HealthStream, Inc.
HEALTHSTREAM INC (Form: 10-Q, Received: 08/10/2009 14:47:51)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2009
Commission File No.: 000-27701
HealthStream, Inc.
(Exact name of registrant as specified in its charter)
     
Tennessee   62-1443555
     
(State or other jurisdiction of
incorporation or organization)
  (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
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
As of August 10, 2009, 21,429,430 shares of the registrant’s common stock were outstanding.
 
 

 


 

Index to Form 10-Q
HEALTHSTREAM, INC.
         
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  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2

 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    June 30,     December 31,  
    2009     2008  
    (Unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 8,280,579     $ 4,106,612  
Restricted cash
    22,399       17,128  
Interest receivable
    2,051       4,090  
Accounts receivable, net of allowance for doubtful accounts of $229,464 and $106,542 at June 30, 2009 and December 31, 2008, respectively
    9,330,147       8,303,212  
Accounts receivable — unbilled
    1,898,100       1,669,356  
Prepaid royalties, net of amortization
    1,298,580       995,493  
Prepaid development fees, net of amortization
    508,906       375,866  
Deferred tax assets, current
    356,987       356,987  
Other prepaid expenses and other current assets
    645,666       1,034,026  
 
           
Total current assets
    22,343,415       16,862,770  
Property and equipment:
               
Equipment
    13,154,818       12,651,227  
Leasehold improvements
    2,003,164       1,990,532  
Furniture and fixtures
    1,599,932       1,579,592  
 
           
 
    16,757,914       16,221,351  
Less accumulated depreciation and amortization
    (13,699,830 )     (12,746,487 )
 
           
 
    3,058,084       3,474,864  
 
               
Capitalized software feature enhancements, net of accumulated amortization of $3,222,872 and $2,500,017 at June 30, 2009 and December 31, 2008, respectively
    4,334,974       4,392,780  
Goodwill
    21,146,864       21,146,864  
Intangible assets, net of accumulated amortization of $10,122,759 and $9,649,321 at June 30, 2009 and December 31, 2008, respectively
    4,264,384       4,737,821  
Deferred tax assets, noncurrent
    2,008,342       2,008,342  
Other assets
    503,205       173,441  
 
           
Total assets
  $ 57,659,268     $ 52,796,882  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 866,932     $ 1,386,771  
Accrued liabilities
    3,157,050       2,556,102  
Accrued compensation and related expenses
    957,757       477,277  
Commercial support liabilities
    176,726       347,234  
Deferred revenue
    12,144,089       10,202,309  
Current portion of long term debt
    671,191       724,095  
Current portion of capital lease obligations
    11,461       20,592  
 
           
Total current liabilities
    17,985,206       15,714,380  
 
               
Long term debt, less current portion
          306,942  
Capital lease obligations, less current portion
    7,993       12,778  
Commitments and contingencies
           
 
               
Shareholders’ equity:
               
Common stock, no par value, 75,000,000 shares authorized; 21,383,055 and 21,382,055 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively
    95,618,530       95,320,889  
Accumulated deficit
    (55,952,461 )     (58,558,107 )
 
           
Total shareholders’ equity
    39,666,069       36,762,782  
 
           
Total liabilities and shareholders’ equity
  $ 57,659,268     $ 52,796,882  
 
           
See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    Three Months Ended June 30,  
    2009     2008  
Revenues, net
  $ 14,583,522     $ 13,012,995  
Operating costs and expenses:
               
Cost of revenues (excluding depreciation and amortization)
    5,228,069       4,862,638  
Product development
    1,447,422       1,330,530  
Sales and marketing
    2,601,702       2,694,108  
Other general and administrative expenses
    2,194,327       2,192,591  
Depreciation and amortization
    1,250,065       1,208,872  
 
           
Total operating costs and expenses
    12,721,585       12,288,739  
 
               
Income from operations
    1,861,937       724,256  
 
               
Other income (expense):
               
Interest and other income
    7,321       40,089  
Interest and other expense
    (9,391 )     (16,904 )
 
           
Total other income (expense)
    (2,070 )     23,185  
 
               
Income before income taxes
    1,859,867       747,441  
Income tax provision
    131,750       8,000  
 
           
Net income
  $ 1,728,117     $ 739,441  
 
           
 
               
Net income per share:
               
Basic
  $ 0.08     $ 0.03  
 
           
Diluted
  $ 0.08     $ 0.03  
 
           
 
               
Weighted average shares of common stock outstanding:
               
Basic
    21,382,802       21,961,252  
 
           
Diluted
    21,626,406       22,578,825  
 
           
See accompanying notes to the condensed consolidated financial statements.

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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    Six Months Ended June 30,  
    2009     2008  
Revenues, net
  $ 28,202,729     $ 24,434,695  
Operating costs and expenses:
               
Cost of revenues (excluding depreciation and amortization)
    10,495,901       9,390,411  
Product development
    2,981,846       2,614,963  
Sales and marketing
    5,315,093       5,251,096  
Other general and administrative expenses
    4,095,803       3,955,072  
Depreciation and amortization
    2,516,365       2,454,947  
 
           
Total operating costs and expenses
    25,405,008       23,666,489  
 
               
Income from operations
    2,797,721       768,206  
 
               
Other income (expense):
               
Interest and other income
    16,277       86,218  
Interest and other expense
    (19,232 )     (41,299 )
 
           
Total other income (expense)
    (2,955 )     44,919  
 
               
Income before income taxes
    2,794,766       813,125  
Income tax provision
    189,120       8,000  
 
           
Net income
  $ 2,605,646     $ 805,125  
 
           
 
               
Net income per share:
               
Basic
  $ 0.12     $ 0.04  
 
           
Diluted
  $ 0.12     $ 0.04  
 
           
 
               
Weighted average shares of common stock outstanding:
               
Basic
    21,382,429       22,024,098  
 
           
Diluted
    21,596,805       22,652,960  
 
           
See accompanying notes to the condensed consolidated financial statements.

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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2009
                                 
    Common Stock     Accumulated     Total Shareholders’  
    Shares     Amount     Deficit     Equity  
Balance at December 31, 2008
    21,382,055     $ 95,320,889     $ (58,558,107 )   $ 36,762,782  
 
                               
Net income
                2,605,646       2,605,646  
 
                               
Stock based compensation
          296,401             296,401  
 
                               
Exercise of stock options
    1,000       1,240             1,240  
 
                       
 
                               
Balance at June 30, 2009
    21,383,055     $ 95,618,530     $ (55,952,461 )   $ 39,666,069  
 
                       
See accompanying notes to the condensed consolidated financial statements.

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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Six Months Ended June 30,  
    2009     2008  
OPERATING ACTIVITIES:
               
Net income
  $ 2,605,646     $ 805,125  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,516,365       2,454,947  
Stock based compensation expense
    296,401       426,112  
Provision for doubtful accounts
    125,000       20,000  
Realized loss on disposal of property and equipment
    419       15,605  
Changes in operating assets and liabilities:
               
Accounts and unbilled receivables
    (1,380,679       1,302,992  
Restricted cash
    (5,271 )     (84,181 )
Interest receivable
    2,039       5,957  
Prepaid royalties
    (303,087 )     (306,297 )
Prepaid development fees
    (94,281 )     (67,698 )
Other prepaid expenses and other current assets
    388,360       (211,606 )
Other assets
    58,152       138,476  
Accounts payable
    (519,839 )     (1,090,843 )
Accrued liabilities and accrued compensation and related expenses
    471,844       (360,968 )
Commercial support liabilities
    (170,508 )     268,588  
Deferred revenue
    1,41,780       747,751  
 
           
Net cash provided by operating activities
    5,933,341       4,063,959  
 
           
 
               
INVESTING ACTIVITIES:
               
Acquisition, net of cash acquired
          (9,194 )
Payments associated with capitalized software feature enhancements
    (665,048 )     (289,542 )
Purchases of property and equipment, net
    (721,804 )     (480,477 )
 
           
Net cash used in investing activities
    (1,386,852 )     (779,213 )
 
           
 
               
FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    1,240       66,316  
Issuance of common stock to Employee Stock Purchase Plan
          130,911  
Repurchase of common stock
          (999,977 )
Payments on promissory note
    (359,846 )     (351,200 )
Payments on capital lease obligations
    (13,916 )     (84,087 )
 
           
Net cash used in financing activities
    (372,522 )     (1,238,037 )
 
           
 
               
Net increase in cash and cash equivalents
    4,173,967       2,046,709  
Cash and cash equivalents at beginning of period
    4,106,612       3,599,346  
 
           
Cash and cash equivalents at end of period
  $ 8,280,579     $ 5,646,055  
 
           
See accompanying notes to the condensed consolidated financial statements.

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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 Form 10-Q and Article 10 of Regulation S-X. Accordingly, condensed consolidated 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. All significant intercompany transactions have been eliminated in consolidation. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
The balance sheet at December 31, 2008 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 consolidated financial statements and footnotes thereto for the year ended December 31, 2008 (included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2009).
In the second quarter of 2009 we recorded an adjustment related to capitalized software feature enhancements and product development expense that resulted in an increase to net income of approximately $105,000. The error resulted from improperly expensing software development costs incurred during the first quarter of 2009. Management evaluated the effect of this error on the first quarter financial statements, and concluded the error is immaterial to the Company’s financial position and results of operations on an annualized basis, and therefore has corrected the error in the second quarter financial statements. The correction of the error resulted in a reduction of product development expenses and an increase to capitalized software feature enhancements during the second quarter of 2009, but did not have an effect on net income for the six months ended June 30, 2009.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, contractual contingencies, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) changes the accounting for acquisition-related restructuring cost accruals and the recognition of changes in the acquirer’s income tax valuation allowance, and no longer permits the capitalization of certain acquisition costs. In addition, SFAS No. 141(R) establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective prospectively, except for certain retrospective adjustments for deferred tax balances. The Company’s consolidated financial statements will be impacted by SFAS 141(R) in relation to business combination activities subsequent to January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted SFAS No. 160 on January 1, 2009. The adoption of this new standard did not have an effect on the Company’s financial position, results of operations, or cash flows.
In April 2008, FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”), was issued. FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company adopted FSP No. FAS 142-3 on January 1, 2009. The adoption of this new standard did not have a material effect on the Company’s financial position, results of operations, or cash flows.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS No. 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This statement is effective for interim or annual reporting periods ending after June 15, 2009. During the quarter ended June 30, 2009, we adopted SFAS No. 165. The adoption of this new standard did not have a material effect on the Company’s financial position, results of operations, or cash flows.

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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management’s estimate of future taxable income is performed during the fourth quarter in connection with the Company’s annual budget process. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of June 30, 2009, the Company had established a valuation allowance of $11.0 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.
The Company’s effective tax rate for the three and six months ended June 30, 2009 and 2008 is substantially less than the statutory rate because a significant portion of our taxable income has been offset through utilization of our net operating loss (“NOL”) carryforwards. Taxable income for the six months ended June 30, 2009 has been applied towards our NOL carryforwards and resulted in a reduction of the valuation allowance of approximately $1.2 million. The Company’s effective tax rate could change in the future based on our projections of taxable income, changes in federal or state tax rates, or changes in state apportionment factors, as well as changes in the valuation allowance applied to the Company’s deferred tax assets.
4. STOCK BASED COMPENSATION
The Company currently maintains one stock incentive plan. We account for our stock based compensation plan using the fair-value based method for costs related to share-based payments, including stock options. We use the Black Scholes option pricing model for calculating the fair value of awards issued under our stock based compensation plan. During the six months ended June 30, 2009, we granted 289,000 stock options with a weighted average grant date fair value of $1.17. During the six months ended June 30, 2008, we granted 498,000 stock options with a weighted average grant date fair value of $1.69. The fair value of stock based awards granted during the six months ended June 30, 2009 and 2008 was estimated using the Black Scholes option pricing model, with the assumptions as follows:
         
    Six Months Ended
    June 30,
    2009   2008
Risk-free interest rate
  1.73 - 3.22%   2.63 - 3.56%
Expected dividend yield
  0.0%   0.0%
Expected life (in years)
  5 - 7 years        5 - 8 years
Expected forfeiture rate
  0-20%   0-20%
Volatility
  60%   65%
Total stock based compensation expense recorded for the three and six months ended June 30, 2009 and 2008, which is recorded in our condensed consolidated statements of income, is as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Cost of revenues (excluding depreciation and amortization)
  $ 8,299     $ 12,750     $ 13,491     $ 23,549  
Product development
    27,903       40,072       62,989       73,319  
Sales and marketing
    49,110       55,610       87,751       105,824  
Other general and administrative
    65,473       164,745       132,170       223,420  
 
                       
Total stock based compensation expense
  $ 150,785     $ 273,177     $ 296,401     $ 426,112  
 
                       

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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options and warrants, escrowed or restricted shares, and shares subject to vesting are included in diluted net income per share only to the extent these shares are dilutive. Common equivalent shares are dilutive when the average market price during the period exceeds the exercise price of the underlying shares. The total number of common equivalent shares excluded from the calculations of diluted net income per share, due to their anti-dilutive effect, was approximately 2.3 million and 2.2 million for the three and six months ended June 30, 2009, respectively, and approximately 2.0 million and 1.8 million for the three and six months ended June 30, 2008, respectively.
The following table sets forth the computation of basic and diluted net income per share for three and six months ended June 30, 2009 and 2008:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Numerator:
                               
Net income
  $ 1,728,117     $ 739,441     $ 2,605,646     $ 805,125  
 
                       
 
                               
Denominator:
                               
Weighted average shares outstanding:
                               
Basic
    21,382,802       21,961,252       21,382,429       22,024,098  
Employee stock options and escrowed shares
    243,604       617,573       214,376       628,862  
 
                       
Diluted
    21,626,406       22,578,825       21,596,805       22,652,960  
 
                       
 
                               
Net income per share:
                               
Basic
  $ 0.08     $ 0.03     $ 0.12     $ 0.04  
 
                       
Diluted
  $ 0.08     $ 0.03     $ 0.12     $ 0.04  
 
                       
6. BUSINESS SEGMENTS
We provide our services to healthcare organizations, pharmaceutical and medical device companies, and other members within the healthcare industry. Our services are primarily focused on the delivery of education and training products and services (HealthStream Learning), as well as survey and research services (HealthStream Research). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2008.
We measure segment performance based on operating income (loss) before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The following is our business segment information as of and for the three and six months ended June 30, 2009 and 2008.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Revenues
                               
Learning
  $ 9,315,512     $ 8,172,642     $ 18,309,122     $ 15,669,348  
Research
    5,268,010       4,840,353       9,893,607       8,765,347  
 
                       
Total net revenue
  $ 14,583,522     $ 13,012,995     $ 28,202,729     $ 24,434,695  
 
                       
 
                               
Income (loss) from operations
                               
Learning
  $ 2,441,212     $ 1,665,897     $ 4,488,377     $ 3,325,529  
Research
    1,287,190       972,534       1,860,347       1,001,478  
Unallocated
    (1,866,465 )     (1,914,175 )     (3,551,003 )     (3,558,801 )
 
                       
Total income from operations
  $ 1,861,937     $ 724,256     $ 2,797,721     $ 768,206  
 
                       

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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. BUSINESS SEGMENTS (continued)
                 
    June 30, 2009     December 31, 2008  
Segment assets *
               
Learning
  $ 16,994,869     $ 16,027,451  
Research
    27,115,832       27,018,000  
Unallocated
    13,548,567       9,751,431  
 
           
Total assets
  $ 57,659,268     $ 52,796,882  
 
           
 
*   Segment assets include restricted cash, accounts and unbilled receivables, prepaid and other current assets, other assets, capitalized software feature enhancements, certain property and equipment, and intangible assets. Cash and cash equivalents are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.
7. SUBSEQUENT EVENTS
On July 17, 2009, the Company signed an amendment to its revolving credit facility, renewing the agreement through July 21, 2011. The availability under the line of credit was maintained at $15.0 million, and a tangible net worth covenant was reinstated. The loan bears interest at 30 Day LIBOR plus a margin of either 190 or 220 basis points determined in accordance with a pricing grid, but has a minimum interest rate of not less than three percent. The Company’s fee for unused funds was increased from 10 to 25 basis points per annum of the average daily unused amount of the loan. No other material terms were modified within the loan agreement.
Management has evaluated subsequent events and transactions in consideration for disclosure of or recognition in our condensed consolidated financial statements through August 10, 2009, the date which they were issued.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2008, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on March 27, 2009 (the “2008 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “ projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.
The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set forth under the caption “Item 1A. Risk Factors” in our 2008 Form 10-K and the information regarding forward-looking statements in our earnings releases, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in “Critical Accounting Policies and Estimates.” We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.
Overview
HealthStream’s services are focused on the professionals who work within healthcare organizations, and include the delivery of education and training products and services (“HealthStream Learning”), as well as survey and research services (“HealthStream Research”). HealthStream Learning products and services are used by healthcare organizations to meet a broad range of their training and assessment needs, while HealthStream Research products and services provide our customers valuable insight into measuring quality and satisfaction of patients, physicians, employees, and members of the community. Across both our HealthStream Learning and HealthStream Research segments, our customers include approximately 2,400 healthcare organization facilities (predominately acute-care facilities) throughout the United States.
The Company’s flagship learning product is the HealthStream Learning Center ® (“HLC”), our proprietary, Internet-based learning platform. We deliver educational and training courseware to our customers through the HLC platform. HealthStream Learning products and services are focused on education and training initiatives designed to reach hospital-based healthcare professionals, as well as physicians and medical device and pharmaceutical industry sales representatives.
HealthStream Research products and services include quality and satisfaction surveys, data analyses of survey results, and other research-based measurement tools focused on patients, physicians, employees, and members of the community. HealthStream Research services are designed to provide customers thorough analyses that provide insightful recommendations for change, benchmarking capabilities using our comprehensive databases, and consulting services to identify solutions based on their survey results. As a certified vendor designated by the Centers for Medicare & Medicaid Services, we offer our customers HCAHPS ® (Hospital Consumer Assessment of Healthcare Providers and Systems) survey services.
Key financial and operational indicators for the second quarter of 2009 include:
    Revenues of $14.6 million in the second quarter of 2009, up 12% over the second quarter of 2008
 
    Net income of $1.7 million in the second quarter of 2009, up from $739,000 in the second quarter of 2008
 
    Earnings per share (EPS) of $0.08, up from $0.03 in the second quarter of 2008
 
    Revenues of $28.2 million for the first six months of 2009, up 15% over the first six months of 2008
 
    Net income of $2.6 million and EPS of $0.12 for the first six months of 2009, up from a net income of $805,000 and EPS of $0.04 for the first six months of 2008

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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions during the preparation of our financial statements. We believe the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.
The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following:
    Revenue recognition
 
    Accounting for income taxes
 
    Product development costs and related capitalization
 
    Goodwill, intangibles, and other long-lived assets
 
    Allowance for doubtful accounts
 
    Accrual for service credits
 
    Stock based compensation
 
    Nonmonetary exchange of content rights and deferred service credits
In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to Consolidated Financial Statements in our 2008 Form 10-K, which contains additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no changes in our critical accounting policies and estimates from those reported in our 2008 Form 10-K.
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.
Revenues. Revenues for our HealthStream Learning business segment consist of the provision of services through our Internet-based HLC, authoring tools, a variety of courseware subscriptions (add-on courseware), implementation and consulting services, maintenance of third party content, online sales training courses (RepDirect™), online training and content development, HospitalDirect ® , and a variety of other educational activities for physicians, nurses and other professionals within healthcare organizations. Revenues for our HealthStream Research business segment consist of quality and satisfaction surveys, data analyses of survey results, and other research-based measurement tools focused on patients, physicians, employees, and other members of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, royalties paid by us to content providers based on a percentage of revenues, materials, outsourced phone survey support, contract labor, hosting costs, as well as other direct expenses associated with revenues. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, conduct, process and manage phone and paper-based surveys, handle customer support calls or inquiries, manage the technology infrastructure for our hosted applications, manage content and survey services, coordinate content maintenance services, and provide training or implementation services.
Product Development. Product development expenses consist primarily of salaries and employee benefits, stock based compensation, content acquisition costs before technological feasibility is achieved, costs associated with the development of content and expenditures associated with maintaining, developing and operating our training, delivery and administration platforms. In addition, product development expenses are associated with the development of new software feature enhancements and new products. Personnel costs within product development include our systems, application development, and quality assurance teams, product managers, and other personnel associated with content and product development.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions and employee benefits, stock based compensation, employee travel and lodging, advertising, trade shows, promotions, and related marketing costs. Personnel costs within sales and marketing include our HealthStream Learning and HealthStream Research sales teams, strategic account management, and marketing personnel, as well as our account management group.

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Depreciation and Amortization. Depreciation and amortization consist of depreciation of property and equipment, amortization of intangibles considered to have definite lives, amortization of content development fees, and amortization of capitalized software feature enhancements.
Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, facility costs, office expenses, fees for professional services, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions (accounting, legal, human resources, administrative, internal information systems, and executive management) as well as personnel who maintain our accreditation status with various organizations.
Other Income/Expense. The primary component of other income is interest income related to interest earned on cash and cash equivalents. The primary component of other expense is interest expense related to a promissory note, capital leases and our revolving credit facility.
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Revenues. Revenues increased approximately $1.6 million, or 12.1%, to $14.6 million for the three months ended June 30, 2009 from $13.0 million for the three months ended June 30, 2008. Revenues for 2009 consisted of $9.3 million, or 64% of total revenue, for HealthStream Learning and $5.3 million, or 36% of total revenue, for HealthStream Research. In 2008, revenues consisted of $8.2 million, or 63% of total revenue, for HealthStream Learning and $4.8 million, or 37% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $1.1 million, or 14.0%, over the second quarter of 2008. Revenues from our Internet-based subscription learning products increased by $1.2 million, and were comprised of revenue increases from the HLC of $696,000 and from courseware subscriptions of $505,000. Revenues from our Internet-based subscription products increased 18.0% over the prior year quarter due to a higher number of subscribers and more courseware consumption by more subscribers. Our HLC subscriber base increased to 1,863,000 fully-implemented subscribers and 1,945,000 contracted subscribers at June 30, 2009 compared to 1,639,000 fully-implemented subscribers and 1,758,000 contracted subscribers at June 30, 2008. Revenues associated with implementation, development, and consulting services increased $287,000 over the prior year quarter due to increased courseware development service revenues compared to the prior year. These increases in revenues were partially offset by a decline in revenues from live events, study guides, and other project-based activities, which collectively declined $376,000 from the second quarter of 2008 due to a de-emphasis on live events and other similar project-based services.
Revenues for HealthStream Research increased $428,000, or 8.8%, over the second quarter of 2008. This revenue growth is attributable to increased survey volumes with new and existing customers compared to the prior year quarter. HealthStream Research provides four survey product lines: patient, physician, employee and community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $365,000, or 7.5%, to $5.2 million for the three months ended June 30, 2009 from $4.9 million for the three months ended June 30, 2008. Cost of revenues as a percentage of revenues were 35.8% of revenues for the three months ended June 30, 2009 down favorably from 37.4% of revenues for the three months ended June 30, 2008. Cost of revenues for HealthStream Learning increased approximately $159,000 to $2.9 million and approximated 31.2% and 33.7% of revenues for the three months ended June 30, 2009 and 2008, respectively. The expense increase was primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues and were partially offset by expense decreases associated with the declines in live events and other project-based revenues. Cost of revenues for HealthStream Research increased approximately $206,000 to $2.3 million and approximated 44.0% and 43.6% of revenues for the three months ended June 30, 2009 and 2008, respectively. The increase in cost of revenues for HealthStream Research is primarily a result of the costs associated with increased survey volumes compared to the same quarter in the prior year.
Product Development. Product development expenses increased approximately $117,000, or 8.8%, to $1.4 million for the three months ended June 30, 2009 from $1.3 million for the three months ended June 30, 2008. Product development expenses as a percentage of revenues were 9.9% and 10.2% of revenues for the three months ended June 30, 2009 and 2008, respectively. Product development expenses for the three months ended June 30, 2009 has been reduced by $105,000 to reflect the correction of an error related to software development that should have been capitalized during the first quarter of 2009.
Product development expenses for HealthStream Learning increased approximately $161,000 and approximated 13.4% and 13.3% of revenues for the three months ended June 30, 2009 and 2008, respectively. This expense increase resulted from additional personnel and contract labor associated with maintenance and support of our learning platform products. Product development expenses for HealthStream Research decreased approximately $44,000 and approximated 3.8% and 5.1% of revenues for the three months ended June 30, 2009 and 2008, respectively. The decrease was a result of using internal resources for software development projects which were eligible for capitalization.

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Sales and Marketing. Sales and marketing expenses, including personnel costs, decreased approximately $92,000, or 3.4%, to $2.6 million for the three months ended June 30, 2009 from $2.7 million for the three months ended June 30, 2008. Sales and marketing expenses approximated 17.8% and 20.7% of revenues for the three months ended June 30, 2009 and 2008, respectively.
Sales and marketing expenses for HealthStream Learning increased $36,000 and approximated 19.4% and 21.7% of revenues for the three months ended June 30, 2009 and 2008, respectively. This expense increase primarily resulted from additional sales personnel and related expenses and was partially offset by lower travel expenses. Sales and marketing expenses for HealthStream Research decreased approximately $135,000, and approximated 13.6% and 17.5% of revenues for the three months ended June 30, 2009 and 2008, respectively. This decrease resulted primarily from fewer sales and marketing personnel and related expenses when compared to the prior year quarter.
Other General and Administrative. Other general and administrative expenses were comparable between periods and approximated $2.2 million for both the three months ended June 30, 2009 and 2008. Other general and administrative expenses as a percentage of revenues decreased to 15.0% for the three months ended June 30, 2009 from 16.8% for the three months ended June 30, 2008. The percentage decrease is a result of the revenue increases mentioned above.
Other general and administrative expenses for HealthStream Learning increased $22,000 compared to the prior year quarter. Other general and administrative expenses for HealthStream Research increased approximately $85,000 over the prior year quarter, primarily due to recruiting fees and bad debt expense. The unallocated corporate portion of other general and administrative expenses decreased $106,000 from the prior year quarter, primarily due to lower stock based compensation, facility costs, recruiting fees, and travel expense, offset by expense increases associated with additional personnel and related costs.
Depreciation and Amortization. Depreciation and amortization increased approximately $41,000, or 3.4%, to $1.3 million for the three months ended June 30, 2009 from $1.2 million for the three months ended June 30, 2008. The increase resulted from depreciation expense associated with capital expenditures.
Other Income (Expense). Other income (expense) decreased approximately $25,000, or 108.9%, to an expense of $2,000 for the three months ended June 30, 2009 from income of $23,000 for the three months ended June 30, 2008. Interest income decreased $33,000 from the prior year quarter resulting from lower yield rates on cash and cash equivalents. Interest expense decreased $8,000 from the prior year quarter due to reductions in debt and capital lease balances.
Provision for Income Taxes. The Company’s income tax provision primarily consists of the federal alternative minimum tax and state income taxes. Taxable income for 2009 is expected to be substantially offset by the utilization of our net operating loss carryforwards.
Net Income. Net income was approximately $1.7 million for the three months ended June 30, 2009, up from $739,000 for the three months ended June 30, 2008. Net income per share was $0.08 per share for the three months ended June 30, 2009, up from $0.03 per share for the three months ended June 30, 2008. This improvement is a result of the factors mentioned above.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenues. Revenues increased approximately $3.8 million, or 15.4%, to $28.2 million for the six months ended June 30, 2009 from $24.4 million for the six months ended June 30, 2008. Revenues for 2009 consisted of $18.3 million, or 65% of total revenue, for HealthStream Learning and $9.9 million, or 35% of total revenue, for HealthStream Research. In 2008, revenues consisted of $15.7 million, or 64% of total revenue, for HealthStream Learning and $8.8 million, or 36% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $2.6 million, or 16.8%, over the first six months of 2008. Revenues from our Internet-based subscription learning products accounted for $2.5 million of the increase, and were comprised of revenue increases from the HLC of $1.3 million and from courseware subscriptions of $1.1 million. Revenues from Internet-based subscription products increased 18.0% over the prior year period due to a higher number of subscribers and more courseware consumption by more subscribers. Our HLC subscriber base increased to 1,863,000 fully-implemented subscribers and 1,945,000 contracted subscribers at June 30, 2009 compared to 1,639,000 fully-implemented subscribers and 1,758,000 contracted subscribers at June 30, 2008. Revenues associated with implementation, development, and consulting services increased $846,000 over the prior year period due to increased courseware development service revenues compared to the prior year. These increases in revenues were partially offset by a decline in revenues from live events, study guides, and other project-based activities, which collectively declined $676,000 from the prior year period due to a de-emphasis on live events and other similar project-based services.
Revenues for HealthStream Research increased $1.1 million, or 12.9%, over the first six months of 2008. This revenue growth is attributable to increased survey volumes with new and existing customers compared to the prior year.

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Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $1.1 million, or 11.8%, to $10.5 million for the six months ended June 30, 2009 from $9.4 million for the six months ended June 30, 2008. Cost of revenues as a percentage of revenues were 37.2% of revenues for the six months ended June 30, 2009 down favorably from 38.4% of revenues for the six months ended June 30, 2008. Cost of revenues for HealthStream Learning increased approximately $708,000 to $5.9 million and approximated 32.3% and 33.2% of revenues for the six months ended June 30, 2009 and 2008, respectively. The expense increase was primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues as well as increased costs to support the growth in implementation, development, and consulting revenues, and was partially offset by expense decreases associated with the declines in live events and other project-based revenues. Cost of revenues for HealthStream Research increased approximately $398,000 to $4.6 million and approximated 46.3% and 47.7% of revenues for the six months ended June 30, 2009 and 2008, respectively. The increase in cost of revenues for HealthStream Research is primarily a result of the costs associated with increased survey volumes compared to the prior year. The decrease in cost of revenues as a percentage of revenues resulted from improved operating efficiencies compared to the same period in the prior year.
Product Development. Product development expenses increased approximately $367,000, or 14.0%, to $3.0 million for the six months ended June 30, 2009 from $2.6 million for the six months ended June 30, 2008. Product development expenses as a percentage of revenues were 10.6% and 10.7% of revenues for the six months ended June 30, 2009 and 2008, respectively.
Product development expenses for HealthStream Learning increased approximately $361,000 and approximated 13.6% of revenues for both the six months ended June 30, 2009 and 2008. This expense increase resulted from additional personnel and contract labor associated with maintenance and support of our learning platform products. Product development expenses for HealthStream Research increased approximately $6,000 and approximated 5.0% and 5.6% of revenues for the six months ended June 30, 2009 and 2008, respectively.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $64,000, or 1.2%, and approximated $5.3 million for both the six months ended June 30, 2009 and 2008. Sales and marketing expenses approximated 18.8% and 21.5% of revenues for the six months ended June 30, 2009 and 2008, respectively. The percentage decrease is a result of the revenue increases mentioned above.
Sales and marketing expenses for HealthStream Learning increased $266,000 and approximated 19.9% and 21.6% of revenues for the six months ended June 30, 2009 and 2008, respectively. This expense increase primarily resulted from additional sales personnel and related expenses. Sales and marketing expenses for HealthStream Research decreased approximately $220,000, and approximated 15.5% and 19.9% of revenues for the six months ended June 30, 2009 and 2008, respectively. This decrease resulted primarily from fewer sales and marketing personnel and related expenses when compared to the prior year.
Other General and Administrative. Other general and administrative expenses increased approximately $141,000, or 3.6%, and approximated $4.1 million for the six months ended June 30, 2009 compared to $4.0 million for the six months ended June 30, 2008. Other general and administrative expenses as a percentage of revenues decreased to 14.5% for the six months ended June 30, 2009 from 16.2% for the six months ended June 30, 2008. The percentage decrease is a result of the revenue increases mentioned above.
Other general and administrative expenses for HealthStream Learning increased $163,000 compared to the prior year period, primarily due to recruiting fees, bad debt expense, and office expenses. Other general and administrative expenses for HealthStream Research increased approximately $105,000 over the prior year period, primarily due to recruiting fees, bad debt expense, and office expenses. The unallocated corporate portion of other general and administrative expenses decreased $127,000 from the prior year period, primarily due to lower stock based compensation, facility costs, recruiting fees, and travel, which were partially offset by expense increases associated with additional personnel and related costs.
Depreciation and Amortization. Depreciation and amortization increased approximately $61,000, or 2.5%, to $2.5 million for the six months ended June 30, 2009 from $2.4 million for the six months ended June 30, 2008. The increase resulted from depreciation expense associated with capital expenditures.
Other Income (Expense). Other income (expense) decreased approximately $48,000, or 106.6%, to an expense of $3,000 for the six months ended June 30, 2009 from income of $45,000 for the six months ended June 30, 2008. Interest income decreased $70,000 from the prior year period resulting from lower yield rates on cash and cash equivalents. Interest expense decreased $22,000 from the prior year period due to reductions in debt and capital lease balances.
Provision for Income Taxes. The Company’s income tax provision primarily consists of the federal alternative minimum tax and state income taxes. Taxable income for 2009 is expected to be substantially offset by the utilization of our net operating loss carryforwards.

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Net Income. Net income was approximately $2.6 million for the six months ended June 30, 2009, up from $805,000 for the six months ended June 30, 2008. Net income per share was $0.12 per share for the six months ended June 30, 2009, up from $0.04 per share for the six months ended June 30, 2008. This improvement is a result of the factors mentioned above.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $5.9 million and $4.1 million during the six months ended June 30, 2009 and 2008, respectively. Our primary sources of cash were generated from receipts from the sales of our products and services. Our days sales outstanding (“DSO”) which we calculate by dividing the accounts receivable balance, excluding unbilled and other receivables, by average daily revenues for the quarter, approximated 58 days for the second quarter of 2009 compared to 48 days for the second quarter of 2008. DSO for the second quarter of 2009 has improved compared to 69 days for the first quarter of 2009. The increase over the prior year is due to slower payment processing by one of our project-based customers. The primary uses of cash to fund our operations for the six months ended June 30, 2009 included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses. The increase in accounts receivable negatively impacted our cash flows from operations for the six months ended June 30, 2009.
Net cash used in investing activities was approximately $1.4 million and $779,000 for the six months ended June 30, 2009 and 2008, respectively. The primary uses of cash for the six months ended June 30, 2009 were associated with property and equipment purchases of $722,000 and capitalized software feature enhancements of $665,000. These uses of cash were associated with technology investments in our platform products.
Cash used in financing activities was approximately $373,000 and $1.2 million for the six months ended June 30, 2009 and 2008, respectively. The primary uses of cash for the six months ended June 30, 2009 related to payments under a promissory note and capital lease obligations. The primary uses of cash for the six months ended June 30, 2008 related to purchases of our common stock and payments under a promissory note and capital lease obligations.
Our revenues increased and our operating income improved over the prior year period, and our balance sheet reflects positive working capital of $4.4 million at June 30, 2009. Current assets increased approximately $5.5 million during the first six months of 2009 primarily due to increases in cash balances, accounts receivable, and prepaid royalties, while current liabilities increased approximately $2.3 million during the first six months of 2009 resulting primarily from increases in deferred revenue and accrued compensation. Our primary source of liquidity was $8.3 million of cash and cash equivalents, restricted cash, and interest receivable. We also have renewed our $15.0 million revolving credit facility loan agreement through July 21, 2011, all of which was available at June 30, 2009.
We believe that our existing cash and cash equivalents, restricted cash, related interest receivable, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated cash needs for working capital, new product development and capital expenditures for at least the next 12 months. As part of our growth strategy, we review possible strategic alliances and acquisitions that complement our products and services. We anticipate that future strategic alliances and acquisitions, if any, would be effected through a combination of stock and cash consideration. We may need to raise additional capital through the issuance of equity or debt securities and/or borrowings under our revolving credit facility to finance any future acquisitions. The issuance of our stock as consideration for an acquisition would have a dilutive effect and could adversely affect our stock price. The credit markets have been experiencing extreme volatility and disruption, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates. We do not have any foreign currency exchange rate risk or commodity price risk. As of June 30, 2009, our outstanding indebtedness included a promissory note of approximately $671,000 and approximately $19,000 of capital lease obligations. We may become subject to interest rate market risk associated with borrowings under our revolving credit facility, which was renewed through July 21, 2011. Effective with the July 2009 renewal of our revolving credit facility, the new interest rate will be based on 30 Day LIBOR plus a margin of either 190 or 220 basis points determined in accordance with a pricing grid, but has a minimum interest rate of not less than three percent. We are also exposed to market risk with respect to our cash balances. At June 30, 2009, the Company had cash and cash equivalents, restricted cash, and related interest receivable totaling approximately $8.3 million. Current investment rates of return approximate 1.00% — 1.50%. Assuming a 1.25% rate of return on $8.3 million, a hypothetical 10% decrease in interest rates would decrease interest income and decrease net income on an annualized basis by approximately $10,400.
The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.

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Item 4T. Controls and Procedures
Evaluation of Controls and Procedures
HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its chief executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in HealthStream’s internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 2009, the Company held its Annual Meeting of Shareholders. At the Annual Meeting, the shareholders of the Company elected the following persons as Class III directors to serve until the Annual Meeting of Shareholders in 2012 and until such time as their respective successors are duly elected and qualified, with the number of votes cast for, or withheld as set forth opposite their names.
                 
    Votes
            Withheld
Nominee   For   Authority/Abstained
 
Robert A. Frist, Jr.
    19,770,707       1,076,124  
Frank Gordon
    19,760,872       1,085,959  
The shareholders of the Company ratified the appointment of Ernst and Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009, with the number of votes cast for, against, or withheld as set forth below:
         
Votes
        Withheld
For   Against   Authority/Abstained
 
20,805,230
  37,001   4,600
Item 6. Exhibits
  (a)   Exhibits
  31.1   — Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  31.2   — Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  32.1   — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  32.2   — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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 thereunto duly authorized.
         
  HEALTHSTREAM, INC.
 
 
August 10, 2009  By:   /s/ Gerard M. Hayden, Jr.    
    Gerard M. Hayden, Jr.   
    Chief Financial Officer   

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HEALTHSTREAM, INC.
EXHIBIT INDEX
31.1   Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2   Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

18

Exhibit 31.1
I, Robert A. Frist, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: August 10, 2009  /s/ robert a. frist, Jr.    
  Robert A. Frist, Jr.   
  Chief Executive Officer   

 

         
Exhibit 31.2
I, Gerard M. Hayden, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: August 10, 2009  /s/ Gerard M. Hayden, Jr.    
  Gerard M. Hayden, Jr.   
  Chief Financial Officer   

 

         
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HealthStream, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert A. Frist, Jr., Chief Executive Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
/s/ robert a. frist, Jr.
 
   
Robert A. Frist, Jr.
   
Chief Executive Officer
   
August 10, 2009
   

 

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HealthStream, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerard M. Hayden, Jr., Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
/s/ Gerard M. Hayden, Jr.
 
   
Gerard M. Hayden, Jr.
   
Chief Financial Officer
   
August 10, 2009