Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
of 1934
For the quarterly period ended June 30, 2005
Commission File No.: 001-8833
HealthStream, Inc.
(Exact name of registrant as specified in its charter)
| Tennessee | 62-1443555 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 209 10th Avenue South, Suite 450 | ||
| 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 is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of August 10, 2005, 21,550,069 shares of the registrant’s common stock were outstanding.
Index to Form 10-Q
HEALTHSTREAM, INC.
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| EX-31.1 SECTION 302 CERTIFICATION OF THE CEO | ||||||||
| EX-31.2 SECTION 302 CERTIFICATION OF THE CFO | ||||||||
| EX-32.1 SECTION 906 CERTIFICATION OF THE CEO | ||||||||
| EX-32.2 SECTION 906 CERTIFICATION OF THE CFO | ||||||||
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | (Note 1) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,749,304 | $ | 2,257,372 | ||||
Investments in short term marketable securities |
4,500,000 | 14,025,000 | ||||||
Restricted cash |
102,290 | 184,041 | ||||||
Interest receivable |
21,919 | 25,899 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $208,432
at June 30, 2005 and $234,167 at December 31, 2004 |
4,023,125 | 3,990,590 | ||||||
Accounts receivable — unbilled |
790,177 | 596,877 | ||||||
Prepaid development fees, net of amortization |
503,989 | 542,823 | ||||||
Other prepaid expenses and other current assets |
1,182,996 | 850,529 | ||||||
Total current assets |
14,873,800 | 22,473,131 | ||||||
Property and equipment: |
||||||||
Furniture and fixtures |
1,012,526 | 931,118 | ||||||
Equipment |
7,160,691 | 6,402,343 | ||||||
Leasehold improvements |
1,276,630 | 1,267,133 | ||||||
| 9,449,847 | 8,600,594 | |||||||
Less accumulated depreciation and amortization |
(6,956,602 | ) | (6,281,311 | ) | ||||
| 2,493,245 | 2,319,283 | |||||||
Goodwill |
11,317,540 | 3,306,688 | ||||||
Intangible assets, net of accumulated amortization of $7,007,864
at June 30, 2005 and $6,695,922 at December 31, 2004 |
2,504,278 | 166,220 | ||||||
Other assets |
329,710 | 291,779 | ||||||
Total assets |
$ | 31,518,573 | $ | 28,557,101 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 655,926 | $ | 830,941 | ||||
Accrued liabilities |
1,224,947 | 1,117,367 | ||||||
Accrued compensation and related expenses |
237,857 | 284,301 | ||||||
Registration liabilities |
96,919 | 174,697 | ||||||
Commercial support liabilities |
1,001,435 | 378,893 | ||||||
Deferred revenue |
4,085,366 | 3,987,697 | ||||||
Current portion of capital lease obligations |
123,979 | 24,113 | ||||||
Total current liabilities |
7,426,429 | 6,798,009 | ||||||
Capital lease obligations, less current portion |
214,008 | 29,428 | ||||||
Commitments and contingencies |
— | — | ||||||
Shareholders’ equity: |
||||||||
Common stock, no par value, 75,000,000 shares authorized;
21,475,455 and 20,667,515 shares issued and outstanding
at June 30, 2005 and December 31, 2004, respectively |
93,623,492 | 91,642,383 | ||||||
Accumulated deficit |
(69,745,356 | ) | (69,912,719 | ) | ||||
Total shareholders’ equity |
23,878,136 | 21,729,664 | ||||||
Total liabilities and shareholders’ equity |
$ | 31,518,573 | $ | 28,557,101 | ||||
See accompanying notes to the condensed consolidated financial statements.
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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended June 30, | ||||||||
| 2005 | 2004 | |||||||
Revenues, net |
$ | 6,806,420 | $ | 4,691,433 | ||||
Operating costs and expenses: |
||||||||
Cost of revenues |
2,459,438 | 1,750,972 | ||||||
Product development |
743,101 | 634,079 | ||||||
Sales and marketing |
1,601,201 | 1,204,578 | ||||||
Depreciation |
401,950 | 329,576 | ||||||
Amortization of intangibles, content fees, feature enhancements,
and prepaid compensation |
358,358 | 174,851 | ||||||
Other general and administrative expenses |
1,287,012 | 1,171,187 | ||||||
Total operating costs and expenses |
6,851,060 | 5,265,243 | ||||||
Loss from operations |
(44,640 | ) | (573,810 | ) | ||||
Other income (expense): |
||||||||
Interest and other income |
72,490 | 47,763 | ||||||
Interest and other expense |
(4,653 | ) | (2,928 | ) | ||||
| 67,837 | 44,835 | |||||||
Net income (loss) |
$ | 23,197 | $ | (528,975 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.00 | $ | (0.03 | ) | |||
Diluted |
$ | 0.00 | $ | (0.03 | ) | |||
Weighted average shares of common stock outstanding: |
||||||||
Basic |
21,054,335 | 20,581,052 | ||||||
Diluted |
22,064,179 | 20,581,052 | ||||||
See accompanying notes to the condensed consolidated financial statements.
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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2005 | 2004 | |||||||
Revenues, net |
$ | 12,488,822 | $ | 9,599,205 | ||||
Operating costs and expenses: |
||||||||
Cost of revenues |
4,495,121 | 3,641,045 | ||||||
Product development |
1,379,619 | 1,281,081 | ||||||
Sales and marketing |
2,791,463 | 2,361,531 | ||||||
Depreciation |
810,111 | 643,383 | ||||||
Amortization of intangibles, content fees, feature enhancements,
and prepaid compensation |
568,178 | 348,664 | ||||||
Other general and administrative expenses |
2,443,023 | 2,365,826 | ||||||
Total operating costs and expenses |
12,487,515 | 10,641,530 | ||||||
Income (loss) from operations |
1,307 | (1,042,325 | ) | |||||
Other income (expense): |
||||||||
Interest and other income |
177,940 | 102,987 | ||||||
Interest and other expense |
(11,884 | ) | (8,605 | ) | ||||
| 166,056 | 94,382 | |||||||
Net income (loss) |
$ | 167,363 | $ | (947,943 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.01 | $ | (0.05 | ) | |||
Diluted |
$ | 0.01 | $ | (0.05 | ) | |||
Weighted average shares of common stock outstanding: |
||||||||
Basic |
20,870,061 | 20,513,798 | ||||||
Diluted |
21,765,611 | 20,513,798 | ||||||
See accompanying notes to the condensed consolidated financial statements.
3
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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005
SIX MONTHS ENDED JUNE 30, 2005
| Common Stock | Total Shareholders’ | |||||||||||||||
| Shares | Amount | Accumulated Deficit | Equity | |||||||||||||
Balance at December 31, 2004 |
20,667,515 | $ | 91,642,383 | $ | (69,912,719 | ) | $ | 21,729,664 | ||||||||
Net income |
— | — | 167,363 | 167,363 | ||||||||||||
Issuance of common stock to Employee
Stock Purchase Plan |
83,742 | 159,445 | — | 159,445 | ||||||||||||
Issuance of common stock in acquisition |
479,234 | 1,343,149 | — | 1,343,149 | ||||||||||||
Exercise of stock options |
244,964 | 478,515 | — | 478,515 | ||||||||||||
Balance at June 30, 2005 |
21,475,455 | $ | 93,623,492 | $ | (69,745,356 | ) | $ | 23,878,136 | ||||||||
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, | ||||||||
| 2005 | 2004 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 167,363 | $ | (947,943 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Depreciation |
810,111 | 643,383 | ||||||
Amortization of intangibles, content fees, feature enhancements
and prepaid compensation |
568,178 | 348,664 | ||||||
Provision for doubtful accounts |
15,000 | 15,000 | ||||||
Realized loss on disposal of property & equipment |
4,854 | 3,138 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts and unbilled receivables |
206,057 | 59,726 | ||||||
Restricted cash |
81,751 | 644,878 | ||||||
Interest receivable |
3,980 | 103,604 | ||||||
Prepaid development fees |
(174,253 | ) | (375,198 | ) | ||||
Other prepaid expenses and other current assets |
(276,820 | ) | (236,402 | ) | ||||
Other assets |
(37,931 | ) | 43,496 | |||||
Accounts payable |
(209,814 | ) | (221,789 | ) | ||||
Accrued liabilities and compensation |
(351,040 | ) | (123,948 | ) | ||||
Registration liabilities |
(77,778 | ) | (657,609 | ) | ||||
Commercial support liabilities |
622,542 | 385,466 | ||||||
Deferred revenue |
(111,262 | ) | 387,292 | |||||
Net cash provided by operating activities |
1,240,938 | 71,758 | ||||||
INVESTING ACTIVITIES: |
||||||||
Acquisition, net of cash acquired |
(9,362,342 | ) | — | |||||
Proceeds from maturities and sales of investments in marketable securities |
10,525,000 | 12,951,000 | ||||||
Purchase of investments in marketable securities |
(1,000,000 | ) | (12,452,045 | ) | ||||
Proceeds
from note receivable — related party |
— | 233,003 | ||||||
Purchase of property and equipment |
(521,039 | ) | (782,178 | ) | ||||
Net cash used in investing activities |
(358,381 | ) | (50,220 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Exercise of stock options |
478,515 | 128,489 | ||||||
Issuance of stock to Employee Stock Purchase Plan |
159,445 | 76,726 | ||||||
Payments on capital lease obligations |
(28,585 | ) | (29,790 | ) | ||||
Net cash provided by financing activities |
609,375 | 175,425 | ||||||
Net increase in cash and cash equivalents |
1,491,932 | 196,963 | ||||||
Cash and cash equivalents at beginning of period |
2,257,372 | 3,219,807 | ||||||
Cash and cash equivalents at end of period |
$ | 3,749,304 | $ | 3,416,770 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Capital lease obligations incurred |
$ | 313,031 | $ | — | ||||
Interest paid |
$ | 8,168 | $ | 6,412 | ||||
Issuance of common stock in connection with acquisition of company |
$ | 1,343,149 | $ | — | ||||
Effects of acquisition: |
||||||||
Estimated fair value of tangible assets acquired |
$ | 718,357 | $ | — | ||||
Estimated fair value of liabilities assumed |
(655,907 | ) | — | |||||
Purchase price in excess of net tangible assets acquired |
10,660,852 | — | ||||||
Stock issued |
(1,343,149 | ) | — | |||||
Cash paid |
9,380,153 | — | ||||||
Less cash acquired |
(17,811 | ) | — | |||||
Net cash paid for acquisition |
$ | 9,362,342 | $ | — | ||||
See accompanying notes to the condensed consolidated financial statements.
5
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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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 three and six months ended June
30, 2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
The balance sheet at December 31, 2004 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, 2004 (included in the Company’s Annual Report on Form 10-K, filed with the
Securities and Exchange Commission).
The statement of cash flows for the six months ended June 30, 2004 has been revised to reflect the
reclassification of investments in marketable securities for auction rate securities held by the
Company on June 30, 2004. We previously classified investments in auction rate securities as cash
equivalents due to the short-term nature of their relative auction dates. We modified the statement
of cash flows for the six months ended June 30, 2004 to include additional gross sales of $7.5
million and purchases of $9.9 million related to our investments in marketable securities.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123(R), “Share-Based Payments.” Statement 123(R) supersedes
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
will require companies to recognize compensation expense, using a fair-value based method, for
costs related to share-based payments, including stock options. In April 2005, the Securities and
Exchange Commission amended the effective date of the Statement to begin with the first interim or
annual reporting period of the first fiscal year beginning on or after December 15, 2005. The
Company intends to adopt Statement 123(R) in the first quarter of 2006, and to implement it on a
prospective basis. We are currently assessing the impact the Statement will have on our
consolidated results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” which amends APB
Opinion No. 29. The guidance in APB 29, “Accounting for Nonmonetary Transactions,” is based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. The amendment made by Statement 153 eliminates the exception for exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. The provisions of the statement are effective for
exchanges taking place in fiscal periods beginning after June 15, 2005. We do not believe the
adoption of this Statement will have a material effect on our consolidated financial position or
results of operations.
3. ACQUISITION
On March 28, 2005, the Company acquired all of the stock of Data Management & Research, Inc. (DMR)
for approximately $10.7 million, consisting of $9.1 million in cash and 479,234 shares of our
common stock. Of the common stock portion, 319,489 shares are being held in an escrow account for
eighteen months from the acquisition date, subject to any claims for indemnification pursuant to
the stock purchase agreement. The Company also incurred direct, incremental expenses associated
with the acquisition of approximately $0.4 million. DMR provides healthcare organizations a wide
range of quality and satisfaction surveys, data analyses of survey results, and other
research-based measurement tools. The allocation of purchase price is preliminary and may be
subject to change as a result of changes in estimates related to the acquired business. The
preliminary purchase price allocation is disclosed on the statement of cash flows. The Company is
currently determining the composition and valuation of indefinite and finite lived intangible
assets, therefore amounts recorded for goodwill and intangible assets at June 30, 2005 are subject
to change.
The results of operations for DMR have been included in the Company’s statement of operations,
effective March 29, 2005.
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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITION (continued)
The following unaudited pro forma results of operations give effect to the operations of DMR as if
the acquisition had occurred as of January 1, 2005 and 2004. These unaudited pro forma results of
operations include certain adjustments arising from the acquisition such as owner compensation and
amortization expense. The pro forma results of operations do not purport to represent what the
Company’s results of operations would have been had such transactions in fact occurred at
the beginning of the period presented or to project the Company’s results of operations in any
future period.
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2005 | June 30, 2004 | June 30, 2005 | June 30, 2004 | |||||||||||||
Revenue |
$ | 6,806,420 | $ | 5,574,331 | $ | 13,899,025 | $ | 11,784,657 | ||||||||
Net income (loss) |
$ | 23,197 | $ | (508,321 | ) | $ | 640,724 | $ | (480,667 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic and diluted |
$ | 0.00 | $ | (0.02 | ) | $ | 0.03 | $ | (0.02 | ) | ||||||
4. STOCK-BASED COMPENSATION
We account for our stock-based compensation plans under the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (APB 25) and related interpretations. APB 25 does not utilize the fair value method, as
prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) .
However, we have disclosed the fair value recognition requirements of SFAS No. 123 and the
additional disclosure requirements as specified in SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure,” which amended SFAS No. 123.
If the alternative method of accounting for stock incentive plans prescribed by SFAS No. 123 had
been followed, our net income (loss) and net income (loss) per share would have been as follows:
| Three Months Ended | ||||||||
| June 30, 2005 | June 30, 2004 | |||||||
Net income (loss) as reported |
$ | 23,197 | $ | (528,975 | ) | |||
Add: Stock-based employee compensation expense included in reported net income (loss),
net of related taxes |
— | — | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards net of related tax effects |
(198,540 | ) | (173,087 | ) | ||||
Pro forma net loss |
$ | (175,343 | ) | $ | (702,062 | ) | ||
Basic net
income (loss) per share — as reported |
$ | 0.00 | $ | (0.03 | ) | |||
Basic net
loss per share — pro forma |
$ | (0.01 | ) | $ | (0.03 | ) | ||
Diluted net
income (loss) per share — as reported |
$ | 0.00 | $ | (0.03 | ) | |||
Diluted net
loss per share — pro forma |
$ | (0.01 | ) | $ | (0.03 | ) | ||
| Six Months Ended | ||||||||
| June 30, 2005 | June 30, 2004 | |||||||
Net income (loss) as reported |
$ | 167,363 | $ | (947,943 | ) | |||
Add: Stock-based employee compensation expense included in reported net income (loss),
net of related taxes |
— | — | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards net of related tax effects |
(284,240 | ) | (291,843 | ) | ||||
Pro forma net loss |
$ | (116,877 | ) | $ | (1,239,786 | ) | ||
Basic net
income (loss) per share — as reported |
$ | 0.01 | $ | (0.05 | ) | |||
Basic net
loss per share — pro forma |
$ | (0.01 | ) | $ | (0.06 | ) | ||
Diluted net
income (loss) per share — as reported |
$ | 0.01 | $ | (0.05 | ) | |||
Diluted net
loss per share — pro forma |
$ | (0.01 | ) | $ | (0.06 | ) | ||
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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income (loss) available to common
shareholders for the period by the weighted-average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of incremental common shares issuable upon the exercise
of stock options and warrants, and escrowed or restricted shares, are included in diluted net
income (loss) per share only to the extent these shares are dilutive. The total number of common
equivalent shares excluded from the calculations of diluted net loss per share, due to their
anti-dilutive effect, was approximately 1,400,000 and 3,100,000 for the three months ended June 30,
2005 and 2004, respectively, and approximately 1,400,000 and 3,250,000 for the six months ended
June 30, 2005 and 2004, respectively.
The following table sets forth the computation of basic and diluted net income (loss) per share for
three and six months ended June 30, 2005 and 2004:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2005 | June 30, 2004 | June 30, 2005 | June 30, 2004 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 23,197 | $ | (528,975 | ) | $ | 167,363 | $ | (947,943 | ) | ||||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
21,054,335 | 20,581,052 | 20,870,061 | 20,513,798 | ||||||||||||
Employee stock options and other |
1,009,844 | — | 895,550 | — | ||||||||||||
Diluted |
22,064,179 | 20,581,052 | 21,765,611 | 20,513,798 | ||||||||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.00 | $ | (0.03 | ) | $ | 0.01 | $ | (0.05 | ) | ||||||
Diluted |
$ | 0.00 | $ | (0.03 | ) | $ | 0.01 | $ | (0.05 | ) | ||||||
6. BUSINESS SEGMENTS
We have two reportable segments, services provided to healthcare organizations and professionals
(HCO) and services provided to pharmaceutical and medical device companies (PMD). On March 28,
2005, we acquired DMR, a company focused on offering healthcare organizations a wide range of
quality and satisfaction surveys, data analyses of survey results, and other research-based
measurement tools. Accordingly, DMR is included in our HCO business segment. 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, 2004. We believe the
accounting policies related to DMR are consistent with our accounting policies. We manage and
operate our business segments based on the markets they serve and the products and services
provided to those markets.
The following is our business segment information as of and for the three and six months ended June
30, 2005 and 2004. We measure segment performance based on operating income (loss) before income
taxes and prior to the allocation of corporate overhead expenses, interest income, interest
expense, and depreciation.
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2005 | June 30, 2004 | June 30, 2005 | June 30, 2004 | |||||||||||||
Revenues |
||||||||||||||||
HCO |
$ | 5,272,959 | $ | 3,230,957 | $ | 9,239,954 | $ | 6,447,701 | ||||||||
PMD |
1,533,461 | 1,460,476 | 3,248,868 | 3,151,504 | ||||||||||||
Total net revenue |
$ | 6,806,420 | $ | 4,691,433 | $ | 12,488,822 | $ | 9,599,205 | ||||||||
Income (loss) from operations |
||||||||||||||||
HCO |
$ | 1,764,879 | $ | 1,109,433 | $ | 3,350,097 | $ | 2,212,410 | ||||||||
PMD |
89,148 | 2,587 | 318,708 | 112,686 | ||||||||||||
Unallocated |
(1,898,667 | ) | (1,685,830 | ) | (3,667,498 | ) | (3,367,421 | ) | ||||||||
Total income (loss) from operations |
$ | (44,640 | ) | $ | (573,810 | ) | $ | 1,307 | $ | (1,042,325 | ) | |||||
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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. BUSINESS SEGMENTS (continued)
| Six months ended | ||||||||
| June 30, 2005 | June 30, 2004 | |||||||
Segment Assets |
||||||||
HCO * |
$ | 18,000,439 | $ | 4,797,867 | ||||
PMD * |
3,837,834 | 4,249,399 | ||||||
Unallocated |
9,680,300 | 18,342,796 | ||||||
Total assets |
$ | 31,518,573 | $ | 27,390,062 | ||||
| * | Segment assets include restricted cash, accounts and unbilled receivables, certain prepaid and other current assets, other assets, certain property and equipment, and intangible assets. Cash and cash equivalents, investments in marketable securities and related interest receivable are not allocated to individual segments. |
7. GOODWILL
We account for goodwill under the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets.” We test goodwill for impairment using a discounted cash flow model. The technique used to
determine the fair value of our reporting units is sensitive to estimates and assumptions
associated with cash flow from operations and its growth, discount rates, and reporting unit
terminal values. If these estimates or their related assumptions change in the future, we may be
required to record impairment charges, which could adversely impact our operating results for the
period in which such a determination is made. We perform our annual impairment evaluation of
goodwill during the fourth quarter of each year and as changes in facts and circumstances indicate
impairment exists.
On March 28, 2005, we acquired DMR. We are in the process of performing the purchase price
allocation and related evaluation of indefinite and finite lived intangible assets, thus the amount
of goodwill recorded at June 30, 2005 related to the acquisition of DMR is preliminary. During the
three months ended June 30, 2005, certain adjustments to goodwill were made as a result of changes
in the purchase price allocation for DMR. There were no changes in the carrying amount of goodwill
during the six months ended June 30, 2004.
| HCO | PMD | Total | ||||||||||
Balance at January 1, 2005 |
$ | 1,982,961 | $ | 1,323,727 | $ | 3,306,688 | ||||||
Changes in carrying value of goodwill |
8,010,852 | — | 8,010,852 | |||||||||
Balance at June 30, 2005 |
$ | 9,993,813 | $ | 1,323,727 | $ | 11,317,540 | ||||||
| HCO | PMD | Total | ||||||||||
Balance at January 1, 2004 |
$ | 1,982,961 | $ | 1,323,727 | $ | 3,306,688 | ||||||
Changes in carrying value of goodwill |
— | — | — | |||||||||
Balance at June 30, 2004 |
$ | 1,982,961 | $ | 1,323,727 | $ | 3,306,688 | ||||||
8. INTANGIBLE ASSETS
All identifiable intangible assets have been evaluated in accordance with SFAS No. 142 and are
considered to have finite useful lives. We are in the process of performing the purchase price
allocation and related evaluation of indefinite and finite lived intangible assets associated with
the acquisition of DMR, thus the balances recorded at June 30, 2005 are preliminary. Intangible
assets with finite lives are being amortized over their estimated useful lives, ranging from one to
five years. Amortization of intangible assets was $224,072 and $311,942 for the three and six
months ended June 30, 2005, respectively, and $83,239 and $177,585 for the three and six months
ended June 30, 2004, respectively.
Identifiable intangible assets are comprised of the following:
| As of June 30, 2005 | As of December 31, 2004 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross Amount | Amortization | Net | Gross Amount | Amortization | Net | |||||||||||||||||||
Content |
$ | 3,500,000 | $ | (3,500,000 | ) | $ | — | $ | 3,500,000 | $ | (3,350,000 | ) | $ | 150,000 | ||||||||||
Customer lists |
5,340,000 | (3,063,945 | ) | 2,276,055 | 2,940,000 | (2,940,000 | ) | — | ||||||||||||||||
Other |
672,142 | (443,919 | ) | 228,223 | 422,142 | (405,922 | ) | 16,220 | ||||||||||||||||
Total |
$ | 9,512,142 | $ | (7,007,864 | ) | $ | 2,504,278 | $ | 6,862,142 | $ | (6,695,922 | ) | $ | 166,220 | ||||||||||
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HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INTANGIBLE ASSETS (continued)
Estimated amortization expense for the periods and years ending December 31, is as follows:
July 1, 2005 through December 31, 2005 |
$ | 281,408 | ||
2006 |
563,333 | |||
2007 |
563,333 | |||
2008 |
500,149 | |||
2009 and thereafter |
596,055 | |||
Total |
$ | 2,504,278 | ||
9. INCOME TAXES
Taxable income for the year is expected to be reduced by available net operating loss
carryforwards. Therefore, no income tax provision has been recorded in the Company’s statement of
operations for the three or six months ended June 30, 2005.
10. COMMERCIAL SUPPORT GRANTS
Commercial support liabilities represent grant funds received from entities supporting educational
activities, such as live events, in which we are the accredited provider of the continuing
educational activity. The funds are unrestricted, and are primarily used to pay for expenses
associated with conducting the educational activities. The grants will be used to pay for live
event expenses during 2005 and 2006.
11. CONTINGENCIES
We are subject to various legal proceedings and claims that may arise in the ordinary course of
business. In the opinion of management, the ultimate liability with respect to those proceedings
and claims will not materially affect our financial position or results of operations.
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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
This Quarterly Report includes various forward-looking statements that are subject to risks and
uncertainties. Forward-looking statements include without limitation, statements preceded by,
followed by, or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,”
“estimates” or similar expressions. For those statements, HealthStream, Inc. claims the protection
of the safe harbor for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in this Quarterly Report,
could affect our future financial results and could cause actual results to differ materially from
those expressed in forward-looking statements contained in this document:
| - | our ability to effectively implement our growth strategy, as well as manage growth of our operations and infrastructure, including effective identification and integration of acquisitions; | ||
| - | variability and length of our sales cycle; | ||
| - | our ability to accurately forecast results of operations due to certain revenue components being subject to significant fluctuations; | ||
| - | an increase in the percentage of our business subject to renewal. We are in discussions regarding renewing our agreements with HCA, Inc. (HCA) and Tenet Healthcare Corporation (Tenet), which expire at the end of the third and fourth quarters of 2005, respectively. Our agreement with Tenet includes a provision to extend the contract through a series of four annual renewable periods. Our agreement with HCA represented approximately 12% of our revenues in the six months ended June 30, 2005 and our agreement with Tenet represented less than 5% of our revenues during the same period. No assurance can be given that these contracts will be renewed or, if renewed, that the terms will be the same as those in the existing agreements; | ||
| - | our ability to adequately address our customers’ needs in products and services; | ||
| - | the pressure on healthcare organizations and pharmaceutical/medical device companies to reduce costs to their customers could result in financial pressures on our customers to cut back on our services; | ||
| - | our ability to maintain our competitive position against current and potential competitors; | ||
| - | our ability to develop enhancements to our existing products and services, achieve widespread acceptance of new features, and keep pace with technological developments; | ||
| - | our ability to obtain proper distribution rights from content partners to support growth in courseware subscriptions; | ||
| - | our ability to achieve profitability on a consistent basis; | ||
| - | fluctuations in quarterly operating results caused by a variety of factors including the timing of sales, subscription revenue recognition and customer subscription renewals; | ||
| - | loss of a significant customer and concentration of a significant portion of our revenue with a relatively small number of customers; | ||
| - | our ability to adequately develop and maintain our network infrastructure, computer systems, software and related security; | ||
| - | the effect of governmental regulation on us, our business partners and our customers, including, without limitation, changes in federal, state and international laws or other regulations regarding education, training and Internet transactions; and | ||
| - | other risk factors detailed in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. |
Overview and Critical Accounting Policies and Estimates
HealthStream was incorporated in 1990 and began marketing its Internet-based solutions in March
1999. The Company focuses on being a provider of training solutions for entities in the healthcare
industry. Revenues from our healthcare organizations business unit (HCO) are derived from the
following categories: provision of services through our Internet-based learning products,
courseware subscriptions, workforce development tools and services, maintenance and support of
installed learning management products and a variety of other online products. On March 28, 2005,
we acquired Data Management & Research, Inc. (DMR), which provides healthcare organizations a wide
range of quality and satisfaction surveys, analyses of survey results, and other research-based
services. Accordingly, DMR is included in our HCO business segment. Revenues from our
pharmaceutical and medical device company business unit (PMD) are derived from live event
development, content development, Web cast events, and other educational and training services,
including HospitalDirect.
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Our condensed consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). These accounting principles require us
to make certain estimates, judgments and assumptions during the preparation of our financial
statements. We believe that 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:
| o | Revenue recognition | ||
| o | Product development costs and related capitalization | ||
| o | Goodwill, intangibles, and other long-lived assets | ||
| o | Allowance for doubtful accounts |
In many cases, the accounting treatment of a particular transaction is specifically dictated by
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 Annual Report on Form 10-K
for the year ended December 31, 2004 filed with the Securities and Exchange Commission, which
contains additional information regarding our accounting policies and other disclosures required by
GAAP. There have been no changes in our critical accounting policies and estimates from those
reported in our Annual Report on Form 10-K for the year ended December 31, 2004.
Acquisition
On March 28, 2005, the Company acquired all of the stock of DMR for approximately $10.7 million,
consisting of $9.1 million in cash and 479,234 shares of our common stock. Of the common stock
portion, 319,489 shares were deposited in an escrow account to be held for eighteen months from the
acquisition date, subject to any claims for indemnification pursuant to the stock purchase
agreement. DMR provides healthcare organizations a wide range of quality and satisfaction surveys,
data analyses of survey results, and other research-based measurement tools.
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 HCO business unit currently consist of the provision of services through
our Internet-based HealthStream Learning Center (HLC), authoring tools, maintenance and support
services for our installed learning management products, maintenance of content, competency tools,
courseware subscriptions (add-on courseware), as well as revenues from survey-related services.
Revenues for our PMD business unit consist of live event development, online training and content
development, online sales training courses, HospitalDirect, live educational activities for nurses
and technicians conducted within healthcare organizations, and continuing education activities at
association meetings.
Cost of Revenues. Cost of revenues consists primarily of salaries and employee benefits, employee
travel and lodging, materials, contract labor, hosting costs, and other direct expenses associated
with revenues as well as royalties paid by us to content providers based on a percentage of
revenues. Personnel costs within cost of revenues are associated with individuals that provide
services, handle customer support calls or inquiries, manage our web sites, content delivery 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, 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 feature enhancements and new products to the extent
that such enhancements don’t expand the anticipated revenues associated with the base product or
further extend the life of such product. In accordance with our policy, we capitalize the cost of
features and content developed by third parties where the life expectancy is greater than one year
and the anticipated cash flows from such content are expected to exceed their respective costs.
Personnel costs within product development include our systems team, 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, employee travel and lodging, advertising, promotions, and
related marketing costs. Annually, we host a national users’ group in Nashville known as The
Summit. Personnel costs within sales and marketing include our sales and marketing team as well as
our account management group.
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Our account management personnel are involved with the contract renewal process for existing
hospital customers, as well as working to ensure our products and services are fully utilized by
our customers.
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation,
amortization of intangibles considered to have finite lives, amortization of content or license
fees, software feature enhancements, and prepaid compensation.
Other General and Administrative Expenses. Other general and administrative expenses consist
primarily of salaries and employee benefits, 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 and executive management) as well as
accreditation professionals.
Other Income/Expense. The primary component of other income is interest income related to interest
earned on cash, cash equivalents and investments in marketable securities. The primary component of
other expense is interest expense related to capital leases and other obligations.
Results of Operations
During the three months ended June 30, 2005, revenues increased $2.1 million, or 45.1%, to $6.8
million from $4.7 million for the three months ended June 30, 2004. Revenue increases of $1.2
million resulted from the acquisition of DMR, while revenues from our flagship product, the
HealthStream Learning CenterTM, increased $590,000, or 25% over the prior year quarter.
Growth in add-on courseware revenues also contributed $270,000 of the increase, while revenues from
maintenance fees associated with our HCO installed learning management products declined over the
prior year quarter by $100,000. Our fully implemented subscriber base was approximately 1,113,000
at June 30, 2005. Revenues from our PMD unit experienced moderate increases over the prior year
quarter, while the mix of revenues changed. Revenues from live events and online content
subscriptions increased, but were partially offset by declines in content development and other
training services.
Gross margins (which we define as revenues less cost of revenues divided by revenues) for the
second quarter 2005 increased to 63.9% as compared to 62.7% for the second quarter 2004 primarily
as a result of increased revenues from DMR and the HealthStream Learning CenterTM. We
achieved net income of $23,000 in the second quarter of 2005, compared to a net loss of $529,000 in
the second quarter of 2004. This improvement is primarily related to the increase in revenues and
related gross margins. Marketing expenses increased over the prior year quarter, primarily
associated with our annual Summit, which occurred during April 2005. This event was split
between the first and second quarters of 2004. We also experienced increases in product
development, sales, depreciation, amortization, and other general and administrative expenses as a
result of the DMR acquisition. Net income (loss) per share improved to break-even for the three
months ended June 30, 2005 from a loss of $(0.03) per share for the three months ended June 30,
2004.
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
Revenues. Revenues increased approximately $2.1 million, or 45.1%, to $6.8 million for the three
months ended June 30, 2005 from $4.7 million for the three months ended June 30, 2004. Revenues for
2005 consisted of $5.3 million for HCO and $1.5 million for PMD. In 2004, revenues consisted of
$3.2 million for HCO and $1.5 million for PMD. The increase in HCO revenues related primarily to
revenues from the acquisition of DMR of $1.2 million, revenue growth of $590,000 from our
Internet-based HLC subscriber base, and $270,000 from growth in add-on courseware revenues. Our
subscriber base increased approximately 29%, to approximately 1,113,000 fully implemented
subscribers at June 30, 2005 from approximately 864,000 fully implemented subscribers at June 30,
2004. These HCO revenue increases were partially offset by an anticipated decline in revenues from
maintenance and support fees associated with our installed learning management products of
approximately $100,000. This decline is consistent with our strategy to transition these customers
to our Internet-based learning platform. Revenues from our Internet-based subscription products
represented approximately 59% of revenues for the three months ended June 30, 2005 compared to 65%
of revenues for the three months ended June 30, 2004. This percentage decrease resulted from the
addition of DMR’s revenues, which are not included within our Internet-based product offering. PMD
revenues increased slightly over the prior year quarter. Live event and online training revenues
increased modestly, but were partially offset by a decline in content development and other
training services.
We expect continued revenue growth during the third quarter for HCO, compared to both the third
quarter 2004 and second quarter 2005, primarily associated with our Internet-based subscription
products and survey revenues from the DMR acquisition. Revenues associated with DMR are seasonal, with the first and fourth quarters being the strongest. During the third quarter, we
expect the percentage of total revenues from our Internet-based subscription products to remain
comparable to the second quarter. As we continue to focus on transitioning the customers using our
installed learning management products to our Internet-based learning platform, we expect revenues
from our installed products to continue to decline during the remainder of 2005. We expect third
quarter revenues for PMD to experience modest increases from the levels experienced in the second
quarter, and we expect the mix of revenues for PMD to remain comparable to the second quarter.
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Cost of Revenues. Cost of revenues increased approximately $708,000, or 40.5%, to $2.5 million for
the three months ended June 30, 2005 from $1.8 million for the three months ended June 30, 2004.
Cost of revenues as a percentage of revenues decreased to 36.1% of revenues for the three months
ended June 30, 2005 from 37.3% of revenues for the three months ended June 30, 2004. The overall
increase in cost of revenues resulted primarily from additional costs associated with DMR,
increases in personnel expenses and increased royalties paid by us associated with the increase in
add-on courseware revenues.
Cost of revenues for HCO increased approximately $800,000 and approximated 27.2% and 19.6% of
revenues for the three months ended June 30, 2005 and 2004, respectively. Cost of revenues for HCO
increased due to additional costs associated with DMR, increases in personnel expenses and contract
labor associated with content maintenance, as well as an increase in the percentage royalties paid
by us to content partners. Cost of revenues for PMD declined $100,000 as compared to the prior
year quarter and approximated 56.8% and 67.0% of revenues for the three months ended June 30, 2005
and 2004, respectively. Cost of revenues for PMD decreased as a result of lower personnel expenses
and lower direct costs associated with the declines in content development revenues. We expect
quarter-to-quarter fluctuations in cost of revenues for PMD due to the seasonality in live event
and association activities and the variability related to our content development services.
Gross Margin. Gross margin (which we define as revenues less cost of revenues divided by revenues)
improved to approximately 63.9% for the three months ended June 30, 2005 from 62.7% for the three
months ended June 30, 2004. The improvement is a result of the change in revenue mix and related
cost of revenues discussed above. Gross margins for HCO were 72.8% and 80.4% for the three months
ended June 30, 2005 and 2004, respectively. Gross margins for PMD were 43.2% and 33.0% for the
three months ended June 30, 2005 and 2004, respectively.
Product development. Product development expenses increased approximately $109,000, or 17.2%, to
$743,000 for the three months ended June 30, 2005 from $634,000 for the three months ended June 30,
2004. This increase resulted from personnel expenses associated with DMR. Product development
expenses as a percentage of revenues decreased to 10.9% of revenues for the three months ended June
30, 2005 from 13.5% for the three months ended June 30, 2004. The percentage decrease is a result
of the increases in revenues.
Product development expenses for HCO increased approximately $100,000 as compared to the prior year
quarter and approximated 11.1% and 15.0% of revenues for the three months ended June 30, 2005 and
2004, respectively. The increase for HCO is a result of DMR personnel expenses. Product development
expenses for PMD decreased slightly as compared to the prior year period and approximated 6.2% and
7.9% of revenues for the three months ended June 30, 2005 and 2004, respectively. The unallocated
corporate portion of our product development expenses was comparable between periods.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased
approximately $397,000, or 32.9%, to $1.6 million for the three months ended June 30, 2005 from
$1.2 million for the three months ended June 30, 2004. Sales and marketing expenses approximated
23.5% and 25.7% of revenues for the three months ended June 30, 2005 and 2004, respectively. Sales
and marketing expenses for HCO increased approximately $276,000 and approximated 22.4% and 28.1% of
revenues for the three months ended June 30, 2005 and 2004, respectively. HCO experienced increases
in marketing expenses, sales personnel expenses, and expenses associated with DMR. Our annual Summit, which was held during the second quarter of 2005, contributed $150,000 of the HCO
increase. This increase is a result of the event being split between the first and second quarters
in 2004 and an increase in customer attendance at the event. Sales and marketing expenses for PMD
increased approximately $110,000, and approximated 22.4% and 16.0% of revenues for the three months
ended June 30, 2005 and 2004, respectively. The increase for PMD is associated with increased sales
personnel, commissions and marketing expenses.
Depreciation and Amortization. Depreciation and amortization increased approximately $256,000, or
50.7%, to $760,000 for the three months ended June 30, 2005 from $504,000 for the three months
ended June 30, 2004. The increase is associated with depreciation of property and equipment and
amortization of DMR intangible assets, content and feature enhancements.
Other General and Administrative. Other general and administrative expenses increased approximately
$116,000, or 9.9%, to $1.3 million for the three months ended June 30, 2005 from $1.2 million for
the three months ended June 30, 2004. The increase is associated with DMR personnel and office
expenses. Other general and administrative expenses as a percentage of revenues decreased to 18.9%
for the three months ended June 30, 2005 from 25.0% for the three months ended June 30, 2004. The
percentage decrease is a result of the increases in revenues.
Other Income/Expense. Other income/expense increased approximately $23,000, or 51.3%, to $68,000
for the three months ended June 30, 2005 from $45,000 for the three months ended June 30, 2004. The
increase resulted from an increase in interest income on investments in marketable securities.
Net Income (Loss). Net income was $23,000 for the three months ended June 30, 2005 compared to a
net loss of $529,000 for the three months ended June 30, 2004. This improvement is a result of the
factors mentioned above.
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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Revenues. Revenues increased approximately $2.9 million, or 30.1%, to $12.5 million for the six
months ended June 30, 2005 from $9.6 million for the six months ended June 30, 2004. Revenues for
2005 consisted of $9.2 million for HCO and $3.3 million for PMD. In 2004, revenues consisted of
$6.4 million for HCO and $3.2 million for PMD. The increase in HCO revenues related primarily to
growth in revenues from our Internet-based HLC subscriber base of $1.2 million, $1.2 million from
the DMR acquisition, $430,000 from growth in add-on courseware revenues, and $195,000 from content
maintenance services. These HCO revenue increases were partially offset by an anticipated decline
in revenues from maintenance and support fees associated with our installed learning management
products of $286,000. PMD revenues increased $100,000 over the prior year, although we experienced
a change in revenue mix. Revenues from online training content increased $180,000, and live event
revenues were comparable between periods. This increase was partially offset by a decline in
content development services. On a pro forma basis, taking into consideration the effect of the
DMR acquisition as if the acquisition occurred on January 1, 2004, pro forma revenues for the six
months ended June 30, 2005 would have been $13.9 million compared to $11.8 million for the six
months ended June 30, 2004.
Cost of Revenues. Cost of revenues increased approximately $854,000, or 23.5%, to $4.5 million for
the six months ended June 30, 2005 from $3.6 million for the six months ended June 30, 2004. Cost
of revenues as a percentage of revenues decreased to 36.0% of revenues for the six months ended
June 30, 2005 from 37.9% of revenues for the six months ended June 30, 2004. The increase in cost
of revenues resulted from the incremental expenses associated with DMR, increases in personnel
expenses and royalties paid by us, and was partially offset by declines in contract labor and
materials associated with declines in content development revenues.
Cost of revenues for HCO increased approximately $1.1 million and approximated 25.7% and 19.9% of
revenues for the six months ended June 30, 2005 and 2004, respectively. Cost of revenues increases
for HCO resulted from the additional expenses associated with DMR, increased personnel expenses and
contract labor associated with content maintenance, as well as an increase in the percentage
royalties paid by us to content partners. Cost of revenues for PMD declined $255,000 as compared
to the prior year period and approximated 55.8% and 65.6% of revenues for the six months ended June
30, 2005 and 2004, respectively. Cost of revenues for PMD decreased as a result of lower personnel
expenses and lower direct costs associated with the declines in content development revenues. We
expect quarter-to-quarter fluctuations in cost of revenues for PMD due to the seasonality in live
event and association activities and the variability related to our content development services.
Gross Margin. Gross margin (which we define as revenues less cost of revenues divided by revenues)
improved to approximately 64.0% for the six months ended June 30, 2005 from 62.1% for the six
months ended June 30, 2004. The improvement is a result of the change in revenue mix and related
cost of revenues discussed above. Gross margins for HCO were 74.3% and 80.1% for the six months
ended June 30, 2005 and 2004, respectively. Gross margins for PMD were 44.2% and 34.4% for the six
months ended June 30, 2005 and 2004, respectively.
Product development. Product development expenses increased approximately $99,000, or 7.7%, to $1.4
million for the six months ended June 30, 2005 from $1.3 million for the six months ended June 30,
2004. This increase is primarily related to additional personnel expenses associated with the DMR
acquisition. Product development expenses as a percentage of revenues decreased to 11.0% of
revenues for the six months ended June 30, 2005 from 13.3% for the six months ended June 30, 2004.
The decrease is a result of the increases in revenues.
Product development expenses for HCO increased approximately $44,000 as compared to the prior year
period and approximated 11.5% and 15.8% of revenues for the six months ended June 30, 2005 and
2004, respectively. Product development expenses for PMD were comparable between periods and
approximated 6.1% and 6.3% of revenues for the six months ended June 30, 2005 and 2004,
respectively. The unallocated corporate portion of our product development expenses increased
approximately $56,000.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased
approximately $430,000, or 18.2%, to $2.8 million for the six months ended June 30, 2005 from $2.4
million for the six months ended June 30, 2004. Sales and marketing expenses approximated 22.4% and
24.6% of revenues for the six months ended June 30, 2005 and 2004, respectively. Sales and
marketing expenses for HCO increased approximately $273,000 and approximated 21.6% and 26.8% of
revenues for the six months ended June 30, 2005 and 2004, respectively. HCO increases were a result
of the DMR acquisition, increased spending associated with The Summit, and to a lesser extent,
increased commissions. Sales and marketing expenses for PMD increased approximately $149,000 and
approximated 20.4% and 16.3% of revenues for the six months ended June 30, 2005 and 2004,
respectively. The increase is associated with increased personnel expenses and commissions.
Depreciation and Amortization. Depreciation and amortization increased approximately $386,000, or
38.9%, to $1.4 million for the six months ended June 30, 2005 from $1.0 million for the six months
ended June 30, 2004. The increase is associated with depreciation of property and equipment and
amortization of DMR intangible assets, content and feature enhancements.
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Other General and Administrative. Other general and administrative expenses increased approximately
$77,000, or 3.3%, and approximated $2.4 million for the six months ended June 30, 2005 and 2004.
Other general and administrative expenses as a percentage of revenues decreased to 19.6% for the
six months ended June 30, 2005 from 24.6% for the six months ended June 30, 2004. The percentage
decrease is a result of the increases in revenues.
Other Income/Expense. Other income/expense increased approximately $72,000, or 75.9%, to $166,000
for the six months ended June 30, 2005 from $94,000 for the six months ended June 30, 2004. The
increase resulted from an increase in interest income on investments in marketable securities.
Net Income (Loss). Net income was $167,000 for the six months ended June 30, 2005 compared to a net
loss of $948,000 for the six months ended June 30, 2004. This improvement is a result of the
factors mentioned above. On a pro forma basis, as if the DMR acquisition occurred on January 1,
2004, pro forma net income would have been $641,000 for the six months ended June 30, 2005 compared
to a pro forma net loss of $481,000 for the six months ended June 30, 2004.
Liquidity and Capital Resources
Since our inception, we have financed our operations largely through proceeds from our initial
public offering, private placements of equity securities, loans from related parties and, to an
increasing extent, from revenues generated from the sale of our products and services.
Net cash provided by operating activities was approximately $1.2 million during the six months
ended June 30, 2005 compared to $72,000 during the six months ended June 30, 2004. The improvement
over the prior year was primarily related to the improvement from a net loss in 2004 of $948,000 to
net income of $167,000 in 2005, receipts from commercial support grants and a decline in accounts
receivable (net of acquired balances from DMR). These cash increases were partially offset by the
purchases of content and other prepaid assets and declines in accounts payable and accrued
liabilities. Days sales outstanding, or the number of days it takes to collect accounts receivable,
increased compared to the prior year, approximating 58 days for the six months ended June 30, 2005
compared to 48 days for the six months ended June 30, 2004. The increase in days sales outstanding
is a result of slower collections during the second quarter of 2005 resulting primarily from
certain larger customers having payment terms greater than our standard payment term. The Company
calculates days sales outstanding by dividing the accounts receivable balance (excluding unbilled
and other receivables) by average daily revenues for the period. During the six months ended June
30, 2004, the primary sources of cash resulted from improved net loss and receipts of commercial
support grants, offset by cash utilized to fund operations and purchase content and other prepaid
assets.
Net cash used in investing activities was approximately $358,000 during the six months ended June
30, 2005 compared to approximately $50,000 during the six months ended June 30, 2004. The primary
uses of cash during the six months ended June 30, 2005 related to cash paid in connection with the
acquisition of DMR of $9.4 million, $1.0 million in purchases of investments in marketable
securities and $521,000 of property and equipment acquisitions. These uses of cash were offset by
$10.5 million of proceeds from the sale and maturity of investments in marketable securities.
Property and equipment acquisitions related to hardware and software to support the growth of our
product infrastructure, primarily our Internet-based learning platform. During the six months ended
June 30, 2004, we received proceeds of $13.0 million from the maturity of investments in marketable
securities and $233,000 in proceeds from collection of a note
receivable — related party, offset by
$12.5 million in purchases of investments in marketable securities and $782,000 in property and
equipment acquisitions.
Cash provided by financing activities was approximately $609,000 for the six months ended June 30,
2005 compared to $175,000 during the six months ended June 30, 2004. Cash provided by financing
activities during 2005 consisted of proceeds from the exercise of stock options of $479,000 and
$159,000 associated with the issuance of common stock to our Employee Stock Purchase Plan, and was
partially offset by payments under capital lease obligations. Cash provided by financing activities
during the six months ended June 30, 2004 consisted of proceeds from the exercise of stock options
of $128,000 and $77,000 associated with the issuance of common stock to our Employee Stock Purchase
Plan, and was partially offset by payments under capital lease obligations.
As of June 30, 2005, our primary source of liquidity was $8.4 million of cash and cash equivalents,
restricted cash, investments in marketable securities, and interest receivable. We have no bank
credit facility or other indebtedness other than capital lease obligations. As of July 31, 2005, we
had cash and cash equivalents, restricted cash, investments in marketable securities, and interest
receivable of approximately $8.7 million. The increase in our liquidity is a result of strong cash
collections during July 2005.
We believe that our existing cash and cash equivalents, restricted cash, and related interest
receivable will be sufficient to meet anticipated cash needs for working capital, new product
development and capital expenditures for at least the next 12 months. Failure to generate
sufficient cash flow from operations or raise additional capital when required during or following
that period in sufficient amounts and on terms acceptable to us could harm our business, financial
condition and results of operations. Our growth strategy may also include acquiring companies that
complement our products and services. We anticipate that these acquisitions, if any, will be
effected through a combination of stock and cash consideration. The issuance of stock would have a
dilutive effect and could adversely affect our stock price.
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Commitments and Contingencies
We expect that content and capital expenditures will range between $2.0 and $2.5 million for the
remainder of 2005.
Our strategic alliances have typically provided for payments to content and distribution partners
and development partners based on revenues, and we expect to continue similar arrangements in the
future. We have capital lease obligations and operating lease commitments for our operating
facilities in Nashville, TN, Franklin, TN, and Denver, CO, and a closed facility in Dallas, TX. We
entered into capital lease arrangements during the three months ended June 30, 2005 that include
future payments of approximately $223,000 over three years.
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 commodity price
risk. As of June 30, 2005, we had no outstanding indebtedness other than approximately $338,000 of
capital lease obligations. Accordingly, we are not exposed to significant market risk. We are
exposed to market risk with respect to the cash and cash equivalents and marketable securities in
which we invest. At July 31, 2005, we had approximately $8.7 million of cash and cash equivalents,
restricted cash, investments in marketable securities, and accrued interest that was invested in a
combination of short term investments. Current investment rates of return approximate 2-3%.
Assuming a 2.5% rate of return on $8.7 million of investments, a hypothetical 10% decrease in
interest rates would decrease interest income and decrease net income on an annualized basis by
approximately $22,000.
We manage our investment risk by investing in corporate debt securities, foreign corporate debt and
secured corporate debt securities with minimum acceptable credit ratings. For certificates of
deposit and corporate obligations, ratings must be A2/A or better; A1/P1 or better for commercial
paper; A2/A or better for taxable or tax advantaged auction rate securities and AAA or better for
tax free auction rate securities. We also require that all securities must mature within 24 months
from the original settlement date, the average portfolio shall not exceed 18 months, and the
greater of 10% or $5.0 million shall mature within 90 days. Further, our investment policy also
limits concentration exposure and other potential risk areas.
The above market risk discussion and the estimated amounts presented are forward-looking statements
of market risk assuming the occurrence of certain adverse market conditions. Actual results in the
future may differ materially from those projected as a result of actual developments in the market.
Item 4. 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 effectively and timely provide them with material information relating to
HealthStream required to be disclosed in the reports it files or submits under the Exchange Act.
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.
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PART II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 26, 2005, the Company held its Annual Meeting of Shareholders. At the Annual Meeting, the
shareholders of the Company elected the following persons as Class II directors to serve until the
Annual Meeting of Shareholders in 2008 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 | ||||||
Linda Rebrovick |
16,206,601 | 987,259 | ||||||
Jeffrey L. McLaren |
16,206,151 | 987,709 | ||||||
Item 6. Exhibits
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. |
||||
| By: | /s/ Arthur E. Newman | |||
| Arthur E. Newman | ||||
| Chief Financial Officer August 12, 2005 |
||||
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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 |
20
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(s) 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)) 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) 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 (c) 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(s) 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 12, 2005 /s/ ROBERT A. FRIST, JR. -------------------------- Robert A. Frist, Jr. Chief Executive Officer
Exhibit 31.2 I, Arthur E. Newman, 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(s) 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)) 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) 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 (c) 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(s) 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 12, 2005 /s/ ARTHUR E. NEWMAN ----------------------- Arthur E. Newman 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, 2005, 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 12, 2005
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, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Arthur E. Newman, 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/ ARTHUR E. NEWMAN - ----------------------- Arthur E. Newman Chief Financial Officer August 12, 2005