
incorporation into the modules defined hereafter.
B. "Interactive Content" shall mean Developer's computer browser-based
adaptation and implementation of the Content for delivery through HealthStream's
Training Navigator(R) (or T.NAV(R)) System.
C. "Modules" shall mean Interactive Content that has been organized
into a clearly defined and limited course of study equaling no fewer than one
hundred twenty (120) browser-based screens. Modules may be comprised of
disparate Content subjects equaling no fewer than one hundred twenty (120)
browser-based screens. Subject to Developer's reservation of rights as specified
in Section 3.1 herein, Modules are the proprietary property of HealthStream.
SECTION 2. COURSEWARE DEVELOPMENT
2.1 Courseware Development.
A. Developer hereby agrees to develop Interactive Content into no
fewer than forty (40) Modules or a combination of browser
screens that would equal forty (40) Modules according to the
Quality Criterion outlined in Section 2.1.B below,
(collectively, the "Courseware").
<PAGE> 2
B. Developer agrees to develop all Courseware at a level of
quality and interactivity substantially equal to or greater
than those courses developed by HealthStream for the Cleveland
Clinic Foundation. Developer also agrees to develop the
Courseware so that it may function and work with
HealthStream's T.NAV System. Such criterion for the Courseware
shall be known as the "Quality Criterion." HealthStream shall
not be obligated to pay for any Courseware unless HealthStream
reasonably believes the Quality Criterion has been satisfied.
C. Developer agrees to develop Content into Courseware and
deliver completed Courseware to HealthStream no later than
sixty (60) days following receipt of the Content from
HealthStream.
D. Both parties will ensure that resources from both parties will
be allocated to accomplish the development of the Courseware
in a timely fashion. Developer shall provide HealthStream with
a weekly status update of the development of the Courseware.
E. The Modules will be developed in "Alpha" and "Beta" test
phases (each, a "Phase"). Upon completion of a Phase,
Developer shall provide notice to this effect to
HealthStream (the "Completion Notice"). Within ten (10) days
after the receipt of the Completion Notice by HealthStream;
Developer and HealthStream shall consult and cooperate with
each other to determine whether the subject Module
substantially conforms with the applicable Quality Criterion
at such Phase. In the event HealthStream determines in its
reasonable discretion that the Module does not substantially
conform with the applicable Quality Criterion, HealthStream
shall provide written notice to Developer within such ten
(10) day period containing a description of the failure to
conform (the "Defect Notice"). Within twenty (20) days after
its receipt of the Defect Notice, Developer shall make such
corrections or modifications as may be necessary for the
subject Module to substantially conform with the applicable
Quality Criterion. Within ten (10) days after the date the
corrections or modifications are made, HealthStream shall in
its reasonable discretion make a determination about whether
such corrected or modified Module substantially conforms
with the applicable Quality Criterion. In the event
HealthStream determines such corrected or modified Module
substantially conforms with the applicable Quality
Criterion, HealthStream shall provide written notice of
acceptance of the Module. In the event such corrected or
modified Module does not substantially conform with the
applicable Quality Criterion, the procedure for correction
and modification provided for in this Subsection shall be
repeated until such time as the Module substantially
conforms with the applicable Quality Criterion. In the event
HealthStream fails to deliver a Defect Notice to Developer
within the period specified in this Subsection, HealthStream
shall be deemed to have made acceptance of such Module.
2.2. Courseware Development Fee. Upon execution of this Agreement,
HealthStream shall pay to Developer Ninety Five Thousand and No/100ths Dollars
(US$95,000). Upon delivery to HealthStream of a completed Module and upon
HealthStream's reasonable determination that the Module satisfies the Quality
Criterion, HealthStream shall pay to Developer Ten Thousand and No/100ths
Dollars (US$10,000.00) per completed Module. HealthStream is responsible for any
and all taxes, other than income, applicable to or in connection with the
services rendered by Developer.
2.3. Expenses. Upon the submission of invoices by Developer,
HealthStream shall reimburse Developer for reasonable travel, room, and board
expenses incurred by Developer in connection with its performance of the
services provided for in this Agreement.
2.
<PAGE> 3
SECTION 3. INTELLECTUAL PROPERTY OWNERSHIP.
3.1. HealthStream's Retained Rights. The Courseware is a "work made for
hire," and Developer's work on the Courseware has been specially ordered by
HealthStream and will be developed under HealthStream's direction and control.
Developer's work on the Courseware is derivative of HealthStream's previous work
and merely a contribution to HealthStream's collective work. HealthStream is the
sole author of the Courseware, its contents, and any work embodying or derived
from any portion of the Courseware. HealthStream is also the owner of the
Courseware and all intellectual property rights related to the Courseware, and
to the extent that the Courseware is not properly characterized as "work made
for hire," or to the extent that Developer has rendered any Courseware design
services on behalf of HealthStream prior to the date of this Agreement, then
Developer will irrevocably grant, assign, and otherwise transfer, and hereby
does irrevocably grant, assign, and transfer, exclusively and in perpetuity to
HealthStream, its successors and its assigns, all intellectual property rights
and other rights of Developer in the Courseware whatsoever, now existing or
hereafter discovered, in all media and forms of expression. The provisions of
this Section shall not have application to any methods, processes, technology,
approaches, know-how, development tools, or third-party software (with respect
to which Developer is unable to make a transfer) which are used in connection
with, or incorporated in, the Courseware, and all of the foregoing, together
with any proprietary rights associated with any of the foregoing, shall be
exclusively owned by the Developer.
3.2. Reproduction, Derivation, Performance and Display Rights.
Developer grants, assigns and otherwise transfers exclusively and in perpetuity
to HealthStream, its successors and its assigns, any right Developer may have to
reproduce, make derivative works, publicly perform or publicly display the
Courseware, and the right to license or sublicense the Courseware, or any
portion thereof; provided, however, subject to section 4.2 herein, HealthStream
acknowledges and agrees that Developer may without restriction develop,
distribute, and use computer software and courseware that is similar to the
Courseware and has the same intended functionality as the Courseware, regardless
of whether such computer software or courseware is competitive with the
Courseware or provided to competitors of HealthStream.
SECTION 4. CONFIDENTIAL AND PROPRIETARY INFORMATION.
4.1. Confidentiality. HealthStream and Developer acknowledge that they
have been and will be in a confidential relationship with each other, and that
they have each gained and will gain knowledge that comprises valuable trade
secrets and other confidential information of the other party (collectively, the
"Confidential Information"), which is the exclusive property of the other party,
including, without limitation, customer data, sales and marketing data and
strategies, technical information, and data concerning financial and educational
institutions. Each party agrees that it will not disclose any of the other
party's Confidential Information, nor will either party take any action that
might reasonably be expected to lead to such disclosure, both during the term of
this Agreement and thereafter. Each party agrees that it will not use any of the
other party's Confidential Information, nor will either party take any action
that might reasonably be expected to lead to such use, both during the term of
this Agreement and thereafter, except for the purposes of this Agreement.
4.2. Non-Competition. Developer agrees that, during the term of this
Agreement and for a period of one (1) year following termination or expiration
of this Agreement, Developer shall not design or develop, or render design or
development services to third parties with respect to any products having
subject matter that is so similar to the Modules or Courseware developed
pursuant to the terms of this Agreement that such product would directly compete
with the Modules or the Courseware. Because HealthStream's business is
accessible on the worldwide web, Developer agrees that this non-competition
provision will apply worldwide, and that this worldwide scope is reasonable.
4.3. Specific Performance. Developer acknowledges and agrees that the
performance of the obligations under this Section 4 is special, unique and
extraordinary in character. In addition to such other rights and remedies that
HealthStream may have at equity or law with respect to any breach by Developer
of any of the provisions of this Section 4, HealthStream shall have the right
and remedy to have such
3.
<PAGE> 4
provisions specifically enforced by any court of competent jurisdiction or to
enjoin Developer from performing any act taken by Developer in violation of this
Section 4. Developer acknowledges and agrees that any such breach or threatened
breach will cause irreparable injury to HealthStream and its business and that
money damages will not provide an adequate remedy to HealthStream.
4.
<PAGE> 5
SECTION 5. WARRANTIES AND REPRESENTATIONS
A. Developer warrants and represents that:
A. All of the services Developer performs under this Agreement
will be performed in a professional and workmanlike manner,
consistent with generally accepted industry standards, using
properly trained personnel.
B. Developer has all requisite power, authority and legal right
to execute, deliver and perform its obligations under this
Agreement and all of such actions have been duly and validly
authorized by all necessary proceedings on the part of
Developer.
C. No authorization, consent, approval, license, permit,
exemption or other action by, and no registration,
qualification, designation, declaration or filing with any
governmental authority is or will be necessary in connection
with the execution of this Agreement.
D. Developer will substantially comply with all applicable laws
and regulations in the performance of its obligations under
this Agreement
E. The execution and delivery of this Agreement by Developer
does not and will not: (a) materially violate any applicable
law; or (b) conflict with or result in a material breach of
or default under any agreement or instrument to which
Developer is a party or by which any of its properties is
bound.
F. There is no pending action, suit or threatened proceeding by
or before any governmental authority against Developer that
in any way affects Developer's ability to enter into this
Agreement or perform any of Developer's obligations
hereunder.
G. To the best of Developer's knowledge, and as applicable,
ability, Developer's work shall not (a) impair or infringe
on the intellectual property rights of any third party or
any rights of publicity or privacy; (b) violate any law,
including without limitation, the laws and regulations
governing export control, unfair competition,
antidiscrimination or false advertising; (c) be defamatory,
trade libelous, or unlawfully harassing; (d) be obscene,
child pornographic or indecent; (e) contain any viruses,
trojan horses, trap doors, easter eggs, worms, time bombs,
or other computer programming routines intended to damage,
interfere with, intercept, or expropriate any system, date
or business/personal information.
H. To the best of Developer's ability, The Courseware shall be
free of any bugs or programming devices that are designed to
disrupt or are capable of disrupting the use or
functionality of T.NAV.
I. The Courseware shall perform substantially as described
herein.
J. THE DEVELOPER EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED
WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR ACCURACY OF INFORMATIONAL CONTENT.
B. HealthStream warrants and represents that:
1. HealthStream has all requisite power, authority and legal
right to execute, deliver and perform its obligations under
this Agreement and all of such actions have
5.
<PAGE> 6
been duly and validly authorized by all necessary
proceedings on the part of HealthStream.
2. The execution and delivery of this Agreement by HealthStream
does not and will not: (a) materially violate any applicable
law; or (b) conflict with or result in a material breach of
or default under any agreement or instrument to which
HealthStream is a party or by which any of its properties is
bound.
3. The Content shall not infringe any patents, copyrights,
trade secrets, or other proprietary rights of any third
parties, and HealthStream will have no reason to believe
that any such infringement or claims thereof could be made
by third parties.
SECTION 6. TERM AND TERMINATION.
6.1. Term. This Agreement shall be effective as of the date hereof and
shall continue, unless sooner terminated as provided herein, for twelve (12)
months.
6.2. Termination. This Agreement may be terminated upon the occurrence
of one or more of the following events:
A. HealthStream may terminate this Agreement without cause upon
sixty (60) days prior written notice to Developer. Upon receipt
of such notice, Developer shall inform HealthStream of the extent
to which performance has been completed through such date or
receipt of notice, and collect and deliver to HealthStream all
work product and any Courseware then existing in a manner
prescribed by HealthStream. Developer shall be paid for all work
performed through the date of receipt of notice of such
termination;
B. Either party may terminate this Agreement if the other party
seeks protection under the bankruptcy laws (other than as a
creditor) or any assignment is made for the benefit of creditors
or a trustee is appointed for all or any portion of such party's
assets;
C. Either party may terminate this Agreement if the other party is
in default of any material provision of this Agreement and such
default is not cured within thirty (30) days after receipt of
written notice of default by such other party.
6.3 Post-Termination Rights.
A. Upon termination of this Agreement, each party shall immediately
deliver to the other party all copies of the other party's
Confidential Information in such party's possession or control;
and Developer shall immediately deliver to HealthStream (a) all
Courseware, including any Modules, Content, and Interactive
Content; and (b) any other information or item related to this
Agreement in Developer's possession or control.
B. If this Agreement is terminated for any reason, subject to
Developer's reservation of rights as specified in Section 3.1
herein, Developer will and hereby does grant to HealthStream all
right, title, and interest, including all United States and
international copyrights and all other intellectual property
rights in the Courseware.
SECTION 7. INDEMNITIES AND INSURANCE.
Developer agrees to:
6.
<PAGE> 7
A. Indemnify and hold harmless HealthStream from any liability
resulting from the actions of any officer, director, employee or
agent of Developer in the performance of this Agreement,
including any and all losses, claims penalties, expenses,
actions, suits, obligations, damages, liabilities, and liens (and
all costs and expenses, including reasonable attorney's fees
incurred in connection therewith), that HealthStream sustains or
incurs or may sustain or incur in connection with Developer's
performance hereunder, or as a consequence of any default by
Developer in the performance or observance of any covenant or
condition contained in this Agreement, including without
limitation, the breach of any representation or warranty, the
failure of Developer to substantially comply with any of
HealthStream's specifications for its Courseware, or the failure
to substantially comply with any applicable requirements of law
(the "Claims"). Developer agrees that upon written notice by
HealthStream of the assertion of any Claims, Developer shall, at
HealthStream's option, either assume full responsibility for, or
reimburse HealthStream for the reasonable costs and expenses of,
the defense thereof.
B. Obtain and maintain during the term of this Agreement all
insurance coverage reasonably necessary to guard against all
risks of loss that may arise out of, or relating to, this
Agreement, including business interruption insurance.
HealthStream agrees to:
A. Indemnify and hold harmless Developer from and against any and
all claims that the Content or any portion thereof, infringes
upon any patent, copyright, trade secret, or other proprietary
rights.
B. Indemnify and hold harmless Developer from and against any and
all claims or liability arising out of or related to the use,
results of the use or the application of Courseware specifically
relating to Content provided by HealthStream.
SECTION 8. MISCELLANEOUS.
8.1 Further Actions. Developer agrees to take any future actions that
HealthStream may reasonably deem necessary or advisable to implement the terms
of this Agreement.
8.2. No Implied Waivers. No action or course of dealing on the part of
either party, their officers, employees, consultants, or agents, nor any failure
or delay by either party with respect to exercising any right, power or
privilege of such party under this Agreement shall operate as a waiver thereof,
except to the extent expressly provided therein.
8.3. Attorneys' Fees, Costs and Expenses. Each party agrees to pay all
reasonable costs and expenses, including, without limitation, attorney's fees
and compensation for time spent by the other party's employees, that either
party may incur in enforcing the terms of this Agreement against the other
party, in protecting such party's rights hereunder, or in amending, waiving or
modifying any of the terms hereunder.
8.4. Limitation on Damages. Neither party shall have liability to the
other party or any other person or organization for, and each party expressly
waives, all remedies and damages relating to indirect, incidental, and
consequential or special damages of any description, whether arising out of
warranty or other contract, negligence or other tort, or otherwise, including
without limitation, recession, difference in value damages, capital losses,
foreseeable business losses, loss of profits, and reliance damages. Under no
circumstances shall the Developer's liability under this Agreement for any cause
exceed the amount paid by HealthStream to the Developer; and under no
circumstances shall HealthStream's liability under this Agreement for any cause
exceed an amount equal to One Hundred
7.
<PAGE> 8
Thousand and No/100ths Dollars (US$100,000), plus Ten Thousand and No/100ths
Dollars (US$10,000) multiplied by the number of Modules delivered by the
Developer to HealthStream.
8.5. Notices. All notices shall be deemed received three days after
they are sent by certified mail, return receipt requested, or when actually
received by hand-delivery or overnight courier. All notices shall be sent to:
To HealthStream: Robert Laird, Esq.
General Counsel/Vice President of Finance
HealthStream, Inc.
209 10th Avenue South, Suite 450
Nashville, TN 37203
To Developer: Mark L. Schroeder
Chief Executive Officer
E-Vitro, Inc.
507 Canyon Boulevard
Suite 200
Boulder, Colorado 80302
8.6. Headings. Captions and headings to sections are included
solely for convenience and are not intended to affect the interpretation of any
provision of this Agreement.
8.7. Force Majeure. In the event an act of the government, war
conditions, fire, flood, or other act of God prevents either party from
performing in accordance with the provisions of this Agreement, such
nonperformance shall be excused and shall not be considered a breach or default
for so long as the said conditions prevail.
8.8. Independent Contractors. Each party to this Agreement is an
independent contractor and this Agreement shall not be construed as creating a
joint venture, partnership, agency or employment relationship between the
parties hereto nor shall either party have the right, power or authority to
create any obligation or duty, express or implied, on behalf of the other.
Developer shall be fully responsible for paying all income taxes, penalties and
interest, in addition to workers compensation and Social Security wages of any
personnel under the employ of Developer, if any, and the filing of all necessary
documents, forms and returns pertinent to all of the foregoing.
8.9. Preferred Vendor Status. Developer may represent that HealthStream
is a preferred vendor of Developer in any of its marketing materials; provided,
however that upon prior written notice by HealthStream of its desire to
terminate such preferred vendor status, Developer agrees to (1) cease and desist
including any such representation or reference to HealthStream in its marketing
materials; and (2) cease and desist using or distributing any marketing
materials that may contain such representation or reference to HealthStream.
8.10. Assignment. This Agreement shall be binding upon and inure to the
benefit of HealthStream and Developer and their respective successors and
assigns; provided, however, HealthStream has retained Developer for Developer's
unique development capabilities and Developer shall not delegate any of its
duties under this Agreement to any other person or entity without the prior
written consent of HealthStream, which consent shall not be unreasonably
withheld.
8.11. Governing Law. This Agreement shall be governed by the laws of
the State of Tennessee without regard to its choice of law provisions.
8.12. Severability. The invalidity or unenforceability of any of the
provisions of this Agreement shall not affect the validity of the rest of this
Agreement. Each provision of this Agreement shall be
8.
<PAGE> 9
enforceable to the fullest extent permitted by law. If a court finds that any
provision of this Agreement is invalid or unenforceable, but that by limiting
such provision it would become valid and enforceable, then such provision shall
be deemed to be written, construed, and enforced as so limited.
8.13. Entire Agreement. This Agreement is the entire agreement between
the parties related to the matters herein and replaces and supersedes all other
agreements, proposals, and understandings, oral or written. This Agreement may
be amended only in writing and must be signed by appropriate officers of the
parties hereto.
8.14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, and intending to be legally bound hereby, each
party hereto warrants and represents that this Agreement has been duly
authorized by all necessary corporate action and that this agreement has been
duly executed by and constitutes a valid and binding agreement of that party.
All signed copies of this Agreement shall be deemed originals.
HealthStream, Inc.
By:
----------------------------
Title:
------------------------
Date:
-------------------------
e-Vitro, Inc.
By:
----------------------------
Title:
-------------------------
Date:
--------------------------
9.
<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 February 11, 2000, (2) our report dated January 22, 2000, with
respect to the financial statements of Quick Study, Inc. and (3) our report
dated September 17, 1999, with respect to the financial statements of
SilverPlatter Education, Inc., in Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-8839) and related Prospectus of HealthStream, Inc. for the
registration of 5 million shares of its common stock.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 11, 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.
Dallas, Texas
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHSTREAM, INC. FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,632,144
<SECURITIES> 86,063
<RECEIVABLES> 599,919
<ALLOWANCES> 37,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,544,643
<PP&E> 1,923,533
<DEPRECIATION> 589,632
<TOTAL-ASSETS> 17,454,705
<CURRENT-LIABILITIES> 3,079,379
<BONDS> 185,801
0
19,172,060
<COMMON> 4,008,991
<OTHER-SE> (8,991,526)
<TOTAL-LIABILITY-AND-EQUITY> 17,454,705
<SALES> 2,567,868
<TOTAL-REVENUES> 2,567,868
<CGS> 2,119,127
<TOTAL-COSTS> 2,119,127
<OTHER-EXPENSES> 2,037,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205,100
<INCOME-PRETAX> (4,456,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,456,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,456,094)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
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