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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 8-K/A
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 29, 2005 (March 28, 2005)
HEALTHSTREAM, INC.
| Tennessee | 001-8833 | 62-1443555 | ||
| (State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer | ||
| Identification No.) |
209 10th Avenue South, Suite 450, Nashville, Tennessee 37203
(615) 301- 3100
Not Applicable
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):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
| Item 9.01 Financial Statements and Exhibits. | ||||||||
| SIGNATURE | ||||||||
| INDEX TO EXHIBITS | ||||||||
| EX-23.1 CONSENT OF ERNST & YOUNG LLP | ||||||||
| EX-99.2 AUDITED FINANCIAL STATEMENTS | ||||||||
| EX-99.3 UNAUDITED PRO FORMA FINANCIAL INFORMATION | ||||||||
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Item 9.01 Financial Statements and Exhibits.
On March 28, 2005, HealthStream, Inc., a Tennessee corporation (the “Company”), entered into a Stock Purchase Agreement with Data Management & Research, Inc., a Tennessee corporation (“DMR”), and Mel B. Thompson (the “Seller”), the owner of 100% of the stock of DMR. On the same day and in accordance with the terms of the Stock Purchase Agreement, the Company acquired 100% of the stock of DMR from the Seller for $10.6 million resulting in DMR becoming a wholly-owned subsidiary of the Company.
The disclosure of the DMR acquisition was reported in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2005. Since the historical financial statements of DMR and related pro forma financial information were not available at the time of our initial filing on Form 8-K, we are filing such information within the time allowed for such filing as Amendment No. 1 to Form 8-K.
1. Financial Statements of Business Acquired
The audited financial statements of DMR for the year ended December 31, 2004 are filed as Exhibit 99.2 and are hereby incorporated by reference.
2. Pro Forma Financial Information
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2004 and for the three months ended March 31, 2005 are filed as Exhibit 99.3 and are hereby incorporated by reference.
3. Exhibits
| *2.1 | Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream,
Inc., Mel B. Thompson and Data Management & Research, 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 | Consent of
Ernst & Young LLP |
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| *99.1 | Press Release dated March 29, 2005. |
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| 99.2 | Audited Financial Statements of Data Management & Research, Inc. for the year ended
December 31, 2004. |
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| 99.3 | Unaudited pro forma financial information of HealthStream, Inc. for the year ended
December 31, 2004 and for the three months ended March 31, 2005. |
* Exhibit has been previously filed on the Company’s Form 8-K dated March 29, 2005.
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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.
| HEALTHSTREAM, INC. |
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| By: | /s/ Arthur E. Newman | |||
| Arthur E. Newman | ||||
| Chief Financial Officer June 10, 2005 |
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INDEX TO EXHIBITS
| Exhibit | ||||
| Number | Description | |||
| * 2.1 | Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc.,
Mel B. Thompson and Data Management & Research, 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). |
|||
| 23.1 | Consent
of Ernst & Young LLP |
|||
| *99.1 | Press Release dated March 29, 2005. |
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| 99.2 | Audited Financial Statements of Data Management & Research, Inc. for the year ended
December 31, 2004. |
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| 99.3 | Unaudited pro forma financial information of HealthStream, Inc. for the year ended
December 31, 2004 and for the three months ended March 31, 2005. |
|||
* Exhibit has been previously filed on the Company’s Form 8-K dated March 29, 2005
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EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITOR 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, 2005 (except for Note 7 as to which the date is March 28, 2005) with respect to the financial statements of Data Management & Research, Inc. appearing in this Current Report on Form 8-K/A of HealthStream, Inc. /s/ Ernst & Young LLP Nashville, Tennessee June 7, 2005
EXHIBIT 99.2 DATA MANAGEMENT & RESEARCH, INC. FINANCIAL STATEMENTS DECEMBER 31, 2004 INDEX TO FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditor...................................................... F-1 Balance Sheet - December 31, 2004.................................................. F-2 Statement of Operations - Twelve months ended December 31, 2004.................... F-3 Statement of Shareholder's Equity - Twelve months ended December 31, 2004.......... F-4 Statement of Cash Flows - Twelve months ended December 31, 2004.................... F-5 Notes to Financial Statements ..................................................... F-6
REPORT OF INDEPENDENT AUDITOR The Board of Directors of Data Management & Research, Inc. We have audited the accompanying balance sheet of Data Management & Research, Inc. as of December 31, 2004, and the related statements of operations, shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 Company's 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 Company's 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 audit provides 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 Data Management & Research, Inc. at December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Nashville, Tennessee March 9, 2005, except for Note 7, as to which the date is March 28, 2005 F-1
DATA MANAGEMENT & RESEARCH, INC. BALANCE SHEET DECEMBER 31, 2004 ASSETS Current assets: Cash and cash equivalents .............................................. $ 93,741 Accounts and unbilled receivables ...................................... 417,720 Prepaid expenses and other current assets .............................. 25,841 --------- Total current assets ................................................ 537,302 Property and equipment: Furniture .............................................................. 124,309 Equipment .............................................................. 244,828 Leasehold improvements ................................................. 10,326 --------- 379,463 Less accumulated depreciation and amortization ...................... (209,326) --------- 170,137 Capitalized software costs, net of accumulated amortization of $45,688 .... 1,491 --------- Total assets ..................................................... $ 708,930 ========= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable ....................................................... $ 67,357 Accrued compensation ................................................... 115,481 Deferred revenue ....................................................... 165,894 Deferred tax liability, current portion ................................ 7,501 Other current liabilities .............................................. 92,762 --------- Total current liabilities ........................................ 448,995 Deferred tax liability .................................................... 13,113 Commitments and contingencies ............................................. -- Shareholder's equity: Common stock, no par value, 1,000 shares authorized; 100 shares issued and outstanding ................................... 1,000 Retained earnings ...................................................... 245,822 --------- Total shareholder's equity ....................................... 246,822 --------- Total liabilities and shareholder's equity ....................... $ 708,930 ========= See accompanying notes to the financial statements. F-2
DATA MANAGEMENT & RESEARCH, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 Revenues ..................................................... $ 5,172,579 Operating costs and expenses: Cost of revenues .......................................... 1,556,143 Product development ....................................... 359,734 Sales and marketing ....................................... 612,909 Depreciation .............................................. 35,136 Amortization of capitalized software ...................... 24,527 Other general and administrative expenses ................. 2,696,125 ----------- Total operating costs and expenses .................. 5,284,574 Loss from operations ......................................... (111,995) Other income ................................................. 6,259 Provision for taxes .......................................... 6,606 ----------- Net loss ..................................................... $ (99,130) =========== Net loss per share: Basic and diluted net loss per share ......................... $ (991.30) =========== Weighted average shares of common stock outstanding: Basic and diluted ......................................... 100 =========== See accompanying notes to the financial statements. F-3
DATA MANAGEMENT & RESEARCH, INC. STATEMENT OF SHAREHOLDER'S EQUITY YEAR ENDED DECEMBER 31, 2004 TOTAL COMMON STOCK RETAINED SHAREHOLDER'S SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ----------- Balance at December 31, 2003..... 100 $ 1,000 $ 344,952 $ 345,952 Net loss......................... -- -- (99,130) (99,130) -------- --------- --------- ----------- Balance at December 31, 2004..... 100 $ 1,000 $ 245,822 $ 246,822 ======== ========= ========= =========== See accompanying notes to the financial statements. F-4
DATA MANAGEMENT & RESEARCH, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2004 OPERATING ACTIVITIES: Net loss .................................................................... $ (99,130) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation .......................................................... 35,136 Amortization of capitalized software .................................. 24,527 Changes in operating assets and liabilities: Accounts and unbilled receivables ..................................... 109,629 Prepaid expenses and other current assets ............................. (9,237) Accounts payable ...................................................... 19,000 Deferred revenue ...................................................... 15,710 Accrued pension expense ............................................... 24,167 Deferred taxes ........................................................ (6,606) Other current liabilities ............................................. 21,368 --------- Net cash provided by operating activities ........................ 134,564 INVESTING ACTIVITIES: Investment in capitalized software .......................................... (21,994) Purchase of property and equipment .......................................... (79,826) --------- Net cash used in investing activities .......................... (101,820) FINANCING ACTIVITIES: Net cash provided by (used in) financing activities ............... -- --------- Net increase in cash and cash equivalents ................................... 32,744 Cash and cash equivalents at beginning of period ............................ 60,997 --------- Cash and cash equivalents at end of period .................................. $ 93,741 ========= See accompanying notes to the financial statements. F-5
DATA MANAGEMENT & RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY Data Management & Research, Inc. ("the Company") was incorporated in 1992 as a Tennessee corporation and is located in Franklin, Tennessee. The Company provides physician, employee and patient survey services to meet the ongoing information and business needs of the healthcare industry. BUSINESS SEGMENT The Company operates primarily in one business segment, services provided to healthcare organizations. RECOGNITION OF REVENUE Revenues are derived from survey and reporting services provided through our information products. Revenues recognized from our survey related services are determined using the proportional performance method. Revenues are earned over the estimated survey cycle, which typically ranges from less than one month to up to four months. The survey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports 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 the 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 receivables from customers are typically due within 30 days and are unsecured. UNBILLED RECEIVABLES Unbilled receivables represent revenue earned 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 We believe that no accounts receivable are doubtful for collection at December 31, 2004. 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
DATA MANAGEMENT & RESEARCH, 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, except for leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. YEARS ----- Furniture.............................................................. 10 Equipment.............................................................. 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of deferred expenses associated with delivering survey services, prepaid insurance, warranty maintenance and technical support, and other assets expected to benefit future periods. The Company defers certain direct, incremental costs associated with delivering survey services, such as postage and materials. These costs are charged to cost of revenues proportionally as revenues are recognized. 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 management's 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 year ended December 31, 2004 was approximately $6,600. SHIPPING AND HANDLING COSTS Shipping and handling costs are included in cost of revenues. INCOME TAXES The Company has elected to be taxed as an S-Corporation, and as such, the Company's income tax obligations pass through to its shareholder. No income tax liability or expense is recorded in these financial statements, except for certain state income taxes in states which do not recognize S-Corporations. F-7
DATA MANAGEMENT & RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CAPITALIZED SOFTWARE COSTS Capitalized software costs includes internal and external costs to develop our survey tools and reporting products. We capitalize the cost of software where the life expectancy is greater than one year and the anticipated cash flows from such software is expected to exceed its cost. During 2004, capitalized software was $21,994. Such amounts are included in the accompanying balance sheet under the caption "Capitalized software costs." We amortize capitalized software over its expected useful life, which is generally one to three years. Software costs that have been capitalized are subject to a periodic impairment review in accordance with our policy. Management did not identify any impairments of capitalized software during the year ended December 31, 2004. NET LOSS PER SHARE Net loss per share is determined following SFAS No. 128, "Earnings Per Share," ("Statement 128"). Under the provisions of Statement 128, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company did not have any common stock equivalents as of December 31, 2004. 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. Customers representing more than ten percent of net revenues during 2004 were as follows: HCA, Inc. - 17%, Community Health - 13%, and Vanguard Health - 11%. Total accounts receivable from these significant customers at December 31, 2004 were as follows: HCA, Inc.: $16,974, Community Health: $-0-, and Vanguard Health: $32,352. 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, accounts receivable-unbilled, accounts 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. 2. SHAREHOLDER'S EQUITY COMMON STOCK We are authorized to issue up to 1,000 shares of common stock. As of December 31, 2004 one shareholder owned all issued and outstanding shares of the Company's common stock. F-8
DATA MANAGEMENT & RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. EMPLOYEE BENEFIT PLANS 401(K) PLAN We have a defined-contribution employee benefit plan ("401(k) Plan") incorporating provisions of Section 401(k) of the Internal Revenue Code. Our employees must have attained the age of 21 and have completed one continuous year of service to be eligible to participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, not to exceed the maximum amount allowed by the IRS. The Company has not provided matching contributions through December 31, 2004. PROFIT SHARING PLAN We have an employee profit sharing plan (the "Plan"). Our employees must have attained the age of 21, have completed one continuous year of service, completed 1,000 hours of service during each Plan year, and must be employed on December 31st in order to be eligible for a contribution during the year. Contributions vest 20% per year, and employees become fully vested after five eligible years of service. Forfeited, unvested balances are redistributed to employees remaining in the Plan. For the year ended December 31, 2004, the Company contributed $115,481 on behalf of the employees in the Plan. On January 1, 2005, the 401(k) Plan and the Plan were merged to become the Data Management & Research, Inc. 401(k) Profit Sharing Plan. 4. LEASE COMMITMENTS We lease office facilities in Franklin, TN, under an agreement that expires on August 31, 2007 and provides for two one-year renewal options. Our office lease agreement contains a provision for escalating rent payments over the initial term of the lease. We account 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 also leases certain office equipment under a non-cancelable operating lease. Total rent expense under all operating leases was approximately $102,000 for the year ended December 31, 2004. Future rental payment commitments at December 31, 2004 under non-cancelable operating leases, with initial terms of one year or more, are as follows: 2005.............................................................. $ 110,112 2006.............................................................. 98,796 2007 and thereafter............................................... 67,346 ---------- Total minimum lease payments...................................... $ 276,254 ========== 5. NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share: YEAR ENDED DECEMBER 31, 2004 Numerator: Net loss.............................................. $ (99,130) ================ Denominator: Weighted-average shares outstanding................... $ 100 ================ Net loss per share, basic and diluted................. $ (991.30) ================ F-9
DATA MANAGEMENT & RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RELATED PARTY TRANSACTIONS The Company has one shareholder who owns all issued and outstanding shares of the Company's common stock. The shareholder holds the title of President and Chief Executive Officer. For the year ended December 31, 2004, the Company paid the shareholder approximately $2.0 million in compensation. 7. SUBSEQUENT EVENTS On March 28, 2005, the Company and its sole shareholder entered into a stock purchase agreement with HealthStream, Inc. in which HealthStream, Inc. acquired 100% of the Company's common stock from the shareholder, for consideration of $9.1 million in cash and 479,234 shares of Healthstream, Inc. common stock. In connection with the stock purchase agreement with HealthStream, Inc., the Data Management & Research, Inc. 401(k) Profit Sharing Plan was terminated. F-10
EXHIBIT 99.3 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 Data Management & Research, Inc. ("DMR") on March 28, 2005 for approximately $10.6 million, consisting of approximately $9.1 million in cash and 479,234 shares of HealthStream, Inc. common stock. A portion of the common stock, 319,489 shares, will be held in an escrow account until September 28, 2006, subject to any claims for indemnification pursuant to the stock purchase agreement. The Company also incurred approximately $0.2 million of direct, incremental expenses associated with the acquisition of DMR. DMR provides healthcare organizations a wide range of quality and satisfaction surveys, data analyses of survey results, and other research-based measurement tools. The unaudited pro forma financial information is presented to combine the historical results of operations of HealthStream and DMR. The unaudited pro forma combined statements of operations for the year ended December 31, 2004 and for the three months ended March 31, 2005 give effect to the acquisition of DMR as if it had occurred at the beginning of the earliest period presented. A pro forma combined balance sheet is not presented within this Current Report on Form 8-K/A, since the transaction was reflected in the Company's consolidated balance sheet filed on Form 10-Q for the period ended March 31, 2005, filed with the Securities and Exchange Commission ("SEC") on May 13, 2005. The unaudited pro forma financial information is for informational purposes only and does not intend to represent what the Company's results of operations would have been had the acquisition of DMR occurred at the beginning of the period presented, or intend to project the results of operations for any future periods. The unaudited pro forma financial information does not reflect any cost savings or synergies which may result from the acquisition, other than the reduction in DMR's sole shareholder's compensation based on a new employment agreement in connection with the acquisition. The unaudited pro forma financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2004 as filed by the Company with the SEC on March 18, 2005 and the audited financial statements of DMR, included as Exhibit 99.2 within this Current Report on Form 8-K/A.
HEALTHSTREAM, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 HISTORICAL PRO FORMA --------------------------- ----------------------------------- HEALTHSTREAM DMR ADJUSTMENTS COMBINED ------------ ------------ ------------ ------------ Revenues, net ........................................ $ 20,057,308 $ 5,172,579 $ -- $ 25,229,887 Operating costs and expenses: Cost of revenues .................................. 7,277,173 1,556,143 -- 8,833,316 Product development ............................... 2,531,177 359,734 -- 2,890,911 Sales and marketing ............................... 4,798,687 612,909 -- 5,411,596 Depreciation ...................................... 1,366,216 35,136 21,576 (1,2) 1,422,928 Amortization ...................................... 740,542 24,527 540,297 (1,3) 1,305,366 Other general and administrative expenses ......... 4,634,377 2,696,125 (1,910,550) (4,5) 5,419,952 ------------ ------------ ------------ ------------ Total operating costs and expenses .......... 21,348,172 5,284,574 (1,348,677) 25,284,069 Loss from operations.................................. (1,290,864) (111,995) 1,348,677 (54,182) Other income.......................................... 242,484 6,259 (136,168) (6) 112,575 Provision for taxes .................................. -- 6,606 -- 6,606 ------------ ------------ ------------ ------------ 242,484 12,865 (136,168) 119,181 Net (loss) income .................................... $ (1,048,380) $ (99,130) $ 1,212,509 $ 64,999 ============ ============ ============ ============ Basic net (loss) income per share .................... $ (0.05) $ 0.00 ============ ============ Diluted net (loss) income per share .................. $ (0.05) $ 0.00 ============ ============ Weighted average shares of common stock outstanding: Basic ............................................. 20,585,825 159,745 (7) 20,745,570 ============ ============ ============ Diluted............................................ 20,585,825 962,324 (8) 21,548,149 ============ ============ ============ PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS (1) Reflects the elimination of historical depreciation and amortization. (2) Reflects depreciation based on the fair value of fixed assets of $170,137 over an average three year life. (3) Reflects the amortization of capitalized software over a one year life, the amortization of non-compete agreement of $250,000 over an estimated three year life and the amortization of remaining definite lived intangibles of $2.4 million over an estimated five year life. (4) Reflects the elimination of DMR's sole shareholder's compensation, less the expected replacement salary based on the employment agreement in connection with the acquisition. (5) Reflects the elimination of personal charitable donation's made on behalf of the sole DMR shareholder. (6) Reflects the elimination of a portion of HealthStream's interest income resulting from cash paid in connection with the acquisition of DMR. (7) Reflects the issuance of 479,234 shares issued in connection with the acquisition of DMR, less the 319,489 shares that were placed in escrow. (8) Reflects the issuance of 479,234 shares issued in connection with the acquisition of DMR, and the assumed conversion of 483,090 HealthStream common stock equivalent shares that were "in-the-money" at December 31, 2004.
HEALTHSTREAM, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 HISTORICAL PRO FORMA --------------------------- ----------------------------------- HEALTHSTREAM DMR ADJUSTMENTS COMBINED ------------ ------------ ------------ ------------ Revenues, net ........................................ $ 5,682,402 $ 1,410,203 $ -- $ 7,092,605 Operating costs and expenses: Cost of revenues .................................. 2,035,765 508,639 (88,014) (1) 2,456,390 Product development ............................... 636,518 174,212 (131,073) (1) 679,657 Sales and marketing ............................... 1,190,262 311,368 (193,016) (1) 1,308,614 Depreciation ...................................... 408,161 16,772 -- (2) 424,933 Amortization ...................................... 209,820 517 140,833 (3) 351,170 (1,4, Other general and administrative expenses ......... 1,155,929 382,169 (237,969) 5,6) 1,300,129 ------------ ------------ ------------ ------------ Total operating costs and expenses .......... 5,636,455 1,393,677 (509,239) 6,520,893 Income from operations................................ 45,947 16,526 509,239 571,712 Other income.......................................... 98,219 503 (52,907) (7) 45,815 ------------ ------------ ------------ ------------ Net income ........................................... $ 144,166 $ 17,029 $ 456,332 $ 617,527 ============ ============ ============ ============ Basic net income per share ........................... $ 0.01 $ 0.03 ============ ============ Diluted net income per share ............................ $ 0.01 $ 0.03 ============ ============ Weighted average shares of common stock outstanding: Basic ............................................. 20,685,786 154,420 (8) 20,840,206 ============ ============ ============ Diluted............................................ 21,772,332 154,420 (8) 21,926,752 ============ ============ ============ PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS (1) Reflects the elimination of payments to DMR employees paid prior to the acquisition, triggered as a result of the acquisition transaction. (2) No adjustment for depreciation is required as the historical results of DMR for the three months ended March 31, 2005 reflect the depreciable lives consistent with HealthStream's policies. (3) Reflects the amortization of non-compete agreement of $250,000 over an estimated three year life and the amortization of remaining definite lived intangibles of $2.4 million over an estimated five year life. (4) Reflects the elimination of DMR's sole shareholder's compensation, less the expected replacement salary based on the employment agreement in connection with the acquisition. (5) Reflects the elimination of personal charitable donation's made on behalf of the sole DMR shareholder. (6) Reflects the elimination of direct, incremental expenses paid by DMR related to the acquisition. (7) Reflects the elimination of a portion of HealthStream's interest income resulting from cash paid in connection with the acquisition of DMR. (8) Reflects the impact on the weighted average shares related to the issuance of 479,234 shares issued in connection with the acquisition of DMR, less the 319,489 shares that were placed in escrow.