LETTER TO
SHAREHOLDERS
F I N A N C I A L H I G H L I G H T S
Year Ended December 31,
(In thousands, except per share amounts)
Statement of Income Data:
Revenues
Operating costs and expenses
Income from operations
Other income (expense), net
Income before income taxes
Income tax (benefit)
Net income
Net income per share:
Basic
Diluted
Weighted average shares of common stock outstanding:
Basic
Diluted
Income before interest, taxes, share-based compensation,
depreciation and amortization (“adjusted EBITDA”(1)):
Net income
Interest, income taxes, share-based compensation, depreciation and amortization
Income before interest, income taxes, share-based compensation, depreciation
and amortization
2010
2009
$ 65,754
58,695
7,059
(21)
7,038
2,884
4,154
$
$ 57,398
52,276
5,122
(15)
5,107
(8,865)
$ 13,972
$
$
0.19
0.18
$
$
0.65
0.64
21,767
22,488
21,458
21,838
$
4,154
8,450
$ 13,972
(3,047)
$ 12,604
$ 10,925
(1)In order to better assess the Company’s financial results, management believes that income before interest, income taxes, share-based compensation,
depreciation and amortization (“Adjusted EBITDA”) is an appropriate measure for evaluating the operating performance of the Company at this stage in
its life cycle because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many
investors to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a
measure of financial performance under generally accepted accounting principles. Because adjusted EBITDA is not a measurement determined in
accordance with generally accepted accounting principles, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not
be comparable to other similarly titled measures of other companies.
Year Ended December 31,
(In thousands)
Balance Sheet Data:
Cash and cash equivalents
Investments in marketable securities – short term
Goodwill and intangible assets
Working capital
Total assets
Deferred revenue
Long-term debt and capital leases, net of current portion
Shareholders' equity
T O TA L R E V E N U E S (in $ millions)
2010
2009
$ 17,868
5,703
23,991
19,524
82,011
16,740
—
56,790
$ 12,287
—
24,938
10,714
71,002
12,234
4
51,821
20062007200820092010051015202530354045505560657057.465.851.631.843.9 L E T T E R T O S H A R E H O L D E R S
At HealthStream, we remain excited about the future of
healthcare—and the future of our Company. Last year,
2010, was an outstanding year for HealthStream as we
continued to offer our healthcare organization customers
learning and research solutions to improve their business and clini-
cal outcomes. More and more hospitals are turning to HealthStream
to develop their workforce, improve compliance, reduce risks, and
provide key insights about their organizations—all with the ultimate
goal of improving patient care.
In 2010, HealthStream continued to gain growth momentum, end-
ing the year with a 15 percent increase in revenues over 2009 to a record
total of $65.8 million. Operating income for 2010 was $7.1 million,
which was 38 percent higher than 2009, while adjusted ebitda (earn-
ings before interest, income taxes, share-based compensation, depre-
ciation, and amortization) improved to $12.6 million, which is 15
percent higher than 2009. We ended 2010 well capitalized with a $23.6
million cash and investment in market securities balance and full avail-
ability of our $15.0 million line of credit—which was subsequently
raised to $20.0 million in March of 2011—and which remains untapped.
At year-end 2010, approximately 2.45 million healthcare profes-
sionals—from healthcare organizations in all 50 states—were con-
tracted to use the HealthStream Learning Center® (hlc), our online
learning platform offered via software-as-a-service (SaaS). This means
that nearly half of healthcare professionals working in acute-care hos-
pitals in the United States were provided the opportunity—through
their respective organizations—to learn through the hlc. In 2010,
we contracted an annual record 377,000 new subscribers, or stated
differently, the equivalent of over 1,000 new subscribers each day.
Concurrent with expanding the number of healthcare organizations that
contract to use our learning platform, HealthStream is committed to
expanding the number and scope of solutions delivered to existing cus-
tomers. This is achieved through our delivery of the highest quality
courseware and add-on software applications. Our success in this process
in 2010 created leveraged growth for the third consecutive year, as evi-
denced by a growth in 2010 revenues of 15 percent over 2009 while oper-
ating income expanded by 38 percent during the same period.
HealthStream partners with healthcare industry leaders, highly regard-
ed professional medical and nursing associations, and other best-in-
class providers to offer healthcare organizations an outstanding array
of courseware to meet their regulatory, clinical, and business learn-
ing needs. Over 4,000 online courses from, collectively, 41 content
providers are offered by HealthStream, including Laerdal Medical,
the American Association of Critical Care Nurses (aacn), Lippin-
cott Williams & Wilkins, Healthcare Information and Management
Systems Society (himss), and Harvard Business Publishing. Togeth-
er, in 2010, our hospital customers completed over 22 million
courses and loaded over 2.5 billion pages on our learning platform.
Along with adding courseware, our healthcare organization customers
can choose to expand services they receive from HealthStream with
add-on software applications, such as the Authoring Center™ and the
HealthStream Competency Center™ (hcc). The Authoring Center
provides full-service capabilities to create online courses by con-
verting existing course material or self-authored new materials and,
in turn, offering the new courses through the hlc. At year-end 2010,
approximately 80 percent of our learning customers had contracted
to use the Authoring Center in their organizations.
The hcc, our SaaS competency management solution for healthcare
organizations, allows us to offer our customers tools to assess com-
petency and appraise performance. Competency assessment is a
requirement of healthcare organizations for maintaining accredita-
tion, based on requirements from The Joint Commission to evalu-
ate, document, and report performance competencies. In 2010, we
released a set of significant enhancements to the hcc that included
features to enable large, multi-facility enterprises to more effective-
ly manage their competency and performance initiatives across all of
their facilities.
To further support our healthcare organization customers, Health-
Stream is broadening its offering of assessment tools for healthcare
professionals. In 2010, HealthStream was selected by the American
Academy of Pediatrics (aap) to develop and offer the online exami-
nations that are required in the Neonatal Resuscitation Program (nrp).
Launch of the online examinations is expected in 2011. Beginning in
2012, the nrp lesson examination will be available exclusively
online through the aap’s partnership with HealthStream.
HealthStream’s research solutions complement our learning product
and service offerings by providing healthcare organizations with Patient
Insights,™ Employee Insights,™ Physician Insights,™ and Communi-
ty Insights™ surveys, data analyses of survey results, and a powerful
benchmarking capability to analyze results more meaningfully. For
full-year 2010, revenues from our research solutions increased seven
percent over 2009, with approximately half of those revenues derived
from our patient survey, Patient Insights, a product that generates
recurring revenues.
In 2010, HealthStream launched a new analytics and reporting
website, Insights Online,™ to provide actionable information to health-
care leaders based on data solicited through HealthStream’s research
solutions. Insights Online offers a robust data warehouse that pro-
vides dashboards, expansive analytic capabilities, and advanced fil-
tering and exporting options for customers’ reporting needs. We
believe Insights Online delivers a dynamic tool for healthcare lead-
ers to access the right information to make the right decisions to
improve outcomes in their organizations.
Industry-wide, interest continues to increase in research due, in part,
to regulatory measures recently announced by the Centers for Medicare
and Medicaid Services (cms). In partnership with the Agency for
Healthcare Research and Quality, cms requires hospitals to submit
data for a series of required quality measures—which include the
hcahps (Hospital Consumer Assessment of Healthcare Providers
and Systems) survey—in order to receive the full market basket increase
to their reimbursement payment rates. Beginning in 2012, reimburse-
ment rates will begin to take into account healthcare organizations’
scores on both the required quality measures and hcahps. This devel-
opment is a result of cms’ larger vision to initiate “value-based pur-
chasing (vbp),” which links payment more directly to the quality of
care provided. As a cms-certified vendor for the cahps® Hospital Sur-
vey and the cahps® Home Health Care Survey, we offer our cus-
tomers a range of tools to support their compliance with requirements
from cms. In the first quarter of 2011, we launched the vbp Report
Card,™ which offers meaningful analyses through a variety of nation-
al and local market benchmarks for comparison against individual
facility hcahps scores.
HealthStream and Laerdal Medical, a global leader in the provision
of educational solutions for healthcare providers—including advanced
patient simulators—formed a joint venture, SimVentures, in 2010.
The joint venture will offer products and services aimed at accelerat-
ing the global adoption of simulation-based learning by healthcare
providers—with a focus on improving clinical competencies and
patient outcomes. In the first quarter of 2011, we announced the glob-
al launch of SimCenter,™ an innovative simulation management plat-
form designed specifically for healthcare organizations to manage
their simulation initiatives. Also announced in the first quarter was
SimStore,™ one of the components of SimCenter, that—beginning
in the second quarter of 2011—will offer healthcare providers an oppor-
tunity to sample and purchase simulation scenarios to use in their
simulation training activities. We anticipate launching all of the com-
ponents of SimCenter in 2011.
In 2010, HealthStream’s board of directors was strengthened with the
additions of C. Martin Harris, M.D. and Deborah Taylor Tate. Dr.
Harris is currently the chief information officer and chairman of the
Information Technology Division of Cleveland Clinic Foundation,
while concurrently serving as a staff physician for Cleveland Clinic
Hospital. As former commissioner of the Federal Communications
Commission, Ms. Tate presently serves on the national board of direc-
tors for the Centerstone Research Institute and as a distinguished sen-
ior fellow at the Free State Foundation, assistant professor at Vanderbilt
School of Nursing, and executive-in residence at Lipscomb Univer-
sity. Their distinguished careers and expertise bring additional promi-
nence and leadership to the Company.
As HealthStream’s prominence grows in the marketplace, interest
in the Company grows, accordingly. In 2010, four research invest-
ment firms launched independent research coverage of HealthStream:
Avondale Partners, Sidoti & Company, Craig-Hallum Capital Group,
and First Analysis Securities Corporation. These research investment
firms join Noble Financial Group, who has covered HealthStream
since 2006.
The management team is grateful to the board of directors and our
employees for their energy and commitment. We also thank you, as
fellow investors in HealthStream, for your investment in the Compa-
ny. If you are a long-term investor, we greatly appreciate your consis-
tency through the years; if you are a more recent investor, welcome to
the Company and thank you for the support your investment provides.
Sincerely,
Robert A. Frist, Jr.
Chairman and Chief Executive Officer
D I R E C T O R S A N D O F F I C E R S
D I R E C T O R S
Robert A. Frist, Jr.
Chief Executive Officer, President, and
Chairman of the Board of Directors
HealthStream, Inc.
Jeffrey L. McLaren
Chief Executive Officer
Medaxion LLC
Thompson S. Dent
Executive Chairman
Re:Cognition Health Ltd.
William W. Stead, M.D.
Associate Vice Chancellor for Health Affairs /
Chief Strategy & Information Officer
Vanderbilt University Medical Center
Linda E. Rebrovick
Chief Executive Officer
Consensus Point
Frank E. Gordon
Managing Partner
Crofton Capital
Michael Shmerling
Chairman
Choice Food Group, Inc.
Dale W. Polley
Past President
First American Corporation
C. Martin Harris, M.D.
Chief Information Officer, Chairman
Information Technology Division
Staff Physician, Internal Medicine
Cleveland Clinic
Deborah Taylor Tate
Former Commissioner
Federal Communications Commission
E X E C U T I V E O F F I C E R S
Robert A. Frist, Jr.
Chief Executive Officer, President, and
Chairman of the Board of Directors
Arthur E. Newman
Executive Vice President
Gerard M. Hayden, Jr.
Chief Financial Officer and Senior Vice President
J. Edward Pearson
Senior Vice President and President, HealthStream Research
Kevin P. O’Hara
Senior Vice President, General Counsel & Corporate Secretary
Jeffrey S. Doster
Senior Vice President and Chief Technology Officer
Michael J. Sousa
Senior Vice President
2010 marked 20 years
since HealthStream
was founded and
10 years since it
went public.
LETTERTOSHAREHOLDERS C O R P O R A T E D A T A
A N N U A L M E E T I N G
The annual meeting of shareholders will be held on May 26, 2011 at
2:00 p.m. (cdt) at HealthStream, Inc., 209 10th Avenue South,
Suite 450, Nashville, Tennessee 37203.
C O R P O R A T E S T O C K
HealthStream, Inc.’s common stock is traded on the NASDAQ
Stock Market under the symbol HSTM. The following table shows the
quarterly range of high and low closing sales prices of the common
stock from 2008.
I N D E P E N D E N T A U D I T O R S
Ernst & Young llp
Nashville, Tennessee
T R A N S F E R A G E N T
Computershare
250 Royall Street
Canton, Massachusetts 02021
(800) 962-4284
L E G A L C O U N S E L
Bass, Berry & Sims plc
Nashville, Tennessee
C O R P O R A T E H E A D Q U A R T E R S
HealthStream, Inc.
209 10th Avenue South, Suite 450
Nashville, Tennessee 37203
F O R M 1 0 - K
A copy of the Company’s Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission, is being mailed with this let-
ter. Additional copies of the Company’s Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission, are available
without exhibits, free of charge, to its shareholders. Requests should
be addressed to Mollie Condra, Investor Relations Department, Health-
Stream, Inc., 209 10th Avenue South, Suite 450, Nashville, Tennessee
37203.
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
HIGH
LOW
$ 3.37
3.20
3.07
2.76
$ 2.40
2.74
5.21
4.65
$ 4.27
4.85
5.32
8.04
$ 2.77
2.57
2.33
2.01
$ 1.70
2.01
2.56
3.75
$ 3.47
4.05
4.39
5.11
$ 8.13
$ 6.76
As of March 4, 2011, HealthStream, Inc. had approximately 4,947 share-
holders, including 125 shareholders of record and 4,822 persons or enti-
ties holding common stock in nominee name.
The Company has never declared or paid any cash dividends on its
common stock and does not anticipate paying cash dividends in the
foreseeable future. HealthStream intends to retain earnings to finance
the expansion of its operations.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements (all statements other than those made
solely with respect to historical fact) within the meaning of Section 21E of the Secu-
rities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These
forward-looking statements are subject to known and unknown risks and uncertain-
ties (some of which are beyond the Company’s control) that could cause actual results
to differ materially and adversely from those anticipated in the forward-looking state-
ments. See the Company’s 10-K filing for more detailed disclosure regarding forward-
looking statements and associated risks and uncertainties.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-27701
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
209 10th Avenue South, Suite 450
Nashville, Tennessee
(Address of principal executive offices)
62-1443555
(I.R.S. Employer Identification No.)
37203
(Zip Code)
(615) 301-3100
(Registrant's telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
Title of each class
Common Stock, No Par Value
Name of each Exchange on which registered
NASDAQ Global Market
Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the Registrant, based upon the closing sales price
for the Common Stock on the NASDAQ Global Market on June 30, 2010 was $71,681,232. All executive officers and directors of the registrant have
been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.
As of March 22, 2011, there were 21,931,535 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2011 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
HEALTHSTREAM, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business..........................................................................................................................................................
Risk Factors....................................................................................................................................................
Unresolved Staff Comments..........................................................................................................................
Properties........................................................................................................................................................
Legal Proceedings..........................................................................................................................................
(Removed and Reserved) ..............................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ....................................................................................................................................
Selected Financial Data. ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................
Quantitative and Qualitative Disclosures About Market Risk......................................................................
Financial Statements and Supplementary Data.............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................
Controls and Procedures ................................................................................................................................
Other Information ..........................................................................................................................................
Directors, Executive Officers and Corporate Governance............................................................................
Executive Compensation ...............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...
Certain Relationships and Related Transactions, and Director Independence.............................................
Principal Accounting Fees and Services .......................................................................................................
Exhibits, Financial Statement Schedules.......................................................................................................
Signatures.......................................................................................................................................................
Page
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PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,”
“intends,” “believes,” “may,” “will,” “should,” “continue” and similar language or the negative of such terms or other comparable
terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, HealthStream’s actual
results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section “Risk Factors” in Item 1A of this Annual Report on Form 10-K
and elsewhere in this document. In addition, factors that we are not currently aware of could harm our future operating results. You
should carefully review the risks described in other documents HealthStream files from time to time with the Securities and Exchange
Commission. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this
Annual Report on Form 10-K. HealthStream undertakes no obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document.
Item 1. Business
OVERVIEW AND HISTORY
HealthStream, Inc. (HealthStream or the Company) provides Internet-based learning and research solutions for healthcare
organizations—all designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of
business and clinical outcomes. Our learning products are used by healthcare organizations to meet a broad range of their training,
certification, and development needs, while our research products provide our customers information about patients’ experiences,
workforce engagement, physician relations, and community perceptions of their services. HealthStream’s customers include
healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. Our
customer base across both our learning and research business units includes over 2,500 healthcare organizations (predominately
acute-care facilities) throughout all 50 states of the United States.
The Company’s core learning product is the HealthStream Learning Center® (HLC), our proprietary learning platform provided
through the Internet via software-as-a-service. At December 31, 2010, HealthStream had approximately 2.45 million contracted,
primarily hospital-based subscribers, to the HLC. We deliver educational activities and training courseware to our customers through
the HLC platform. Our research products and service offerings include quality and satisfaction surveys, data analyses of survey
results, and other research-based measurement tools focused on patients, physicians, employees, and members of the community. The
Company’s core research product is the Patient Insights™ survey, which accounts for approximately half of our research product
business.
Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its Internet-based solutions in
1999 and its survey and research solutions in 2005. Including an additional office in Laurel, Maryland, HealthStream had 356 full-
time and 76 part-time employees as of December 31, 2010. HealthStream has evolved from a company with an initial focus on
technology-based training to a company providing outcomes-focused learning and research solutions to the nation’s healthcare
providers.
INDUSTRY BACKGROUND
According to the deputy director of the National Health Statistics Group at the Centers for Medicare and Medicaid Services (CMS),
spending in the healthcare industry reached approximately $2.5 trillion in 2009, or 17.6 percent of the gross domestic product. Hospital
care expenditures accounted for approximately 30 percent of the $2.5 trillion industry. Approximately 14.3 million professionals are
employed in the healthcare segment of the domestic economy, with approximately 5.3 million employed in acute-care hospitals, our
target market for our learning and research products. As of December 31, 2010, approximately 2.45 million, or 46 percent, of these
healthcare professionals were contracted to use our Internet-based HLC platform.
All of the 5.3 million hospital-based healthcare professionals that work in the nation’s approximately 5,000 acute-care hospitals are
required by federal mandates and accrediting bodies to complete training in a number of areas. This training includes safety training
mandated by both the Occupational Safety and Health Administration (OSHA) and The Joint Commission (an independent, not-for-profit
organization that accredits and certifies healthcare organizations and programs in the United States), as well as training on patient
information confidentiality required under the Health Insurance Portability and Accountability Act (HIPAA).
In hospitals, staffing issues and personnel shortages have also contributed to the need for facility based workforce development as well as
additional assessment and competency based training. For example, the American Hospital Association (AHA)’s report “Workforce
2015: Strategy Trumps Shortage” (January 2010) indicates that the shortfall of registered nurses in 2025 will be 260,000 FTEs and the
shortage of physicians in 2020 will be 109,000. We believe that offering training and education for hospital personnel is increasingly
being utilized as a retention and recruitment incentive.
Many healthcare professionals use continuing education to keep abreast of the latest developments and meet licensing, certification, and
credentialing requirements. Continuing education requirements include continuing education for nurses, emergency medical services
1
personnel, first responder personnel, radiologic personnel, and physicians. Pharmaceutical and medical device companies must also
provide their medical industry sales representatives with training mandated for the healthcare industry and training for new products.
Such companies also provide support for education and training for those audiences that use their products in healthcare organizations.
A large portion of the nation’s hospitals utilize research and survey tools to gain valuable insight about patients’ experiences, to assess
workforce competency and engagement, to determine the status of physician relations, and to measure the perceptions about the hospitals
in the communities they serve. Industry-wide, interest is increasing in research, due, in part, to the CAHPS® (Consumer Assessment of
Healthcare Providers and Systems) Hospital Survey launched by CMS in partnership with the Agency for Healthcare Research and
Quality (AHRQ). Hospitals must submit data to CMS for certain required quality measures—which for inpatients includes the CAHPS®
Hospital Survey—in order to receive the full market basket increase to their reimbursement payment rates from CMS. Hospitals that fail
to submit this survey data will incur a reduction of two percentage points in the inpatient market basket update amount for the following
federal fiscal year. We are designated as a certified vendor and offer CAHPS® Hospital Survey services.
Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of reductions in government
reimbursement rates and increased focus on cost containment consistent with participation of patients in managed care programs. In
addition, hospitals, as well as pharmaceutical and medical device companies, continue to experience rising operating costs, coupled with
increased pressure to measure and report on the outcomes of the dollars spent on training. Our products and services are designed to meet
these needs by reducing healthcare organizations' costs of training while improving learning outcomes, enhancing reporting capabilities,
and supporting customers’ business objectives.
HEALTHSTREAM'S SOLUTIONS
HealthStream’s products and services are organized into two segments, 1) HealthStream Learning and 2) HealthStream Research, which
collectively help healthcare organizations meet their ongoing training, education, assessment, and compliance needs. Our objective is to
better support our healthcare organization customers in their efforts to transform insight into action as they measure and benchmark key
data points for their constituencies and then to incorporate the results into training and improvement programs through our learning
products.
HealthStream Learning
Within HealthStream Learning, we bring training and education content together with administrative and management tools through our
Internet-based platforms, the HealthStream Learning Center® and a more streamlined version, HealthStream Express™. We offer our
Internet-based platform customers a wide array of additional courseware subscriptions. Our learning management system supports
healthcare administrators in configuring training to meet the precise needs of different groups of employees, modifying training materials,
and documenting that training has been completed. At December 31, 2010, 2.45 million healthcare professionals had contracted
subscriptions for our Internet-based HLC services. Pricing for the HLC is subscription based, with fees based on the number of
subscribers, courseware provided, and other factors. We offer training, implementation, and account management services to facilitate
adoption of our platform. Fees for training are based on the time and efforts of the personnel involved. Implementation fees vary based
on the size, scope, and complexity of the project.
Our Internet-based platform and our courseware are hosted in a central data center that allows authorized subscribers Internet access to
our services, thereby eliminating the need for onsite local implementations of installed learning management products.
Along with the Internet-based HLC, we also offer healthcare organizations full-service capabilities to create online courses by converting
their existing course material, self-author new materials through our Authoring Center product, and electively share these materials with
other HealthStream customers through a courseware exchange. We also offer Authoring Pro, an upgraded product which includes an
industry leading image library, owned by A.D.A.M., Inc., as an additional subscription to this product. Pricing for these products is
subscription based, with fees based on the number of subscribers and level of penetration of services.
The HealthStream Competency Center™ (HCC), our software-as-a-service competency management solution for healthcare
organizations, allows us to offer our customers tools to assess competency and appraise performance. Competency assessment is a
requirement of hospitals and healthcare organizations for maintaining accreditation, based on requirements from The Joint Commission
to evaluate, document, and report performance competencies. We believe that the HCC offers an effective means of determining which
competencies are associated with each position and evaluating and documenting competency assessments.
During 2010, we released a set of significant enhancements to the HCC. These enhancements included features to enable large, multi-
facility enterprises to more effectively manage competency and performance initiatives across all of their facilities and will, therefore,
serve the growing competency management needs of our larger customers.
HealthStream and Laerdal Medical A/S, a Norwegian limited stock company formed a collaborative arrangement in 2010—named
SimVentures—to offer products and services aimed at accelerating the global adoption of simulation-based learning by healthcare
providers—with a focus on improving clinical competencies and patient outcomes. The new venture will offer healthcare organizations
and medical & nursing schools, worldwide, a range of fully integrated software-as-a-service applications that accelerate development
and distribution of simulation content; enable enterprise-wide management of simulation centers, simulators, and programs; and support
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assessment of the effectiveness of simulation training as part of complete curricula. Our new simulation management platform,
SimCenter™, was announced in January 2011 and will be launched at a later date in 2011.
Through HospitalDirect™, we develop, manage, and distribute online, print education, and training activities for provider-based
healthcare professionals and physicians, as well as online education and training activities for sales representatives. Certain of the
education activities we develop and distribute provide continuing education credit for healthcare professionals completing them. Pricing
for these products varies based on the size, scope, and nature of the project. Most of these activities are supported by either
pharmaceutical or medical device companies.
Our strategy for HealthStream Learning is to continue adding subscribers to our Internet-based HLC, while expanding penetration of
courseware offerings to existing accounts, providing add-on software applications (e.g. HCC, Authoring Center, SimCenter, etc.),
developing new tools, and penetrating other professional services across our customer base.
HealthStream Research
HealthStream Research complements HealthStream Learning’s product and service offerings by providing hospital-based customers with
Patient Insights™, Employee Insights™, Physician Insights™, and Community Insights™ surveys, data analyses of survey results, and
other research-based measurement tools. Our services are designed to provide thorough analyses with insightful recommendations for
change; to provide benchmarking capability using our comprehensive databases; and to provide consulting services to identify solutions
for our customers based on their survey results. Clients are able to access and analyze their survey results data through Insights Online™,
our secure web-based reporting platform. Our survey and research solutions focus on providing industry-leading, statistically valid data to
assist our customers with their decision making related to their organization’s performance improvement objectives. In addition to
collecting and reporting data, we provide expert analysis and consulting to help customers understand their survey results and the
underlying impact on their business. It is with this insight that healthcare organizations are able to develop plans for improved
performance that is able to be delivered through HealthStream’s learning solutions. Pricing for these services is based on the survey type,
delivery method, size of the survey instrument, sample size, frequency of survey cycles, and other factors.
To further support our customers, HealthStream offers the HealthStream Improvement Center™, an online system for hospital leaders to
optimize and accelerate the execution of improvement plans—including those plans based on results from patient, employee, physician,
and community surveys. The Improvement Center is one among a storehouse of solutions from HealthStream Research that include a
comprehensive line of survey products, national benchmarks, HCAHPS Improvement Library, consulting services, and other support
tools.
Our strategy for HealthStream Research includes continuing to grow our customer base, expanding the products and services provided to
each customer, and introducing HealthStream Learning solutions to address survey research findings. We will continue to expand our
offering of research and assessment tools that are aligned with healthcare quality initiatives and continuous improvement efforts.
CUSTOMERS
We provide our learning and research solutions to customers across a broad range of entities within the healthcare industry, including
healthcare organizations (including government entities) and pharmaceutical and medical device companies. We derive a substantial
portion of our revenues from a relatively small number of customers, although no single customer represented more than 10 percent
of our revenues during 2010, 2009, or 2008. Examples of customers that have purchased or contracted for products and services from
HealthStream include: HCA, Inc., Tenet Healthcare Corporation, Catholic Health Initiatives, Community Health Systems, Inc., Lifepoint
Hospitals, Inc., Ardent Health Services, LLC, and Baxter Healthcare Corporation.
SALES AND MARKETING
We market our products and services primarily through our direct sales teams, our consultants, and our account relationship managers,
who are based at our corporate headquarters in Nashville, Tennessee and in our additional office located in Laurel, Maryland, as well as
remote home office sales locations. As of December 31, 2010, our HealthStream Learning sales and relationship management personnel
consisted of 54 employees—of which 45 carried sales quotas—and our HealthStream Research sales and consultant personnel consisted
of 25 employees—of which 15 carried sales quotas. As of December 31, 2009, our HealthStream Learning sales and relationship
management personnel consisted of 49 employees—of which 40 carried sales quotas—and our HealthStream Research sales and
consultant personnel consisted of 22 employees—of which 12 carried sales quotas. Our geographically dispersed field sales organization
is divided into one team focused on selling our learning products and a separate sales team focused on selling our research products. In
addition to sales professionals, we also employ strategic account personnel that manage our largest customer relationships as well as
account relationship managers and consultants who work to develop and expand relationships, including contract renewals.
We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups—including
our annual customer Summit, trade shows, online promotion and demonstrations, telemarketing campaigns, public relations, distribution
of product-specific literature, direct mail, and advertising.
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Over most of the last ten years, we have hosted a conference in Nashville for our customers known as “The Summit.” We have utilized
this client conference to reach out to existing and potential customers and business partners, provide training and educational services,
and demonstrate our new and existing product offerings. We have marketing teams that are responsible for these initiatives and for
working with and supporting our product management and sales teams. At December 31, 2010, our marketing personnel consisted of 16
employees.
OPERATIONS
We believe our ability to establish and maintain long-term customer relationships, adoption of our products and services, recurring sales,
and development and maintenance of new and existing products are dependent on the strength of our operations, customer service,
product development and maintenance, training, and other support teams. As of December 31, 2010, these personnel consisted of
approximately 100 employees for our Learning segment and approximately 206 employees for our Research segment, of which 127
employees worked in our interviewing center. Our Learning operations team consists of personnel associated with customer support,
implementation services, product development and maintenance, training, and project management. Our Research operations team
consists of personnel associated with phone interviewing, distributing and processing paper-based survey instruments, data analysis and
reporting of survey results, and project management.
TECHNOLOGY MANAGEMENT
Our services are designed to be reliable, secure, and scalable. Our software is a combination of proprietary and commercially available
software and operating systems. Our software supports hosting and management of content, publication of our web sites, execution of
courseware, registration and tracking of users, collection, sampling, and analysis of survey data, and reporting of information for both
internal and external use. We designed the platforms that provide our services to allow each component to be independently scaled by
adding commercially available hardware and a combination of commercially available and proprietary software components.
Our software applications, servers, and network infrastructure that deliver the majority of our services are hosted by third party data
center providers. Our primary data center is located at a tier-four rated hosting facility in Chicago, Illinois, and our disaster recovery data
center is hosted by a separate provider located in Franklin, Tennessee. Both of our providers maintain our equipment in secure, limited
access environments, supported by redundant power, environmental conditioning, and network connectivity. Our providers’ hosting
centers are connected to the Internet through multiple, redundant, high-speed fiber optic circuits. The transactional systems supporting the
data collection for our survey products are located in secure, limited access environments located at our Nashville, Tennessee and Laurel,
Maryland offices and feed our core business intelligence platforms supporting our survey products located at our primary hosting facility
in Chicago. Company personnel monitor all servers, networks, and systems on a continuous basis. Together with our providers, we
employ several levels of enterprise firewall systems and data abstraction to protect our databases, customer information, and courseware
library from unauthorized access. All of our production data located in our Chicago data center is backed up in real time to our disaster
recovery data center. Monthly snap-shots of our data are stored off site with a third party data storage provider.
COMPETITION
The healthcare education industry is highly fragmented, varies significantly in delivery methods (i.e., written materials, live events, video,
CD-ROM products, manikins, and online products), and is composed of a wide variety of entities competing for customers. The sheer
volume of healthcare information available to satisfy continuing education needs, rapid advances in medical developments, and the time
constraints that healthcare professionals face make it difficult to quickly and efficiently access the continuing education content most
relevant to an individual's practice or profession. Historically, healthcare professionals have received continuing education and training
through offline publications, such as medical journals and CD-ROMs, and by attending conferences and seminars. In addition, other
healthcare workers and pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usually fulfill their
education and training needs through instructor-led programs from external vendors or internal training departments. While these
approaches satisfy the ongoing education and training requirements, they are typically costly and inconvenient. In addition, live courses
are often limited in the breadth of offerings and do not provide a method for tracking training completion. The results of these traditional
methods, both from a business and compliance standpoint, are difficult to track and measure. While hospitals and health systems
occasionally survey their patients, physicians, and employees using their own internal resources, the practice is limited since they do not
typically possess the valuable comparative benchmarking data that is available from independent survey research vendors.
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In addition to the competing delivery methods described above, we also have direct competitors. A number of companies offer
competitive learning management products to the healthcare industry. We compete with learning management system providers such as
SABA, Taleo, Plateau Systems, Cornerstone OnDemand, and SumTotal Systems that provide their services to multiple industries,
including healthcare. We also compete with large medical publishers that have operating units that offer learning management systems
that focus on healthcare, including Cengage Learning’s Net Learning and Reed Elsevier Group’s MC Strategies. In the survey business,
we see competition from large nationally recognized survey research firms such as Press Ganey Associates, National Research
Corporation, Gallup, and others. Our survey business also experiences direct competition from vendors who provide survey research
services to other industries including Kenexa and Foresight. Finally, in our SimVentures joint venture, we expect to compete with B-Line
Medical, CAE, and Medical Education Technologies, Inc.
We believe our learning solutions, which include both products and services that facilitate training for healthcare professionals, a wide
assortment of courseware, a mechanism for measuring satisfaction and/or other results, and the ability to provide all our services on a
single platform over the Internet, provide us with a competitive advantage. In our survey research business, we believe our large
proprietary database of survey results, technology infrastructure designed to automate the processing of survey results, proprietary core
survey instruments and action plan development methodology, and our ability to quickly deliver relevant online courseware targeted at
addressing survey related findings provide us with a competitive advantage. We believe that the principal competitive factors affecting
the marketing of our learning and research solutions to the healthcare industry include:
features of the HLC product, including reporting, management functionality, ability to manage a variety of events or
modalities, courseware assignment, curriculum management, scalability, and the ability to track utilization and results;
scope and variety of Internet-based learning courseware available, including mandated content for OSHA, The Joint
Commission, patient safety, and HIPAA requirements, competency-based content, as well as the ability of our
customers to create and host their own web-enabled courseware;
our singular focus on the healthcare industry and our deep healthcare expertise;
scope and quality of professional services offered, including survey execution, implementation, benchmarking, training
and the expertise and technical knowledge of the customers’ employees;
competitive pricing, which supports a return on investment when compared to other alternative delivery methods;
customer service and support;
effectiveness of sales and marketing efforts; and
company reputation.
Collectively, we believe these capabilities provide us with the ability to improve the quality of healthcare by assessing and developing the
people who deliver care.
GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY
Regulation of the Internet and the Privacy and Security of Personal Information
The laws and regulations that govern our business change rapidly. For example, the United States government and the governments of
some states and foreign countries have attempted to regulate activities on the Internet. The following are some of the evolving areas of
law that are relevant to our business:
Privacy and Security Laws. Current and proposed federal, state and foreign privacy and security regulations and other
laws restricting the collection, use, security and disclosure of personal information could limit our ability to collect
information or use and disclose the information in our databases or derived from other sources to generate revenues. It
may be costly to implement security or other measures designed to comply with any new legislation. For example, the
American Recovery and Reinvestment Act of 2009 (ARRA) has expanded the application of certain HIPAA privacy
and security requirements to apply directly to us as a business associate of our customers.
Encryption Laws. Many copyright owner associations have lobbied the federal government for laws requiring
copyrighted materials transmitted over the Internet to be digitally encrypted in order to track rights and prevent
unauthorized use of copyrighted materials. If these laws are adopted, we may incur substantial costs to comply with
these requirements or change the way we do business.
Content Regulation. Both foreign and domestic governments have adopted and proposed laws governing the content
of material transmitted over the Internet. These include laws relating to obscenity, indecency, libel and defamation.
We could be liable if content delivered by us violates these regulations.
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Information Security Accountability Regulation. As a business associate of our customers, we are required to report
certain breaches of unsecured protected health information to our customers, which must in turn notify affected
individuals, HHS and, in certain situations involving large breaches, the media. In addition, we are subject to
certain state laws that relate to privacy or the reporting of security breaches that are more restrictive than the
requirements of AARA. For example, California has enacted legislation requiring disclosure of security breaches
involving personal information and medical information. We may incur costs to comply with these security
requirements. Because many of these laws are new and there is little guidance related to many of these laws, it is
difficult to estimate the cost of our compliance with these laws. Further, Congress has considered bills that would
require companies to engage independent third parties to audit the companies’ computer information security. If the
Company is required to make a public announcement regarding a breach of security or if one of the Company’s
customers is required to make a public announcement in connection with a breach of security by the Company, the
Company’s business could be negatively impacted.
Sales and Use Tax. Through December 31, 2010, we collected sales, use or other taxes on taxable transactions in all
states in which we have employees or have a significant level of sales activity. While HealthStream expects that this
approach is appropriate, other states or foreign jurisdictions may seek to impose tax collection obligations on
companies like us that engage in online commerce. If they do, these obligations could limit the growth of electronic
commerce in general and limit our ability to profit from the sale of our services over the Internet.
Laws and regulations directly applicable to e-commerce, Internet communications, and the privacy and security of personal information
are becoming more prevalent. Congress continues considering laws regarding Internet taxation. The dynamic nature of this regulatory
environment increases the uncertainty regarding the marketplace impact of such regulation. The enactment of any additional laws or
regulations may increase our cost of conducting business or otherwise harm our business, financial condition and operating results.
Regulation of Education, Training and Other Services for Healthcare Professionals
Occupational Safety and Health Administration (OSHA). OSHA regulations require employers to provide training to employees to
minimize the risk of injury from various potential workplace hazards. Employers in the healthcare industry are required to provide
training with respect to various topics, including blood borne pathogens exposure control, laboratory safety and tuberculosis infection
control. OSHA regulations require employers to keep records of their employees' completion of training with respect to these workplace
hazards.
The Joint Commission. The Joint Commission mandates that employers in the healthcare industry provide certain workplace safety and
patient interaction training to employees. Training required by The Joint Commission may include programs on infection control, patient
bill of rights, radiation safety, and incident reporting. Healthcare organizations are required to provide and document training on these
topics to receive accreditation from The Joint Commission. In addition, The Joint Commission imposes continuing education
requirements on physicians that relate to each physician's specific staff appointments.
Health Insurance Portability and Accountability Act (HIPAA). HIPAA regulations require certain organizations, including most
healthcare providers and health plans, to adopt safeguards regarding the use and disclosure of health-related information. HIPAA
regulations also require organizations that maintain or transmit health information electronically in connection with certain transactions to
provide reasonable and appropriate safeguards to protect the privacy, integrity and confidentiality of individually identifiable healthcare
information. These healthcare organizations are required to establish, maintain and provide training with regard to their policies and
procedures for protecting the integrity and confidentiality of individually identifiable healthcare information. Healthcare organizations are
required to document training on these topics to support their compliance. ARRA expanded the application of certain HIPAA privacy and
security requirements to apply directly to companies (known as business associates) that provide services to certain healthcare
organizations.
The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides
individuals and organizations throughout the nursing profession with the resources they need to achieve practice excellence. ANCC's
internationally renowned credentialing programs certify nurses in specialty practice areas; recognize healthcare organizations for
promoting safe, positive work environments through the Magnet Recognition Program® and the Pathway to Excellence® Program;
and accredit providers of continuing nursing education. In addition, ANCC’s Institute for Credentialing Innovation® offers an array
of informational and educational services and products to support its core credentialing programs. ANCC certification exams validate
nurses’ skills, knowledge, and abilities. More than a quarter million nurses have been certified by ANCC since 1990. More than
80,000 advanced practice nurses are currently certified by ANCC. The ANCC Magnet Recognition Program® recognizes healthcare
organizations that provide the very best in nursing care and professionalism in nursing practice. The program also provides a vehicle
for disseminating best practices and strategies among nursing systems. The ANCC Magnet Recognition Program is the gold standard
for nursing excellence. The Pathway to Excellence® Program recognizes the essential elements of an optimal nursing practice
environment. The designation is earned by healthcare organizations that create work environments where nurses can flourish. The
award substantiates the professional satisfaction of nurses and identifies best places to work.
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Continuing Nursing Education (CNE). State nurse practice laws are usually the source of authority for establishing the state board of
nursing requirements. The state board of nursing establishes the state's CNE requirements for professional nurses. CNE credits are
provided through accredited providers that have been approved by the American Nurses Credentialing Center (ANCC) Commission on
Accreditation and/or the state board of nursing. CNE requirements vary widely from state to state. Thirty-two states require registered
nurses to certify that they have accumulated a minimum number of CNE credits in order to maintain their licenses. In some states, the
CNE requirement only applies to re-licensure of advance practice nurses, or additional CNEs may be required of this category of nurses.
Required CNE ranges from 12 to 50 credits annually, with reporting generally on a bi-annual basis. Board certifications (e.g., CNOR –
certification of perioperative nursing) also require CNE credits, with certain percentages required in specific categories based on the
certification type. We are an accredited provider of CNE by the ANCC.
Continuing Medical Education (CME). State licensing boards, professional organizations and employers require physicians to certify that
they have accumulated a minimum number of continuing medical education hours to maintain their licenses. Generally, each state's
medical practice laws authorize the state's board of medicine to establish and track CME requirements. Forty-eight state medical
licensing boards currently have CME requirements, as well as Puerto Rico, Guam, and the U.S. Virgin Islands. The number of CME
hours required by each state ranges from 12 to 50 hours per year. Other sources of CME requirements are state medical societies and
practice specialty boards. The failure to obtain the requisite amount and type of CME could result in non-renewal of the physician's
license to practice medicine and/or membership in a medical or practice specialty society. The American Medical Association’s (AMA)
Physician Recognition Award certificate (PRA) is widely accepted as proof of participation in CME. The AMA classifies continuing
medical education activities as either Category 1, which includes formal CME activities, or Category 2, which includes most informal
activities. Sponsors want to designate CME activities for AMA PRA Category 1 Credit™ because this has become the benchmark for
quality in formally organized educational activities. Most agencies nationwide that require CME participation specify AMA PRA
Category 1 Credit™. Only institutions and organizations accredited to provide CME can designate an activity for AMA PRA Category 1
Credit™. The Accreditation Council for Continuing Medical Education (ACCME) is responsible for awarding accreditation status to
state medical societies, medical schools, and other institutions and organizations that provide CME activities for a national audience of
physicians. Only institutions and organizations are accredited. The ACCME and state medical societies do not accredit or approve
individual activities. State medical societies, operating under the aegis of the ACCME, accredit institutions and organizations that provide
CME activities primarily for physicians within the state or bordering states. We are an accredited provider of CME by the ACCME.
Centers for Medicare & Medicaid Services (CMS). CMS has articulated a vision for health care quality—the right care for every
person every time. To achieve this vision, CMS is committed to care that is safe, effective, timely, patient-centered, efficient, and
equitable. Medicare’s current payment systems reward quantity, rather than quality of care, and provide neither incentive nor support
to improve quality of care. Value-based purchasing (VBP), which links payment more directly to the quality of care provided, is a
strategy that can help to transform the current payment system by rewarding providers for delivering high quality, efficient clinical
care. Through a number of public reporting programs, demonstration projects, pilot programs, and voluntary efforts, CMS has
launched VBP initiatives in hospitals, physician offices, nursing homes, home health services, and dialysis facilities.
Consumer Assessment of Healthcare Providers and Systems (CAHPS). CMS has partnered with AHRQ to develop a standardized survey
instrument and data collection methodology for measuring patients’ perspectives on hospital care. The intent of the survey is to produce
comparable data on the patients’ perspectives to allow consumer-based comparisons between hospitals, align incentives to drive hospitals
to improve their quality of care, and increase the transparency of hospital reporting. Hospitals must submit data for certain required
quality measures—which for inpatients includes the CAHPS® Hospital Survey—in order to receive the full market basket increase to
their reimbursement payment rates from CMS. While hospital participation is voluntary, hospitals that fail to submit this survey data will
incur a reduction of two percentage points in the inpatient market basket update amount for the following federal fiscal year. We have
received certified vendor designation and will continue to offer CAHPS® Hospital Survey services. In addition, we are a certified vendor
approved to offer CAHPS® Home Health Care Survey used to measure the experiences of people receiving home health care from
Medicare-certified home health agencies.
Medicare and Medicaid EHR Incentive Programs. The Medicare and Medicaid EHR Incentive Programs will provide incentive
payments to eligible professionals, eligible hospitals and critical access hospitals (CAHs) as they adopt, implement, upgrade or
demonstrate meaningful use of certified EHR technology. The Medicare and Medicaid EHR Incentive Programs provide a financial
incentive for the "meaningful use" of certified EHR technology to achieve health and efficiency goals. By putting into action and
meaningfully using an EHR system, providers will reap benefits beyond financial incentives–such as reduction in errors, availability
of records and data, reminders and alerts, clinical decision support, and e-prescribing/refill automation.
Allied Disciplines. Various allied health professionals are required to obtain continuing education to maintain their licenses. For example,
emergency medical services personnel may be required to acquire up to 20 continuing education hours per year, all or a portion of which
can be fulfilled online. These requirements vary by state and depend on the classification of the employee.
Other Continuing Education. We are also an accredited provider of continuing education and continuing pharmacy education by the
Association of Surgical Technologists, Inc. (AST) and the Accreditation Council for Pharmacy Education (ACPE), respectively.
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Regulation of Educational Program Sponsorship and Support
The Office of Inspector General (OIG) issued Compliance Program Guidance for Pharmaceutical Manufacturers in April 2003 and
issued Compliance Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry in July 1999
(collectively, the Guidelines). These documents include guidelines related to continuing educational activities supported by
pharmaceutical and medical device companies. The Guidelines already have and may continue to affect the type and extent of
commercial support we receive for our continuing education activities. The trade associations for the pharmaceutical and medical
device industries (PhRMA and AdvaMed, respectively) have also promulgated their own codes of ethics. In January 2009, the
PhRMA code of ethics was updated, and AdvaMed made changes to its code of ethics that became effective in July 2009. These
changes placed further restrictions on the interactions between industry and health care professionals. The AMA has established its
own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for the medical profession. The
Company follows the rules and guidelines provided by ACCME, ANCC, and other continuing education accrediting bodies to ensure
that its continuing education programming is free from commercial bias and consistent with the Guidelines.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of
2010 (collectively, ACA) became law. ACA requires manufacturers of drugs and devices to annually report to the Department of
Health and Human Services anything of value, including educational programs, given by such manufacturers to physicians beginning
March 31, 2013. It is difficult to predict the impact of this provision of ACA on us due to lack of implementing regulations or
interpretive guidance, gradual and potentially delayed implementation of the requirement, and, pending court challenges and possible
amendment or repeal of the law.
The U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC)
Current FDA and FTC rules and enforcement actions and regulatory policies or those that the FDA or the FTC may develop in the future
could have a material adverse effect on our ability to provide existing or future applications or services to our end users or obtain the
necessary corporate sponsorship to do so. The FDA and the FTC regulate the form, content and dissemination of labeling, advertising and
promotional materials, including direct-to-consumer prescription drug and medical device advertising, prepared by, or for,
pharmaceutical, biotechnology or medical device companies. The FTC regulates over-the-counter drug advertising and, in some cases,
medical device advertising. Generally, regulated companies must limit their advertising and promotional materials to discussions of the
FDA-approved claims and, in limited circumstances, to a limited number of claims not approved by the FDA. Therefore, any information
that promotes the use of pharmaceutical or medical device products that is presented with our services is subject to the full array of the
FDA and FTC requirements and enforcement actions. We believe that banner advertisements, sponsorship links and any educational
programs that lack independent editorial control that we may present with our services could be subject to FDA or FTC regulation. While
the FDA and the FTC place the principal burden of compliance with advertising and promotional regulations on the advertiser, if the
FDA or FTC finds that any regulated information presented with our services violates FDA or FTC regulations, they may take regulatory
action against us or the advertiser or sponsor of that information. In addition, the FDA may adopt new regulatory policies that more
tightly regulate the format and content of promotional information on the Internet.
Other Government Regulations
It is likely that we will be required to comply with Section 404(b) of the Sarbanes-Oxley Act in the calendar year 2011.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements and
procedures with employees, consultants and other third parties, license agreements with consultants, vendors and customers, and control
access to our software, documentation and other proprietary information. We own Federal trademark and service mark registrations for
the marks “HEALTHSTREAM”, “HOSPITAL DIRECT”, “OR PROTOCOL”, “INSIGHT INTO ACTION”, and “QUALITY
CHECK.” We have also obtained registration of the “HEALTHSTREAM” mark in certain other countries. Applications for several
trademarks are currently pending, however, there can be no assurance that we will be successful in obtaining registration of other
trademarks for which we have applied.
The courseware that we license to our customers is developed through a combination of license agreements with publishers or authors,
assignments and work-for-hire arrangements with third parties, and development by employees. We require publishers, authors and other
third parties to represent and warrant that their content does not infringe on or misappropriate any third-party intellectual property rights
and that they have the right to provide their content and have obtained all third-party consents necessary to do so. Our publishers, authors
and other third parties also agree to indemnify us against certain liability we might sustain due to the content they provide.
If a third party asserts a claim that we have infringed its patents or other intellectual property, we may be required to redesign our
products or enter into royalty or licensing agreements. In addition, we license technologies from third parties for incorporation into our
services. Royalty and licensing agreements with these third parties may not be available on terms acceptable to us, if at all. Additionally,
the steps we have taken to protect our intellectual property and proprietary rights may not be adequate. Third parties may infringe or
misappropriate our intellectual property. Competitors may also independently develop technologies that are substantially equivalent or
superior to the technologies we employ in our products or services. If we fail to protect our proprietary rights adequately, our competitors
could offer similar services, potentially significantly harming our competitive position and decreasing our revenues.
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AVAILABLE INFORMATION
The Company files reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from
time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. The Company is an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports,
proxy and information statements, and other information filed electronically. Our website address is www.healthstream.com. Please note
that our website address is provided as an inactive textual reference only. We make available free of charge through our website, the
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website
is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced
elsewhere in this report.
OUR EMPLOYEES
As of December 31, 2010, we employed 356 full-time and 76 part-time persons, including approximately 127 employees in our
interviewing center. Our success will depend in large part upon our ability to attract and retain qualified employees. We face competition
in this regard from other companies, but we believe that we maintain good relations with our employees. We are not subject to any
collective bargaining agreements.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a brief summary of the business experience of each of the executive officers of the Company. Officers of the Company
are elected by the Board of Directors and serve at the pleasure of the Board of Directors. The following table sets forth certain
information regarding the executive officers of the Company:
Age
Name
Robert A. Frist, Jr. ........................ 43
Jeffrey S. Doster ........................... 46
Gerard M. Hayden, Jr................... 56
Arthur E. Newman ....................... 62
J. Edward Pearson ........................ 48
Kevin P. O’Hara........................... 41
Michael Sousa .............................. 42
Position
Chief Executive Officer, President and Chairman of the Board of Directors
Senior Vice President and Chief Technology Officer
Senior Vice President and Chief Financial Officer
Executive Vice President
Senior Vice President and President of HealthStream Research™
Senior Vice President, General Counsel, and Compliance Officer
Senior Vice President
Robert A. Frist, Jr., one of our co-founders, has served as our chief executive officer and chairman of the board of directors since 1990
and president since 2001. Mr. Frist is the company’s chief operating decision maker, and has primary responsibility and oversight of
HealthStream Learning. He graduated with a Bachelor of Science in business with concentrations in finance, economics and marketing
from Trinity University.
Jeffrey S. Doster joined the Company in May 2008 as senior vice president and chief technology officer. From November 2006 to May
2008, he served as principal at The Altus Group LLC, a business consulting company. From March 2005 to October 2006, he served as
senior vice president and chief technology officer at The Shop at Home Network, LLC, a television shopping company. From October
2000 to April 2004, he served as senior vice president of information technology at New Roads, Inc., a provider of fulfillment and other
services to retailers. He earned undergraduate degrees in both Economics and Business Administration from Towson University, as well
as a Master of Business Administration from Loyola College, in Maryland.
Gerard M. Hayden, Jr. joined the Company as senior vice president and chief financial officer in May 2008. From April 2007 to May
2008, he served as executive vice president and chief financial officer of MedAvant Healthcare Solutions, a healthcare transaction
processing company. From January 2005 to April 2007, he was a consultant for various healthcare, technology and other business
ventures. From November 2001 to January 2005, he served as chief financial officer for Private Business, Inc., a company offering
marketing and software solutions to regional and community banks in the United States. He earned a Bachelor of Arts from the
University of Notre Dame and a Master of Science from Northeastern University. Mr. Hayden served on the Company’s Board of
Directors and was a member of the Audit Committee from September 2006 to May 2008.
Arthur E. Newman joined the Company in January 2000, and is currently our Executive Vice President. Previously he served as our chief
financial officer and senior vice president from January 2000 to March 2006. He holds a Bachelor of Science in chemistry from the
University of Miami and a Master of Business Administration from Rutgers University.
J. Edward Pearson joined the company in June 2006 as senior vice president, responsible for our survey and research business and was
named president of HealthStream Research™ during 2007. From June 2003 to June 2006, he served as president and chief executive
officer of DigiScript, an Internet-based training and communication solutions provider for the life sciences industry. He earned a
Bachelor of Business Administration in accounting from Middle Tennessee State University.
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Kevin P. O’Hara joined the company in January 2002, and was promoted to senior vice president and general counsel in February 2007.
He assumed compliance officer responsibilities during August 2007. He previously served as vice president for the company. He earned a
Bachelor of Arts degree and a J.D. from Vanderbilt University.
Michael Sousa joined the company in October 2004, and was promoted to senior vice president in January 2010. He previously served as
vice president for the Company, with responsibilities for our strategic accounts program within HealthStream Learning. He earned a
Bachelor of Science degree from Boston College and a Master of Business Administration from Boston University.
Item 1A. Risk Factors
We believe that the risks and uncertainties described below and elsewhere in this document are the principal material risks facing the
Company as of the date of this report. In the future, we may become subject to additional risks that are not currently known to us. Our
business, financial condition or results of operations could be materially adversely affected by any of the following risks and by any
unknown risks. The trading price of our common stock could decline due to any of the following risks or any unknown risks.
Risks Related to Our Business Model
We may be unable to effectively execute our growth strategy which could have an adverse effect on our business and competitive
position in the industry.
Our business strategy includes increasing our market share and presence through sales to new customers, additional sales to existing
customers, introductions of new products and services, and maintaining strong relationships with our existing customers. Some of the
risks that we may encounter in executing our growth strategy include:
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expenses, delays and difficulties of identifying and developing new products or services and integrating such new
products or services into our existing organization;
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inability to leverage our operational and financial systems sufficiently to support our growth;
inability to generate sufficient revenue from new products to offset investment costs;
inability to effectively identify, manage and exploit existing and emerging market opportunities;
inability to maintain our existing customer relationships;
increased competition from new and existing competitors;
lengthy sales cycles, or customers delaying purchasing decisions due to economic conditions;
reduced spending within the training, information and education departments of hospitals within our target market; and
failure of the market for training, information and education in the healthcare industry to grow to a sufficient size or at a
sufficient rate.
If any of these risks are realized, our business, and our competitive position in the industry, could suffer.
We may be unable to effectively identify, complete or integrate the operations of future acquisitions, joint ventures or other growth
investments.
As part of our growth strategy, we actively review possible acquisitions, joint ventures or growth investments that complement or
enhance our business. We may not be able to identify, complete or integrate the operations of future acquisitions, joint ventures or
other growth investments. In addition, if we finance acquisitions, joint ventures or other growth initiatives by issuing equity securities,
our existing shareholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate
and execute acquisitions and investments, our business prospects may be seriously harmed. Some of the risks that we may encounter
in implementing our acquisition, joint venture or growth investment strategies include:
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expenses, delays or difficulties in identifying and integrating acquired companies or joint venture operations or other
growth investments into our organization;
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inability to retain personnel associated with acquisitions, joint ventures, or other growth investments;
diversion of management’s attention from other initiatives to effectively execute our growth strategy; and
inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, or other growth
investments to offset our investment costs.
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Our ability to accurately forecast revenue for certain products and services may be hindered by customer scheduling.
As revenues from our subscription business continue to increase, a larger portion of our revenues will be predictable; however,
quarterly performance may be more subject to fluctuations. Our HealthStream Research products and services are typically contracted
by healthcare organizations for multi-year terms, but the frequency, sample size, and timing of survey cycles can vary from quarter to
quarter and year to year. Also, other project-based products, such as certain content development, and professional services, are
subject to the customers’ involvement in the provision of the product or service. The timing and magnitude of these project-based
product and service contracts may vary widely from quarter to quarter and year to year, and thus may affect our ability to accurately
forecast quarterly and annual financial performance.
Our ability to accurately forecast revenue may be affected by lengthy and widely varying sales cycles.
The period from our initial contact with a potential customer and the first purchase of our solution by the customer typically ranges
from three to nine months, and in some cases has extended much further. The range in the sales cycle can be impacted by multiple
factors, including an increasing trend towards more formal request for proposal (RFP) processes and more competition within our
industry, as well as formal budget timelines which impact timing of purchases by target customers. New products tend to have a
longer and more unpredictable revenue ramp period. Also, the contract structure for some Research products gives customers latitude
about when to initiate a survey, which can affect quarterly or annual revenue forecasts. As a result of these factors, we have only
limited ability to forecast the timing and type of initial sales. This, in turn, makes it more difficult to forecast quarterly and annual
financial performance.
We may not be able to maintain our competitive position against current and potential competitors, especially those with
significantly greater financial, technical, marketing, or other resources.
Several of our competitors and many potential competitors have longer operating histories and significantly greater financial,
technical, marketing, or other resources than we do. We encounter direct competition from both large and small e-learning companies
and other companies focused on training and talent management in the healthcare industry. We also face competition from larger
survey and research companies. Given the profile and growth of the healthcare industry and the growing need for education, training,
simulation, research, and information, it is likely that additional competitors will emerge. We believe we maintain a competitive
advantage against our competitors by offering a comprehensive array of products and services; however, our lack of market
diversification resulting from our concentration on the healthcare industry may make us susceptible to losing market share to our
competitors who also offer a complete e-learning solution to a cross-section of industries. These companies may be able to respond
more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Further, most of our
customer agreements are for terms ranging from one to four or five years, with no obligation to renew. The short terms of these
agreements enable customers to more easily shift to one of our competitors.
The failure to maintain and strengthen our relationships with strategic partners or significant changes in the terms of the
agreements we have with them may have an adverse impact on our ability to successfully market our products and services.
We have entered into contracts with other companies, including content, technology, and retail channel vendors. Our ability to
increase the sales of our products and services depends in part upon maintaining and strengthening relationships with these current
and future strategic partners. Most of these contracts are on a non-exclusive basis. Certain strategic partners may offer products and
services from multiple distinct companies, including, in some instances, products or services which may compete with our products
and services. Moreover, under contracts with some of our strategic partners, we may be bound by provisions that restrict our ability to
market and sell our products and services to certain potential customers. The success of these contractual arrangements will depend in
part upon the strategic partners’ own competitive, marketing, and strategic considerations, including the relative advantages of using
alternative products being developed and marketed by them or our competitors.
We can not guarantee that we will be able to strengthen our relationships with strategic partners or that such relationships will be
successful in generating additional revenue. If any of these strategic partners are unsuccessful in their involvement with our products
and services, or seek to amend the financial or other terms of the contracts we have with them, we will need to broaden our efforts to
increase focus on the solutions they sell and alter our development, integration, and/or distribution strategies, which may divert our
planned efforts and resources from other projects.
Lastly, we could be subject to claims and liability, as a result of the activities, products, or services of these strategic partners. Even if
these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in
adverse publicity that could harm our business.
We may not be able to retain proper distribution rights from our content partners, and this could affect projected growth in
courseware subscription revenue.
Most of our agreements with content providers are for initial terms of two to three years. The content partners may choose not to
renew their agreements with us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant
number of our content providers terminate or fail to renew their agreements with us on acceptable terms, it could result in a reduction
in the number of courses we are able to distribute, causing decreased revenues. Most of our agreements with our content partners are
non-exclusive, and our competitors offer, or could offer, training and continuing education content that is similar to or the same as
ours. If publishers and authors, including our current content partners, offer information to users or our competitors on more favorable
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terms than those offered to us, or increase our license fees, our competitive position and our profit margins and prospects could be
harmed. In addition, the failure by our content partners to deliver high-quality content and to revise their content in response to user
demand and evolving healthcare advances and trends could result in customer dissatisfaction and inhibit our ability to attract and
retain subscribers of our courseware offerings.
We may not be able to develop new products and services, or enhancements to our existing products and services, or be able to
achieve widespread acceptance of new products, services or features, or keep pace with technological developments.
We expect to generate revenue growth through sales to new customers as well as increasing sales of additional courseware
subscriptions and other products and services to existing customers. Our identification of additional features, content, products and
services may not result in timely development of complementary products. In addition, the success of certain new products and
services may be dependent on continued growth in our base of Internet-based customers and we are not able to accurately predict the
volume or speed with which old and new customers will adopt such new methodology. Because healthcare training continues to
change and evolve, we may be unable to accurately predict and develop new products, features, content and other products to address
the needs of the healthcare industry. Further, the new products, services and enhancements we develop may introduce significant
defects into our core software platforms. While all new products and services are subject to testing and quality control, all software is
subject to error. If we release new products, services and/or enhancements with bugs, defects or errors or that cause bugs, defects or
errors in existing products, it could result in lost revenues, reduced ability to meet contractual obligations and would be detrimental to
our business and reputation. If new products, features, or content are not accepted by new or existing customers, we may not be able
to recover the cost of this development and our financial performance will be harmed. Continued growth of our Internet-based
customer population is dependent on our ability to continue to provide relevant products and services in a timely manner. The success
of our business will depend on our ability to continue providing our products and services as well as enhancing our courseware,
product and service offerings that address the needs of healthcare organizations.
We may be unable to continue to license our third party software, on which a portion of our product and service offerings rely, or
we may experience errors in this software, which could increase our costs and decrease our revenue.
We use licensed third party technology components in some of our products. Future licenses to this technology may not be available
to us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these licenses could result in
delays in the introduction of new products and services or could force us to discontinue offering portions of our learning management
or survey and research solutions until equivalent technology, if available, is identified, licensed and integrated. The operation of our
products would be impaired if errors occur in the third party technology or content that we incorporate, and we may incur additional
costs to repair or replace the defective software. It may be difficult for us to correct any errors in third party software because the
software is not within our control. Accordingly, our revenue could decrease and our costs could increase in the event of any errors in
this technology. Furthermore, we may become subject to legal claims related to licensed technology based on product liability,
infringement of intellectual property or other legal theories.
Financial Risks
A significant portion of our revenue is generated from a relatively small number of customers.
We derive a substantial portion of our revenues from a relatively small number of customers. A termination of our agreements with
our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, would have a material
adverse effect on our business.
A significant portion of our business is subject to renewal each year. Therefore, renewals have a significant impact on our
revenue and operating results.
For the year ended December 31, 2010, approximately 65 percent of our net revenue was derived from our Internet-based subscription
products. Our Internet-based HLC customers have no obligation to renew their subscriptions for our products or services after the
expiration of the subscription agreement, and in fact, some customers have elected not to renew their subscription. In addition, our
customers may renew at a lower pricing or activity level. During the year ended December 31, 2010, we renewed 101% of the annual
HLC contract value up for renewal and 100% of the subscribers which were up for renewal. Because a significant portion of our
customer contracts have only renewed three or fewer times, we do not have sufficient historical data to accurately predict future
customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including but not
limited to their dissatisfaction with our service, pricing or competitive product offerings. If we are unable to renew a substantial
portion of the contracts that are up for renewal or maintain our pricing, our revenue could be adversely affected, which would have a
material adverse affect on our results of operations and financial position. HealthStream Research product and service contracts
typically range from one to three years in length, and customers are not obligated to renew their contract with us after their contract
expires. Because Research customers have only renewed three or fewer times we do not have sufficient historical data to accurately
predict customer renewal rates. If our customers do not renew their arrangements for our services, or if their activity levels decline,
our revenue may decline and our business will suffer.
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We may be unable to accurately predict the timing of revenue recognition from sales activity as it is often dependent on achieving
certain events or performance milestones, and this inability could impact our operating results.
Our ability to recognize revenue is dependent upon several factors including the transfer of customer-specific information such as
unique subscriber IDs, which are required for us to implement customers on our Internet-based learning platform. Accordingly, if
customers do not provide us with the specified information in a timely manner, our ability to recognize revenue will be delayed,
which could adversely impact our operating results. In addition, completion and acceptance by our customers of developed content
and courseware must be achieved, survey responses must be received and tabulated, and utilization of courseware is required in
connection with subscription Internet-based learning products for us to recognize revenue.
Because we recognize revenue from subscriptions for our products and services over the term of the subscription period,
downturns or upturns in sales may not be immediately reflected in our operating results.
We recognize approximately 65 percent of our revenue from customers monthly over the terms of their subscription agreements,
which have initial contract terms ranging from one to three years, although terms can range from less than one to up to five years. As
a result, much of the revenue we report in each quarter is related to subscription agreements entered into during previous quarters.
Consequently, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the
revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost
structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our
products and services may not be fully reflected in our results of operations until future periods. Additionally, our subscription model
also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers
must be recognized over the applicable subscription term. Finally, the majority of costs associated with sales are incurred up front,
and therefore unexpected successes in platform and courseware sales may increase our costs in the near term negatively affecting our
financial performance.
We may not be able to meet our strategic business objectives unless we obtain additional financing, which may not be available to
us on favorable terms, or at all.
We expect our current cash reserves, revolving credit facility, and results of operations to be sufficient to meet our cash requirements
through at least 2011. However, we may need to raise additional funds in order to:
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develop new, or enhance existing, services or products;
respond to competitive pressures;
finance working capital requirements;
acquire complementary businesses, technology, content or products, or
otherwise effectively execute our growth strategy.
At December 31, 2010, we had approximately $23.6 million in unrestricted cash, cash equivalents, investments in marketable
securities and related interest receivable. We also have up to $15.0 million of availability under a revolving credit facility, subject to
certain covenants, which expires in July 2011. We expect to incur approximately $6.0 million of capital expenditures, software
feature enhancements and content purchases during 2011 to support our business. We continue to actively review possible business
acquisitions that would complement or enhance our products and services. We may not have adequate cash and investments or
availability under our revolving credit facility to consummate one or more of these acquisitions. The capital markets have been
experiencing extreme volatility and disruption, and we cannot assure you that if we need additional financing that it will be available
on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund
expansion, take advantage of available opportunities, develop or enhance services or products or otherwise respond to competitive
pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage
ownership of our existing shareholders may be reduced.
We have significant goodwill and identifiable intangible assets recorded on our balance sheet that may be subject to impairment
losses that would reduce our reported assets and earnings.
As of December 31, 2010, our balance sheet included goodwill of $21.1 million and identifiable intangible assets of $2.8 million.
Economic, legal, regulatory, competitive, contractual, and other factors could result in future declines in the operating results of our
business units or market value declines that do not support the carrying value of goodwill and identifiable intangible assets. If any of
these factors impair the value of these assets, accounting rules require us to reduce their carrying value and report an impairment
charge, which would reduce our reported assets and earnings for the period in which an impairment is recognized.
Our stock price is likely to be volatile.
The market price of our common stock is likely to be volatile and could be subject to significant fluctuations in response to factors
such as the following, many of which are beyond our control: quarterly variations in our operating results; operating results that vary
from the expectations of securities analysts and investors; changes in expectations regarding our future financial performance;
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changes in market valuations of other online service companies; future sales of our common stock; stock market price and volume
fluctuations; general political and economic conditions, such as a recession or war or terrorist attacks or interest rate or currency rate
fluctuations; and other risk factors described in this Annual Report on Form 10-K. Moreover, our stock is thinly traded, and we have a
relatively small public float. These factors may adversely affect the market price of our common stock. In addition, the market prices
for stocks of many Internet related and technology companies have historically experienced significant price fluctuations that in some
cases appear to bear no relationship to the operating performance of these companies.
The current uncertain economic environment may have a negative impact on our customers and us which could have a significant
impact on our revenue, operating results and financial condition.
It is difficult to predict the full magnitude and duration of the current uncertain economic environment and its related impact on our
customers, suppliers and our company. For example, our customers may experience fluctuations or declines in their business and as a
consequence, some customers may choose to invest less in information technology assets for their business which, in turn, could have
an impact on us. The potential negative effects on us include, but are not limited to, reductions in our renewal and revenue growth
rates, shorter contract terms, pricing pressures, and delays in payments from customers that increase our accounts receivable resulting
in a deterioration of our cash flow and working capital position. We continue to monitor general economic conditions, however, and
depending on the severity and/or duration of any economic downturn, these circumstances could have a material adverse effect on our
revenue, results from operations and financial condition.
We may not be able to demonstrate compliance with Sarbanes-Oxley Section 404 in a timely manner, and the correction of any
deficiencies identified during upcoming annual audits may be costly and could harm our business.
Sarbanes-Oxley Section 404 requires our management to report on, and may require our independent public accounting firm to attest
to, the effectiveness of our internal controls over financial reporting. It is likely that we will be required to comply with the reporting
requirements under Sarbanes-Oxley Section 404(b) in the 2011 calendar year since the Company’s public float currently exceeds the
$75 million threshold for becoming an accelerated filer. The rules governing the standards to be met are complex and will require
significant process review, documentation and testing, as well as possible remediation efforts for any identified deficiencies. This
process of review, documentation, testing and remediation will result in increased expenses and require significant attention from
management and other internal and external resources. Any material weaknesses identified during this process may preclude us from
asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediate the
issues identified in a timely manner.
Changes in generally accepted accounting principles (GAAP) and other accounting regulations and interpretations could require
us to delay recognition of revenue and/or accelerate the recognition of expenses, resulting in lower earnings.
While we believe we correctly account for and recognize revenue and expenses, any changes in GAAP or other accounting
regulations and interpretations concerning revenue and expense recognition could decrease our revenue or increase our expenses.
Changes to regulations concerning revenue recognition could require us to alter our current revenue accounting practices and cause us
to either defer revenue into a future period, or to recognize lower revenue in a current period. Likewise, changes to regulations
concerning expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition of
expense into a future period, or to recognize increased expenses in a current period. Changes to either revenue recognition or expense
recognition accounting practices could affect our financial performance.
Risks Related to Sales, Marketing and Competition
Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted
by our customers and the market.
Over the past few years we have implemented several changes, and we continue to make changes, in our pricing and our product and
service offerings to increase revenue and to meet the needs of our customers. We cannot predict whether our current pricing and
products and services, or any ongoing refinements we make will be accepted by our existing customer base or by prospective
customers. If our customers and potential customers decide not to accept our current or future pricing or product and service
offerings, it could have a material adverse effect on our business.
Risks Related to Operations
We may be unable to adequately develop our systems, processes and support in a manner that will enable us to meet the demand
for our services.
We have provided our online products and services since 1999 and continue to develop our ability to provide our courseware, learning
management systems, and research systems on both a subscription and transactional basis over the Internet. Our future success will
depend on our ability to effectively develop and maintain the infrastructure, including additional hardware and software, and
implement the services, including customer support, necessary to meet the demand for our services. Our inability from time to time to
successfully develop the necessary systems and implement the necessary services on a timely basis has resulted in our customers
experiencing some delays or interruptions in their service. Such delays or interruptions may cause customers to become dissatisfied
with our service and move to competing providers of traditional and online training and education services. If this happens, our
revenue could be adversely affected, which would have a material adverse effect on our financial condition.
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Our business operations could be significantly disrupted if we lose members of, or fail to integrate, our management team.
Our future performance is substantially dependent on the continued services of our management team and our ability to retain and
motivate them. The loss of the services of any of our officers or senior managers could harm our business, as we may not be able to
find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chief executive
officer, and we do not maintain any “key person” life insurance policies.
We may not be able to hire and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively
execute our growth strategy or maintain the quality of our services.
Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial,
marketing, customer support, and survey personnel. Competition for certain personnel is intense, especially for developers, web
designers and sales personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have experienced
difficulty in the past hiring qualified personnel in a timely manner for these positions. The pool of qualified technical personnel, in
particular, is limited in Nashville, Tennessee, where our headquarters are located. Our interviewing center is located in Laurel,
Maryland, and we may experience difficulty in maintaining and recruiting qualified individuals to perform these services. We will
also need to maintain or increase the size of our staff to support our anticipated growth, without compromising the quality of our
offerings or customer service. Our inability to locate, hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our services and impair our ability to grow.
We may not be able to upgrade our hardware and software technology infrastructure quickly enough to effectively meet demand
for our services.
We must continue to obtain reasonably priced, commercially available hardware and operating software as well as continue to
enhance our software to accommodate the increased use of our platform and increased courseware in our library. In order to make
timely decisions about hardware and software enhancements, we must be able to accurately forecast the growth in demand for our
services. This growth in demand for our services is difficult to forecast and the potential audience for our services is large. If we are
unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand, our customers may
encounter delays or disruptions in their service. Unscheduled downtime could harm our business and also could discourage current
and potential customers from using or continuing to use our services and reduce future revenue.
Our network infrastructure and computer systems and software may fail.
An unexpected event including but not limited to a telecommunications failure, fire, earthquake, or other catastrophic loss at our
Internet service providers’ facilities or at our on-site data facility could cause the loss of critical data and prevent us from offering our
products and services for an unknown period of time. Our business interruption insurance may not adequately compensate us for
losses that may occur. In addition, we rely on third parties to securely store our archived data, house our web server and network
systems and connect us to the Internet. While our service providers have planned for certain contingencies, the failure by any of these
third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our ability to access
archives and operate our systems and software.
We may lose users and lose revenue if our security measures fail.
If the security measures that we use to protect customer or personal information are ineffective, we may lose users of our services,
which could reduce our revenue. We rely on security and authentication technology licensed from third parties. With this technology,
we perform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We
cannot predict whether these security measures could be circumvented by new technological developments. Further, the audit
processes and controls used within our production platforms may not be sufficient to identify and prevent errors or deliberate misuse.
In addition, our software, databases and servers may be vulnerable to computer viruses, physical or electronic attacks and similar
disruptions. We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any
breaches. We cannot assure that we can prevent all security breaches.
We may experience errors in our software products that administer and report on hospital performance, and these errors could
result in action taken against us that could harm our business.
Certain survey data collected and reported by us, such as the survey data included as part of our CAHPS® Hospital survey is used by
the Centers for Medicare and Medicaid Services (CMS) to determine, in part, the amount of reimbursement payments to hospitals,
and any errors in data collection, survey sampling, or statistical reporting could result in reduced reimbursements to our hospital
customers if we are unable to correct these errors, and this could, in turn, result in litigation against us. Further, this survey data
reported to CMS is then published by CMS to the general public, and any errors we experience which result in incorrect scoring on
our hospital customer may result in damage to that hospital’s reputation, and the hospital may in turn bring litigation against us. We
may be required to indemnify against such claims, and defending against any such claims could be costly and time consuming and
could negatively affect our business.
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Risks Related to Government Regulation, Content and Intellectual Property
Government regulation may require us to change the way we do business.
The laws and regulations that govern our business change rapidly. Evolving areas of law that are relevant to our business include
privacy and security laws, proposed encryption laws, content regulation, information security accountability regulation, and sales and
use tax laws and regulations and attempts to regulate activities on the Internet. Because of this rapidly evolving and uncertain
regulatory environment, we cannot predict how these laws and regulations might affect our business. These uncertainties make it
difficult to ensure compliance with the laws and regulations governing or impacting our business. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do business. In addition, certain laws mandate that our customers
contractually require us to protect the privacy and security of certain personal and health related information. If we fail to abide by
these required contractual provisions, our customers may terminate their contracts with us. In addition, ARRA recently expanded the
application of certain of the HIPAA privacy and security regulations to apply directly to business associates including us. Violations
of HIPAA privacy and security regulations may result in civil and criminal penalties. Further, ARRA has increased these penalties
and strengthened other enforcement provisions of HIPAA, which may result in increased enforcement activity. See “Business -
Government Regulation of the Internet and the Healthcare Industry” for a more complete discussion of these laws and regulations.
We may not be able to maintain our certification to conduct CMS mandated surveys, and this could adversely affect our business.
Our survey product offerings include providing survey services to assist customers in their compliance with CMS regulations. We are
currently designated by CMS as a certified vendor to offer CAHPS® Hospital Surveys and CAHPS® Home Health Care Surveys,
including data collection and submission services. If we are unable to maintain these certifications, or secure certifications for future
CMS mandated surveys, we would not be able to administer these survey instruments for our customers and our business may suffer.
Any reduction or change in the regulation of continuing education and training in the healthcare industry may adversely affect
our business.
Our business model is dependent in part on required training and continuing education for healthcare professionals and other
healthcare workers resulting from regulations of state and Federal agencies, state licensing boards and professional organizations.
Any change in these regulations that reduce the requirements for continuing education and training for the healthcare industry could
harm our business. In addition, a portion of our business with pharmaceutical and medical device manufacturers and hospitals is
predicated on our ability to maintain accreditation status with organizations such as the ACCME, ANCC, and ACPE. The failure to
maintain status as an accredited provider could have a detrimental effect on our business.
Changes to government and industry standards and regulations regarding pharmaceutical and medical device customers could
negatively affect our business in these areas.
In April 2003, the OIG issued “OIG Compliance Program Guidance for Pharmaceutical Manufacturers.” In July 1999, the OIG issued
“Compliance Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry.” These guidelines
collectively identify three areas of risks for pharmaceutical and medical device companies and recommend certain best practices to be
included in a compliance plan designed to avoid the risk of federal healthcare program abuse. The guidance highlighted a number of
arrangements that have the potential to trigger fraud and abuse violations, including educational grants. In April 2007, the U.S. Senate
Finance Committee released a report critical of practices related to the funding of educational programs by pharmaceutical
manufacturers. In March 2010, ACA became law. As enacted, ACA will change how health care services are covered, delivered, and
reimbursed. ACA includes requirement that manufacturers of drugs and medical devices to annually report to HHS anything of value,
including educational programs given by such manufacturers to physicians, beginning March 31, 2013. It is unclear how this
requirement may change the behavior of our pharmaceutical and medical device customers, but should our customers choose to
discontinue providing such education programs to physicians, our business may be negatively impacted. ACA is currently subject to a
number of court challenges and appeals. It is unclear how they will be resolved. Further, Congress is considering bills that would
repeal or revise ACA.
The Company follows the rules and guidelines provided by the ACCME, ANCC and other continuing education accrediting bodies to
ensure that its continuing education programming is free from commercial bias and consistent with the OIG guidance. The 2009
changes to the codes of ethics of the pharmaceutical and medical device trade associations place further restrictions on interactions
between pharmaceutical and medical device manufacturers and health care professionals. The majority of the Company’s accredited
continuing education programming is funded by educational grants from our pharmaceutical and medical device customers. There is
no assurance that our pharmaceutical and medical device customers will continue to provide educational grants consistent with past
practices. In fact, we have experienced a reduction in live event activities we provide that are supported by pharmaceutical and
medical device companies. To the extent that our customers continue to curtail or restructure their business practices, our business
with this customer base may suffer.
We may be liable to third parties for content that is available from our online library.
We may be liable to third parties for the content in our online library if the text, graphics, software or other content in our library
violates copyright, trademark, or other intellectual property rights, our content partners violate their contractual obligations to others
by providing content to our library, or the content does not conform to accepted standards of care in the healthcare profession. We
attempt to minimize these types of liabilities by requiring representations and warranties relating to our content partners’ ownership of
16
the rights to distribute as well as the accuracy of their content. We also take necessary measures to review this content ourselves.
Although our agreements with our content partners contain provisions providing for indemnification by the content providers in the
event of inaccurate content, our content partners may not have the financial resources to meet this obligation. Alleged liability could
harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and
costs, and diverting management’s attention away from our business. See “Business - Intellectual Property and Other Proprietary
Rights” for a more complete discussion of the potential effects of this liability on our business.
Protection of certain intellectual property may be difficult and costly.
Despite protection of certain proprietary rights, a third-party could, without authorization, copy or otherwise misappropriate our
content, information from our databases, or other intellectual property. Our agreements with employees, consultants and others who
participate in development activities could be breached and result in our trade secrets becoming known, or our trade secrets and other
intellectual property could be independently developed by competitors. We may not have adequate remedies for any breach. In
addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States,
and effective intellectual property protection may not be available in those jurisdictions. We currently own several trademarks and
domain names. The current system for registering, allocating and managing domain names has been the subject of litigation and
proposed regulatory reform. Additionally, legislative proposals have been made by the federal government that would afford broad
protection to owners of databases of information, such as stock quotes. This protection of databases already exists in the European
Union. There has been substantial litigation in the computer and online industries regarding intellectual property assets, particularly
patents. Third parties may claim infringement by us with respect to current and future products, trademarks or other proprietary rights,
and we may counterclaim against such third parties in such actions. Any such claims or counterclaims could be time-consuming,
result in costly litigation, divert management’s attention, cause product release delays, require us to redesign our products or require
us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our business, financial
condition and operating results. Such royalty and licensing agreements may not be available on terms acceptable to us, if at all.
We may be unable to protect our intellectual property, and we may be liable for infringing the intellectual property rights of
others.
Our business could be harmed if unauthorized parties infringe upon or misappropriate our intellectual property, proprietary systems,
content, platform, services or other information. Our efforts to protect our intellectual property through copyright, trademarks and
other controls may not be adequate. In the future, litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the patents, intellectual property or other proprietary rights of third parties, which could be time
consuming and costly. Intellectual property infringement claims could be made against us, especially as the number of our
competitors grows. These claims, even if not meritorious, could be expensive and divert our attention from operating our company
and result in a temporary inability to use the intellectual property subject to such claim. In addition, if we become liable to third
parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and develop
comparable non-infringing intellectual property, to obtain a license, or to cease providing the content or services that contain the
infringing intellectual property. We may be unable to develop non-infringing intellectual property or obtain a license on commercially
reasonable terms, if at all. See “Business-Intellectual Property and Other Proprietary Rights” for a more complete discussion of the
potential effects of this liability on our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal office is located in Nashville, Tennessee. Our lease for approximately 50,000 square feet at this location expires in April
2017. The lease provides for a two-year renewal option with rates increasing during the renewal period. Rent at this location is currently
approximately $58,000 per month through April 2012, $61,000 per month from May 2012 through April 2014, $62,000 per month from
May 2014 through April 2015, and $65,000 per month from May 2015 through April 2017.
We are leasing approximately 19,000 square feet of office space in Laurel, Maryland. The lease expires in March 2012 and provides for
two renewal options for two years each. Rent at this location is approximately $32,000 per month, with annual rental increases of
approximately three percent.
Item 3. Legal Proceedings
None.
Item 4. (Removed and Reserved)
17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the
NASDAQ Global Market under the ticker symbol HSTM:
First Quarter ......................................................................................................
Second Quarter..................................................................................................
Third Quarter.....................................................................................................
Fourth Quarter...................................................................................................
Common Stock Price
2010
$
High
4.27
4.85
5.32
8.04
$
Low
3.47
4.05
4.39
5.11
2009
$
$
High
2.40
2.74
5.21
4.65
Low
1.70
2.01
2.56
3.75
On March 4, 2011, there were 125 registered holders and approximately 4,822 beneficial holders of our common stock. Because many of
such shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of
shareholders represented by these record holders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying cash dividends in the
foreseeable future. We intend to retain earnings to finance the expansion of our operations.
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on our common stock since December 31, 2005, with the cumulative
total return of companies on the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index over the same period
(assuming the investment of $100 in our common stock, the Nasdaq Composite Index and the Nasdaq Computer & Data Processing
Index on December 31, 2005 (for our stock and the indices) and reinvestment of all dividends).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)
Among HealthStream, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/05
12/06
12/07
12/08
12/09
12/10
HealthStream, Inc.
100.00
169.53
150.21
100.00
169.53
345.06
NASDAQ Composite
100.00
111.74
124.67
NASDAQ Computer &
Data Processing
100.00
112.40
134.94
73.77
77.33
107.12
125.93
122.47
135.78
HealthStream, Inc.
NASDAQ Composite
NASDAQ Computer & Data Processing
(1) $100 invested on 12/31/2005 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
18
RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities since December 31, 2009.
ISSUER PURCHASES OF EQUITY SECURITIES
There were no common stock purchases by the Company during the quarter ended December 31, 2010.
Item 6. Selected Financial Data
The selected statement of income and balance sheet data for the past five years are derived from our audited consolidated financial
statements. You should read the following selected financial data in conjunction with our consolidated financial statements and the notes
to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in
this report.
HealthStream acquired The Jackson Organization, Research Consultants, Inc. (TJO) on March 12, 2007. TJO’s results of operations are
included within our consolidated statement of operations effective March 13, 2007. As a result of this acquisition, the annual results
presented below are not comparable. Revenues may be subject to fluctuations as discussed further in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” located elsewhere in this report. During 2010, we recorded a tax provision of
approximately $2.9 million. During 2009, 2008, and 2007 we recognized portions of our deferred tax assets through the reversal of the
valuation allowance, resulting in deferred income tax benefits of approximately $9.1 million, $375,000, and $2.0 million, respectively. As
a result of these factors, the annual results presented below are not comparable. The operating results for any single year are not
necessarily indicative of the results to be expected in the future.
Year Ended December 31,
2010
(in thousands, except per share data)
2007
2008
2009
2006
$
65,754
$
57,398
$
51,600
$
43,949
$
31,783
STATEMENT OF INCOME DATA:
Revenues, net .......................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) .....
Product development.....................................................................
Sales, marketing, general and administrative expenses .............
Depreciation and amortization .....................................................
Total operating costs and expenses............................................
Income from operations .......................................................................
Other income (expense), net ................................................................
Income before income taxes ................................................................
Income tax provision (benefit).............................................................
Net income ............................................................................................
Net income per share – basic ........................................................
Net income per share – diluted ......................................................
Weighted average shares of common stock outstanding – basic ......
Weighted average shares of common stock outstanding – diluted ...
24,191
6,989
22,635
4,880
58,695
7,059
(21)
7,038
2,884
4,154
0.19
0.18
21,767
22,488
21,344
6,285
19,508
5,139
52,276
5,122
(15)
5,107
(8,865)
13,972
0.65
0.64
21,458
21,838
$
$
$
19,654
5,670
18,972
4,822
49,118
2,482
72
2,554
(301)
2,855
0.13
0.13
21,707
22,204
$
$
$
$
$
$
2010
2009
At December 31,
2008
(in thousands)
16,162
4,308
17,060
4,503
42,033
1,916
226
2,142
(1,945)
4,087
0.19
0.18
21,999
22,701
10,869
3,503
12,613
2,889
29,874
1,909
619
2,528
28
2,500
0.12
0.11
21,577
22,359
$
$
$
2007
2006
3,599
--
26,851
(906)
53,361
9,493
1,064
35,714
$
10,726
1,700
13,073
11,148
41,008
5,376
107
29,634
$
$
$
$
BALANCE SHEET DATA:
Cash and cash equivalents....................................................................
Investments in marketable securities – short term..............................
Goodwill and intangible assets ...........................................................
Working capital (deficit) ......................................................................
Total assets ...........................................................................................
Deferred revenue ..................................................................................
Long-term debt and capital leases, net of current portion..................
Shareholders’ equity ............................................................................
$
17,868
5,703
23,991
19,524
82,011
16,740
--
56,790
$
12,287
--
24,938
10,714
71,002
12,234
4
51,821
$
4,107
--
25,885
1,148
52,797
10,202
320
36,763
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with
“Selected Financial Data” and HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this
report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ
significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including
but not limited to those described under “Risk Factors” and elsewhere in this report.
The following discussion provides an overview of our history together with a summary of our critical accounting policies and estimates.
19
Our critical accounting policies and estimates include revenue recognition, income taxes, product development costs and related
capitalization, impairment of goodwill, intangibles and other long-lived assets, allowance for doubtful accounts, accrual for service
credits, stock based compensation, and nonmonetary exchanges.
OVERVIEW
We provide our services to healthcare organizations, pharmaceutical and medical device companies, and other participants within the
healthcare industry. Our services are primarily focused on the delivery of education and training products and services (HealthStream
Learning), as well as survey and research services (HealthStream Research). HealthStream Learning products and services include our
Internet-based HealthStream Learning Center®, authoring tools, courseware subscriptions, online training and content development,
online sales training courses, live events, HospitalDirect® and other products focused on education and training to serve professionals
that work within healthcare organizations. HealthStream Research provides a wide range of quality and satisfaction surveys, data
analyses of survey results, and other research-based measurement tools focused on patients, employees, physicians, and members of the
community. Our learning solutions help healthcare organizations improve their required regulatory training, while also offering an
opportunity to train their employees in multiple clinical areas. Our research products provide customers valuable insight into measuring
quality and satisfaction of physicians, patients, employees, and members of the community.
Revenues for the year ended December 31, 2010 were approximately $65.8 million compared to $57.4 million for the year ended
December 31, 2009, an increase of 14.6%. Operating income increased by 37.8% to $7.1 million for 2010 compared to $5.1 million for
2009. Net income was approximately $4.2 million for 2010, compared to $14.0 million for 2009. Net income per diluted share was
$0.18 per share for 2010 compared to $0.64 per diluted share for 2009. Net income for 2010 includes an income tax provision of $2.9
million, or $0.13 per diluted share, while net income for 2009 included an income tax benefit of $8.9 million, or $0.41 per diluted
share. Revenues from HealthStream Learning grew by 18.4%, or $7.0 million, and revenues from HealthStream Research grew by 7.0%,
or $1.3 million. We had approximately 2,450,000 contracted subscribers, of which approximately 2,250,000 were fully implemented
subscribers on our Internet-based HLC platform at December 31, 2010, representing over 2,500 hospitals in the United States. During
2010, we renewed approximately 900,000 HLC subscribers, representing a 100% renewal rate for the subscribers up for renewal, and a
101% renewal rate based on the annual contract value up for renewal. As of December 31, 2010 our cash and investment balances
approximated $23.6 million, and we maintained full availability under our $15.0 million revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
We recognize revenues from our Internet-based learning products and courseware subscriptions based on a per person subscription basis,
and in some cases on a per license basis. Our fees are based on the size of the facilities’ or organizations’ employee user population and
the service offerings to which they subscribe. Revenue is recognized ratably over the service period of the underlying contract. Revenues
associated with online training are recognized over the term of the subscription period or over the historical usage period, if usage
typically differs from the subscription period. All other service revenues are recognized as the related services are performed or products
are delivered.
Revenues from survey and research services are recognized when survey results are delivered to customers via either Internet-
based reporting throughout the survey period or by providing final survey results once all services are complete. A significant
portion of revenues for survey and reporting services that are provided through the use of Internet-based reporting
methodologies are recognized using the proportional performance method, reflecting recognition throughout the service period
which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months.
If survey results are delivered to the customer after all services have been completed, then the corresponding revenues are
recognized in full in the period such results are provided to the customer. All other revenues are recognized as the related
services are performed or products are delivered to the customer. Revenues for these services can be subject to seasonal factors
based on customers’ requirements that can impact the timing, frequency, and volume of survey cycles.
Revenues from professional services include content maintenance, consulting, and implementation services. Fees are based on the time
and efforts involved, and revenue is recognized upon completion of performance milestones using the proportional performance method.
We offer training services for clients to facilitate integration of our Internet-based products. Fees for training are based on the time and
efforts of the personnel involved. Basic online training is generally included in the initial contract; however, incremental training is fee
based and revenues are generally recognized upon completion of training services.
Revenues from content maintenance and development services are recognized using a percentage of completion method based on labor
hours, which correspond to the completion of performance milestones and deliverables. Sales of products and services to pharmaceutical
and medical device companies can be subject to seasonal factors as a result of meeting and conference dates for such companies.
We expect to continue to generate revenues by marketing our Internet-based products and our survey and research services through
healthcare organizations and to a lesser extent, through pharmaceutical and medical device companies. We expect that the portion of our
revenues related to services provided via our Internet-based learning products will increase in absolute dollar amounts. Specifically, we
will seek to generate revenues from healthcare workers by marketing to their employers or sponsoring organizations. The fees we charge
20
for courseware resulting from this marketing is typically paid by either the employer or sponsoring organization.
Accounting for Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be
in effect for the year in which the differences are expected to affect taxable income. The Company has significant net operating loss
carryforwards (NOLs) which management believes will be available to reduce future tax expense. These NOLs are subject to annual
limitations under the Internal Revenue Code Section 382, which could result in the expiration of certain portions of the Company’s NOLs
before they are fully utilized. Management periodically assesses the realizability of its deferred tax assets, and to the extent that we
believe a recovery is not likely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be
recoverable. At December 31, 2009, management concluded that it was more likely than not that substantially all of the remaining
deferred tax assets will be realized in future periods, and released approximately $9.1 million from the valuation allowance. The
Company continues to maintain a valuation allowance of approximately $1.1 million for the remaining portion of its deferred tax assets,
which are related to the portion of our NOLs associated with deductions for stock option exercises.
Product Development Costs
Product development includes our costs to develop and maintain our products and applications, including our Internet-based learning
products and our survey reporting application. Once planning is completed and development begins, we capitalize internal costs and
payments to third parties associated with the development efforts where the life expectancy is greater than one year and the anticipated
cash flows are expected to exceed the cost of the related asset. During 2010 and 2009, we capitalized approximately $57,000 and
$84,000, respectively, related to development of content, primarily by third parties. Such amounts are included in the accompanying
consolidated balance sheets under the caption “prepaid development fees” and “other assets.” During 2010 and 2009, we capitalized
approximately $2.0 million and $1.3 million, respectively, for the development of various software feature enhancements. Such amounts
are included in the accompanying consolidated balance sheets under the caption “capitalized software feature enhancements.” A
significant portion of these capitalized costs was associated with our competency assessment product and additional features for our
Internet-based HLC platform. We amortize content and software feature enhancements over their expected life, which is generally one to
four years. Capitalized content and software feature enhancements are subject to a periodic impairment review in accordance with our
impairment review policy.
In connection with product development, our significant estimates involve the assessment of the development period for new products, as
well as the expected useful life of costs associated with new products, software feature enhancements and content. Once capitalized,
software feature enhancements and content development costs are subject to the policies and estimates described below regarding
goodwill, intangibles and other long-lived assets.
Product development costs also include our systems team, which manages our efforts associated with product development and
maintenance, database management, quality assurance and security. This team is responsible for new internal product development,
integration of external new products, and continued enhancements and regularly scheduled maintenance to our learning and research
platform products. Personnel who are responsible for our overall product portfolio as well as prioritization of new product development
are also included in product development costs.
Goodwill, Intangibles and Other Long-lived Assets
We measure goodwill for impairment at the reporting unit level using both income and market based models to determine the fair value
of the reporting units. Our models contain 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 and
could result in an impairment. We perform our goodwill impairment test whenever events or changes in facts or circumstances indicate
that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-lived assets are also reviewed for
events or changes in facts and circumstances, both internally and externally, which may indicate an impairment is present. We measure
any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow
estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at
the date of evaluation.
Allowance for Doubtful Accounts
We estimate the allowance for doubtful accounts using both a specific and non-specific identification method. Management’s evaluation
includes reviewing past due accounts on a case-by case basis, and determining whether an account should be reserved, based on the facts
and circumstances surrounding each potentially uncollectible account. An allowance is also maintained for accounts not specifically
identified that may become uncollectible in the future. Uncollectible accounts 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 necessary based on our specific and non-specific identification approach. Our allowance for doubtful accounts
totaled approximately $157,000 as of December 31, 2010.
Accrual for Service Credits
Due to the complexity of our hosted applications, variability in customer utilization patterns, changes in technology, and potential
software defects, our hosted learning management applications could experience periodic downtime. In addition, we have specific
contractual obligations that can result in penalties to us associated with system performance and other commitments. We maintain an
21
accrual which is intended to provide for concessions due to customers experiencing inconveniences or operation disruption resulting
from downtime or performance of our applications, or our failure to meet certain contractual obligations to customers. Our accrual for
service credits totaled approximately $194,000 as of December 31, 2010.
Stock Based Compensation
We recognize compensation expense using a fair-value based method for costs related to share based payments including stock options.
Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that the Black Scholes
option pricing model we use for calculating the fair value of our stock based compensation plans provides a reasonable measurement
methodology using a framework that is widely adopted.
As of December 31, 2010, we had a stock incentive plan which qualified as a stock based compensation plan. During the years ended
December 31, 2010, 2009, and 2008, we recorded approximately $664,000, $661,000, and $772,000 of stock based compensation
expense, respectively. We typically grant stock options to our management group on an annual basis, or when new members of the
management group begin their employment. We grant stock options to members of our board of directors in conjunction with our annual
shareholders meeting, or as new members are added on a pro rata basis based on the time elapsed since our annual shareholders’ meeting.
We expect to continue this practice for the foreseeable future; however, we may adjust the size of the annual grant. As of December 31,
2010, total future compensation cost related to non-vested awards not yet recognized was $950,377 net of estimated forfeitures, with a
weighted average expense recognition period of 2.2 years. Future compensation expense recognition for new option grants will vary
depending on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-
free interest rates, or if actual forfeitures vary significantly from our estimates.
Nonmonetary Exchange of Content Rights and Deferred Service Credits
During 2009, we recorded content rights and deferred service credits of approximately $665,000 in connection with a nonmonetary
exchange with one of our customers. In order to account for this transaction, we estimated the fair value of the related assets and service
credits, assessed whether the value assigned to the content was recoverable, and amortized the related assets over their estimated useful
lives. Our future operating results will be impacted by the customer’s utilization of the service credits. Revenues for services provided in
exchange for service credits will be recognized in accordance with our revenue recognition policies.
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 HealthStream Learning business segment primarily consist of the following products and services: provision
of services through our Internet-based HLC, authoring tools, a variety of courseware subscriptions, implementation and consulting
services, maintenance of third party content, content development, online sales training courses (RepDirect™), HospitalDirect®, and a
variety of other educational activities for physicians, nurses and other professionals within healthcare organizations. Revenues for our
HealthStream Research business segment consist of quality and satisfaction surveys, data analyses of survey results, and other research-
based measurement tools focused on patients, physicians, employees, and other members of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists
primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, materials, outsourced phone survey
support, 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 facilitate
product delivery, provide services, conduct, process and manage phone and paper-based surveys, handle customer support calls or
inquiries, manage the technology infrastructure for our hosted applications, manage content and survey services, coordinate content
maintenance services, and provide training or implementation services.
Product Development. Product development expenses consist primarily of salaries and employee benefits, contract labor, stock based
compensation, content acquisition costs before technological feasibility is achieved, costs associated with the development of content and
expenditures associated with maintaining, developing and operating our training, delivery and administration platforms. In addition,
product development expenses are associated with the development of new software feature enhancements and new products. Personnel
costs within product development include our systems, application development, and quality assurance teams, product managers, and
other personnel associated with content and product development.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions and employee benefits, stock
based compensation, employee travel and lodging, advertising, trade shows, promotions, and related marketing costs. During the past
several years, excluding 2010 and 2009, we have hosted a national customer conference in Nashville known as “The Summit,” of which
a significant portion of the costs are included in sales and marketing expenses. Personnel costs within sales and marketing include our
Learning and Research sales teams, strategic account management, consultants, and marketing personnel, as well as our account
management group.
22
Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee
benefits, stock based compensation, employee travel and lodging, facility costs, office expenses, fees for professional services, and other
operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate
functions (accounting, legal, human resources, administrative, internal information systems, and executive management) as well as
personnel who maintain our accreditation status with various organizations.
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered
to have definite lives, amortization of content development fees, and amortization of capitalized software feature enhancements.
Other Income/Expense, Net. 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 a promissory
note, capital leases and our revolving credit facility.
2010 Compared to 2009
Revenues. Revenues increased approximately $8.4 million, or 14.6%, to $65.8 million for 2010 from $57.4 million for 2009. Revenues
for 2010 consisted of $45.2 million, or 69% of total revenue, for HealthStream Learning and $20.6 million, or 31% of total revenue, for
HealthStream Research. In 2009, revenues consisted of $38.2 million, or 67% of total revenue, for HealthStream Learning and $19.2
million, or 33% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased approximately $7.0 million, or 18.4%, over 2009. Revenues from our Internet-based
subscription learning products increased by $8.7 million over the prior year, and were comprised of revenue increases from the HLC of
$4.4 million and from courseware subscriptions of $4.2 million. Revenues from our Internet-based subscription products increased 25.4%
over the prior year due to a higher number of subscribers and more courseware consumption by subscribers. Our HLC subscriber base
increased by 14% during 2010 to 2,250,000 fully-implemented subscribers at the end of 2010 compared to 1,974,000 fully-implemented
subscribers at the end of 2009. Additionally, we had an 18% increase in contracted subscribers, with 2,450,000 contracted subscribers at
December 31, 2010 compared to 2,073,000 contracted subscribers at December 31, 2009. Revenues associated with implementation,
development, and consulting services decreased $1.2 million from the prior year, and were impacted primarily by fewer engagements.
Additionally, revenues from live events, study guides, and other project-based activities collectively declined $489,000 from the prior
year due to a de-emphasis on providing these services.
Revenues for HealthStream Research increased $1.3 million, or 7.0%, over 2009. Revenues from recurring patient surveys increased by
$1.6 million, or 12.7%, over the prior year, primarily due to sales growth with new customers. Revenues from surveys conducted on
annual or bi-annual cycles—namely employee, physician, and community surveys—decreased by $299,000, primarily due to fewer
projects than the prior year, as well as changes in the timing and size of the projects.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $2.9 million, or 13.3%, to $24.2
million for 2010 from $21.3 million for 2009. Cost of revenues as a percentage of revenues was 36.8% of revenues for 2010 compared to
37.2% of revenues for 2009. Cost of revenues for HealthStream Learning increased approximately $1.6 million to $13.5 million and
approximated 30.0% and 31.3% of its revenues for 2010 and 2009, respectively. The overall expense increase is primarily associated with
increased royalties paid by us resulting from growth in courseware subscription revenues, but was partially offset by expense decreases
associated with the decline in implementation, development, and consulting service revenues. The decline as a percentage of revenue is
attributable to the growth in subscription based revenues over the prior year. Cost of revenues for HealthStream Research increased
approximately $1.3 million to $10.7 million and approximated 51.8% and 48.8% of its revenues for 2010 and 2009, respectively. The
increase in cost of revenues for HealthStream Research is primarily the result of costs associated with the growth in patient survey
volume over the prior year. Additional costs were also incurred by our interview center operation during the second quarter of 2010 to
complete projects on schedule in light of unprecedented snow storms experienced in the Baltimore area.
Product Development. Product development expenses increased approximately $704,000, or 11.2%, to $7.0 million for 2010 from $6.3
million for 2009. Product development expenses as a percentage of revenues were 10.6% and 11.0% of revenues for 2010 and 2009,
respectively.
Product development expenses for HealthStream Learning increased approximately $253,000 and approximated 12.1% and 13.7% of its
revenues for 2010 and 2009, respectively. The decrease as a percentage of revenue is the result of the growth in revenues over the prior
year, while the expense increase is the result of personnel expenses associated with SimVentures. Product development expenses for
HealthStream Research increased approximately $451,000 and approximated 7.3% and 5.5% of its revenues for 2010 and 2009,
respectively. This increase is primarily due to additional personnel associated with developing and supporting our survey reporting
platform, Insights Online.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $2.2 million, or 19.4%, to $13.1
million for 2010 from $10.9 million for 2009. Sales and marketing expenses approximated 19.9% and 19.0% of revenues for 2010 and
2009, respectively.
Sales and marketing expenses for HealthStream Learning increased $992,000 and approximated 18.4% and 19.2% of its revenues for
2010 and 2009, respectively. The expense increase is primarily associated with increased commissions due to better sales performance
23
compared to the prior year. Sales and marketing expenses for HealthStream Research increased approximately $1.0 million and
approximated 21.2% and 17.3% of its revenues for 2010 and 2009, respectively. The expense increase for HealthStream Research
resulted from additional sales personnel and commissions. The additional sales personnel were hired during the second half of 2009.
These expense increases also impacted the increase as a percentage of revenues for HealthStream Research.
Other General and Administrative. Other general and administrative expenses increased approximately $1.0 million, or 11.7% to $9.6
million for 2010 from $8.6 million for 2009. Other general and administrative expenses as a percentage of revenues approximated 14.6%
and 14.9% for 2010 and 2009, respectively.
Other general and administrative expenses for HealthStream Learning increased $82,000 compared to the prior year. Other general and
administrative expenses for HealthStream Research decreased $39,000 compared to the prior year. The unallocated corporate portion of
other general and administrative expenses increased $961,000 over the prior year, primarily associated with contract labor, software
maintenance renewal fees, professional fees, rent expense, and other expenses.
Depreciation and Amortization. Depreciation and amortization decreased approximately $259,000, or 5.1%, to $4.9 million for 2010
from $5.1 million for 2009. The decrease resulted from lower depreciation expense associated with certain assets reaching the end of their
useful lives, and was partially offset by increased amortization of capitalized software features over the prior year. Amortization for
HealthStream Learning increased $64,000, or 3.5%, and approximated 4.2% and 4.8% of its revenues for 2010 and 2009, respectively.
This expense increase was primarily associated with amortization of capitalized software feature enhancements. Amortization for
HealthStream Research increased $270,000, or 27.4%, and approximated 6.1% and 5.1% of its revenues for 2010 and 2009, respectively.
This expense increase resulted from the amortization of capitalized software feature enhancements. The unallocated corporate portion
decreased approximately $593,000 associated with certain assets reaching the end of their depreciable lives.
Other Expense, Net. Other expense, net increased approximately $6,000 to $21,000 for 2010 from $15,000 for 2009, and was associated
with lower interest income resulting from lower yield rates on cash and cash equivalents.
Income Tax Provision (Benefit). The Company recorded a provision for income taxes of approximately $2.9 million for 2010. The
Company’s effective tax rate for 2010 was approximately 41%. During 2009, the Company recorded a $9.1 million income tax benefit
offset by $226,000 of current income tax expense. The income tax benefit in 2009 resulted from the reversal of a valuation allowance,
which was based on management’s conclusion that a portion of the Company’s deferred tax assets would more likely than not be
realized. Actual tax payments will be substantially less than our income tax provision until we utilize our federal and state net operating
loss carry-forwards of approximately $24.6 million and $19.8 million, respectively, to offset taxable income.
Net Income. Net income was approximately $4.2 million for 2010, compared to $14.0 million for 2009. Net income per diluted share was
$0.18 per share for 2010 compared to $0.64 per diluted share for 2009. Net income for 2010 includes an income tax provision of $2.9
million, or $0.13 per diluted share, while net income for 2009 included an income tax benefit of $8.9 million, or $0.41 per diluted share.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and
amortization) was approximately $12.6 million for the year ended December 31, 2010, compared to $10.9 million for the year ended
December 31, 2009. This improvement is consistent with the factors mentioned in management’s discussion and analysis of financial
condition and results of operations herewith. Our reconciliation of this calculation to measures under US GAAP is listed in the table
below.
In order to better assess the Company’s financial results, management believes that adjusted EBITDA is an appropriate measure for
evaluating the operating performance of the Company at this stage in its life cycle because adjusted EBITDA reflects net income adjusted
for non-cash and non-operating items. Adjusted EBITDA is also used by many investors and securities analysts to assess the Company’s
results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of
financial performance under US GAAP. Because adjusted EBITDA is not a measurement determined in accordance with US GAAP, it is
susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled
measures of other companies.
The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of
companies, this measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis
of the Company’s results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash expenditures, or future
requirements for capital expenditures or contractual commitments; it does not reflect non-cash components of employee compensation; it
does not reflect changes in, or cash requirements for, our working capital needs; and due to the Company’s utilization of federal and state
net operating loss carryforwards in 2009 and 2010, actual cash income tax payments have been significantly less than the tax provision
recorded in accordance with US GAAP, and income tax payments will continue to be less than the income tax provision until our existing
federal and state net operating loss carryforwards have been fully utilized or have expired.
24
Management compensates for the inherent limitations associated with using adjusted EBITDA through disclosure of such limitations,
presentation of our financial statements in accordance with US GAAP, and a reconciliation of adjusted EBITDA to net income, the most
directly comparable US GAAP measure.
Income before interest, taxes, stock-based compensation, depreciation and amortization, or adjusted EBITDA:
Net income ...............................................................................................................
Interest income ..........................................................................................................
Interest expense .........................................................................................................
Income taxes..............................................................................................................
Stock-based compensation expense .........................................................................
Depreciation and amortization .................................................................................
Income before interest, income taxes, share-based compensation, depreciation
2010
$ 4,154,418
(18,500)
40,925
2,884,287
663,518
4,879,794
Year Ended
December 31,
2009
$ 13,972,246
(22,828)
40,695
(8,865,192)
660,522
5,139,475
2008
$ 2,854,795
(139,563)
61,526
(301,089)
771,560
4,822,268
and amortization ................................................................................................
$ 12,604,442
$ 10,924,918
$ 8,069,497
2009 Compared to 2008
Revenues. Revenues increased approximately $5.8 million, or 11.2%, to $57.4 million for 2009 from $51.6 million for 2008. Revenues
for 2009 consisted of $38.2 million, or 67% of total revenue, for HealthStream Learning and $19.2 million, or 33% of total revenue, for
HealthStream Research. In 2008, revenues consisted of $32.8 million, or 64% of total revenue, for HealthStream Learning and $18.8
million, or 36% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $5.3 million, or 16.2%, over 2008. Revenues from our Internet-based subscription
learning products increased by $5.4 million over 2008, and were comprised of revenue increases from the HLC of $3.0 million and from
courseware subscriptions of $2.4 million. Revenues from Internet-based subscription products increased 19% over the prior year due to
an increase in the number of subscribers and more courseware consumption by subscribers. Our HLC subscriber base increased by 14%
during 2009 to 1,974,000 fully-implemented subscribers at the end of 2009 compared to 1,732,000 fully-implemented subscribers at the
end of 2008. Additionally, we had 2,073,000 contracted subscribers at December 31, 2009 compared to 1,855,000 contracted subscribers
at December 31, 2008. Revenues associated with implementation, development, and consulting services increased $1.2 million over the
prior year due to increased courseware development service revenues compared to the prior year. These increases in revenues were
partially offset by a decline in revenues from live events, study guides, and other project-based activities, which collectively declined $1.3
million from the prior year due to a de-emphasis on live events and other similar project-based services.
Revenues for HealthStream Research increased $476,000, or 2.5%, over 2008. Revenue from recurring patient surveys increased $1.7
million, or 15%, over the prior year, but was offset by revenue declines from employee, physician, and community surveys of $1.2
million. The revenue decline in these survey categories was generally attributable to customer decisions to defer conducting surveys
based on budgetary, operational, and other considerations. Also during 2009, a portion of the revenue decrease was attributable to the loss
of one customer contract.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $1.7 million, or 8.6%, to $21.3
million for 2009 from $19.7 million for 2008. Cost of revenues as a percentage of revenues was 37.2% of revenues for 2009 down
favorably from 38.1% of revenues for 2008. Cost of revenues for HealthStream Learning increased approximately $1.3 million to $11.9
million and approximated 31.3% and 32.3% of its revenues for 2009 and 2008, respectively. The expense increase was primarily
associated with increased royalties paid by us resulting from growth in courseware subscription revenues as well as increased costs to
support the growth in implementation, development, and consulting revenues, and was partially offset by expense decreases associated
with the declines in live events and other project-based revenues. Cost of revenues for HealthStream Research increased approximately
$361,000 to $9.4 million and approximated 48.8% and 48.2% of its revenues for 2009 and 2008, respectively. The increase in cost of
revenues for HealthStream Research is primarily a result of the costs associated with increased survey volumes for our patient survey
category compared to the prior year. Cost of revenues as a percentage of revenues for HealthStream Research was impacted favorably by
improved operating efficiencies compared to the prior year, but was offset by the effect of lower revenues from the employee and
physician survey categories.
Product Development. Product development expenses increased approximately $615,000, or 10.9%, to $6.3 million for 2009 from $5.7
million for 2008. Product development expenses as a percentage of revenues were 11.0% of revenues for both 2009 and 2008.
Product development expenses for HealthStream Learning increased approximately $597,000 and approximated 13.7% and 14.1% of its
revenues for 2009 and 2008, respectively. This expense increase resulted from additional personnel expenses associated with both
maintenance and support of our learning platform products and product portfolio management. Product development expenses for
HealthStream Research increased approximately $19,000, and approximated 5.5% of its revenues for both 2009 and 2008.
25
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $110,000, or 1.0%, and
approximated $10.9 million for 2009 compared to $10.8 million for 2008. Sales and marketing expenses approximated 19.0% and 21.0%
of revenues for 2009 and 2008, respectively. The decrease as a percentage of revenues was due to the overall growth in revenues over the
prior year.
Sales and marketing expenses for HealthStream Learning increased $231,000 and approximated 19.2% and 21.6% of its revenues for
2009 and 2008, respectively. This expense increase primarily resulted from increased sales personnel and commissions, but was partially
offset by lower marketing expenses associated with our decision not to conduct our annual customer Summit during 2009. Sales and
marketing expenses for HealthStream Research decreased approximately $198,000, and approximated 17.3% and 18.8% of its revenues
for 2009 and 2008, respectively. This expense decrease resulted primarily from fewer sales and marketing personnel and related expenses
when compared to the prior year. The unallocated corporate portion of sales and marketing increased $77,000 over the prior year due to
additional personnel.
Other General and Administrative. Other general and administrative expenses increased approximately $425,000, or 5.2%, and
approximated $8.6 million for 2009 compared to $8.2 million for 2008. Other general and administrative expenses as a percentage of
revenues decreased to 14.9% for 2009 from 15.8% for 2008. The percentage decrease was primarily a result of the revenue increases
mentioned above.
Other general and administrative expenses for HealthStream Learning increased $167,000 compared to the prior year, primarily due to
employee bonuses and employee recruiting fees. Other general and administrative expenses for HealthStream Research decreased
$28,000 compared to the prior year, but included expense increases associated with employee bonuses, employee recruiting fees, and bad
debt expense, and were offset by lower consulting expenses. The unallocated corporate portion of other general and administrative
expenses increased $286,000 compared to the prior year, and included expense increases associated with additional personnel and their
related costs, employee bonuses, and fees for professional services, but was partially offset by lower stock based compensation expense,
consulting expenses, facility costs, and employee recruiting fees.
Depreciation and Amortization. Depreciation and amortization increased approximately $317,000, or 6.6%, to $5.1 million for 2009 from
$4.8 million for 2008. The increase resulted from depreciation expense associated with capital expenditures and amortization of
capitalized software features. Amortization for HealthStream Learning increased $118,000, or 6.9%, and approximated 4.8% and 5.2% of
its revenues for 2009 and 2008, respectively. This expense increase was primarily associated with amortization of capitalized software
feature enhancements. Amortization for HealthStream Research decreased $20,000, or 2.0%, and approximated 5.1% and 5.3% of its
revenues for 2009 and 2008, respectively. This expense decrease resulted from certain intangible assets reaching the end of their
estimated useful life. The unallocated corporate portion increased approximately $219,000 associated with the depreciation of property
and equipment.
Other Income (Expense), Net. Other income (expense), net decreased approximately $87,000 to an expense of $15,000 for 2009 from
income of $72,000 for 2008. Interest income decreased $114,000 from the prior year period resulting from lower yield rates on cash and
cash equivalents. Interest expense decreased $27,000 from the prior year period due to reductions in debt and capital lease balances.
Income Tax (Benefit) Provision. The Company recognized a deferred income tax benefit of approximately $9.1 million and $375,000
during 2009 and 2008, respectively, through a reversal of the valuation allowance, which was based on management’s conclusion that a
portion of the Company’s deferred tax assets would more likely than not be realized. During 2009, the $9.1 million income tax benefit
was partially offset by $226,000 of current income tax expense. During 2008, the $375,000 income tax benefit was partially offset by
$74,000 of current income tax expense. Taxable income for both 2009 and 2008 was substantially offset by the Company’s net operating
loss carryforwards.
Net Income. Net income was approximately $14.0 million, or $0.64 per diluted share, for the year ended December 31, 2009 up from
$2.9 million, or $0.13 per diluted share for the year ended December 31, 2008. This increase was primarily the result of the $9.1 million,
or $0.42 per diluted share, income tax benefit recognized during 2009 in addition to the changes in income from operations described
above.
FINANCIAL OUTLOOK FOR 2011
The Company provides projections and other forward-looking information in this “Financial Outlook for 2011” section within MD&A.
This section contains many forward-looking statements, particularly relating to the Company’s future financial performance. These
forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the precautionary statements set forth in the
introduction in Part I of this Annual Report on Form 10-K above. Actual results are likely to differ, and in the past have differed,
materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth
in Item 1A, Risk Factors.
The Company anticipates that consolidated revenues for the full year 2011 will grow by 15 percent to 19 percent when compared to the
full year 2010. We anticipate revenue growth in the Learning segment to be in the 16 percent to 20 percent range and the Research
segment’s revenue to increase by approximately 13 percent to 17 percent.
26
We anticipate that operating expenses will grow between 15 percent and 19 percent when compared to the Company's full year 2010
levels. These categories include cost of revenues, product development, sales and marketing, depreciation and amortization, and other
general and administrative expense.
We expect that operating income will increase between 15 percent and 19 percent for the full year of 2011 versus our 2010 results.
We expect our effective book income tax rate for 2011 to be between 41 percent and 42 percent. Actual tax payments will be
substantially less than our income tax provision as we continue to utilize our federal and state net operating loss carry-forwards of
approximately $25 million and $20 million, respectively, to offset taxable income.
We expect that capital expenditures, including hardware, software and capitalized software development for new features, enhancements,
content development, and additional office space will be approximately $6.0 million during the full year of 2011.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statements of income data for each of the eight quarters in the period ended December 31, 2010
both in absolute dollars and as a percentage of total revenues. The information for each quarter has been prepared on the same basis as the
audited statements included in other parts of this report and, in our opinion, includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of operations for these periods. You should read this information in
conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. The
operating results for any quarter are not necessarily indicative of the results to be expected in the future.
Factors Affecting Quarterly Operating Results
Revenues from our subscription products are recognized ratably over the subscription term. Survey and research revenues are
impacted by seasonal factors resulting from the volume, timing, and frequency of survey cycles. During the fourth quarter of 2009 we
recognized substantially all of our deferred tax assets, resulting in an income tax benefit of approximately $9.1 million. During the second
quarter of 2009, we corrected an accounting error associated with improperly expensing $105,000 of software development costs
incurred during the first quarter of 2009. The error correction resulted in a reduction of product development expenses and an increase to
net income during the second quarter of 2009, but does not have an effect on net income for the year ended December 31, 2009. In
addition, our expense for compensated absences may fluctuate from quarter to quarter, depending on vesting and utilization by our
employees.
STATEMENT OF INCOME DATA:
Revenues, net .................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) ..................................
Product development..................................................................................................
Sales and marketing....................................................................................................
Other general and administrative expenses ..............................................................
Depreciation and amortization...................................................................................
Total operating costs and expenses ...........................................................................
Income from operations ................................................................................................
Other expense, net ........................................................................................................
Income before income taxes ........................................................................................
Income tax provision .................................................................................................
Net income ....................................................................................................................
Net income per share (1):
Basic ............................................................................................................................
Diluted.........................................................................................................................
Weighted average shares of common stock outstanding:
Basic ............................................................................................................................
Diluted.........................................................................................................................
Quarter Ended
March 31,
2010
June 30,
2010
September 30,
2010
December 31,
2010
(In thousands, except per share data)
$
14,837
$
16,660
$
16,616
$
17,640
5,462
1,526
2,961
2,086
1,390
13,425
1,412
(8)
1,404
597
807
0.04
0.04
21,676
22,130
$
$
$
5,906
1,723
3,050
2,398
1,236
14,313
2,347
(4)
2,343
995
1,348
0.06
0.06
21,796
22,433
$
$
$
6,274
1,750
3,358
2,401
1,143
14,926
1,690
(5)
1,685
889
796
0.04
0.04
21,807
22,511
$
$
$
6,548
1,990
3,685
2,696
1,111
16,030
1,610
(2)
1,608
404
1,204
0.06
0.05
21,790
22,878
$
$
$
27
STATEMENT OF INCOME DATA:
Revenues, net .................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) ..................................
Product development..................................................................................................
Sales and marketing....................................................................................................
Other general and administrative expenses .............................................................
Depreciation and amortization...................................................................................
Total operating costs and expenses ...........................................................................
Income from operations ................................................................................................
Other expense, net ........................................................................................................
Income before income taxes ........................................................................................
Income tax provision (benefit) ..................................................................................
Net income ....................................................................................................................
Net income per share (1):
Basic ............................................................................................................................
Diluted.........................................................................................................................
Weighted average shares of common stock outstanding:
Basic ............................................................................................................................
Diluted.........................................................................................................................
STATEMENT OF INCOME DATA:
Revenues........................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) .............................
Product development.............................................................................................
Sales and marketing ..............................................................................................
Other general and administrative expenses .........................................................
Depreciation and amortization ......................................................................
Total operating costs and expenses.................................................................
Income from operations................................................................................................
Other expense, net ........................................................................................................
Income before income taxes ........................................................................................
Income tax provision ...............................................................................................
Net income ....................................................................................................................
STATEMENT OF INCOME DATA:
Revenues........................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) .............................
Product development.............................................................................................
Sales and marketing ..............................................................................................
Other general and administrative expenses .........................................................
Depreciation and amortization ............................................................................
Total operating costs and expenses.................................................................
Income from operations................................................................................................
Other expense, net ........................................................................................................
Income before income taxes ........................................................................................
Income tax provision (benefit) .................................................................................
Net income ....................................................................................................................
March 31,
2009
June 30,
2009
September 30,
2009
December 31,
2009
Quarter Ended
(In thousands, except per share data)
$
13,619
$
14,584
$
14,105
$
15,090
5,268
1,534
2,714
1,901
1,266
12,683
936
(1)
935
57
878
0.04
0.04
21,382
21,567
$
$
$
5,228
1,448
2,602
2,194
1,250
12,722
1,862
(2)
1,860
132
1,728
0.08
0.08
21,382
21,626
$
$
$
5,408
1,620
2,625
2,068
1,305
13,026
1,079
(9)
1,070
47
1,023
0.05
0.05
21,464
21,932
$
$
$
5,440
1,683
2,990
2,414
1,318
13,845
1,245
(3)
1,242
(9,102)
10,344
0.48
0.47
21,601
22,227
$
$
$
Quarter Ended
March 31,
2010
June 30,
2010
September 30,
2010
December 31,
2010
(% of Revenues)
100.0
100.0
100.0
100.0
36.8
10.3
20.0
14.1
9.4
90.6
9.4
0.0
9.4
4.0
5.4
35.5
10.3
18.3
14.4
7.4
85.9
14.1
0.0
14.1
6.0
8.1
37.8
10.5
20.2
14.5
6.9
89.9
10.1
0.0
10.1
5.3
4.8
37.1
11.3
20.9
15.3
6.3
90.9
9.1
0.0
9.1
2.3
6.8
Quarter Ended
March 31,
2009
June 30,
2009
September 30,
2009
December 31,
2009
(% of Revenues)
100.0
100.0
100.0
38.7
11.3
19.9
14.0
9.3
93.2
6.8
0.0
6.8
0.4
6.4
35.9
9.9
17.8
15.0
8.6
87.2
12.8
0.0
12.8
0.9
11.9
38.3
11.4
18.6
14.7
9.3
92.3
7.7
(0.1)
7.6
0.3
7.3
100.0
36.0
11.2
19.8
16.0
8.7
91.7
8.3
0.0
8.3
(60.3)
68.6
(1) – Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the full year.
28
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $16.1 million during 2010 compared to $11.6 million during 2009. Our
primary sources of cash were generated from receipts from the sales of our products and services. The number of days sales outstanding
(DSO) was 57 days for both 2010 and 2009. The Company calculates DSO by dividing the average accounts receivable balance
(excluding unbilled and other receivables) by average daily revenues for the year. The primary uses of cash to fund our operations include
personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery
of our products and services, and general corporate expenses.
Net cash used in investing activities was approximately $10.4 million for 2010, compared to $3.1 million during 2009. During 2010, we
purchased $5.7 million of investments in marketable securities, $2.6 million of property and equipment, and spent $2.0 million for
software feature enhancements. During 2009, we purchased $1.8 million of property and equipment, and spent $1.3 million for software
feature enhancements. The uses of cash for property and equipment and software feature enhancements were primarily associated with
technology investments in our platform products, although purchases in 2010 also included build-out costs to accommodate the
consolidation of operations of our Franklin, Tennessee office with our corporate office in Nashville, along with an expansion of our
professional interviewing center in Baltimore, Maryland.
Net cash used in financing activities was approximately $159,000 for 2010 compared to $319,000 for 2009. The primary source of cash
included proceeds associated with the issuance of common stock upon the exercise of employee stock options of $536,000 and $425,000,
in 2010 and 2009, respectively. The primary uses of cash during 2010 included $379,000 associated with a share repurchase plan and
$307,000 of payments under the promissory note. The primary use of cash during 2009 included $724,000 of payments under the
promissory note.
Our revenues increased and our operating income improved over the prior year period, and our balance sheet reflects positive working
capital of $19.5 million at December 31, 2010 compared to $10.7 million at December 31, 2009. The improvement in working capital is
primarily associated with increases in cash and cash equivalents and investments in marketable securities resulting from the net cash
provided by operating activities mentioned above. Current assets increased approximately $14.4 million during 2010 primarily a result of
increases in cash and investments balances, accounts receivable, and prepaid assets, while current liabilities increased approximately $5.6
million during 2010 resulting primarily from increases in deferred revenue, accounts payable and accrued liabilities. Our primary source
of liquidity is $23.6 million of cash and cash equivalents and investments in marketable securities. We also have a $15.0 million
revolving credit facility loan agreement, all of which was available at December 31, 2010.
We believe that our existing cash and cash equivalents, investments in marketable securities, related interest receivable, cash
generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated cash
needs for working capital, new product development and capital expenditures for at least the next 12 months. As part of our growth
strategy, we review possible acquisitions that complement our products and services. We anticipate that future acquisitions, if any,
would be effected through a combination of stock and cash consideration. We may need to raise additional capital through the
issuance of equity or debt securities and/or borrowings under our revolving credit facility, or another facility, to finance any future
acquisitions. The issuance of our stock as consideration for an acquisition would have a dilutive effect and could adversely affect our
stock price. Because we have no material debt or outstanding borrowings under our revolving credit facility, our balance sheet is
unleveraged. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum
leverage ratio of outstanding debt to equity. Therefore, if we were to borrow against our revolving credit facility, our debt capacity
would be dependent on the covenant values at the time of borrowing. The credit markets have been experiencing extreme volatility
and disruption, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at
all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on
terms acceptable to us could harm our business, financial condition and results of operations.
Commitments and Contingencies
We expect that our capital expenditures, software feature enhancements, and content purchases will be approximately $6.0 million in
2011. We expect to fund these capital expenditures with existing cash and investments and from cash generated from operations, and if
necessary from our revolving credit facility. From January 1 through February 28, 2011, we had capital expenditures of approximately
$0.6 million, primarily related to leasehold improvements, hardware, software, and software feature enhancements.
Our strategic alliances have typically provided for payments to content partners based on revenues and development partners and other
parties based on services rendered. We expect to continue similar arrangements in the future. We have commitments under capital lease
obligations for computer hardware and operating lease commitments for our operating facilities in Nashville, Tennessee and Laurel,
Maryland.
29
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements primarily consist of operating leases, purchase commitments, and our revolving credit
facility, which is described further in Note 14 to the Company’s consolidated financial statements contained elsewhere in this report.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (“FASB”) issued revised guidance on the accounting for revenue
arrangements with multiple deliverables. The revised guidance changes when individual deliverables in a multiple element
arrangement can be treated as separate units of accounting, and also changes the manner in which the transaction consideration is
allocated across the separately identified deliverables. The adoption of the guidance did not have an effect on the Company’s financial
position, results of operations, or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates. We do not have any foreign currency exchange rate risk or commodity
price risk. As of December 31, 2010, our outstanding indebtedness included approximately $4,000 of capital lease obligations. We may
become subject to interest rate market risk associated with any future borrowings under our revolving credit facility. The interest rate
under the revolving credit facility is based on 30 Day LIBOR plus a margin of either 190 or 220 basis points determined in accordance
with a pricing grid, but has a minimum interest rate of not less than three percent. We are also exposed to market risk with respect to our
cash and investment balances. At December 31, 2010, the Company had cash and cash equivalents, investments in marketable securities,
and related interest receivable totaling approximately $23.6 million. Our current investment rates of return approximate 0.20%. Assuming
a 0.20% rate of return on $23.6 million, a hypothetical 10% decrease in interest rates would decrease interest income and decrease net
income on an annualized basis by approximately $4,700.
The Company manages its investment risk by investing in corporate debt securities, foreign corporate debt, secured corporate debt, and
municipal debt securities with minimum acceptable credit ratings. For certificates of deposit and corporate obligations, ratings must be
A1/A, BBB, FDIC insured or better; A1/P1 or better for commercial paper, and MIG 1/S, P/1 or better for municipal debt securities. The
Company also requires 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, the Company's 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.
30
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ..............................................................................................
Consolidated Balance Sheets ..............................................................................................................................................
Consolidated Statements of Income ...................................................................................................................................
Consolidated Statements of Shareholders’ Equity .............................................................................................................
Consolidated Statements of Cash Flows.............................................................................................................................
Notes to Consolidated Financial Statements ......................................................................................................................
Page
32
33
34
35
36
37
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
HealthStream, Inc.
We have audited the accompanying consolidated balance sheets of HealthStream, Inc. as of December 31, 2010 and 2009, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
HealthStream, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
Nashville, Tennessee
March 23, 2011
/s/ Ernst & Young LLP
32
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2010
December 31,
2009
ASSETS
Current assets:
Cash and cash equivalents ...................................................................................................................
Investments in short-term marketable securities ................................................................................
Restricted cash .....................................................................................................................................
Interest receivable ...............................................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $156,723
and $140,559 at December 31, 2010 and 2009, respectively .......................................................
Accounts receivable - unbilled ............................................................................................................
Deferred tax assets, current .................................................................................................................
Prepaid royalties, net of amortization .................................................................................................
Prepaid development fees, net of amortization ...................................................................................
Other prepaid expenses and other current assets.................................................................................
Total current assets.........................................................................................................................
Property and equipment:
Equipment............................................................................................................................................
Leasehold improvements.....................................................................................................................
Furniture and fixtures...........................................................................................................................
Less accumulated depreciation and amortization..........................................................................
Capitalized software feature enhancements, net of accumulated amortization of $5,886,594
and $3,993,689 at December 31, 2010 and 2009, respectively.....................................................
Goodwill ...................................................................................................................................................
Intangible assets, net of accumulated amortization of $8,043,328
and $7,096,196 at December 31, 2010 and 2009, respectively....................................................
Deferred tax assets, noncurrent ...............................................................................................................
Other assets...............................................................................................................................................
Total assets .............................................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable ................................................................................................................................
Accrued liabilities ...............................................................................................................................
Accrued compensation and related expenses .....................................................................................
Commercial support liabilities ............................................................................................................
Deferred revenue .................................................................................................................................
Current portion of long term debt ......................................................................................................
Current portion of capital lease obligations........................................................................................
Total current liabilities ...........................................................................................................
Other long term liabilities ........................................................................................................................
Capital lease obligations, less current portion .........................................................................................
Commitments and contingencies ............................................................................................................
Shareholders’ equity:
Common stock, no par value, 75,000,000 shares authorized;
21,805,235 and 21,623,350 shares issued and outstanding
$
$
$
17,867,860
5,703,192
84,528
51,226
11,069,108
1,314,025
3,436,671
3,145,297
505,364
1,093,510
44,270,781
14,347,683
2,737,715
2,027,535
19,112,933
(15,287,579)
3,825,354
4,332,705
21,146,864
2,843,814
5,346,536
244,649
82,010,703
2,374,621
4,044,320
1,506,245
76,466
16,740,454
--
4,362
24,746,468
473,897
--
--
$
$
$
12,287,059
--
65,855
807
9,577,409
1,638,326
2,830,477
2,084,154
419,189
987,583
29,890,859
14,121,140
2,004,822
1,689,350
17,815,312
(14,881,423)
2,933,889
4,181,858
21,146,864
3,790,946
8,626,400
431,464
71,002,280
1,552,101
3,322,794
1,401,604
350,792
12,233,876
306,942
8,905
19,177,014
--
4,362
--
at December 31, 2010 and 2009, respectively...............................................................................
Accumulated other comprehensive income (loss)
Accumulated deficit ............................................................................................................................
Total shareholders’ equity......................................................................................................
Total liabilities and shareholders’ equity ...............................................................................
97,227,198
(5,417)
(40,431,443)
56,790,338
82,010,703
$
96,406,765
--
(44,585,861)
51,820,904
71,002,280
$
See accompanying notes to the consolidated financial statements.
33
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Revenues, net.............................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) .............................................
Product development ..........................................................................................................
Sales and marketing ............................................................................................................
Other general and administrative expenses .........................................................................
Depreciation and amortization ............................................................................................
Total operating costs and expenses ........................................................................
Income from operations ............................................................................................................
Other income (expense):
Interest and other income .....................................................................................................
Interest and other expense....................................................................................................
Total other income (expense), net ..........................................................................
Income before income taxes .....................................................................................................
Income tax provision (benefit) ............................................................................................
Net income ................................................................................................................................
Net income per share:
Basic ....................................................................................................................................
Diluted .................................................................................................................................
For the Year Ended December 31,
2009
2008
2010
$ 65,754,263
$ 57,398,230
$ 51,599,543
24,190,701
6,988,965
13,053,675
9,581,565
4,879,794
58,694,700
21,343,451
6,285,305
10,930,233
8,577,488
5,139,475
52,275,952
19,653,450
5,669,954
10,820,062
8,152,291
4,822,268
49,118,025
7,059,563
5,122,278
2,481,518
20,067
(40,925)
(20,858)
25,471
(40,695)
(15,224)
7,038,705
2,884,287
4,154,418
5,107,054
(8,865,192)
$ 13,972,246
0.19
0.18
$
$
0.65
0.64
139,801
(67,613)
72,188
2,553,706
(301,089)
2,854,795
0.13
0.13
$
$
$
$
$
$
Weighted average shares of common stock outstanding:
Basic ....................................................................................................................................
Diluted ................................................................................................................................
21,766,915
22,488,024
21,457,517
21,838,040
21,707,364
22,204,314
See accompanying notes to the consolidated financial statements.
34
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Balance at December 31, 2007........................................
Net income ................................................................
Stock based compensation ........................................
Exercise of stock options ...........................................
Issuance of common stock to Employee Stock
Purchase Plan .....................................................
Repurchase of common stock ...................................
Balance at December 31, 2008........................................
Net income ................................................................
Stock based compensation ........................................
Exercise of stock options ...........................................
Balance at December 31, 2009........................................
Net income ................................................................
Unrealized loss on investments in marketable
securities ............................................................
Comprehensive income .............................................
Stock based compensation ........................................
Exercise of stock options ...........................................
Repurchase of common stock ...................................
Balance at December 31, 2010........................................
Accumulated
Other
Common Stock
Shares
22,315,485
--
--
106,162
Amount
$ 97,126,520
--
771,560
210,928
Accumulated Comprehensive
Income (Loss)
--
$
--
--
--
Deficit
$ (61,412,902)
2,854,795
--
--
$
Total
Shareholders’
Equity
35,713,618
2,854,795
771,560
210,928
53,108
(1,092,700)
21,382,055
--
--
241,295
21,623,350
--
130,911
(2,919,030)
95,320,889
--
660,522
425,354
96,406,765
--
--
--
--
259,650
(77,765)
21,805,235
--
--
663,519
536,332
(379,418)
$ 97,227,198
--
--
(58,558,107)
13,972,246
--
--
(44,585,861)
4,154,418
--
--
--
--
--
$ (40,431,443)
--
--
--
--
--
--
--
--
(5,417)
--
--
--
--
(5,417)
$
$
130,911
(2,919,030)
36,762,782
13,972,246
660,522
425,354
51,820,904
4,154,418
(5,417)
4,149,001
663,519
536,332
(379,418)
56,790,338
See accompanying notes to the consolidated financial statements.
35
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
2010
2009
2008
4,154,418
$
13,972,246
$
2,854,795
5,139,475
(9,091,548)
660,522
150,000
3,974
(48,727)
3,283
(1,393,167)
(1,088,661)
(196,286)
46,443
129,894
165,330
1,081,435
3,558
2,031,567
11,569,338
--
--
(1,282,750)
(1,787,297)
(3,070,047)
--
425,354
--
(20,103)
(724,095)
(318,844)
8,180,447
4,106,612
12,287,059
43,689
145,835
665,000
$
$
$
$
4,822,268
(375,467)
771,560
130,000
15,933
(3,624)
13,250
(383,277)
(677,930)
(88,594)
(374,706)
186,773
(428,901)
(1,211,005)
82,184
709,339
6,042,598
(9,194)
--
(980,433)
(1,138,598)
(2,128,224)
130,911
210,928
(2,919,030)
(123,219)
(706,698)
(3,407,108)
507,266
3,599,346
4,106,612
60,235
46,860
--
$
$
$
$
OPERATING ACTIVITIES:
Net income........................................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................................................................
Deferred income taxes .............................................................................................................
Stock based compensation expense .........................................................................................
Provision for doubtful accounts................................................................................................
Realized loss on disposal of property and equipment ..............................................................
Changes in operating assets and liabilities, excluding effects of acquisition:
Restricted cash ..................................................................................................................
Interest receivable .............................................................................................................
Accounts and unbilled receivables....................................................................................
Prepaid royalties ...............................................................................................................
Prepaid development fees .................................................................................................
Other prepaid expenses and other current assets ..............................................................
Other assets........................................................................................................................
Accounts payable ..............................................................................................................
Accrued liabilities, accrued compensation and related expenses, and other
long-term liabilities ................................................................................................
Commercial support liabilities ..........................................................................................
Deferred revenue ...............................................................................................................
Net cash provided by operating activities.......................................................................
4,879,794
2,673,670
663,519
65,000
1,011
(18,673)
(50,419)
(1,232,398)
(1,061,143)
(394,788)
(105,927)
187,929
822,520
1,300,064
(274,326)
4,506,578
16,116,829
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ......................................................................................................
Purchases of investments in marketable securities .............................................................................
Payments associated with capitalized software feature enhancements .............................................
Purchases of property and equipment .................................................................................................
Net cash used in investing activities ...............................................................................
--
(5,709,723)
(2,043,752)
(2,623,620)
(10,377,095)
FINANCING ACTIVITIES:
Issuance of common stock to Employee Stock Purchase Plan...........................................................
Proceeds from exercise of stock options.............................................................................................
Repurchase of common stock ............................................................................................................
Payments on capital lease obligations.................................................................................................
Payments on long-term debt ...............................................................................................................
Net cash used in financing activities...............................................................................
--
536,332
(379,418)
(8,905)
(306,942)
(158,933)
Net increase in cash and cash equivalents ..........................................................................................
Cash and cash equivalents at beginning of period..............................................................................
Cash and cash equivalents at end of period ........................................................................................ $
5,580,801
12,287,059
17,867,860
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .................................................................................................................................... $
Income taxes paid .......................................................................................................................... $
40,925
368,407
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of content rights in exchange for future services ...................................................... $
--
See accompanying notes to the consolidated financial statements.
36
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Segments
HealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville,
Tennessee. We operate our business in two segments: 1) HealthStream Learning and 2) HealthStream Research. Our HealthStream
Learning products consist of Internet-based services and solutions to meet the ongoing training, information, and education needs of
the healthcare community. These solutions provide, deliver and track computer based education for our customers in the United States
through our software-as-a-service (SaaS) model. HealthStream Research products offer healthcare organizations a wide range of
quality and satisfaction surveys, analyses of survey results, and other research-based services.
Recognition of Revenue
Revenues are derived from providing services through our Internet-based learning products, provision of survey and research services,
courseware subscriptions, professional services, content maintenance, custom courseware development and other education and
training services.
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable
and earned when persuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to
the customer and collectability is probable or reasonably assured.
Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair
values of the elements. While elements include software products and post contract customer support, the fair value of each element is
based on objective evidence specific to the vendor. If fair value cannot be determined for each element of the arrangement, all revenue
from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer
acceptance has occurred. Sales of the Company’s Internet-based learning products include customer support, implementation services,
and training; therefore all revenues are deferred until the Internet-based learning product is implemented, at which time revenues are
recognized ratably over the subscription service period. In the event that circumstances occur, which give rise to uncertainty regarding
the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services are
billed on either a monthly, quarterly, or annual basis.
Revenues derived from the delivery of services through the Company’s Internet-based learning products and courseware subscriptions
are recognized ratably over the term of the subscription service agreement. Other training revenues are generally recognized upon the
completion of training.
Revenues recognized from the Company’s survey and research services are determined using both the proportional performance
method and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges
from less than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response
and runs through provision of related survey reports to the customer. If survey results are not available to the customer during the
survey fielding cycle, revenues are recognized at time of report delivery. Fees for these services are billed upon initiation of the survey
cycle, with progress billings made throughout the survey cycle.
Revenues from professional services, content maintenance, and custom courseware development services are recognized using a
percentage of completion method based on labor hours, which correspond to the completion of performance milestones and
deliverables. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services
are generally billed at project initiation and upon completion of various milestones.
37
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All
inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated
financial statements.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three
months.
Restricted Cash
Cash received for registration fees is classified as restricted cash on the accompanying consolidated balance sheets. The use of this cash
is restricted because it is held on behalf of the commercial supporter until services have been rendered, at which time the registration
fees are used to pay certain expenses and fees for conducting those services. Excess registration funds are typically remitted to the
commercial supporter or applied to other projects. Any deficiency in registration funds is billed to the commercial supporter.
Investments in Marketable Securities
Investments in marketable securities are classified as available-for-sale and are stated at fair market value, with the unrealized gains
and losses, net of tax, reported in other comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains
and losses and declines in market value judged to be other-than-temporary on investments in marketable securities are included in
interest and other income on the accompanying consolidated statements of income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income on
the accompanying consolidated statements of income. Premiums and discounts are amortized over the life of the related available-for-
sale security as an adjustment to yield using the effective interest method.
Accounts Receivable-Unbilled and Deferred Revenue
Accounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the
proportional performance method for which invoices have not been generated or contractual billing dates have not been reached; and
2) the difference between billings for contracts containing escalated pricing over the term of the agreement and the recognition of
revenue ratably over the subscription period. Deferred revenue represents amounts, which have been billed or collected, but not yet
recognized in revenue.
Allowance for Doubtful Accounts
The Company estimates its 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 the Company’s specific identification approach.
Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense were as follows:
Allowance Balance at
Beginning of Period
Charged to Costs and
Expenses
Write-offs
Allowance Balance at
End of Period
Year ended December 31,
2010 ..................................................
2009 ..................................................
2008 ..................................................
$
$
$
140,559
106,542
72,895
$
$
$
65,000
150,000
130,000
$
$
$
48,836
115,983
96,353
$
$
$
156,723
140,559
106,542
38
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Capitalized Software Feature Enhancements
Capitalized software feature enhancements are stated on the basis of cost, and are presented net of accumulated amortization. The
Company capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are
amortized using the straight-line method, generally over one to four years. The Company capitalized approximately $2.0 million and
$1.3 million during 2010 and 2009, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2010
and 2009, there were no capitalized internal development costs for computer software developed for resale.
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the
following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the
shorter of the estimated useful life or their respective lease term. Depreciation and amortization of property and equipment totaled
$1,731,144 and $2,324,297 for the years ended December 31, 2010 and 2009, respectively.
Furniture and fixtures ..........................................................................................................................................................
Equipment............................................................................................................................................................................
Years
5-10
3-5
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of net tangible assets acquired. The Company measures goodwill for
impairment at the reporting unit level using both income and market based models to determine the fair value of the reporting units.
The Company will perform its goodwill impairment test whenever events or changes in facts or circumstances indicate that impairment
may exist, or at least annually during the fourth quarter each year.
Intangible assets acquired through acquisitions are comprised of content, contract rights, customer relationships, non-competition
agreements and favorable lease rights. As of December 31, 2010 intangible assets with remaining unamortized balances include
contract rights, customer relationships and non-competition agreements recorded in connection with the acquisitions of The Jackson
Organization, Research Consultants, Inc. (TJO) and Data Management and Research, Inc. (DMR). Intangible assets are considered to
have definite useful lives and are being amortized on a straight line basis over the expected periods to be benefited, generally three to
five years for content, two to eight years for contract rights, customer lists and customer relationships, six months to four years for non-
competition agreements, and over the lease term for favorable lease rights. The weighted average amortization period for definite lived
intangible assets as of December 31, 2010 is 7.7 years. Intangible assets are reviewed for impairment whenever events or changes in
facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no impairments identified or
recorded for the years ended December 31, 2010, 2009, or 2008.
Long-Lived Assets
Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally,
which may indicate that an impairment of long-lived assets held for use are present. The Company measures any impairment using
observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates
incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.
Management periodically evaluates whether the carrying value of long-lived assets, including property and equipment, capitalized
software feature enhancements, other assets and intangible assets will be recoverable. There were no impairments identified or
recorded for the years ended December 31, 2010, 2009, or 2008.
Other Assets
Other assets are comprised of the long-term portion of content development fees and other assets of a long-term nature.
39
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on
the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in
effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both
positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization
of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient
taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four
possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences
and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing
temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and
4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior
to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any
significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets.
As of December 31, 2010, the Company has established a valuation allowance of $1.1 million for the portion of its net deferred tax
assets that are not more likely than not expected to be realized.
The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits
of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the
tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations
as general and administrative expenses and interest expense, respectively.
Commercial Support Liabilities
Commercial support liabilities represent grant funds received from entities supporting educational activities, in which we are the
accredited provider. The funds are unrestricted, and are primarily used to pay for expenses associated with conducting the activities.
Accrual for Service Credits
The Company maintains an accrual for service credits that may occur from our Internet-based learning products. The accrual is
estimated using management’s judgment and analysis of potential risk of loss associated with downtime, system performance, or other
contractual obligations associated with our hosted applications. At December 31, 2010, and 2009, the accrual for service credits
balance was approximately $194,000 and $318,000, respectively, and is included on the accompanying consolidated balance sheets
under the caption “accrued liabilities.”
Other Long Term Liabilities
Other long term liabilities represent the deferred rent liability associated with an operating lease for office space in Nashville,
Tennessee.
Advertising
The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2010, 2009, and
2008 was approximately $130,000, $137,000, and $284,000, respectively.
Shipping and Handling Costs
Shipping and handling costs that are associated with our products and services are included in cost of revenues.
40
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product Development Costs
Product development costs include internal and external costs to develop and convert content for our Internet-based learning products.
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 its cost. The Company capitalized approximately $57,000 and $84,000 of content
development costs during 2010 and 2009, respectively. Capitalized content development costs are included in the accompanying
consolidated balance sheets under the captions “prepaid development fees” and “other assets.” We amortize content development over
its expected life, which is generally one to three years. Content development costs that have been capitalized are subject to a periodic
impairment review in accordance with our policy. The Company did not capitalize any internal web site development costs during
2010 or 2009, since the costs incurred were related to planning or operation of such products and sites.
Net Income Per Share
Basic net income per share is computed by dividing the net income available to common shareholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of incremental common shares issuable upon the exercise of stock options and warrants, escrowed or
restricted shares, and shares subject to vesting are included in diluted net income per share to the extent these shares are dilutive.
Common equivalent shares that have an anti-dilutive effect on diluted net income per share have been excluded from the calculation of
diluted weighted average shares outstanding for the years ended December 31, 2010, 2009, and 2008.
Concentrations of Credit Risk and Significant Customers
The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such
investments may be in excess of the FDIC insurance limits.
The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We
perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from customers. The
Company did not have any single customer representing over 10% of net revenues during 2010, 2009, or 2008.
Stock Based Compensation
As of December 31, 2010, the Company maintains a stock based compensation plan, which is described in Note 12. The Company
accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock
options. The Company uses the Black Scholes option pricing model for calculating the fair value of awards issued under its stock based
compensation plan. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately
expected to vest, and is recognized as an expense over the requisite service period.
Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair value for financial instruments:
Cash and cash equivalents and restricted cash: The carrying amounts approximate the fair value because of the short-term maturity or
short-term nature of such instruments.
Accounts receivable, accounts receivable-unbilled, interest receivable, accounts payable, accrued liabilities and deferred revenue: The
carrying amounts, net of any allowance for doubtful accounts, approximate the fair value because of the short-term nature of such
instruments.
Investments in marketable securities: The carrying amounts approximate the fair value based on quoted market prices. See Note 5.
Promissory note: The carrying amount approximates fair value based on current market rates for similar arrangements available to the
Company.
41
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Newly Issued Accounting Standards
In September 2009, the Financial Accounting Standards Board (“FASB”) issued revised guidance on the accounting for revenue
arrangements with multiple deliverables. The revised guidance changes when individual deliverables in a multiple element
arrangement can be treated as separate units of accounting, and also changes the manner in which the transaction consideration is
allocated across the separately identified deliverables. The adoption of the guidance did not have an effect on the Company’s
financial position, results of operations, or cash flows.
2. SHAREHOLDERS' EQUITY
Common Stock
The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding
as of December 31, 2010 and 2009 was 21,805,235 and 21,623,350, respectively. During February 2010, our Board of Directors
authorized the Company to purchase up to $4.0 million of its common stock over a one year period. During 2010, the Company
purchased 77,765 shares at an average price of $4.88 per share.
Preferred Stock
The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers,
designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in
providing for the issuance of such series, without any vote or action of the shareholders. During 2000, all outstanding shares of
preferred stock were converted into common stock in connection with our initial public offering (IPO). There have been no shares of
preferred stock outstanding since our IPO.
3. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share:
Numerator:
Net income ....................................................................................
$
4,154,418
$
13,972,246
$
2,854,795
2010
Year Ended December 31,
2009
2008
Denominator:
Weighted-average shares outstanding:
Basic.........................................................................................
Employee stock options and escrowed shares ..........................
Diluted......................................................................................
Net income per share:
21,766,915
721,109
22,488,024
21,457,417
380,623
21,838,040
21,707,364
496,950
22,204,314
Basic ..............................................................................................
Diluted ...........................................................................................
$
$
0.19
0.18
$
$
0.65
0.64
$
$
0.13
0.13
For the years ended December 31, 2010, 2009, and 2008, the calculation of weighted average and equivalent shares excluded options
and warrants that were anti-dilutive. The equivalent common shares related to such options and warrants were 397,875 in 2010,
1,478,664 in 2009, and 1,913,082 in 2008.
42
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 2010, the fair value of investments in marketable securities, which were all classified as current and
available-for-sale, included the following:
Corporate debt securities................................................ $
Municipal debt securities ...............................................
Amortized Cost
3,201,094
2,507,515
5,708,609
$
Unrealized Losses
(2,607)
$
(2,810)
(5,417)
$
Fair Value
3,198,487
2,504,705
5,703,192
$
$
All of the above debt securities at December 31, 2010 mature within one year.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most
advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy
prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on
the reliability of inputs, as follows:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted market prices for
identical or similar assets and liabilities in markets that are not active.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own
assumptions.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level at which to classify them for each reporting period. This determination requires significant judgments to be made by the
Company.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2010 were as follows:
Available-for-sale securities .......................................
$ 5,703,192
$
--
$
--
Level 1
Level 2
Level 3
The Company’s investments in marketable securities consist of Corporate and Municipal debt securities classified as available for
sale. The carrying amounts reported in the condensed consolidated balance sheets approximate the fair value of the Company’s
investments in marketable securities based on quoted market prices.
At December 31, 2010 and 2009, the Company did not have any financial liabilities that were subject to fair value measurements.
43
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. GOODWILL
Goodwill is tested for impairment at least annually using a fair value method. The Company tests goodwill for impairment using
both income and market based models. 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 additional impairment
charges, which could adversely impact our operating results for the period in which such a determination is made. The Company
performs its annual impairment evaluation of goodwill during the fourth quarter of each year and as changes in facts and
circumstances indicate impairment exists. During the annual impairment evaluation in the fourth quarter of 2010 and 2009, the
results of our goodwill impairment analysis indicated the fair value of our reporting units exceeded their carrying values. Therefore
no impairment existed at December 31, 2010 and 2009.
Goodwill for HealthStream Learning totaled $3,306,688 at December 31, 2010 and 2009, and goodwill for HealthStream Research
totaled $17,840,176 at December 31, 2010 and 2009. There were no changes in the carrying amount of goodwill during the years
ended December 31, 2010 and 2009. On January 1, 2002, upon the adoption of FASB guidance for goodwill and other intangible
assets, the Company recorded a $5.0 million goodwill impairment charge for HealthStream Learning.
7. INTANGIBLE ASSETS
All intangible assets are considered to have finite useful lives. Customer related intangible assets include contract rights, customer lists,
and customer relationships associated with our acquisitions of DMR and TJO. Other intangible assets include non-competition
agreements associated with the same acquired entities. The intangibles are being amortized over their estimated useful lives, ranging
from one to eight years. Amortization of intangible assets was approximately $947,000, $947,000, and $967,000, for the years ended
December 31, 2010, 2009 and 2008, respectively.
Identifiable intangible assets are comprised of the following:
As of December 31, 2010
As of December 31, 2009
Customer related ...............
Other..................................
Total
Gross Amount
9,915,000
$
972,142
$ 10,887,142
Accumulated
Amortization
$
(7,085,849) $ 2,829,151
14,663
(8,043,328) $ 2,843,814
(957,479)
$
Net
Gross Amount
9,915,000
$
972,142
$ 10,887,142
Accumulated
Amortization
(6,213,974)
(882,222)
(7,096,196)
$
$
Net
$ 3,701,026
89,920
$ 3,790,946
Estimated amortization expense for the years ending December 31, is as follows:
2011 ............................................................................................................................................................................................
2012 ............................................................................................................................................................................................
2013 ...........................................................................................................................................................................................
2014 ...........................................................................................................................................................................................
2015 ............................................................................................................................................................................................
Total ......................................................................................................................................................................................
$
886,537
871,875
549,632
446,875
88,895
$ 2,843,814
8. CONTENT RIGHTS AND DEFERRED SERVICE CREDITS
During 2009, the Company entered into a renewal agreement with a customer in which the Company was provided continued rights
to distribute and resell courseware owned by them. In exchange for the receipt of an exclusive license to distribute and resell this
courseware, the Company provided the customer with service credits that can be exchanged for future purchases of the Company’s
products and services. The value assigned to the content rights and the deferred service credits was $665,000, which represented the
estimated fair value of the assets relinquished. The content rights are classified within prepaid development fees and other assets, and
the deferred service credits are classified within accrued liabilities on our condensed consolidated balance sheets as of December 31,
2010 and 2009.
44
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CONTENT RIGHTS AND DEFERRED SERVICE CREDITS (continued)
These exchangeable service credits will be issued annually through December 31, 2011, and will expire twenty-four months after
issuance. Any unused credits will be forfeited upon expiration. During the years ended December 31, 2010 and 2009, the Company
issued exchangeable service credits of $100,000 and $465,000, respectively, in accordance with this agreement, and is obligated to
issue remaining service credits of $100,000 in 2011. The content rights are being amortized on a straight-line basis through December
31, 2012. Revenues for products or services provided in exchange for these service credits will be recognized in accordance with the
Company’s revenue recognition policies.
9. COLLABORATIVE ARRANGEMENT
On June 23, 2010, the Company announced the formation of SimVentures, a collaborative arrangement between HealthStream and
Laerdal Medical Corporation. SimVentures will offer products and services aimed at accelerating the global adoption of simulation-
based learning by healthcare providers—with a focus on improving clinical competencies and patient outcomes. The Company will
receive 50 percent of the profits or losses generated from the collaborative arrangement. A legal entity was not formed as part of the
collaborative arrangement, therefore, the Company is accounting for SimVentures as a collaborative arrangement in accordance with
applicable accounting guidance. SimVentures is currently in the product development phase, and sales activity is expected to
commence during 2011. During the year ended December 31, 2010, the Company recorded approximately $413,000 of expenses
related to the collaborative arrangement, which are primarily recorded in the product development category within the statements of
income. The Company also recorded approximately $282,000 of capitalized software feature enhancements during 2010. SimVentures
is included in the HealthStream Learning business segment.
10. BUSINESS SEGMENTS
The Company provides services to healthcare organizations, pharmaceutical and medical device companies, and other members within
the healthcare industry. These services are primarily focused on the delivery of education and training products and services
(HealthStream Learning), as well as survey and research services (HealthStream Research). HealthStream Learning products and
services include our Internet-based HealthStream Learning Center®, authoring tools, courseware subscriptions, online training and
content development, online sales training courses, HospitalDirect® and other products focused on education and training to serve
professionals that work within healthcare organizations. HealthStream Research products and services include Patient Insights™,
Employee Insights™, Physician Insights™, and Community Insights™ surveys, along with the Improvement Center™, national
benchmarks, HCAHPS Improvement Library, consulting services, and other support tools.
The following is the Company’s business segment information as of and for the years ended December 31, 2010, 2009 and 2008. The
Company measures segment performance based on operating income before income taxes and prior to the allocation of certain
corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes
corporate functions, such as accounting, human resources, legal, investor relations, administrative, and executive personnel,
depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment
performance.
Revenues, net ...........................................................................
Cost of revenues (excluding depreciation and
amortization) ........................................................................
Product development .............................................................
Sales and marketing ................................................................
Other general and administrative ...........................................
Depreciation and amortization ...............................................
Total income from operations...................................................
*Segment assets ........................................................................
Purchases of property and equipment ......................................
Payments associated with capitalized software
Learning
$ 45,165,253
13,528,252
5,484,337
8,310,131
1,865,646
1,896,435
$ 14,080,452
Year ended December 31, 2010
Unallocated
--
Research
$ 20,589,010
$
10,662,449
1,504,628
4,372,034
1,823,864
1,252,214
973,821
$
--
--
371,510
5,892,055
1,731,145
$ (7,994,710)
Consolidated
$ 65,754,263
24,190,701
6,988,965
13,053,675
9,581,565
4,879,794
$ 7,059,563
$ 18,730,859
$ 1,172,471
$ 26,701,566
399,891
$
$ 36,578,278
$ 1,051,258
$ 82,010,703
$ 2,623,620
feature enhancements ..........................................................
$ 1,794,514
$
249,238
$
--
$ 2,043,752
45
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. BUSINESS SEGMENTS (continued)
Revenues, net ...........................................................................
Cost of revenues (excluding depreciation and
amortization) ........................................................................
Product development .............................................................
Sales and marketing ................................................................
Other general and administrative............................................
Depreciation and amortization ...............................................
Total income from operations...................................................
*Segment assets ........................................................................
Purchases of property and equipment ......................................
Payments associated with capitalized software
Learning
$ 38,153,924
11,945,931
5,231,410
7,318,205
1,784,121
1,832,542
$ 10,041,715
Year ended December 31, 2009
Unallocated
--
Research
$ 19,244,306
$
9,397,520
1,053,895
3,324,589
1,862,433
982,636
2,623,233
$
--
--
287,439
4,930,934
2,324,297
(7,542,670)
$
Consolidated
$ 57,398,230
21,343,451
6,285,305
10,930,233
8,577,488
5,139,475
5,122,278
$
$ 18,185,466
1,131,642
$
$ 26,209,873
168,055
$
$ 26,606,941
487,600
$
$ 71,002,280
1,787,297
$
feature enhancements ..........................................................
$
783,786
$
498,964
$
--
$
1,282,750
Revenues, net ...........................................................................
Cost of revenues (excluding depreciation and
amortization) ........................................................................
Product development .............................................................
Sales and marketing ................................................................
Other general and administrative............................................
Depreciation and amortization ...............................................
Total income from operations...................................................
*Segment assets ........................................................................
Purchases of property and equipment ......................................
Payments associated with capitalized software
Learning
$ 32,831,640
10,616,573
4,634,664
7,087,094
1,617,432
1,714,119
$ 7,161,758
Year ended December 31, 2008
Unallocated
--
Research
$ 18,767,903
$
9,036,877
1,035,290
3,522,928
1,889,971
1,002,527
$ 2,280,310
--
--
210,040
4,644,888
2,105,622
$ (6,960,560)
Consolidated
$ 51,599,543
19,653,450
5,669,954
10,820,062
8,152,291
4,822,268
$ 2,481,518
$ 16,027,451
594,816
$
$ 27,018,000
118,328
$
$ 9,751,430
425,454
$
$ 52,796,882
$ 1,138,598
feature enhancements ..........................................................
$
513,540
$
466,893
$
--
$
980,433
* Segment assets include restricted cash, accounts and unbilled receivables, prepaid and other current assets, other assets, capitalized software feature enhancements,
certain property and equipment, and intangible assets. Cash and cash equivalents and investments in marketable securities are not allocated to individual segments, and
are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.
$
Year Ended December 31,
2009
116,401
109,955
(8,134,543)
(957,005)
(8,865,192)
$
$
$
2008
19,450
54,928
(335,944)
(39,523)
(301,089)
11. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
Current federal ..................................................................................................... $
Current state .........................................................................................................
Deferred federal ...................................................................................................
Deferred state .......................................................................................................
Provision (benefit) for income taxes .................................................................... $
2010
145,697
64,920
2,515,383
158,287
2,884,287
46
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (continued)
The provision (benefit) for income taxes differs from the amounts computed by applying the federal statutory rate of 34% to the
income before income taxes as follows:
Federal tax provision at the statutory rate............................................................. $
State income tax provision, net of federal benefit................................................
Other......................................................................................................................
Decrease in valuation allowance ..........................................................................
Provision (benefit) for income taxes..................................................................... $
2010
2,391,318
309,152
183,817
--
2,884,287
$
Year Ended December 31,
2009
1,736,259
202,223
229,484
(11,033,158)
(8,865,192)
$
$
$
2008
868,360
135,883
335,641
(1,640,973)
(301,089)
Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation
allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. During 2009, the valuation
allowance decreased $11,033,158, of which $9,091,548 was associated with the Company’s conclusion that substantially all of its
deferred tax assets will be realized in future periods. During 2008, the Company released $375,467 of the valuation allowance. At
December 31, 2010, a valuation allowance of $1,093,699 exists for the remaining portion of deferred tax assets, which are comprised
of the portion of net operating loss carryforwards attributable to the exercises of stock options. Any future reductions of the valuation
allowance associated with this deferred tax asset would be recognized as an increase to common stock.
As of December 31, 2010, the Company had federal and state net operating loss carryforwards of $24,645,179 and $19,781,583,
respectively. These loss carryforwards will expire in years 2012 through 2024. As of December 31, 2010, $3,240,478 of the net
operating loss carryforwards is attributable to the exercise of stock options, and if realized, the tax benefit will be recorded as an
increase to common stock. The net operating loss carryforwards are subject to annual limitations under Internal Revenue Code Section
382. The annual limitations could result in the expiration of a portion of net operating loss and tax credit carryforwards before they
are fully utilized.
The Company has research and development tax credit carryforwards of $285,787 that expire in varying amounts through 2024. As
of December 31, 2010, the Company has alternative minimum tax credit carryforwards of $360,754 that are available to offset
future regular tax liabilities and they do not expire. Federal income tax payments of $191,000, $95,000 and $5,300, were made during
the years ended December 31, 2010, 2009, and 2008, respectively. State income tax payments of $177,407, $50,835, and $41,560 were
made during the years ended December 31, 2010, 2009, and 2008, respectively.
As of December 31, 2010 and 2009, the Company’s consolidated balance sheets did not reflect a liability for uncertain tax positions,
nor any accrued penalties or interest associated with income tax uncertainties. The Company is subject to income taxation at the federal
and various state levels. The Company is subject to U.S. federal tax examinations for tax years 2007 through 2010. Loss carryforwards
and credit carryforwards generated or utilized in years earlier than 2007 are also subject to examination and adjustment. The
Company has no income tax examinations in process.
47
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (continued)
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets
are as follows:
Current deferred tax assets:
Allowance for doubtful accounts ..............................................................................................................
Accrued liabilities......................................................................................................................................
Net operating loss carryforwards .............................................................................................................
Less: Valuation allowance ........................................................................................................................
Net current deferred tax assets ......................................................................................................................
Noncurrent deferred tax assets:
Depreciation...............................................................................................................................................
Research and development credits ............................................................................................................
Stock based compensation ........................................................................................................................
Alternative minimum tax credits ..............................................................................................................
Net operating loss carryforwards ..............................................................................................................
Less: Valuation allowance.........................................................................................................................
Net noncurrent deferred tax assets ..............................................................................................................
December 31,
2010
2009
$
59,544
753,953
3,015,898
3,829,395
(392,724)
$ 3,436,671
$
53,412
707,050
2,320,194
3,080,656
(250,179)
$ 2,830,477
$
319,170
285,787
205,924
360,754
6,265,284
7,436,919
(700,975)
$ 6,735,944
$
301,388
285,787
154,430
215,057
9,721,833
10,678,495
(843,520)
$ 9,834,975
Noncurrent deferred tax liabilities:
Deductible goodwill.......................................................................................................................................
Nondeductible intangible assets ...................................................................................................................
Total noncurrent deferred tax liabilities ...........................................................................................................
$
673,750
715,658
$ 1,389,408
$
291,565
917,010
$ 1,208,575
Net noncurrent deferred tax asset .....................................................................................................................
$ 5,346,536
$ 8,626,400
12. STOCK BASED COMPENSATION
Total stock based compensation expense recorded for the years ended December 31, 2010, 2009, and 2008, which is recorded in our
statements of income, is as follows:
Cost of revenues (excluding depreciation and amortization).............. $
Product development ..........................................................................
Sales and marketing ............................................................................
Other general and administrative ........................................................
Total stock based compensation expense ................................... $
Stock Option Plan
Years Ended December 31,
2010
37,067
127,682
161,675
337,095
663,519
2009
22,722
113,324
199,529
324,947
660,522
$
$
2008
45,479
157,969
199,832
368,280
771,560
$
$
The Company’s 2010 Stock Incentive Plan (the Plan) authorizes the grant of options or other forms of stock based compensation to
employees, officers, directors and others, and such grants must be approved by the Compensation Committee of the Board of
Directors. Options granted under the Plan have terms of no more than ten years, with certain restrictions. The Plan allows the
Compensation Committee of the Board of Directors to determine the vesting period of each grant. The vesting period of the options
granted ranges from immediate vesting to annual vesting up to four years, beginning one year after the grant date. As of December 31,
2010, 1,372,500 shares of unissued common stock remained reserved for future grants under the Plan. The Company issues new shares
of common stock when options are exercised.
48
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCK BASED COMPENSATION (continued)
The weighted average fair value of options granted was estimated using the Black-Scholes method. The ranges of assumptions used for
these estimates include:
Risk-free interest rate ........................................................................................
Expected dividend yield ....................................................................................
Expected life (in years)......................................................................................
Expected forfeiture rate ....................................................................................
Volatility ............................................................................................................
2010
2009
2008
1.88 – 2.49%
1.73 – 3.22%
2.63 – 3.56%
0.0%
5 to 7
0-10%
55%
0.0%
5 to 7
0-20%
60%
0.0%
5 to 8
0-20%
65%
Risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the option grant having a term equivalent to the
expected life of the option.
Expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay
dividends in the foreseeable future.
Expected life is the period of time the option is expected to remain outstanding, and is based on historical experience. The
contractual option life ranges from eight to ten years. The Company estimated the expected life of options granted to members of
management to be five years and seven to eight years for directors.
Expected forfeiture rate is the estimated percentage of options granted that are not expected to become fully vested. This estimate is
based on historical experience, and will be adjusted as necessary to match the actual forfeiture experience.
Volatility is the measure of the amount by which the price is expected to fluctuate. The Company estimated volatility based on the
actual historical volatility of the Company’s common stock, and management believes future volatility will be similar to the
Company’s historical volatility experience.
The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the
requisite service period, which generally is the vesting period.
A progression of activity and various other information relative to stock options for the year ended December 31, 2010 is presented in
the table below.
Outstanding – beginning of period.......................................................
Granted .................................................................................................
Exercised...............................................................................................
Expired..................................................................................................
Forfeited................................................................................................
Outstanding – end of period .................................................................
Exercisable at end of period. ................................................................
Common
Shares
2,465,750
341,500
(259,650)
(69,500)
(52,100)
2,426,000
1,527,200
$
Weighted-
Average
Exercise Price
2.87
4.07
2.07
8.02
2.71
2.98
2.83
$
$
Aggregate
Intrinsic Value
$ 12,299,238
$ 7,694,660
The aggregate intrinsic value in the table above represents the total difference between the Company’s closing stock price on
December 31, 2010 (the last trading day of the year) of $8.04 and the option exercise price, multiplied by the number of in-the-money
options as of December 31, 2010. As of December 31, 2010, total unrecognized compensation expense related to non-vested stock
options was $950,377, net of estimated forfeitures, with a weighted average expense recognition period of 2.2 years. The weighted
average remaining contractual term of options outstanding at December 31, 2010 was 4.3 years. Options exercisable at December 31,
2010 have a weighted average remaining contractual term of 3.2 years.
49
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCK BASED COMPENSATION (continued)
Other information relative to option activity during the years ended December 31, 2010, 2009, and 2008 is as follows:
Weighted average grant date fair value of stock options granted ...............
Total fair value of stock options vested .......................................................
Total intrinsic value of stock options exercised ..........................................
Cash proceeds from exercise of stock options ............................................
$
$
$
$
2.15
587,599
637,760
536,332
$
$
$
$
1.17
531,104
547,628
425,354
$
$
$
$
1.69
629,528
61,617
210,928
Year Ended December 31,
2009
2010
2008
13. EMPLOYEE BENEFIT PLAN
401(k) Plan
The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the
Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to
participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis,
not to exceed 20% of compensation, subject to IRS limitations. The Company has not provided matching contributions through
December 31, 2010.
14. DEBT
At December 31, 2010 and 2009, the Company had the following debt outstanding:
Promissory Note ............................................................................................................... $
Less current portion ..........................................................................................................
Long-term debt (net of current portion) .......................................................................... $
--
--
--
$
$
306,942
(306,942)
--
December 31,
2010
2009
Promissory Note
During 2007, the Company financed the purchase of approximately $2.1 million in multi-year software licenses. As a result of this
transaction, the Company entered into a promissory note loan agreement which was scheduled to be repaid in 36 payments due on a
monthly basis beginning July 1, 2007. The promissory note included interest at an annual rate of 2.32%, and was unsecured. The
promissory note was paid in full during 2010.
Revolving Credit Facility
The Company maintains a Loan Agreement (the “Revolving Credit Facility”) with SunTrust Bank (“SunTrust”) in the aggregate
principal amount of $15.0 million, which matures on July 21, 2011. The obligations under the revolving credit facility are guaranteed
by each of the Company’s subsidiaries. The Company’s borrowings under the revolving credit facility bear interest at the 30-Day
LIBOR Rate plus a margin of either 190 or 220 basis points determined in accordance with a pricing grid, but has a minimum interest
rate of not less than three percent. Principal is payable in full on the maturity date. The Company is required to pay a commitment fee
of 25 basis points per annum of the average daily unused portion of the revolving credit facility.
The purpose of the revolving credit facility is for general working capital needs, permitted acquisitions (as defined in the Loan
Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.
The revolving credit facility contains certain covenants that, among other things, restrict additional indebtedness, liens and
encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or
discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements.
50
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. DEBT (continued)
In addition, the revolving credit facility requires the Company to meet certain financial tests, including, without limitation:
a maximum total leverage ratio (consolidated debt/consolidated EBITDA) of 2.0 to 1.0;
funded debt to total capitalization may not exceed 40%; and
tangible net worth may not be less than $1.00
As of December 31, 2010, the Company believes it was in compliance with all covenants. There were no balances outstanding on
the revolving credit facility as of December 31, 2010.
15. LEASES
As of December 31, 2010, the Company leased office facilities in Nashville, TN and Laurel, MD under agreements that expire before
or during April 2017. Some lease agreements contain provisions for escalating rent payments over the initial terms of the lease. The
Company accounts for these leases by recognizing rent expense on a straight-line basis and adjusting the deferred rent expense liability
for the difference between the straight-line rent expense and the amount of rent paid. The Company also leases certain office
equipment under operating leases. Total rent expense under all operating leases was approximately $1,756,000, $1,467,000, and
$1,502,000, for the years ended December 31, 2010, 2009, and 2008, respectively. The Company also leases office equipment from
third parties which are accounted for as capital leases.
Future rental payment commitments at December 31, 2010 under capital and non-cancelable operating leases, with initial terms of one
year or more, are as follows:
2011.........................................................................................................................................................
2012.........................................................................................................................................................
2013 ........................................................................................................................................................
2014 ........................................................................................................................................................
2015.........................................................................................................................................................
Thereafter ................................................................................................................................................
Total minimum lease payments..............................................................................................................
Less amounts representing interest.........................................................................................................
Present value of minimum lease payments ...........................................................................................
$
Capital Leases
4,494
--
--
--
--
--
4,494
(132)
$
4,362
Operating Leases
$
1,456,183
885,589
768,011
752,557
764,741
1,036,384
5,663,465
$
The carrying value of assets under capital leases, which are included with owned assets in the accompanying consolidated balance
sheets, was $-0- and $7,500 at December 31, 2010 and 2009, respectively. Amortization of the assets under the capital leases is
included in depreciation expense on the accompanying consolidated statements of income.
16. LITIGATION
In the ordinary course of business, the Company is from time to time involved in various pending legal actions. The litigation
process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the
financial condition and / or results of operations of the Company. However, in the opinion of the Company’s management, matters
currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or
results of operations of the Company.
51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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 December 31, 2010. Based on that evaluation, the chief executive officer and
principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the
information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was
accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for assessing the effectiveness of internal control over financial
reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The
Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of
our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial
reporting. Management believes that, as of December 31, 2010, the Company’s internal control over financial reporting was
effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2010
that have materially affected, or that are reasonably likely to materially affect, HealthStream’s internal control over financial
reporting.
Item 9B. Other Information
None.
52
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information as to directors of the Company and corporate governance is incorporated by reference from the information contained in
our proxy statement for the 2011 Annual Meeting of Shareholders that we will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates. Pursuant to General Instruction G(3), certain information
concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption “Executive Officers of the
Registrant.”
Item 11. Executive Compensation
Incorporated by reference from the information contained in our proxy statement for the 2011 Annual Meeting of Shareholders that we
will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from the information contained in our proxy statement for the 2011 Annual Meeting of Shareholders that we
will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference from the information contained in our proxy statement for the 2011 Annual Meeting of Shareholders that we
will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
Item 14. Principal Accounting Fees and Services
Incorporated by reference from the information contained in our proxy statement for the 2011 Annual Meeting of Shareholders that we
will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
53
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Reference is made to the financial statements included in Item 8 to this Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial
Statements or the notes thereto.
(a)(3) Exhibits
Description
Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data
Management & Research, Inc.
Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization, Research
Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
Form of Fourth Amended and Restated Charter of HealthStream, Inc.
Form of Amended and Restated Bylaws of HealthStream, Inc.
Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
Reference is made to Exhibits 3.1 and 3.2.
1994 Employee Stock Option Plan, effective as of April 15, 1994
2000 Stock Incentive Plan, effective as of April 10, 2000
2010 Stock Incentive Plan, effective as of May 27, 2010
Form of Indemnification Agreement
Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
Lease dated March 27, 1995, as amended June 6, 1995 and September 22, 1998, between Cummins Station LLC, as landlord, and
NewOrder Media, Inc., as tenant
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
Loan Agreement dated July 21, 2006 between HealthStream, Inc. and SunTrust Bank
First Amendment to Loan Agreement dated February 16, 2007 between HealthStream, Inc. and SunTrust Bank
Second Amendment to Loan Agreement dated July 23, 2007 between HealthStream, Inc. and SunTrust Bank
Third Amendment to Loan Agreement dated July 17, 2009 between HealthStream, Inc. and SunTrust Bank
Summary of Director and Executive Officer Compensation
Subsidiaries of HealthStream, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Incorporated by reference to Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
Management contract or compensatory plan or arrangement
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2006.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 20, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 24, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 17, 2009.
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
Number
2.1 (1)
2.2 (2)
*3.1
*3.2
*4.1
4.2
*10.1^
*10.2^
*10.3^(9)
*10.4^
*10.5^(3)
*10.6
^10.7 (4)
^10.8 (4)
^10.9 (4)
10.10 (5)
10.11 (6)
10.12 (7)
10.13 (8)
^10.14
21.1
23.1
31.1
31.2
32.1
32.2
*
^
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
54
Pursuant to the requirements of Section 13 or 15(d) 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 on this 23rd day of March, 2011.
SIGNATURES
HEALTHSTREAM, INC.
By:/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
Signature
Title(s)
Date
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
Thompson Dent
/s/ FRANK GORDON
Frank Gordon
/s/ C. MARTIN HARRIS
C. Martin Harris
/s/ JEFFREY L. MCLAREN
Jeffrey L. McLaren
/s/ DALE POLLEY
Dale Polley
/s/ LINDA REBROVICK
Linda Rebrovick
/s/ MICHAEL SHMERLING
Michael Shmerling
/s/ WILLIAM STEAD
William Stead
/s/ DEBORAH TAYLOR TATE
Deborah Taylor Tate
President, Chief Executive Officer and
Chairman (Principal Executive Officer)
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
March 23, 2011
Director
Director
Director
Director
Director
Director
Director
Director
Director
55
INDEX TO EXHIBITS
Description
Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data
Management & Research, Inc.
Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization,
Research Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
Form of Fourth Amended and Restated Charter of HealthStream, Inc.
Form of Amended and Restated Bylaws of HealthStream, Inc.
Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
Reference is made to Exhibits 3.1 and 3.2.
1994 Employee Stock Option Plan, effective as of April 15, 1994
2000 Stock Incentive Plan, effective as of April 10, 2000
2010 Stock Incentive Plan, effective as of May 27, 2010
Form of Indemnification Agreement
Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
Lease dated March 27, 1995, as amended June 6, 1995 and September 22, 1998, between Cummins Station LLC, as
landlord, and NewOrder Media, Inc., as tenant
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
Loan Agreement dated July 21, 2006 between HealthStream, Inc. and SunTrust Bank
First Amendment to Loan Agreement dated February 16, 2007 between HealthStream, Inc. and SunTrust Bank
Second Amendment to Loan Agreement dated July 23, 2007 between HealthStream, Inc. and SunTrust Bank
Third Amendment to Loan Agreement dated July 17, 2009 between HealthStream, Inc. and SunTrust Bank
Summary of Director and Executive Officer Compensation
Subsidiaries of HealthStream, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
Number
2.1 (1)
2.2 (2)
*3.1
*3.2
*4.1
4.2
*10.1^
*10.2^
*10.3^(9)
*10.4^
*10.5^(3)
*10.6
^10.7 (4)
^10.8 (4)
^10.9 (4)
10.10 (5)
10.11 (6)
10.12 (7)
10.13 (8)
^10.14
21.1
23.1
31.1
31.2
32.1
32.2
*
^
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference to Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
Management contract or compensatory plan or arrangement
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2006.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 20, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 24, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 17, 2009.
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
HealthStream, Inc. (the “Company”)
Summary of Director and Executive Officer Compensation
EXHIBIT 10.13
I. Director Compensation. Directors who are employees of the Company do not receive additional compensation for serving as
directors of the Company. The following table sets forth current rates of cash compensation for the Company’s non-employee
directors.
Retainers and Fees
Annual Retainer fee
Board meeting fee
Committee chair meeting fee
Committee member meeting fee
2011
$2,000
$1,000
$1,000
$500
In addition to the cash compensation set forth above, each non-employee director receives a nondiscretionary annual grant
of a non-qualified option for the purchase of 15,000 shares of the Company’s common stock. The option is granted in connection
with our Annual Meeting of Shareholders, vests over a three year period, and has an exercise price equal to the fair market value of
the stock on the grant date.
II. Executive Officer Compensation. The following table sets forth the current base salaries and the fiscal 2010 performance
bonuses provided to our executive officers, including the individuals who the Company expects to be its Named Executive Officers
for 2011.
Executive Officer
Robert A. Frist, Jr.
Arthur E. Newman
J. Edward Pearson
Kevin P. O’Hara
Gerard M. Hayden, Jr.
Jeffrey S. Doster
Michael Sousa
Current Salary
$ 230,000
$ 217,500
$ 222,500
$ 212,500
$ 212,500
$ 212,500
$ 185,000
Fiscal 2010 Bonus Amount
$80,500
$76,125
$77,875
$74,375
$74,375
$74,375
$18,750
III. Additional Information. The foregoing information is summary in nature. Additional information regarding Director and
Named Executive Officer compensation will be contained in our proxy statement for the 2011 Annual Meeting of Shareholders that
we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
SUBSIDIARIES OF HEALTHSTREAM, INC.
Names Under Which We Do Business
Education Design, Inc.
Data Management & Research, Inc.
The Jackson Organization, Research Consultants, Inc.
HealthStream Acquisition I, Inc.
HealthStream Acquisition II, Inc.
EXHIBIT 21.1
State or Other Jurisdiction of
Incorporation or
Organization
Tennessee
Tennessee
Maryland
Tennessee
Tennessee
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
Registration Statement (Form S-8 No. 333-167241) pertaining to the 2010 Stock Incentive Plan of HealthStream, Inc. and
Registration Statement (Form S-8 No. 333-37440) pertaining to the 1994 Employee Stock Option Plan, 2000 Stock Incentive Plan
and Employee Stock Purchase Plan of HealthStream, Inc. of our report dated March 23, 2011, with respect to the consolidated
financial statements of HealthStream, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2010.
EXHIBIT 23.1
Nashville, Tennessee
March 23, 2011
EXHIBIT 31.1
CERTIFICATION
I, Robert A. Frist, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 23, 2011
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Gerard M. Hayden, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 23, 2011
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31,
2010, 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. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
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
March 23, 2011
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 Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31,
2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerard M. Hayden, Jr., Chief
Financial Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
Chief Financial Officer
March 23, 2011