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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 13, 2003, 20,367,427 shares of the registrant's common stock were
outstanding.
INDEX TO FORM 10-Q
HEALTHSTREAM, INC.
PAGE
NUMBER
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited)
and December 31, 2002....................................................................... 1
Condensed Consolidated Statements of Operations (Unaudited) - Three Months
ended March 31, 2003 and 2002............................................................... 2
Condensed Consolidated Statement of Shareholders' Equity (Unaudited) - Three Months
ended March 31, 2003........................................................................ 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months
ended March 31, 2003 and 2002............................................................... 4
Notes to Condensed Consolidated Financial Statements............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 14
Item 4. Controls and Procedures.......................................................................... 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................. 14
Signature........................................................................................ 15
Certifications................................................................................... 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 6,541,283 $ 4,069,631
Investments in short term marketable securities ....................... 11,593,451 12,087,008
Restricted cash ....................................................... 475,106 835,437
Interest receivable ................................................... 212,441 306,507
Accounts receivable, net of allowance for doubtful accounts of $303,083
at March 31, 2003 and $295,704 at December 31, 2002, respectively .. 3,613,377 3,346,355
Accounts receivable - unbilled ........................................ 344,847 248,439
Prepaid development fees, net of amortization ......................... 341,481 406,416
Other prepaid expenses and other current assets ....................... 780,130 587,746
------------ ------------
Total current assets ............................................... 23,902,116 21,887,539
Property and equipment:
Furniture and fixtures ................................................ 937,152 930,657
Equipment ............................................................. 4,624,465 4,361,466
Leasehold improvements ................................................ 1,235,293 1,232,083
------------ ------------
6,796,910 6,524,206
Less accumulated depreciation and amortization ..................... (4,229,868) (3,855,921)
------------ ------------
2,567,042 2,668,285
Goodwill ................................................................. 3,306,688 3,306,688
Intangible assets, net of accumulated amortization of $5,599,370
at March 31, 2003 and $5,211,965 at December 31, 2002, respectively 1,262,772 1,650,177
Investments in marketable securities ..................................... -- 3,066,067
Notes receivable - related party ......................................... 233,003 233,003
Other assets ............................................................. 65,431 101,457
------------ ------------
Total assets .................................................... $ 31,337,052 $ 32,913,216
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 1,367,967 $ 718,803
Accrued liabilities ................................................... 847,683 1,179,795
Accrued compensation and related expenses ............................. 329,360 763,521
Registration liabilities .............................................. 551,925 900,654
Deferred revenue ...................................................... 3,635,092 3,346,224
Current portion of capital lease obligations .......................... 53,355 66,925
------------ ------------
Total current liabilities .......................................... 6,785,382 6,975,922
Capital lease obligations, less current portion .......................... 26,385 41,011
Commitments and contingencies ............................................ -- --
Shareholders' equity:
Common stock, no par value, 75,000,000 shares authorized;
20,322,687 shares issued and outstanding
at March 31, 2003 and December 31, 2002, respectively .............. 91,223,052 91,223,052
Accumulated other comprehensive income ................................ 113,978 125,536
Accumulated deficit ................................................... (66,811,745) (65,452,305)
------------ ------------
Total shareholders' equity ...................................... 24,525,285 25,896,283
------------ ------------
Total liabilities and shareholders' equity ...................... $ 31,337,052 $ 32,913,216
============ ============
See accompanying notes to the condensed consolidated financial statements.
1
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
------------ ------------
Revenues, net .................................................................. $ 4,416,709 $ 3,534,858
Operating costs and expenses:
Cost of revenues ............................................................ 1,495,488 1,831,851
Product development ......................................................... 955,460 1,008,561
Sales and marketing ......................................................... 1,128,855 1,561,264
Depreciation ................................................................ 376,576 447,871
Amortization of intangibles, content fees, fixed royalties, and prepaid
compensation .............................................................. 519,871 713,041
Other general and administrative expenses ................................... 1,422,731 1,649,571
------------ ------------
Total operating costs and expenses .................................... 5,898,981 7,212,159
Loss from operations ........................................................... (1,482,272) (3,677,301)
Other income (expense):
Interest and other income ................................................... 129,309 257,289
Interest and other expense .................................................. (6,477) (8,976)
------------ ------------
122,832 248,313
------------ ------------
Loss, before cumulative effect of a change in accounting principle ............. (1,359,440) (3,428,988)
Cumulative effect of a change in accounting principle .......................... -- (5,000,000)
------------ ------------
Net loss ....................................................................... $ (1,359,440) $ (8,428,988)
============ ============
Net loss per share:
Basic and diluted net loss before cumulative effect of a change in accounting
principle ................................................................. $ (0.07) $ (0.17)
Cumulative effect of a change in accounting principle ....................... -- (0.25)
------------ ------------
Basic and diluted net loss per share ........................................... $ (0.07) $ (0.42)
============ ============
Weighted average shares of common stock outstanding:
Basic and diluted ........................................................... 20,306,364 20,195,982
============ ============
See accompanying notes to the condensed consolidated financial statements.
2
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003
COMMON STOCK OTHER TOTAL
---------------------------- ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT DEFICIT INCOME EQUITY
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 ......... 20,322,687 $ 91,223,052 $(65,452,305) $ 125,536 $ 25,896,283
Net loss ............................. -- -- (1,359,440) -- (1,359,440)
Unrealized loss on investments,
net of tax ......................... -- -- -- (11,558) (11,558)
------------
Comprehensive loss ................... -- -- -- -- (1,370,998)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 ............ 20,322,687 $ 91,223,052 $(66,811,745) $ 113,978 $ 24,525,285
============ ============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements.
3
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss .................................................................. $ (1,359,440) $ (8,428,988)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ........................................................ 376,576 447,871
Amortization of intangibles, content fees, fixed royalties,
and prepaid compensation ......................................... 519,871 713,041
Provision for doubtful accounts ..................................... 40,000 --
Realized loss on disposal of property & equipment ................... 2,202 2,213
Cumulative effect of a change in accounting principle ............... -- 5,000,000
Changes in operating assets and liabilities:
Accounts and unbilled receivables ................................ (403,430) (184,102)
Restricted cash .................................................. 360,331 (490,526)
Interest receivable .............................................. 94,066 179,495
Prepaid development fees ......................................... (34,629) 21,031
Other prepaid expenses and other current assets .................. (207,660) 2,523
Other assets ..................................................... 116,467 41,691
Accounts payable ................................................. 649,164 (265,006)
Accrued liabilities and compensation ............................. (766,273) (204,898)
Registration liabilities ......................................... (348,729) 419,784
Deferred revenue ................................................. 288,868 346,591
------------ ------------
Net cash used in operating activities .......................... (672,616) (2,399,280)
INVESTING ACTIVITIES:
Proceeds from maturities and sale of investments in marketable securities . 3,450,000 6,164,956
Purchase of investments in marketable securities .......................... -- (5,324,886)
Purchase of property and equipment ........................................ (277,536) (190,071)
------------ ------------
Net cash provided by investing activities ...................... 3,172,464 649,999
FINANCING ACTIVITIES:
Payments on capital lease obligations ..................................... (28,196) (50,223)
------------ ------------
Net cash used in financing activities .......................... (28,196) (50,223)
------------ ------------
Net increase increase (decrease) in cash and cash equivalents ............. 2,471,652 (1,799,504)
Cash and cash equivalents at beginning of period .......................... 4,069,631 4,747,434
------------ ------------
Cash and cash equivalents at end of period ................................ $ 6,541,283 $ 2,947,930
============ ============
Total cash and cash equivalents, restricted cash, investments in marketable
securities and accrued interest at end of period ....................... $ 18,822,281 $ 24,574,633
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................................. $ 4,430 $ 6,763
============ ============
See accompanying notes to the condensed consolidated financial statements
4
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, condensed consolidated
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. All significant intercompany transactions have been eliminated in
consolidation. Operating results for the three months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
The balance sheet at December 31, 2002 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, 2002 (included in the Company's Annual Report on Form
10-K, filed with the Securities and Exchange Commission).
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS No. 148 is effective for financial statements issued for
fiscal years ending after December 15, 2002, and interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. We have elected to account for
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"), which does not utilize the fair value
method. However, we have adopted the disclosure requirements of SFAS No. 123,
and we adopted the additional disclosure requirements as specified in SFAS 148.
If the alternative method of accounting for stock incentive plans prescribed by
SFAS No. 123 had been followed, our net loss and net loss per share would have
been:
Three Months Ended
----------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Net loss as reported ............................................................... $(1,359,440) $(8,428,988)
Add: Stock-based employee compensation expense included in reported net 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 ......................... (144,604) (193,958)
----------- -----------
Pro forma net loss ................................................................. $(1,504,044) $(8,622,946)
=========== ===========
Basic and diluted net loss per share - as reported* ................................ $ (0.07) $ (0.42)
=========== ===========
Basic and diluted net loss per share - pro forma* .................................. $ (0.07) $ (0.43)
=========== ===========
- --------------
* - The net loss per share as reported and pro forma for the three months ended
March 31, 2002 includes a $5.0 million (or $0.25 per share) charge related to a
cumulative effect of a change in accounting principle.
3. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available to
common shareholders for the period by the weighted-average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares, composed of incremental common shares issuable upon the exercise of
stock options and warrants, and escrowed or restricted shares are included in
diluted net 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
3,100,000 and 3,600,000 at March 31, 2003 and 2002, respectively.
5
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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"). 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, 2002. We manage and
operate our business segments based on the markets they serve and products and
services provided to those markets.
The following is our business segment information as of and for the three months
ended March 31, 2003 and 2002. We measure segment performance based on the
operating loss before income taxes and prior to the allocation of corporate
overhead expenses, interest income, interest expense, and substantially all
depreciation.
Three months ended
------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Revenues
HCO ........................ $ 2,879,231 $ 2,137,658
PMD ........................ 1,537,478 1,397,200
------------ ------------
Total net revenue ........ $ 4,416,709 $ 3,534,858
============ ============
Income (Loss) from operations
HCO ........................ $ 545,652 $ (1,267,646)
PMD ........................ (66,014) (506,131)
Unallocated ................ (1,961,910) (1,903,524)
------------ ------------
Total loss from operations $ (1,482,272) $ (3,677,301)
============ ============
Segment Assets
HCO * ...................... $ 5,902,044 $ 9,265,689
PMD * ...................... 5,227,555 6,449,798
Unallocated ................ 20,207,453 25,127,342
------------ ------------
Total assets ............. $ 31,337,052 $ 40,842,829
============ ============
- --------------
* Segment assets include restricted cash, accounts and unbilled receivables,
prepaid and other current assets, other assets, property and equipment, and
intangible assets. Cash and cash equivalents, investments in marketable
securities and related interest receivable are not allocated to individual
segments.
5. GOODWILL
We account for goodwill under the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." Effective January 1, 2002 we recorded a transitional
goodwill impairment loss of $5.0 million in our HCO business unit. The loss was
recorded as a cumulative effect of a change in accounting principle.
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.
6
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GOODWILL (CONTINUED)
There have been no changes in the carrying amount of goodwill for the three
months ended March 31, 2003. The changes in the carrying amount of goodwill for
the three months ended March 31, 2003 and 2002 are as follows:
HCO PMD Total
----------- ----------- -----------
Balance at January 1, 2003............................. $ 1,982,961 $ 1,323,727 $ 3,306,688
Changes in carrying value of goodwill.................. -- -- --
----------- ----------- -----------
Balance at March 31, 2003.............................. $ 1,982,961 $ 1,323,727 $ 3,306,688
=========== =========== ===========
HCO PMD Total
------------ ----------- -----------
Balance at January 1, 2002............................. $ 6,982,961 $ 1,323,727 $ 8,306,688
Transitional impairment loss........................... (5,000,000) -- (5,000,000)
----------- ----------- -----------
Balance at March 31, 2002.............................. $ 1,982,961 $ 1,323,727 $ 3,306,688
=========== =========== ===========
6. INTANGIBLE ASSETS
All intangible assets have been evaluated in accordance with SFAS No. 142 and
are considered to have finite useful lives. The intangibles are being amortized
over their estimated useful lives, ranging from one to five years. Amortization
of intangible assets was approximately $387,000 and $479,000 for the three
months ended March 31, 2003 and 2002, respectively.
Identifiable intangible assets are comprised of the following:
As of March 31, 2003 As of December 31, 2002
---------------------------------------------- -----------------------------------------------
Accumulated Accumulated
Gross Amount Amortization Net Gross Amount Amortization Net
------------ ------------ ----------- ------------ ------------ -----------
Content ...... $ 3,500,000 $(2,519,445) $ 980,555 $ 3,500,000 $(2,277,778) $ 1,222,222
Customer lists 2,940,000 (2,745,555) 194,445 2,940,000 (2,612,221) 327,779
Other ........ 422,142 (334,370) 87,772 422,142 (321,966) 100,176
----------- ----------- ----------- ----------- ----------- -----------
Total .... $ 6,862,142 $(5,599,370) $ 1,262,772 $ 6,862,142 $(5,211,965) $ 1,650,177
=========== =========== =========== =========== =========== ===========
Estimated amortization expense for the periods and years ending December 31, is
as follows:
April 1, 2003 through December 31, 2003................................................... $ 752,494
2004...................................................................................... 344,066
2005...................................................................................... 166,212
2006...................................................................................... --
2007...................................................................................... --
-------------
Total $ 1,262,772
=============
7. CONTINGENCIES
We are subject to various legal proceedings and claims that may arise in the
ordinary course of our business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect our financial position, results from operations, or liquidity.
7
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 limited operating history;
- variability and length of our sales cycle and our product mix;
- our ability to attract new customers and to transition
customers of our installed learning management products to our
Internet-based learning products and our ability to sell
additional content and services to our customers;
- our history of losses;
- our ability to manage the growth of our operations and
infrastructure;
- our ability to maintain and continue to develop our technology
infrastructure, continue to meet customer demand and maintain
appropriate security;
- successful implementation of our operating and growth
strategy;
- competitive pressures from actual and potential competitors;
- fluctuations in quarterly operating results caused by a
variety of factors including the timing of sales and
development contracts as well as the continued development and
maintenance of the Internet as a tool for online training and
continuing education in the healthcare industry and
availability of increased bandwidth;
- our ability to successfully establish and maintain new and
existing relationships with customers and content partners;
and
- global and/or regional economic factors and potential changes
in laws and regulations, including, without limitation,
changes in federal, state and international laws or other
regulations regarding education, training and Internet
transactions.
For additional information concerning risks and uncertainties that may affect
our results of operations, please see the risks outlined under the heading "Risk
Factors" in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
OVERVIEW AND CRITICAL ACCOUNTING POLICIES AND ESTIMATES
HealthStream, Inc. was incorporated in 1990 and began marketing its
Internet-based solutions in March 1999. We evolved from an initial focus of
providing multimedia tools for information dissemination to facilitating
training tools for entities in the healthcare industry. Revenues from the
healthcare organization and professionals business unit ("HCO") are derived from
the following categories: provision of services through our Internet-based
learning products, content subscriptions, licensing, maintenance and support of
our installed learning management products, custom content development and a
variety of online and enduring products. Revenues from the pharmaceutical and
medical device business unit ("PMD") are derived from live event development,
coordination, and registration services, online development and training, Web
cast events and other educational and training services.
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
8
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 critical accounting policies that we believe are the most critical to aid 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.
Our senior management has reviewed these critical accounting policies and
related disclosures with our Audit Committee. See Notes to Consolidated
Financial Statements in our Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2002, which contains additional
information regarding our accounting policies and other disclosures required by
GAAP.
REVENUE RECOGNITION
Internet-based learning products including our Healthcare Learning Center(TM)
("HLC") and content subscriptions are provided on a per person subscription
basis, with fees ranging from less than $1 to more than $6 per month, based on
the size of the facilities' employee population and the content offerings to
which they subscribe. Contracts for e-learning products generally range from
$5,000 to approximately $400,000, and are based on the duration of the contract,
number of users and content involved. Revenues derived from the provision of
services through our Internet-based learning products are recognized ratably
over the term of the service agreement. The Company also offers training
services for clients to facilitate integration of this technology. Fees for
training are based on the time and efforts of the personnel involved. Other
transaction-based online services are provided based on a fee ranging from $5 to
$25 per underlying credit hour, or based upon access to a body of content for a
defined period of time. Most courses provide one to three credit hours, however,
we also sell board review courses that include significantly more credit. We
recognize revenue for all content subscription services ratably over the
subscription period and recognize revenue for transaction-based online course
sales when the course is delivered. Training revenues are generally recognized
upon completion of training services. We also have arrangements that provide for
commercial support of online courseware. Such revenue recognition is based on an
estimate of usage ratably over the term unless usage varies from this estimate.
As discussed in the "Risk Factors" section of our Annual Report on Form 10-K
filed with the Securities and Exchange Commission, revenue recognition policies
for Internet-based learning products and other services vary significantly from
our installed learning management products.
Revenues from sales of installed learning management products are recognized
upon shipment or installation of the software. The one-time license fee
typically ranges from $20,000 to $200,000 based on the number of users. Revenues
related to installed learning management products may be subject to seasonal
fluctuations because purchases of these licenses typically are included in
customers' capital expenditure budgets. Training services are typically based on
the length of the related training course. Such training revenues are typically
recognized upon completion of the training services. Maintenance and technical
support revenues are typically based on a percentage of the original contract
amount and are recognized over the term of the service period. Revenues derived
from content development services or the sale of products requiring significant
modification, conversion or customization are recorded based on the percentage
of completion method using labor hours. We recognize custom content development
revenues based on the percentage of a project that is completed.
We recognize revenue from online and live event development and coordination
services based on the percentage of completion method using labor hours or
similar event milestones. This methodology requires ongoing estimates regarding
the total expenses or significant milestones associated with the project as well
as periodic estimates of the progress with respect to completion of such
projects. Event registration services are recognized upon completion of the
related event and are based on estimates of event registration (note: our
registration fees do not vary based on the number of registrants unless there is
some incongruence with the initial estimate). Revenues associated with online
training are recognized over the term of the service period or over the
historical usage period, if usage typically differs from the service period. All
other service revenues, including Web cast events, are recognized as the related
services are performed or products are delivered. Sales of products and services
to pharmaceutical and medical device companies can be subject to seasonal
factors as a result of drug and product introductions, meeting and conference
dates and budget cycles for such companies.
We expect to continue to generate revenues by marketing our Internet-based
products and services to healthcare workers through healthcare organizations. We
expect that the portion of our revenues related to services provided via our
Internet-based learning products will increase. Specifically, we will seek to
generate revenues from healthcare workers by marketing to their employers or
commercially supporting organizations. The transaction fees for courseware
resulting from this marketing may either be paid by the employer or commercially
supporting
9
organization or, in the case of healthcare professionals, may be billed directly
to the individual. Our Internet-based learning model allows us to host our
system in a central data center, therefore eliminating the need for costly
onsite installations of our software. Under the Internet-based learning model,
revenues are generated by charging for use of our courseware on a subscription
basis. In addition, we will continue to sell services on our Web site on a
transaction basis. We expect to continue to transition customers from our
existing installed learning management platforms to our Internet-based learning
products. We expect that revenues resulting from transition customers will
remain comparable or increase when compared to the annual maintenance fees due
to sales of additional content and courseware.
PRODUCT DEVELOPMENT COSTS
Product development costs include the costs to maintain and internally develop
our Internet-based learning and installed learning management products as well
as convert and load content. Once technological feasibility is achieved, we
capitalize the cost of content developed by third parties where the life
expectancy is greater than one year and the anticipated cash flows from such
content is expected to exceed the cost of the content. We amortize content
development over its expected life, which is generally one to two years. Product
development and content development costs that have been capitalized are subject
to a periodic impairment review in accordance with our policy. During the three
months ended December 31, 2002, we recorded an impairment charge of
approximately $105,000 with respect to certain content development fees.
We account for Web site development costs in accordance with EITF Issue No.
00-2, "Accounting for Web Site Development Costs," which provides guidance on
when to capitalize versus expense costs incurred to develop a Web site. We
capitalize costs incurred between the point of establishing technological
feasibility and general release when such costs are material. To date, we have
not capitalized any internal development costs for computer software developed
for resale or any internal Web site development. The costs incurred with respect
to our Internet-based learning products and Web sites were incurred prior to the
adoption of EITF No. 00-2.
GOODWILL, INTANGIBLES AND OTHER LONG-LIVED ASSETS
We account for goodwill and intangibles and other long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Intangible Assets," and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." We measure for impairment at the
reporting unit level using a discounted cash flow model to determine the
estimated fair value of the reporting units. Our discounted cash flow model
contains significant assumptions and accounting estimates about discount rates,
future cash flows and terminal values that could materially affect our operating
results or financial position if they were to change significantly in the
future. We perform our goodwill impairment test whenever events or changes in
facts or circumstances, internally and externally, indicate that impairment may
exist and also during the fourth quarter each year.
In connection with our adoption of SFAS No. 142, we completed a transitional
goodwill impairment evaluation. As a result of this evaluation, we recorded a
transitional goodwill impairment loss of $5.0 million, effective January 1,
2002. This impairment evaluation included significant assumptions and accounting
estimates as described above.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We estimate the allowance for doubtful accounts using a specific identification
method. Management determines the allowance for doubtful accounts on a
case-by-case basis, based on the facts and circumstances surrounding each
potentially uncollectible receivable. An allowance is also maintained for
accounts that are not specifically identified that may become uncollectible in
the future. Uncollectible receivables are written-off in the period management
believes it has exhausted every opportunity to collect payment from the
customer. Bad debt expense is recorded when events or circumstances indicate an
additional allowance is required based on our specific identification approach.
RESULTS OF OPERATIONS
REVENUES AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses apply to
the comparison of results of operations.
Revenues. Revenues for our HCO business unit consist of the provision of
services through our Internet-based learning products, content subscriptions,
the licensing, maintenance and support of our installed learning management
products and online development. Revenues for our PMD business unit consist of
online and live event development, coordination, and registration services,
online products and commercial support, sale of online enduring products and
training services, and Web cast events.
Cost of Revenues. Cost of revenues consist primarily of salaries and employee
benefits, materials, hosting costs, and other direct expenses associated with
revenues as well as royalties paid to content providers and distribution
partners based on a percentage of revenues.
10
Product Development. Product development expenses consist primarily of salaries
and employee benefits, third-party content acquisition costs, costs associated
with maintaining, developing and operating our Web sites and training delivery
and administration platform, costs associated with the development of new
products and the development of content.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions and employee benefits, travel and lodging, advertising,
promotions, and related marketing costs.
Depreciation and Amortization. Depreciation and amortization consist of fixed
asset depreciation, amortization of intangibles, amortization of content,
license fees, and prepaid compensation and royalties paid to content providers
that are of a fixed nature.
Other General and Administrative Expenses. Other general and administrative
expenses consist primarily of salaries and employee benefits, facility costs,
and fees for professional services.
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.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues increased approximately $0.9 million, or 24.9%, from $3.5
million for the three months ended March 31, 2002 to $4.4 million for the three
months ended March 31, 2003. Revenues for 2003 consisted of $2.9 million for HCO
and $1.5 million for PMD. In 2002, revenues consisted of $2.1 million for HCO
and $1.4 million for PMD. The increase in HCO revenues over 2002 related
primarily to growth in our Internet-based Healthcare Learning Center(TM)
subscriber base of $0.7 million and growth of add-on courseware of approximately
$0.3 million. Add-on courseware subscription revenue increases were primarily
related to training associated with the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). These revenue increases were partially
offset by a decline in revenues from maintenance and support fees associated
with our installed learning management products of approximately $0.1 million
and content development revenues of approximately $0.1 million. PMD revenues
increased approximately $0.1 million over 2002, primarily related to increases
in live event services, while online development revenues decreased moderately.
We expect revenues from our installed learning management products to decline
during 2003 as we focus on our Internet-based learning products and continue to
transition these customers to our Internet-based learning platform. Revenues
from our Internet-based subscription products represented approximately 55% of
revenues for the three months ended March 31, 2003 compared to 39% of revenues
for the three months ended March 31, 2002.
Cost of Revenues. Cost of revenues decreased approximately $0.3 million, or
18.4%, from $1.8 million for the three months ended March 31, 2002 to $1.5
million for the three months ended March 31, 2003. Cost of revenues as a
percentage of revenues decreased from 51.8% of revenues for the three months
ended March 31, 2002 to 33.9% of revenues for the three months ended March 31,
2003. This improvement is primarily related to the revenue increases and change
in revenue mix discussed above, as well as reductions in personnel expenses,
principally associated with consolidation of customer service operations that
occurred during the first quarter of 2002.
Cost of revenues for the HCO unit decreased approximately $0.2 million and
approximated 17.2% and 33.1% of revenues for the three months ended March 31,
2003 and 2002, respectively. This percentage decreased due to the increases in
HCO revenues and change in revenue mix discussed above and from reductions in
personnel expenses discussed above. Cost of revenues for the PMD unit decreased
approximately $0.1 million and approximated 56.8% and 69.6% of revenues for the
three months ended March 31, 2003 and 2002, respectively. This percentage
decreased as a result of the moderate increases in PMD revenues discussed above
as well as personnel reductions and a change in focus within PMD from content
and online development services to development of new products. As a result of
this change in focus, expenses have been shifted from cost of goods to product
development. We expect quarter-to-quarter fluctuations in cost of revenues for
our PMD unit due to seasonality in live event activities and as we balance the
utilization of our online development resources to meet changes in demand for
such services.
Gross Margin. Gross margins (which we define as revenues less cost of revenues
divided by revenues) improved to approximately 66.1% for the three months ended
March 31, 2003 from 48.2% for the three months ended March 31, 2002. The
improvement is a result of the revenue increases and decreases in cost of
revenues discussed above. Gross margins for the HCO business unit were 82.8% and
66.9% for the three months ended March 31, 2003 and 2002, respectively. Gross
margins for the PMD business unit were 43.2% and 30.4% for the three months
ended March 31, 2003 and 2002, respectively.
Product development. Product development expenses decreased approximately
$40,000 or 3.4%, from approximately $1.0 million for the three months ended
March 31, 2002 to approximately $960,000 for the three months ended March 31,
2003. Product development expenses as a percentage of revenues decreased from
28.5% for the three months ended March 31, 2002 to 21.6% of revenues for the
three months ended March 31, 2003. The decrease as a percentage of revenues
primarily relates to the increase in revenues discussed above.
11
Product development expenses for the HCO unit decreased approximately $0.1
million and approximated 20.0% and 33.5% of revenues for the three months ended
March 31, 2003 and 2002, respectively. The percentage decrease is attributable
to the HCO revenue increases and to a lesser extent, decreases in personnel
expenses resulting from reductions in personnel associated with the development
of certain content products. Product development efforts for HCO consisted
primarily of ongoing maintenance and development of our Internet-based learning
platform and new products. Product development expenses for the PMD unit
increased approximately $0.2 million and approximated 18.3% and 8.1% of revenues
for the three months ended March 31, 2003 and 2002, respectively. The increases
in product development expenses for PMD are attributable to costs associated
with the development of a new product called HospitalDirect(TM) and due to
additional resources focused on the development of other content products.
HospitalDirect(TM) is intended to expand our existing Internet-based learning
products by providing pharmaceutical and medical device companies with
opportunities to provide facility-based personnel with online product training.
HospitalDirect(TM) is expected to be launched during the second quarter of 2003.
The unallocated corporate portion of our product development expenses decreased
approximately $0.1 million, or 45.9%, as a higher portion of corporate resources
were utilized for the ongoing maintenance and development of our Internet-based
learning platform for the HCO business unit.
Sales and Marketing Expenses. Sales and marketing expenses, including personnel
costs, decreased approximately $0.4 million, or 27.7%, from $1.6 million for the
three months ended March 31, 2002 to $1.1 million for the three months ended
March 31, 2003. This decrease primarily resulted from lower commissions and
marketing and personnel related expenses. Commission expense is lower as a
result of changes in commission structures for 2003. Personnel expense and
related travel decreases are a result of reductions in headcount of both sales
and marketing personnel.
Sales and marketing expense for the HCO unit decreased approximately $0.3
million and approximated 28.9% and 51.6% of revenues for the three months ended
March 31, 2003 and 2002, respectively. The percentage decreased due to the
increases in HCO revenues, reductions in commission expense primarily due to
changes in 2003 commission structure and decreases in both sales and marketing
personnel related expenses due to lower headcount. HCO marketing and advertising
expenses, excluding personnel, were comparable between periods. Sales and
marketing expenses for our PMD business unit decreased approximately $0.2
million, and approximated 17.4% and 32.5% of revenues for the three months ended
March 31, 2003 and 2002, respectively. The decreases resulted from personnel
related expenses due to both lower headcount and lower commission expenses
associated with lower headcount and changes in commission structure. PMD
marketing and advertising expenses, excluding personnel, declined slightly as
compared to 2002.
Depreciation and Amortization. Depreciation and amortization decreased
approximately $0.3 million, or 22.8%, from approximately $1.2 million for the
three months ended March 31, 2002 to $0.9 million for the three months ended
March 31, 2003. Depreciation expense decreased as a result of certain assets
becoming fully depreciated and declines in fixed asset acquisitions over the
past two years. Amortization declined as a result of certain intangible assets
and prepaid content becoming fully amortized.
Other General and Administrative. Other general and administrative expenses
decreased approximately $0.2 million, or 13.8%, from $1.6 million for the three
months ended March 31, 2002 to $1.4 million for the three months ended March 31,
2003. Other general and administrative expenses as a percentage of revenues
decreased from 46.7% for the three months ended March 31, 2002 to 32.2% for the
three months ended March 31, 2003. The decrease is a result of reductions in
personnel and other corporate operating expenses.
Other general and administrative expenses for the HCO business unit decreased
approximately $0.3 million, and approximated 1.1% and 13.4% of revenues for the
three months ended March 31, 2003 and 2002, respectively. The decrease for HCO
resulted from a redesignation of certain personnel to corporate as well as
headcount reductions. Other general and administrative expenses for the PMD
business unit decreased approximately $0.2 million and approximated 4.5% and
17.3% of revenues for the three months ended March 31, 2003 and 2002,
respectively. The decrease for PMD resulted from a redesignation of certain
personnel to corporate. Other general and administrative expenses for the
unallocated corporate functions increased approximately $0.2 million primarily
as a result of a redesignation of certain personnel to corporate and
redesignation of certain operating expenses. This realignment resulted in an
additional $0.4 million of unallocated expenses, which was partially offset by
certain headcount and operating expense reductions of $0.2 million resulting
from consolidating our corporate functions.
Other Income/Expense. Other income/expense decreased approximately $0.1 million,
or 50.5%, from $0.2 million for the three months ended March 31, 2002 to $0.1
million for the three months ended March 31, 2003. The decrease resulted from a
reduction of interest income from investments in marketable securities due to
lower invested balances and to a lesser degree, lower yield rates.
Net Loss. Net loss decreased approximately $7.0 million, or 83.9%, from $8.4
million for the three months ended March 31, 2002 to $1.4 million for the three
months ended March 31, 2003. Net loss before the cumulative effect of a change
in accounting principle of $5.0 million, decreased $2.0 million, or 60.4%, from
a loss of $3.4 million for the three months ended March 31, 2002 to a loss of
$1.4 million for the three months ended March 31, 2003 due to the factors
mentioned above.
12
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 used in operating activities was $0.7 million during the three months
ended March 31, 2003 and $2.4 million during the three months ended March 31,
2002. Cash used in operating activities during the three months ended March 31,
2003 resulted from the net loss of $1.4 million, an increase in accounts and
unbilled receivables and prepaid expenses and a decrease in accrued and
registration liabilities. These operating uses of cash were offset by decreases
in restricted cash, interest receivable and other assets, increases in accounts
payable and deferred revenue, as well as depreciation and amortization. Cash
used in operating activities during the three months ended March 31, 2002
related to the net loss before the cumulative effect of a change in accounting
principle of $3.4 million, increases in accounts and unbilled receivables, and
restricted cash, and decreases in accounts payable, accrued liabilities and
compensation. These operating uses of cash were offset by decreases in interest
receivable, increases in registration liabilities and deferred revenue as well
as depreciation and amortization.
Net cash provided by investing activities was $3.2 million during the three
months ended March 31, 2003 and $0.6 million for the three months ended March
31, 2002. Cash provided by investing activities during the three months ended
March 31, 2003 related to the proceeds from maturities of investments in
marketable securities of $3.5 million, offset by $0.3 million for the purchase
of property and equipment. Cash provided by investing activities during the
three months ended March 31, 2002 related to the excess of proceeds from sales
of investments over purchases of investments of $0.8 million, offset by $0.2
million of cash paid for property and equipment.
Cash used in financing activities was $30,000 for the three months ended March
31, 2003 and $50,000 for the three months ended March 31, 2002. Cash used in
financing activities during the three months ended March 31, 2003 and 2002
related to payments under capital lease obligations.
As of March 31, 2003, our primary source of liquidity was $18.8 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 April 30, 2003 we had cash and cash
equivalents, restricted cash, investments in marketable securities, and interest
receivable of approximately $17.8 million.
We believe that our existing cash and cash equivalents, restricted cash,
investments in marketable securities, and interest receivable will be sufficient
to meet anticipated cash needs for working capital, new product development,
capital expenditures and acquisitions for at least the next 12 months. Our
growth strategy may also include acquiring companies that complement our
products and services. We anticipate that these acquisitions, if any, will be
effected through a combination of issuance of our common stock and cash
consideration. Failure to generate sufficient cash flow from operations or raise
additional capital when required during or following that period in sufficient
amounts and on terms acceptable to us could harm our business, financial
condition and results of operations.
COMMITMENTS AND CONTINGENCIES
In connection with our October 2001 agreement with HCA Information Technology &
Services, Inc. ("HCA"), HCA will pay us minimum revenues of $12.0 million over
the four-year term of the agreement. We expect that our capital expenditures
will be approximately $1.0 to $1.2 million for the remainder of 2003.
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. In addition to these
commitments, we have capital lease obligations and operating lease commitments
for our operating facilities in Nashville, TN and Denver, CO, and closed
facilities in Dallas, TX and Raleigh, NC. There have been no changes, other than
scheduled payments, in the future anticipated payments for our commitments and
other contractual obligations reported in our Annual Report on Form 10-K for the
year ended December 31, 2002.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, and to a lesser
degree, we are exposed to foreign currency exchange rate risk on certain
transactions with our customers in Canada. We do not have any commodity price
risk. As of March 31, 2003, we had no outstanding indebtedness other than
approximately $80,000 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 that we invest. At
April 30, 2003, we had approximately $17.8 million of cash and cash equivalents,
restricted cash, investments in marketable securities, and accrued interest that
were invested in a combination of short term investments. At this investment
level, a hypothetical 10% decrease in the interest rate would decrease interest
income and increase net loss on an annualized basis by approximately $178,000.
At March 31, 2003, the average maturity for our investment portfolio
approximated eight months.
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
HealthStream's chief executive officer and chief financial officer have reviewed
and evaluated the effectiveness of HealthStream's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a
date within ninety days before the filing date of this quarterly report. Based
on that evaluation, the chief executive officer and chief financial officer have
concluded that HealthStream's disclosure controls and procedures effectively and
timely provide them with material information relating to HealthStream and its
consolidated subsidiaries required to be disclosed in the reports HealthStream
files or submits under the Exchange Act. There have not been any significant
changes in HealthStream's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses, and therefore no
corrective actions were taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A
signed original of this written statement required by Section
906 has been provided to HealthStream, Inc. and will be retained
by HealthStream, Inc. and furnished to the Securities and
Exchange Commission upon request)
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A
signed original of this written statement required by Section
906 has been provided to HealthStream, Inc. and will be retained
by HealthStream, Inc. and furnished to the Securities and
Exchange Commission upon request)
(b) Reports on Form 8-K
(1) The Company filed a report on Form 8-K on February 7, 2003 - Item
5 to disclose a summary of select business metrics.
(2) The Company filed a report on Form 8-K on February 25, 2003 - Item
9 to disclose the results for the fourth quarter ended December
31, 2002.
(3) The Company filed a report on Form 8-K on April 28, 2003 - Item 9
to furnish information pursuant to Item 12 related to the results
for the first quarter ended March 31, 2003.
14
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
May 15, 2003
15
CERTIFICATION
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ ROBERT A. FRIST, JR.
- --------------------------------------------
Robert A. Frist, Jr.
Chief Executive Officer
May 15, 2003
16
CERTIFICATION
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ ARTHUR E. NEWMAN
- --------------------------------------------
Arthur E. Newman
Chief Financial Officer
May 15, 2003
17
HEALTHSTREAM, INC.
EXHIBIT INDEX
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
18