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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 001-8833
HEALTHSTREAM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Tennessee 62-1443555
(State Or Other Jurisdiction Of (I.R.S. Employer Identification No.)
Incorporation Or Organization)
209 10th Avenue South, Suite 450 37203
Nashville, Tennessee (Zip Code)
(Address Of Principal Executive Offices)
(615) 301-3100
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant To Section 12(b) Of The Act:
None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock issued and outstanding and held
by non-affiliates of the Registrant, based upon the closing sales price for the
Common Stock on the Nasdaq National Market on March 23, 2001 was $34,287,418.
All executive officers and directors of the registrant have been deemed, solely
for the purpose of the foregoing calculation, to be "affiliates" of the
registrant.
As of March 23, 2001, there were 20,312,452 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders are incorporate by reference into Part III hereof.
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HEALTHSTREAM, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 11
Item 3. Legal Proceedings......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................. 12
Item 6. Selected Financial Data................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 20
Item 8. Financial Statements and Supplementary Data............................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.......................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 41
Item 11. Executive Compensation.................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................... 41
Item 13. Certain Relationships and Related Transactions............................ 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 42
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PART I
Except for historical information, this Annual Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934. Such forward-looking
statements include, among others, those statements including the words
"expects", "anticipates", "intends", "believes", "may", "will", "should",
"continue" and similar language or the negative of such terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, HealthStream's actual results may
differ significantly from those projected in the forward-looking statements.
Factors that might cause or contribute to such differences include, but are not
limited to, those discussed in the section "Risk Factors" and elsewhere in this
document. In addition, factors that we are not currently aware of could harm our
future operating results. You should carefully review the risks described in
other documents HealthStream files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q that
HealthStream will file in 2001. You are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. HealthStream undertakes no obligation to publicly release
any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
ITEM 1. BUSINESS
OVERVIEW AND HISTORY
HealthStream, Inc. ("HealthStream" or the "Company") provides Web-based
solutions and services to meet the training and education needs of the
healthcare industry. HealthStream provides services to customers throughout the
United States, focusing primarily on healthcare organizations and pharmaceutical
and medical device companies. Within healthcare organizations, our focus is on
expanding HealthStream's installed and Internet-based application service
provider, or ASP e-learning solutions to hospitals and long-term care and
outpatient facilities. Services to healthcare organizations are delivered
through our proprietary installed and ASP-based products. For pharmaceutical and
medical device companies, our focus is on providing services including Web cast
events, content and courseware development, event development and registration,
and Web-based sponsorship of courseware. Services to pharmaceutical and medical
device companies are facilitated through our library of licensed content as well
as our distribution of Web portal partners.
The Company was incorporated in 1990 and initiated online operations in March
1999. The Company developed from an initial focus of providing multimedia tools
for information dissemination to the full-service delivery of training and
education for the healthcare industry. We have established relationships with
major healthcare institutions to provide training solutions to meet the needs of
the healthcare organization, its employees and its vendors.
Industry Background
Industry sources estimate that the healthcare industry represents a $1.3
trillion market, or approximately 14% of the gross domestic product. We believe
over 10.0 million professionals are employed in this segment of the domestic
economy, including over 5.0 million allied healthcare professionals (which
include among others approximately 700,000 emergency medicine and first
responder personnel and approximately 250,000 radiology technicians),2.6 million
registered nurses, 2.4 million non-clinical employees and 600,000 physicians.
Approximately 4.0 million of these professionals work in the hospital
environment.
The healthcare education industry is a dynamic industry characterized by ongoing
development of new therapeutic treatments and procedures and innovations in
medical technology that together create a 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 institutional-based healthcare workers.
Continuing education requirements include continuing education for nurses,
emergency medicine and first responder personnel, radiology personnel, and
continuing medical education, or CME, for doctors. Simultaneously, the
healthcare industry continues to operate under intense pressure to reduce costs
as a result of reductions in government reimbursement and increased
participation of patients in managed care programs. In addition, healthcare
organizations as well as pharmaceutical and medical device companies are under
increased pressure to measure and report on the outcomes or results of the
dollars spent on training. Our products and services meet these needs, reduce
healthcare organizations' costs of training and provide unique opportunities for
additional products or services within the healthcare industry.
HEALTHSTREAM'S SOLUTIONS
Healthcare Organization Solutions
HealthStream's solutions are designed to meet the ongoing training and education
needs of the healthcare community. We bring high quality content together with
administrative and management tools. This combination allows healthcare
administrators to configure training to meet the precise needs of different
groups of employees, modify training materials and monitor the results of
training. Healthcare organizations are confronted with significant mandated and
recurring training requirements for continuing certification of professionals
and the requirements of individual facilities.
Historically, we have provided our services through sales of installed learning
management systems. Introduced during the second quarter of 2000, our ASP-based
Healthcare Learning Center provides organizations with the ability to access our
training and continuing education services over the
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Internet. 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. The Healthcare
Learning Center also provides a set of administrative and management tools that
enable administrators to configure and modify training materials, track
performance and predict training expenses. Pricing is subscription based, with
fees varying based on the number of users, content provided and other factors.
We also offer training services to facilitate integration of this technology
product into the organization's operating environments. Fees for training are
based on the time and efforts of the personnel involved. Further, we monitor
utilization by customer facility with the intent of achieving full deployment
within our customer base.
Our installed systems are provided on an initial license basis, with pricing
based on the number of employees, sites involved, and content provided.
Installed software contracts typically consist of an upfront license fee,
additional content sales and ongoing maintenance and support. For both our
ASP-based, Healthcare Learning Center customers and installed system users,
technical support teams provide customer service on-site and via telephone or
electronic mail.
In addition to our ASP-based Healthcare Learning Center and installed learning
management systems, we also offer healthcare organizations with full-service
capabilities to convert existing course materials to a Web-enabled format or
develop custom courseware for the organization. Pricing for these services is
generally based on time and efforts involved. Our development group responsible
for such services 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 other customers provides these healthcare organizations with
the opportunity to offset their development costs through courseware sales
royalties.
In the future our focus will be on growing our existing customer base of over
200 facilities using the ASP-based Healthcare Learning Center and converting our
over 800 installed product customers to our ASP-based product. We will also
continue to target new customers, both through our sales force, and by
capitalizing on our existing preferred vendor arrangements with several hospital
group purchasing organizations, or GPOs, including Premier, Inc., Voluntary
Hospital Association (VHA) and Amerinet. We believe our existing sales force,
along with these arrangements, offers us the opportunity to grow our ASP
customer base. Further, our experience demonstrates that our ASP-based product
fits the healthcare industry well since it facilitates predictability of
training costs, reduces capital outlays, and reduces the demands for in-house
technology resources due to hosting by HealthStream.
Services to pharmaceutical and medical device companies
HealthStream has historically provided services to seven of the top ten
pharmaceutical companies and eight of the top ten medical device companies. We
have an opportunity to expand our revenues by further developing these
relationships. During 2000, we provided services to these customers in the form
of content and courseware development, event development and registration
services, Web cast events and course sponsorship.
We provide pharmaceutical and medical device companies with content and
courseware development and conversion services. Many pharmaceutical and medical
device manufacturers provide their employees or customers with interactive
training. We have full-service capabilities to convert existing course materials
to a Web-enabled format or develop custom courseware for our customers through a
dedicated development group. In some cases, these services include development
and sales of materials distributed on CD-ROMs. Pricing for these services is
based on time and efforts of the personnel involved.
HealthStream offers event development and registration services. These services
include development of course agendas, coordination of subject matter experts,
preparation of course materials, and registration of attendees. Development
services are based on the size of the event, number of attendees and other
factors. Pricing for registration services is based on the size of the event or
a percentage of the registration value.
Our Web cast events offer both live and archived Web casts of medical
procedures, thought-leader discussions, and other events in a cost effective
manner to facilitate provision of continuing education. These Web cast events
typically consist of the presentation of an edited streaming video of a lecture
by a leading physician in the field and may include a demonstration of a new
procedure or technique followed by a live discussion. In addition, our Web cast
events may be followed by other interactive courseware or other continuing
education opportunities. The Web cast event may be supported by an educational
grant by a pharmaceutical or medical device company. Fees or the amount of the
grant for Web cast events vary based on the scope of the event, the target
audience, publicity services provided and other peripheral services related to
the event.
Course sponsorship arrangements can be based on an individual course provided
tuition-free to all participants or can be based on providing a broad audience
access to a full array of courseware across our distribution partner network for
a specific period of time. Pricing for sponsorship arrangements is typically
based on the size of the target audience, the content involved and the duration
of the sponsorship.
Sales of products and services to pharmaceutical and medical device companies
can be subject to seasonal factors as a result of drug and product introductions
and budget cycles for such companies.
ACQUISITIONS
HealthStream has made seven acquisitions over the past two years and has focused
on acquisitions that add products or services, increase our customer base, or
provide enabling technologies that are complementary to our existing business.
We believe we can recognize economies of scale by making acquisitions in markets
in which we already have a presence. In addition, we look to expand our product
and service offerings by leveraging products that can operate on our existing
technology platform. Acquisitions completed during the last two years, all of
which were accounted for using the purchase method of accounting, are as
follows: SilverPlatter Education, Inc. in July 1999 ("SilverPlatter");
KnowledgeReview, LLC ("KnowledgeReview") in January 2000; Quick Study, Inc.
("Quick Study") in January 2000; Multimedia Marketing, Inc. d/b/a m3 the
Healthcare Learning Company ("m3") in January 2000; Emergency Medicine
Internetwork, Inc. d/b/a EMInet ("EMInet") in January 2000; Education Design,
Inc. ("Education Design") in July 2000; and SynQuest Technologies, Inc.
("SynQuest") in September 2000. For additional
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information regarding recent acquisitions, please see Note 2 of the Consolidated
Financial Statements and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CUSTOMERS
We provide our training and education solutions to customers across a broad
range of entities within the healthcare industry including hospital
organizations (including government entities), pharmaceutical and medical device
companies. The following is a partial list of customers that have purchased or
contracted for products and services from HealthStream:
Healthcare Organizations Pharmaceutical Companies
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HCA-the Healthcare Company Pfizer
Cox Health Systems Merck
North Atlantic Regional Medical Command AstraZeneca
Medical Device Companies
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GE Medical Systems
Johnson & Johnson
Medtronic
Boston Scientific
SALES, MARKETING, AND CUSTOMER SUPPORT
HealthStream markets its learning solutions primarily through its direct sales
force. As of December 31, 2000, HealthStream's sales force consisted of
approximately forty employees based at its corporate headquarters in Nashville,
Tennessee and at other locations in Colorado, Massachusetts, North Carolina and
Texas as well as remote sales offices. These employees include direct and inside
sales professionals as well as program managers. The program managers are
responsible for live event services and work to develop the existing
relationships with pharmaceutical and medical device companies. Our direct sales
organization is divided into two groups: one is focused on healthcare
organizations and the other on sales to pharmaceutical and medical device
companies. The inside sales force supports the direct sales force by helping
field initial inquiries, qualify sales leads, prepare proposals, and prepare
sales contracts. The Company anticipates minor growth in the sales force during
2001.
HealthStream conducts a variety of marketing programs to promote HealthStream's
products and services, including direct mail, advertising, trade shows, public
relations and distribution of literature. We also focus on leveraging our
marketing efforts through co-branding arrangements with our partners.
We believe our ability to establish and maintain long-term customer
relationships, adoption of our products and services, and recurring sales is
dependent on the strength of our customer service and operations team. Our
customer service team consists of a total of approximately thirty employees
located in our offices in Nashville, North Carolina and Texas. We provide
customer support to end users through a toll-free telephone line. Our
representatives are trained to understand our philosophy and corporate culture
and our specific sales, marketing and support issues. We believe our customer
service department will decrease in size due to the consolidation of the
customer service functions as well as the consolidation of operating platforms.
In addition, we have five additional personnel responsible for implementation of
ASP customers and three individuals responsible for maintaining relationships
with distribution partners. We expect that our ASP implementation department
will increase in size in 2001 as we continue to grow our ASP customer base.
TECHNOLOGY MANAGEMENT
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 support
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.
Our client-server training and administrative software 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.
Our network infrastructure, Web site and servers delivering our services are
hosted by a third party provider. Our provider maintains suitable environmental
conditions and multiple back up power sources and network connections. Our
provider provides its hosting and connectivity services on high-quality
Hewlett-Packard servers and Cisco routers. Our provider'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
our provider, 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
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a daily basis. Data back-up tapes are archived at a remote location on a weekly
basis. During 2000 PSINet provided hosting and connectivity services. During
2001, we began utilizing Exodus as our provider of hosting and connectivity
services. Exodus' operations are substantially similar to PSINet.
COMPETITION
The healthcare education industry is highly fragmented, varies significantly in
delivery methods (i.e., written materials, live events, video and CD-ROM
products and online products), has historically shown an inability to measure
outcomes or results, and is composed of a wide variety of entities competing for
customers. 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 quickly and
efficiently access the continuing education content most relevant to an
individual's 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 device
manufacturers' sales and internal regulatory personnel usually fulfill their
education and training needs through instructor-led programs from external
vendors or internal training departments. While these approaches satisfy the
ongoing requirements, they are limited in that they are typically costly and
inconvenient. In addition, such live courses are often limited in the breadth of
offerings and do not provide a method for tracking the results of training. The
related results of these traditional methods, both from a business and
compliance standpoint, are difficult to track and measure.
HealthStream believes there are no competitors that currently offer
comprehensive e-learning solutions that are directly comparable to our services
for the healthcare industry. HealthStream believes that its solutions, which
include products and services that facilitate training for healthcare
professionals, a wide assortment of content, a mechanism for measuring results,
and the ability to provide all services on a single platform over the Internet,
provide us with a competitive advantage. HealthStream believes that the
principal competitive factors affecting the marketing of e-learning services to
the healthcare industry include:
- features of the e-learning product, including reporting,
management functionality, scalability, and the ability to
track utilization and results;
- scope and variety of e-learning content available including
mandated content for OSHA and JCAHO requirements as well as
the ability of entities to add their own Web-enabled content;
- scope and quality of professional services offered, including
training and the expertise and technical knowledge of the
providers' employees;
- pricing;
- customer service and support;
- effectiveness of sales and marketing efforts; and
- company reputation.
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,
confidentiality and disclosure of personal information could limit our
ability to collection information, use the information in our
databases, or derived from other sources, to generate revenues. It may
be costly to implement security or other measures designed to comply
with any new legislation.
- 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 incur substantial costs to comply with these
requirements or change the way we do business.
- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over
the Internet. These include laws relating to obscenity, indecency,
libel and defamation. We could be liable if content delivered by us
violates these regulations.
- Sales and Use Tax. Through December 31, 2000, we collected sales, use
or other taxes on taxable transactions in all states in which we have
employees. While HealthStream expects that this approach is
appropriate, other 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.
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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.
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 may be required to 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 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.
CE. State nurse practice laws are usually the source of authority for
establishing the state board of nursing, which then establishes the state's CE
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. CE requirements vary widely
from state to state. Twenty-nine states require some form of CE in order to
renew a nurse's license. In some states, the CE requirement only applies to
re-licensure of advance practice nurses or additional CEs may be required of
this category of nurses. On average, 12 to 15 CEs 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 50 hours per year. Other sources of CME requirements are state medical
societies and practice specialty boards. The failure to obtain the requisite
amount and type of CME could 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 Accreditation Council on
Continuing Medical Education, or 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 the 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.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We obtain a portion 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. We require our content partners to
represent and warrant that their content does not infringe on any third-party
copyrights and that they have the right to provide their content and have
obtained all third-party consents necessary to do so. Some of our content
partners also agree to indemnify us against liability we might sustain due to
the content they provide.
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."
OUR EMPLOYEES
As of December 31, 2000 we employed 227 persons. Our success will depend in
large part upon our ability to attract and retain qualified employees. We face
competition in this regard from other companies, but we believe that we maintain
good relations with our employees. We are not subject to any collective
bargaining agreements.
EXECUTIVE OFFICERS
The following is a brief summary of the business experience of each of the
executive officers of the Company. Officers of the Company are elected by the
Board of Directors and serve at the pleasure of the Board of Directors. The
following table sets forth certain information regarding the executive officers
of the Company:
NAME AGE POSITION
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Robert A. Frist, Jr. 34 Chief Executive Officer, President and Chairman of the Board of Directors
Arthur E. Newman 52 Senior Vice President and Chief Financial Officer
Michael Pote 39 Senior Vice President
Fred Perner 47 Senior Vice President
Scott Portis 34 Vice President of Technology
Stephen Clemens 36 Vice President of Product Development
Robert H. Laird, Jr. 33 Vice President, General Counsel and Secretary
Susan A. Brownie 36 Vice President of Finance and Corporate Controller
Jeffrey L. McLaren 34 Vice Chairman of the Board of Directors
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 HealthLeaders, Inc., 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.
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.
Fred Perner has served as senior vice president since November 2000 and senior
director from July 2000 to November 2000. From January 1999 until the June 2000,
Mr. Perner served as president of Education Design, Inc., a company acquired by
HealthStream in July 2000. Mr. Perner served as corporate director of marketing
for the Association of periOperative Registered Nurses from 1996 to 1999. Mr.
Perner holds a Bachelor of Science in General Management and a Masters in
Business Administration from Indiana University. Mr. Perner also holds a J.D.
from the University of Denver College of Law.
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 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, president
and chairman of the board.
Stephen Clemens has served as our vice president of product 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.
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Robert H. Laird, Jr. has served as our vice president and general counsel since
March 1997 and secretary since October 1999. Mr. Laird also served as our
director of finance from March 1997 until November 1999. He holds a Bachelor of
Arts in English from Tulane University, a J.D. from the University of Tennessee
College of Law and a Masters of Business Administration from the University of
Tennessee. Prior to attending graduate school from 1993 to 1996, Mr. Laird was
employed by CIGNA employee benefits, an insurance organization, in contracts
administration from 1991 to 1993.
Susan A. Brownie has served as our vice president of finance and corporate
controller since November 1999. From August 1986 until 1999, Ms. Brownie 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.
Jeffrey L. McLaren, one of our co-founders, served as our president and as one
of our directors from 1990 through November 2000 and as our chief product
officer from 1999 through November 2000. Mr. McLaren currently serves as our
vice chairman. He graduated from Trinity University with a Bachelor of Arts in
both business and philosophy.
RISK FACTORS
We believe that the risks and uncertainties described below and elsewhere in
this document are the principal material risks facing our company as of the date
of this report. In the future, we may become subject to additional risks that
are not currently known to us. Our business, financial condition or results of
operations could be materially adversely affected by any of the following risks.
The trading price of our common stock could decline due to any of the following
risks.
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 customers;
- develop our infrastructure, including additional hardware and
software, customer support, personnel and facilities, to
support our business;
- develop and introduce desirable services and compelling
content;
- establish and maintain strategic relationships with content
and distribution partners;
- establish and maintain relationships with sponsors and
advertisers; and
- respond effectively to competitive and technological
developments.
VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR PRODUCTS AND SERVICES AS WELL
AS OUR PRODUCT MIX MAY MAKE OUR OPERATING RESULTS UNPREDICTABLE AND VOLATILE.
The period from our initial contact with a potential customer and the first
purchase of our solution by the customer typically ranges from three to nine
months, and in some cases has extended much further. In addition the revenue
recognition policies for sales of ASP and other services vary significantly from
our installed products. As a result of both of these factors, we have only
limited ability to forecast the timing and type of sales. This, in turn, makes
it more difficult to predict quarterly financial performance.
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, 1999 and December 31, 2000. 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. 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.
THE MARKET FOR ONLINE TRAINING AND CONTINUING EDUCATION IN THE HEALTHCARE
INDUSTRY IS NEW AND RAPIDLY EVOLVING.
Uncertainty as to the level of demand and market acceptance for online training
and continuing education in the healthcare industry exposes us to a high degree
of risk. We cannot assure you that the healthcare community will completely
adopt 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, becomes
saturated with competitors, or services do not achieve or sustain market
acceptance, our business will suffer.
HEALTHSTREAM MAY NOT BE ABLE TO MAINTAIN ITS COMPETITIVE POSITION AGAINST
CURRENT AND POTENTIAL COMPETITORS, ESPECIALLY THOSE WITH SIGNIFICANTLY GREATER
FINANCIAL, MARKETING, TECHNICAL AND OTHER RESOURCES.
Several of HealthStream's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
HealthStream, and several of the larger e-learning companies have announced
their intentions to enter the healthcare e-learning market. These companies may
be able to respond more quickly than HealthStream to new or changing
opportunities, technologies, standards or customer requirements. In addition, if
such competitors were to offer a complete e-learning solution to the healthcare
industry, HealthStream's competitive position could be adversely affected.
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WE MAY BE UNABLE TO IMPLEMENT OUR GROWTH STRATEGY, WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS AND COMPETITIVE POSITION IN THE INDUSTRY.
Our business strategy includes increasing our market share and presence through
strategic acquisitions that complement or enhance our business, and we have
recently consummated a number of acquisitions involving multiple remote offices.
We do not have substantial experience in completing and integrating large
acquisitions or multiple simultaneous acquisitions. In addition, we do not have
experience operating multiple remote offices. We may have difficulty integrating
the operations and realizing the results of these recently completed
acquisitions. We may not be able to identify, complete, or 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, delays and difficulties of integrating the acquired
company into our existing organization;
- diversion of management's attention from other business
matters;
- expenses associated with and difficulties in identifying
potential targets and the costs associated with acquisitions
that are not completed;
- 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 THE
ACCEPTANCE AND EFFECTIVENESS OF INTERNET SPONSORSHIP IS UNCERTAIN.
We plan to derive significant revenues from sponsorships in conjunction with our
online training and continuing education services. The market for corporate
sponsorship on the Internet is new and rapidly evolving. Many sponsors have
limited experience with Internet sponsorship, and may ultimately conclude that
Internet sponsorships are not effective relative to traditional sponsorship
opportunities. As a result, the market for sponsorship on the Internet may not
continue to emerge or become sustainable. This makes it difficult to project our
future sponsorship revenues and rates. If the market for Internet sponsorship
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 depends 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.
WE MAY BE UNABLE TO MAINTAIN OUR EXISTING RELATIONSHIPS WITH OUR DISTRIBUTION
PARTNERS OR TO BUILD NEW RELATIONSHIPS WITH OTHER DISTRIBUTION PARTNERS.
If we are not successful in developing and enhancing our relationships with
distribution partners, we could become less competitive and our revenues could
decline. We formed our existing relationships recently, and our distribution
partners may not view their relationships with us as significant to the success
of their business. As a result, they may reassess their commitment to us or
decide to compete directly with us in the future. We generally do not have
agreements that prohibit our distribution partners from competing against us
directly or from contracting with our competitors. Arrangements with our
distribution partners generally do not establish minimum performance
requirements, but instead rely on the voluntary efforts of our distribution
partners. As a result, these relationships may not be successful. Certain
agreements with distribution partners may require guaranteed royalty payments.
We cannot assure you that we will be able to generate sufficient revenues to
recoup the minimum payments that we are obligated to pay our distribution
partners. The failure to do so would have a material adverse effect on our
results of operations.
PROTECTION OF CERTAIN PROPRIETARY TRADEMARKS AND DOMAIN NAMES MAY BE DIFFICULT
AND COSTLY.
Despite protection of certain proprietary trademarks and domain names, 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
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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 may not be available on terms
acceptable to us, if at all.
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.
In 2000, we had a net loss of approximately $20.3 million. At December 31, 2000,
our accumulated deficit was $29.2 million. We expect substantial net losses and
negative cash flow through at least 2001. With increased expenses, we will need
to generate significant additional revenues in order to achieve profitability.
As a result, we may never achieve or sustain profitability.
OUR REVENUE RECOGNITION IS DEPENDENT UPON ACHIEVEMENT OF CERTAIN EVENTS, AND OUR
INABILITY TO RECOGNIZE REVENUE IN ACCORDANCE WITH OUR EXPECTATIONS WILL HARM OUR
OPERATING RESULTS.
In accordance with our revenue recognition policy, our ability to record
revenues depends upon several factors. These factors include completion and
acceptance by our customers of developed content and courseware and utilization
of courseware both in connection with sponsorships and subscription ASP
arrangements. While our customer contracts have not historically provided for
minimum levels of participant registration or course completion, customer
requirements may demand such contract features in the future. Further, delivery
of customer-specific data is required for us to implement customers on our ASP
platform. Accordingly, if customers do not provide us with the specified
information in a timely manner, our ability to recognize revenues will be
delayed, which could harm our operating results.
WE MAY NOT BE ABLE TO MEET OUR STRATEGIC BUSINESS OBJECTIVES UNLESS WE OBTAIN
ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS OR AT
ALL.
The net proceeds of our initial public offering, or IPO, and the preceding
private offerings of our common and preferred stock, together with our current
cash reserves, are expected to be sufficient to meet our cash requirements
through at least 2001. 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, 2000, we had approximately $41.5 million in cash, cash
equivalents, restricted cash, investments and related interest receivable. In
addition, we have fixed commitments of approximately $302,000 in 2001 and other
variable payments will be due based on revenues and certain milestones related
to agreements with content, distribution and development partners. These
commitments may increase over time as a result of competitive pressures. We
expect to incur approximately $3.0 to $5.0 million of capital expenditures
during 2001 to support our business. We expect operating losses and negative
cash flows to continue through at least 2001. 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.
REVENUES FROM CONTENT DEPEND, IN PART, ON OUR OBTAINING PROPER OWNERSHIP AND
DISTRIBUTION RIGHTS FROM OUR CONTENT PARTNERS.
Most of our agreements with content providers are for initial terms of one to
three years. The content partners may choose not to renew their agreements with
us or may terminate the agreements early if we do not fulfill our contractual
obligations. If a significant number of our content providers terminate or fail
to renew their agreements with us on acceptable terms, it could result in a
reduction in the number of courses we are able to distribute and decreased
revenues. Most of our agreements with our content partners are also
non-exclusive, and our competitors offer, or could offer, training and
continuing education content that is similar to or the same as ours. If
publishers and authors, including our current content partners, offer
information to users or our competitors on more favorable terms than those
offered to us or increase our license fees, our competitive position and our
profit margins and prospects could be harmed. In addition, the failure by our
content partners to deliver high-quality content and to continuously upgrade
their content in response to user demand and evolving healthcare advances and
trends could result in user dissatisfaction and inhibit our ability to attract
users.
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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 provided 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 MAY NOT SUPPORT OUR SERVICES, WHICH MAY RESULT IN REDUCED SPONSORSHIP
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 are unwilling
to provide data or if they falsify data, our marketing and sales efforts would
be less effective since sponsors 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 revenues.
RISKS RELATED TO OPERATIONS
WE MAY BE UNABLE TO ADEQUATELY DEVELOP OUR SYSTEMS, PROCESSES AND SUPPORT IN A
MANNER THAT WILL ENABLE US TO MEET THE DEMAND FOR OUR SERVICES.
We have provided our online products and services for less than two years and
continue to develop our ability to provide our courses and education management
systems on both a subscription and transactional basis over the Internet. Our
future success will depend on our ability to develop effectively the
infrastructure, including additional hardware and software, and implement the
services, including customer support, necessary to meet the demand for our
services. In the event we are not successful in developing the necessary systems
and implementing the necessary services on a timely basis, our revenues could be
adversely affected, which would have a material adverse effect on our financial
condition. In addition, in February 2000, we entered into a four-year agreement
with HCA - The Healthcare Company (HCA), formerly known as Columbia/HCA
Healthcare Corporation, to provide our ASP services. HCA currently represents
the majority of our ASP business. HCA has the right to terminate this agreement
if we fail to deliver the required services under this agreement on a timely
basis. A termination of our agreement with HCA would have a material adverse
effect on our business as well as our ability to secure other large customers
for these services.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO INTEGRATE, OUR MANAGEMENT TEAM.
Our future performance will be substantially dependent on the continued services
of our management team and our ability to retain and motivate them. The loss of
the services of any of our officers or senior managers could harm our business,
as we may not be able to find suitable replacements. We do not have employment
agreements with any of our key personnel, other than our chief executive
officer, and we do not maintain any "key person" life insurance policies.
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 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 maintain 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 as well as 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
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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.
RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY
GOVERNMENT REGULATION MAY REQUIRE US TO CHANGE THE WAY WE DO BUSINESS.
The laws and regulations that govern our business change rapidly. The United
States government and the governments of states and foreign countries have
attempted to regulate activities on the Internet. Evolving areas of law that are
relevant to our business include privacy law, proposed encryption laws, content
regulation and sales and use tax laws and regulations. Because of this rapidly
evolving and uncertain regulatory environment, we cannot predict how these laws
and regulations might affect our business. In addition, these uncertainties make
it difficult to ensure compliance with the laws and regulations governing the
Internet. These laws and regulations could harm us by subjecting us to liability
or forcing us to change how we do business. See "Business - Government
Regulation of the Internet and the Healthcare Industry" for a more complete
discussion of these laws and regulations.
WE MAY BE LIABLE TO THIRD PARTIES FOR CONTENT THAT IS AVAILABLE FROM OUR ONLINE
LIBRARY.
We may be liable to third parties for the content in our online library if the
text, graphics, software or other content in our library violates copyright,
trademark, or other intellectual property rights, our content partners violate
their contractual obligations to others by providing content to our library or
the content does not conform to accepted standards of care in the healthcare
profession. We may also be liable for anything that is accessible from our Web
site or our distribution partners' Web sites through links to other Web sites.
We attempt to minimize these types of liabilities by requiring representations
and warranties relating to our content partners' ownership of, the rights to
distribute as well as the accuracy of their content. We also take necessary
measures to review this content ourselves. Although our agreements with our
content partners contain provisions providing for indemnification by the content
providers in the event of inaccurate content, we cannot assure you that our
content partners will have the financial resources to meet this obligation.
Alleged liability could harm our business by damaging our reputation, requiring
us to incur legal costs in defense, exposing us to awards of damages and costs
and diverting management's attention away from our business. See "Business -
Intellectual Property and Other Proprietary Rights" for a more complete
discussion of the potential effects of this liability on our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE LIABLE FOR
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our business could be harmed if unauthorized parties infringe upon or
misappropriate our proprietary systems, content, services or other information.
Our efforts to protect our intellectual property through copyright, trademarks
and other controls may not be adequate. In the future, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others, which could be time
consuming and costly. Intellectual property infringement claims could be made
against us as the number of our competitors grows. These claims, even if not
meritorious, could be expensive and divert our attention from operating our
company. In addition, if we become liable to third 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 that reduce the
requirements for continuing education and training for the healthcare industry
could harm our business.
ITEM 2. PROPERTIES
Our principal executive offices are located in Nashville, Tennessee. Our lease
for approximately 24,000 square feet at this location expires in 2005. The lease
provides for two five-year renewal options. Rent at this location is $17,903 per
month through February 2001; $18,204 per month from March 2001 through February
2004; and $16,231 per month from March 2004 through April 2005. We are currently
negotiating terms for additional contiguous space at our Nashville headquarters
that will increase our total square footage to approximately 34,000.
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, 2001. Rent for this space is $5,200 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 EMInet, we are leasing approximately 2,180
square feet of office space in Houston, Texas until September 30, 2001. Rent for
this space is $2,180 per month. In February 2001, we entered into an agreement
to terminate this agreement for a settlement of approximately $11,000.
As a result of our acquisition of m3, we are leasing approximately 7,500 square
feet of office space in Dallas, Texas. The Dallas lease expires on October 31,
2006 and has a monthly rent of $10,000.
As a result of our acquisition of Education Design, we are leasing approximately
8,000 square feet of office space in Denver, Colorado. The Denver lease expires
on June 30, 2005 and has monthly rent of $8,049 through June 30, 2001; $8,552
through June 30, 2002; $9,055 through June 30, 2003; $ 9,558 through June 30,
2004 and $10,061 through June 30, 2005.
As a result of our acquisition of SynQuest Technologies, we are leasing
approximately 7,500 square feet of office space in Raleigh, North Carolina. The
Raleigh lease expires on June 30, 2001 and has monthly rent of $10,783.
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ITEM 3. LEGAL PROCEEDINGS
On November 17, 2000, a complaint was filed in the Circuit Court of Tennessee
for the Thirtieth Judicial District at Memphis against us, SynQuest
Technologies, Inc. and two individual shareholders of SynQuest Technologies. The
complaint asserts that HealthStream violated the terms of a licensing agreement
entered into between HealthStream and the plaintiff and that HealthStream
allegedly failed to pay royalties due to the plaintiff pursuant to the terms of
that agreement. The plaintiff also alleges that HealthStream induced SynQuest
Technologies to breach a marketing agreement entered into between SynQuest and
the plaintiff. Alternatively, the plaintiff alleges that HealthStream, which
purchased certain assets of SynQuest, is liable for SynQuest's alleged breach of
the marketing agreement pursuant to the legal theory of successor liability. The
aggregate damages alleged total approximately $9.0 million. We believe the
allegations in the complaint are without merit, intend to defend the litigation
vigorously and do not believe this litigation will have a material adverse
effect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We completed the initial public offering of our common stock on April 10, 2000.
Our common stock has been traded on the Nasdaq National Market under the symbol
"HSTM" since April 10, 2000. Prior to that date, there was no public market for
our common stock and, therefore, no quoted market prices for our common stock
are available for the year ended December 31, 1999 or the quarter ended March
31, 2000. The following table sets forth, for the periods indicated, the high
and low sales prices per share of the common stock as reported on the Nasdaq
National Market:
HIGH LOW
------- -------
2000
----
Second Quarter (April 11 though June 30, 2000) ........................... $ 10.13 $ 3.63
Third Quarter............................................................. 5.75 1.88
Fourth Quarter............................................................ 2.63 0.75
On March 13, 2001, there were 238 registered holders and approximately 1,950
beneficial holders of our common stock. Because many of such shares are held by
brokers and other institutions on behalf of shareholders, we are unable to
estimate the total number of shareholders represented by these record holders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and we do
not anticipate paying cash dividends in the foreseeable future. We intend to
retain earnings to finance the expansion of our operations.
RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following unregistered securities since
April 10, 2000:
- On July 1, 2000, 184,421 shares of our common stock were issued to
Association of Operating Room Nurses, Inc. for an acquisition of the
assets of Education Design, Inc. for an aggregate of $1,000,000 under
Section 4(2) of the Securities Act, in which no public solicitations
were made;
- On September 18, 2000, 787,087 shares of our common stock were issued
to the shareholders of SynQuest Technologies, Inc. for an acquisition
of the assets of SynQuest Technologies, Inc. for an aggregate of
$1,672,560 under Section 4(2) of the Securities Act, in which no public
solicitations were made;
- On January 26, 2001, 181,250 shares of our common stock were issued to
Lippincott William & Wilkins, Inc. for an acquisition of the assets of
de'MEDICI Systems, a business unit owned and operated by Lippincott
William & Wilkins, Inc., for an aggregate of $300,186 under Section
4(2) of the Securities Act, in which no public solicitations were made.
USE OF PROCEEDS
On April 10, 2000 our Registration Statement on Form S-1 (File No. 333-88939)
was declared effective by the Securities and Exchange Commission. Pursuant to
the Registration Statement, we registered and sold 5,275,000 shares of common
stock at a price of $9.00 per share. The managing underwriters were FleetBoston
Robertson Stephens, Inc. The aggregate price of the amount offered and sold was
$47,475,000. In connection with the issuance and distribution of the securities
registered, the Company paid $3,323,250 related to underwriting discounts and
commissions and approximately $2,000,000 of other expenses.
The net offering proceeds to the Company after deducting the total expenses
noted above were approximately $42,200,000. From the effective date of the
Registration Statement through February 28, 2001, we have used approximately
$5,900,000 of the net offering proceeds to fund general operating expenses,
acquisitions and other working capital needs.
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ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations data for the three-year period ended
December 31, 2000 and the balance sheet data as of December 31, 1999 and 2000
are derived from our financial statements that have been audited by Ernst &
Young LLP, our independent auditors, and are included elsewhere in this report.
The data for the year ended December 31, 1997 and the balance sheet data as of
December 31, 1998 are derived from audited financial statements that are
included in our initial filing on Form S-1 (Reg. No. 333-88939). The data for
the year ended December 31, 1996 and the balance sheet data at December 31, 1996
are derived from unaudited financial statements that are not included in this
filing. You should read the following selected financial data in conjunction
with our financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" located elsewhere in this report.
As discussed in "Acquisitions" elsewhere in this report, HealthStream acquired 7
companies during 1999 and 2000. As a result of these acquisitions, the annual
results presented below are not comparable. In addition, revenues may be subject
to fluctuations as discussed further in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" located elsewhere in this report.
The operating results for any single year are not necessarily indicative of the
results to be expected in the future.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 556 $ 1,268 $ 1,716 $ 2,568 $ 9,652
Operating costs and expenses:
Cost of revenues 475 870 1,057 2,119 4,146
Product development 142 294 443 2,037 5,639
Selling, general and administrative expenses 675 875 1,477 2,972 22,540
------- ------- ------- ------- --------
Total operating costs and expenses 1,292 2,039 2,977 7,128 32,325
Loss from operations (736) (771) (1,261) (4,560) (22,673)
Other income (expense) (43) (189) (329) 104 2,388
------- ------- ------- ------- --------
Net loss $ (779) $ (960) $(1,590) $(4,456) $(20,285)
======= ======= ======= ======= ========
Net loss per share - basic and diluted $ (0.25) $ (0.29) $ (0.49) $ (1.19) $ (1.29)
======= ======= ======= ======= ========
Weighted average shares of common stock
outstanding - basic and diluted 3,069 3,256 3,256 3,757 15,786
======= ======= ======= ======= ========
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 29 $ 84 $ 51 $13,632 $ 19,831
Investments - short and long term -- -- -- -- 20,341
Working capital (deficit) (604) (1,708) (2,854) 11,465 26,437
Total assets 540 948 1,153 17,455 70,452
Deferred revenue -- 236 323 791 2,764
Long-term debt and capital leases, net of current portion 57 36 32 186 216
Shareholders' equity (deficit) (276) (1,236) (2,285) 14,190 62,017
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
HealthStream should be read in conjunction with "Selected Financial Data" and
HealthStream's Consolidated Financial Statements and related notes thereto
included elsewhere in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. HealthStream's actual results
may differ significantly from the results discussed and 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 report.
OVERVIEW
HealthStream was originally incorporated in 1990 and initiated online operations
in March 1999. The Company developed from a company with an initial focus of
providing multimedia tools for information dissemination to a facilitator of
training tools for entities in the healthcare industry. Revenues are derived
from the following categories: provision of services through our application
service provider (ASP) product, content subscriptions, license of installed
learning management systems, maintenance and technical support services, content
and courseware development, sponsorship services, sales of CD-ROM products, Web
cast events, event development and registration services, Web site development,
online products and training services. Historically, we have referred to these
categories broadly as services distributed through our ASP model and services
distributed through our Web distribution network. While our historical results
are presented in this format, during 2001, the Company will begin presenting its
results classified as either services to healthcare organizations or services to
pharmaceutical and medical device companies.
ASP services and content subscriptions are provided on a per person subscription
basis for a monthly fee ranging from over $1.00 to more than $6 per month, based
on the size of the facility and the content offerings. Contracts range from
$5,000 to approximately $400,000 based on the duration of the contract, number
of users and content involved. Revenue derived from the provision of services
through our ASP products are recognized ratably over the term of the service
agreement. The Company also offers training services for ASP users to facilitate
integration of this technology. Fees for training are based on the time and
efforts of the personnel involved. Other transaction-based online services are
provided based on a fee ranging from $5 to $25 per underlying credit hour, or
based upon access to a body of content for a defined period of time. Most
courses provide one to three credit hours, however, during 2000 we began selling
board review courses that include significantly more credit. We recognize
revenue for online subscription services ratably over the subscription period
and recognize revenue for transaction-based online course sales when the course
is delivered. Training revenues are recognized upon completion of training
services. Late in 1999, we began entering into sponsorship agreements that
provide for sponsorship of online courseware. Sponsorship revenue is recognized
ratably over the term unless usage exceeds the ratable portion. As discussed in
"Risk Factors" above, revenue recognition policies for ASP and other services
vary significantly from our installed products.
Revenues from installed learning management system fees are recognized upon
shipment or installation of the software. The one-time license fee typically
ranges from $20,000 to $200,000 based on the number of users. Revenues related
to installed learning management systems may be subject to fluctuations because
purchase of these licenses typically are included in customers' capital
expenditure budgets. Services such as training, maintenance and technical
support are provided either based on a fixed fee, estimated usage or actual time
incurred. Maintenance and technical support revenues are recognized over the
term of the service period. Revenues derived from the sale of products requiring
significant modification, conversion or customization are recorded based on the
percentage of completion method using labor hours. Training revenues are
recognized upon completion of training services. We recognize multimedia
development revenues based on the percentage of a project that is completed. We
recognize revenue from live event development services based on the percentage
of completion method using labor hours. Event registration services are
recognized upon completion of the related event. All other service revenues are
recognized as the related services are performed or products are delivered.
Sales of products and services to pharmaceutical and medical device companies
can be subject to seasonal factors as a result of drug and product introductions
and budget cycles for such companies.
Revenues provided under a service agreement that included the grant of a warrant
to HCA - Information Technology & Services, Inc., formerly Columbia Information
Services, an affiliate of HCA - The Healthcare Company, formerly Columbia/HCA
(collectively referred to herein as "HCA") are recognized as services are
rendered, net of the amortization of the fair value of the related warrant as a
reduction of the revenues proportionately over the term of the four-year
agreement. The related amortization will fluctuate based on the revenues
received from this agreement and will vary as a percentage of revenues based on
the estimated revenues over the course of the agreement. See Note 4 of the
Consolidated Financial Statements. Historically, we have marketed our training
and education delivery system directly or licensed it to resellers to re-brand
and distribute under their private label. Our primary reseller relationship was
with Lippincott Williams & Wilkins, Inc. ("LWW"), a leading medical sciences
publisher. LWW's business unit, de'MEDICI Systems, combined its line of OSHA and
JCAHO training content with our installed learning management systems and their
sales force sold the resulting solution directly into healthcare organizations.
In January 2001, we purchased de'MEDICI Systems from LWW and acquired the
existing base of more than 200 customers.
We expect to continue to generate revenues by marketing our Web-based services
to healthcare workers through healthcare organizations. We expect that the
portion of our revenues related to services provided via our ASP agreements will
increase. 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 allows 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 are
generated by charging for use of our courseware on a subscription basis. In
addition, we will continue to sell services on our Web site on a transaction
basis.
In February 2000, the Company entered into a five-year agreement with WebMD
Corporation, formerly Healtheon/WebMD, ("WebMD"). The agreement provided that
the Company would be the exclusive provider of education, continuing education
and training services for all healthcare organizations, healthcare professionals
and healthcare workers on all Web sites owned or operated by WebMD. The Company
committed to pay WebMD a guaranteed minimum royalty of $6.0 million per year.
The agreement also provided that the Company would receive 100% of any revenues
from the sale of its products and services until all payments to WebMD were
recovered, and after that revenues would be shared 75% to the Company and 25% to
WebMD. WebMD also committed to purchase $10.0 million of the Company's common
stock in a private sale that closed concurrent with the Company's IPO. WebMD
also agreed to provide certain marketing and co-branding services to the Company
under this
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agreement. During 2000, the Company expensed and paid WebMD $1.5 million. At
December 31, 2000, the Company accrued but did not pay royalties related to this
agreement of $1.5 million. During January 2001, the Company terminated its prior
agreement with WebMD and set forth a new business arrangement. Under the new,
non-exclusive three-year agreement, the Company will be a preferred provider of
continuing medical education, continuing education and board preparation courses
for WebMD's professional portal. Under this new arrangement, financial
consideration will be based entirely on revenues generated from the sale of
HealthStream's services to WebMD's professional portal customers.
We have acquired the following companies since 1999 all of which were accounted
for using the purchase method of accounting:
SilverPlatter Education, Inc. On July 23, 1999, the Company acquired
substantially all of the assets of SilverPlatter Education, Inc., a Boston-based
company that provided CD-ROM and Internet-based continuing medical education
programs to physicians, for $0.8 million in cash and 49,202 shares of the
Company's common stock, and the assumption of certain liabilities. The results
of operations are included in the Company's financial statements from July 23,
1999. The SilverPlatter Education business generates one-time sales,
subscription revenues and training service revenues.
KnowledgeReview, LLC. On January 3, 2000, the Company acquired substantially all
of the assets of KnowledgeReview, LLC (d/b/a "CMECourses.com") for $0.3 million
in cash and 17,343 shares of the Company's common stock. KnowledgeReview owned
and operated an Internet Web page that provided a search engine (CMEsearch.com)
that helped physicians locate continuing medical education by specialty and
facilitated online registration for such courses. The CMECourses.com business
generates one-time sales of CD-ROM products and generates traffic for our online
courseware sales.
Quick Study, Inc. On January 11, 2000, the Company acquired substantially all of
the assets and liabilities of Quick Study, Inc. ("Quick Study") for $0.1 million
in cash and 61,397 shares of the Company's common stock. In addition, the
Company issued 6,669 additional shares of common stock based on post acquisition
events. Quick Study published CD-ROM and network-based products for the
healthcare industry.
m3 the Healthcare Learning Company. 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 $0.6 million in cash and
818,037 shares of the Company's common stock. m3 provided interactive,
multimedia education and training solutions to hospitals and other healthcare
organizations. The m3 business generates installed product and ASP revenues.
EMINet, Inc. On January 28, 2000, the Company acquired substantially all of the
assets of Emergency Medicine Internetwork, Inc. d/b/a EMInet for $0.6 million in
cash and 269,902 shares of the Company's common stock. In addition, the Company
issued 2,170 additional shares of common stock based on post acquisition events.
EMInet sold approved online medical education content to emergency medical
services personnel. The EMInet business generates revenues related to sales of
subscription products.
Education Design Inc. On July 1, 2000, the Company acquired substantially all of
the assets of Education Design, Inc. ("EDI") for $3.0 million in cash and
184,421 shares of the Company's common stock. In addition, approximately
$300,000 of cash and 31,711 shares of the Company's common stock was provided to
the employees of EDI, subject to certain restricted stock award agreements. EDI
provided services for live educational events that are supported by the medical
device industry. The EDI business generates event development and registration
revenues.
SynQuest Technologies, Inc. On September 18, 2000, the Company acquired
substantially all of the assets of SynQuest Technologies, Inc. ("SynQuest") for
787,087 shares of the Company's common stock and assumption of certain debt and
other liabilities, $2.3 million of which were repaid in connection with the
purchase transaction. SynQuest provided online training and education to
hospitals and healthcare organizations. The SynQuest business generates
installed product and ASP revenues.
As a result of the acquisitions, we have recorded goodwill of $17.3 million and
$6.6 million of other acquisition intangibles at December 31, 2000. Goodwill and
intangibles, net of accumulated amortization, represented 6.5% and 25.6% of
total assets and 8.0% and 29.1% of total shareholders' equity at December 31,
1999 and 2000, respectively. Our weighted average amortization period is 3.5
years.
We expect to continue to transition m3 and SynQuest customers from existing
platforms to the ASP model, and therefore expect that revenues will remain
comparable for the annual maintenance fees with increases related to sales of
additional content and courseware.
During January 2001, the Company acquired substantially all of the assets of
de'MEDICI Systems, a business unit of Lippincott, Williams & Wilkins for
approximately $360,000 in cash and 181,250 shares of the Company's common stock.
The acquisition adds over 200 hospital customers. This business generates
ongoing maintenance and support revenues.
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
through 2001, as we continue to 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.
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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 of the provision of services through our
ASP product, the licensing of the Company's installed learning management
systems, maintenance and support services, content subscriptions, content and
courseware development, Web cast events, event development and registration
services, Web site development, professional and technical consulting services,
online products, sale of CD-ROM's and training services.
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 and
distribution partners based on a percentage of revenues.
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, developing and operating our Web sites 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, fees for professional services and royalties paid
to content providers that are of a fixed nature. 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 debt, loans from related parties and capital leases. The primary
component of other income is interest income related to interest earned on cash,
cash equivalents and investments.
1998 COMPARED TO 1999
Revenues. Revenues increased $852,000, or 49.6%, from approximately $1.7 million
for 1998 to approximately $2.6 million for 1999. The increase in revenues was
due to increased sales and marketing of our installed software 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 installed software 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 installed
software 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 1998 to approximately $2.1 million
for 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 1998 to 82.5% for 1999. This increase as a percentage of revenues
resulted from an increase of approximately 30 service and production personnel
during the year, 11 of which were added in connection with the acquisition of
SilverPlatter.
Product Development. Product development expenses increased approximately $1.6
million, or 359.5%, from $443,000 for, 1998 to approximately $2.0 million for
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 1998 to 79.3% for 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.
Selling, General and Administrative. Selling, general and administrative
expenses increased approximately $1.5 million, or 101.2%, from approximately
$1.5 million for 1998 to approximately $3.0 million for 1999. As a percentage of
revenues, selling, general and administrative expenses increased from 86.0% for
1998 to 115.7% for 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 Income/Expense. Other expense decreased $122,000, or 36.9%, from $331,000
for 1998 to $209,000 for 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 convertible 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 1998 to $312,000 for 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 1998 to approximately $4.5 million for 1999 due
to the factors described above.
1999 COMPARED TO 2000
Revenues. Revenues increased approximately $7.1 million, or 275.9%, from
approximately $2.6 million for 1999 to approximately $9.7 million for 2000. The
increase in revenues was attributable to approximately $6.1 million of revenues
primarily related to the acquisition of m3, EDI, SynQuest and EMInet. The
remainder of the increase, approximately $1.0 million, related to revenues from
ASP services and Web cast events. During 2000, 13.9% of revenues related to
development services, 44.1% related to our installed learning management system
licensing fees and related services, 18.0 % related to live event services,
14.0% related to other transactions and product sales (including sponsorships),
5.6% related to Web cast
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events, and 4.4% related to ASP services. During 1999, 48.9% of revenues related
to development services, 26.3% related to other transactions and product sales
and 24.8% related to T.NAV licensing fees and related services. Revenues for ASP
services in 2000 are net of approximately $1.0 million of warrant expense
related to the HCA arrangement.
Cost of Revenues. Cost of revenues increased approximately $2.0 million, or
95.6%, from approximately $2.1 million for 1999 to approximately $4.1 million
for 2000. The increase was primarily attributable to increased volume of
business, including approximately $1.2 million from direct costs related to the
revenue from acquisitions and $800,000 of increases in salaries, labor, related
benefits, training and facilities for such personnel. As a percentage of
revenues, cost of revenues decreased from 82.5% for 1999 to 43.0% for 2000. This
decrease as a percentage of revenues resulted from lower fixed costs as a
percentage of revenues related to the acquired businesses and new ASP and Web
cast services in 2000.
Product Development. Product development expenses increased approximately $3.6
million, or 176.8%, from approximately $2.0 million for 1999 to approximately
$5.6 million for 2000. This increase in product development expenses was due to
approximately $3.0 million related to additional personnel resulting from the
acquired businesses, an increase of approximately $800,000 related to contract
personnel and direct expenses of our development personnel, as well as
approximately $400,000 related to facilities for new personnel. These increases
were offset by a decrease of approximately $750,000 related to warrant expense
in 1999 that did not recur in 2000. As a percentage of revenues, product
development expenses decreased from 79.3% for 1999 to 58.4% for 2000. The
decrease as a percentage of revenues was due to growth in revenues, despite
continued growth in product development. We anticipate continued growth in
product development expenses in future periods due to salaries and employee
benefits associated with increased development efforts. Such efforts may be
somewhat mitigated by capitalization of new product developments if the Company
modifies its ASP software and Web sites and as it develops new ASP software
applications and Web sites.
Selling, General and Administrative. Selling, general and administrative
expenses increased approximately $19.5 million, or 658.6%, from approximately
$3.0 million for 1999 to approximately $22.5 million for 2000. As a percentage
of revenues, selling, general and administrative expenses increased from 115.7%
for 1999 to 233.5% for 2000. General and administrative expenses increased by
approximately $8.7 million from approximately $1.5 million for 1999 to
approximately $10.2 million for 2000. The increase was due to approximately $3.2
million of fixed royalties, primarily related to our agreement with WebMD,
approximately $3.0 million related to increased personnel, benefits and travel
associated with new employees, approximately $1.7 million related to additional
offices and related operational expenses and an increase of approximately
$600,000 related to professional fees and the costs of being a public company.
The additional personnel relate to the acquired businesses as well as personnel
to provide the infrastructure required by the growth experienced during 2000.
While we expect increases in general and administrative expenses during 2001, we
do not expect significant growth in personnel during 2001. In addition, the
termination of the previous arrangement with WebMD will lead to a reduction of
approximately $3.0 million in fixed royalties during 2001 when compared to 2000.
Sales and marketing expenses, including personnel costs, increased approximately
$4.8 million, from approximately $1.0 million for 1999 to approximately $5.8
million for 2000. Sales and marketing expenses increased by approximately $2.8
million related to additional sales and marketing personnel, primarily in
connection with the acquisitions of m3 and SynQuest. The remaining increase of
approximately $2.0 million related primarily to increased advertising, direct
mail, attendance at trade shows and travel related costs. We expect to incur
additional sales and marketing expenses as we hire additional sales and
marketing personnel to support our planned growth.
Depreciation and amortization expenses increased by approximately $6.1 million
from $452,000 for 1999 to approximately $6.6 million for 2000. Of the increase,
approximately $5.4 million related to the current year amortization of the
acquisitions completed in 2000 as well as the full year impact of the
acquisition of SilverPlatter. The remaining $700,000 related to increases in
depreciation attributable to the acquisitions and fixed asset additions in both
1999 and 2000.
Other Income/Expense. Other income increased approximately $2.2 million, or
705.2%, from $312,000 for 1999 to approximately $2.5 million for 2000. The
increase was primarily due to interest income related to the investment of the
IPO proceeds. Other expense decreased by $83,000 from $209,000 for 1999 to
$126,000 for 2000. The decrease relates to the repayment and conversion of all
outstanding indebtedness, other than capital leases, in connection with the
Company's initial public offering ("IPO").
Net Loss. Net loss increased approximately $15.8 million, or 355.2%, from
approximately $4.5 million for 1999 to approximately $20.3 million for 2000 due
to the factors described above.
17
20
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statement of operations data for the
eight quarters ended December 31, 1999 and December 31, 2000 both in absolute
dollars and as a percentage of total revenues. The information for each quarter
has been prepared on substantially the same basis as the audited statements
included in other parts of this report and, in our opinion, includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results of operations for these periods. You should
read this information in conjunction with HealthStream's Consolidated Financial
Statements and related notes thereto included elsewhere in this report. The
operating results for any quarter are not necessarily indicative of the results
to be expected in the future.
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 653 $ 459 $ 652 $ 804
Operating costs and expenses:
Cost of revenues 294 408 371 1,046
Product development 286 455 509 787
Selling, general and administrative expenses 359 685 1,083 845
------- ------- ------- -------
Total operating costs and expenses 939 1,548 1,963 2,678
Loss from operations (286) (1,089) (1,311) (1,874)
Other income (expense) (92) (11) 50 157
------- ------- ------- -------
Net loss $ (378) $(1,100) $(1,261) $(1,717)
======= ======= ======= =======
Net loss per share - basic and diluted $ (0.12) $ (0.31) $ (0.31) $ (0.41)
======= ======= ======= =======
Weighted average shares of common stock
outstanding - basic and diluted 3,256 3,590 4,021 4,158
======= ======= ======= =======
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,445 $ 2,201 $ 2,729 $ 3,277
Operating costs and expenses:
Cost of revenues 758 1,040 1,034 1,314
Product development 1,190 1,238 1,617 1,594
Selling, general and administrative expenses 3,180 5,931 6,408 7,022
------- ------- ------- -------
Total operating costs and expenses 5,128 8,209 9,059 9,930
Loss from operations (3,683) (6,008) (6,330) (6,653)
Other income (expense) 178 452 1,064 695
------- ------- ------- -------
Net loss $(3,505) $(5,556) $(5,266) $(5,958)
======= ======= ======= =======
Net loss per share - basic and diluted $ (0.74) $ (0.30) $ (0.27) $ (0.30)
======= ======= ======= =======
Weighted average shares of common stock
outstanding - basic and diluted 4,743 18,595 19,640 20,165
======= ======= ======= =======
18
21
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(% OF REVENUES)
STATEMENT OF OPERATIONS DATA:
Revenues 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenues 45.0 88.9 56.9 130.0
Product development 43.8 99.1 78.1 97.9
Selling, general and administrative expenses 55.0 149.2 166.1 105.2
------- ------- ------- -------
Total operating costs and expenses 143.8 337.2 301.1 333.1
Loss from operations (43.8) (237.2) (201.1) (233.1)
Other income (expense) (14.1) (2.6) 7.7 19.5
------- ------- ------- -------
Net loss (57.9) (239.8) (193.4) (213.6)
======= ======= ======= =======
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(% OF REVENUES)
STATEMENT OF OPERATIONS DATA:
Revenues 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenues 52.5 47.2 37.9 40.1
Product development 82.4 56.2 59.3 48.6
Selling, general and administrative expenses 220.0 269.5 234.8 214.3
------- ------- ------- -------
Total operating costs and expenses 354.9 372.9 332.0 303.0
Loss from operations (254.9) (272.9) (232.0) (203.0)
Other income (expense) 12.4 20.5 39.0 21.2
------- ------- ------- -------
Net loss (242.5) (252.4) (193.0) (181.8)
======= ======= ======= =======
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
As discussed above, during July 1999, we acquired SilverPlatter. We acquired m3,
EMInet, KnowledgeReview and Quick Study during January 2000. We acquired EDI
effective July 1, 2000 and SynQuest on September 18, 2000. As a result of these
acquisitions, the quarterly results presented above are not comparable on a
quarter-to-quarter basis. In addition, revenues from installed learning
management systems may be subject to fluctuations because purchases of these
licenses typically are included in customers' capital expenditure budgets.
Further, sales of products and services to pharmaceutical and medical device
companies can be subject to seasonal factors as a result of drug and product
introductions and budget cycles for such companies.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations largely through proceeds
from the IPO, private placements of equity securities, loans from related
parties and, to a lesser extent, from revenues generated from the sale of our
products and services.
Net cash used in operating activities was approximately $14.6 million in 2000.
Cash used in operating activities was attributable to funding net operating
losses and increases in accounts receivable, prepaid expenses and other assets,
which were partially offset by increases in accrued liabilities and
depreciation, amortization and other non-cash expenses. Net cash used in
investing activities was approximately $30.5 million in 2000. Cash used in
investing activities was primarily for the purchase of investments, property and
equipment and the acquisitions discussed above. Cash provided by financing
activities was approximately $51.2 million in 2000. Cash provided by financing
activities related primarily to the IPO and a private placement of common stock,
net of offering costs and repayment of outstanding indebtedness. As of December
31, 2000, our primary source of liquidity was approximately $27.3 million of
cash and short-term investments. We have no bank credit facility or other
indebtedness other than capital lease obligations.
As of February 28, 2001, we had cash and short term investments of approximately
$28.3 million, which reflected the results of operations, the closing of the
acquisition of de'MEDICI Systems, the repurchase of shares of our common stock
from WebMD Corporation, and the movement of certain investments from long-term
to short-term. See Note 12 to the Consolidated Financial Statements.
We believe that the net proceeds from the IPO and the preceding private
offerings will be sufficient to meet anticipated cash needs for working capital,
capital expenditures and acquisitions for at least the next 12 months. Our
growth strategy also includes acquiring companies that
19
22
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.
COMMITMENTS AND CONTINGENCIES
In connection with our February 2000 agreement with HCA, HCA will pay us minimum
revenues of $12.0 million over the four-year term of the agreement. While we
expect costs to increase during 2001 as we grow our business, we expect costs to
decrease as a percentage of revenues. We expect that our capital expenses will
be approximately $3.0 to $5.0 million in 2001.
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, the Company's commitments for
fixed payments include approximately $302,000 in 2001, all of which is
nonrefundable. We also have variable commitments of approximately $100,000
related to an agreement under which another company has agreed to provide
content development services for us.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended during 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities," which
requires companies to recognize all derivatives as either assets or liabilities
in the balance sheet and measure such instruments at fair value. The Company is
required to adopt the provisions of SFAS No. 133 beginning January 1, 2001. The
Company had no derivative instruments during 1999 or 2000. Adoption of this
statement will not currently have any impact on the consolidated financial
statements or related disclosures.
On March 16, 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-2 "Accounting for Web Site Development Costs." The consensus
requires that certain development costs related to Web sites applications be
capitalized. The consensus was effective prospectively for all costs incurred
for quarters beginning after June 30, 2000. Effective July 1, 2000 the Company
began accounting for Web site development costs in accordance with EITF Issue
No. 00-2. The Company did not capitalize any Web site development costs during
2000 since the costs incurred with respect to its ASP software and Web sites
were incurred prior to June 30, 2000 or were related to planning or operation of
such software and sites.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE'S ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We do not have any
foreign currency exchange rate risk or commodity price risk. As of December 31,
2000, we had no outstanding indebtedness other than approximately $505,000 of
capital lease arrangements. Accordingly, the Company is not exposed to
significant interest rate market risk. The Company is exposed to market risk
with respect to its cash and investment balances. At December 31, 2000, the
Company had cash and investments totaling approximately $41.0 million. At this
investment level, a hypothetical 10% decrease in interest rates would decrease
interest income and increase the net loss on an annualized basis by
approximately $410,000.
The Company manages its investment risk by investing in corporate debt
securities, foreign corporate debt and secured corporate debt securities with
minimum acceptable credit ratings. For certificates of deposit and corporate
obligations, ratings must be A2/A or better; A1/P1 or better for commercial
paper; A2/A or better for taxable or tax advantaged auction rate securities and
AAA or better for tax free auction rate securities. The Company also requires
that all securities must mature within 24 months from the original settlement
date, the average portfolio shall not exceed 18 months, and the greater of 10%
or $5.0 million shall mature within 90 days. Further, the Company's investment
policy also limits concentration exposure and other potential risk areas.
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.
20
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Years ended December 31, 1998, 1999 and 2000
Report of Ernst & Young LLP, Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Operations 25
Consolidated Statements of Shareholders' Equity (Deficit) 26
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 30
21
24
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
HealthStream, Inc.
We have audited the accompanying consolidated balance sheets of HealthStream,
Inc. as of December 31, 1999 and 2000, and the related consolidated statements
of operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000. 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 consolidated financial position of HealthStream, Inc.
at December 31, 1999 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 10, 2001, except for
Note 12, as to which the date
is February 23, 2001
22
25
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 13,632,144 $ 19,830,572
Short term investments.................................................... -- 7,451,450
Restricted cash........................................................... -- 794,342
Interest receivable....................................................... -- 578,534
Accounts receivable, net of allowance for doubtful accounts
of $37,000 in 1999 and $198,000 in 2000................................ 544,042 3,957,149
Accounts receivable - unbilled............................................ 18,877 49,600
Prepaid development fees.................................................. -- 695,427
Other prepaid expenses and other current assets........................... 263,517 1,297,526
------------ ------------
Total current assets................................................... 14,458,580 34,654,600
Property and equipment:
Furniture and fixtures.................................................... 445,172 883,660
Equipment................................................................. 1,109,015 3,893,720
Fixed assets in progress.................................................. -- 117,000
Leasehold improvements.................................................... 369,346 885,630
------------ ------------
1,923,533 5,780,010
Less accumulated depreciation and amortization ........................... (589,632) (1,505,004)
------------ ------------
1,333,901 4,275,006
Intangible assets, net of accumulated amortization
of $213,000 in 1999 and $5,847,000 in 2000................................ 1,134,673 18,024,526
Investments.................................................................. 86,063 12,889,674
Other assets................................................................. 441,488 607,770
------------ ------------
Total assets................................................................. $ 17,454,705 $ 70,451,576
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 443,455 $ 1,150,996
Accrued liabilities....................................................... 448,727 1,719,906
Accrued royalties......................................................... -- 1,500,000
Registration liabilities.................................................. -- 794,342
Deferred revenue.......................................................... 791,424 2,764,235
Notes payable - related party............................................. 1,293,000 --
Current portion of long-term debt - related party......................... 12,892 --
Current portion of capital lease obligations.............................. 89,881 288,831
------------ ------------
Total current liabilities........................................... 3,079,379 8,218,310
Capital lease obligations, less current portion.............................. 185,801 216,072
Commitments and contingencies
23
26
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
Shareholders' equity:
Common stock, no par value, 20,000,000 and 75,000,000 shares
authorized at December 31, 1999 and 2000, respectively;
4,165,461 shares and 21,242,312 shares issued and outstanding at
December 31, 1999 and 2000, respectively.................................. 4,008,991 91,221,775
Preferred stock, no par value, 5,000,000 and 10,000,000 shares authorized
at December 31, 1999 and 2000, respectively
Series A Convertible Preferred Stock; 76,000 and 0 shares
issued and outstanding................................................. 760,000 --
Series B Convertible Preferred Stock; 1,228,801 and 0 shares
issued and outstanding................................................. 12,138,000 --
Series C Convertible Preferred Stock; 627,406 and 0 shares
issued and outstanding................................................. 6,274,060 --
Accumulated other comprehensive income (loss)................................ (41,690) 30,556
Accumulated deficit.......................................................... (8,949,836) (29,235,137)
------------ ------------
Total shareholders' equity............................................. 14,189,525 62,017,194
------------ ------------
Total liabilities and shareholders' equity............................. $ 17,454,705 $ 70,451,576
============ ============
See accompanying notes.
24
27
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1999 2000
----------- ----------- ------------
Revenues, net of warrant expense of $991,693 in 2000 $ 1,716,094 $ 2,567,868 $ 9,651,775
Operating costs and expenses:
Cost of revenues 1,057,453 2,119,127 4,145,943
Product development 443,336 2,037,272 5,639,422
Selling, general and administrative expenses 1,476,639 2,971,408 22,540,172
----------- ----------- ------------
Total operating costs and expenses 2,977,428 7,127,807 32,325,537
----------- ----------- ------------
Loss from operations (1,261,334) (4,559,939) (22,673,762)
----------- ----------- ------------
Other income (expense):
Interest and other income 2,634 312,324 2,514,813
Interest expense - related parties (328,412) (193,059) (34,255)
Interest expense (2,070) (12,041) (92,097)
Other expense (318) (3,689) --
----------- ----------- ------------
(328,166) 103,535 2,388,461
----------- ----------- ------------
Net loss $(1,589,500) $(4,456,404) $(20,285,301)
=========== =========== ============
Net loss per share:
Basic $ (0.49) $ (1.19) $ (1.29)
=========== =========== ============
Diluted $ (0.49) $ (1.19) $ (1.29)
=========== =========== ============
Weighted average shares of common stock outstanding:
Basic 3,256,307 3,756,556 15,785,946
=========== =========== ============
Diluted 3,256,307 3,756,556 15,785,946
=========== =========== ============
See accompanying notes.
25
28
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
---------------------------- ----------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- -------- --------- ---------- ------------
Balance at
December 31, 1997 ........... 3,256,307 $ 1,668,166 -- $ -- -- $ --
Net loss ....................... -- -- -- -- -- --
Issuance of Preferred Stock .... -- -- 41,000 410,000 -- --
Issuance of stock options
for services ................ -- 130,332 -- -- -- --
----------- ----------- -------- --------- ---------- ------------
Balance at
December 31, 1998 ........... 3,256,307 1,798,498 41,000 410,000 -- --
Net loss ....................... -- -- -- -- -- --
Unrealized loss on
investment, net of tax ...... -- -- -- -- -- --
Comprehensive loss ............. -- -- -- -- -- --
Issuance of Preferred Stock .... -- -- 35,000 350,000 1,228,801 12,138,000
Issuance of common stock ....... 855,327 1,231,590 -- -- -- --
Issuance of common stock
in acquisition .............. 49,202 200,000 -- -- -- --
Issuance of common 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
Net loss ....................... -- -- -- -- -- --
Unrealized gain on
investment, net of tax ...... -- -- -- -- -- --
Comprehensive
income (loss) ............... -- -- -- -- -- --
Issuance of common
stock in acquisitions ....... 2,209,953 12,949,437 -- -- -- --
Exercise of stock options ...... 801,997 600,786 -- -- -- --
Issuance of common stock in
initial public offering ..... 5,275,000 44,151,750 -- -- -- --
Issuance of common stock in
private offering ............ 1,111,111 10,000,000 -- -- -- --
Payment of expenses of
initial public offering ..... -- (1,977,629) -- -- -- --
Conversion of Preferred Stock
into common stock in
connection with initial
public offering ............ 7,131,153 19,172,060 (76,000) (760,000) (1,228,801) (12,138,000)
Conversion of related party
notes payable into common
stock in connection with
initial public offering ..... 553,711 1,293,000 -- -- -- --
Repurchase of common stock in
connection with the
initial public offering ..... (6,074) (14,213) -- -- -- --
Recognition of warrant
expense ..................... -- 991,693 -- -- -- --
Issuance of stock options
for services ................ -- 45,900 -- -- -- --
----------- ----------- -------- --------- ---------- ------------
Balance at
December 31, 2000 ........... 21,242,312 $91,221,775 -- $ -- -- $ --
=========== =========== ======== ========= ========== ============
26
29
SERIES C
CONVERTIBLE ACCUMULATED
PREFERRED STOCK ACCUMU- OTHER COMPRE- TOTAL
------------------------- LATED HENSIVE INCOME SHAREHOLDERS
SHARES AMOUNT DEFICIT (LOSS) EQUITY (DEFICIT)
-------- ----------- ------------ -------------- ----------------
Balance at December 31, 1997 ........... -- $ -- $ (2,903,932) $ -- $ (1,235,766)
Net loss ............................... -- -- (1,589,500) -- (1,589,500)
Issuance of Preferred Stock ............ -- -- -- -- 410,000
Issuance of stock options
for services ....................... -- -- -- -- 130,332
-------- ----------- ------------ -------- ------------
Balance at December 31, 1998 ........... -- -- (4,493,432) -- (2,284,934)
Net loss ............................... -- -- (4,456,404) -- (4,456,404)
Unrealized loss on
investment, net of tax .............. -- -- -- (41,690) (41,690)
-------- ------------
Comprehensive loss ..................... -- -- -- -- (4,498,094)
------------
Issuance of Preferred Stock ............ 627,406 6,274,060 -- -- 18,762,060
Issuance of common stock ............... -- -- -- -- 1,231,590
Issuance of common stock
in acquisition ...................... -- -- -- -- 200,000
Issuance of common 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 ........... 627,406 6,274,060 (8,949,836) (41,690) 14,189,525
Net loss ............................... -- -- (20,285,301) -- (20,285,301)
Unrealized gain on
investment, net of tax .............. -- -- -- 72,246 72,246
-------- ------------
Comprehensive income (loss) ............ -- -- -- -- (20,213,055)
------------
Issuance of common stock
in acquisitions ..................... -- -- -- -- 12,949,437
Exercise of stock options .............. -- -- -- -- 600,786
Issuance of common stock in
initial public offering ............. -- -- -- -- 44,151,750
Issuance of common stock in
private offering .................... -- -- -- -- 10,000,000
Payment of expenses of
initial public offering ............. -- -- -- -- (1,977,629)
Conversion of Preferred Stock
into common stock in connection
with initial public offering ........ (627,406) (6,274,060) -- -- --
Conversion of related party
notes payable into common
stock in connection with
initial public offering ............. -- -- -- -- 1,293,000
Repurchase of common stock in
connection with the
initial public offering ............. -- -- -- -- (14,213)
Recognition of warrant expense ......... -- -- -- -- 991,693
Issuance of stock options
for services ........................ -- -- -- -- 45,900
-------- ----------- ------------ -------- ------------
Balance at December 31, 2000 ........... -- $ -- $(29,235,137) $ 30,556 $ 62,017,194
======== =========== ============ ======== ============
See accompanying notes.
27
30
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1999 2000
------------ ------------- -------------
OPERATING ACTIVITIES:
Net loss ........................................................... $ (1,589,500) $ (4,456,404) $ (20,285,301)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ................................................. 132,267 239,248 920,504
Amortization ................................................. 14,648 213,032 5,634,000
Gain on sale of investment ................................... -- -- (94,438)
Allowance for doubtful accounts .............................. 36,500 500 85,000
Loss on disposal of assets ................................... 3,727 3,689 --
Noncash warrant expense ...................................... -- -- 991,693
Noncash compensation expense ................................. 128,232 30,560 45,900
Noncash legal expense ........................................ 2,100 -- --
Noncash product development expense .......................... -- 748,343 --
Amortization of content fees ................................. -- -- 97,474
Amortization of fixed royalties .............................. -- -- 129,350
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable ....................................... (232,593) (51,239) (1,452,523)
Unbilled receivables ...................................... 54,150 (8,056) (30,723)
Restricted cash ........................................... -- -- (141,082)
Interest receivable ....................................... -- -- (578,534)
Prepaid development fees .................................. -- -- (792,901)
Other prepaid expenses and other current assets ........... (4,409) (225,442) (832,561)
Other assets .............................................. -- (440,011) 270,795
Accounts payable .......................................... 71,942 324,353 (319,167)
Accrued liabilities ....................................... 46,676 236,561 554,546
Accrued royalties ......................................... -- -- 1,500,000
Registration liabilities .................................. -- -- 139,492
Deferred revenue .......................................... 87,005 126,714 (416,199)
------------ ------------- -------------
Net cash used in operating activities ................... (1,249,255) (3,258,152) (14,574,675)
INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired ..................... -- (780,206) (6,767,810)
Proceeds from sale of investment ................................... -- -- 122,271
Purchase of investments ............................................ -- (127,753) (20,734,425)
Purchase of property and equipment ................................. (208,577) (639,724) (3,094,665)
------------ ------------- -------------
Net cash used in investing activities ................... (208,577) (1,547,683) (30,474,629)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of underwriting discount -- -- 54,151,750
Costs of issuing common stock ...................................... -- -- (1,977,629)
Repayment of note payable .......................................... -- -- (1,180,000)
Proceeds from notes payable - related party ........................ 1,040,000 18,000 --
Proceeds from issuance of preferred stock .......................... 410,000 18,202,060 --
Proceeds from exercise of stock options ............................ -- 231,590 600,786
Payments on long-term debt - related party ......................... (20,931) (23,585) (132,559)
Repurchase of stock in connection with initial public offering ..... -- -- (14,213)
Payments on capital lease obligations .............................. (4,779) (40,909) (200,403)
------------ ------------- -------------
Net cash provided by financing activities ............... 1,424,290 18,387,156 51,247,732
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents ............... (33,542) 13,581,321 6,198,428
Cash and cash equivalents at beginning of year ..................... 84,365 50,823 13,632,144
------------ ------------- -------------
Cash and cash equivalents at end of year ........................... $ 50,823 $ 13,632,144 $ 19,830,572
============ ============= =============
28
31
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1999 2000
--------- ----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ...................................................... $ 320,320 $ 225,074 $ 126,352
========= =========== ============
Capital lease obligations incurred ................................. $ 34,394 $ 286,976 $ 343,549
========= =========== ============
Preferred stock converted into common stock ........................ $ -- $ -- $ 19,172,060
========= =========== ============
Notes payable - related parties converted into common stock ........ $ -- $ 1,000,000 $ 1,293,000
========= =========== ============
Notes payable - related parties converted into preferred stock ..... $ -- $ 560,000 $ --
========= =========== ============
Issuance of common stock in connection with acquisition of companies $ -- $ 200,000 $ 12,949,437
========= =========== ============
Issuance of common stock in exchange for professional services ..... $ -- $ 18,800 $ 45,900
========= =========== ============
Issuance of common stock to advisory boards ........................ $ -- $ 11,760 $ --
========= =========== ============
Effects of acquisitions:
Estimated fair value of assets acquired ................... $ -- $ 95,713 $ 3,608,502
Purchase price in excess of net assets acquired ........... -- 1,374,619 22,442,980
Estimated fair value of liabilities assumed ............... -- (490,126) (6,173,054)
Stock issued .............................................. -- (200,000) (12,949,437)
--------- ----------- ------------
Cash paid ................................................. -- 780,206 6,928,991
Less cash acquired ........................................ -- -- (161,181)
--------- ----------- ------------
Net cash paid for acquisitions ............................ $ -- $ 780,206 $ 6,767,810
========= =========== ============
See accompanying notes.
29
32
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED 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 provides Web-based solutions 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 for the healthcare industry in
the United States through application service provider ("ASP") products and
installed learning management products. The Company also provides event
development and registration services, custom development services, translation
of content into an interactive experience, and assists in the development of
other educational activities, provided through the Internet.
BUSINESS SEGMENT
Through December 31, 2000, the Company's revenues have been primarily derived
from one business segment, the sale of education and training products to the
healthcare industry.
The Chief Executive Officer has been identified as the Chief Operating Decision
Maker ("CODM") because he has final authority over resource allocation decisions
and performance assessment. The CODM does not receive discrete financial
information about any individual components. During 2001, the Company expects to
begin producing discrete financial information for services provided to
healthcare organizations or services to pharmaceutical and medical device
companies.
RECOGNITION OF REVENUE
Revenues are derived from the provision of services through our ASP product, the
license of the Company's installed learning management systems, maintenance and
support services, content subscriptions, custom content development, Web cast
events, live event registration, development and coordination services, Web site
development, professional and technical consulting services, online products and
sponsorships, training services and the sale of CD-ROM's. The Company has
entered into sponsorship agreements that 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. The provision of services via the Internet
began in March 1999 and increased in 2000 as the Company began providing ASP
services.
The Company recognizes revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), SEC Staff Accounting Bulletin No.
101, "Revenue Recognition" and EITF 99-19 "Reporting Revenue Gross Versus Net."
SOP 97-2 provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on the relative fair values of the elements. Such elements
include software products, post contract customer support, installation, and
training. The determination of fair value is based on objective evidence that is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that the evidence of fair value does exist or until all elements of
the arrangement are delivered.
Revenues derived from the provision of services through our ASP product are
deferred and recognized ratably over the term of the service agreement. Training
revenues are recognized upon the completion of training. Revenues derived from
the license of installed learning management systems are recognized upon
shipment or installation of the software. 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. Sponsorship revenues are recognized
either based on provision of courseware or over the sponsorship period,
depending on the scope of services provided. The Company recognizes revenue from
event development services based on the percentage of completion method using
labor hours. Registration services are recognized upon completion of the related
event. All other revenues are recognized as the related services are performed
or products are delivered.
The Company also receives a percentage of its resellers' revenue from the sale
of certain installed software products. The Company recognizes a percentage of
revenue from resellers upon notification from the reseller that a sale has
occurred.
Revenues provided under a service agreement that included the grant of a warrant
to HCA - Information Technology & Services, Inc., formerly Columbia Information
Services, an affiliate of HCA - The Healthcare Company, formerly Columbia/HCA
(collectively referred to herein as "HCA") are recognized as services are
rendered, net of the amortization of the fair value of the related warrant as a
reduction of the revenues proportionately over the term of the four-year
agreement. The related amortization will fluctuate based on the revenues
received from this agreement and will vary as a percentage of revenues based on
the estimated revenues over the course of the agreement.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant inter-company
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates and such differences could be material to the consolidated
financial statements.
30
33
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
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:
ALLOWANCE
BALANCE AT CHARGED TO CHARGED TO ALLOWANCE
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD
------------ ---------- ---------- ---------- -------------
Year ended December 31,:
1998 $ -- $ 36,500 $ -- $ -- $ 36,500
1999 $ 36,500 $ 6,250 $ -- $ 5,750 $ 37,000
2000 $ 37,000 $ 85,000 $ 78,000 $ 2,000 $ 198,000
The amount "charged to other accounts" represents the allowance for doubtful
accounts of acquired companies.
INVESTMENTS
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in other comprehensive income. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in other
income.
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 and leasehold
improvements, which are amortized over the shorter of the estimated useful life
or the lease term.
YEARS
-----
Furniture and fixtures 5-10
Equipment 3-5
INTANGIBLE ASSETS
Intangible assets, which represents the excess of purchase price over fair value
of net tangible assets acquired or goodwill, content, customer lists, and
non-compete agreements, are amortized on a straight-line basis over the expected
periods to be benefited, generally three to five years, three to five years, two
to three years and six months to two years, respectively. In addition,
intangible assets includes favorable lease rights which represents the
difference between contractual terms and market rates for obligations under
lease contracts at the date of acquisition. Favorable lease rights are amortized
over the remaining lease term.
OTHER ASSETS
Other assets are comprised of licensing fees, offering costs in 1999, the long
term portion of content development and other long term items. Licensing and
content development fees are amortized based on the lives of the related
agreements or the accreditation lives of the related content, generally two
years.
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with 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," which
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, 1998, 1999 and 2000. Should there be an impairment
in the future, the Company would recognize the amount of the impairment based on
expected future cash flows from the impaired assets. The cash flow estimates
that would be used would 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 amounts which have been billed or
collected, but not yet recognized in revenue.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for 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,
31
34
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
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.
ADVERTISING
The Company expenses the costs of advertising as incurred. Advertising expense
for the years ended December 31, 1998, 1999 and 2000, was approximately $2,900,
$121,800 and $1,115,000, respectively.
PRODUCT DEVELOPMENT COSTS
Product development costs include the cost to internally develop and convert
content for our installed and ASP products as well as to provide content via
portal partners. The Company capitalizes the cost of content developed by third
parties where the life expectancy is greater than one year. During 2000, the
Company capitalized approximately $800,000 related to third party content
development. Such amounts are included in the accompanying consolidated balance
sheet in prepaid development fees. The Company amortizes content development
over the expected life, which is generally one to two years. Product development
costs incurred to establish the technological feasibility of computer software
products that are developed for resale and ASP software and Web sites prior to
June 30, 2000 are charged to expense as incurred. Effective July 1, 2000 the
Company began accounting for Web site development costs in accordance with EITF
Issue No. 00-2 "Accounting for Web Site Development Costs" that provides
guidance on when to capitalize versus expense costs incurred to develop a Web
site. The Company capitalizes costs incurred between the point of establishing
technological feasibility and general release when such costs are material. As
of December 31, 1999 and 2000, the Company had no capitalized development costs
for computer software that was developed for resale. The Company did not
capitalize any Web site development costs during 2000 since the costs incurred
with respect to its ASP software and Web sites were incurred prior to June 30,
2000 and costs incurred after June 30, 2000 related to planning or operation of
such software and sites.
NET LOSS PER SHARE
The Company computes net loss per share following SFAS No. 128, "Earnings Per
Share". 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, escrowed
or restricted shares, shares subject to vesting 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 the computation of diluted net loss
per share for the years ended December 31, 1998, 1999 and 2000, because the
effect would be anti-dilutive.
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 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. During 2000, no customer represented more than
10% of total revenue. The Company derived less than 5% of its net revenues from
HCA in 2000. 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 HCA at
December 31, 2000 were approximately $680,000.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and
other parties with an exercise price not less than the fair value of the shares
at the grant date. The Company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. To the extent that options are issued to members of our
advisory boards or non-employees, the value of such options is measured in
accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
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, cash equivalents and restricted cash: The carrying amounts approximate the
fair value because of the short-term maturity or short-term nature of such
instruments.
Accounts receivable, accounts receivable-unbilled, interest receivable, accounts
payable, accrued liabilities and deferred revenue: The carrying amounts
approximate the fair value because of the short-term nature of such instruments.
Investments: The carrying amounts approximate the fair value based on quoted
prices.
32
35
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended during 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities," which
requires companies to recognize all derivatives as either assets or liabilities
in the balance sheet and measure such instruments at fair value. The Company is
required to adopt the provisions of SFAS No. 133 beginning January 1, 2001. The
Company had no derivative instruments during 1999 and 2000. Adoption of the
statement will not currently have any impact on the consolidated financial
statements or related disclosures.
2. ACQUISITIONS
SilverPlatter Education, Inc. On July 23, 1999, the Company acquired
substantially all of the assets of SilverPlatter Education, Inc.
("SilverPlatter"), a Boston-based company that provided CD-ROM and
Internet-based continuing medical education programs to physicians, for $0.8
million in cash and 49,202 shares of the Company's common stock, and the
assumption of certain liabilities. The results of operations are included in the
Company's financial statements from July 23, 1999. The acquisition was accounted
for as a purchase. Intangible assets acquired consisted of goodwill, customer
lists and non-competition agreements of $1.0 million, $0.2 million, and $0.1
million, respectively, and are being amortized on a straight-line basis over
three, two and two years, respectively.
KnowledgeReview, LLC. On January 3, 2000, the Company acquired substantially all
of the assets of KnowledgeReview, LLC (d/b/a "CMECourses.com") for $0.3 million
in cash and 17,343 shares of the Company's common stock. All of the shares will
be held in an escrow account for a one-year period, subject to claims for
indemnification pursuant to the asset purchase agreement. KnowledgeReview owned
and operated an Internet Web page that provided a search engine (CMEsearch.com)
that helped physicians locate continuing medical education by specialty and
facilitated online registration for such courses. The acquisition was accounted
for as a purchase. Intangible assets acquired consisted of goodwill, customer
lists and non-competition agreements of $0.4 million, $40,000 and $20,000,
respectively, and are being amortized on a straight-line basis over three years,
two years and six months, respectively.
Quick Study, Inc. On January 11, 2000, the Company acquired substantially all of
the assets and liabilities of Quick Study, Inc. ("Quick Study") for $0.1 million
in cash and 61,397 shares of the Company's common stock. In addition, the
Company issued 6,669 additional shares of common stock based on achievement of
revenue goals subsequent to the acquisition. A portion of the shares and the
contingently issued shares will be held in an escrow account for a one-year
period, subject to claims for indemnification pursuant to the agreement and plan
of merger. In connection with the acquisition, the Company assumed $0.1 million
of long-term debt. Quick Study published CD-ROM and network-based products for
the healthcare industry. The acquisition was accounted for as a purchase.
Intangible assets acquired consisted of goodwill, customer lists, and
non-competition agreements of $0.6 million, $0.1 million and $0.1 million,
respectively, and are being amortized on a straight-line basis over three, three
and two years, respectively.
m3 the Healthcare Learning Company. 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 $0.6 million in cash and
818,037 shares of the Company's common stock. m3 provided interactive,
multimedia education and training solutions to hospitals and other healthcare
organizations. A portion of the shares will be held in an escrow account for a
one-year period, subject to claims for indemnification pursuant to the agreement
and plan of merger. In connection with the acquisition, the Company assumed $1.2
million of long-term debt. The acquisition was accounted for as a purchase.
Intangible assets acquired consisted of goodwill and customer lists of $8.4
million and $1.0 million, respectively, and are being amortized on a
straight-line basis over three years.
EMINet, Inc. On January 28, 2000, the Company acquired substantially all of the
assets of Emergency Medicine Internetwork, Inc. d/b/a EMInet ("EMInet") for $0.6
million in cash and 269,902 shares of the Company's common stock. A portion of
the shares will be held in an escrow account for a one-year period, subject to
claims for indemnification pursuant to the asset purchase agreement. In
addition, the Company issued 2,170 additional shares of common stock based on
achievement of revenue goals subsequent to the acquisition. EMInet sold approved
online medical education content to emergency medical services personnel. The
acquisition was accounted for as a purchase. Intangible assets acquired
consisted of goodwill and customer lists of $2.8 million and $0.5 million,
respectively, and are being amortized on a straight-line basis over three years.
The allocation of purchase price is preliminary and may be subject to change as
a result of changes in estimates related to the acquired business.
Education Design Inc. On July 1, 2000, the Company acquired substantially all of
the assets of Education Design, Inc. (EDI) for $3.0 million in cash and 184,421
shares of the Company's common stock. Three-quarters of the shares will be held
in an escrow account for a one year period, subject to any claims for
indemnification pursuant to the asset purchase agreement. In addition,
approximately $300,000 of cash and 31,711 shares of the Company's common stock
were provided to the employees of EDI, subject to certain restricted stock award
agreements. EDI provided services for live educational events that are supported
by the medical device industry. The acquisition was accounted for as a purchase.
Intangible assets acquired consisted of goodwill, content, customer lists, and a
non-competition agreement of $1.9 million, $1.5 million, $0.3 million, and $0.1
million, respectively, and are being amortized on a straight-line basis over
five years, five years, three years and one year, respectively. The allocation
of purchase price is preliminary and may be subject to change as a result of
changes in estimates related to the acquired business.
SynQuest Technologies, Inc. On September 18, 2000, the Company acquired
substantially all of the assets of SynQuest Technologies, Inc. (SynQuest) for
787,087 shares of the Company's common stock and assumption of certain debt and
other liabilities, $2.3 million of which were repaid in connection with the
purchase transaction. Approximately two-thirds of the shares will be held in an
escrow account subject to any claims or are subject to certain
33
36
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
stock vesting agreements. SynQuest provided online training and education to
hospitals and healthcare organizations. The acquisition was accounted for as a
purchase. Intangible assets acquired consisted of goodwill, content, and
customer lists of $2.1 million, $2.0 million, $0.5 million, respectively, and
are being amortized on a straight-line basis over five years, three years, and
three years, respectively. The allocation of purchase price is preliminary and
may be subject to change as a result of changes in estimates related to the
acquired business.
The following unaudited results of operations give effect to the operations of
the acquisitions discussed above as if the acquisitions had occurred as of the
first day of the fiscal year immediately preceding the year of acquisition. 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 period presented or to project the Company's results of
operations in any future period.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1999 2000
------------ ------------- -------------
Revenue $ 4,059,529 $ 12,818,000 $ 13,497,000
Net loss $ (2,156,838) $ (13,956,000) $ (23,451,000)
Net loss per share:
Basic $ (0.65) $ (2.36) $ (1.19)
Diluted $ (0.65) $ (2.36) $ (1.19)
In accordance with SFAS 128, escrowed shares and any shares subject to
restrictions or vesting are excluded from the weighted average shares
outstanding for purposes of calculating net loss per share since such shares are
anti-dilutive.
The intangible assets related to the acquisitions summarized above consist of
the following:
DECEMBER 31,
---------------------------------
1999 2000
----------- -----------
Intangible assets:
Goodwill $ 1,047,673 $17,309,384
Content -- 3,500,000
Customer lists 200,000 2,590,000
Noncompetition agreements 100,000 320,000
Favorable lease rights -- 152,142
----------- -----------
Total intangible assets 1,347,673 23,871,526
----------- -----------
Accumulated amortization (213,000) (5,847,000)
----------- -----------
Net intangible assets $ 1,134,673 $18,024,526
=========== ===========
3. NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES
Notes payable and long-term debt consists of the following:
DECEMBER 31,
---------------------------------
1999 2000
----------- -----------
Notes payable - related parties $ 1,293,000 $ --
=========== ===========
Long-term debt - related party $ 12,892 $ --
Less current portion (12,892) --
----------- -----------
$ -- $ --
=========== ===========
The Company had notes payable to the Chief Executive Officer ("CEO") and
principal stockholder totaling $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 had identical terms as the April note.
The August note was unsecured and accrued 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 was payable monthly. The August note totaling $1,293,000 was
converted into series B convertible preferred stock and then into common stock
in connection with the Company's April 2000 initial public offering ("IPO").
The Company had an unsecured long-term promissory note payable to the CEO,
totaling $12,892 at December 31, 1999. The note required monthly installments of
principal and interest of $2,224 through May 23, 2000. The note accrued interest
at 12%. During 1999, the Company had a partially secured demand note payable to
a vice president and stockholder of the Company totaling $60,000, which accrued
interest at 12% and was converted into series B convertible preferred stock on
August 23, 1999.
The Company's weighted average debt outstanding for the year ended December 31,
1999 and the portion of the year ended December 31, 2000 during which the
Company had debt outstanding was $2,000,261 and $1,751,059, respectively. The
effective interest rate on such debt was 12.5%, 10.1% and 8.8 % for the years
ended December 31, 1998, 1999 and the portion of the year ended December 31,
2000 during which the Company had debt outstanding, respectively.
34
37
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDERS' EQUITY
Common Stock
On April 14, 2000, the Company completed its IPO of 5,000,000 shares of its
common stock for net proceeds of $39.8 million. On April 14, 2000, the Company
completed a private placement of 1,111,111 shares of its common stock to WebMD
for net proceeds of $10.0 million. In addition, the underwriters exercised their
right to purchase 275,000 additional shares of common stock in May 2000, which
resulted in additional gross proceeds of $2.4 million. Upon consummation of the
IPO, all series A, B and C convertible preferred stock converted by its terms
into 7,131,153 shares of our common stock. In addition, the $1,293,000
promissory note payable to Robert A. Frist, Jr., the Company's chief executive
officer and chairman, also converted into 553,711 shares of common stock. Also
in connection with the IPO, the Company repurchased 6,074 shares of common
stock.
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. During 2000, all shares of preferred stock were
converted into common stock in connection with the IPO. No additional shares of
preferred stock were issued in 2000.
The Company had 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 and 650,000 shares designated as series
C convertible preferred stock. On April 21, 1999, the Company amended its
charter increasing the authorized shares of preferred stock to 5 million. During
2000, the Company increased the authorized shares of preferred stock to 10
million.
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 was converted into the
Company's common stock at the conversion rate of 4.28238 shares of common stock
per share of series A and B convertible preferred stock. Each share of series C
convertible preferred stock was converted 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.
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 within 30 days after 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 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. At all times, the Company has reserved 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 shares from time to time. At December 31, 1998 and
1999, the Company reserved and kept available 175,577 and 7,684,866 shares,
respectively, of common stock to effect the conversion of the series A, B and C
convertible preferred stock.
Warrants
During 1999, the Company entered into a distribution agreement with a business
partner. In connection with this agreement, the business partner was provided
with a warrant 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 the recognition of $748,343 of product development expense in 1999.
No part of the 1999 warrant has been exercised as of December 31, 2000.
During February 2000, the Company entered into a four-year Online Education
Services Provider Agreement with HCA that included providing a warrant to
purchase 2,182,568 shares of the Company's common stock at an exercise price of
$7.18 per share. The warrant is exercisable over a four year period. Under the
terms of the agreement, HCA will purchase a minimum of $12.0 million in services
from the Company over the term of the contract. The Company is amortizing the
fair value of the warrant ($8.8 million) as a reduction of revenues
proportionately over the term of the four-year agreement. The amortization will
fluctuate based on the revenues received from this agreement and will vary as a
percentage of revenues based on the estimated revenues over the course of the
agreement. During the year ended December 31, 2000, the Company reduced revenues
by the $991,693 of expense related to this HCA warrant.
35
38
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
At December 31, 2000, the fair value of the Company's investments, which were
all available-for-sale, included the following:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST LOSSES GAINS VALUE
------------ ---------- ---------- ------------
Corporate debt securities $ 10,667,165 $ -- $ 68,602 $ 10,735,767
Foreign corporate debt securities 8,537,985 -- 43,043 8,581,028
Secured corporate debt securities 1,005,498 -- 4,812 1,010,310
Equity securities 99,920 (85,901) -- 14,019
------------ --------- --------- ------------
$ 20,310,568 $ (85,901) $ 116,457 $ 20,341,124
============ ========= ========= ============
The maturities of the above debt securities at December 31, 2000 are shown
below:
Mature within one year $ 7,451,450
Mature after one year but before two years 12,875,655
------------
Total debt securities $ 20,327,105
============
6. 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 Subchapter 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 Subchapter 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:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000
---------- ------------ ------------
Tax benefit at the statutory rate $ (540,430) $ (1,515,177) $ (6,897,002)
State income tax benefit, net of federal benefit (63,335) (177,741) (667,145)
Nondeductible goodwill -- -- 1,188,473
Other 2,086 4,382 (69,774)
Tax benefit of losses attributable to shareholders due to
S corporation status prior to October 1, 1998 336,301 -- --
Deferred taxes recorded upon termination of S corporation status 57,287 -- --
Increase in valuation allowance 208,091 1,688,536 6,445,448
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============
Pro forma income taxes for 1998 as if the Company had been a C Corporation for
all of that year, 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:
DECEMBER 31,
-----------------------------------
1999 2000
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 13,914 $ 75,240
Differences related to business combinations 66,726 718,930
Accrued liabilities 18,841 41,048
Deferred revenue 303,351 --
Difference related to warrants 284,370 661,214
Research and development credits -- 57,448
Other -- 3,458
Net operating loss carryforwards 1,418,589 7,044,093
------------ ------------
Total deferred tax assets 2,105,791 8,601,431
Less: Valuation allowance (2,069,017) (8,514,465)
------------ ------------
36,774 86,966
Deferred tax liability - depreciation (36,774) (86,966)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
36
39
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, the Company had federal and state net operating loss
carryforwards of $3,326,625 and $7,188,395, respectively in 1999 and $18,099,076
and $22,260,182 respectively in 2000. These losses will expire in years 2012
through 2020. A portion of these losses may be subject to limitation in future
years.
The Company has established a valuation allowance for deferred tax assets at
December 31, 1999 and 2000 due to the uncertainty of realizing these assets in
the future. The valuation allowance increased $208,091 during 1998, $1,688,536
during 1999 and $ 6,445,448 in 2000. No federal or state income tax payments
were made during the years ended December 31, 1998, 1999 and 2000.
7. STOCK OPTION PLAN
The Company's 1994 Employee Stock Option Plan ("1994 Plan") and 2000 Stock
Incentive Plan ("2000 Plan") (The 1994 Plan and the 2000 Plan are collectively
referred to as "the Plan") authorizes the grant of options to employees,
officers and directors. In February 2000, the Company adopted the 2000 Plan. The
terms of the 2000 Plan are substantially similar to the 1994 Plan. 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. In connection with the 2000 Plan, 5,000,000
shares have been reserved for issuance, bringing the total shares reserved for
issuance through options to 9,000,000 shares.
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 123 had been followed, the Company's net loss and net loss per share would
have been:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1999 2000
------------ ------------ -------------
Net loss as reported $ (1,589,500) $ (4,456,404) $ (20,285,301)
Pro forma compensation expense 80,849 289,426 1,524,880
------------ ------------ -------------
Pro forma net loss $ (1,670,349) $ (4,745,830) $ (21,810,181)
============ ============ =============
Pro forma basic and diluted net loss per share $ (0.51) $ (1.26) $ (1.38)
============ ============ =============
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
estimated using the minimum value option pricing model in 1998, 1999 and 2000
prior to the Company's IPO and the Black-Scholes method subsequent to the
Company's IPO. The assumptions used for these estimates include:
1998 1999 2000
----- ---- -----
ASSUMPTIONS (WEIGHTED AVERAGE)
Risk-free interest rate 5.70% 6.00% 6.00%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life (in years) 5 5 5
Volatility -- -- 60%
The estimated weighted average fair values of options granted during 1998, 1999
and 2000 using the above pricing models were $0.58; $1.11; and $2.09,
respectively.
A progression of activity and various other information relative to stock
options is presented in the table below.
1998 1999 2000
----------------------- ---------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------
Outstanding - beginning of period 1,170,639 $0.57 1,650,784 $1.07 2,470,229 $2.84
Granted 496,332 2.30 1,383,892 4.29 2,097,316 6.21
Exercised -- -- (427,085) 0.54 (801,997) 0.75
Forfeited (16,187) 2.30 (137,362) 3.26 (639,809) 7.30
--------- --------- ----------
Outstanding - end of period 1,650,784 1.07 2,470,229 2.84 3,125,739 4.73
========= ========= ==========
Exercisable at end of period 1,196,539 0.61 892,477 1.08 665,261 4.51
========= ========= ==========
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 then 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 who left 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 August 2000, the CEO
exercised options granted in 1995 and purchased 314,500 shares of the Company's
common stock at an average exercise price of $0.57 per share. During August
2000, a vice president also exercised options that were granted in 1995 and
purchased 105,243 shares at an average exercise price of $0.58 per share.
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 that immediately
vested. The Company recognized $11,760 of expense in connection with these
grants. During 2000, the Company issued 27,254 stock
37
40
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
options to its professional consulting boards at exercise prices ranging from
$2.125 to $ 11.89 per share and recognized $29,900 of expense in connection with
these grants. During 2000, the Company also granted options to individuals for
services and recognized $16,000 of expense in connection with these grants.
Shares of common stock available for future grants of options totaled 1,102,685
and 3,868,004 at December 31, 1999 and 2000, respectively. Exercise prices per
share and various other information for options outstanding at December 31, 2000
are segregated into ranges as follows:
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
--------- ---------------- ---------------- --------- --------------
$0.61 18,500 $ 0.61 4.2 18,500 $ 0.61
$2.125 838,963 2.125 7.8 7,846 2.125
$2.34 327,383 2.34 4.6 170,675 2.34
$4.06 938,413 4.06 6.7 312,303 4.06
$5.42 152,500 5.42 7.5 -- --
$6.49 271,025 6.49 7.0 52,262 6.49
$8.65 156,540 8.65 7.1 23,125 8.65
$9.00 65,750 9.00 9.1 65,750 9.00
$10.00 186,850 10.00 7.2 -- --
$11.89 169,815 11.89 7.2 14,800 11.89
--------- ------ ------ ------- -------
3,125,739 4.73 7.0 665,261 4.51
========= ====== ====== ======= =======
8. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company has a defined-contribution employee benefit plan ("401-K 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
thirty days of service to be eligible to participate in the 401-K Plan. Under
the provisions of the 401-K Plan, 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.
Employee Stock Purchase Plan
During 2000, the Company adopted an Employee Stock Purchase Plan ("Purchase
Plan"), which incorporates the provisions of Section 423 of the Internal Revenue
Code. Under the Purchase Plan, 1,000,000 shares of common stock have been
reserved for purchase by employees. The Purchase Plan provides for annual offer
periods of twelve months to eligible employees. Under the Purchase Plan,
eligible employees can purchase through payroll deductions, the lesser of up to
15% of their eligible base compensation or 2,500 shares of common stock, at a
price equivalent to 85% of the lesser of the beginning or end of year price.
9. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office facilities in Nashville, TN, Dallas, TX, Denver, CO,
Houston, TX, Raleigh, NC and Boston, MA under agreements that expire before or
during June 2005. The Nashville, TN lease provides for two five-year renewal
options. Some lease agreements contain provisions for escalating rent payments
over the initial terms of the lease. The Company accounts for these leases by
recognizing the straight-line rent expense and adjusting the deferred rent
expense liability for the difference between the straight-line rent expense and
the amount of rent paid. The Company also leases certain office equipment under
both operating and capital leases. Total rent expense under all operating leases
was $51,756, $210,234 and $795,342 for the years ended December 31, 1998, 1999
and 2000, 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, 2000 under
capital and non-cancelable operating leases, with initial terms of one year or
more, are as follows:
CAPITAL OPERATING
LEASES LEASES
---------- -----------
2001 $ 333,288 $ 1,009,563
2002 140,816 769,620
2003 62,818 596,684
2004 36,877 458,120
2005 1,212 255,828
2006 (thereafter) -- 100,000
---------- -----------
Total minimum lease payments $ 575,011 $ 3,189,815
===========
Less amounts representing interest (70,108)
----------
Present value of net minimum lease payments (including $288,831
classified as current) $ 504,903
==========
The carrying value of assets under capital leases, which are included with owned
assets in the accompanying balance sheets was $275,596 and $395,850 at December
31, 1999 and 2000, respectively. Amortization of the assets under the capital
leases is included in depreciation expense.
38
41
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Legal Issues
On November 17, 2000, a complaint was filed in the Circuit Court of Tennessee
for the Thirtieth Judicial District at Memphis against the Company, SynQuest and
two individual shareholders of SynQuest. The complaint asserts that HealthStream
violated the terms of a licensing agreement entered into between HealthStream
and the plaintiff and that HealthStream allegedly failed to pay royalties due to
the plaintiff pursuant to the terms of that agreement. The plaintiff also
alleges that HealthStream induced SynQuest to breach a marketing agreement
entered into between SynQuest and the plaintiff. Alternatively, the plaintiff
alleges that HealthStream, which purchased certain assets of SynQuest, is liable
for SynQuest's alleged breach of the marketing agreement pursuant to the legal
theory of successor liability. The aggregate damages alleged total approximately
$9.0 million. We believe the allegations in the complaint are without merit,
intend to defend the litigation vigorously and do not believe this litigation
will have a material adverse effect on our financial condition or results of
operations.
The Company is subject to various other legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management, the
ultimate liability with respect to those proceedings and claims will not
materially affect the financial position, operations or liquidity of the
Company.
10. LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000
----------- ----------- -------------
Numerator:
Net loss $(1,589,500) $(4,456,404) $(20,285,301)
=========== =========== ============
Denominator:
Weighted-average shares outstanding 3,256,307 3,756,556 15,785,946
=========== =========== ============
Net loss per share, basic and diluted $ (0.49) $ (1.19) $ (1.29)
=========== =========== ============
For the years ended December 31, 1998, 1999 and 2000, the calculation of
weighted average and equivalent shares excluded options, warrants, restricted
stock and convertible preferred stock because such items were anti-dilutive. The
equivalent common shares related to such options, warrants, restricted stock and
preferred stock were 1,826,362 in 1998, 9,846,414 in 1999 and 6,522,065 in 2000.
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 that
provide for up front payments of approximately $302,000 in 2001, all of which
are nonrefundable. Additional payments may be required upon delivery of courses
or occurrence of certain events. In addition, the Company has commitments of
approximately $100,000 related to content development services. Payment of such
amounts is contingent upon delivery of content by the provider.
The Company entered into a distribution agreement with a business partner during
1999 that provided the business partner with a warrant to purchase 245,032
shares of the Company's common stock at $4.06 per share. The warrant expires in
June 2009. The issuance of the warrant resulted in recognition of $748,343 of
product development expense in 1999. No part of the 1999 warrant has been
exercised as of December 31, 2000.
The Company also entered into a development agreement in January 2000 with a
private company under which the Company paid $95,000 and paid the entity another
$400,000 during 2000 as courses were developed. 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.
In February 2000, the Company entered into a five-year agreement with WebMD. The
agreement provided that the Company would be the exclusive provider of
education, continuing education and training services for all healthcare
organizations, healthcare professionals and healthcare workers on all Web sites
owned or operated by WebMD. The Company committed to pay WebMD a guaranteed
minimum royalty of $6.0 million per year. The agreement also provided that the
Company would receive 100% of any revenues from the sale of its products and
services until all payments to WebMD were recovered, and after that revenues
would be shared 75% to the Company and WebMD would receive 25% of any revenues.
WebMD also committed to purchase $10.0 million of the Company's common stock in
a private sale that closed concurrent with the Company's IPO. WebMD also agreed
to provide certain marketing and co-branding services to the Company under this
agreement. During 2000, the Company expensed and paid WebMD $1.5 million. At
December 31, 2000, the accompanying balance sheet includes accrued and unpaid
royalties related to this agreement of $1.5 million. As noted below, this
agreement was terminated during January 2001.
12. SUBSEQUENT EVENTS
On January 5, 2001, the Company terminated its prior agreement with WebMD and
set forth a new business arrangement. Under the new, non-exclusive three-year
agreement, the Company will be a preferred provider of continuing medical
education, continuing education and board preparation courses for WebMD's
professional portal. Under this new arrangement, financial consideration will be
based entirely on revenues generated from the sale of HealthStream's services to
WebMD's professional portal customers.
This arrangement also terminated the lock-up agreement related to the 1.1
million shares of HealthStream common stock that WebMD purchased in a private
offering just prior to the Company's IPO. In connection with this termination,
HealthStream gave WebMD the right to sell the shares back to HealthStream at any
time through March 30, 2001. On February 8, 2001, WebMD exercised its right to
sell the 1.1 million shares of HealthStream common stock back to the Company at
$1.7833 per share. The Company reacquired the shares on February 16, 2001.
39
42
HEALTHSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the quarter ending March 31, 2001, HealthStream will recognize a gain on
termination of the prior WebMD agreement. This gain represents the reversal of
the scheduled $1.5 million fixed payment, which was accrued during the quarter
ended September 30, 2000, and will be reduced by the fair value of the right
granted to WebMD to cause HealthStream to purchase the 1.1 million shares of
HealthStream common stock held by WebMD.
On January 26, 2001, the Company acquired substantially all of the assets of
de'MEDICI Systems, a business unit of Lippincott, Williams & Wilkins for
approximately $360,000 and 181,250 shares of HealthStream common stock. The
acquisition adds over 200 hospital customers. The acquisition will be accounted
for as a purchase.
During February 2001, options to purchase 40,000 shares of common stock at an
exercise price of $1.75 per share were granted.
40
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to directors of the Company is incorporated by reference from the
information contained in our proxy statement for the 2001 Annual Meeting of
Stockholders that we will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
Pursuant to General Instruction G(3), certain information concerning executive
officers of the Company is included in Part I of this Form 10-K, under the
caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information contained in our proxy statement
for the 2001 Annual Meeting of Stockholders that we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information contained in our proxy statement
for the 2001 Annual Meeting of Stockholders that we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information contained in our proxy statement
for the 2001 Annual Meeting of Stockholders that we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
41
44
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the financial statements included in Item 8 to
this Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or the notes thereto.
(a)(3) Exhibits
NUMBER DESCRIPTION
------ -----------
*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 Warrant to purchase common stock of HealthStream, Inc., dated June 14, 1999, held by GE Medical
Systems.
*4.5 Warrant to purchase common stock of HealthStream, Inc., dated February 11, 2000, held by
Columbia Information Systems.
*4.6 Common Stock Purchase Agreement between HealthStream, Inc. and Healtheon/WebMD Corporation
*10.1 1994 Employee Stock Option Plan, effective as of April 15, 1994
*10.2 2000 Stock Incentive Plan, effective as of April 10, 2000
*10.3 Form of Indemnification Agreement
*10.4 Executive Employment Agreement, dated April 21, 1999, between HealthStream, Inc. and Robert A. Frist, Jr.
*10.5 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
*+10.6 Development and Distribution Agreement between HealthStream, Inc. and GE Medical Systems
*+10.7 Online Services Agreement between HealthStream, Inc. and Columbia Information Systems.
*10.8 Form of Employee Stock Purchase Plan
*21.1 Subsidiaries of HealthStream, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on page 43)
+ Confidential treatment was received, with respect to certain portions of
this document. Such portions were omitted and filed separately with the
Securities and Exchange Commission.
* Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 333-88939).
(b) Reports on Form 8-K
Report filed on January 8, 2001 regarding termination of WebMD
agreement.
42
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 29th day of March,
2001.
HEALTHSTREAM, INC.
By:/s/ Robert A. Frist, Jr.
-------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Robert H. Laird,
Jr. and Arthur E. Newman, and each one of them, his or her attorneys-in-fact,
each with the power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ Robert A. Frist, Jr. President, Chief Executive Officer and March 29, 2001
---------------------------------------- Chairman (Principal Executive Officer)
Robert A. Frist, Jr.
/s/ Arthur E. Newman Senior Vice-President and Chief Financial March 29, 2001
---------------------------------------- Officer (Principal Financial Officer)
Arthur E. Newman
/s/ Susan A. Brownie Vice President of Finance and Corporate March 29, 2001
---------------------------------------- Controller (Principal Accounting Officer)
Susan A. Brownie
/s/ Jeffrey L. McLaren
---------------------------------------- Vice Chairman March 29, 2001
Jeffrey L. McLaren
---------------------------------------- Director March 29, 2001
John Dayani
/s/ James Daniell
---------------------------------------- Director March 29, 2001
James Daniell
/s/ William Stead
---------------------------------------- Director March 29, 2001
William Stead
/s/ M. Fazle Husain
---------------------------------------- Director March 29, 2001
M. Fazle Husain
/s/ Thompson Dent
---------------------------------------- Director March 29, 2001
Thompson Dent
/s/ Charles N. Martin
---------------------------------------- Director March 29, 2001
Charles N. Martin
43
46
INDEX TO EXHIBITS
ITEM DESCRIPTION
---- -----------
EXHIBITS
NUMBER DESCRIPTION
----- -----------
*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 Warrant to purchase common stock of HealthStream, Inc., dated June 14, 1999, held by GE Medical
Systems.
*4.5 Warrant to purchase common stock of HealthStream, Inc., dated February 11, 2000, held by
Columbia Information Systems.
*4.6 Common Stock Purchase Agreement between HealthStream, Inc. and Healtheon/WebMD Corporation
*10.1 1994 Employee Stock Option Plan, effective as of April 15, 1994
*10.2 2000 Stock Incentive Plan, effective as of April 10, 2000
*10.3 Form of Indemnification Agreement
*10.4 Executive Employment Agreement, dated April 21, 1999, between HealthStream, Inc. and Robert A. Frist, Jr.
*10.5 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
*+10.6 Development and Distribution Agreement between HealthStream, Inc. and GE Medical Systems
*+10.7 Online Services Agreement between HealthStream, Inc. and Columbia Information Systems.
*10.8 Form of Employee Stock Purchase Plan
*21.1 Subsidiaries of HealthStream, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on page 43)
+ Confidential treatment was received, or is requested, with respect to
certain portions of this document. Such portions were omitted and filed
separately with the Securities and Exchange Commission.
* Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 333-88939).
44