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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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.
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 18, 2002 was $13,797,955.
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 18, 2002, there were 20,372,544 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 incorporated by reference into Part III hereof.
HEALTHSTREAM, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
PAGE
----
PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 16
Item 3. Legal Proceedings............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 17
Item 6. Selected Financial Data....................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 28
Item 8. Financial Statements and Supplementary Data................................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......... 55
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 55
Item 11. Executive Compensation........................................................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 55
Item 13. Certain Relationships and Related Transactions................................................ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 56
PART I
This Annual Report contains forward-looking statements within the meaning of
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 filed 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 Internet-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 Internet-based application service provider, or ASP,
e-learning products and installed learning management products to hospitals and
long-term care and outpatient facilities. Services to healthcare organizations
are delivered through our proprietary Internet e-learning products and installed
learning management products. For pharmaceutical and medical device companies,
our focus is on providing services including live and online educational and
promotional activities aimed at healthcare professionals, as well as online
training for medical industry representatives. Pharmaceutical and medical device
companies also provide commercial support for some of our continuing education
activities. Services to pharmaceutical and medical device companies are
facilitated through our library of licensed content, our online services, and to
a lesser degree, our distribution of Web portal partners.
The Company was incorporated in 1990 and began marketing its Internet-based
solutions in March 1999. The Company evolved 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 and companies to provide
training solutions to meet the needs of healthcare organizations, their
employees and their vendors.
INDUSTRY BACKGROUND
According to the National Center of Health Statistics, 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 2.6 million registered nurses, 5.0
million allied healthcare professionals (which include among others
approximately 800,000 emergency medical services and first responder personnel
and approximately 250,000 radiologic technologists), 2.4 million non-clinical
employees and 600,000 physicians. Approximately 4.0 million of these
professionals work in hospital organizations.
The healthcare industry is a dynamic industry characterized by ongoing
development of new therapeutic treatments, procedures and innovations in medical
technology that together create a demand for related education and training
products. 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. 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. In addition, to keep
abreast of the latest developments and to meet licensing, certification and
credentialing requirements, healthcare professionals must obtain continuing
education. Continuing education requirements include continuing education for
nurses, emergency medical services and first responder personnel and radiologic
personnel. 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 rising operating costs coupled with
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increased pressure to measure and report on the outcomes or results of the
dollars spent on training. Our products and services meet these needs by
reducing healthcare organizations' costs of training and providing unique
opportunities for additional products or services within the healthcare
industry.
HEALTHSTREAM'S SOLUTIONS
SERVICES TO HEALTHCARE ORGANIZATIONS
HealthStream's solutions are designed to meet the ongoing training, education
and compliance reporting 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 products. During the second quarter of 2000 we introduced our
Internet-based Healthcare Learning Center ("HLC") which provides organizations
with the ability to access our training and continuing education services over
the Internet. Our training software is hosted in a central data center that
allows end users Web access to HLC services, thereby eliminating the need for
onsite local installations of installed learning management products. The HLC
also provides tools that enable administrators to configure and modify training
materials, track performance and predict training expenses. Pricing for the HLC
is subscription based, with fees varying based on the number of users, content
provided and other factors. We also offer training and implementation 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.
Our installed learning management products are provided on a licensed 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.
In addition to our Internet-based HLC and installed learning management
products, 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 programmers, instructional and multimedia designers, graphic
artists, and project managers.
Our strategy includes focusing on expanding our services to existing customers,
focusing on growing our existing customer base of approximately 500 facilities
using the Internet-based HLC and converting our over 800 installed learning
management product customers to our Internet-based HLC. We believe our existing
sales force offers us the opportunity to grow our HLC customer base.
SERVICES TO PHARMACEUTICAL AND MEDICAL DEVICE COMPANIES
Our services to pharmaceutical companies and medical device companies include
live educational and promotional activities for healthcare professionals, as
well as online training for medical industry representatives. We also offer live
event development, coordination, and registration services. These services
include development of course agendas, coordination of subject matter experts,
preparation of course materials, and registration of attendees. Pricing for
online development and education 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.
We provide pharmaceutical and medical device companies with online development
and training services. Many pharmaceutical and medical device manufacturers
provide their employees or customers with interactive training. We have
full-service capabilities to develop course materials to a Web-enabled format
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.
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 the provision of training or 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
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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, and other peripheral services related to the event.
Commercial support 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. Commercial support revenues are typically based on
the size of the target audience, the content involved and the duration of the
arrangement.
Our strategy includes expanding our revenues by further developing these
relationships and by leveraging our existing base of Internet-based HLC
customers for deployment of pharmaceutical and medical device training.
ACQUISITIONS
We have made eight acquisitions over the past three years and has focused on
acquisitions that have added products or services, increased our customer base
and/or provided enabling technologies that are complementary to our existing
business. We believe we have recognized economies of scale through acquisitions
in markets in which we already had a presence. In addition, we have expanded our
product and service offerings by leveraging products that can operate on our
existing technology platform. Acquisitions completed during the last three
years, all of which were accounted for using the purchase method of accounting,
are as follows: de'MEDICI Systems ("de'MEDICI") in January 2001; SynQuest
Technologies, Inc. ("SynQuest") in September 2000; Education Design, Inc.
("Education Design") in July 2000; Emergency Medicine Internetwork, Inc. d/b/a
EMInet ("EMInet") in January 2000; Multimedia Marketing, Inc. d/b/a m3 the
Healthcare Learning Company ("m3") in January 2000; Quick Study, Inc. ("Quick
Study") in January 2000; KnowledgeReview, LLC ("KnowledgeReview") in January
2000; and SilverPlatter Education, Inc. in July 1999 ("SilverPlatter"). For
additional 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) and 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 MEDICAL DEVICE COMPANIES
- ------------------------ ------------------------ ------------------------
HCA Inc. Pfizer GE Medical Systems
Banner Health Systems Merck Cordis, a Johnson & Johnson Company
Pinnacle Health, Inc. Zimmer
Trinity Health, Novi, MI Stryker
Sutter Health
SALES, MARKETING, AND CUSTOMER SUPPORT
We market products and services primarily through our direct sales force. As of
December 31, 2001, our sales force consisted of approximately 40 employees based
at its corporate headquarters in Nashville, Tennessee and at other locations in
Denver, Colorado, and Raleigh, North Carolina 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 and expand relationships with pharmaceutical and medical device
companies. Our geographically disbursed 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, qualifying
sales leads, preparing proposals, and preparing sales contracts. We anticipate
minor growth in the sales force during 2002.
We conduct a variety of marketing programs to promote our products and services,
including trade shows, public relations, distribution of literature, direct
mail, online promotion and advertising. We also conduct geographically focused
meetings with target customers.
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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 approximately 20 employees located in our
offices in Nashville and Raleigh. We provide customer support to end users
through a toll-free telephone line as well as electronic mail. Our
representatives are trained to understand our philosophy and corporate culture
and our specific sales, marketing and support issues. We expect a decline in our
customer service team during 2002 as we consolidate this function in Nashville
and seek to gain greater operating efficiencies.
We have approximately ten additional personnel responsible for implementation of
HLC customers. We expect that our HLC implementation department will increase in
size in 2002 as we continue to grow our HLC customer base.
TECHNOLOGY MANAGEMENT
Our technology infrastructure is based on an open architecture and is 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, hosting and 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 by adding readily available hardware and
software components.
Our network infrastructure, Web site and servers delivering our services, are
hosted by a third party provider. This provider maintains our equipment in a
secure environment, including multiple redundancies in power sources and network
connections. Our provider's hosting center is connected to the Internet through
multiple, redundant high-speed fiber optic circuits. Monitoring of all servers,
networks and systems is performed by Company personnel on a continuous basis.
Together with 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 a daily basis. Data back-up
tapes are archived at a secure remote location on a weekly basis.
COMPETITION
The healthcare education industry is highly fragmented, varies significantly in
delivery methods (i.e., written materials, live events, satellite broadcasts,
video, CD-ROM products, and online products) 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 training results. The related results of these traditional methods,
both from a business and compliance standpoint, are difficult to track and
measure.
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We believe there are few competitors that currently offer comprehensive
e-learning solutions that are directly comparable to our services for the
healthcare industry. We believe our 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. We believe 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;
- ability to access and leverage an existing customer base to
increase exposure for pharmaceutical and medical device
companies;
- 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 collect information or 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, 2001, 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 increase our cost of conducting business 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"). 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 blood
borne 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 ("JCAHO"). JCAHO
imposes continuing education requirements on physicians that relate to each
physician's specific staff appointments. In addition, 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.
Continuing Education ("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 CE's may be
required of this category of nurses. On average, 12 to 15 CE's are required
annually, with reporting generally on a bi-annual basis.
Continuing Medical Education ("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 activities, 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
activities. 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. 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.
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THE U.S. FOOD AND DRUG ADMINISTRATION AND THE FEDERAL TRADE COMMISSION
Current FDA and FTC rules and enforcement actions and regulatory policies or
those that the FDA or the FTC may develop in the future could have a material
adverse effect on our ability to provide existing or future applications or
services to our end users or obtain the necessary corporate sponsorship to do
so. The FDA and the FTC regulate the form, content and dissemination of
labeling, advertising and promotional materials, including direct-to-consumer
prescription drug and medical device advertising, prepared by, or for,
pharmaceutical, biotechnology or medical device companies. The FTC regulates
over-the-counter drug advertising and, in some cases, medical device
advertising. Generally, regulated companies must limit their advertising and
promotional materials to discussions of the FDA-approved claims and, in limited
circumstances, to a limited number of claims not approved by the FDA. Therefore,
any information that promotes the use of pharmaceutical or medical device
products that is presented with our service is subject to the full array of the
FDA and FTC requirements and enforcement actions. We believe that banner
advertisements, sponsorship links, and any educational programs that lack
independent editorial control that we may present with our service could be
subject to FDA or FTC regulation. While the FDA and the FTC place the principal
burden of compliance with advertising and promotional regulations on the
advertiser, if the FDA or FTC finds that any regulated information presented
with our service violates FDA or FTC regulations, they may take regulatory
action against us or the advertiser or sponsor of that information. In 1996, the
FDA announced it would develop a guidance document expressing a broad set of
policies dealing with the promotion of pharmaceutical, biotechnology, and
medical device products on the Internet. Although the FDA has yet to issue that
guidance document, agency officials continue to predict its eventual release.
The FDA guidance document may reflect new regulatory policies that more tightly
regulate the format and content of promotional information on the Internet.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We obtain 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, 2001 we employed 211 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
- ---- --- --------
Robert A. Frist, Jr............ 34 Chief Executive Officer, President and Chairman of the Board of Directors
Arthur E. Newman............... 53 Senior Vice President and Chief Financial Officer
Michael Pote................... 40 Senior Vice President
Fred Perner.................... 48 Senior Vice President
Scott Portis .................. 35 Vice President of Technology
Robert H. Laird, Jr............ 34 Vice President, General Counsel and Secretary
Susan A. Brownie............... 37 Vice President of Finance and Corporate Controller
D. Robert Wiemer, Jr........... 33 Vice President
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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 HearingPlanet, Inc., an online hearing aid
distribution company, 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 serves on the board of directors
of HealthLeaders, Inc., a healthcare publisher. 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 in education and a Masters of
Science in education 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 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.
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.
D. Robert Wiemer, Jr. has served as vice president since January 2002. Since
joining the Company in June 1999, Mr. Wiemer served in several operational and
business development roles within the organization. He holds a Bachelor of
Engineering from Vanderbilt University and a Masters of Business Administration
from the University of Texas at Austin. From May 1995 until May 1999, Mr. Wiemer
worked for PhyCor, Inc., most recently as manager of operations.
8
RISK FACTORS
We believe that the risks and uncertainties described below and elsewhere in
this document are the principal material risks facing the 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
providers or partners; 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 Internet-based e-learning products and other
services vary significantly from our installed learning management 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 and
related infrastructure. We anticipate an expansion in end user traffic from our
Internet-based e-learning products and other services. To manage our growth, we
must successfully implement, constantly improve and effectively utilize our
operational and financial systems. 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.
9
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 our e-learning products 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.
WE MAY NOT BE ABLE TO MAINTAIN OUR COMPETITIVE POSITION AGAINST CURRENT AND
POTENTIAL COMPETITORS, ESPECIALLY THOSE WITH SIGNIFICANTLY GREATER FINANCIAL,
MARKETING, TECHNICAL AND OTHER RESOURCES.
Several of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than us, 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 us 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, our competitive position could
be adversely affected.
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
sales to new customers, further penetration and additional sales to existing
customers, and strategic acquisitions that complement or enhance our business.
During 1999 through 2001, we have consummated a number of acquisitions involving
multiple remote offices. We may have difficulty integrating the operations and
realizing the results of these 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 certain components of 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 OUR ABILITY TO SELL ADDITIONAL CONTENT
AND SERVICES TO EXISTING CUSTOMERS, AS WELL AS CONTINUING TO SELL TO NEW
CUSTOMERS.
We plan to grow our revenues by increasing our sales of content and other
services to existing customers as well as sell to new customers. Our
identification of additional content and services may not result in timely
development of complementary products. In addition, the success of certain new
products and services may be dependent on continued growth in our base of
Internet-based customers. Because healthcare training continues to change and
evolve, we may be unable to accurately predict and develop content and other
products to address the needs of the healthcare industry. Continued growth of
our Internet-based customer population is dependent on our ability to continue
to provide relevant products and services in a timely manner. The success of our
business will depend on our ability to continue providing our products and
services as well as continued content and product enhancements to address the
needs of the healthcare industry.
10
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 market and sale of additional services to existing customers 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.
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 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.
11
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. This variability results primarily from the differences in
revenue recognition for our various products and services. 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 2001, we had a net loss of approximately $19.6 million. At December 31, 2001,
our accumulated deficit was $48.8 million. We expect substantial net losses and
negative cash flow through at least 2002. 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 in connection with subscription Internet-based e-learning
products, content development, and commercial support 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 Internet-based e-learning
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 2002. However, we may need to raise additional funds in order
to:
- acquire complementary businesses, technology, 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, 2001, we had approximately $27.2 million in cash, cash
equivalents, restricted cash, investments and related interest receivable. In
addition, we have commitments of approximately $100,000 in 2002 due to certain
milestones related to agreements with content and development partners. These
commitments may increase over time as a result of competitive pressures. We
expect to incur approximately $1.5 to $2.0 million of capital expenditures
during 2002 to support our business. We expect operating losses and negative
cash flows to continue through at least 2002. 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
12
acceptable terms, our ability to fund 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.
RISKS RELATED TO SALES, MARKETING AND COMPETITION
WE EXPECT COMPETITION TO INCREASE 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 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
CONTENT PARTNERS MAY NOT SUPPORT OUR SERVICES, WHICH MAY RESULT IN REDUCED
COURSEWARE 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 content partners 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 courseware 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 three 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 effectively develop 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 October 2001, we renegotiated our agreement with HCA
Information Technology & Services, Inc. ("HCA") to provide our Internet-based
e-learning products to them over the next four years. HCA currently represents a
large portion of our INTERNET-BASED E-LEARNING 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
13
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 Web site 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,
earthquake, or other catastrophic loss 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. While our service providers have
planned for certain contingencies, the failure by any of these third parties to
provide these services satisfactorily and our inability to find suitable
replacements would impair our ability to access archives and operate our
systems.
WE MAY LOSE USERS AND LOSE REVENUES IF OUR ONLINE SECURITY MEASURES FAIL.
If the security measures that we use to protect personal information are
ineffective, we may lose users of our services, which could reduce our revenues.
We rely on security and authentication technology licensed from third parties.
With this technology, we perform real-time credit card authorization and
verification. We cannot predict whether these security measures could be
circumvented by new technological developments. In addition, our software,
databases and servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to spend significant
resources to protect against security breaches or to alleviate problems caused
by any breaches. We cannot assure you that we can prevent all security breaches.
14
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 OR CHANGE 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.
15
ITEM 2. PROPERTIES
Our principal executive offices are located in Nashville, Tennessee. Our lease
for approximately 31,000 square feet at this location expires in 2005. The lease
provides for two five-year renewal options. Rent at this location is
approximately $18,000 per month through May 2002; approximately $24,000 per
month through February 2004; and approximately $22,000 per month through April
2005.
As a result of our acquisition of m3, we are leasing approximately 6,000 square
feet of office space in Dallas, Texas. The lease expires on January 31, 2007 and
has a monthly rent of approximately $8,000. We are currently subleasing this
office space at the rate of approximately $6,000 per month to a third party for
the remaining lease term.
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 approximately $9,000 through June 30,
2003 and approximately $10,000 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 September 30, 2004 and has monthly rent of $5,702
through June 30, 2002; $5,873 through June 30, 2003; $6,050 through June 30,
2004; and $6,231 through September 30, 2004. We are currently seeking to
sublease this space as we consolidate operations in Nashville.
ITEM 3. LEGAL PROCEEDINGS
On November 17, 2000, a complaint was filed by Challenger Corporation in the
Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis
against us, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
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 prior to that date. The following table sets forth, for the
periods indicated, the high and low sales prices per share of our common stock
as reported on the Nasdaq National Market:
2000 HIGH LOW
- ---- ---- ---
Second Quarter (April 11 though June 30, 2000).......... $ 10.13 $ 3.63
Third Quarter........................................... 5.75 1.88
Fourth Quarter.......................................... 2.63 0.75
2001
- ----
First Quarter........................................... $ 2.00 $ 1.03
Second Quarter.......................................... 1.82 1.00
Third Quarter........................................... 1.70 1.05
Fourth Quarter.......................................... 1.50 0.86
On March 7, 2002, there were 254 registered holders and approximately 1,800
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
December 31, 2000:
- 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 underwriter was 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 December 31, 2001, we have used approximately
$24,000,000 of the net offering proceeds to fund general operating expenses,
acquisitions and other working capital needs.
17
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations data for the three-year period ended
December 31, 2001 and the balance sheet data as of December 31, 2001 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 balance sheet data as of December 31, 1999 and 1998 and the data for the
year ended December 31, 1997 are derived from audited financial statements that
are included in our initial filing on Form S-1 (Reg. No. 333-88939). 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
eight companies between 1999 and 2001. 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,
2001 2000 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues, net ........................................... $ 13,503 $ 9,652 $ 2,568 $ 1,716 $ 1,268
Operating costs and expenses:
Cost of revenues ...................................... 5,772 4,357 2,138 1,057 870
Product development ................................... 5,041 5,639 2,037 443 294
Sales, marketing, general and administrative expenses . 13,019 15,428 2,501 1,330 766
Depreciation and amortization ......................... 9,936 6,901 452 147 109
Office consolidation charge ........................... 401 -- -- -- --
Impairment of long-lived assets ....................... 712 -- -- -- --
-------- -------- -------- ------- -------
Total operating costs and expenses .................. 34,881 32,325 7,128 2,977 2,039
Loss from operations .................................... (21,378) (22,673) (4,560) (1,261) (771)
Other income (expense) .................................. 1,802 2,388 104 (329) (189)
-------- -------- -------- ------- -------
Net loss ................................................ $(19,576) $(20,285) $ (4,456) $(1,590) $ (960)
======== ======== ======== ======= =======
Net loss per share - basic and diluted .................. $ (0.98) $ (1.29) $ (1.19) $ (0.49) $ (0.29)
======== ======== ======== ======= =======
Weighted average shares of common stock
outstanding - basic and diluted ....................... 19,921 15,786 3,757 3,256 3,256
======== ======== ======== ======= =======
AT DECEMBER 31,
2001 2000 1999 1998 1997
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ............................... $ 4,747 $ 19,831 $ 13,632 $ 51 $ 84
Investments - short and long term ....................... 21,410 20,341 -- -- --
Working capital (deficit) ............................... 17,945 26,436 11,465 (2,854) (1,708)
Total assets ............................................ 49,247 70,452 17,455 1,153 948
Deferred revenue ........................................ 3,274 2,764 791 323 236
Long-term debt and capital leases, net of current portion 119 216 186 32 36
Shareholder's equity (deficit) .......................... 42,543 62,017 14,190 (2,285) (1,236)
18
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.
The following discussion provides an overview of our history together with a
summary of our revenue recognition policies, policy regarding impairment of
long-lived assets, and the significant current year transactions. Our critical
accounting policies include revenue recognition, impairment of long-lived
assets, accounting for strategic alliances and acquisitions.
OVERVIEW AND CRITICAL ACCOUNTING POLICIES
HealthStream was incorporated in 1990 and began marketing its Internet-based
solutions in March 1999. The Company evolved from an initial focus of providing
multimedia tools for information dissemination to a facilitator of training
tools for entities in the healthcare industry. Revenues from the healthcare
organization business unit are derived from the following categories: provision
of services through our Internet-based e-learning products, content
subscriptions, licensing, maintenance and support of installed learning
management products, content subscriptions, custom content development, and a
variety of online and enduring products. Revenues from the pharmaceutical and
medical device companies are derived from live event development, coordination,
and registration services, Web cast events, online development and training, and
other educational and training services.
Internet-based e-learning products and content subscriptions are provided on a
per person subscription basis with fees ranging from over $1 to more than $6 per
month, based on the size of the facility and the content offerings. Contracts
for e-learning products 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 Internet-based e-learning products
are recognized ratably over the term of the service agreement. The Company also
offers training services for HLC 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 content
subscription services ratably over the subscription period and recognize revenue
for transaction-based online course sales when the course is delivered. Training
revenues are generally recognized upon completion of training services. Late in
1999, we began entering into arrangements that provide for commercial support of
online courseware. Such revenue is recognized ratably over the term unless usage
exceeds the ratable portion. As discussed in "Risk Factors" above, revenue
recognition policies for Internet-based e-learning products and other services
vary significantly from our installed learning management products.
Revenues from installed learning management products 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 products may be subject to fluctuations because
purchases 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
generally recognized upon completion of training services. We recognize custom
content development revenues based on the percentage of a project that is
completed.
We recognize revenue from live event development and coordination 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.
19
We accounted for long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," ("Statement 121") through
December 31, 2001. In accordance with Statement 121, we reviewed internal and
external factors to determine whether events or changes in facts and
circumstances were present and indicative of an impairment of long-lived assets.
This review included estimates of future cash flows related to such long-lived
assets. As discussed in Notes 1 and 5 to the Consolidated Financial Statements,
we recorded a charge of approximately $712,000 related to impairment of
long-lived assets during the year ended December 31, 2001. As discussed further
in Note 1 to the Consolidated Financial Statements, Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," will be adopted as of January 1, 2002.
Effective October 1, 2001, we entered into a new four-year agreement with HCA,
replacing the prior agreement with Columbia Information Systems, Inc. that had
approximately two and one half years remaining. Together with HCA, we mutually
agreed to cancel the warrant held by CIS Holdings, Inc., an affiliate of HCA, to
purchase our common stock. As a result, we are no longer amortizing the
remaining cost of the warrant as a reduction of revenues. See Note 4 of the
Consolidated Financial Statements for additional information. Revenues through
September 2001, provided under the prior service agreement that included the
grant of the warrant to CIS Holdings, Inc., were recognized as services were
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.
We expect to continue to generate revenues by marketing our Internet-based
products and services to healthcare workers through healthcare organizations. We
expect that the portion of our revenues related to services provided via our
Internet-based e-learning products 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 Internet-based e-learning 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 Internet-based e-learning 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, we entered into a five-year agreement with WebMD Corporation,
formerly Healtheon/WebMD, ("WebMD"). The agreement provided that we 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 in exchange for certain guaranteed
payments. WebMD also purchased $10.0 million of our common stock in a private
sale that closed concurrently with our IPO. During 2000, we expensed and paid
WebMD $1.5 million. At December 31, 2000, we accrued but did not pay royalties
related to this agreement of $1.5 million. On January 5, 2001, we terminated the
prior agreement with WebMD and set forth a new business arrangement. Under the
new, non-exclusive three-year agreement, we 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 is 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:
de'MEDICI Systems. On January 26, 2001, we acquired substantially all of the
assets of de'MEDICI Systems ("de'MEDICI"), a business unit of Lippincott
Williams & Wilkins, Inc., for approximately $330,000 in cash and 181,250 shares
of the Company's common stock. de'MEDICI provided computer based education and
training to over 230 hospitals and healthcare organizations.
SynQuest Technologies, Inc. On September 18, 2000, we acquired substantially all
of the assets of SynQuest Technologies, Inc. ("SynQuest") for 787,087 shares of
our 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 learning management
product and Internet-based e-learning revenues.
Education Design, Inc. On July 1, 2000, we acquired substantially all of the
assets of Education Design, Inc. ("EDI") for $3.0 million in cash and 184,421
shares of our common stock. In addition, approximately $300,000 of cash and
31,711 shares of our 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 EDI
business generates live event development, coordination, and registration
revenues.
20
EMINet, Inc. On January 28, 2000, we 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 our common stock. In addition, we issued 2,170 additional
shares of our common stock based on post acquisition events. EMInet sold online
medical education content to emergency medical services personnel. The EMInet
business generates revenues related to sales of subscription products.
m3 the Healthcare Learning Company. On January 28, 2000, we 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 our common stock. m3 provided interactive, multimedia
education and training solutions to hospitals and other healthcare
organizations. The m3 business generates installed learning management product
and Internet-based e-learning revenues.
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. The Quick Study business generates installed learning
management product and Internet-based e-learning product 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.
As a result of the acquisitions, we have recorded goodwill of $18.3 million and
$6.9 million of other acquisition intangibles at December 31, 2001. Goodwill and
intangibles, net of accumulated amortization, represented 24.1% and 25.6% of
total assets and 27.9% and 29.1% of total shareholders' equity at December 31,
2001 and 2000, respectively. Our weighted average amortization period is 3.5
years. As discussed in Note 1 to the Consolidated Financial Statements, we
expect amortization expense to decline during 2002 as a result of new accounting
standards.
We expect to continue to transition m3, SynQuest, and de'MEDICI customers from
existing platforms to our Internet-based e-learning products, and therefore
expect that revenues will remain comparable or improve when compared to the
annual maintenance fees with increases related to sales of additional content
and courseware.
To date, we have incurred substantial costs to develop our technologies, create,
license and acquire our content, build brand awareness, develop our
infrastructure and expand our business, and have yet to achieve significant
revenues or generate positive operating cash flows. 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 2002, as we continue to expand
our business and develop synergies with the companies we have acquired. These
costs could have a material adverse effect on our future financial condition or
operating results. We believe that period-to-period comparisons of our financial
results are not necessarily meaningful, and you should not rely upon them as an
indication of our future performance.
RESULTS OF OPERATIONS
REVENUES AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses apply to
the comparison of results of operations. As discussed in Note 1 to the
Consolidated Financial Statements, we began producing discrete financial
information under two reportable segments during 2001 - healthcare organizations
and professionals ("HCO") and pharmaceutical and medical device companies
("PMD"). As a result of this change, we have provided 2001 information for these
segments and have provided comparative 2000 information to the extent such
information was prepared.
Revenues. Revenues currently consist of the provision of services through our
Internet-based e-learning products, the licensing of our installed learning
management products, maintenance and support services, content subscriptions,
online development, Web cast events, live event development, coordination, and
registration services, online products and commercial support, sale of online
enduring products and training services.
21
Cost of Revenues. Cost of revenues consists primarily of salaries and employee
benefits, materials, hosting costs, and other direct expenses associated with
revenues 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, 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.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions and employee benefits, advertising, promotions, and
related marketing costs.
Other General and Administrative Expenses. Other general and administrative
expenses consist primarily of salaries and employee benefits, facility costs and
fees for professional services.
Depreciation and Amortization. Depreciation and amortization consist of fixed
asset depreciation, amortization of intangibles and amortization of content,
license fees, and royalties paid to content providers that are of a fixed
nature.
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.
2001 COMPARED TO 2000
Revenues. Revenues increased approximately $3.8 million, or 39.9%, to $13.5
million for 2001 from approximately $9.7 million for 2000. Revenues for 2001
consisted of $8.0 million for HCO and $5.5 million for PMD. In 2000, revenues
consisted of $5.8 million for HCO and $3.9 million for PMD. The growth in HCO
revenues over 2000 related primarily to growth in our Internet-based learning
network, while PMD increases resulted primarily from live event development,
coordination and registration services associated with the full year impact of
the acquisition of EDI. We expect HCO revenues to increase during 2002 as a
result of continued growth in Internet-based e-learning product revenues as well
as due to the elimination of warrant expense as a reduction of revenues. We
expect HCO revenues associated with the installed learning management products
to decline as customers continue to transition to the Internet-based e-learning
products. We expect PMD revenues to grow as well primarily due to increased
penetration of live event business. Revenues for 2001 and 2000 are presented net
of warrant expense of approximately $1.5 million and $1.0 million, respectively.
During 2001, 26.7% of revenues related to live event development, coordination
and registration services, 19.3% related to maintenance and support fees for our
installed learning management products, 14.9% related to our Internet-based
e-learning products, 12.7% related to other transactions and product sales
(including commercial support), 11.3% related to online development services,
10.9% related to our installed learning management product licensing fees and
4.2% related to Web cast events. During 2000, 29.6% of revenues related to our
installed learning management product licensing fees, 18.0% related to live
event development, coordination and registration services, 14.5% related to
maintenance and support fees for our installed learning management products,
14.0% related to other transactions and product sales (including commercial
support), 13.9% related to online development services, 5.6% related to Web cast
events, and 4.4% related to Internet-based e-learning products. We expect
revenues to continue to increase during 2002.
Cost of Revenues. Cost of revenues increased approximately $1.4 million, or
32.5%, to $5.8 million for 2001 from approximately $4.4 million for 2000. The
increase was primarily due to additional personnel associated with
implementation of Internet-based e-learning products, higher direct costs
associated with live event development, coordination and registration services
and growth in other direct expenses that increase along with related revenues.
As a percentage of revenues, cost of revenues decreased to 42.7% for 2001 from
45.1% for 2000. This decrease as a percentage of revenues resulted from lower
costs associated with installed learning management products and lower fixed
costs associated with Internet-based e-learning products. We expect that cost of
revenues will increase during 2002, but decrease as a percentage of revenues as
Internet-based e-learning product revenues increase. This change is attributable
to the fact that a large component of the costs associated with the
Internet-based e-learning products are of a fixed nature. Cost of goods
approximated 33% of revenues for HCO and 55% of revenues for PMD during 2001. We
expect costs of goods to decrease as a percentage of revenues for HCO in 2002 as
a result of continued growth in revenues associated with Internet-based
e-learning products. We expect cost of goods to increase as a percentage of
revenues during 2002 for PMD as a result of additional personnel associated with
new product teams.
22
Product Development. Product development expenses decreased approximately $0.6
million, or 10.6%, to $5.0 million for 2001 from approximately $5.6 million for
2000. As a percentage of revenues, product development expenses decreased to
37.3% for 2001 from 58.4% for 2000. This decrease was due primarily to lower
installed learning management product support costs. We expect product
development expenses to increase slightly during 2002, but to decrease as a
percentage of revenues, as a result of continued reductions in installed
learning product maintenance and content development during 2002, which we
expect to be offset by investments in new product development. Such new product
efforts may be somewhat mitigated by capitalization of new product developments
if such investments result in technologically feasible products during 2002.
Product development expenses as a percentage of revenues approximated 34% for
HCO and 19% for PMD in 2001.
Sales and Marketing Expenses. Sales and marketing expenses, including personnel
costs, increased by $0.1 million, or 1.8%, to $5.9 million in 2001 from $5.8
million in 2000. The increase related primarily to an increase of $0.7 million
related to personnel costs associated with additional sales personnel and the
full year impact of the SynQuest acquisition in September 2000 as well as
increased commissions associated with new contract value in 2001. This increase
was partially offset by a decrease of $0.6 million associated with lower
advertising and marketing spending in 2001. As a percentage of revenues, sales
and marketing expenses decreased to 43.7% in 2001 from 60.0% in 2000. We expect
sales and marketing expenses to increase during 2002, but decrease as a
percentage of revenues. Sales and marketing as a percentage of revenues
approximated 58% for HCO and 23% for PMD for 2001. During 2002, we expect sales
and marketing for HCO to remain fairly consistent with 2001 levels, but to
decrease as a percentage of revenues as revenues continue to grow. For PMD, we
expect sales and marketing to increase both in total and as a percentage of
revenues as we focus on further penetration of existing customer relationships
and introduction of new products.
Depreciation and Amortization. Depreciation and amortization increased by $3.0
million, or 44.0%, to $9.9 million for 2001 from $6.9 million for 2000. The
increase consisted of a $2.2 million increase in amortization, primarily
associated with the 2001 acquisition of de'MEDICI and the full year impact of
the 2000 acquisitions of SynQuest and EDI. The depreciation increase of $0.8
million related to the impact of fixed asset additions associated with the
acquisitions and those added in the normal course of business. As discussed in
Note 1 to the Consolidated Financial Statements, we expect amortization expense
to decline during 2002 as a result of new accounting standards. While
depreciation will increase as a result of capital expenditures during 2002,
amortization will decrease as a result of the elimination of goodwill
amortization upon the adoption of new accounting standards. Depreciation and
amortization for both HCO and PMD is expected to decline in 2002 both in total
and as a percentage of revenues as a result of implementation of new accounting
standards.
Other General and Administrative. Other general and administrative expenses
decreased approximately $2.5 million, or 26.1%, to approximately $7.1 million
for 2001 from approximately $9.6 million for 2000. As a percentage of revenues,
other general and administrative expenses decreased to 52.8% for 2001 from 99.9%
for 2000. The decrease is attributable to a $1.5 million gain on the
renegotiation of the WebMD agreement during 2001 as well as the elimination of
$3.0 million in fixed royalties incurred during 2000 associated with the WebMD
arrangement. The gain and decline in fixed royalties were somewhat offset by the
full year impact of the SynQuest and EDI acquisitions, which resulted in
additional administrative personnel and facility expenses. The impact of these
acquisitions was partially mitigated by the consolidation of offices and
administrative functions during 2001. We expect other general and administrative
expenses to decline during 2002 both in total and as a percentage of revenues,
primarily as a result of actions taken to consolidate functions during 2001.
Other general and administrative expenses as a percentage of revenues
approximated 38% for HCO and 16% for PMD during 2001. We expect other general
and administrative expenses for HCO to decline in total and as a percentage of
revenues during 2002 as a result of consolidation of facilities and duplicative
functions. We expect other general and administrative expenses for PMD to remain
consistent between 2001 and 2002 in total but to decline as a percentage of
revenues as revenues continue to increase.
Office Consolidation Charge. The Company recorded a non-recurring office
consolidation charge in 2001, totaling approximately $400,000, as a result of
closure of its Dallas and Boston offices. The charge consisted of lease
obligations in excess of estimated sublease income and impairment of certain
fixed assets. The closure of these facilities resulted from the Company's
efforts to consolidate facilities and eliminate duplicative tasks in order to
maximize economies of scale within the organization.
Impairment of Long-lived Assets. The Company recorded an impairment charge in
2001 totaling approximately $700,000. Approximately $400,000 of the impairment
related to prepaid content development fees for which the future estimated cash
flows exceeded the anticipated future revenues to be generated from the content.
In addition, we recognized a loss of approximately $300,000 related to fixed
assets that will not be used in future operations. The assets were written down
to
23
their estimated fair value, less costs to sell.
Other Income/Expense. Other income decreased $0.6 million, or 24.6%, to
approximately $1.8 million for 2001 from approximately $2.4 million for 2000.
The decrease was primarily due to a reduction of interest income from
investments. We expect other income to continue to decrease during 2002
primarily due to cash used in operations.
Net Loss. Net loss decreased approximately $0.7 million, or 3.5%, to
approximately $19.6 million for 2001 from approximately $20.3 million for 2000
due to the factors mentioned above.
2000 COMPARED TO 1999
Revenues. Revenues increased approximately $7.1 million, or 275.9%, to
approximately $9.7 million for 2000 from approximately $2.6 million for 1999.
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 Internet-based e-learning products and Web cast events. During 2000, 44.1%
related to our installed learning management product licensing fees and related
services, 18.0% related to live event development, coordination, and
registration services, 14.0% related to other transactions and product sales
(including commercial support), 13.9% of revenues related to online development
services, 5.6% related to Web cast events, and 4.4% related to Internet-based
e-learning products. During 1999, 48.9% of revenues related to development
services, 26.3% related to other transactions and product sales and 24.8%
related to installed learning management product licensing fees and related
services. Revenues for Internet-based e-learning products 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 $2.2 million, or
105.6%, to approximately $4.4 million for 2000 from approximately $2.1 million
for 1999. 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 to 45.1% for 2000 from 82.2% for 1999. This
decrease as a percentage of revenues resulted from lower fixed costs as a
percentage of revenues related to the acquired businesses and new Internet-based
e-learning and Web cast services in 2000.
Product Development. Product development expenses increased approximately $3.6
million, or 176.8%, to approximately $5.6 million for 2000 from approximately
$2.0 million for 1999. 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 to 58.4% for 2000 from 79.3% for 1999. The
decrease as a percentage of revenues was due to growth in revenues, despite
continued growth in product development.
Sales and Marketing Expenses. Sales and marketing expenses, including personnel
costs, increased approximately $4.8 million, or 478.1%, to approximately $5.8
million for 2000 from approximately $1.0 million for 1999. 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. As a percentage of revenues, sales and marketing expenses
increased to 60.0% in 2000 from 38.9% in 1999.
Depreciation and Amortization. Depreciation and amortization expenses increased
by approximately $6.4 million, or 1,425.8%, to approximately $6.9 million for
2000 from $452,000 for 1999. 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 $1.0
million related to increases in depreciation attributable to the acquisitions
and fixed asset additions in both 2000 and 1999 as well as increases in
amortization of fixed royalties in 2000.
Other General and Administrative. Other general and administrative expenses
increased by approximately $8.1 million, or 535.1%, to approximately $9.6
million for 2000 from approximately $1.5 million for 1999. 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
24
costs of being a public company. The additional personnel related to the
acquired businesses as well as personnel to provide the infrastructure required
by the growth experienced during 2000.
Other Income/Expense. Other income and expense increased approximately $2.3
million, or 2,206.9%, to approximately $2.4 million for 2000 from $100,000 for
1999. The increase was primarily due to interest income related to the
investment of the IPO proceeds. Other expense decreased due to the repayment and
conversion of all outstanding indebtedness, other than capital leases, in
connection with our initial public offering ("IPO").
Net Loss. Net loss increased approximately $15.8 million, or 355.2%, to
approximately $20.3 million for 2000 from approximately $4.5 million for 1999
due to the factors described above.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statement of operations data for the
eight quarters ended December 31, 2001 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,
2001 2001 2001 2001
--------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues .................................. $ 3,054 $ 3,523 $ 3,078 $ 3,848
Operating costs and expenses:
Cost of revenues ........................ 1,626 1,175 1,281 1,690
Product development ..................... 1,203 1,284 1,263 1,290
Sales and marketing ..................... 1,408 1,549 1,422 1,515
Depreciation and amortization ........... 2,410 2,475 2,528 2,523
Other general and administrative expenses 1,373 2,223 1,767 1,762
Office consolidation charge ............. -- 401 -- --
Impairment of long-lived assets ......... -- -- -- 712
-------- -------- -------- --------
Total operating costs and expenses ... 8,020 9,107 8,261 9,492
Loss from operations ...................... (4,966) (5,584) (5,183) (5,644)
Other income .............................. 585 376 395 446
-------- -------- -------- --------
Net loss .................................. $ (4,381) $ (5,208) $ (4,788) $ (5,198)
======== ======== ======== ========
Net loss per share - basic and diluted .... $ (0.22) $ (0.26) $ (0.24) $ (0.26)
======== ======== ======== ========
Weighted average shares of common stock
outstanding - basic and diluted ........ 19,968 19,655 19,846 20,068
======== ======== ======== ========
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 ........................ 780 1,093 1,079 1,405
Product development ..................... 1,190 1,238 1,617 1,594
Sales and marketing ..................... 1,073 1,537 1,243 1,938
Depreciation and amortization ........... 1,083 1,578 1,871 2,370
Other general and administrative expenses 1,002 2,763 3,249 2,623
-------- -------- -------- --------
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 .............................. 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
======== ======== ======== ========
25
QUARTER ENDED
-------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
--------------------------------------------------------
(% OF REVENUES)
STATEMENT OF OPERATIONS DATA:
Revenues .................................. 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenues ........................ 53.3 33.3 41.6 43.9
Product development ..................... 39.4 36.5 41.0 33.5
Sales and marketing ..................... 46.1 43.9 46.2 39.4
Depreciation and amortization ........... 78.9 70.3 82.1 65.5
Other general and administrative expenses 44.9 63.1 57.4 45.8
Office consolidation charge ............. -- 11.4 -- --
Impairment of long-lived assets ......... -- -- -- 18.5
------- -------- -------- --------
Total operating costs and expenses ... 262.6 258.5 268.3 246.6
Loss from operations ...................... (162.6) (158.5) (168.3) (146.6)
Other income .............................. 19.2 10.7 12.8 11.6
------- -------- -------- --------
Net loss .................................. (143.4) (147.8) (155.5) (135.0)
======= ======== ======== ========
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 ........................ 54.0 49.7 39.5 42.9
Product development ..................... 82.4 56.3 59.2 48.6
Sales and marketing ..................... 74.3 69.8 45.5 59.2
Depreciation and amortization ........... 75.0 71.7 68.5 72.3
Other general and administrative expenses 69.3 125.5 119.1 80.0
------- -------- -------- --------
Total operating costs and expenses ... 355.0 373.0 331.8 303.0
Loss from operations ...................... (255.0) (273.0) (232.0) (203.0)
Other income .............................. 12.4 20.5 39.0 21.2
------- -------- -------- --------
Net loss .................................. (242.6) (252.5) (193.0) (181.8)
======= ======== ======== ========
26
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
As discussed above, we acquired de'MEDICI on January 26, 2001, SynQuest on
September 18, 2000, EDI effective July 1, 2000, and m3, EMInet, KnowledgeReview
and Quick Study during January 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, and 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. During the second quarter of 2001, the Company closed two
office locations and recorded a one-time office consolidation charge. Further,
during our evaluation of long-lived assets in the fourth quarter of 2001, we
recorded an impairment charge (See Note 5 to the Consolidated Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations largely through proceeds
from our 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 $9.7 million in 2001 and
$14.6 million in 2000. Cash used in operating activities during 2001 related to
the $19.6 million net loss, increases in accounts and unbilled receivables,
prepaid development fees, deferred revenue and decreases in prepaid expenses and
other current assets, other assets, and accrued liabilities. These operating
uses of cash were offset by the $1.5 million gain on the WebMD renegotiation,
non-cash warrant expense of $1.5 million, office consolidation charge of $0.4
million, impairment charges of $0.7 million, depreciation and amortization,
provision for doubtful accounts, as well as other non-cash expenses. Cash used
in operating activities during 2000 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 $3.1 million in 2001 and
$30.5 million in 2000. Cash used in investing activities during 2001 was
primarily related to the purchase of investments of $11.3 million, property and
equipment of $1.6 million, issuance of a note receivable of $0.2 million, and
the acquisition of de'MEDICI Systems of $0.3 million, which were offset by the
sale and redemption of investments of $10.1 million and the $0.1 million
received for the repayment of a note. Cash used in investing activities during
2000 was primarily for the purchase of investments of $20.7 million, property
and equipment of $3.1 million and the acquisitions made in 2000 of $6.8 million,
partially offset by the receipt of $0.1 million of cash from the sale of
investments by the Company.
Cash used in financing activities was approximately $2.3 million in 2001 and
cash provided by financing activities was approximately $51.2 million in 2000.
Cash used in financing activities during 2001 related to the repurchase of
1,111,111 shares of common stock from WebMD for $2.0 million and $0.3 million
related to payments under capital lease obligations. Cash provided by financing
activities in 2002 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, 2001, our primary source of liquidity was $27.2 million of
cash and cash equivalents, restricted cash, investments, and related interest
receivable. We have no bank credit facility or other indebtedness other than
capital lease obligations. As of February 28, 2002, we had cash and cash
equivalents, restricted cash, investments, and related interest receivable of
approximately $25.2 million.
27
We believe that the net proceeds from the IPO and the preceding private
offerings received during 2000 will be sufficient to meet anticipated cash needs
for working capital, new product development, capital expenditures, and
acquisitions for at least the next 12 months. Our growth strategy may also
include acquiring companies that complement our products and services. We
anticipate that these acquisitions, if any, will be effected through a
combination of stock and cash consideration. Failure to generate sufficient cash
flow from operations or raise additional capital when required during or
following that period in sufficient amounts and on terms acceptable to us could
harm our business, results of operations and financial condition.
COMMITMENTS AND CONTINGENCIES
In connection with our October 2001 agreement with HCA, HCA will pay us minimum
revenues of $12.0 million over the four-year term of the agreement. We expect
that our capital expenses will be approximately $1.5 to $2.0 million in 2002.
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, our commitments for variable
payments approximate $100,000 related to agreements under which other companies
have agreed to provide content development services for us. In addition to these
commitments, our lease obligations outlined in Note 11 to the Consolidated
Financial Statements include approximately $870,000 in 2002, $680,000 in 2003,
$610,000 in 2004, $260,000 in 2005, $100,000 in 2006 and $10,000 thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("Statement
141") and No. 142, "Goodwill and Other Intangible Assets" ("Statement 142").
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets arising from business combinations completed after June 30,
2001. Statement 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives. Statement 142 requires that these assets be
reviewed for impairment at least annually. Intangible assets with finite lives
will continue to be amortized over their estimated useful lives.
We will apply Statement 142 beginning January 1, 2002. While we have not
completed the assessment of the impact of the Statement, application of the
non-amortization provisions of the Statement would result in a decrease in net
loss of approximately $5.4 million ($0.27 per share) per year. This estimate is
based on our current level of amortization expense for intangibles with
indefinite lives and the current weighted average shares outstanding. During
2002, we will perform the test for goodwill impairment using the two-step
process described in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount, if any, of impairment. We
expect to perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets during the first six months of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle as of
January 1, 2002. We have not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"). Statement 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. Statement 144 will be adopted as of
January 1, 2002. We have reviewed the provisions of Statement 144, and believe
that upon adoption, the Statement will not have a significant effect on our
consolidated financial statements. The Statement supersedes FASB Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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,
2001, we had no outstanding indebtedness other than approximately $245,000 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, 2001, the
Company had cash and investments totaling approximately $27.2 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 $272,000.
28
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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........................... 31
Consolidated Balance Sheets................................................. 32
Consolidated Statements of Operations....................................... 33
Consolidated Statements of Shareholders' Equity (Deficit)................... 34
Consolidated Statements of Cash Flows....................................... 36
Notes to Consolidated Financial Statements.................................. 38
30
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, 2001 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, 2001. 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, 2001 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,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 2, 2002, except for
Note 15, as to which the
date is March 15, 2002
31
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 4,747,434 $ 19,830,572
Short term investments .......................................................... 12,701,086 7,451,450
Restricted cash ................................................................. 520,184 794,342
Interest receivable ............................................................. 537,585 578,534
Accounts receivable, net of allowance for doubtful accounts of
$288,000 and $198,000 at December 31, 2001 and December 31, 2000, respectively 3,776,635 3,957,149
Accounts receivable - unbilled .................................................. 566,069 49,600
Prepaid development fees ........................................................ 1,030,843 695,427
Other prepaid expenses and other current assets ................................. 649,543 1,297,526
------------ ------------
Total current assets ......................................................... 24,529,379 34,654,600
Property and equipment:
Furniture and fixtures .......................................................... 990,992 883,660
Equipment ....................................................................... 4,566,342 3,893,720
Fixed assets in progress ........................................................ -- 117,000
Leasehold improvements .......................................................... 1,111,360 885,630
------------ ------------
6,668,694 5,780,010
Less accumulated depreciation and amortization .................................. (2,974,347) (1,505,004)
------------ ------------
3,694,347 4,275,006
Intangible assets, net of accumulated amortization of $13,301,000 and
$5,847,000 at December 31, 2001 and December 31, 2000, respectively ............. 11,873,155 18,024,526
Investments ........................................................................ 8,709,003 12,889,674
Notes receivable - related party ................................................... 215,000 --
Other assets ....................................................................... 225,760 607,770
------------ ------------
Total assets ....................................................................... $ 49,246,644 $ 70,451,576
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 889,254 $ 1,150,996
Accrued liabilities ............................................................. 943,616 1,278,422
Accrued compensation and related expenses ....................................... 717,200 441,484
Accrued royalties ............................................................... -- 1,500,000
Registration liabilities ........................................................ 633,788 794,342
Deferred revenue ................................................................ 3,273,825 2,764,235
Current portion of capital lease obligations .................................... 126,733 288,831
------------ ------------
Total current liabilities .................................................... 6,584,416 8,218,310
Capital lease obligations, less current portion .................................... 118,769 216,072
Commitments and contingencies ...................................................... -- --
Shareholders' equity:
Common stock, no par value, 75,000,000 shares
authorized at December 31, 2001 and 2000, respectively;
20,372,542 and 21,242,312 shares issued and outstanding at
December 31, 2001 and 2000, respectively ..................................... 91,275,282 91,221,775
Accumulated other comprehensive income .......................................... 79,240 30,556
Accumulated deficit ............................................................. (48,811,063) (29,235,137)
------------ ------------
Total shareholders' equity ................................................... 42,543,459 62,017,194
------------ ------------
Total liabilities and shareholders' equity ................................... $ 49,246,644 $ 70,451,576
============ ============
See accompanying notes to the consolidated financial statements.
32
HEALTHSTREAM, INC. CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
Revenues, net of warrant expense of $1,489,933 in 2001
and $991,693 in 2000 .............................. $ 13,503,307 $ 9,651,775 $ 2,567,868
Operating costs and expenses:
Cost of revenues .................................. 5,772,320 4,356,819 2,138,252
Product development ............................... 5,040,407 5,639,422 2,037,272
Sales and marketing ............................... 5,894,580 5,790,941 1,001,755
Depreciation ...................................... 1,756,401 920,504 239,248
Amortization ...................................... 8,179,835 5,980,524 213,032
Other general and administrative expenses ......... 7,124,247 9,637,327 1,498,248
Office consolidation charge ....................... 400,678 -- --
Impairment of long-lived assets ................... 712,344 -- --
------------ ------------ -----------
Total operating costs and expenses ............. 34,880,812 32,325,537 7,127,807
------------ ------------ -----------
Loss from operations ................................. (21,377,505) (22,673,762) (4,559,939)
------------ ------------ -----------
Other income (expense):
Interest and other income ......................... 2,019,720 2,420,375 312,324
Realized (loss) gain on investments ............... (99,920) 94,438 --
Interest expense - related parties ................ -- (34,255) (193,059)
Interest expense .................................. (49,566) (92,097) (12,041)
Loss on disposal of assets ........................ (68,655) -- (3,689)
------------ ------------ -----------
1,801,579 2,388,461 103,535
------------ ------------ -----------
Net loss ............................................. $(19,575,926) $(20,285,301) $(4,456,404)
============ ============ ===========
Net loss per share:
Basic and diluted ................................. $ (0.98) $ (1.29) $ (1.19)
============ ============ ===========
Weighted average shares of common stock outstanding:
Basic and diluted ................................. 19,920,521 15,785,946 3,756,556
============ ============ ===========
See accompanying notes to the consolidated financial statements.
33
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, 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 loss ................... -- -- -- -- -- --
Exercise of stock options ............ 801,997 600,786 -- -- -- --
Issuance of common stock in
acquisitions ...................... 2,209,953 12,949,437 -- -- -- --
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 -- -- -- --
Net loss ............................. -- -- -- -- -- --
Unrealized gain on investment, net of
reclassification adjustment and tax -- -- -- -- -- --
Comprehensive loss ................... -- -- -- -- -- --
Exercise of stock options ............ 8,700 10,557 -- -- -- --
Issuance of common stock in
acquisitions ...................... 181,250 300,186 -- -- -- --
Issuance of common stock to Employee
Stock Purchase Plan ............... 53,606 56,956 -- -- -- --
Repurchase of shares in connection
with WebMD renegotiation .......... (1,111,111) (1,981,444) -- -- -- --
Cancellation of restricted stock ..... (2,215) -- -- -- -- --
Valuation of WebMD repurchase right .. -- 120,000 -- -- -- --
Issuance of stock options to
advisory boards ................... -- 57,319 -- -- -- --
Recognition of warrant expense ....... -- 1,489,933 -- -- -- --
----------- ------------ ------- --------- ----------- -----------
Balance at December 31, 2001 ......... 20,372,542 $ 91,275,282 -- $ -- -- $ --
=========== ============ ======= ========= =========== ===========
34
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
ACCUMULATED
SERIES C OTHER
CONVERTIBLE COMPREHENSIVE TOTAL
PREFERRED STOCK ACCUMULATED INCOME SHAREHOLDERS
SHARES AMOUNT DEFICIT (LOSS) EQUITY (DEFICIT)
------ ------ ------- ------ ----------------
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 loss ...................... -- -- -- -- (20,213,055)
------------
Exercise of stock options ............... -- -- -- -- 600,786
Issuance of common stock in acquisitions -- -- -- -- 12,949,437
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
Net loss ................................ -- -- (19,575,926) -- (19,575,926)
Unrealized gain on investment, net of
reclassification adjustment and tax .. -- -- -- 48,684 48,684
-------- ------------
Comprehensive loss ...................... -- -- -- -- (19,527,242)
------------
Exercise of stock options ............... -- -- -- -- 10,557
Issuance of common stock in acquisitions -- -- -- -- 300,186
Issuance of common stock to Employee
Stock Purchase Plan .................. -- -- -- -- 56,956
Repurchase of shares in connection with
WebMD renegotiation .................. -- -- -- -- (1,981,444)
Cancellation of restricted stock ........ -- -- -- -- --
Valuation of WebMD repurchase right ..... -- -- -- -- 120,000
Issuance of stock options to advisory
boards ............................... -- -- -- -- 57,319
Recognition of warrant expense .......... -- -- -- -- 1,489,933
-------- ----------- ------------ -------- ------------
Balance at December 31, 2001 ............ -- $ -- $(48,811,063) $ 79,240 $ 42,543,459
======== =========== ============ ======== ============
See accompanying notes to the consolidated financial statements.
35
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES:
Net loss ........................................................... $(19,575,926) $(20,285,301) $ (4,456,404)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ................................................. 1,756,401 920,504 239,248
Amortization of intangibles, content fees, fixed royalties,
and prepaid compensation ................................ 8,179,835 5,980,524 213,032
Gain on WebMD renegotiation .................................. (1,500,000) -- --
Realized loss/(gain) on investments .......................... 99,920 (94,438) --
Office consolidation charge .................................. 400,678 -- --
Impairment of long-lived assets .............................. 712,344 -- --
Provision for doubtful accounts .............................. 150,000 85,000 6,250
Loss on disposal of assets ................................... 68,655 -- 3,689
Noncash warrant expense ...................................... 1,489,933 991,693 --
Noncash compensation expense ................................. 57,319 45,900 30,560
Noncash product development expense .......................... -- -- 748,343
Changes in operating assets and liabilities, excluding effects
of acquisitions:
Accounts and unbilled receivables .......................... (562,758) (1,483,246) (65,045)
Restricted cash ............................................ 274,158 (141,082) --
Interest receivable ........................................ 40,949 (578,534) --
Prepaid development fees ................................... (1,206,836) (792,901) --
Other prepaid expenses and other current assets ............ 203,305 (952,261) (225,442)
Other assets ............................................... 382,010 270,795 (440,011)
Accounts payable ........................................... (261,742) (319,167) 324,353
Accrued liabilities and compensation ....................... (363,885) 554,546 236,561
Accrued royalties .......................................... -- 1,500,000 --
Registration liabilities ................................... (160,554) 139,492 --
Deferred revenue ........................................... 114,582 (416,199) 126,714
------------ ------------ ------------
Net cash used in operating activities .................... (9,701,612) (14,574,675) (3,258,152)
INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired ..................... (328,988) (6,767,810) (780,206)
Issuance of note receivable - related party ........................ (215,000) -- --
Repayment of note receivable ....................................... 128,119 -- --
Proceeds from sale of investments .................................. 10,143,229 122,271 --
Purchase of investments ............................................ (11,263,430) (20,734,425) (127,753)
Purchase of property and equipment ................................. (1,588,445) (3,094,665) (639,724)
------------ ------------ ------------
Net cash used in investing activities .................. (3,124,515) (30,474,629) (1,547,683)
FINANCING ACTIVITIES:
Repurchase of common stock from WebMD .............................. (1,981,444) -- --
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 ........................ -- -- 18,000
Proceeds from issuance of preferred stock .......................... -- -- 18,202,060
Proceeds from exercise of stock options ............................ 10,557 600,786 231,590
Issuance of common stock for Employee Stock Purchase Plan .......... 56,956 -- --
Payments on long-term debt - related party ......................... -- (132,559) (23,585)
Repurchase of stock in connection with initial public offering ..... -- (14,213) --
Payments on capital lease obligations .............................. (343,080) (200,403) (40,909)
------------ ------------ ------------
Net cash (used in) provided by financing activities ........ (2,257,011) 51,247,732 18,387,156
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............... (15,083,138) 6,198,428 13,581,321
Cash and cash equivalents at beginning of year ..................... 19,830,572 13,632,144 50,823
------------ ------------ ------------
Cash and cash equivalents at end of year ........................... $ 4,747,434 $ 19,830,572 $ 13,632,144
============ ============ ============
Total cash, restricted cash, investments,
and accrued interest at end of period .............................. $ 27,215,292 $ 41,544,572 $ 13,718,207
============ ============ ============
36
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ...................................................... $ 51,833 $ 126,352 $ 225,074
=========== ============ ===========
Capital lease obligations incurred ................................. $ 83,679 343,549 $ 286,976
=========== ============ ===========
Preferred stock converted into common stock ........................ $ -- $ 19,172,060 $ --
=========== ============ ===========
Notes payable - related parties converted into common stock ........ $ -- $ 1,293,000 $ 1,000,000
=========== ============ ===========
Notes payable - related parties converted into preferred stock ..... $ -- $ -- $ 560,000
=========== ============ ===========
Issuance of common stock in connection with acquisition of companies $ 300,186 $ 12,949,437 $ 200,000
=========== ============ ===========
Issuance of common stock in exchange for professional services ..... $ -- $ 45,900 $ 18,800
=========== ============ ===========
Issuance of common stock to advisory boards ........................ $ 57,319 $ -- $ 11,760
=========== ============ ===========
Effects of acquisitions:
Estimated fair value of assets acquired ......................... $ 5,000 $ 3,608,502 $ 95,713
Purchase price in excess of net assets acquired ................. 1,036,491 22,442,980 1,374,619
Estimated fair value of liabilities assumed ..................... (412,317) (6,173,054) (490,126)
Stock issued .................................................... (300,186) (12,949,437) (200,000)
----------- ------------ -----------
Cash paid ....................................................... 328,988 6,928,991 780,206
Less cash acquired .............................................. -- (161,181) --
----------- ------------ -----------
Net cash paid for acquisitions .................................. $ 328,988 $ 6,767,810 $ 780,206
=========== ============ ===========
See accompanying notes to the consolidated financial statements.
37
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. We provide Web-based solutions to meet the ongoing
training and continuing education needs of the healthcare community. We changed
our name to HealthStream, Inc. from NewOrder Media, Inc. on September 1, 1998.
We provide Internet-based solutions 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. We
also provide the healthcare community with live event development, coordination
and registration services, online development services, translation of content
into an interactive experience, and assist in the development of other
educational activities, provided through the Internet.
BUSINESS SEGMENTS
During 2001, we began organizing the business along two segments: 1) services
provided to healthcare organizations and professionals, and 2) services provided
to pharmaceutical and medical device companies. Accordingly, we began tracking
financial information on a more detailed basis for these segments. Through
December 31, 2000, our revenues were primarily derived from one business
segment, the sale of education and training products to the healthcare industry.
Services to healthcare organizations and professionals include offerings of our
Internet-based e-learning products, licensing, maintenance and support of our
installed learning management products, content subscriptions, custom content
development, and a variety of online and enduring products. Services provided to
pharmaceutical and medical device companies include live event registration,
development and coordination services, Web cast events, online development and
training, and other education and training services.
In 2001, we began producing discrete financial information under two reportable
segments -- healthcare organizations and professionals ("HCO") and
pharmaceutical and medical device companies ("PMD"), and accordingly, resource
allocation decisions and performance assessments began to be made based on the
discrete financial information for these segments. Because discrete financial
information about individual components was not prepared for any periods prior
to December 31, 2000, comparative segment information is not provided.
RECOGNITION OF REVENUE
Revenues are derived from providing services through our Internet-based
e-learning products, licensing of our installed learning management products,
maintenance and support services, content subscriptions, online development, Web
cast events, live event development, coordination and registration services, Web
site development, professional and technical consulting services, online
products and commercial support and other education and training services. We
have entered into commercial support agreements that involve integration with
services and provide for varied sources of revenue to us over the terms of the
agreements. In some cases revenues derived from electronic commerce transactions
are shared between the other entity and us, in accordance with the term of the
arrangement, as realized.
We recognize revenue in accordance with Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition" and Emerging Issues Task Force ("EITF") Issue No. 99-19
"Reporting Revenue Gross Versus Net." This guidance provides 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. While elements
include software products, post contract customer support, installation, and
training, fair value of each element is based on objective evidence specific to
the vendor. If fair value cannot be determined for each element of the
arrangement, all revenue from the arrangement is deferred until fair value can
be determined or until all elements of the arrangement are delivered. Sales of
our Internet-based e-learning products include customer support, implementation
services, and training; therefore all revenues are deferred until the
Internet-based e-learning product is implemented, at which time revenues are
recognized ratably over the service period.
38
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE (CONTINUED)
Revenues derived from the provision of services through our Internet-based
e-learning products are recognized ratably over the term of the service
agreement. Revenues derived from the license of installed learning management
products are recognized upon shipment or installation of the software. Software
support and maintenance revenues are recognized ratably over the term of the
related agreement. Revenues derived from the sale of products requiring
significant modification or customization are recorded based on the percentage
of completion method using labor hours. Other training revenues are generally
recognized upon the completion of training. Revenues from content subscriptions
are recognized ratably over the term of the subscription.
Revenues associated with commercial support arrangements are recognized either
based on utilization of courseware or over the support period, depending on the
scope of services provided. Live event registration services are recognized upon
completion of the related event. We recognize revenue from live event
development and coordination services and Web cast events based on the
percentage of completion method using labor hours. All other revenues are
recognized as the related services are performed or products are delivered.
Effective October 1, 2001, we entered into a new four-year agreement with HCA,
replacing the prior agreement, that had approximately two and one half years
remaining in its term. Together with HCA, we mutually agreed to cancel the
warrant held by CIS Holdings, Inc. an affiliate of HCA, to purchase our common
stock. As a result, we will no longer amortize the remaining cost of the warrant
as a reduction of revenues. See Note 4 for additional information.
Through September 2001, we had a prior service arrangement with HCA that
included the grant of a warrant to purchase our common stock. Revenues were
recognized as services were rendered, net of the amortization of the fair value
of the related warrant.
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.
CASH AND CASH EQUIVALENTS
We consider cash and cash equivalents to be unrestricted, highly liquid
investments with initial maturities of less than three months. Cash received
associated with live event registration fees is classified as restricted cash on
the accompanying consolidated balance sheets, since it is held on behalf of the
commercial supporter of the event.
39
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,:
2001............................. $ 198,000 $ 150,000 $ -- $ 60,000 $ 288,000
2000............................. $ 37,000 $ 85,000 $ 78,000 $ 2,000 $ 198,000
1999............................. $ 36,500 $ 6,250 $ -- $ 5,750 $ 37,000
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 (loss).
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 interest and other income on the accompanying consolidated
statements of operations.
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
Through December 31, 2001, intangible assets, which represent the excess of
purchase price over fair value of net tangible assets acquired or goodwill,
content, customer lists, and non-competition agreements, were 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 include 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.
We plan to adopt Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142") effective January 1,
2002. Statement 142 no longer permits the amortization of goodwill and
intangible assets with indefinite useful lives. Statement 142 requires that
these assets be reviewed for potential impairment as described further under
"long-lived assets," at least annually. Under Statement 142, goodwill is
classified as an intangible asset with an indefinite life, while content,
customer lists, and non-competition agreements are classified as intangible
assets with finite lives. Intangible assets with finite lives will continue to
be amortized over their estimated useful lives.
40
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets are comprised of licensing fees, the long term portion of content
development fees 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 one to two years.
LONG-LIVED ASSETS
We account for assets of a long term nature ("long-lived assets") in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," ("Statement 121") 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. Through December 31, 2001 we evaluated any potential
impairment based on expected future cash flows from the long-lived assets. The
cash flow estimates incorporate management's best estimates, using appropriate
and customary assumptions and projections at the date of evaluation. During
2001, we recorded impairment charges related to property and equipment and
certain content assets totaling approximately $712,000 (See Note 5 for
additional information).
Management periodically evaluated the carrying value of long-lived assets,
including property and equipment, other assets and intangible assets and
determined that there was no impairment as of December 31, 2000 or 1999.
We plan to adopt SFAS Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144") effective January 1, 2002.
Statement 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. We have reviewed
the provisions of Statement 144, and believe that upon adoption, Statement 144
will not have a significant effect on our consolidated financial position or
results of operations.
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."
ADVERTISING
We expense the costs of advertising as incurred. Advertising expense for the
years ended December 31, 2001, 2000 and 1999 was approximately $548,000,
$1,115,000 and $122,000 respectively.
PRODUCT DEVELOPMENT COSTS
Product development costs include the cost to internally develop and convert
content for our Internet-based e-learning and installed learning management
products as well as to provide content via portal partners. We capitalize the
cost of content developed by third parties where the life expectancy is greater
than one year. During 2001 and 2000, we capitalized approximately $1.3 million
and $800,000 respectively, related to third party content development. Such
amounts are included in the accompanying consolidated balance sheets in prepaid
development fees. We amortize content development over the expected life, which
is generally one to two years. Product development fees that have been
capitalized are subject to a periodic impairment review in accordance with our
policy. During 2001, we recorded an impairment charge of approximately $400,000
with respect to certain product development fees (See Note 5 for additional
information).
41
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT COSTS (CONTINUED)
Effective July 1, 2000, we 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. Product development costs incurred to establish the
technological feasibility of computer software products, such as our installed
learning management products, that are developed for resale, and Internet-based
e-learning products and Web sites prior to June 30, 2000 were charged to expense
as incurred. We capitalize costs incurred between the point of establishing
technological feasibility and general release when such costs are material. As
of December 31, 2001 and 2000, we had no capitalized development costs for
computer software developed for resale. We did not capitalize any Web site
development costs during 2001 or 2000 since the costs incurred after June 30,
2000 related to planning or operation of such products and sites. The costs
incurred with respect to our Internet-based e-learning products and Web sites
were incurred prior to June 30, 2000.
NET LOSS PER SHARE
We compute net loss per share following SFAS No. 128, "Earnings Per Share,"
("Statement 128"). Under the provisions of Statement 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, 2001, 2000, and 1999 because the
effect would be anti-dilutive.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
We place our 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.
We sell our systems and services to various companies in the healthcare
industry. We perform ongoing credit evaluations of our customers' financial
condition and generally require no collateral from customers. During 2001, we
derived approximately 11%, or $1.5 million, of net revenues from HCA, net of
warrant expense of approximately $1.5 million (See Note 4). During 2000, no
customer represented more than 10% of our total revenue. The total amounts
receivable from HCA at December 31, 2001 and 2000 were approximately $800,000
and $680,000 respectively. During 1999, we derived approximately 15%, or
$380,000, of revenues from ActivHealth International, Inc. and approximately 9%,
or $240,000, of revenues from Lippincott, Williams and Wilkins, formerly
Waverly, Inc.
STOCK BASED COMPENSATION
We grant 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. We account 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
our 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" ("Statement 123"). During the
years ended December 31, 2001, 2000, and 1999, we recorded expense of
approximately $57,000, $30,000, and $12,000, respectively, related to options
granted to advisory board members.
42
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating 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.
Notes receivable: The carrying amounts approximate fair value based on the
consideration provided and the estimated consideration expected to receive.
Investments: The carrying amounts approximate the fair value based on quoted
market prices.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation. These reclassifications had no effect on previously reported
consolidated results of operations.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," ("Statement 141") and No. 142, "Goodwill and Other
Intangible Assets" ("Statement 142"). Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives.
We will apply Statement 142 beginning January 1, 2002. While we have not
completed the assessment of the impact of the Statement, application of the
non-amortization provisions would result in a decrease in net loss of
approximately $5.4 million ($0.27 per share) per year. This estimate is based on
our current level of amortization expense for intangibles with indefinite lives
and the current weighted average shares outstanding. During 2002, we will
perform the test for goodwill impairment using the two-step process described in
Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount, if any, of impairment. We expect to perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets during the first six months of 2002. Any impairment charge
resulting from these transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principle as of January 1, 2002. We
have not yet determined what the effect of these tests will be on our financial
position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("Statement 144"). Statement 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. Statement 144 will be adopted as of
January 1, 2002. We have reviewed the provisions of Statement 144, and believe
that upon adoption, it will not have a significant effect on our consolidated
financial position or results of operations. The Statement supersedes Statement
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
43
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
de'MEDICI Systems. On January 26, 2001, we acquired substantially all of the
assets of de'MEDICI Systems ("de'MEDICI"), a business unit of Lippincott
Williams & Wilkins, Inc., for approximately $330,000 in cash and 181,250 shares
of our common stock. de'MEDICI provided computer based education and training to
over 230 hospitals and healthcare organizations. The acquisition was accounted
for as a purchase. Intangible assets acquired consisted of goodwill, customer
lists, and trade name of $0.6 million, $0.4 million, and $0.1 million,
respectively, and are being amortized on a straight-line basis over five years,
three years, and three years, respectively.
SynQuest Technologies, Inc. On September 18, 2000, we acquired substantially all
of the assets of SynQuest Technologies, Inc. ("SynQuest") for 787,087 shares of
our 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 acquisition was accounted for as a purchase. Intangible
assets acquired consisted of goodwill, content, and customer lists of $2.4
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.
Education Design, Inc. On July 1, 2000, we acquired substantially all of the
assets of Education Design, Inc. ("EDI") for $3.0 million in cash and 184,421
shares of our common stock. In addition, approximately $300,000 of cash and
31,711 shares of our 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.
EMINet, Inc. On January 28, 2000, we 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 our common stock. In addition, we issued 2,170
additional shares of our 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.
m3 the Healthcare Learning Company. On January 28, 2000, we 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 our common stock. m3 provided interactive, multimedia
education and training solutions to hospitals and other healthcare
organizations. In connection with the acquisition, we 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.
Quick Study, Inc. On January 11, 2000, we 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 our common stock. In addition, we issued 6,669
additional shares of common stock based on achievement of revenue goals
subsequent to the acquisition. In connection with the acquisition, we 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.
KnowledgeReview, LLC. On January 3, 2000, we 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 our 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 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.
44
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
SilverPlatter Education, Inc. On July 23, 1999, we 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 our common
stock, and the assumption of certain liabilities. 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.
The results of operations are included in our financial statements from the date
of acquisition.
The following unaudited results of operations give effect to the operations of
the acquisitions discussed above, except for the de'MEDICI acquisition, as if
the acquisitions had occurred as of the first day of the fiscal year immediately
preceding the year of acquisition. Because the pro forma impact of the de'MEDICI
acquisition would not have been material to the results presented for 2001 or
2000, the pro forma disclosures do not include the impact of the de'MEDICI
acquisition. The pro forma results of operations do not purport to represent
what our results of operations would have been had such transactions in fact
occurred at the beginning of the period presented or to project our results of
operations in any future period.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenue.................................... $ 13,503,000 $ 13,497,000 $ 12,818,000
Net loss................................... $(19,576,000) $(23,451,000) $(13,956,000)
Net loss per share:
Basic and diluted...................... $ (0.98) $ (1.19) $ (2.36)
In accordance with Statement 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. As discussed in Note 1, the adoption of Statement 142 will result
in the discontinuation of amortization of goodwill and other intangible assets
with indefinite lives.
The intangible assets related to the acquisitions summarized above consist of
the following:
DECEMBER 31,
------------
2001 2000
---- ----
Intangible assets:
Goodwill ..................... $ 18,311,775 $ 17,309,384
Content ...................... 3,500,000 3,500,000
Customer lists ............... 2,940,000 2,590,000
Non-competition agreements ... 220,000 320,000
Favorable lease rights ....... 152,142 152,142
Trade name ................... 50,000 --
------------ ------------
Total intangible assets ...... 25,173,917 23,871,526
Accumulated amortization ..... (13,300,762) (5,847,000)
------------ ------------
Net intangible assets ........ $ 11,873,155 $ 18,024,526
============ ============
45
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES
In connection with our April 2000 initial public offering ("IPO"), all
outstanding notes payable were converted into series B convertible preferred
stock and then into common stock.
The weighted average debt outstanding for the year ended December 31, 2001 and
for the portion of the year ended December 31, 2000 during which we had debt
outstanding was $-0-, and $1,751,059 respectively. The effective interest rate
on such debt was 0%, 8.8 %, and 10.1% for the year ended December 31, 2001, the
portion of the year ended December 31, 2000 during which we had debt
outstanding, and December 31, 1999, respectively.
4. SHAREHOLDERS' EQUITY
COMMON STOCK
During 2001, we repurchased 1,111,111 shares of our common stock from WebMD
Corporation ("WebMD") in connection with the renegotiation of a previous
agreement (See Note 14).
On April 14, 2000, we completed our IPO of 5,000,000 shares of common stock for
net proceeds of $39.8 million. On April 14, 2000, we completed a private
placement of 1,111,111 shares of 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 our 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, a $1,293,000 promissory note payable to Robert
A. Frist, Jr., our president, chief executive officer and chairman, also
converted into 553,711 shares of common stock. Also in connection with the IPO,
we repurchased 6,074 shares of common stock.
PREFERRED STOCK
We are 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 our IPO. No additional shares of
preferred stock were issued in 2001 or 2000.
Prior to April 21, 1999, we 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, we
amended our charter increasing the authorized shares of preferred stock to 5
million. During 2000, we increased the authorized shares of preferred stock to
10 million.
As previously discussed, upon consummation of our IPO, each share of series A
and B convertible preferred stock was converted into our 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 our common stock at the conversion rate of 2.46013 shares of
common stock per share of series C convertible preferred stock.
WARRANTS
Effective October 1, 2001 we revised our prior agreement with HCA. The new
four-year agreement, which provides for a minimum of $12.0 million in services,
replaces the prior agreement that had approximately two and one half years
remaining. In addition, both parties agreed to cancel the warrant held by CIS
Holdings, Inc. an affiliate of HCA. As a result, we will no longer amortize the
remaining cost of the warrant as a reduction of revenues. During the years ended
December 31, 2001 and 2000, our revenues were reduced by the expense related to
this warrant totaling approximately $1,490,000 and $992,000, respectively.
During February 2000, we entered into a four-year Online Education Services
Provider Agreement with HCA that included providing a warrant to purchase
2,182,568 shares of our common stock at an exercise price of $7.18 per share.
The warrant was exercisable over a four year period. Under the terms of the
agreement, HCA agreed to purchase a minimum of $12.0 million in
46
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDERS' EQUITY (CONTINUED)
services from us over the term of the contract. Until September 2001, we
amortized the fair value of the warrant ($8.8 million) as a reduction of
revenues proportionately over the term of the original agreement. The
amortization fluctuated based on the revenues received from this agreement.
During 1999, we 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 our common stock at $4.06 per share. The
warrants expire in June 2009. The issuance of the warrants resulted in the
recognition of approximately $748,000 of product development expense in 1999. No
part of the 1999 warrant has been exercised as of December 31, 2001.
5. IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of 2001, we performed an impairment assessment of our
long-lived assets including goodwill and other identifiable intangibles. We
recorded a charge of approximately $712,000 related to certain property and
equipment and prepaid development fees. We recorded a charge of approximately
$400,000 related to prepaid content development fees. This charge reflects the
expectation that the carrying value exceeded the anticipated revenues to be
generated from the content. The remainder of the charge is approximately
$312,000 related to fixed assets that will no longer be used in future
operations. As a result, the carrying value of the fixed assets held for sale
were written down to their fair value, less costs to sell, and have been
included in other current assets in the accompanying consolidated balance
sheets. Fair value was determined based on bids received from third parties. The
assets were sold during January 2002 at carrying value.
6. INVESTMENTS
At December 31, 2001, the fair value of investments, which were all
available-for-sale, included the following:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST LOSSES GAINS VALUE
---- ------ ----- -----
Corporate debt securities ....... $ 14,755,681 $ (53,408) $ 105,501 $14,807,774
Foreign corporate debt securities 4,812,256 (10,721) 18,193 4,819,728
Secured corporate debt securities 1,763,004 -- 19,583 1,782,587
------------ --------- ----------- -----------
$ 21,330,941 $ (64,129) $ 143,277 $21,410,089
============ ========= =========== ===========
At December 31, 2000, the fair value of 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, 2001 are shown
below:
Mature within one year........................................... $ 12,701,086
Mature after one year but before two years....................... 8,709,003
-------------
Total debt securities............................................ $ 21,410,089
=============
47
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BUSINESS SEGMENTS
We have two reportable segments, healthcare organizations and professionals
("HCO") and pharmaceutical and medical device companies ("PMD"). The accounting
policies of the segments are the same as those described in Note 1, "Summary of
Significant Accounting Policies." Our reportable segments are based on the
markets they serve, the products and services provided to those markets, and
they are each managed separately by business unit managers. Substantially all
sales during 2001 were made to customers in the United States.
The following is our business segment information as of and for the year ended
December 31, 2001. We measure segment performance based on the operating loss
before income taxes and prior to the allocation of corporate overhead expenses,
interest expense, and substantially all depreciation.
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------
HCO PMD UNALLOCATED * CONSOLIDATED
---------------------------------------------------------------
Revenues, net of warrant expense . $ 7,957,717 $ 5,545,590 $ -- $ 13,503,307
Cost of revenues ............... (2,646,652) (3,021,412) (104,256) (5,772,320)
Product development ............ (2,688,845) (1,061,679) (1,289,883) (5,040,407)
Sales and marketing ............ (4,593,632) (1,295,658) (5,290) (5,894,580)
Depreciation and amortization .. (7,215,931) (963,904) (1,756,401) (9,936,236)
Other general and administrative (3,019,926) (911,258) (3,193,063) (7,124,247)
Office consolidation charge .... (400,678) -- -- (400,678)
Impairment of long-lived assets (400,000) -- (312,344) (712,344)
------------ ----------- ------------ ------------
Segment loss from operations ..... $(13,007,947) $(1,708,321) $ (6,661,237) $(21,377,505)
============ =========== ============ ============
**Segment assets ................. $ 15,617,965 $ 5,058,474 $ 28,570,205 $ 49,246,644
============ =========== ============ ============
Purchase of property and equipment $ 808,082 $ 429,049 $ 351,314 $ 1,588,445
============ =========== ============ ============
* Unallocated items include certain unallocated corporate expenses and
corporate assets.
** Segment assets include restricted cash, accounts and unbilled receivables,
prepaid and other current assets, other assets, property and equipment, and
intangible assets. Investments are not allocated to individual segments.
8. INCOME TAXES
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,
-----------------------
2001 2000 1999
---- ---- ----
Tax benefit at the statutory rate .............. $(6,655,815) $(6,897,002) $(1,515,177)
State income tax benefit, net of federal benefit (592,104) (667,145) (177,741)
Nondeductible goodwill ......................... 1,588,345 1,188,473 --
Other .......................................... (215,501) (69,774) 4,382
Increase in valuation allowance ................ 5,875,075 6,445,448 1,688,536
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
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 deferred tax liabilities and assets are as follows:
48
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
DECEMBER 31,
------------
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts ............ $ 109,374 $ 75,240
Differences related to business combinations 1,518,029 718,930
Accrued liabilities ........................ 154,699 41,048
Deferred revenue ........................... 40,700 --
Difference related to warrants ............. 1,227,388 661,214
Research and development credits ........... 90,948 57,448
Other ...................................... 6,403 3,458
Net operating loss carryforwards ........... 11,330,299 7,044,093
------------ -----------
Total deferred tax assets .................. 14,477,840 8,601,431
Less: Valuation allowance .................. (14,389,540) (8,514,465)
------------ -----------
88,300 86,966
Deferred tax liability - depreciation ...... (88,300) (86,966)
------------ -----------
Net deferred tax asset ..................... $ -- $ --
============ ===========
As of December 31, we had federal and state net operating loss carryforwards of
$30,223,415 and $26,358,436, respectively, in 2001 and $18,099,076 and
$22,260,182, respectively, in 2000. These losses will expire in years 2012
through 2021. A portion of these losses may be subject to limitation in future
years.
We have established a valuation allowance for deferred tax assets at December
31, 2001 and 2000, due to the uncertainty of realizing these assets in the
future. The valuation allowance increased $5,875,075 in 2001, $6,445,448 in 2000
and $1,688,536 during 1999. No federal or state income tax payments were made
during the years ended December 31, 2001, 2000, and 1999.
9. STOCK OPTION PLAN
Our 2000 Stock Incentive Plan ("2000 Plan") and 1994 Employee Stock Option Plan
("1994 Plan") (the 2000 Plan and the 1994 Plan are collectively referred to as
"the Plan") authorizes the grant of options to employees, officers, directors,
and others. In February 2000, we 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.
We account for our stock incentive plans in accordance with APB 25. If the
alternative method of accounting for stock incentive plans prescribed by
Statement 123 had been followed, our net loss and net loss per share would have
been:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Net loss as reported ......................... $(19,575,926) $(20,285,301) $(4,456,404)
Pro forma compensation expense ............... 1,140,396 1,524,880 289,426
------------ ------------ -----------
Pro forma net loss ........................... $(20,716,322) $(21,810,181) $(4,745,830)
============ ============ ===========
Pro forma basic and diluted net loss per share $ (1.04) $ (1.38) $ (1.26)
============ ============ ===========
49
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN (CONTINUED)
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 2000 and 1999 prior to
our IPO and the Black-Scholes method subsequent to our IPO in April 2000. The
assumptions used for these estimates include:
2001 2000 1999
---- ---- ----
Risk-free interest rate.................... 4.20% 6.00% 6.00%
Expected dividend yield.................... 0.0% 0.0% 0.0%
Expected life (in years)................... 5 5 5
Volatility................................. 60% 60% --
The estimated weighted average fair values of options granted during 2001, 2000
and 1999 using the above pricing models were $0.70; $2.09; and $1.11,
respectively.
A progression of activity and various other information relative to stock
options is presented in the table below.
2001 2000 1999
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding - beginning of period... 3,125,739 $ 4.73 2,470,229 $ 2.84 1,650,784 $ 1.07
Granted............................. 410,750 1.22 2,097,316 6.21 1,383,892 4.29
Exercised........................... (8,700) 1.21 (801,997) 0.75 (427,085) 0.54
Forfeited........................... (711,072) 4.74 (639,809) 7.30 (137,362) 3.26
--------- --------- ---------
Outstanding - end of period......... 2,816,717 4.17 3,125,739 4.73 2,470,229 2.84
========= ========= =========
Exercisable at end of period........ 1,306,994 4.19 665,261 4.51 892,477 1.08
========= ========= =========
During August 2000, our CEO exercised options granted in 1995 and purchased
314,500 shares of our 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. In December 1999, the then president exercised options granted
in 1994 and purchased 3,170 shares of our common stock at an exercise price of
$0.608 per share. In July and August 1999, the CEO exercised options granted in
1995 and purchased 416,250 shares of our common stock at an exercise price of
$0.54 per share.
During 2001, 2000 and 1999, we issued 5,750, 27,254, and 51,800 respectively,
stock options to our professional consulting boards at per share exercise prices
ranging from $1.24 in 2001, $2.125 to $11.89 in 2000, and $2.34 to $6.49 in
1999. In connection with these grants we recognized expense of approximately
$57,000 in 2001, $30,000 in 2000, and $12,000 in 1999. During 2000, we also
granted options to individuals for services and recognized approximately $16,000
of expense in connection with these grants.
50
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN (CONTINUED)
Shares of common stock available for future grants of options totaled 4,951,208
and 3,868,004 at December 31, 2001 and 2000, respectively. Exercise prices per
share and various other information for options outstanding at December 31, 2001
are segregated into ranges as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER AVERAGE EXERCISE REMAINING NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICES PER SHARE OF SHARES PRICE PER SHARE CONTRACTUAL LIFE OF SHARES PER SHARE
- ---------------------------------- --------- --------------- ---------------- --------- ---------
$ 0.00 - $1.19.................... 314,800 $ 1.09 6.9 89,800 $ 1.05
$ 1.20 - $2.38.................... 1,000,148 2.14 6.9 471,634 1.24
$ 3.58 - $4.76.................... 761,350 4.06 5.7 435,248 4.06
$ 4.77 - $5.95.................... 118,000 5.42 7.3 29,500 5.42
$ 5.96 - $7.13.................... 253,912 6.49 6.0 111,922 6.49
$ 8.33 - $9.50.................... 86,059 8.92 6.8 86,059 8.92
$ 9.51 - $10.70................... 119,325 10.00 6.2 29,828 10.00
$10.71 - $11.89................... 163,123 11.89 6.2 53,003 11.89
--------- ------ --- --------- ------
2,816,717 $ 4.17 6.5 1,306,994 $ 4.19
========= ====== === ========= ======
10. EMPLOYEE BENEFIT PLANS
401(K) PLAN
We have a defined-contribution employee benefit plan ("401-K Plan")
incorporating provisions of Section 401(k) of the Internal Revenue Code. Our
employees 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. We have not
provided matching contributions through December 31, 2001.
EMPLOYEE STOCK PURCHASE PLAN
During 2000, we 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. During
2001, 53,606 shares were purchased under the plan at an average price per share
of $1.06.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
We lease office facilities in Nashville, TN, Dallas, TX, Denver, CO, and
Raleigh, NC under agreements that expire before or during January 2007. The
Dallas, TX facility is subleased to a third party through the expiration of the
original lease which ends January 2007.
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. We account 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 approximately
$605,000, $795,000, and $210,000 for the years ended December 31, 2001, 2000,
and 1999,
51
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
respectively. We also lease certain computer and office equipment and office
furnishings from various third parties accounted for as capital leases.
Future rental payment commitments at December 31, 2001 under capital and
non-cancelable operating leases, with initial terms of one year or more, are as
follows:
CAPITAL OPERATING
LEASES LEASES
------- ----------
2002................................................................................... $142,977 $ 723,520
2003................................................................................... 85,024 599,126
2004................................................................................... 41,769 564,443
2005................................................................................... 1,212 254,753
2006................................................................................... -- 95,648
2007 (thereafter)...................................................................... -- 7,971
-------- ----------
Total minimum lease payments........................................................... $270,982 $2,245,461
==========
Less amounts representing interest..................................................... (25,480)
========
Present value of net minimum lease payments (including $126,733 classified as current). $245,502
========
Sublease rental income related to the Dallas, TX facility will be approximately
$6,000 per month over the remaining term of the lease.
The carrying value of assets under capital leases, which are included with owned
assets in the accompanying consolidated balance sheets was $182,712 and $395,850
at December 31, 2001 and 2000, respectively. Amortization of the assets under
the capital leases is included in depreciation expense.
LITIGATION
On November 17, 2000, a complaint was filed by Challenger Corporation in the
Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis
against us, 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.
We are 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 our financial position, operations or liquidity.
52
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Numerator:
Net loss.................................... $(19,575,926) $(20,285,301) $(4,456,404)
============ ============ ===========
Denominator:
Weighted-average shares outstanding......... 19,920,521 15,785,946 3,756,556
============ ============ ===========
Net loss per share, basic and diluted....... $ (0.98) $ (1.29) $ (1.19)
============ ============ ===========
For the years ended December 31, 2001, 2000, and 1999, 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 3,238,311 in 2001, 6,522,065 in 2000 and 9,846,414 in 1999.
13. OFFICE CONSOLIDATION CHARGE
During the second quarter of 2001, we recorded a non recurring office
consolidation charge of approximately $401,000 as a result of closure of our
Dallas and Boston offices. The charge consisted of lease obligations of
approximately $245,000 and impairment of certain fixed assets of approximately
$156,000. We recorded a liability for such charges and the expense is included
in office consolidation charge on the accompanying consolidated income
statement. As of December 31, 2001 we have paid approximately $40,000 in lease
obligations and charged approximately $156,000 to the recorded liability for the
disposal of fixed assets. At December 31, 2001, the remaining balance of accrued
liabilities associated with this charge was approximately $205,000.
14. STRATEGIC ALLIANCES
We periodically enter 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. We have commitments of approximately $100,000 for
2002 related to content development services, which are contingent upon delivery
of courses or occurrence of certain events. Payment of such amounts is
contingent upon delivery of content by the provider.
We 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
our 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, 2001.
We also entered into a development agreement in January 2000 with a private
company under which we paid $95,000 and paid the entity another $400,000 during
2000 as courses were developed. In connection with this agreement, we received a
warrant to purchase 223,834 shares of the entity's common stock at an exercise
price of $4.47 per share. Because the development services were provided at
market rates, no value has been ascribed to the warrant.
In February 2000, we entered into a five-year agreement with WebMD. The
agreement provided that we 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 in exchange for certain guaranteed payments. WebMD also
purchased $10.0 million of our common stock in a private sale that closed
concurrent with our IPO. During 2000, we expensed and paid WebMD royalties of
$1.5 million. At December 31, 2000, the accompanying consolidated balance sheet
included accrued and unpaid royalties related to this agreement of $1.5 million.
On January 5, 2001, we terminated the prior agreement with WebMD and set forth a
new business arrangement. Under the new, non-exclusive three-year agreement, we
53
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STRATEGIC ALLIANCES (CONTINUED)
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 is based entirely on revenues
generated from the sale of HealthStream's services to WebMD's professional
portal customers.
In connection with this renegotiation, we gave WebMD the right to sell the
shares back to us at any time through March 30, 2001. On February 8, 2001, WebMD
exercised its right to sell the 1.1 million shares of our common stock back to
us at $1.7833 per share. We reacquired the shares on February 16, 2001. In
connection with the termination of the prior WebMD agreement, we recognized a
gain of $1.5 million, representing the reversal of the scheduled $1.5 million
fixed payment that was accrued at December 31, 2000.
15. SUBSEQUENT EVENTS
On March 15, 2002, options to purchase 401,000 shares of common stock at an
exercise price of $1.35 per share were granted. In addition, the 1994 Plan was
amended to exclude any cancelled or forfeited options from shares available for
future grants. As a result of this amendment, the total shares reserved for
issuance was reduced to 7,747,542 and the total shares available for future
option grants at December 31, 2001 was reduced to 3,790,064.
54
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.
55
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.
*4.6 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 Education Services Provider Agreement dated October 1, 2001
between HealthStream, Inc. and HCA Information Technology &
Services, Inc.
*10.8 Form of Employee Stock Purchase Plan
*21.1 Subsidiaries of HealthStream, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
+ 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 November 1, 2001 regarding agreement with HPG and HCA.
56
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 22nd day of March,
2002.
HEALTHSTREAM, INC.
By:/s/ ROBERT A. FRIST, JR.
-------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
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 22, 2002
- ----------------------------------- Chairman (Principal Executive Officer)
Robert A. Frist, Jr.
/s/ ARTHUR E. NEWMAN Senior Vice-President and Chief Financial March 22, 2002
- ----------------------------------- Officer (Principal Financial Officer)
Arthur E. Newman
/s/ SUSAN A. BROWNIE Vice President of Finance and Corporate March 22, 2002
- ----------------------------------- Controller (Principal Accounting Officer)
Susan A. Brownie
/s/ JEFFREY L. MCLAREN Vice Chairman March 22, 2002
- -----------------------------------
Jeffrey L. McLaren
/s/ JOHN DAYANI Director March 22, 2002
- -----------------------------------
John Dayani
/s/ JAMES DANIELL Director March 22, 2002
- -----------------------------------
James Daniell
/s/ WILLIAM STEAD Director March 22, 2002
- -----------------------------------
William Stead
/s/ M. FAZLE HUSAIN Director March 22, 2002
- -----------------------------------
M. Fazle Husain
/s/ THOMPSON DENT Director March 22, 2002
- -----------------------------------
Thompson Dent
/s/ CHARLES N. MARTIN Director March 22, 2002
- -----------------------------------
Charles N. Martin
/s/ LINDA REBROVICK Director March 22, 2002
- -----------------------------------
Linda Rebrovick
57
INDEX TO EXHIBITS
EXHIBIT
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.
*4.6 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 Education Services Provider Agreement dated October 1, 2001
between HealthStream, Inc. and HCA Information Technology &
Systems, Inc.
*10.8 Form of Employee Stock Purchase Plan
*21.1 Subsidiaries of HealthStream, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
+ 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).
58