HEALTHSTREAM, INC. - FORM 8-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 12, 2007
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
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Tennessee |
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000-27701 |
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62-1443555 |
(State or Other Jurisdiction of Incorporation)
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(Commission File Number)
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(I.R.S. Employer
Identification No.) |
209 10th Avenue South, Suite 450, Nashville, Tennessee 37203
(Address of principal executive offices) (Zip Code)
(615) 301- 3100
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy
the filing obligation of the registrant under any of the following provisions (see General
Instruction A.2. below):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) |
Item 1.01 Entry into a Material Definitive Agreement
Business Combination
On March 12, 2007, HealthStream, Inc., a Tennessee corporation (the Company), entered into a
Stock Purchase Agreement with The Jackson Organization, Research Consultants, Inc. (TJO), a
Maryland corporation, and David Jackson and the Jackson Charitable Remainder Trust (collectively
the Seller), the owner of 100% of the stock of TJO. On the same day and in accordance with the
terms of the Stock Purchase Agreement, the Company acquired 100% of the stock of TJO from the
Seller for approximately $11.6 million in cash and 252,616 shares of Company common stock resulting
in TJO becoming a wholly-owned subsidiary of the Company (the TJO Transaction). The terms of the
Stock Purchase Agreement are summarized below.
In the transaction, the Seller received cash and shares of common stock of the Company as provided
in Item 2.01 below.
The Stock Purchase Agreement contains customary representations and warranties from the Company and
the Seller, including representations and warranties about TJOs business, assets, operations, and
liabilities. The Stock Purchase Agreement also includes indemnifications by the Company and Seller
for losses resulting from breaches or misrepresentations under the Stock Purchase Agreement.
In
connection with the TJO Transaction, David Jackson has entered into a consulting agreement with the
Company and has agreed not to compete with the Company for a period of four (4) years. In
addition, certain employees of TJO have entered into employment
agreements with TJO which will operate as a wholly-owned subsidiary
of the Company.
In connection with the TJO Transaction, the Company entered into a new
lease for its office facility with an entity owned by David Jackson. The new lease includes a five year term, with two
options to renew the lease for two years each.
The descriptions contained herein of the Stock Purchase Agreement entered into in connection with
the TJO Transaction are qualified in their entirety by reference to the Stock Purchase Agreement
attached hereto as Exhibit 2.1. In addition, on March 12, 2007, the Company issued a press release
announcing the completion of the TJO Transaction, the text of which is set forth in Exhibit 99.1
and incorporated herein by reference.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Pursuant to the terms of the Stock Purchase Agreement discussed in Item 1.01 above, the Company
acquired 100% of the stock of TJO in consideration for the following combination of cash and common
stock delivered to the Seller or in escrow as follows:
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$6,177,625 of cash paid at closing to the Seller or other designated parties; |
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$447,233 payable in cash associated with the payment of certain outstanding debts of the Seller; |
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$3,262,375 payable in cash to be held in escrow, subject to settlement of
debts of the seller and release of a guaranty; |
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$1,560,000 payable in cash to be held in escrow, with one half to be released 12 months
after March 12, 2007, and the remainder to be released 18 months after March 12, 2007 subject to indemnification claims; |
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$200,000 payable in cash, subject to the determination of working capital as of the closing date, to be held in escrow with a release date no later than 105 days
from March 12, 2007; and |
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252,616 shares of HealthStream, Inc. common stock to be held in escrow until the date
that is 18 months after March 12, 2007, subject to indemnification claims. |
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In addition to the Stock Purchase Agreement, the Company
entered into a consulting agreement with David Jackson, which
includes payments based on achieving certain financial objectives. |
Item 2.02 Results of Operations and Financial Condition.
On March 12, 2007, the Company issued a press release announcing the acquisition of TJO, the text
of which is set forth in Exhibit 99.1.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant.
The information under Item 1.01 above is incorporated by reference hereunder.
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Item 3.02 Unregistered Sale of Equity Securities.
On March 12, 2007, as described in Item 2.01 above, as part of the consideration for the
acquisition of the TJO business, the Company issued to Seller a total of 252,616 shares of the
Companys common stock, no par value per share, which are to be held in escrow until the date that
is 18 months after March 12, 2007.
Pursuant to the Stock Purchase Agreement, the aggregate offering price of the common stock issued
to Seller was $1.0 million, which amount includes the shares to be held in escrow as provided
above.
The issuance of the common stock to Seller is exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
Item 9.01 Financial Statements and Exhibits.
On
March 12, 2007, the Company entered into a
Stock Purchase Agreement with Seller. In accordance with the terms of the Stock Purchase
Agreement, the Company acquired 100% of the stock of TJO from the
Seller for approximately $11.6
million in cash and 252,616 shares of Company common stock, resulting in TJO becoming a
wholly-owned subsidiary of the Company. Approximately $5.0 million in cash and 252,616 shares of
Company common stock are to be held in escrow pending the satisfaction of certain items in the
stock purchase agreement.
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Financial Statements of Business |
The audited financial statements of TJO for the years ended December 31, 2005 and 2004 and the
unaudited condensed financial statements for the nine months ended September 30, 2006 and 2005 are
filed as Exhibit 99.2 and Exhibit 99.3, respectively, and are hereby incorporated by reference.
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Pro Forma Financial Information |
The unaudited pro forma condensed combined balance sheet as of September 30, 2006 and unaudited pro
forma condensed combined statements of operations for the year ended December 31, 2005 and for the
nine months ended September 30, 2006 are filed as Exhibit 99.4 and are hereby incorporated by
reference.
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Exhibits |
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2.1 |
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Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc. and The
Jackson Organization, Research Consultants, Inc. (Pursuant to Item 601 (b)(2) of Regulation
S-K, the schedules and exhibits to this agreement are omitted, but will be provided
supplementally to the Securities and Exchange Commission upon request). |
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23.1 |
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Consent of Ernst & Young LLP |
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99.1 |
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Press release dated March 12, 2007, announcing the acquisition of The Jackson Organization,
Research Consultants, Inc. |
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99.2 |
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Audited Financial Statements of The Jackson Organization, Research Consultants, Inc. for the
years ended December 31, 2005 and 2004. |
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99.3 |
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Unaudited Condensed Financial Statements of The Jackson
Organization, Research Consultants,
Inc. for the nine months ended September 30, 2006 and 2005. |
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99.4 |
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Unaudited pro forma condensed combined financial information of HealthStream, Inc. for the
year ended December 31, 2005 and for the nine months ended September 30, 2006. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
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HEALTHSTREAM, INC. |
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By:
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/s/ Susan A. Brownie
Susan A. Brownie
Chief Financial Officer
March 12, 2007
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INDEX TO EXHIBITS
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Exhibit |
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Description |
2.1
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Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc. and The
Jackson Organization, Research Consultants, Inc. (Pursuant to Item 601 (b)(2) of Regulation
S-K, the schedules and exhibits to this agreement are omitted, but will be provided
supplementally to the Securities and Exchange Commission upon request). |
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23.1
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Consent of Ernst & Young LLP |
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99.1
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Press release dated March 12, 2007, announcing the acquisition of The Jackson Organization,
Research Consultants, Inc. |
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99.2
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Audited Financial Statements of The Jackson Organization, Research Consultants, Inc. for the
years ended December 31, 2005 and 2004. |
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99.3
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Unaudited Condensed Financial
Statements of The Jackson Organization, Research Consultants,
Inc. for the nine months ended September 30, 2006 and 2005. |
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99.4
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Unaudited pro forma condensed combined financial information of HealthStream, Inc. for the
year ended December 31, 2005 and for the nine months ended September 30, 2006. |
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EX-2.1 STOCK PURCHASE AGREEMENT
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the Agreement), dated as of March 12, 2007, is by and
among (a) HealthStream, Inc., a Tennessee corporation (Buyer), (b) David Jackson and The
Jackson Charitable Remainder Trust (the Sellers) and (c) The Jackson Organization,
Research Consultants, Inc., a Maryland corporation (the Company). Capitalized terms used
in this Agreement are defined as set forth in Annex A attached hereto. Buyer, Sellers and
the Company are sometimes referred to individually as a Party and collectively as the
Parties.
WHEREAS, Sellers own 850 shares of common stock of the Company (the Shares), which
Shares constitute all of the issued and outstanding shares of capital stock of the Company;
WHEREAS, Sellers desire to sell, and Buyer desires to purchase, all of the Shares, for the
consideration and on the terms set forth in this Agreement; and
WHEREAS, the Company, in consideration of the anticipated benefits to be received by the
Company in connection with the closing of the transactions contemplated hereby, and in order to
induce Buyer to enter into this Agreement, has agreed to be a Party to this Agreement for certain
purposes as set forth herein.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from the Agreement, the
representations, warranties, conditions and promises hereinafter contained, and other
consideration, the receipt and sufficiency of which consideration are hereby acknowledged, each of
the Parties hereby agrees as follows:
ARTICLE I
SALE AND TRANSFER OF SHARES; CLOSING
Section 1.1. Sale and Transfer of Shares. Subject to the terms and conditions of this
Agreement, at the Closing, Sellers shall sell and transfer the Shares to Buyer, and Buyer shall
purchase the Shares from Sellers.
Section 1.2. Purchase Price. The purchase price (the Purchase Price) for
the Shares shall be $12,650,000, adjusted initially by the Estimated Closing Adjustment Amount and
finally by the Closing Adjustment Amount. In accordance with Section 1.4(b), at the Closing, the
Purchase Price, prior to adjustment by the Closing Adjustment Amount, shall be delivered as
follows:
(a) $5,206,380.41, adjusted by the Estimated Closing Adjustment Amount, if applicable, payable
in cash by Buyer to Sellers by wire transfer of immediately available funds (the Cash
Consideration);
(b) $200,000, payable in cash by Buyer to the Escrow Agent by wire transfer of immediately
available funds to be held pursuant to the Cash Escrow Agreement (the Working Capital Cash
Escrow);
(c) $1,560,000 payable in cash by Buyer to the Escrow Agent by wire transfer of immediately
available funds to be held pursuant to the Cash Escrow Agreement (the Additional Cash
Escrow and together with the Working Capital Cash Escrow, the Cash Escrow);
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(d) $3,262,375, payable in cash by Buyer to the Escrow Agent by wire transfer of immediately
available funds to be held pursuant to the Guaranty Escrow Agreement (the Guaranty
Escrow);
(e) the number of shares of HealthStream Stock having a value equal to $1,000,000, with the
value of each share of HealthStream Stock to be equal to the Average Price (such HealthStream Stock
delivered to the Escrow Agent to be held pursuant to the Stock Escrow Agreement, the Escrow
Stock);
(f) $299,000 to Tim Grugeon as payment for all financial advisory fees and expenses owed as a
result of the Closing;
(g) $32,000 to Venable LLP as payment for all legal fees and expenses owed as a result of the
Closing;
(h) $530,244.59 to Paul Staros in full satisfaction of that certain Promissory Note, dated
August 11, 2006, issued by the Company to Paul Staros;
(i) $447,232.60 to Branch Banking and Trust Company as payment of the Companys
outstanding debt as set forth on the Financial Statements.
(j) $100,000 to Thomas S. Hutchinson pursuant to Section 2.27(a); and
(k) $10,000 to Karen Reynolds pursuant to Section 2.27(a).
The Closing Adjustment Amount shall be paid by Buyer or Sellers, as the case may be, following the
Closing in accordance with Section 1.6.
Section 1.3. Closing. The closing of the transactions contemplated by this Agreement
(the Closing) will take place at the offices of Bass, Berry & Sims PLC, 315 Deaderick
Street, Suite 2700, Nashville, Tennessee 37238-3001 at 2:00 p.m. (local time) on the later of (i)
the satisfaction or waiver of all the closing conditions set forth in Article V of this Agreement,
or (ii) March 12, 2007, or at such other time and place as Buyer and Sellers may agree in writing
(the date of the Closing, the Closing Date). Subject to the provisions of Article VI,
failure to consummate the purchase and sale provided for in this Agreement on the date and time and
at the place determined pursuant to this Section 1.3 will not result in the termination of this
Agreement and will not relieve any Party of any obligations under this Agreement. In such event,
the Closing will occur as soon as practicable, subject to Article VI.
Section 1.4. Closing Obligations. In addition to any other documents to be delivered
under other provisions of this Agreement, at the Closing:
(a) Sellers shall deliver, or cause to be delivered, to Buyer:
(i) certificates representing the Shares, duly endorsed (or accompanied by duly
executed stock powers), for transfer to Buyer;
(ii) releases in substantially the form attached hereto as Exhibit A, executed
by each of the Sellers (the Releases);
(iii) a consulting agreement in substantially the form attached hereto as Exhibit
B, executed by David Jackson (the Consulting Agreement);
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(iv) employment agreements in substantially the form attached hereto as Exhibit
C, executed by each of Tom Hutchinson, Ariel Adams, Berke Bilbay, Ted Gumer, Karen
Sorensen, Christine Gilbert, Bonnie Lowry, Allan Acton, Rob Reigle, Karen Reynolds, Teresa
Diamante and Lisa Marrow (the Employment Agreements);
(v) a noncompetition, nondisclosure and nonsolicitation agreement in substantially the
form attached hereto as Exhibit D, executed by David Jackson (the
Noncompetition Agreement);
(vi) an escrow agreement relating to the Cash Escrow in substantially the form attached
hereto as Exhibit E, executed by Sellers and the Escrow Agent (the Cash Escrow
Agreement);
(vii) an escrow agreement relating to the Escrow Stock in substantially the form
attached hereto as Exhibit F, executed by Sellers and the Escrow Agent (the
Stock Escrow Agreement);
(viii) an escrow agreement relating to the Guaranty Escrow in substantially the form
attached hereto as Exhibit G, executed by Sellers and the Escrow Agent (the
Guaranty Escrow Agreement);
(ix) a cross receipt in substantially the form attached hereto as Exhibit H,
executed by Paul Staros;
(x) Legal Opinion of Venable LLP in the form set forth as Exhibit I;
(xi) Lease Agreement in substantially the form attached hereto as Exhibit J,
executed by the Company and MOR Montpelier 3 LLC (the New Lease);
(xii) an agreement in substantially the form attached hereto as Exhibit K,
executed by David Jackson, the Company and Buyer (the Payoff Agreement).
(b) Buyer shall deliver, or caused to be delivered, to Sellers or the Escrow Agent, as
applicable:
(i) the Cash Consideration to Sellers by wire transfer of immediately available funds
to an account specified in writing by Sellers, to be allocated pursuant to the percentages
set forth on Schedule 1.4(b)(i);
(ii) the Cash Escrow Agreement, executed by Buyer and the Escrow Agent, together with
the delivery to the Escrow Agent of the Cash Escrow by wire transfer to an account specified
by the Escrow Agent;
(iii) the Stock Escrow Agreement, executed by Buyer and the Escrow Agent, together with
the delivery to the Escrow Agent of the stock certificates for the Escrow Stock;
(iv) the Guaranty Escrow Agreement, executed by Buyer and the Escrow Agent, together
with the delivery to the Escrow Agent of the Guaranty Escrow by wire transfer to an account
specified by the Escrow Agent;
(v) the Consulting Agreement, executed by Buyer;
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(vi)
the Employment Agreements, executed by Buyer;
(vii)
the Noncompetition Agreement, executed by Buyer;
(viii)
the New Lease, executed by Buyer; and
(viii)
the Payoff Agreement, executed by Buyer.
Section 1.5. Estimated Closing Adjustment Amount.
(a) The Estimated Closing Adjustment Amount will be the amount, if any, by which the
Working Capital deficit of the Company as reflected on the Estimated Balance Sheet (as prepared and
delivered pursuant to Section 1.5(b) below) is greater than $1,100,000. For example, if the
Working Capital deficit of the Company as reflected on the Estimated Balance Sheet is $1,300,000,
then the Estimated Closing Adjustment Amount would be $200,000. The Estimated Closing Adjustment
Amount, if any, will be subtracted from the cash portion of the Purchase Price payable by Buyer to
Sellers pursuant to Section 1.4(b)(i).
(b) No later than one (1) Business Day prior to the Closing Date, Sellers shall cause an
estimated balance sheet of the Company as of December 31, 2006 (as adjusted to reflect the cost of
the transaction and other Transaction Expenses or other transactions or adjustments in anticipation
of Closing, as set forth on Schedule 1.5(b) (the Estimated Balance Sheet) to be
prepared and delivered to Buyer, which will be accompanied by an estimated calculation of the
Working Capital of the Company as of December 31, 2006, which calculation shall also reflect the
items set forth on Schedule 1.5(b); however, for purposes of the Estimated Closing
Adjustment Amount, any current portion of outstanding debt shall be excluded from the calculation
of Working Capital.
Section 1.6. Closing Adjustment Amount.
(a) Subject to the provisions set forth below, the Closing Adjustment Amount will be
an amount (which shall be a positive number) equal to the difference between (x) the Working
Capital of the Company as reflected on the Closing Balance Sheet and (y) the Working Capital of the
Company as reflected on the Estimated Balance Sheet.
(i) If the Working Capital deficits of the Company as reflected on the Closing Balance
Sheet and on the Estimated Balance Sheet are both less than $1,100,000, then the Closing
Adjustment Amount shall automatically equal zero.
(ii) If (A) the Working Capital deficit of the Company as reflected on the Estimated
Balance Sheet is less than the Working Capital deficit of the Company as reflected on the
Closing Balance Sheet and (B) the Working Capital deficit of the Company as reflected on the
Estimated Balance Sheet is greater than or equal to $1,100,000, then the Closing Adjustment
Amount will be paid to Buyer to an account specified by Buyer from and to the extent of the
Working Capital Cash Escrow held by the Escrow Agent under the Cash Escrow Agreement, and to
the extent the Closing Adjustment Amount is greater than the Working Capital Cash Escrow,
the excess will be paid to Buyer first from the Additional Cash Escrow and secondly from the
Escrow Stock.
(iii) If (A) the Working Capital deficit of the Company as reflected on the Estimated
Balance Sheet is less than the Working Capital deficit of the Company as reflected on the
Closing Balance Sheet and (B) the Working Capital deficit of the Company as reflected on the
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Estimated Balance Sheet is less than $1,100,000, then the Closing Adjustment Amount
shall be calculated assuming that the Working Capital deficit of the Company as reflected on
the Estimated Balance Sheet was equal to $1,100,000. Such amount will be paid to Buyer to
an account specified by Buyer from and to the extent of the Working Capital Cash Escrow held
by the Escrow Agent under the Cash Escrow Agreement, and to the extent the Closing
Adjustment Amount is greater than the Working Capital Cash Escrow, the excess will be paid
to Buyer first from the Additional Cash Escrow and secondly from the Escrow Stock.
(iv) If (A) the Working Capital deficit of the Company as reflected on the Closing
Balance Sheet is less than the Working Capital deficit of the Company as reflected on the
Estimated Balance Sheet, and (B) the Working Capital deficit of the Company as reflected on
the Closing Balance Sheet is greater than or equal to $1,100,000, then the Closing
Adjustment Amount will be paid by wire transfer of immediately available funds by Buyer to
Sellers to the account specified by Sellers.
(v) If (A) the Working Capital deficit of the Company as reflected on the Closing
Balance Sheet is less than the Working Capital deficit of the Company as reflected on the
Estimated Balance Sheet, and (B) the Working Capital deficit of the Company as reflected on
the Closing Balance Sheet is less than $1,100,000, then the Closing Adjustment Amount shall
be calculated assuming that the Working Capital deficit of the Company as reflected on the
Closing Balance Sheet was equal to $1,100,000. Such amount will be paid by wire transfer of
immediately available funds by Buyer to Sellers to the account specified by Sellers.
(b) Within three (3) Business Days after the calculation of the Closing Adjustment Amount
becomes binding and conclusive on the Parties pursuant to Sections 1.6(d) and 1.6(e), Sellers or
Buyer, as the case may be, will make the payment provided for in Section 1.6(a) and/or Buyer and
Sellers will deliver joint written instructions to the Escrow Agent under the Cash Escrow Agreement
directing that the appropriate amount be paid to Buyer from the Working Capital Cash Escrow (and
the Additional Cash Escrow and/or Escrow Stock, if applicable) with any remaining amount of the
Working Capital Cash Escrow, if any, being distributed to Sellers. If the payment provided for in
Section 1.6(a) is not made within 10 Business Days after such Closing Adjustment Amount becoming
binding and conclusive on a Party, interest at the rate of 8% per annum shall accrue and be payable
on the Closing Adjustment Amount.
(c) Buyer shall prepare a balance sheet of the Company as of the Closing Date (the
Closing Balance Sheet), which will include a calculation of the Working Capital of the
Company as of the Closing Date. Buyer shall deliver the Closing Balance Sheet to Sellers within
sixty (60) days following the Closing Date (the date of such delivery, the Delivery
Date).
(d) If within fifteen (15) days following the Delivery Date, Sellers have not given Buyer
written notice of their objection to the Closing Balance Sheet calculation (which notice must
contain (i) a statement of Sellers calculation of the Companys Working Capital as of the Closing
Date and (ii) the basis of Sellers objection), then the Working Capital amount reflected in the
Closing Balance Sheet will be binding and conclusive on the Parties and will be used in computing
the Closing Adjustment Amount.
(e) If Sellers duly give Buyer such notice of objection within fifteen (15) days following the
Delivery Date, and if Sellers and Buyer fail to resolve the issues outstanding with respect to the
Closing Balance Sheet and the calculation of the Working Capital reflected in the Closing Balance
Sheet within fifteen (15) days of Buyers receipt of the objection notice from Sellers, Sellers and
Buyer shall submit the issues remaining in dispute to Lattimore Black Morgan & Cain, PC (the
Independent
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Accountants) for resolution. If issues are submitted to the Independent Accountants
for resolution, (i) Sellers and Buyer shall furnish or cause to be furnished to the Independent
Accountants such work papers and other documents and information relating to the disputed issues as
the Independent Accountants may request and are available to that Party or its agents and shall be
afforded the opportunity to present to the Independent Accountants any material relating to the
disputed issues and to discuss the issues with the Independent Accountants; (ii) the determination
by the Independent Accountants, as set forth in a notice to be delivered to Sellers and Buyer
within thirty (30) days of the submission to the Independent Accountants of the issues remaining in
dispute, will be final, binding and conclusive on Sellers and Buyer; and (iii) Sellers and Buyer
shall pay equal percentages of the fees and costs of the Independent Accountants in connection with
such determination, unless one Partys calculation of the Working Capital of the Company as of the
Closing Date differs from the calculation of the Working Capital of the Company as of the Closing
Date by the Independent Accountants by more than 33.33% in which case such Party shall then pay
one-hundred percent (100%) of the Independent Accountants fees and costs in connection with such
determination. In the event that both Parties calculation of the Closing Adjustment Amount
differs from the determination of the Independent Accountant by more than 33.33%, then the Party
whose calculation differs from the determination of the Independent Accountants by the greatest
amount shall pay one-hundred percent (100%) of the Independent Accountants fees and costs.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE COMPANY
Sellers and the Company, jointly and severally, represent and warrant to Buyer as follows:
Section 2.1. Organization and Good Standing.
(a) Schedule 2.1(a) contains a complete and accurate list of the Companys
jurisdiction of incorporation and any other jurisdictions in which it is qualified to do business
as a foreign corporation. The Company is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation, with full corporate power and
authority to conduct its business as it is now being conducted, to own or use its properties and
assets and to perform all of its obligations under the Applicable Contracts. The Company is duly
qualified to do business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the properties owned or used by
it, or the nature of the activities conducted by it, requires such qualification, except where the
failure to so qualify would not have a Material Adverse Effect.
(b) True and complete copies of the Articles of Incorporation and Bylaws of the Company, as
currently in effect, have been delivered to Buyer.
(c) The Company does not, directly or indirectly, own, and has not agreed to purchase or
otherwise acquire, the capital stock or other equity interests of, or any interest convertible into
or exchangeable or exercisable for capital stock or other equity interests of, any Person.
Section 2.2. Authority; No Conflict.
(a) This Agreement constitutes the valid and binding obligation of each of Seller Parties,
enforceable against each of Seller Parties in accordance with its terms. Upon the execution and
delivery by Sellers or the Company, respectively, of each document or instrument to be executed or
delivered by Sellers and the Company at Closing pursuant to Section 1.4(a) or any other provision
of this Agreement (collectively, the Seller Closing Documents), each of the Seller
Closing Documents will constitute the valid and binding obligation of Sellers and the Company, as
applicable, enforceable against
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Sellers and the Company, as applicable, in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the
enforceability of creditors rights generally, (ii) general equitable principles and (iii) the
discretion of courts in granting equitable remedies. The Company has all requisite corporate power
and authority and Sellers have all requisite power, authority and capacity, to execute and deliver
this Agreement and the Seller Closing Documents and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement by the Company and the
consummation of the transactions contemplated hereby have been duly and validly authorized and
approved by the Company, and no other corporate action on the part of the Company is necessary to
authorize the execution and delivery of this Agreement by the Company or the consummation of the
transactions contemplated hereby.
(b) Except as set forth in Schedule 2.2(b), neither the execution and delivery of this
Agreement by Seller Parties nor the consummation of the transactions contemplated hereby will,
directly or indirectly (with or without notice or lapse of time):
(i) conflict with or violate the Articles of Incorporation or Bylaws of the Company;
(ii) conflict with or violate, or give any Governmental Authority or other Person the
right to challenge any of the transactions contemplated hereby or exercise any remedy or
obtain any relief under, any Legal Requirement or any Order to which any Seller Party, or
any of the assets owned or used by the Company, may be subject;
(iii) cause Buyer or the Company to become subject to, or to become liable for, the
payment of any Tax resulting from the transactions contemplated by this Agreement;
(iv) breach any provision of any Applicable Contract, or give any Person the right to
declare a default under, exercise any remedy under, accelerate the maturity or performance
of or payment under, or cancel, terminate or modify, any Applicable Contract; or
(v) result in the imposition or creation of any Lien upon or with respect to any of the
assets owned or used by the Company.
(c) Except as set forth in Schedule 2.2(c), no Selling Party is or will be required to
give any notice to or obtain any consent or approval from (i) any Governmental Authority, (ii) any
party to any Applicable Contract, or (iii) any other Person, in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated hereby.
Section 2.3. Capitalization. The authorized equity securities of the Company consist
of 1,000 shares of common stock, of which 850 shares are issued and outstanding and are defined
herein as the Shares. Sellers are and will be on the Closing Date the record and
beneficial owners of the Shares as set forth on Schedule 2.3, free and clear of any Liens.
All of the Shares have been duly authorized and validly issued and are fully paid and
non-assessable. The Shares have not been issued in violation of, and the capital stock of the
Company is not subject to, any preemptive or subscription rights or rights of first refusal. None
of the Shares were issued in violation of the Securities Act or any other Legal Requirement. There
are no options, warrants, calls, subscriptions, convertible securities, or other rights, agreements
or commitments that obligate the Company to issue, transfer or sell any shares of capital stock of
the Company. There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company. There is no obligation, contingent
or otherwise, of the Company to repurchase, redeem or otherwise acquire any Shares. There are no
voting
7
trusts, proxies or other agreements to which any Seller is a party with respect to the voting
or transfer of any Shares.
Section 2.4. Financial Statements. Attached as Schedule 2.4 are copies of (i)
the unaudited balance sheet of the Company as of December 31, 2003, and the related unaudited
income statement for the year then ended, (ii) the unaudited balance sheet of the Company as of
December 31, 2006 (the Most Recent Balance Sheet), and the related unaudited income
statement for the year then ended and (iii) the audited balance sheets of the Company for the years
ended December 31, 2004 and 2005, and the related audited income statements for the years then
ended (the financial statements referred to in clauses (i), (ii) and (iii) above, including the
notes thereto, if any, the Financial Statements), each of which are accurate and complete
in all material respects. The Financial Statements fairly present in all material respects (and
the financial statements to be delivered pursuant to Section 4.7 will fairly present in all
material respects) the financial condition and results of operations of the Company as at the
respective dates of and for the periods referred to in such Financial Statements. The Financial
Statements have been prepared from the books and records of the Company (which books and records
are accurate and complete in all material respects) in accordance with GAAP and reflect the
consistent application of accounting principles throughout the periods involved, except as
disclosed in the notes to the Financial Statements.
Section 2.5. Real Property.
(a) The Company does not own any real property.
(b) Schedule 2.5(b) lists (i) all real property with respect to which the Company
holds a leasehold interest or subleasehold interest, or otherwise has a license or other right to
use (the Leased Real Property), and (ii) each agreement, contract or other arrangement
under which the Company leases or otherwise has the right to use any such Leased Real Property
(listing, with respect to each such agreement, the date of the agreement and any amendments
thereto, any assignments thereof, the names of the parties to the agreement, the address of the
Leased Real Property, the rentable square footage and annual rent thereunder, the expiration date,
and the existence of any renewal terms). The Company enjoys peaceful and undisturbed possession of
the Leased Real Property. The Company has not entered into any subleases, arrangements, licenses
or other agreements relating to the use or occupancy of all or any portion of the Leased Real
Property by any Person other than the Company.
(c) The Leased Real Property, and the use of the Leased Real Property by the Company for the
purposes for which it is currently being used, conforms to all applicable fire, safety, zoning and
building laws and ordinances, laws relating to the disabled, and other applicable Legal
Requirements. To the Knowledge of Seller Parties, there are no pending or threatened eminent
domain, condemnation, zoning, or other Proceedings affecting the Leased Real Property that would
result in the taking of all or any part of the Leased Real Property or that would prevent or hinder
the continued use of the Leased Real Property as currently used in the conduct of the Company
Business. All Leased Real Property has adequate rights of access to dedicated public ways and is
served by water, electric, sewer and other necessary facilities and services.
Section 2.6. Personal Property.
(a) The Company has good and valid title to, or a valid and enforceable right to use under a
contract listed in Schedule 2.15(a), all property and assets (whether tangible or
intangible) used or held for use by the Company in connection with its business, including all such
assets reflected in the Most Recent Balance Sheet or acquired since December 31, 2006 (the
Most Recent Balance Sheet Date), free and clear of all Liens other than (i) any Lien for
Taxes not yet due and payable, (ii) any landlords, carriers, warehousemens, mechanics,
materialmens or similar Liens arising or incurred in
8
the ordinary course of business with respect to obligations that are not yet due or
delinquent, and (iii) any Liens identified on Schedule 2.6(a) (the Permitted
Liens).
(b) Each item of machinery, equipment, furniture, and other tangible personal property used or
held for use by the Company in connection with its business is in good repair and good operating
condition, ordinary wear and tear excepted, is suitable for the purposes for which it is presently
used, and is free from any latent and patent defects. All such tangible personal property is in
the possession of the Company.
Section 2.7. Taxes.
(a) The Company has timely filed all Tax Returns required to be filed by it in accordance with
applicable Legal Requirements, other than any Tax Returns in respect of which the Company has been
the beneficiary of any extension of time within which to file any such Tax Returns as disclosed on
Schedule 2.7(a). All such Tax Returns are true and accurate. Except as set forth in
Schedule 2.7(a), no such Tax Return has been audited or examined by any taxing authority,
court or other Governmental Authority, and, to the Knowledge of Seller Parties, no such audit or
examination is threatened. The Company has not received from any foreign, federal, state, or local
taxing authority any (i) notice indicating an intent to open an audit or other review, (ii) request
for information related to Tax matters, or (iii) notice of deficiency or proposed adjustment for
any amount of Tax proposed, asserted, or assessed by any taxing authority against the Company.
True and complete copies of such Tax Returns for the past three years and any examination reports
and statements of deficiencies relating thereto assessed against or agreed to by the Company have
been delivered to Buyer.
(b) All Taxes due and owing by the Company (whether or not shown on any Tax Return) have been
paid. All Taxes that the Company is or was required by applicable Legal Requirements to withhold
or collect have been withheld or collected, and, to the extent required, have been properly paid on
a timely basis to the appropriate Governmental Authority or other Person. The (i) unpaid Taxes of
the Company (computed consistent with the Companys historical accounting principles and practices
provided that such principles and practices are consistent with applicable Tax law) do not exceed
the reserve for Taxes (rather than any reserve for deferred Taxes established to reflect timing
differences between book and tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto), and (ii) reserve set forth on the Most Recent Balance Sheet
represents an accurate estimate of the Taxes due with respect to the periods ended December 31,
2006.
(c) There is no dispute or claim concerning (i) any Liability of the Company for additional
Taxes, or (ii) any obligation of the Company to file Tax Returns or pay Taxes in any jurisdiction
in which it does not file Tax Returns or pay Taxes, either (x) claimed or raised by any
Governmental Authority in any notice or other communication provided to the Company, or (y) as to
which any Seller Party has Knowledge. No assessment or other Proceeding by any taxing authority,
court or other Governmental Authority is pending, or to the Knowledge of the Company, threatened,
with respect to the Taxes or Tax Returns of the Company. There are no Liens for Taxes upon any
assets of the Company.
(d) There are no outstanding agreements, waivers or arrangements extending the statutory
period of limitations applicable to any claim for or the period for the collection or assessment of
Taxes due by the Company for any taxable period.
(e) The Company does not have any liability for Taxes of any Person other than the Company (i)
under Treasury Regulations Section 1.1502-6 (or any similar provision of applicable law); or (ii)
as a transferee or successor by contract or otherwise. The Company has not been a member of an
9
affiliated group within the meaning of Section 1504(a) of the Code. The Company is not a
party to any Tax allocation agreement, Tax sharing agreement, Tax indemnity agreement or similar
agreement.
(f) None of the assets of the Company is tax-exempt use property within the meaning of
Section 168(h) of the Code.
(g) The Company has not made any payments, is not obligated to make any payments, and is not a
party to any agreement that under certain circumstances could obligate it or any successor to make
payments, that (i) will not be deductible under Section 280G of the Code (including any payments
required to be made in connection with the consummation of the transactions contemplated hereby),
or (ii) to any employee that would not be deductible under Section 162 of the Code.
(h) The Company has disclosed on its federal income Tax Returns all positions taken therein
that could give rise to a substantial understatement of federal income Tax within the meaning of
Section 6662 of the Code.
(i) No closing agreement pursuant to Section 7121 of the Code or any similar provision of
applicable law has been entered into with respect to the Company or any of its assets.
(j) There are no joint ventures, partnerships or other arrangements or contracts to which the
Company is a party that could be treated as a partnership for federal income tax purposes.
(k) The Company will not be required to include any item of income in, or exclude any item of
deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing
Date as a result of any:
(i) change in method of accounting for a taxable period ending on or prior to the
Closing Date;
(ii) installment sale or open transaction disposition made on or prior to the Closing
Date; or
(iii) prepaid amount received on or prior to the Closing Date.
(l) The Company has not distributed stock of another Person, nor had its stock distributed by
another Person, in a transaction that was purported or intended to be governed in whole or in part
by Section 355 of the Code.
Section 2.8. Employees.
(a) Schedule 2.8(a) sets forth a complete and accurate list of (i) each employee of
the Company, including each employee on leave of absence or layoff status, and (ii) each director
of the Company, giving, with respect to each such individual, name, job title, current annual
salary with the Company, any bonuses paid by the Company in addition to such annual salary during
the twelve (12) months preceding the date of this Agreement, vacation and sick leave that is
accrued but unused, and services credited for purposes of vesting and eligibility to participate
under any Employee Benefit Plan (in each case, to the extent applicable).
(b) There is no collective bargaining agreement in effect between the Company and any labor
unions or organizations in respect of its employees. The Company has not experienced any organized
slowdown, work interruption strike or work stoppage by its employees, and, to the Knowledge
10
of Seller Parties, there is no strike, labor dispute or union organization activities pending
or threatened affecting the Company.
(c) The Company is, and since January 1, 2003 (the Compliance Date), has been, in
compliance with all Legal Requirements regarding employment and employment practices, terms and
conditions of employment, wages and hours, benefits, equal employment opportunity,
anti-discrimination, immigration, occupational health and safety, unfair labor practices and
collective bargaining (the Employment Matters), except where such noncompliance would not
have a Material Adverse Effect. Since the Compliance Date, there have been no Proceedings or
claims regarding the Employment Matters, whether oral or in writing, by or against the Company or
that otherwise relate to or may affect the business of, or any of the assets owned or used by, the
Company.
(d) Except as set forth in Schedule 2.8(d), the Company is not a party to any
employment, non-competition, severance or other contract or agreement with any employee or director
of the Company. To the Knowledge of Seller Parties, no employee or director of the Company is
bound by any contract or agreement that purports to limit the ability of such director or employee
to engage in or continue or perform any conduct, activity, duties or practice relating to the
business of the Company, or that requires the employee to transfer, assign, or disclose information
concerning his work to anyone other than the Company.
Section 2.9. Employee Benefits.
(a) Schedule 2.9(a) lists all employment, consulting, executive compensation, bonus,
deferred compensation, incentive compensation, stock purchase, stock option or other equity-based,
retention, change in control, severance or termination pay, hospitalization or other medical, life,
disability or other insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plans, programs, agreements or arrangements, and each other fringe or other employee
benefit plan, program, agreement or arrangement (including any employee benefit plan, within the
meaning of Section 3(3) of ERISA), sponsored, maintained or contributed to or required to be
contributed to by the Company or by any ERISA Affiliate for the benefit of any employee or former
employee of the Company, or any beneficiaries thereof, or with respect to which the Company or any
ERISA Affiliate may have any Liability (the Employee Benefit Plans).
(b) Each Employee Benefit Plan is and has been maintained and administered in material
compliance with its terms and with the applicable requirements of ERISA, the Code and any other
applicable Legal Requirements. The Company has timely segregated or transferred all employee
contributions and paid all other contributions, premiums and expenses payable to or in respect of
each Employee Benefit Plan under the terms thereof and in accordance with the Code, ERISA, and
other applicable Legal Requirements. Neither the Company, nor, to the Knowledge of Seller Parties,
any other Person, has engaged in any transaction with respect to any Employee Benefit Plan that
would be reasonably likely to subject the Company or Buyer to any Tax or penalty (civil or
otherwise) imposed by ERISA, the Code or other applicable Legal Requirements.
(c) With respect to each Employee Benefit Plan, the Company has delivered to Buyer complete
copies of each of the following documents; (i) a copy of each Employee Benefit Plan (including any
amendments thereto); (ii) a copy of the three most recent Form 5500 and annual report, if any,
required under ERISA or the Code; (iii) a copy of the three most recent nondiscrimination reports,
if any, required under the Code; (iv) a copy of the most recent Summary Plan Description, if any,
required under ERISA; (v) if the Employee Benefit Plan is funded through a trust or any third party
funding vehicle, a copy of the trust or other funding agreement (including any amendments thereto);
and (vi) if the
11
Employee Benefit Plan is intended to be qualified under Section 401(a) of the Code, the most
recent determination letter (if any) received from the Internal Revenue Service.
(d) No Employee Benefit Plan is a multiemployer plan, as such term is defined in Section
3(37) of ERISA or a plan that is subject to Title IV of ERISA, and neither the Company nor any
ERISA Affiliate has at any time within the last six years contributed to, maintained, or incurred
any liability with respect to such a plan.
(e) None of the Employee Benefit Plans that are welfare benefit plans, within the meaning of
Section 3(1) of ERISA, provide for continuing benefits or coverage after termination or retirement
from employment, except for COBRA rights under a group health plan as defined in Section 4980B(g)
of the Code and Section 607 of ERISA.
(f) Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the
Code has been established using prototype documents which may rely upon an IRS Opinion Letter, and
there are no facts or circumstances that would be reasonably likely to adversely affect the
qualified status of any such Employee Benefit Plan.
(g) Except as set forth in Schedule 2.9(g), the consummation of the transactions
contemplated hereby will not (i) result in an increase in or accelerate the vesting of any of the
benefits available under any Employee Benefit Plan, or (ii) otherwise entitle any current or former
director or employee of the Company to any severance pay, bonus payments or other payment from the
Company.
(h) There are no pending or, to the Knowledge of Seller Parties, threatened, Proceedings that
have been asserted relating to any Employee Benefit Plan by any employee or beneficiary covered
under any Employee Benefit Plan or otherwise involving any Employee Benefit Plan (other than
routine claims for benefits), and neither the Company, any ERISA Affiliate nor, to the Knowledge of
the Seller Parties, any other Person has engaged in a nonexempt prohibited transaction described in
Section 406 of ERISA or Section 4975 of the Code with respect to any Employee Benefit Plan. No
examination or audit of any Employee Benefit Plan by any Governmental Authority is currently in
progress or, to the Knowledge of Seller Parties, threatened. The Company is not a party to any
agreement or understanding with the Pension Benefit Guaranty Corporation, the Internal Revenue
Service or the Department of Labor with respect to any Employee Benefit Plan.
Section 2.10. Compliance with Legal Requirements. Except as set forth on Schedule
2.10, the Company is, and at all times since the Compliance Date, has been, in compliance with
all Legal Requirements, including any Legal Requirements related to escheat laws, that are or were
applicable to the operation of its business or the ownership or use of any of its assets, except
where such noncompliance would not have a Material Adverse Effect. Except as set forth on
Schedule 2.10, the Company has not received, at any time since the Compliance Date, any
notice or other communication from any Governmental Authority or other Person regarding any actual,
alleged or potential violation of or failure to comply with any Legal Requirement.
Section 2.11. Governmental Authorizations. Schedule 2.11 contains a true and
complete list of each Governmental Authorization that is held by the Company. Each such
Governmental Authorization is valid and in full force and effect. Except as set forth in
Schedule 2.11, the Company is, and at all times since the Compliance Date, has been, in
compliance with each such Governmental Authorization, except where such noncompliance would not
have a Material Adverse Effect. Except as set forth in Schedule 2.11, the Company has not
received, at any time since the Compliance Date, any notice or other communication from any
Governmental Authority or other Person regarding (a) any actual, alleged or potential violation of
or failure to comply with any term or requirement of any such Governmental
12
Authorization, or (b) any actual, proposed, or potential revocation, suspension, cancellation
or termination of, or modification to, any such Governmental Authorization. The Governmental
Authorizations listed in Schedule 2.11 collectively constitute all of the Governmental
Authorizations necessary to permit the Company to lawfully conduct and operate its business in the
manner it is currently conducted.
Section 2.12. Legal Proceedings; Orders.
(a) There are no pending Proceedings or claims, whether oral or in writing (i) by or against
the Company or that otherwise relate to or may affect the business of, or any of the assets owned
or used by, the Company, or (ii) that challenge, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of the transactions contemplated
hereby. To the Knowledge of Seller Parties no such Proceeding or claim, whether oral or in
writing, has been threatened, and no event has occurred or circumstance exists that may give rise
to or serve as a basis for the commencement of any such Proceeding or claim. Except as set forth
in Schedule 2.12(a), there have not been any orders, judgments or decrees rendered against,
or any settlements effected by, the Company in connection with any Proceedings or claims, whether
oral or in writing, brought by or against the Company or that otherwise relate to or may affect the
business of, or any of the assets owned or used by, the Company.
(b) There are no Orders outstanding (i) against the Company or that otherwise relate to or may
affect the business of, or any of the assets owned or used by, the Company; or (ii) that challenge,
or that may have the effect of preventing, delaying, making illegal or otherwise interfering with,
any of the transactions contemplated hereby. To the Knowledge of Seller Parties, no such Order has
been threatened, and no event has occurred or circumstance exists that may give rise to or serve as
a basis for the commencement of any such Order.
Section 2.13. Environmental Matters.
(a) The Company is and has been in compliance with all Environmental Laws, and does not have
any Liability under any Environmental Laws with respect to the Leased Real Property or any other
properties and assets (whether real, personal, or mixed) in which the Company (or any predecessor)
has or had an interest, except where such noncompliance or Liability would not have a Material
Adverse Effect.
(b) There are no Hazardous Materials present on or in the environment at the Leased Real
Property. There has been no emission, disposal, discharge or other release or, to the Knowledge of
Seller Parties, threat of release, of any Hazardous Materials at or from the Leased Real Property
or, during the period of the Companys ownership or lease thereof, at, on, under or from any
property formerly owned or leased by the Company.
(c) The Company has not received any citation, notice or other communication from any
Governmental Authority regarding any alleged, actual or potential violation of any Environmental
Law, or any alleged, actual or potential obligation to undertake or bear the cost of any
Liabilities under any Environmental Law.
Section 2.14. Insurance. Schedule 2.14 contains a true and complete list of
(a) all policies of property, fire and casualty, products liability, workers compensation and
other forms of insurance under which any of the assets or properties of the Company are covered or
otherwise relating to the business of the Company, and (b) all life insurance policies covering the
life of any employee of the Company for which the Company or any employee of the Company has paid
any premiums. Such policies are in full force and effect, and the Company or such employee has
paid all premiums due, and has otherwise
13
performed all of its obligations under, all such policies of insurance. Neither the Company
nor any employee of the Company has received any notice of (a) cancellation or intent to cancel, or
(b) an increase or intent to increase premiums with respect to such insurance policies, and is not
aware of any basis for any such action. True and complete copies of such insurance policies have
been delivered to Buyer.
Section 2.15. Contracts.
(a) Schedule 2.15(a) lists each contract, agreement or other commitment to which the
Company is a party or by which the Company is otherwise bound, excluding the agreements disclosed
in Schedule 2.5(b), Schedule 2.8(d) and Schedule 2.16(c) (such contracts,
agreements and obligations, together with the agreements disclosed in Schedule 2.5(b),
Schedule 2.8(d) and Schedule 2.16(c), the Applicable Contracts):
(b) Except as set forth in Schedule 2.15(b):
(i) Each Applicable Contract is a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, subject to (A) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the
enforceability of creditors rights generally, (B) general equitable principles and (C) the
discretion of courts in granting equitable remedies.
(ii) The Company and, to the Knowledge of Seller Parties, each other party to any
Applicable Contract is, and at all times since January 1, 2003, has been, in compliance with
all applicable terms and requirements of each Applicable Contract.
(iii) Since January 1, 2003, the Company has not given to, or received from, any other
party to any Applicable Contract, any notice or other communication regarding any actual or
alleged breach of or default under any Applicable Contract by the Company or any other party
to such Applicable Contract.
(c) True and complete copies of each of the Applicable Contracts have been delivered to
Buyer.
Section 2.16. Intellectual Property.
(a) The term Intellectual Property Assets means all intellectual property owned,
licensed (as licensor or licensee) or used by the Company, including:
(i) the Companys name, all fictional business names, trade names, trade dress,
registered and unregistered trademarks, registered and unregistered service marks, and
applications for any of the foregoing (collectively, Marks);
(ii) all patents, patent applications, and inventions and discoveries that may be
patentable or unpatentable worldwide (collectively, Patents);
(iii) all registered and unregistered copyrights in both published works and
unpublished works, and copyright applications (collectively, Copyrights);
(iv) all rights in Internet web sites and Internet domain names (collectively,
Internet Rights);
14
(v) all computer software (excluding off-the-shelf software components licensed to the
Company pursuant to non-negotiable standard form, mass-market or shrink wrap licenses
involving payments of less than $3,000 on an annual basis) (the Software);
(vi) all confidential or proprietary know-how, information, customer lists, technical
information, data, process technology, plans, drawings, and blue prints pertaining to the
business of the Company and maintained by the Company as trade secrets (collectively,
Trade Secrets); and
(vii) all general know-how, business information, customer and supplier lists,
technical information, data processing technology, plans, drawings and blue prints
pertaining to the business of the Company but which are not Trade Secrets (collectively,
Business Knowledge).
(b) Schedule 2.16(b) contains a true and complete list of the Intellectual Property
Assets (other than the Trade Secrets) in each case listing, as applicable, (i) the title of the
application or registration, (ii) the name of the applicant/registrant and current owner, (ii) the
jurisdiction where the application/registration is located, (iv) the application or registration
number, (v) filing date, and (vi) whether each such Intellectual Property Asset is owned or
licensed. Prior to the date of this Agreement, the Company has provided Buyer with specimens
showing the use of each Mark in commerce.
(c) Schedule 2.16(c) contains a true and complete list of agreements and contracts
under which the Company licenses any Intellectual Property Assets (as a licensor or licensee). The
Intellectual Property Assets constitute all of the intellectual property necessary to the conduct
of the Companys business as currently conducted. The Company has good and valid title to, or a
valid and enforceable right to use under an agreement listed in Schedule 2.16(c), each of
the Intellectual Property Assets, free and clear of all Liens. The Company has the right to use
without payment to a third party each of the Intellectual Property Assets, other than any payment
required under any agreement listed in Schedule 2.16(c). Neither this Agreement nor the
transactions contemplated by this Agreement, including the assignment to Buyer by operation of law
or otherwise of any contracts or agreements to which the Company is a party, will result in (i)
Buyer granting to any Person any right to or with respect to any Intellectual Property Assets; or
(ii) Buyer being bound by, or subject to, any non-compete or other restriction on the operation or
scope of its business.
(d) None of the Intellectual Property Assets is infringed by any patent, proprietary right,
trade name, trademark, trade dress, service mark, copyright, domain name or other intellectual
property or proprietary right of any other Person or, to the Knowledge of Seller Parties, has been
challenged or threatened in any way. None of the Intellectual Property Assets infringes or
interferes with or is alleged to infringe or interfere with any patent, trade name, trademark,
trade dress, service mark, copyright, domain name or other intellectual property right of any other
Person, or misappropriates any trade secret or proprietary rights of any other Person.
(e) There are no pending or, to the Knowledge of Seller Parties, threatened, Proceedings
asserting that any of the Intellectual Property Assets is infringed by the intellectual property
rights of any other Person or that any of the Intellectual Property Assets infringes or interferes
with any intellectual property or proprietary rights of any other Person, or otherwise relating to
the Intellectual Property Assets.
(f) All Patents, Marks and Copyrights that have been registered, and all Internet Rights, are
in compliance with all formal Legal Requirements (including the payment of any required maintenance
fees), and are valid and enforceable.
15
(g) The Company has taken all commercially reasonable precautions to protect the secrecy,
confidentiality and value of all Trade Secrets. The Trade Secrets are not part of the public
knowledge or literature, and, to the Knowledge of Seller Parties, the Trade Secrets have not been
used, divulged, or appropriated either for the benefit of any Person (other than the Company) or to
the detriment of the Company. To the Knowledge of Seller Parties, the Business Knowledge has not
been appropriated either for the benefit of any Person (other than the Company) or to the detriment
of the Company.
(h) To the extent that any work, invention or material relating to the business of the Company
has been developed or created by any employee or third party for the Company, the Company has
entered into a written agreement with such employee or third party with respect thereto and thereby
has obtained ownership of, and is the exclusive owner of, all intellectual property in such work,
including all Marks, Copyrights, Patents, Trademarks and Trade Secrets, material or invention by
operation of law or by valid assignment. The Company has not licensed any computer software source
code included in the Intellectual Property Assets to any Person in source code format.
(i) Except as set forth in Schedule 2.16(i), all proprietary software of the Company
conforms in all material respects to the specifications and documentation therefor and is otherwise
in compliance with applicable law. No open source, public source or freeware software, code or
other technology, or any modification or derivative thereof, including, without limitation, any
version of any software licensed pursuant to any GNU general public license or limited general
public license, was or is used in, incorporated into, integrated or bundled with, or used in the
development or compilation (other than generally available commercial compilers) of, any
Intellectual Property Assets.
(j) The Company is not barred from seeking patents on material potentially patentable
inventions by on-sale or similar bars to patentability or by failure to apply for a patent on
such inventions within the time required.
Section 2.17. Accounts Receivable. Attached as Schedule 2.17 are the accounts
receivable of the Company as of December 31, 2006, and such accounts receivable and each account
receivable that will be on the accounting records of the Company as of the Closing Date represent
or will represent valid obligations arising from sales actually made or services actually performed
by the Company in the ordinary course of business. Except to the extent paid prior to the Closing
Date, such accounts receivable are or will be as of the Closing Date current and collectible net of
the respective reserves shown on Schedule 2.17 or on the accounts records of the Company as
of the Closing Date, as the case may be (which reserves are adequate and calculated consistent with
past practice and, in the case of the reserve as of the Closing Date, will not represent a greater
percentage of the accounts receivable reflected as of the Closing Date than the reserve reflected
in Schedule 2.17 represented of the accounts receivable reflected therein and will not
represent a material adverse change in the composition of such accounts receivable in terms of
aging). Subject to such reserves, each of such accounts receivable either has been or will be
collected in full, without any set-off, within ninety (90) days after the day on which it first
becomes due and payable. There is no contest, claim, defense or right of set off, other than
returns in the ordinary course of business, with any account debtor of an account receivable
relating to the amount or validity of such account receivable.
Section 2.18. Sufficiency of Assets. The assets of the Company constitute all of the
assets, tangible and intangible, of any nature whatsoever, used in or necessary to operate the
business of the Company in the manner presently conducted by the Company.
Section 2.19. No Undisclosed Liabilities. Except as set forth in Schedule
2.19, the Company has no Liabilities except for Liabilities reflected or reserved against in
the Most Recent Balance Sheet and
16
current Liabilities incurred in the ordinary course of business of the Company since the Most
Recent Balance Sheet Date.
Section 2.20. Material Adverse Change. Since the Most Recent Balance Sheet Date,
there has not been any material adverse change in the business, operations, assets, results of
operations or financial condition of the Company, and no event has occurred or circumstance exists
that may reasonably be expected to result in such a material adverse change.
Section 2.21. Absence of Certain Changes and Events. Except as set forth in
Schedule 2.21, since January 1, 2006, (i) the Company has conducted its business in the
ordinary course of business, and (ii) the Company has not taken any action that, if taken during
the period from the date of this Agreement through the Closing Date, would require the prior
consent of Buyer pursuant to the provisions of Section 4.2(b).
Section 2.22. Material Customers. Schedule 2.22 sets forth a true and
complete list of (a) each of the top twenty-five (25) customers of the Company (based on revenues
from such customer) for (i) the twelve-month period ended December 31, 2005 and (ii) the nine-month
period ended September 30, 2006, and (b) each of the top twenty-five (25) customers of the Company
(based on anticipated revenues for calendar year 2007 using reasonable assumptions by the Seller
Parties; provided, however, that the Company has not made and does not make any representation or
warranty herein that such projections for anticipated revenues are accurate, and, in fact, the
actual revenue of the Company derived from the Companys customers likely will vary from such
projections) (collectively, the Material Customers). For each of the Material Customers,
Schedule 2.22 sets forth (a) the revenue received from such Material Customer for the
twelve-month period ended December 31, 2005 and the nine-month period ended September 30, 2006, (b)
the expiration date of the current contract(s) under which the Company provides services to such
Material Customer and (c) the anticipated revenues under each contract with a Material Customer
through the date of that contracts expiration. Since December 31, 2005, there has been no
material adverse change in the business relationship of the Company with any Material Customer.
Except as set forth in Schedule 2.22(c), the Company has not received any notice, and
Seller Parties do not have any Knowledge, that any customer of the Company has any intention to
terminate or materially reduce services purchased from the Company on account of the transactions
contemplated hereby or otherwise.
Section 2.23. Transactions with Related Persons. Except as set forth in Schedule
2.23, (i) neither Sellers nor any employee, officer, or director of the Company, or any Related
Person thereof (together, the Company Related Persons), is, or at any time since January
1, 2003 has been, involved in any business arrangement or relationship with, or otherwise is a
party to any Applicable Contract (other than any employment or other agreements disclosed pursuant
to Schedule 2.8(d)), and (ii) no Company Related Person owns, directly or indirectly, any
property or right, tangible or intangible, used by the Company in the current conduct of its
business.
Section 2.24. Securities Laws Matters. Sellers (i) understand that the shares of
HealthStream Stock to be issued pursuant to this Agreement have not been, and, as of the date of
issuance, will not be, registered under the Securities Act, or under any state securities laws, and
are being offered and sold in reliance upon federal and state exemptions for transactions not
involving any public offering; (ii) understand that such shares will be characterized as
restricted securities under the Securities Act and may be resold without registration under the
Securities Act only in certain limited circumstances; (iii) are familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and by the Securities
Act; (iv) are acquiring HealthStream Stock solely for their own account for investment purposes,
and not with a view to the distribution thereof; (v) are sophisticated investors with knowledge and
experience in business and financial matters; (vi) have received certain information concerning
Buyer and have had the opportunity to obtain additional information as desired in order to
17
evaluate the merits and the risks inherent in holding shares of HealthStream Stock; (vii) are
able to bear the economic risk and lack of liquidity inherent in holding HealthStream Stock; (viii)
are Accredited Investors; and (ix) understand that the certificates evidencing the shares of
HealthStream Stock to be issued pursuant to this Agreement will bear the following legend and the
legend set forth in Section 7.5:
The shares represented by this certificate have not been registered under the
Securities Act of 1933, as amended. Such shares have been acquired for investment
and may not be offered for sale, sold, transferred, pledged or hypothecated in the
absence of an effective registration statement covering such shares under the
Securities Act or an opinion of counsel satisfactory to the Company that such
registration is not required.
Section 2.25. Brokers or Finders. Except as set forth on Schedule 2.25,
Seller Parties have not incurred and will not incur any liability for brokerage or finders fees or
agents commissions or other similar payment in connection with the transactions contemplated
hereby.
Section 2.26. HIPAA Compliance. The operations of the Company are compatible, in all
material respects, with the Standards for Privacy of Individually Identifiable Health Information
(45 CFR Part 160 and Part 164, Subparts A and E) (Privacy Standards). The operations of
the Company, as currently structured, are compatible, in all material respects, with the Security
Standards for the Protection of Electronic Protected Health Information (45 CFR Part 164, Subparts
A and C) (Security Standards). To the extent the Company has in effect agreements with
its customers that are intended to satisfy the requirements of 45 CFR § 164.504(e) and 45 CFR §
164.314(a), such agreements permit the Company to provide its services effectively and the Company
is not in breach of any such agreements. Except as set forth on Schedule 2.26, the Company
has not received any complaints from any person regarding the Companys or any of its agents,
employees or contractors uses or disclosures of, or security practices regarding, individually
identifiable health-related information. To the Knowledge of Seller Parties, there has been no
misuse, improper disclosure or security incident (each as determined by reference to the Privacy
Standards, Security Standards or state law, as applicable), by the Company or any of its agents,
employees or contractors, involving individually identifiable health-related information.
Section 2.27. Change in Control Payments and Transaction Expenses.
(a) The aggregate amount of the Change in Control Payments equals $110,000. Schedule
2.27(a) identifies each Person, including any taxing authority, to whom any Change in Control
Payment is owed or to whom any Change in Control Payment has been made, with the amount owed to
such Person specified.
(b) The aggregate amount of the Transaction Expenses equals $___. Schedule
2.27(b) identifies each Person to whom any Transaction Expense is owed or to whom any payment
of Transaction Expense has been made, with the amount owed to such Person specified.
Section 2.28. Disclosure.
(a) No representation or warranty or other statement made by any Seller Party in this
Agreement, the certificate to be delivered pursuant to Section 5.1(h)(iii), and any other document
or agreement delivered or to be delivered by any Seller Party in connection with the transactions
contemplated hereby contains or will contain any untrue statement or omits or will omit to state a
material fact necessary to make any of them, in light of the circumstances in which it was made,
not misleading.
(b) In connection with the preparation and execution of this Agreement, the Seller Parties
have delivered certain projections, sales forecasts, future estimates and budgets for the Companys
18
business. Such projections, sales forecasts, future estimates and budgets were prepared in
good faith by the Seller Parties, were based on reasonable assumptions by the Seller Parties and
were based on the Seller Parties knowledge of the historical business of the Company.
Notwithstanding the foregoing, the Seller Parties do not represent or warrant that the Company will
achieve any results set forth in such projections, sales forecasts, future estimates or budgets.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
Section 3.1. Organization and Good Standing. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee, with full corporate
power and authority to conduct its business as it is now being conducted.
Section 3.2. Authority and No Conflict.
(a) This Agreement constitutes the valid and binding obligation of Buyer, enforceable against
Buyer in accordance with its terms. Upon the execution and delivery by Buyer of each document and
instrument to be executed and delivered at Closing by Buyer pursuant to Section 1.4(b) or any other
provision of this Agreement (collectively, the Buyer Closing Documents), each of the
Buyer Closing Documents will constitute the valid and binding obligation of Buyer enforceable
against Buyer in accordance with its terms, subject to (i) applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting the enforceability of creditors rights
generally, (ii) general equitable principles and (iii) the discretion of courts in granting
equitable remedies. Buyer has all requisite corporate power and authority to execute and deliver
this Agreement and the Buyer Closing Documents and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement by Buyer and the consummation of
the transactions contemplated hereby have been duly and validly authorized and approved by Buyer,
and no other corporate action on the part of Buyer is required to authorize the execution and
delivery of this Agreement by Buyer, or the consummation of the transactions contemplated hereby.
(b) Neither the execution and delivery of this Agreement by Buyer, nor the consummation of the
transactions contemplated hereby will, directly or indirectly (with or without notice or lapse of
time):
(i) conflict with or violate the Charter or Bylaws of Buyer;
(ii) conflict with or violate, or give any Governmental Authority or other Person the
right to challenge any of the transactions contemplated hereby or exercise any remedy or
obtain any relief under, any Legal Requirement applicable to Buyer or any Order to which
Buyer may be subject; or
(iii) breach any provision of any contract or agreement of Buyer, or give any Person
the right to declare a default under, exercise any remedy under, accelerate the maturity or
performance of or payment under, or cancel, terminate, or modify, any such contract or
agreement.
(c) Buyer is not and will not be required to give any notice to or obtain any consent from any
Governmental Authority or any other Person in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
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Section 3.3. Legal Proceedings; Orders. There are no Proceedings or claims pending
or, to the Knowledge of Buyer, threatened, against Buyer that challenge, or that may have the
effect of preventing, delaying, making illegal or otherwise interfering with, any of the
transactions contemplated hereby. There are no Orders outstanding or, to the Knowledge of Buyer,
threatened, against Buyer that challenge, or that may have the effect of preventing, delaying,
making illegal or otherwise interfering with, any of the transactions contemplated hereby.
Section 3.4. Investment Intent. Buyer is acquiring the Shares for its own account and
not with a view to their distribution within the meaning of Section 2(11) of the Securities Act.
Section 3.5. Brokers or Finders. Except as disclosed on Schedule 3.5, Buyer
has not incurred and will not incur any liability for brokerage or finders fees or agents
commissions or other similar payment in connection with the transactions contemplated hereby.
Section 3.6. Capitalization. The authorized HealthStream Stock consists of 75,000,000
shares, of which 21,927,687 shares were issued and outstanding at September 30, 2006. All of the
issued and outstanding shares of HealthStream Stock have been duly authorized, are validly issued,
fully paid and nonassessable. The shares of HealthStream Stock to be delivered as part of the
Purchase Price, when issued in accordance with this Agreement, will be duly authorized, validly
issued, fully paid and nonassessable.
Section 3.7. SEC Reports. Buyer has filed with the SEC all forms, reports and
documents (collectively, Filings) required to be filed with the SEC by it pursuant to the
Securities Act and the Exchange Act, all of which complied at the time filed in all material
respects with all applicable requirements of the Securities Act and the Exchange Act. None of such
Filings, at the time filed, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading, except to the extent any
such statements have been modified or superseded by a later Filing filed prior to the date hereof.
Section 3.8. No Reliance. Buyer acknowledges that the Seller Parties have not made
any representation or warranty, express or implied, as to the accuracy or completeness of any
information regarding the Company, its assets or its business that is not included in this
Agreement or the Schedules hereto. Without limiting the generality of the foregoing and except as
set forth in Section 2.28(b), Buyer acknowledges that the Seller Parties have not made any
representation or warranty with respect to any projections, sales forecasts, future estimates or
budgets for the Companys business.
Section 3.9. Knowledge or Breach. As of the date hereof, Buyer represents that it has
no Knowledge of any breach of a representation or warranty made by Sellers or the Company in
Article II of this Agreement.
ARTICLE IV
PRE-CLOSING COVENANTS
Section 4.1. Access and Investigation. Between the date of this Agreement and the
Closing Date, and upon reasonable advance notice received from Buyer, Sellers shall cause the
Company to (a) afford Buyer and its agents and representatives, and the agents and representatives
of any Persons providing financing to Buyer in connection with the transactions contemplated hereby
(collectively, the Buyer Group), full access, during regular business hours, to the
Companys properties, facilities, contracts, books and records, and other documents and data, such
rights of access to be exercised in a manner that does not unreasonably interfere with the
operations of the Company, (b) furnish to the Buyer
20
Group copies of all such contracts, books and records, and other existing document and data
that the Buyer Group may reasonably request, (c) furnish the Buyer Group with such additional
financial, operating, and other relevant data and information as the Buyer Group may reasonably
request, and (d) otherwise cooperate and assist, to the extent reasonably requested by Buyer Group,
with Buyer Groups investigation of the properties, assets and financial condition of the Company.
Buyer will be provided access prior to the Closing to the Companys employees, significant
customers, significant suppliers, and other Persons having business relations with the Company, at
such times and in the manner mutually agreed to by Buyer and Sellers.
Section 4.2. Operation of the Business of the Company.
(a) Except as contemplated by this Agreement or with the prior written consent of Buyer,
between the date of this Agreement and the Closing Date, Sellers shall cause the Company to (i)
conduct its business in the ordinary course of business; (ii) use reasonable best efforts to
preserve intact the current business organization of the Company, keep available the services of
the Companys officers, employees, and agents, and maintain the Companys relations and good will
with suppliers, customers, landlords, creditors, employees, agents and others having business
relationships with the Company; (iii) confer with Buyer prior to implementing operational decisions
of a nature which are either material in respect of the business of the Company or outside the
ordinary course of business; and (iv) upon reasonable request from Buyer, periodically report to
Buyer concerning the status of the business, operations and finance of the Company.
(b) Without limiting the generality of Section 4.2(a), except as contemplated by this
Agreement, between the date of this Agreement and the Closing Date, the Company shall not, without
the prior written consent of Buyer, take any of the following actions:
(i) issue, sell, repurchase, redeem or acquire any shares of capital stock of the
Company, or grant or enter into any rights, warrants, options, agreements or commitments
with respect to the issuance of such capital stock;
(ii) declare, set aside or pay any dividend or other distribution (whether in cash,
securities or property or other combination thereof) in respect of any shares of capital
stock of the Company;
(iii) adjust, split, combine, subdivide or reclassify any shares of capital stock of
the Company;
(iv) amend the Charter or Bylaws of the Company;
(v) pay or increase (except in the ordinary course of business) any salaries payable to
any employee or director of the Company, or pay any bonuses to any employee or director of
the Company;
(vi) adopt, amend, or increase the payments or benefits under any Employee Benefit
Plan;
(vii) except as set forth in Section 4.8, enter into, amend or terminate, or waive or
assign any material right under (1) any contract or agreement of the Company having a value
per contract, or involving payments by or to the Company, of at least $50,000 in the
aggregate; (2) any contract or agreement with any Material Customer; (3) any joint venture,
21
partnership or other similar agreement; (4) any agreement or contract with any Company
Related Person; or (5) any other material contract or agreement.
(viii) acquire assets or other properties of any Person outside of the ordinary course
of business;
(ix) sell, lease, or otherwise dispose of any assets or properties of the Company other
than dispositions of obsolete or unsaleable inventory or equipment in the ordinary course of
business;
(x) make any capital expenditure (or series of capital expenditures) or commitments for
capital expenditures in excess of $15,000 individually or $45,000 in the aggregate;
(xi) make any loans or advances to any Person, except for advances to employees of the
Company for expenses incurred in the ordinary course of business;
(xii) incur, assume, or guaranty any indebtedness for borrowed money or capitalized
lease obligations in excess of $35,000 or outside of the ordinary course of business,
consistent with past practice;
(xiii) fail to keep in full force and effect insurance comparable in amount and scope
to insurance now carried by the Company;
(xiv) permit or allow any of the assets of the Company to be subject to any Lien other
than any Permitted Lien;
(xv) cancel, waive, settle or compromise any Proceeding disclosed in Schedule
2.12(a);
(xvi) cancel, waive or settle any claims or rights with a value to the Company in
excess of $15,000;
(xvii) make any change in connection with its accounts payable or accounts receivable
terms, policies or procedures;
(xviii) make any material change in the accounting or tax methods used the Company; or
(xix) enter into any agreement, whether oral or written, to do any of the foregoing.
Section 4.3. Required Approvals; Reasonable Best Efforts. As promptly as practicable
after the date of this Agreement, Sellers shall, and shall cause the Company to, make all filings
required by Legal Requirements to be made by the Company or Sellers in order to consummate the
transactions contemplated hereby, and to obtain all consents required in connection with the
transactions contemplated hereby as set forth in Schedule 2.2(c). In addition, between the
date of this Agreement and the Closing Date, each Party will use reasonable best efforts to cause
the conditions in Article V to be satisfied.
Section 4.4. Notification. Between the date of this Agreement and the Closing Date,
Buyer or Seller Parties, as the case may be, shall promptly notify the other Party in writing if
such Party becomes
22
aware of (i) any fact or condition that causes or constitutes a breach of any of the
representations and warranties of such Party made as of the date of this Agreement, or (ii) the
occurrence after the date of this Agreement of any fact or condition that would or be reasonably
likely to cause or constitute a breach of any such representation or warranty had that
representation or warranty been made as of the time of the occurrence of, or such Partys discovery
of, such fact or condition. If any such fact or condition requires any change to the Schedules,
Seller Parties shall promptly deliver to Buyer a supplement to the Schedules specifying such
change. In addition, between the date of this Agreement and the Closing Date, Buyer or Seller
Parties, as the case may be, shall promptly notify the other Party of the occurrence of any breach
of any covenant of such Party in this Article IV or of the occurrence of any event that may make
the satisfaction of any conditions in Section 5.1 or Section 5.2 impossible or unlikely. No
disclosure pursuant to this Section 4.4 will prevent or cure any breach of any representation or
warranty or covenant set forth herein.
Section 4.5. No Negotiation. Until such time as this Agreement is terminated pursuant
to Section 6.1, Seller Parties shall not, and shall cause their respective representatives and
agents not to, directly or indirectly, solicit, initiate, encourage or entertain any inquiries or
proposals from, discuss or negotiate with, provide any information to, or consider the merits of
any inquiries or proposals from, any Person (other than Buyer) relating to any merger,
consolidation, business combination or similar transaction involving the Company, or the sale of
the business or assets of the Company (other than sales of inventory in the ordinary course of
business), or the sale of any capital stock of the Company. Seller Parties shall notify Buyer of
any such inquiry or proposal and the terms thereof within twenty-four (24) hours of receipt or
awareness of the same by any Seller Party.
Section 4.6. Payment of Indebtedness by Related Persons. Sellers shall cause all
indebtedness owed to the Company by Sellers, the employees of the Company, or any Related Person
thereof, to be paid in full prior to Closing.
Section 4.7. Interim Financial Statements. Until the Closing Date, Sellers shall
cause the Company to deliver to Buyer within ten (10) calendar days after the end of each month an
unaudited balance sheet of the Company as of the last day of such month and the related unaudited
income statements for the month then ended prepared in a manner consistent with the Companys
current practices.
Section 4.8. Termination. Prior to the Closing Date, the Company shall take all
necessary steps to terminate (i) The Jackson Organization, Research Consultants, Inc. 401(k) Plan;
(ii) the Deferred Compensation Agreement dated as of August 20, 2003 by and between the Company and
Timothy Beal and assign the variable life insurance policy referenced therein to Timothy Beal in
full satisfaction of the Companys obligations thereunder; (iii) the Deferred Compensation
Agreement dated as of January 1, 2004 by and between the Company and Thomas Hutchinson and assign
the variable life insurance policy referenced therein to Thomas Hutchinson in full satisfaction of
the Companys obligations thereunder; and (iv) the Lease Agreement dated as of February 1, 2006 by
and between the Company and MOR Montpelier 3 LLC and shall provide satisfactory evidence to Buyer
of such termination.
ARTICLE V
CONDITIONS TO CLOSING
Section 5.1. Conditions to Obligations of Buyer. The obligations of Buyer to
consummate the transactions contemplated by this Agreement are subject to the satisfaction at or
prior to the Closing of each of the following conditions (any of which may be waived in writing, in
whole or in part, by Buyer):
23
(a) Representations and Warranties. (i) Each of the representations and warranties of
Sellers and the Company in Article II of this Agreement must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material respects as of the
Closing Date as if made on the Closing Date, without giving effect to any supplement to the
Schedules made after the date hereof, and (ii) each of the representations and warranties of
Sellers and the Company in Article II of the Agreement that contains an express materiality
qualification must have been accurate in all respects as of the date of this Agreement, and must be
accurate in all respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Schedules.
(b) Covenants. All of the covenants and obligations that Seller Parties are required
to perform or to comply with pursuant to this Agreement at or prior to the Closing must have been
duly performed and complied with in all material respects.
(c) Consents. All consents required to be obtained from, and all declarations or
filings required to be made with, any Governmental Authority or other Person in connection with the
transactions contemplated hereby, including those set forth on Schedule 2.2(c), must have
been obtained.
(d) No Proceedings. Since the date of this Agreement, there must not have been
commenced or threatened against Buyer, or against any Affiliate thereof, any Proceeding (i)
involving any challenge to, or seeking Damages or other relief in connection with, the transactions
contemplated hereby, or (ii) that may have the effect of preventing, delaying, making illegal,
imposing limitations or conditions on, or otherwise interfering with, any of the transactions
contemplated hereby.
(e) No Claim regarding Stock Ownership or Sales Proceeds. There must not have been
made or threatened by any Person any claim asserting that such Person (i) is the holder or the
beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock
of, or any other voting, equity, or ownership interest in, the Company, or (ii) is entitled to all
or any portion of the Purchase Price payable for the Shares (except as otherwise contemplated
herein).
(f) No Conflict. Neither the consummation nor the performance of the transactions
contemplated hereby will, directly or indirectly (with or without notice or lapse of time),
conflict with or result in a violation of, or cause Buyer or any Affiliate thereof to suffer any
material adverse consequence under, any Order issued by any court or other Governmental Authority
since the date of this Agreement or any Legal Requirement enacted or promulgated since the date of
this Agreement.
(g) Officers and Directors. Each of the officers and directors of the Company must
have resigned effective as of the Closing.
(h) Closing Deliveries. Sellers must have caused the documents and instruments
required by Section 1.4(a) and the following documents to be delivered (or tendered subject only to
Closing) to Buyer:
(i) the Articles of Incorporation and all amendments thereto of the Company, duly
certified as of a recent date by the Secretary of State of Maryland;
(ii) certificates dated as of a date not earlier than the third Business Day prior to
Closing as to the good standing of the Company, executed by the appropriate officials of the
jurisdiction of the Companys incorporation and each jurisdiction in which the Company is
licensed or qualified to do business as a foreign corporation as specified in Schedule
2.1(a);
24
(iii) a certificate dated as of the Closing Date, executed by Sellers and the Company,
certifying as to the satisfaction of the conditions set forth in Sections 5.1(a) and (b);
and
(iv) such other documents as Buyer may reasonably request for the purpose of evidencing
the satisfaction of any condition referred to in this Section 5.1, or otherwise facilitating
the consummation or performance of any of the transactions contemplated hereby.
(i) Material Adverse Change. Between the date hereof and Closing, there shall have
been no material adverse change in the business, operations, prospects, assets, results of
operations or condition of the Company, and no event shall have occurred or circumstance shall
exist that may reasonably be expected to result in such a material adverse change.
Section 5.2. Conditions to Obligations of Sellers. The obligations of Sellers to
consummate the transactions contemplated by this Agreement are subject to the satisfaction at or
prior to the Closing of each of the following conditions (any of which may be waived in writing, in
whole or in part, by Sellers):
(a) Representations and Warranties. Each of the representations and warranties of
Buyer in Article III of this Agreement must have been accurate in all material respects as of the
date of this Agreement, and must be accurate in all material respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplement to the Schedules.
(b) Covenants. All of the covenants and obligations that Buyer is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing must have been duly
performed and complied with in all material respects.
(c) No Conflict. Neither the consummation nor the performance of the transactions
contemplated hereby will, directly or indirectly (with or without notice or lapse of time),
conflict with, or result in a violation of, or cause Sellers to suffer any material adverse
consequence under, any Order issued by any court or other Governmental Authority since the date of
this Agreement or any Legal Requirement enacted or promulgated since the date of this Agreement.
(d) Closing Deliveries. Buyer must have delivered the documents and instruments
required by Section 1.4(b) and the following documents to Sellers:
(i) the Charter and all amendments thereto of Buyer, duly certified as of a recent date
by the Secretary of State of Tennessee;
(ii) a certificate dated as of a date not earlier than the third Business Day prior to
Closing as to the good standing of Buyer, executed by the Secretary of State of Tennessee;
(iii) a certificate, dated as of the Closing Date, executed by Buyer, certifying as to
the satisfaction of the conditions set forth in Sections 5.2(a) and (b); and
(iv) such other documents as Sellers may reasonably request for the purpose of
evidencing the satisfaction of any condition referred to in this Section 5.2, or otherwise
facilitating the consummation or performance of any of the transactions contemplated hereby.
25
ARTICLE VI
TERMINATION
Section 6.1. Termination Events. By written notice given prior to or at the Closing,
subject to Section 6.2, this Agreement may be terminated as follows:
(a) by Buyer, in the event a material breach of this Agreement has been committed by any
Seller Party and such breach has not been waived in writing by Buyer;
(b) by Sellers, in the event a material breach of this Agreement has been committed by Buyer,
and such breach has not been waived in writing by Sellers;
(c) by Buyer, if the satisfaction of any of the conditions to Buyers obligation to close the
transactions contemplated hereby as set forth in Section 5.1 becomes impossible (other than through
the failure of Buyer to comply with its obligations under this Agreement), and Buyer has not waived
such condition in writing on or before such date;
(d) by Sellers, if the satisfaction of any of the conditions to Sellers obligation to close
the transactions contemplated hereby as set forth in Section 5.2 becomes impossible (other than
through the failure of Sellers to comply with their obligations under this Agreement), and Sellers
have not waived such condition in writing on or before such date;
(e) by mutual consent of Buyer and Sellers; and
(f) by Buyer or Sellers, if the Closing has not occurred on or before March 31, 2007, or such
later date as the Parties may agree upon, unless the terminating party(ies) is in material breach
of this Agreement.
Section 6.2. Effect of Termination. Each Partys right of termination under Section
6.1 is in addition to any other rights it may have under this Agreement or otherwise, and the
exercise of such right of termination will not be an election of remedies. If the Agreement is
terminated pursuant to Section 6.1, all obligations of the Parties under this Agreement will
terminate, except that the obligations in this Article VI, Section 7.1, Section 7.2 and Article IX
will survive; provided, however, that termination of this Agreement will not preclude a Party from
bringing an indemnification claim against any other Party to this Agreement for a breach arising
prior to such termination pursuant to the terms and conditions set forth herein.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1. Public Announcements. Any public announcement or similar publicity with
respect to this Agreement or the transactions contemplated hereby will be issued at such time and
in such manner as the Parties may agree; provided, however, that in the case of announcements,
statements or acknowledgments that any Party is required by applicable Legal Requirements to make,
issue or release, the making, issuing or releasing of any such announcement, statements or
acknowledgment by the Party so required to do by applicable Legal Requirements will not constitute
a breach of this Agreement if such Party has given, to the extent reasonably possible, notice
thereof to the other Parties not less than one (1) Business Day prior to such disclosure and has
attempted, to the extent reasonably possible, to clear such announcement, statement or
acknowledgment with the other Parties.
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Section 7.2. Confidentiality Agreement. The Confidentiality Agreement, dated as of
October 17, 2005, entered into by and between Buyer and the Company (the Confidentiality
Agreement) will remain in full force and effect following the date of this Agreement, whether
or not the Closing occurs, in accordance with the terms thereof.
Section 7.3. Customers and Other Business Relationships. After the Closing, Sellers
will cooperate with Buyer in its efforts to continue and maintain for the benefit of Buyer those
business relationships of Sellers relating to the business of the Company, including relationships
with suppliers, customers, landlords, creditors, lessors and employees. After the Closing, Sellers
will refer all customer inquiries relating to the business of the Company to Buyer.
Section 7.4. Tax Matters.
(a) Sellers shall prepare or cause to be prepared all Tax Returns of the Company for all Tax
periods ending on or prior to the Closing Date which are required to be filed after the Closing
Date, including the Tax Return for the short period ending on the Closing Date. The results
reported and positions taken on all such Tax Returns shall be consistent with the past custom and
practice of the Company. Sellers shall provide Buyer with a copy of such Tax Returns at least
thirty (30) days prior to the due date for any such return and shall make any change reasonably
requested by Buyer. Buyer shall execute and file such Tax Returns.
(b) Buyer and Sellers shall cooperate fully, as and to the extent reasonably requested by the
other Party, in connection with the filing of Tax Returns pursuant to this Section 7.4 and any
audit, litigation or other Proceeding with respect to such Tax Returns. Such cooperation shall
include Buyers retention and (upon Sellers request) the provision of records and information
which are reasonably relevant to any such audit, litigation or other Proceeding. Seller Parties
shall retain all of their books and records with respect to Tax matters pertinent to the Company
relating to any taxable period beginning before the Closing Date until the expiration of the
statute of limitations.
Section 7.5. Lock-Up Agreement.
(a) Except with the prior written consent of Buyer, Sellers will not, directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation any short sale),
grant any right or warrant to purchase, lend, pledge, transfer, establish an open put equivalent
position within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of the
risk of owning any shares of HealthStream Stock received pursuant to this Agreement for a period
commencing on the date hereof and continuing until the date that is twelve (12) months following
the Closing Date. The foregoing sentence shall not apply to the transfer of any or all of such
shares of HealthStream Stock owned by Sellers, either during their lifetimes or on death, by gift,
will or intestate succession to the immediate family of the undersigned or to a trust the
beneficiaries of which are exclusively the undersigned and/or a member or members of their
immediate family; provided, however, that in any such case it shall be a condition to such transfer
that the transferee executes and delivers to Buyer an agreement stating that the transferee is
receiving and holding the shares of HealthStream Stock subject to the provisions of this Section,
and there shall be no further transfer of such shares of HealthStream Stock except in accordance
with this Section. Sellers also agree and consent to the entry of stop transfer instructions with
Buyers transfer agent and registrar against the transfer of such shares of HealthStream Stock
except in compliance with the foregoing restrictions.
(b) Sellers understand that the certificates evidencing the shares of HealthStream Stock to be
issued pursuant to this Agreement will bear the following legend:
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The shares represented by this certificate are subject to contractual restrictions
on transfer expiring after a specified holding period, pursuant to that certain
Stock Purchase Agreement dated as of March 12, 2007 (the Agreement), by and among
HealthStream, Inc. (the Issuer), The Jackson Organization Research Consultants,
Inc., David Jackson, The Jackson Charitable Remainder Trust. Prior to the
expiration of such holding period, such shares may not be sold, transferred or
assigned and the Issuer shall not be required to give effect to any attempted sale,
transfer or assignment except to the extent such sale, transfer or assignment is in
compliance with the Agreement. Upon the written request of the holder of this
certificate, the Issuer agrees to remove this restrictive legend (and any stop order
placed with the transfer agent) when the holding period has expired.
ARTICLE VIII
INDEMNIFICATION
Section 8.1. Survival. All representations, warranties, covenants, and obligations in
this Agreement, the Schedules attached hereto, the certificates delivered pursuant to Article V,
and any other certificate or document delivered pursuant to this Agreement will survive the Closing
to the extent contemplated by Section 8.6. The waiver of any condition based on the accuracy of
any representation or warranty, or on the performance of or compliance with any covenant or
obligation, will not affect the right to indemnification, reimbursement, or other remedy based on
such representations, warranties, covenants and obligations.
Section 8.2. Indemnification by Seller Indemnifying Persons. Subject to the terms and
conditions of this Article VIII, Sellers and (subject to the last sentence of this Section 8.2) the
Company (the Seller Indemnifying Persons), jointly and severally, shall indemnify and
hold harmless Buyer and its Affiliates, stockholders, officers, directors, employees, agents and
representatives (collectively, the Buyer Indemnified Persons), and shall reimburse the
Buyer Indemnified Persons for, any losses, liabilities, claims, diminution of value, damages, and
expenses (including reasonable attorneys fees and expenses), whether or not involving a
third-party claim (collectively, Damages), arising, directly or indirectly, from or in
connection with:
(a) any breach of any representation or warranty made in Article II of this Agreement, the
Schedules attached hereto (including any supplements thereto), the certificate to be delivered by
Sellers and the Company pursuant to Section 5.1(h)(iv), and any certificate or document delivered
at Closing by Seller Parties pursuant to this Agreement;
(b) any breach of any covenant or obligation of Seller Parties in this Agreement; and
(c) any liability or obligation for Taxes payable for all taxable periods ending on or prior
to the Closing Date and the portion through the end of the Closing Date for any taxable period that
includes (but does not end on) the Closing Date that are not taken into consideration in
determining the Closing Adjustment Amount (i) payable by the Company or (ii) for which the Company
otherwise has any liability or obligation as a transferee or successor, or pursuant to any
contractual obligation or otherwise.
Notwithstanding the foregoing, on and after the Closing, the obligation of the Company to indemnify
the Buyer Indemnified Persons will terminate and be of no further force and effect.
Section 8.3. Indemnification by Buyer. Subject to the terms and conditions of this
Article VIII, Buyer shall indemnify and hold harmless Sellers and Sellers Affiliates, Related
Persons, agents and
28
representatives (collectively, the Seller Indemnified Persons), and shall reimburse
Seller Indemnified Persons for, any Damages arising, directly or indirectly, from or in connection
with:
(a) any breach of any representation or warranty made by Buyer in this Agreement, the
certificate to be delivered by Buyer pursuant to Section 5.2(d)(iii), and any certificate or
document delivered at Closing by Buyer pursuant to this Agreement; and
(b) any breach of any covenant or obligation of Buyer in this Agreement.
Section 8.4. Limitations on Indemnification by Seller Indemnifying Persons.
Notwithstanding anything contained herein to the contrary, the obligation of Seller Indemnifying
Persons to indemnify the Buyer Indemnified Persons pursuant to Section 8.2 is subject to the
following limitations and qualifications:
(a) Seller Indemnifying Persons will not have any indemnification liability under Section
8.2(a) until the total amount of Damages incurred or suffered by the Buyer Indemnified Persons
hereunder is at least $70,000 (the Basket), after which Seller Indemnifying Persons will
have indemnification liability for the total amount of Damages;
(b) any indemnification claims brought by or on behalf of the Buyer Indemnified Persons must
be brought within the time periods set forth in Section 8.6(a) below; and
(c) except for liabilities arising out of Sections 2.2(a) (Authority), 2.3 (Capitalization),
2.7 (Taxes), 2.9 (Employee Benefits), 2.13 (Environmental Matters), and 2.25 (Brokers or Finders),
and subject to Section 8.10, the Seller Indemnifying Persons maximum aggregate liability under
Section 8.2(a) shall not exceed $6,000,000.
Section 8.5. Limitations on Indemnification by Buyer. Notwithstanding anything
contained herein to the contrary, the obligation of Buyer to indemnify Seller Indemnified Persons
pursuant to Section 8.2 is subject to the following limitations and qualifications:
(a) Buyer will not have any indemnification liability under Section 8.3(a) until the total
amount of Damages incurred or suffered by Seller Indemnified Persons hereunder exceeds the Basket,
after which Buyer will have indemnification liability for the total amount of Damages;
(b) any indemnification claims brought by or on behalf of Seller Indemnified Persons must be
brought within the time periods set forth in Section 8.6(b) below; and
(c) subject to Section 8.10, Buyers maximum aggregate liability under Section 8.3(a) shall
not exceed $6,000,000.
Section 8.6. Time Limitations.
(a) If the Closing occurs, Seller Indemnifying Persons will have no indemnification liability
under this Article VIII with respect to (i) any claims made under Section 8.2(a) or (ii) any claims
made under Section 8.2(b) relating to any covenant or obligation to be performed and complied with
by Seller Parties on or prior to the Closing Date, unless on or before the date that is eighteen
(18) months following the Closing Date, Buyer notifies Sellers of a claim specifying the factual
basis of that claim in reasonable detail to the extent then known by Buyer; provided, however, that
(x) any claims with respect to Sections 2.7, 2.9, 2.13 and 2.25 made under Section 8.2(a), or any
claims made under Section 8.2(c), may be made at any time prior to the date that is thirty (30)
days after the expiration of the statute of
29
limitations applicable to the subject matter thereof to which the claim for indemnification
relates; and (y) any claims with respect to Sections 2.2(a) and 2.3, or a claim for indemnification
or reimbursement not based upon any covenant or obligation to be performed and complied with prior
to the Closing Date may be made at any time.
(b) If the Closing occurs, Buyer will have no indemnification liability under this Article
VIII with respect to (i) any claim made under Section 8.3(a) or (ii) any claims made under Section
8.3(b) relating to any covenant or obligation to be performed and complied with by Buyer on or
prior to the Closing Date, unless on or before the date that is eighteen (18) months following the
Closing Date, Sellers notify Buyer of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by Sellers; provided, however, that any claim for
indemnification or reimbursement made under Section 8.3(b) not based upon any covenant or
obligation to be performed and complied with prior to the Closing Date may be made at any time.
Section 8.7. Procedure for Indemnification Third Party Claims.
(a) Promptly after receipt by an indemnified party under Section 8.2 or Section 8.3, as the
case may be (an Indemnified Person), of notice of the assertion of any third-party claim
against it, such Indemnified Person shall give notice to the Person obligated to indemnify such
Person under Section 8.2 or Section 8.3, as the case may be (an Indemnifying Person), of
the assertion of such third-party claim, provided that the failure to notify the Indemnifying
Person will not relieve the Indemnifying Person of any liability that it may have to any
Indemnified Person, except to the extent that the Indemnifying Person demonstrates that the defense
of such third-party claim is prejudiced by the Indemnified Persons failure to give such notice.
(b) If an Indemnified Person gives notice to the Indemnifying Person pursuant to Section
8.7(a) of the assertion of a third-party claim, the Indemnifying Person will be entitled to
participate in the defense of such third-party claim and, to the extent that the Indemnifying
Person wishes (unless (i) the Indemnifying Person is also a Person against whom the third-party
claim is made and the Indemnified Person determines in good faith that joint representation would
be inappropriate, or (ii) the Indemnifying Person fails to provide reasonable assurance to the
Indemnified Person of its financial capacity to defend such third-party claim and provide
indemnification with respect to such third-party claim), by providing written notice thereof to the
Indemnified Person within ten (10) days of the delivery of such notice pursuant to Section 8.7(a),
to assume the defense of such third-party claim with counsel satisfactory to the Indemnified
Person. After notice from the Indemnifying Person to the Indemnified Person of its election to
assume the defense of such third-party claim, the Indemnifying Person will not, so long as it
diligently conducts such defense, be liable to the Indemnified Person under this Article VIII for
any fees of other counsel or any other expenses of any Indemnified Person with respect to the
defense of such third-party claim, in each case subsequently incurred by the Indemnified Person in
connection with the defense of such third-party claim, other than reasonable costs of
investigation. If the Indemnifying Person assumes the defense of a third-party claim, (x) such
assumption will conclusively establish for purposes of this Agreement that the claims made in that
third-party claim are within the scope of and subject to indemnification, and (y) no compromise or
settlement of such third-party claims may be effected by the Indemnifying Person without the
Indemnified Persons consent unless (A) there is no finding or admission of any violation of any
Legal Requirement or any violation of the rights of any Person by any Indemnified Person; and (B)
the sole relief provided is monetary damages that are paid in full by the Indemnifying Person, and
the Indemnified Person will have no liability with respect to any compromise or settlement of such
third-party claims effected without its consent. If notice is given to an Indemnifying Person of
the assertion of any third-party claim and the Indemnifying Person does not, within ten (10) days
after the Indemnified Persons notice is given, give notice to the Indemnified Person of its
election to assume the defense of such third-party claim, the Indemnifying Person will be bound by
30
any determination made in such third-party claim or any compromise or settlement effected by
the Indemnified Person.
(c) Notwithstanding the foregoing, if an Indemnified Person determines in good faith that
there is a reasonable probability that a third-party claim may adversely affect such Indemnified
Person other than as a result of monetary damages for which it would be entitled to indemnification
under this Agreement, the Indemnified Person may, by notice to the Indemnifying Person, assume the
exclusive right to defend, compromise or settle such third-party claim, but the Indemnifying Person
will not be bound by any determination of any third-party claim so defended for the purposes of
this Agreement or any compromise or settlement effected without its consent (which may not be
unreasonably withheld).
(d) With respect to any third-party claim subject to indemnification under this Article VIII:
(i) both the Indemnified Person and the Indemnifying Person, as the case may be, shall keep the
other Person fully informed of the status of such third-party claim and any related Proceedings at
all stages thereof where such Person is not represented by its own counsel, and (ii) the
Indemnified Persons and Indemnifying Persons shall render to each other such assistance as they may
reasonably require of each other and cooperate in good faith with each other in order to ensure the
proper and adequate defense of any third-party claim.
(e) With respect to any third-party claim subject to indemnification under this Article VIII,
the Parties shall cooperate in such a manner as to preserve in full (to the extent possible) the
confidentiality of all confidential information and the attorney-client and work-product
privileges. In connection therewith, each party agrees that: (i) it will use its reasonable best
efforts, in respect of any third-party claim in which it has assumed or has participated in the
defense, to avoid production of confidential information (consistent with applicable law and rules
of procedure), and (ii) all communications between any Parties hereto and counsel responsible for
or participating in the defense of any third-party claim will, to the extent possible, be made so
as to preserve any applicable attorney-client or work-product privilege.
Section 8.8. Procedure For Indemnification Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted by notice to the
party from whom indemnification is sought and will be paid promptly after such notice.
Section 8.9. Materiality Qualifications. For purposes of calculating the amount of
Damages to which the Buyer Indemnified Persons and Seller Indemnified Persons are entitled under
this Article VIII (but not for purposes of determining whether a representation or warranty has
been breached), the terms material, materiality, and Material Adverse Effect will be
disregarded.
Section 8.10. Other Actions. Notwithstanding anything to the contrary in this Article
VIII, any liabilities arising from criminal activity, willful misstatements, willful omission,
willful breaches, willful nonfulfillments and willful violations or for fraud shall survive the
periods set forth in Section 8.6 and shall not be subject to the limitations on liability set forth
in Sections 8.4 and 8.5.
Section 8.11. Exclusive Remedy. Each of the Parties agrees that its sole recourse for
any breach or default hereunder, or for any other matter as to which indemnification is provided to
it in this Article VIII, shall be limited to (a) the indemnification provisions set forth herein,
(b) any equitable relief to which it is entitled, and (c) any action based on the fraud or willful
misconduct of any Party.
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ARTICLE IX
GENERAL PROVISIONS
Section 9.1. Expenses. Buyer shall bear its costs and expenses incurred in connection
with the preparation, execution, and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of Buyers agents and representatives and all
transfer, documentary, sales, use or other similar Taxes arising in connection with the
transactions contemplated hereby. The Company shall bear the costs and expenses of Seller Parties
incurred in connection with the preparation, execution, and performance of this Agreement and the
transactions contemplated hereby, including all fees and expenses of Seller Parties agents and
representatives; provided, however, that in no event shall such costs, fees and expenses exceed the
amount set forth on Schedule 2.27(b).
Section 9.2. Assignment; No Third Party Beneficiaries. No party may assign any of its
rights or delegate any of its obligations under this Agreement without the prior written consent of
the other Parties, except that Buyer may assign any of its rights and delegate any of its
obligations under this Agreement to any Affiliate of Buyer, provided that no such assignment or
delegation will relieve Buyer from any of its obligations hereunder. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit
of the successors and permitted assigns of the Parties. Nothing in this Agreement will be
construed to give any Person other than the Parties to this Agreement any legal or equitable right
under or with respect to this Agreement or any provision of this Agreement, except such rights as
will inure to a successor or permitted assignee pursuant to this Section 9.2.
Section 9.3. Notices. All notices, consents, waivers, and other communications under
this Agreement must be in writing and must be delivered (a) personally, (b) by national overnight
courier with confirmation of next-day delivery, (c) by facsimile or electronic mail, or (d) by
registered or certified U.S. mail, return receipt requested, and will be deemed given (i) when so
delivered personally, (ii) if sent by national overnight courier, two (2) days after the date of
mailing, to the addresses set forth below, or (iii) if sent by facsimile or electronic mail, upon
confirmation of transmission by the transmitting equipment, or (iv) if sent by registered or
certified U.S. mail when actually received at the address shown on the postal receipt (or to such
other addresses and facsimile numbers as a Party may designate by notice to the other Parties):
If to Sellers or the Company (prior to the Closing Date):
Mr. David Jackson
7710 Montpelier Road
Laurel, MD 20723
Facsimile: 240-473-1305
with a copy to:
Venable LLP
2 Hopkins Plaza, Suite 1800
Baltimore, Maryland 21201
Attn: Michael J. Baader
Facsimile: 410-244-7742
Email: mjbaader@venable.com
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If to Buyer or the Company (following the Closing Date):
HealthStream, Inc..
209 10th Avenue South, Suite 450
Nashville, Tennessee 37204
Attn: Legal Department
Facsimile: 615-301-3200
Email: Kevin.OHara@healthstream.com with a copy to
Susan.Brownie@healthstream.com
with a copy to:
Bass, Berry & Sims PLC
315 Deaderick Street, Suite 2700
Nashville, Tennessee 37238-3001
Attn: J. Page Davidson
Facsimile: 615-742-2753
Email: pdavidson@bassberry.com
Section 9.4. Entire Agreement; Modification. This Agreement (together with the
Annexes, Exhibits and Schedules attached to this Agreement and the other documents delivered
pursuant to this Agreement) and the Confidentiality Agreement constitute the entire agreement among
the Parties and supersede all prior agreements, whether written or oral, between the Parties with
respect to the subject matter hereof and thereof. This Agreement may not be amended except by a
written agreement signed by each of the Parties to this Agreement.
Section 9.5. Waiver; Remedies Cumulative. Neither the failure nor any delay by any
Party in exercising any right under this Agreement or the documents referred to in this Agreement
will operate as a waiver of such right, and no single or partial exercise of any such right will
preclude any other or further exercise of such right or the exercise of any other right. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or
the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by
a waiver or renunciation of the claim or right unless in writing signed by the other Parties; (b)
no waiver that may be given by a Party will be applicable except in the specific instance for which
it is given; and (c) no notice to or demand on one Party will be deemed to be a waiver of any
obligation of such Party or of the right of the Party giving such notice or demand to take further
action without notice or demand as provided in this Agreement or the documents referred to in this
Agreement. The rights and remedies of the Parties to this Agreement are cumulative and not
alternative.
Section 9.6. Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect, and the Agreement shall be deemed modified to the least extent
necessary and not in a manner that would deprive any Party of the benefit of its bargain.
Section 9.7. Headings; Construction. The headings of Articles and Sections in this
Agreement are provided for convenience only and will not affect its construction or interpretation.
All Annexes, Exhibits and Schedules to this Agreement are incorporated into and constitute an
integral part of this Agreement as if fully set forth herein. All words used in this Agreement
will be construed to be of such gender or number as the context requires. All references to
documents, instruments or agreements will be deemed to refer as well to all addenda, exhibits,
schedules or amendments thereto. The language used in the Agreement will be construed, in all
cases, according to its fair meaning, and not for or against any Party hereto. The Parties
acknowledge that each Party has reviewed this Agreement and that rules of
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construction to the effect that any ambiguities are to be resolved against the drafting Party
will not be available in the interpretation of this Agreement.
Section 9.8. Jurisdiction. The Parties agree that the state and federal courts
located in Davidson County, Tennessee, will be the sole venue and will have sole jurisdiction for
the resolution of all disputes arising hereunder. Process in any action or proceeding referred to
in the preceding sentence may be served on any Party anywhere in the world.
Section 9.9. Governing Law. This Agreement will be governed by and construed under
the laws of the State of Tennessee without regard to any conflicts of laws principles that would
require the application of any other law.
Section 9.10. Execution of Agreement; Counterparts. This Agreement may be executed in
one or more counterparts, each of which will be deemed to be an original copy of this Agreement and
all of which, when taken together, will be deemed to constitute one and the same agreement. The
exchange of copies of this Agreement and of signature pages by facsimile, or by .pdf or similar
imaging transmission, will constitute effective execution and delivery of this Agreement as to the
parties and may be used in lieu of the original Agreement for all purposes. Signatures of the
parties transmitted by facsimile, or by .pdf or similar imaging transmission, will be deemed to be
their original signatures for any purpose whatsoever.
Section 9.11. Further Assurances. The parties shall cooperate reasonably with each
other and with their respective representatives and agents in connection with any steps required to
be taken as part of their respective obligations under this Agreement, and the parties agree (a) to
furnish upon request to the other parties such further information, (b) to execute and deliver to
each other such other documents, and (c) to do such other acts and things, all as the other parties
may reasonably request, for the purpose of carrying out the intent of this Agreement and the
transactions contemplated hereby.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written
above.
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BUYER:
HealthStream, Inc.
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By: |
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Name: |
Robert A. Frist, Jr. |
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Its: Chief Executive Officer |
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The Jackson Charitable Remainder Trust
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By: |
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Name: |
Charles Deuber |
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Its: Trustee |
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COMPANY:
The Jackson Organization, Research
Consultants, Inc.
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By: |
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Name: |
David Jackson |
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Its: President/CEO |
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Annexes, Exhibits & Schedules
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Annexes |
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Annex A
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Defined Terms |
Annex B
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Working Capital as of December 31, 2006 |
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Exhibits |
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Exhibit A
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Form of Release |
Exhibit B
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Form of Consulting Agreement |
Exhibit C
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Form of Employment Agreement |
Exhibit D
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Form of Noncompetition Agreement |
Exhibit E
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Form of Cash Escrow Agreement |
Exhibit F
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Form of Stock Escrow Agreement |
Exhibit G
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Form of Guaranty Escrow Agreement |
Exhibit H
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Form of Staros Cross Receipt |
Exhibit I
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Opinion of Venable LLP |
Exhibit J
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Form of New Lease |
Exhibit K
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Form of Payoff Agreement |
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Schedules |
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Annex A
Defined Terms
Capitalized terms used in this Agreement have the meanings set forth below:
Accredited Investor has the meaning set forth in Regulation D promulgated under the
Securities Act.
Additional Cash Escrow has the meaning set forth in Section 1.2.
Affiliate means, with respect to any Person, any other Person controlling,
controlled by, or under common control with such first Person.
Agreement has the meaning set forth in the first paragraph of this Agreement.
Applicable Contracts has the meaning set forth in Section 2.15(a).
Average Price means the arithmetic mean of the closing price of HealthStream Stock
on The Nasdaq Stock Markets National Market System for the 90 trading days immediately prior to
the second trading day prior to the Closing Date.
Basket has the meaning set forth in Section 8.4(a).
Business Day means any day other than Saturday or Sunday or any other day on which
banks in the State of New York are permitted or required to be closed.
Business Knowledge has the meaning set forth in Section 2.16(a)(vii).
Buyer has the meaning set forth in the first paragraph of this Agreement.
Buyer Closing Documents has the meaning set forth in Section 3.2(a).
Buyer Group has the meaning set forth in Section 4.1.
Cash Escrow has the meaning set forth in Section 1.2.
Cash Escrow Agreement has the meaning set forth in Section 1.4(a)(vi).
Cash Consideration has the meaning set forth in Section 1.2.
Change in Control Payments means any payments made or to be made by the Company to
any Person as a result of the consummation of the transactions contemplated by this Agreement,
including any Taxes paid or payable by the Company as a result of such payments.
Closing has the meaning set forth in Section 1.3.
Closing Balance Sheet has the meaning set forth in Section 1.6(c).
Closing Date has the meaning set forth in Section 1.3.
A-1
Closing Adjustment Amount has the meaning set forth in Section 1.6(a).
Code means the Internal Revenue Code of 1986, as amended.
Company has the meaning set forth in the first paragraph of this Agreement.
Compliance Date has the meaning set forth in Section 2.8(c).
Confidentiality Agreement has the meaning set forth in Section 7.2.
Consulting Agreement has the meaning set forth in Section 1.4(a)(iii).
Company Related Persons has the meaning set forth in Section 2.23.
Copyrights has the meaning set forth in Section 2.16(a)(iii).
Damages has the meaning set forth in Section 8.2.
Delivery Date has the meaning set forth in Section 1.6(c)
Employee Benefit Plans has the meaning set forth in Section 2.9(a).
Employment Agreements has the meaning set forth in Section 1.4(a)(iv).
Employment Matters has the meaning set forth in Section 2.8(c).
Environmental Laws means all domestic or foreign federal, state, local and municipal
Legal Requirements concerning pollution or the protection of the environment.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
ERISA Affiliate means any entity that is considered a single employer with the
Company under Section 414 of the Code.
Escrow Agent means SunTrust Bank, or any successor named pursuant to the Cash Escrow
Agreement or Stock Escrow Agreement.
Escrow Consideration means the Cash Escrow and the Escrow Stock.
Escrow Stock has the meaning set forth in Section 1.2.
Estimated Closing Adjustment Amount has the meaning set forth in Section 1.5(a).
Estimated Balance Sheet has the meaning set forth in Section 1.5(b).
Exchange Act means the Securities Exchange Act of 1934, as amended.
Filings has the meaning set forth in Section 3.7.
Financial Statements has the meaning set forth in Section 2.4.
A-2
Forms has the meaning set forth in Section 4.10(b).
GAAP means generally accepted accounting principles for financial reporting in the
United States.
Governmental Authority means any domestic or foreign federal, state, local or
municipal court, legislature, executive or regulatory authority, agency or commission, or other
governmental entity, authority or instrumentality.
Governmental Authorization means any consent, license, or permit issued, granted,
given, or otherwise made available by or under the authority of any Governmental Authority or
pursuant to any Legal Requirement.
Guaranty Escrow has the meaning set forth in Section 1.2.
Guaranty Escrow Agreement has the meaning set forth in Section 1.4(a)(viii).
Hazardous Materials means any (a) pollutant, contaminant, waste, petroleum,
petroleum products, asbestos or asbestos-containing material, radioactive materials,
polychlorinated biphenyls, mold, urea formaldehyde and radon gas, and (b) any other chemicals,
materials or substances defined or regulated as hazardous waste, hazardous material, hazardous
substance, extremely hazardous waste, restricted hazardous waste, biohazardous waste,
biomedical waste, medical waste, sharps, contaminant, pollutant, toxic waste, toxic
substance or words of similar import, under any Environmental Law.
HealthStream Stock means Buyers common stock, no par value per share.
Indemnified Person has the meaning set forth in Section 8.7(a).
Indemnifying Person has the meaning set forth in Section 8.7(a).
Independent Accountants has the meaning set forth in Section 1.6(e).
Intellectual Property Assets has the meaning set forth in Section 2.16(a).
Internet Rights has the meaning set forth in Section 2.16(a)(iv).
Knowledge of Buyer (and any similar expression) means any matters actually known by,
or which should be known following reasonable inquiry by, the executive officers or directors of
Buyer.
Knowledge of Seller Parties (and any similar expression) means any matters actually
known by, or which should be known following reasonable inquiry by, Sellers, Thomas Hutchinson,
Karen Reynolds, Lisa Marrow, Ariel Adams, Berke Bilbay, Rob Reigle, Ted Gumer, Christine Gilbert,
and Karen Sorensen.
Leased Real Property has the meaning set forth in Section 2.5(b).
Legal Requirements means any domestic or foreign federal, state, local or municipal
laws, ordinances, codes or regulations.
A-3
Liability or Liabilities means, with respect to any Person, any liability
or obligation of such Person of any kind, character or description, whether known or unknown,
absolute or contingent, accrued or unaccrued, liquidated or unliquidated, secured or unsecured,
joint or several, due or to become due, vested or unvested, executory, determined, determinable or
otherwise, and whether or not the same is required to be accrued on the financial statements of
such Person.
Lien means any charge, claim, lien, option, pledge, security interest, mortgage, or
other encumbrance.
Marks has the meaning set forth in Section 2.16(a)(i).
Material Adverse Effect means any event, change, occurrence, effect, fact or
circumstance having, or that would reasonably be expected to have, a material adverse effect on the
business, operations, prospects, assets, results of operations or financial condition of the
Company in an amount in excess of (a) $20,000 individually or (b) $50,000 in the aggregate when
combined with any breach of any representation or warranty made in Article II of this Agreement
that contains a materiality qualification.
Material Customer has the meaning set forth in Section 2.22.
Most Recent Balance Sheet has the meaning set forth in Section 2.4.
Most Recent Balance Sheet Date has the meaning set forth in Section 2.6.
New Lease has the meaning set forth in Section 1.4(a)(xi).
Noncompetition Agreement has the meaning set forth in Section 1.4(a)(v).
Order means any order, injunction, judgment, decree, ruling, assessment or
arbitration award of any Governmental Authority or arbitrator.
Party has the meaning set forth in the first paragraph of this Agreement.
Patents has the meaning set forth in Section 2.16(a)(ii).
Payoff Agreement has the meaning set forth in Section 1.4(a)(xii).
Permitted Liens has the meaning set forth in Section 2.6(a).
Person means any individual, partnership, limited partnership, corporation, business
trust, limited liability company, limited liability partnership, joint stock company, trust,
unincorporated association, joint venture or other entity, or any Governmental Authority.
Privacy Standards has the meaning set forth in Section 2.26.
Proceeding means any action, arbitration, audit, hearing, investigation, litigation,
or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or
informal, whether public or private) commenced, brought, conducted, or heard by or before, or
otherwise involving, any Governmental Authority or arbitrator.
Purchase Price has the meaning set forth in Section 1.2.
A-4
Related Person means, with respect to any individual, (a) such individuals spouse,
siblings, children, siblings children, or parents, and (b) an entity, the beneficiaries,
stockholders, partners or owners, or persons holding a controlling interest of which, consist of
such individual and/or such other individuals referred to in clause (a).
Releases has the meaning set forth in Section 1.4(a)(ii).
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended.
Security Standards has the meaning set forth in Section 2.26.
Sellers has the meaning set forth in the first paragraph of this Agreement.
Seller Closing Documents has the meaning set forth in Section 2.2(a).
Seller Indemnified Persons has the meaning set forth in Section 8.3.
Seller Indemnifying Persons has the meaning set forth in Section 8.2.
Seller Parties means Sellers and the Company.
Shares has the meaning set forth in the Recitals of this Agreement.
Software has the meaning set forth in Section 2.16(a)(v).
Stock Escrow Agreement has the meaning set forth in Section 1.4(a)(vii).
Taxes means any income, payroll, employment, excise, property, franchise,
withholding, social security, unemployment, disability, sales, use, transfer or other tax, fee,
assessment, charge or duty of any kind, and any interest, penalties, additions or additional
amounts thereon, imposed, assessed or collected by or under the authority of, any Governmental
Authority.
Tax Returns means any returns, information returns, reports, statements, schedules,
notices, forms or other documents or information (including any amendment thereof) filed with or
submitted to, or required to be filed with or submitted to, any Governmental Authority in
connection with the determination, assessment, collection, or payment of any Tax or in connection
with the administration, implementation, or enforcement of or compliance with any Legal Requirement
relating to any Tax.
Top Customers has the meaning set forth in Section 2.22.
Trade Secrets has the meaning set forth in Section 2.16(a)(vi).
Transaction Expense means all costs, fees and expenses incurred by the Company,
other than the Change in Control Payments, that are or will become payable upon the Closing or
otherwise in connection with the transactions contemplated by this Agreement and the Seller Closing
Documents or that were incurred in anticipation of or in the course of the transactions
contemplated by this Agreement and the Seller Closing Documents, including without limitation (1)
the fees and expenses of Venable LLP (which are in the amount set forth in Schedule 2.27(b)), (2)
the fees and expenses of Tim Grugeon, and
A-5
(3) the fees and expenses of Jeffrey D. Ring & Company (which are in the amount set forth in
Schedule 2.27(b)).
Working Capital means the current assets of the Company minus the current
liabilities of the Company (including all accruals for unpaid Taxes, all accruals relating to
Employee Benefit Plans, and all accruals for bonuses and commissions, but excluding indebtedness of
the Company to be treated as a reduction in Purchase Price pursuant to Sections 1.2(h) and 1.2(i)),
as determined in accordance with GAAP, after taking into account the payment or accrual of the
Change in Control Payments, Transaction Expenses, including Transaction Expenses accrued after
December 31, 2006 but prior to the Closing Date (unless such expenses are treated as a reduction in
Purchase Price pursuant to Section 1.2), and any obligations related to the termination of the
agreements set forth in Section 4.8. For illustration purposes, the Working Capital of the Company
as of December 31, 2006, without taking into account the payment of the Change in Control Payments
and Transaction Expenses, is set forth on Annex B.
Working Capital Cash Escrow has the meaning set forth in Section 1.2.
A-6
Annex B
Working Capital as of December 31, 2006
The Jackson Organization Research Consultants, Inc.
Working Capital
December 31, 2006
|
|
|
|
|
Cash |
|
|
423,485 |
|
Accounts Receivable |
|
|
1,440,785 |
|
Other receivables |
|
|
8,439 |
|
Related party receivables |
|
|
6,000 |
|
Prepaid expenses and other current assets |
|
|
188,870 |
|
Deferred tax assets, current |
|
|
906,985 |
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
2,974,564 |
|
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
|
30,365 |
|
Notes payable, current portion |
|
|
337,500 |
|
Accrued Payroll Expenses |
|
|
404,775 |
|
Accrued Expenses |
|
|
102,184 |
|
Deferred Revenues |
|
|
3,457,358 |
|
Capital lease obligations, short term |
|
|
10,383 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
4,342,565 |
|
|
|
|
|
|
|
|
|
|
Working Capital Deficit |
|
|
(1,368,001 |
) |
|
|
|
|
|
|
|
|
|
Less amounts to be paid at closing |
|
|
337,500 |
|
|
|
|
|
|
|
|
|
|
Adjusted Working Capital Deficit |
|
|
(1,030,501 |
) |
|
|
|
|
Exhibit A
Form of Release
Exhibit B
Form of Consulting Agreement
Exhibit C
Form of Employment Agreement
Exhibit D
Form of Noncompetition Agreement
Exhibit E
Form of Cash Escrow Agreement
Exhibit F
Form of Stock Escrow Agreement
Exhibit G
Form of Guaranty Escrow Agreement
Exhibit H
Form of Staros Cross Receipt
Exhibit I
Opinion of Venable LLP
Exhibit J
Form of New Lease
Exhibit K
Form of Payoff Agreement
EX-23.1 CONSENT OF ERNST & YOUNG LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-37440)
pertaining to the (1) HealthStream, Inc. 1994 Employee Stock Option Plan; (2) HealthStream, Inc.
2000 Stock Incentive Plan; and (3) HealthStream, Inc. Employee Stock Purchase Plan, of our report
dated March 9, 2007 (except for Note 10 as to which the date is March 12, 2007) with respect to
the financial statements of The Jackson Organization, Research Consultants, Inc. included in this
Current Report (Form 8-K) of HealthStream, Inc.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 12, 2007
EX-99.1 PRESS RELEASE
EXHIBIT 99.1
PRESS RELEASE
|
|
|
|
|
Contact: |
|
|
Susan A. Brownie |
For Immediate Release:
|
|
Chief Financial Officer |
|
|
(615) 301-3163 |
|
|
ir@healthstream.com |
|
|
|
|
|
Media: |
|
|
Mollie Elizabeth Condra |
|
|
Sr. Director Communications, Research, |
|
|
& Investor Relations |
|
|
(615) 301-3237 |
|
|
mollie.condra@healthstream.com |
HealthStream Acquires The Jackson Organization; Launches
HealthStream Research
Hospitals gain insight through HealthStream Research and turn insight into action through
HealthStream Learning
NASHVILLE, Tenn. (BusinessWire)March 12, 2007HealthStream, Inc. (NASDAQ: HSTM) announced
today that it has acquired The Jackson Organization (TJO), a privately held leader in healthcare
research. Building on the success of HealthStreams existing Data Management & Research (DMR) unit,
the Company also announced the launch of its research group, which will be known as HealthStream
Research. J. Edward Pearson, who joined HealthStream in June 2006, will continue to serve as
senior vice president of HealthStream and as president of the HealthStream Research.
Robert A. Frist, Jr., president and chief executive officer, HealthStream, commented, With the
launch of HealthStream Research, we believe HealthStream becomes a more powerful strategic partner
for healthcare organizations, offering insight through research and improved performance through
learning.
Based in Maryland, TJO has approximately 300 healthcare facility customers, which when combined
with HealthStreams existing DMR customer base represents over 1,100 healthcare facilities, or
approximately 22 percent of the nations acute-care hospitals. HealthStream Researchnow
comprised of TJO and DMRprovides valuable insight about patients experiences, workforce
engagement, physician relations, and community perceptions of hospital services. Executives at
client healthcare organizations will be presented with a compelling opportunity to transform
insight into action with HealthStreams industry-leading learning solutions.
TJO and DMRs product strengths and customer bases are highly complementary. As a result,
HealthStream Research enters the market with a strong, full-service product offering, said J.
Edward Pearson, president, HealthStream Research. Moreover, the combination of their historical
research amassed about hospital employees, physicians, patients, and community perceptions
establishes HealthStream as one of the industrys foremost benchmarking resources.
Both TJO and DMR experienced growth during 2006 as a result of adding new customers and expanding
relationships with existing customers. Industry-wide, interest is increasing in research, due, in
part, to the CAHPS® (Consumer Assessment of Health Plan Survey) Hospital Survey launched
by the Centers for Medicare & Medicaid Services (CMS) in partnership with the Agency for Healthcare
Research and Quality (AHRQ). According to the Deficit Reduction Act of 2005, hospitals must now
submit data for all required quality measureswhich includes
the CAHPS® Hospital Surveyin order to receive the full market basket increase to their
reimbursement payment rates from CMS. Hospitals that fail to submit this survey data, beginning in
July 2007, will incur a reduction of 2.0 percentage points in payment rates in 2008. TJO and DMR
have both been designated as certified vendors, and will continue to offer CAHPS®
Hospital Survey services as HealthStream Research.
HealthStream is an ideal fit for The Jackson Organization to grow our customer base and advance
our service to the healthcare industry, said David Jackson, president and chief executive officer
of The Jackson Organization, who will serve as a consultant to HealthStream. Our companies share a
common vision of improving healthcare and expect an exciting future as HealthStream Research.
From HealthStream Research, TJO and DMR customers will continue to receive the same high level of
service and quality research they have grown accustomed to receiving. Routine operations at TJO and
DMR will remain in their respective offices in Laurel, Maryland and Franklin, Tennessee,
respectively. In addition, the strong management teams that have successfully led each of these
organizations will remain on board with their respective personnel as part of HealthStream
Research. J. Edward Pearson, who has provided senior leadership to the Companys research business
since joining HealthStream last June, will continue to lead this operating groupnow HealthStream
Research.
Historical Results and Transaction Terms
For the full year 2006, TJOs unaudited revenues approximated $10.8 million, net income
approximated breakeven, and earnings before interest, taxes, depreciation and amortization (EBITDA)
approximated $0.2 million. Net Income adjusted to exclude certain compensation of $0.7 million,
interest expense of $0.1 million and expenses associated with relocation to a new office of $0.2
million, approximated $1.0 million. Adjusted EBITDA including the further exclusions listed above,
approximated $1.3 million for 2006.
HealthStream has purchased all of the shares of TJO for approximately $12.65 million, consisting of
approximately $11.65 million of cash consideration and 252,616 shares of HealthStream common stock.
A significant portion of both the cash and stock consideration is subject to escrow. Additional
payments totaling $650,000 will be made under a consulting agreement and for achieving certain
financial objectives.
Updated 2007 Guidance
For the period from March 13, 2007 through December 31, 2007, TJO is expected to increase our 2007
revenue by $9.0 to $10.0 million. We also expect the acquisition to be accretive, increasing our
previous range of 2007 earnings guidance by $0.01 per diluted share. With the inclusion of TJO, our
full year revenue guidance for FY 2007 is now $44.5 to $45.5 million or 40 to 43 percent growth
over 2006 results and increases our range of earnings guidance to $0.13 to $0.15 per diluted share.
This guidance reflects the addition of TJOs operations, the impact of our initial estimate of $0.8
million in amortization of definite-lived intangibles, the elimination of interest income on our
cash and investment balances which were used as consideration for the acquisition as well as
incremental interest expense on $1.5 million of borrowings under our revolving credit facility. Our
previous earnings guidance for 2007 indicated break-even results in the first quarter, which we
reiterate.
Gross margins for the full year 2007 are expected to approximate our 2006 full year gross margins.
Our revised guidance reflects the cost structure associated with TJOs call center and operations
teams, which are staffed to support further growth and scale of our integrated operations. We are
not anticipating significant changes to product development expenses from our previous guidance,
however as a percentage of revenues, this expense component is anticipated to decline. We expect
spending in sales, marketing and account management for the full year 2007 will be comparable with
2006 as a percentage of revenue. General and administrative expenses are expected to increase
moderately as a percentage of revenues.
We expect that our capital expenditures for the full year 2007 will increase from previous guidance
by $0.5 to $5.0 million, due to planned investments and integration. Our post-closing cash,
investments and related interest receivable is expected to approximate $3.0 million with $8.5
million available under our existing revolving credit facility.
About HealthStream
HealthStream (NASDAQ: HSTM) is a leading provider of learning and research solutions for the
healthcare industry, transforming insight into action to deliver outcomes-based results for
healthcare organizations. Through its research products, executives from approximately 1,100
healthcare facilities gain valuable insight about patients experiences, workforce challenges,
physician relations, and community perceptions of their services. Through HealthStreams learning
solutionswhich are used by approximately 1.4 million hospital-based healthcare
professionalshealthcare organizations create safer environments for patients, increase clinical
competencies of its workforce, and facilitate the rapid transfer of the latest knowledge and
technologies. Based in Nashville, Tennessee, HealthStream has three satellite offices. For more
information about HealthStreams learning and research solutions, visit www.healthstream.com or
call us at 800-933-9293.
This press release includes certain forward-looking statements (statements other than solely with
respect to historical fact) that involve risks and uncertainties regarding HealthStream. These
statements are based upon managements beliefs, as well as assumptions made by and data currently
available to management. This information has been, or in the future may be, included in reliance
on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to the ability of the Company to integrate the operations of
TJO successfully and the other risks and uncertainties set forth in the Companys Annual Report on
Form 10-K and other filings with the SEC. Investors are cautioned that such results or events
predicted in these statements may differ materially from actual future events or results. Such
forward-looking information should not be regarded as a representation or warranty by the Company
that such projections will be realized. Many of the factors that will determine the Companys
future results are beyond the ability of the Company to control or predict. Readers should not
place undue reliance on forward-looking statements, which reflect managements views only as of the
date hereof. The Company undertakes no obligation to update or revise any such forward-looking
statements.
# # # #
EX-99.2 AUDITED FINANCIAL STATEMENTS
EXHIBIT 99.2
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005
|
|
|
|
|
|
|
Page |
Report of Independent Auditors |
|
|
F-1 |
|
Balance Sheets December 31, 2005 and 2004 |
|
|
F-2 |
|
Statements of Operations Years ended December 31, 2005 and 2004 |
|
|
F-3 |
|
Statements of Stockholders Deficit Years ended December 31, 2005 and 2004 |
|
|
F-4 |
|
Statements of Cash Flows Years ended December 31, 2005 and 2004 |
|
|
F-5 |
|
Notes to Financial Statements |
|
|
F-6 |
|
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
The Jackson Organization, Research Consultants, Inc.
We have audited the accompanying balance sheets of The Jackson Organization, Research Consultants,
Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders
deficit and cash flows for the years then ended. These financial statements are the responsibility
of the Companys 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. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of The Jackson Organization, Research Consultants, Inc. at
December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 9, 2007,
except for Note 10, as to which the date is
March 12, 2007
F-1
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
66,391 |
|
|
$ |
318,674 |
|
Accounts receivable, net of allowance for doubtful accounts of
$21,000 at December 31, 2005 and $-0- at December 31, 2004 |
|
|
1,507,629 |
|
|
|
1,283,253 |
|
Accounts receivable unbilled |
|
|
13,447 |
|
|
|
21,680 |
|
Employee loans |
|
|
4,235 |
|
|
|
1,557 |
|
Related party loan receivable |
|
|
43,713 |
|
|
|
135,271 |
|
Related party receivables |
|
|
73,715 |
|
|
|
|
|
Income taxes receivable |
|
|
|
|
|
|
12,609 |
|
Prepaid expenses and other current assets |
|
|
176,683 |
|
|
|
96,143 |
|
Deferred tax assets, current |
|
|
791,710 |
|
|
|
546,860 |
|
|
|
|
|
|
|
|
Total
Current Assets |
|
|
2,677,523 |
|
|
|
2,416,047 |
|
Property and equipment: |
|
|
|
|
|
|
|
|
Equipment and software |
|
|
1,043,566 |
|
|
|
1,056,018 |
|
Furniture |
|
|
294,937 |
|
|
|
247,047 |
|
Leasehold improvements |
|
|
57,298 |
|
|
|
57,298 |
|
|
|
|
|
|
|
|
|
|
|
1,395,801 |
|
|
|
1,360,363 |
|
Less accumulated depreciation |
|
|
(784,087 |
) |
|
|
(611,830 |
) |
|
|
|
|
|
|
|
|
|
|
611,714 |
|
|
|
748,533 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
21,156 |
|
|
|
10,541 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,310,393 |
|
|
$ |
3,175,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
169,125 |
|
|
$ |
122,550 |
|
Accrued expenses and other liabilities |
|
|
516,283 |
|
|
|
736,996 |
|
Current portion of capital lease obligations |
|
|
5,136 |
|
|
|
|
|
Current portion of long term debt |
|
|
478,570 |
|
|
|
273,374 |
|
Deferred revenue |
|
|
2,932,077 |
|
|
|
2,237,812 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
4,101,191 |
|
|
|
3,370,732 |
|
Deferred tax liabilities |
|
|
122,122 |
|
|
|
122,191 |
|
Capital
lease obligations, net of current portion |
|
|
20,401 |
|
|
|
|
|
Long term
debt, net of current portion |
|
|
672,140 |
|
|
|
144,997 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
4,915,854 |
|
|
|
3,637,920 |
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit: |
|
|
|
|
|
|
|
|
Common Stock, $10 stated value, 1,000 shares authorized;
1,000 shares issued and outstanding at December 31, 2005 and 2004 |
|
|
10,000 |
|
|
|
10,000 |
|
Additional paid in capital |
|
|
23,333 |
|
|
|
23,333 |
|
Treasury stock, 150 shares at cost |
|
|
(850,000 |
) |
|
|
|
|
Accumulated deficit |
|
|
(788,794 |
) |
|
|
(496,132 |
) |
|
|
|
|
|
|
|
Total Stockholders Deficit |
|
|
(1,605,461 |
) |
|
|
(462,799 |
) |
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit |
|
$ |
3,310,393 |
|
|
$ |
3,175,121 |
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-2
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Revenues, net |
|
$ |
8,579,767 |
|
|
$ |
8,674,953 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation) |
|
|
4,625,673 |
|
|
|
3,849,586 |
|
Sales and marketing |
|
|
1,974,890 |
|
|
|
2,071,288 |
|
Depreciation |
|
|
217,738 |
|
|
|
200,354 |
|
Other general and administrative expenses |
|
|
2,145,913 |
|
|
|
2,403,890 |
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
8,964,214 |
|
|
|
8,525,118 |
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(384,447 |
) |
|
|
149,835 |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
5,745 |
|
|
|
271 |
|
Interest expense |
|
|
(24,398 |
) |
|
|
(26,326 |
) |
Other expense |
|
|
(28,595 |
) |
|
|
(61,820 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(47,248 |
) |
|
|
(87,875 |
) |
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(431,695 |
) |
|
|
61,960 |
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
|
|
139,033 |
|
|
|
(50,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(292,662 |
) |
|
$ |
11,543 |
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-3
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
STATEMENTS OF STOCKHOLDERS DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Treasury |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid In |
|
|
Stock, At |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Cost |
|
|
Deficit |
|
|
Deficit |
|
Balance at December 31, 2003 |
|
|
1,000 |
|
|
$ |
10,000 |
|
|
$ |
23,333 |
|
|
$ |
|
|
|
$ |
(507,675 |
) |
|
$ |
(474,342 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,543 |
|
|
|
11,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
1,000 |
|
|
|
10,000 |
|
|
|
23,333 |
|
|
|
|
|
|
|
(496,132 |
) |
|
|
(462,799 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292,662 |
) |
|
|
(292,662 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850,000 |
) |
|
|
|
|
|
|
(850,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
1,000 |
|
|
$ |
10,000 |
|
|
$ |
23,333 |
|
|
$ |
(850,000 |
) |
|
$ |
(788,794 |
) |
|
$ |
(1,605,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-4
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(292,662 |
) |
|
$ |
11,543 |
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
217,738 |
|
|
|
200,354 |
|
Provision for doubtful accounts |
|
|
21,000 |
|
|
|
|
|
Loss on disposition of property and equipment |
|
|
22,570 |
|
|
|
68,520 |
|
Deferred tax benefit |
|
|
(244,919 |
) |
|
|
(76,678 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and unbilled receivables |
|
|
(237,143 |
) |
|
|
(309,675 |
) |
Other receivables |
|
|
(63,784 |
) |
|
|
83,488 |
|
Prepaid expenses and other current assets |
|
|
(80,540 |
) |
|
|
32,695 |
|
Accounts payable |
|
|
46,575 |
|
|
|
(61,950 |
) |
Accrued expenses and other liabilities |
|
|
(220,713 |
) |
|
|
427,948 |
|
Deferred revenue |
|
|
694,265 |
|
|
|
616,650 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(137,613 |
) |
|
|
992,895 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(81,341 |
) |
|
|
(280,994 |
) |
Proceeds from sale of property and equipment |
|
|
7,750 |
|
|
|
|
|
Proceeds from repayment of related party loan receivable |
|
|
91,558 |
|
|
|
|
|
Provision of related party loan receivable |
|
|
|
|
|
|
(135,271 |
) |
Payments associated with cash surrender value of life insurance policies |
|
|
(10,615 |
) |
|
|
(5,515 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
7,352 |
|
|
|
(421,780 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
|
28,554 |
|
|
|
762,221 |
|
Payments for capital lease obligations |
|
|
(4,361 |
) |
|
|
|
|
Repayments of debt |
|
|
(146,215 |
) |
|
|
(1,107,359 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(122,022 |
) |
|
|
(345,138 |
) |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(252,283 |
) |
|
|
225,977 |
|
Cash and cash equivalents at beginning of period |
|
|
318,674 |
|
|
|
92,697 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
66,391 |
|
|
$ |
318,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
24,398 |
|
|
$ |
26,326 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
256,974 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of
vehicle through issuance of note payable |
|
$ |
|
|
|
$ |
64,574 |
|
|
|
|
|
|
|
|
Capital lease obligations incurred |
|
$ |
29,898 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Issuance of long-term debt to purchase treasury stock |
|
$ |
850,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-5
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity
The Jackson Organization Research Consultants, Inc. (the Company) was incorporated in the state
of Maryland on January 15, 1997 and is headquartered in Laurel, Maryland. The Company provides
survey, research and related services to the healthcare industry throughout the United States.
Business Segment
The Company operates primarily in one business segment survey, research and related services to
healthcare organizations.
Basis of Presentation
The accompanying financial statements which present the results of operations of the Company for
the years ended December 31, 2005 and 2004, have been prepared using accounting principles
generally accepted in the United States of America.
Revenue Recognition
Revenues
are derived from survey, research and related services provided
through the Companys information
products.
Patient survey and reporting services are provided through the use of online reporting
methodologies. These revenues are recognized using the proportional performance method consistent with SEC Staff Accounting Bulletin
No. 104, Revenue Recognition,, reflecting
recognition throughout the service period which corresponds with the
survey cycle and reporting access by the customer, which typically
approximates five months. Revenues associated with the
medical staff, community, employee and other surveys are recognized when services are completed
which coincides with delivery of survey results to the customer. All other revenues are recognized
as the related services are performed or products are delivered to the customer.
Use of Estimates
The preparation of 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 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.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts
receivable from customers are typically due within 30 days and are unsecured.
Other and Unbilled Receivables
Other receivables include income tax refunds receivable, unbilled receivables and other amounts due
from third parties. Unbilled receivables represent revenue earned or reimbursable expenses for
contracts accounted for using the proportional performance method for which invoices have not been
generated or billing milestones have not been reached.
Allowance for Doubtful Accounts
The Company presents accounts receivable net of an allowance for doubtful accounts. The Company has
experienced few historical write-offs. Management reviews its accounts receivable portfolio on a
regular basis to determine if any amounts are potentially uncollectible. Write-offs are made in the
period management determines a balance will not be collected.
F-6
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation is provided using the
straight-line method over the following estimated useful lives, as follows:
|
|
|
|
|
Asset Category |
|
Years |
Equipment and software |
|
|
3-7 |
|
Furniture and office equipment |
|
|
5-7 |
|
Leasehold improvements are amortized utilizing the straight-line method over the shorter of the
estimated useful life or the remaining term of the lease.
Prepaid Expenses and Other Assets
Prepaid expenses consist of advanced payment of expenses associated with delivering patient survey
services, prepaid insurance, and other assets expected to benefit future periods. Other assets
consistent of cash surrender value of life insurance policies.
The Company defers certain direct, incremental costs associated with outsourced survey services.
These costs are charged to cost of revenues consistent with the recognition of the related
revenues.
Long-Lived Assets
We account for assets of a long term nature (long-lived assets) in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, (Statement 144), 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. We measure any impairment based on discounted future
cash flows from the long-lived assets. The cash flow estimates and discount rates incorporate
managements best estimates, using appropriate and customary assumptions and projections at the
date of evaluation.
Deferred Revenue
Deferred revenue represents amounts, which have been billed or collected, but not yet recognized in
revenue.
Advertising
We expense the costs of advertising in accordance with SOP 93-7, Reporting on Advertising Costs.
Advertising expense for the years ended December 31, 2005 and 2004 was approximately $5,000 and
$4,000, respectively.
Income Taxes
Income taxes have been provided using the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method, deferred tax assets and liabilities are
determined based on the temporary differences between the financial statements and the tax bases of
assets and liabilities measured at tax rates that will be in effect for the year in which
differences are expected to affect taxable income.
Comprehensive
Income (Loss)
The
comprehensive income (loss) for the Company is equivalent to its net
income (loss).
F-7
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Our services are provided to various companies in the healthcare industry that are located in the
United States. We perform ongoing credit evaluations of our customers financial condition and
generally require no collateral from customers. A significant portion of our revenues are generated
from a relatively small group of customers. One customer represented more than ten percent of net
revenues during 2005 and 2004. During both 2005 and 2004, revenues associated with that customer
represented approximately 23 percent of total revenues. Total accounts receivable from this
customer at December 31, 2005 and 2004 was $262,371 and $182,423, respectively.
Concentrations of credit risk with respect to trade receivables are limited to customers dispersed
across the United States. All trade receivables are concentrated in the healthcare segment of the
economy; accordingly the Company is exposed to business and economic risk. Although the Company
does not currently foresee a concentrated credit risk associated with these trade receivables,
repayment is dependent upon the financial stability of the healthcare industry.
Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair value for financial instruments:
Cash and cash equivalents: The carrying amounts approximate the fair value because of the
short-term maturity or short-term nature of such instruments.
Accounts receivable, loans and other receivables, prepaid expenses, accounts payable, notes
payable, accrued liabilities and deferred revenue: The carrying amounts, net of any allowances,
approximate the fair value because of the short-term nature of such instruments. Certain related
party loan receivables include interest at rates that vary from market terms, but any differences
between the book value and fair value are insignificant.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board issued FIN No. 48, Accounting for
Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income
Taxes. FIN 48 creates a single model to address uncertainty in tax positions, and clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. In addition, FIN 48 clearly scopes out income taxes
from SFAS No. 5, Accounting for Contingencies. Management is in the process of evaluating the
impact of this new standard on the Companys financial position and results of operations. The
Company will be required to adopt the provisions of FIN 48 effective January 1, 2007.
On September 15, 2006 the FASB issued, SFAS No. 157, Fair Value Measurements. The standard
provides guidance for using fair value to measure assets and liabilities and applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. Management is in
the process of evaluating the impact of this new standard on the Companys financial position and
results of operations.
F-8
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
3. STOCKHOLDERS DEFICIT
The Company is authorized to issue up to 1,000 shares of common stock. There were 1,000 shares
issued and outstanding as of December 31, 2005 and 2004, respectively.
During October 2005, the Company
entered into an agreement to repurchase 150 shares held by the
minority stockholder. Accordingly, these shares have been classified as treasury stock at December
31, 2005 and are valued at cost. See Note 4 and Note 7 for further details regarding this
transaction.
4. RELATED PARTY TRANSACTIONS
In February 2006, the Company entered into a lease agreement for office space in an office building
owned by a Limited Liability Company which is solely owned by the
Companys President and majority stockholder. During 2005, the
Company made payments of $73,715 to this LLC associated with advances
to fund construction of the building, which is reflected as a related party receivable on the
balance sheet as of December 31, 2005. The Company also is a
guarantor of an approximately $3.0 million construction loan between General Electric Capital Corporation and the LLC.
In October 2005, the Company entered into an agreement with the minority stockholder to purchase
the 150 shares of stock held by the minority stockholder for a
contractual amount of $510,000. In connection with the stock
purchase agreement, the Company executed a secured promissory note for $510,000. Also in
connection with the stock purchase agreement, the Company entered into a twelve-year employment
agreement with the former stockholder, effective January 1, 2006. The agreement provides for
annual compensation of $20,000 in 2006 plus benefits, with annual modification based on changes in the Consumer
Price Index. Compensation is guaranteed by the Company for the entire
term of the agreement. Because all payments to the former minority
stockholder are guaranteed regardless of services rendered, the
Company has accounted for the transaction as the acquisition of
treasury stock in the aggregate amount of $850,000. See
Note 7 and Note 10 for further details regarding an amendment to this agreement made during 2006.
In December 2004, the Company
loaned $135,000 to the Companys President and majority stockholder.
Terms of the note call for interest to accrue at the annual rate of 2.5%, a rate which is below
market, with any outstanding balance due on December 31, 2005. The terms of the loan were later
modified to allow the note balance to be paid during 2006. The outstanding balance is reflected as
a related party loan receivable at December 31, 2005 and 2004 on the accompanying balance sheets.
Interest income associated with this loan for the years ended December 31, 2005 and 2004
totaled $5,138 and $271, respectively.
5. INCOME TAXES
The benefit (provision) for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Current federal |
|
$ |
(87,379 |
) |
|
$ |
(99,777 |
) |
Current state |
|
|
(18,507 |
) |
|
|
(27,318 |
) |
Deferred federal |
|
|
215,620 |
|
|
|
67,505 |
|
Deferred state |
|
|
29,299 |
|
|
|
9,173 |
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes |
|
$ |
139,033 |
|
|
$ |
(50,417 |
) |
|
|
|
|
|
|
|
Income tax provision (benefit) differs from the amounts computed by applying the federal statutory
rate of 34% to the income (loss) before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Federal tax benefit (provision) at the statutory rate |
|
$ |
146,777 |
|
|
$ |
(21,065 |
) |
State income tax benefit (provision), net of federal benefit |
|
|
19,944 |
|
|
|
(2,863 |
) |
Permanent differences |
|
|
(31,630 |
) |
|
|
(25,336 |
) |
Other |
|
|
3,942 |
|
|
|
(1,153 |
) |
|
|
|
|
|
|
|
Benefit (provision) for income taxes |
|
$ |
139,033 |
|
|
$ |
(50,417 |
) |
|
|
|
|
|
|
|
F-9
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
5. INCOME TAXES (continued)
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 assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Current deferred tax assets: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
793,649 |
|
|
$ |
489,523 |
|
Allowance for doubtful accounts |
|
|
8,110 |
|
|
|
|
|
Deferred rent liabilities |
|
|
4,606 |
|
|
|
16,975 |
|
Accrued liabilities |
|
|
|
|
|
|
54,124 |
|
|
|
|
|
|
|
|
Total current deferred tax assets |
|
|
806,365 |
|
|
|
560,622 |
|
|
|
|
|
|
|
|
Current deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
(4,276 |
) |
|
|
|
|
Prepaid and other current assets |
|
|
(10,379 |
) |
|
|
(13,762 |
) |
|
|
|
|
|
|
|
Total current deferred tax liabilities |
|
|
(14,655 |
) |
|
|
(13,762 |
) |
|
|
|
|
|
|
|
Net current deferred tax assets |
|
$ |
791,710 |
|
|
$ |
546,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
(120,316 |
) |
|
$ |
(120,752 |
) |
Amortization |
|
|
(1,806 |
) |
|
|
(1,439 |
) |
|
|
|
|
|
|
|
Total noncurrent deferred tax liabilities |
|
$ |
(122,122 |
) |
|
$ |
(122,191 |
) |
|
|
|
|
|
|
|
The Company has not established a valuation allowance for deferred tax assets at December 31, 2005
and 2004, due to the Companys history of realizing these assets in the future.
6. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating
provisions of Section 401(k) of the Internal Revenue Code. Employees must meet certain eligibility
requirements 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 the maximum amount allowed by
the IRS. The Company has fully matched participant contributions on the first three percent (3%) of
eligible compensation and matches at the rate of fifty percent (50%) for contributions between
three and five percent (3-5%) of eligible compensation. The Company provided matching
contributions of $142,680 and $140,696 to the 401(k) Plan for the years ended December 31, 2005 and
2004, respectively.
7. DEBT
At December 31, 2005 and 2004, the Company had the following debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
Term loan Branch, Banking & Trust Company |
|
$ |
106,860 |
|
|
$ |
203,820 |
|
Vehicle note Lexus Financial Services, Inc. |
|
|
36,811 |
|
|
|
52,331 |
|
Secured promissory note Minority Stockholder |
|
|
850,000 |
|
|
|
|
|
Line of credit Branch, Banking & Trust Company |
|
|
157,039 |
|
|
|
162,220 |
|
|
|
|
|
|
|
|
|
|
|
1,150,710 |
|
|
|
418,371 |
|
Less current portion |
|
|
(478,570 |
) |
|
|
(273,374 |
) |
|
|
|
|
|
|
|
Long-term debt (net of current portion) |
|
$ |
672,140 |
|
|
$ |
144,997 |
|
|
|
|
|
|
|
|
F-10
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
7. DEBT (continued)
Notes Payable
On December 6, 2002, the Company borrowed $390,000 from Branch, Banking & Trust Company. Terms of
the note require the loan to be fully repaid by 48 monthly payments of principal plus interest at
the floating rate of Banks Prime Rate plus 0.5%. The note could be prepaid in whole or in part
at any time, with any prepayments subject to a penalty of 1% of the prepayment amount if it is made
during the first 36 months of the term of the loan. Security for the loan consists of a priority
security interest in all of the Companys assets, along with an unconditional guaranty by the
Companys President and majority stockholder. The outstanding balance due on the note as of
December 31, 2005 and 2004 was $106,860 and $203,820,
respectively. The Company repaid the note during 2006.
On February 16, 2004, the Company entered into a note agreement with Lexus Financial Services, Inc.
to purchase a vehicle. Terms of the note require the balance of $64,474 to be fully repaid by 48
monthly installments of principal plus interest at the fixed rate of 5.98%. The note is secured by
the vehicle. The outstanding balance due on the note as of December 31, 2005 and 2004, which
includes both principal and interest, was $36,811 and $52,331, respectively.
In October 2005, the Company entered into an agreement with the minority stockholder to repurchase
150 shares of stock held by the minority stockholder for $510,000. In connection with the stock
repurchase agreement, the Company executed a secured promissory note for $510,000. Terms of the
promissory note provide for bi-weekly payments of principal and interest beginning January 13,
2006. Interest is payable at the prime rate as reported in the
Wall Street Journal and is to be
adjusted quarterly. During August 2006, these agreements were amended and replaced by a revised
stock purchase agreement and secured promissory note. The purchase price of the shares was adjusted
to $850,000 requiring the parties to revise the amount of the promissory note to $807,301, which
was inclusive of payments made on the previous note as of the amendment date. At December 31, 2005,
the balance sheet reflects the amended $850,000 promissory note. See Note 10 for further details
regarding the amendment to this agreement made during 2006.
Line of Credit
On July 6, 2004, the Company obtained a line of credit from Branch Banking and Trust Company,
subject to a borrowing base established by the lender, with interest at the floating rate of the
banks prime rate plus 0.25%. This loan was subsequently converted to a term loan for fifty-four
months ending on July 26, 2009. The loan is secured by a priority security interest in all of the
Companys assets, an unconditional guaranty by the
Companys President and majority stockholder
and the assignment of a key man insurance policy in the amount of $750,000. As of December 31,
2005 and 2004, the amounts outstanding on this loan were $157,039 and $162,220, respectively.
Scheduled
principal payments for debt outstanding, as amended, as of December 31, 2005 for the next five years
and thereafter are as follows:
|
|
|
|
|
2006 |
|
$ |
478,570 |
|
2007 |
|
|
169,263 |
|
2008 |
|
|
158,098 |
|
2009 |
|
|
147,257 |
|
2010 |
|
|
102,173 |
|
Thereafter |
|
|
95,349 |
|
|
|
|
|
Total |
|
$ |
1,150,710 |
|
|
|
|
|
See Note
10 for further details regarding debt repayment.
F-11
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
8. LEASES
Through
January 2006, the Company leased and occupied 11,955 square feet of office space in Columbia, Maryland.
Monthly rent was subject to annual increases and approximated $24,000 per month from May 2005
through April 2006. The lease expired during April 2006. The Company accounted for this lease by
recognizing rent expense on the straight-line basis and adjusting the deferred rent expense
liability for the difference between the straight-line rent expense and the amount of rent paid.
The Company moved to a new office space during February 2006, and entered into a lease for 19,170
square feet of commercial office space in Laurel, Maryland. The property is being leased from a
company that is solely owned by the Companys President and
majority stockholder. The term of the
lease is for ten-years, effective February 1, 2006, with payments due at a base rate of $31,950 per
month, increasing each year by the greater of three percent or the difference in Consumer Price
Index (CPI) inflation factor in effect each year versus the CPI inflation factor in effect during
the base year of the lease. The lease agreement provides for one renewal option for an additional
five year term. In connection with this lease agreement, the Company
guaranteed approximately $3.0
million of debt owed by the Companys President and majority stockholder. This debt is secured by
the office building leased by the Company.
The Company also leases certain office equipment under non-cancelable operating leases. Total rent
expense under all operating leases totaled $306,680 and $300,973 for the years ended December 31,
2005 and 2004, respectively, and is included in general and administration expenses in the
accompanying financial statements.
Future rental payment commitments at December 31, 2005 under capital and non-cancelable operating
leases, with initial terms of one year or more, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2006 |
|
$ |
6,993 |
|
|
$ |
461,463 |
|
2007 |
|
|
6,993 |
|
|
|
398,795 |
|
2008 |
|
|
6,993 |
|
|
|
410,613 |
|
2009 |
|
|
6,993 |
|
|
|
422,786 |
|
2010 |
|
|
2,331 |
|
|
|
430,473 |
|
Thereafter |
|
|
|
|
|
|
2,395,689 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
30,303 |
|
|
$ |
4,519,819 |
|
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
(4,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments (including $5,136 classified as current) |
|
$ |
25,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of assets under capital leases, which are included with owned assets in the
accompanying consolidated balance sheets was $24,417 and $-0- at December 31, 2005 and 2004,
respectively. Amortization of the assets under the capital leases is included in depreciation
expense on the accompanying statements of operations.
9. LITIGATION
In the ordinary course of business, the Company is from time to time involved in various pending
legal actions. The litigation process is inherently uncertain and it is possible that the
resolution of such matters might have a material adverse effect upon the financial condition and /
or results of operations of the Company. However, in the opinion of the Companys management,
matters currently pending or threatened against the Company are not expected to have a material
adverse effect on the financial position or results of operations of the Company.
F-12
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
10. SUBSEQUENT EVENTS
During August 2006, the stock purchase agreement, secured promissory note, and employment agreement
with the minority stockholder were amended and replaced by a revised stock purchase agreement and
secured promissory note. The employment agreement was cancelled. The
contractual purchase price of the shares
was adjusted to $850,000 requiring the parties to revise the amount of the promissory note to
$807,301, which is inclusive of previous payments. In addition, a lump sum payment
of $250,000 was due and payable on or before December 31, 2006, with the remaining balance due and payable in sixty equal monthly installment payments of at least $9,288, plus
interest, until paid in full. In the event of a change in control of the Company, the amount
payable on the note shall become accelerated and become payable in a lump sum from the proceeds of
any such change of control transaction. The $250,000 payment was made during January 2007, and
there were no late payment penalties assessed.
During
December 2006, the Company repaid the vehicle note and sold the vehicle to the Companys
President and majority stockholder, for approximately $30,800. The
Company recognized a loss of
approximately $17,000 upon the sale of this asset.
On
March 12, 2007, the Company and its majority stockholder entered into a stock purchase agreement
with HealthStream, Inc. in which HealthStream, Inc. acquired 100% of the Companys common stock
from the stockholder, for consideration of approximately $11,650,000 payable in cash and 252,616
shares of HealthStream, Inc. common stock. In connection with this agreement, the minority
stockholder note payable and Branch, Banking and Trust Company debt was repaid. In addition, the
previous lease agreement for office space was terminated and replaced with a new five year
agreement, including two options to renew the lease for two years each.
F-13
EX-99.3 UNAUDITED CONDENSED FINANCIAL STATEMENTS
EXHIBIT 99.3
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
CONDENSED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2006 (UNAUDITED)
|
|
|
|
|
|
|
Page |
Condensed Balance Sheets September 30, 2006 (unaudited) and December 31, 2005 |
|
P |
-1 |
|
Condensed Statements of Operations Nine months ended September 30, 2006 and 2005 (unaudited) |
|
P |
-2 |
|
Condensed Statements of Cash Flows Nine months ended September 30, 2006 and 2005 (unaudited) |
|
P |
-3 |
|
Notes to Condensed Financial Statements (unaudited) |
|
P |
-4 |
|
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
451,077 |
|
|
$ |
66,391 |
|
Accounts receivable, net of allowance for doubtful accounts of $49,716
at September 30, 2006 and $21,000 at December 31, 2005 |
|
|
1,196,221 |
|
|
|
1,507,629 |
|
Accounts receivable unbilled |
|
|
|
|
|
|
13,447 |
|
Employee loans |
|
|
|
|
|
|
4,235 |
|
Related party loan receivable |
|
|
43,713 |
|
|
|
43,713 |
|
Related party receivables |
|
|
|
|
|
|
73,715 |
|
Other receivables |
|
|
6,745 |
|
|
|
|
|
Prepaid
expenses and other current assets |
|
|
262,131 |
|
|
|
176,683 |
|
Deferred tax assets, current |
|
|
781,647 |
|
|
|
791,710 |
|
|
|
|
|
|
|
|
Total
Current Assets |
|
|
2,741,534 |
|
|
|
2,677,523 |
|
Property and equipment: |
|
|
|
|
|
|
|
|
Equipment and software |
|
|
1,049,945 |
|
|
|
1,043,566 |
|
Furniture |
|
|
584,172 |
|
|
|
294,937 |
|
Leasehold improvements |
|
|
15,300 |
|
|
|
57,298 |
|
|
|
|
|
|
|
|
|
|
|
1,649,417 |
|
|
|
1,395,801 |
|
Less accumulated depreciation |
|
|
(767,785 |
) |
|
|
(784,087 |
) |
|
|
|
|
|
|
|
|
|
|
881,632 |
|
|
|
611,714 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
56,107 |
|
|
|
21,156 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,679,273 |
|
|
$ |
3,310,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
26,285 |
|
|
$ |
169,125 |
|
Accrued expenses and other liabilities |
|
|
512,272 |
|
|
|
516,283 |
|
Current portion of capital lease obligations |
|
|
10,178 |
|
|
|
5,136 |
|
Current portion of long term debt |
|
|
395,353 |
|
|
|
478,570 |
|
Deferred revenue |
|
|
3,145,978 |
|
|
|
2,932,077 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
4,090,066 |
|
|
|
4,101,191 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
140,584 |
|
|
|
122,122 |
|
Capital
lease obligations, net of current portion |
|
|
38,874 |
|
|
|
20,401 |
|
Long term
debt, net of current portion |
|
|
935,140 |
|
|
|
672,140 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
5,204,664 |
|
|
|
4,915,854 |
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit: |
|
|
|
|
|
|
|
|
Common Stock, $10 stated value, 1,000 shares authorized;
1,000 shares issued and outstanding at September 30, 2006 and
December 31, 2005, respectively |
|
|
10,000 |
|
|
|
10,000 |
|
Additional paid in capital |
|
|
23,333 |
|
|
|
23,333 |
|
Treasury stock, 150 shares at cost |
|
|
(850,000 |
) |
|
|
(850,000 |
) |
Accumulated deficit |
|
|
(708,724 |
) |
|
|
(788,794 |
) |
|
|
|
|
|
|
|
Total
Stockholders Deficit |
|
|
(1,525,391 |
) |
|
|
(1,605,461 |
) |
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit |
|
$ |
3,679,273 |
|
|
$ |
3,310,393 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
P-1
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Revenues, net |
|
$ |
8,177,701 |
|
|
$ |
6,616,080 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation) |
|
|
4,143,912 |
|
|
|
3,421,379 |
|
Sales and marketing |
|
|
1,560,255 |
|
|
|
1,436,929 |
|
Depreciation |
|
|
153,697 |
|
|
|
163,180 |
|
Other general and administrative expenses |
|
|
2,033,461 |
|
|
|
1,559,950 |
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
7,891,325 |
|
|
|
6,581,438 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
286,376 |
|
|
|
34,642 |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
10,597 |
|
|
|
609 |
|
Interest expense |
|
|
(55,644 |
) |
|
|
(18,534 |
) |
Other expense |
|
|
(87,134 |
) |
|
|
(24,466 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(132,181 |
) |
|
|
(42,391 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes |
|
|
154,195 |
|
|
|
(7,749 |
) |
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(74,125 |
) |
|
|
(33,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
80,070 |
|
|
$ |
(40,847 |
) |
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
P-2
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
80,070 |
|
|
$ |
(40,847 |
) |
Adjustments
to reconcile net income (loss) to net cash (used
in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
153,697 |
|
|
|
163,180 |
|
Provision for doubtful accounts |
|
|
28,716 |
|
|
|
|
|
Loss on disposition of property and equipment |
|
|
86,092 |
|
|
|
24,466 |
|
Deferred tax
provision (benefit) |
|
|
28,525 |
|
|
|
(56,117 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and unbilled receivables |
|
|
296,139 |
|
|
|
322,189 |
|
Other receivables |
|
|
71,205 |
|
|
|
(116,054 |
) |
Prepaid expenses and other current assets |
|
|
(124,427 |
) |
|
|
3,465 |
|
Accounts payable |
|
|
(142,840 |
) |
|
|
(57,789 |
) |
Accrued expenses and other liabilities |
|
|
(4,010 |
) |
|
|
(286,538 |
) |
Deferred revenue |
|
|
213,901 |
|
|
|
58,298 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
687,068 |
|
|
|
14,253 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
3,038 |
|
|
|
7,750 |
|
Proceeds
from repayment of related party loan receivable |
|
|
|
|
|
|
71,697 |
|
Purchases of property and equipment |
|
|
(479,897 |
) |
|
|
(68,898 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(476,859 |
) |
|
|
10,549 |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
|
825,000 |
|
|
|
219,330 |
|
Payments for capital lease obligations |
|
|
(5,306 |
) |
|
|
(3,140 |
) |
Repayments of debt |
|
|
(645,217 |
) |
|
|
(299,323 |
) |
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities |
|
|
174,477 |
|
|
|
(83,133 |
) |
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents |
|
|
384,686 |
|
|
|
(58,331 |
) |
Cash and cash equivalents at beginning of period |
|
|
66,391 |
|
|
|
318,674 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
451,077 |
|
|
$ |
260,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
55,644 |
|
|
$ |
18,534 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
60,066 |
|
|
$ |
224,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital lease obligations incurred |
|
$ |
28,821 |
|
|
$ |
29,898 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
P-3
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and
with the instructions to Article 10 of Regulation S-X. Accordingly, condensed financial statements
do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2006.
The balance sheet at December 31, 2005 is consistent with the audited financial statements at that
date but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for a complete set of financial statements. For further
information, refer to the financial statements and footnotes thereto for the year
ended December 31, 2005, included elsewhere in this Form 8-K.
2. RELATED PARTY TRANSACTIONS
In February 2006, the Company entered into a lease agreement for office space in an office building
owned by a Limited Liability Company which is solely owned by the
Companys President and majority stockholder. Rental payments associated with this lease totaled approximately $187,000 during the
nine months ended September 30, 2006. The Company also is a
guarantor of an approximately $3.0
million construction loan between General Electric Capital Corporation and the LLC.
The unaudited balance sheet as of September 30, 2006 includes a loan receivable of $43,713 from the
Companys President and majority stockholder.
The unaudited balance sheet as
of September 30, 2006 includes a promissory note with the former minority
stockholder of $815,819. See Note 6 for additional information regarding this transaction.
3. INCOME TAXES
The change in the Companys
effective tax rate is primarily due to the timing of temporary
differences between book income and tax income, and was primarily
related to the change in the deferred tax asset associated with
deferred revenue.
4. DEBT
During August 2006, the stock repurchase agreement, secured promissory note, and employment
agreement with the minority stockholder were amended and replaced by a revised stock repurchase
agreement and secured promissory note. The employment agreement was
cancelled. The contractual purchase price
of the shares was adjusted to $850,000 requiring the parties to revise the amount of the promissory
note to $807,301, which is inclusive of previous payments. In addition a lump sum
payment of $250,000 is due and payable on or before December 31,
2006, with the remaining balance due and payable in sixty equal monthly installment payments of at least $9,288, plus
interest, until paid in full. Interest is payable at the prime rate as reported in the Wall Street
Journal and is to be adjusted quarterly. In the event of a change in control of the Company, the
amount payable on the note shall become accelerated and become payable in a lump sum from the
proceeds of any such change of control transaction. The $250,000 payment was made in January 2007, and there were no late payment penalties assessed.
5. LEASES
During the nine months ended September 30, 2006, the Company entered into a capital lease for
office equipment. The term of the lease is for five years, and includes monthly payments of
approximately $560. The Company also entered into an operating lease for office equipment for a
term of three years, with monthly rental payments of approximately $3,488.
P-4
THE JACKSON ORGANIZATION,
RESEARCH CONSULTANTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
6. SUBSEQUENT EVENTS
During
December 2006, the Company repaid the vehicle note and sold the vehicle to the Companys
President and majority stockholder, for approximately $30,800. The
Company recognized a loss of
approximately $17,000 upon the sale of this asset.
On
March 12, 2007, the Company and its majority stockholder entered into a stock purchase agreement
with HealthStream, Inc. in which HealthStream, Inc. acquired 100% of the Companys common stock
from the stockholder, for consideration of approximately $11,650,000 payable in cash 252,616 shares
of HealthStream, Inc. common stock. In connection with this agreement, the minority stockholder
note payable and Branch, Banking and Trust Company debt was repaid. In addition, the previous lease
agreement for office space was terminated and replaced with a new five year agreement, including
two options to renew the lease for two years each.
P-5
EX-99.4 UNAUDITED FINANCIAL INFORMATION
EXHIBIT 99.4
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO-FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
HealthStream, Inc. (the Company) acquired all of the issued and outstanding common stock of The
Jackson Organization Research Consultants, Inc. (TJO) on
March 12, 2007 for approximately $12.6
million, consisting of approximately $11.6 million payable in
cash and 252,616 shares of HealthStream,
Inc. common stock. A portion of the cash consideration will be held in escrow and will be released
upon the occurrence of future events and the preparation of the closing balance sheet. All of the
common stock shares will be held in an escrow account until eighteen months after March 12, 2007,
subject to any claims for indemnification pursuant to the stock purchase agreement. The Company
expects to incur approximately $0.7 million of direct, incremental expenses associated with the
acquisition of TJO. TJO provides healthcare organizations with quality and satisfaction surveys,
data analyses of survey results, and other research-based measurement tools.
A summary of the purchase price is as follows:
|
|
|
|
|
Cash paid at closing to the seller or other designated parties |
|
$ |
6,177,625 |
|
Cash paid at closing associated with certain debts of the seller |
|
|
447,233 |
|
Cash held in escrow, subject to settlement of debts of the seller and release of a guaranty |
|
|
3,262,375 |
|
Cash held in escrow, with one half to be released 12 months after March 12, 2007, and the
remainder to be released 18 months after March 12, 2007, subject to indemnification
claims |
|
|
1,560,000 |
|
Cash held in escrow, subject to the determination of working
capital as of the closing date, with a release date no later than
105 days from March 12, 2007 |
|
|
200,000 |
|
Issuance of 252,616 shares of HealthStream, Inc. common stock to be held in escrow until
the date that is 18 months after March 12, 2007, subject to indemnification claims |
|
|
1,000,000 |
|
|
|
|
|
Total consideration paid |
|
$ |
12,647,233 |
|
|
|
|
|
The unaudited pro forma combined condensed financial information is presented to combine the
historical results of operations of HealthStream and TJO. The unaudited pro forma combined
condensed balance sheet is presented to give effect to the acquisition of TJO as if it occurred on
September 30, 2006. The unaudited pro-forma combined condensed statements of operations for the
year ended December 31, 2005 and for the nine months ended September 30, 2006 give effect to the
acquisition of TJO as if it had occurred on January 1, 2005.
The preliminary allocation of purchase price is as of September 30, 2006 and is consistent with the
presentation on the unaudited pro-forma combined condensed balance sheet. The preliminary
allocation of purchase price includes estimates with regard to the fair value of property and
equipment and identifiable intangible assets, and their estimated useful lives. We will perform an
analysis to determine the composition and valuation of intangible assets at a later date.
The unaudited pro forma combined condensed financial information is for informational purposes only
and does not intend to represent what the Companys results of operations or financial position
would have been had the acquisition of TJO occurred at the beginning of the periods presented, or
to project the results of operations for any future periods. The unaudited pro forma combined
condensed financial information does not reflect any cost savings or synergies which may result
from the acquisition, other than the reduction in TJOs stockholders compensation based on a new
consulting agreement with TJOs President and majority stockholder in connection with the acquisition.
The unaudited pro forma combined condensed financial information should be read in conjunction with
the Companys Annual Report on Form 10-K for the year ended December 31, 2005 as filed by the
Company with the SEC on March 30, 2006, the Companys Quarterly Report on Form 10-Q for the nine
months ended September 30, 2006 as filed with the SEC on November 13, 2006, and the audited
financial statements of TJO, included as Exhibit 99.2 within this Current Report on Form 8-K.
1
\
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|
|
HealthStream |
|
|
TJO |
|
|
Adjustments |
|
|
Combined |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,060,229 |
|
|
$ |
451,077 |
|
|
$ |
(4,812,368 |
) (1) |
|
$ |
2,698,938 |
|
Investments in short term marketable securities |
|
|
6,100,000 |
|
|
|
|
|
|
|
(6,100,000 |
) (1) |
|
|
|
|
Restricted cash |
|
|
111,520 |
|
|
|
|
|
|
|
|
|
|
|
111,520 |
|
Interest receivable |
|
|
57,492 |
|
|
|
|
|
|
|
|
|
|
|
57,492 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
4,401,126 |
|
|
|
1,196,221 |
|
|
|
|
|
|
|
5,597,347 |
|
Accounts receivable unbilled |
|
|
1,014,777 |
|
|
|
|
|
|
|
|
|
|
|
1,014,777 |
|
Related party receivable |
|
|
|
|
|
|
43,713 |
|
|
|
|
|
|
|
43,713 |
|
Prepaid development fees and content rights, net of amortization |
|
|
1,256,651 |
|
|
|
|
|
|
|
|
|
|
|
1,256,651 |
|
Deferred tax assets |
|
|
|
|
|
|
781,647 |
|
|
|
(781,647 |
) (2) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
647,747 |
|
|
|
268,876 |
|
|
|
|
|
|
|
916,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
20,649,542 |
|
|
|
2,741,534 |
|
|
|
(11,694,015 |
) |
|
|
11,697,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation |
|
|
2,163,574 |
|
|
|
881,632 |
|
|
|
|
|
|
|
3,045,206 |
|
Capitalized software feature enhancements, net of accumulated
amortization |
|
|
1,717,702 |
|
|
|
|
|
|
|
|
|
|
|
1,717,702 |
|
Intangible assets, net of accumulated amortization |
|
|
2,883,064 |
|
|
|
|
|
|
|
6,000,000 |
(3) |
|
|
8,883,064 |
|
Goodwill |
|
|
10,317,393 |
|
|
|
|
|
|
|
8,180,482 |
(4) |
|
|
18,497,875 |
|
Other assets |
|
|
853,042 |
|
|
|
56,107 |
|
|
|
|
|
|
|
909,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
38,584,317 |
|
|
$ |
3,679,273 |
|
|
$ |
2,486,467 |
|
|
$ |
44,750,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
885,648 |
|
|
$ |
26,285 |
|
|
$ |
|
|
|
$ |
911,933 |
|
Accrued liabilities |
|
|
1,969,938 |
|
|
|
140,404 |
|
|
|
|
|
|
|
2,110,342 |
|
Accrued compensation and related expenses |
|
|
633,131 |
|
|
|
371,868 |
|
|
|
|
|
|
|
1,004,999 |
|
Registration liabilities |
|
|
95,036 |
|
|
|
|
|
|
|
|
|
|
|
95,036 |
|
Commercial support liabilities |
|
|
375,006 |
|
|
|
|
|
|
|
|
|
|
|
375,006 |
|
Deferred revenue |
|
|
5,352,962 |
|
|
|
3,145,978 |
|
|
|
|
|
|
|
8,498,940 |
|
|
|
|
|
|
|
|
|
|
|
|
(395,353 |
)(5) |
|
|
|
|
Current portion of long term debt |
|
|
179,326 |
|
|
|
405,531 |
|
|
|
1,500,000 |
(6) |
|
|
1,689,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
9,491,047 |
|
|
|
4,090,066 |
|
|
|
1,104,647 |
|
|
|
14,685,760 |
|
Long term debt, less current portion |
|
|
151,695 |
|
|
|
974,014 |
|
|
|
(935,140 |
) (5) |
|
|
190,569 |
|
Deferred tax liability |
|
|
|
|
|
|
140,584 |
|
|
|
(140,584 |
) (2) |
|
|
|
|
Other long-term liabilities |
|
|
525,000 |
|
|
|
|
|
|
|
|
|
|
|
525,000 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,167,742 |
|
|
|
5,204,664 |
|
|
|
28,923 |
|
|
|
15,401,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
932,153 |
(7) |
|
|
|
|
Common stock |
|
|
94,994,881 |
|
|
|
33,333 |
|
|
|
(33,333 |
)(8) |
|
|
95,927,034 |
|
Treasury stock |
|
|
|
|
|
|
(850,000 |
) |
|
|
850,000 |
(9) |
|
|
|
|
Accumulated deficit |
|
|
(66,578,306 |
) |
|
|
(708,724 |
) |
|
|
708,724 |
(9) |
|
|
(66,578,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity (Deficit) |
|
|
28,416,575 |
|
|
|
(1,525,391 |
) |
|
|
2,457,544 |
|
|
|
29,348,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity (Deficit) |
|
$ |
38,584,317 |
|
|
$ |
3,679,273 |
|
|
$ |
2,486,467 |
|
|
$ |
44,750,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Balance Sheet Adjustments |
|
(1) |
|
Reflects cash consideration paid in accordance with the stock purchase agreement and direct
and incremental acquisition costs incurred by HealthStream. |
|
(2) |
|
Reflects a valuation allowance for TJOs net deferred tax assets, due to the uncertainty of
the combined entity not being able to realize the benefit from the net deferred tax assets of
TJO. |
|
(3) |
|
Preliminary valuation of identifiable intangible assets, including non-compete agreement and
customer-related intangibles. |
|
(4) |
|
Total consideration paid by HealthStream, less fair value of net tangible assets and
identifiable intangible assets acquired. |
|
(5) |
|
Repayment of certain TJO debts in connection with the stock purchase agreement. |
|
(6) |
|
Includes $1.5 million of debt incurred by HealthStream associated with the cash consideration
paid. |
|
(7) |
|
Issuance of 252,616 shares of HealthStream common stock in
accordance with the stock purchase agreement with an assigned value
of $1.0 million and fair market value of approximately $930,000.
|
|
(8) |
|
Elimination of TJO common stock. |
|
(9) |
|
Elimination of TJO treasury stock and accumulated deficit balances. |
2
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|
|
HealthStream |
|
|
TJO |
|
|
Adjustments |
|
|
Combined |
|
Revenues, net |
|
$ |
27,359,406 |
|
|
$ |
8,579,767 |
|
|
$ |
|
|
|
$ |
35,939,173 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization) |
|
|
9,745,470 |
|
|
|
4,625,673 |
|
|
|
|
|
|
|
14,371,143 |
|
Product development |
|
|
2,928,112 |
|
|
|
|
|
|
|
|
|
|
|
2,928,112 |
|
Sales and marketing |
|
|
5,452,168 |
|
|
|
1,974,890 |
|
|
|
|
|
|
|
7,427,058 |
|
|
|
|
|
|
|
|
|
|
|
|
(212,257 |
)(1) |
|
|
|
|
Depreciation |
|
|
1,537,959 |
|
|
|
217,738 |
|
|
|
208,700 |
(2) |
|
|
1,752,140 |
|
Amortization |
|
|
1,140,481 |
|
|
|
|
|
|
|
812,500 |
(3) |
|
|
1,952,981 |
|
Other general and administrative expenses |
|
|
4,958,508 |
|
|
|
2,145,913 |
|
|
|
(635,438 |
) (4) |
|
|
6,468,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
25,762,698 |
|
|
|
8,964,214 |
|
|
|
173,505 |
|
|
|
34,900,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,596,708 |
|
|
|
(384,447 |
) |
|
|
(173,505 |
) |
|
|
1,038,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
337,720 |
|
|
|
(47,248 |
) |
|
|
(447,659 |
) (5) |
|
|
(157,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
1,934,428 |
|
|
|
(431,695 |
) |
|
|
(621,164 |
) |
|
|
881,569 |
|
Income tax (provision) benefit |
|
|
(21,500 |
) |
|
|
139,033 |
|
|
|
(139,033 |
) (6) |
|
|
(21,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,912,928 |
|
|
$ |
(292,662 |
) |
|
$ |
(760,197 |
) |
|
$ |
860,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,051,373 |
|
|
|
|
|
|
|
|
(7) |
|
|
21,051,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
21,942,182 |
|
|
|
|
|
|
|
252,616 |
(8) |
|
|
22,194,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Statement of Operations Adjustments |
|
(1) |
|
Reflects the elimination of historical depreciation. |
|
(2) |
|
Reflects depreciation based on the estimated fair value of fixed assets of $880,000 over an
average four year life. |
|
(3) |
|
Reflects the amortization of non-compete agreement of $500,000 over an estimated four year
life and the amortization of customer-related intangibles of $5.5 million over an estimated
eight year life. |
|
(4) |
|
Reflects the elimination of compensation paid to TJOs
stockholders of approximately $0.8 million, less the expected
replacement salary based on the consulting agreement in connection with the acquisition. |
|
(5) |
|
Reflects the elimination of HealthStreams interest income resulting from cash paid in
connection with the acquisition of TJO, elimination of interest expense associated with
repayment of certain TJO debts, and the addition of interest expense associated with debt
incurred by HealthStream to fund the acquisition. |
|
(6) |
|
Reflects the elimination of TJOs income tax benefit based on the tax position of the
combined entity, and uncertainty of realizing TJOs tax benefit. |
|
(7) |
|
Excludes the issuance of 252,616 shares issued in connection with the acquisition of TJO that
are held in escrow. |
|
(8) |
|
Reflects the issuance of 252,616 shares issued in connection with the acquisition of TJO. |
3
HEALTHSTREAM, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|
|
HealthStream |
|
|
TJO |
|
|
Adjustments |
|
|
Combined |
|
Revenues, net |
|
$ |
23,226,872 |
|
|
$ |
8,177,701 |
|
|
$ |
|
|
|
$ |
31,404,573 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization) |
|
|
8,114,882 |
|
|
|
4,143,912 |
|
|
|
|
|
|
|
12,258,794 |
|
Product development |
|
|
2,617,556 |
|
|
|
|
|
|
|
|
|
|
|
2,617,556 |
|
Sales and marketing |
|
|
5,309,726 |
|
|
|
1,560,255 |
|
|
|
|
|
|
|
6,869,981 |
|
|
|
|
|
|
|
|
|
|
|
|
(147,291 |
)(1) |
|
|
|
|
Depreciation |
|
|
1,039,589 |
|
|
|
153,697 |
|
|
|
156,525 |
(2) |
|
|
1,202,520 |
|
Amortization |
|
|
1,030,842 |
|
|
|
|
|
|
|
609,375 |
(3) |
|
|
1,640,217 |
|
Other general and administrative expenses |
|
|
4,142,906 |
|
|
|
2,033,461 |
|
|
|
(546,397 |
) (4) |
|
|
5,629,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
22,255,501 |
|
|
|
7,891,325 |
|
|
|
72,212 |
|
|
|
30,219,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
971,371 |
|
|
|
286,376 |
|
|
|
(72,212 |
) |
|
|
1,185,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
452,178 |
|
|
|
(132,181 |
) |
|
|
(503,369 |
) (5) |
|
|
(183,372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,423,549 |
|
|
|
154,195 |
|
|
|
(575,581 |
) |
|
|
1,002,163 |
|
Income tax
(provision) benefit |
|
|
(2,064 |
) |
|
|
(74,125 |
) |
|
|
74,125 |
(6) |
|
|
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,421,485 |
|
|
$ |
80,070 |
|
|
$ |
(501,456 |
) |
|
$ |
1,000,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,459,321 |
|
|
|
|
|
|
|
85,131 |
(7) |
|
|
21,544,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
22,323,903 |
|
|
|
|
|
|
|
252,616 |
(8) |
|
|
22,576,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Statement of Operations Adjustments |
|
(1) |
|
Reflects the elimination of historical depreciation. |
|
(2) |
|
Reflects depreciation based on the estimated fair value of fixed assets of $880,000 over an
average four year life. |
|
(3) |
|
Reflects the amortization of non-compete agreement of $500,000 over an estimated four year
life and the amortization of customer-related intangibles of $5.5 million over an estimated
eight year life. |
|
(4) |
|
Reflects the elimination of compensation paid to TJOs
stockholders of approximately $0.6 million through September 30, 2006, less the expected
replacement salary based on the consulting agreement in connection
with the acquisition. Does not reflect the elimination of expenses
associated with the relocation to a new office of approximately $0.2
million. |
|
(5) |
|
Reflects the elimination of HealthStreams interest income resulting from cash paid in
connection with the acquisition of TJO, elimination of interest expense associated with
repayment of certain TJO debts, and the addition of interest expense associated with debt
incurred by HealthStream to fund the acquisition. |
|
(6) |
|
Reflects the elimination of TJOs income tax provision based on the utilization of
HealthStreams NOL carryforwards to offset taxable income of the combined entity. |
|
(7) |
|
Reflects the weighted average portion of 252,616 shares issued in connection with the
acquisition of TJO which are held in escrow for a portion of the year. |
|
(8) |
|
Reflects the issuance of 252,616 shares issued in connection with the acquisition of TJO. |
4