HEALTHSTREAM INC - 10-Q Quarterly Report

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 11, 2003, 20,455,749 shares of the registrant’s common stock were outstanding.


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		Number

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets — September 30, 2003 (Unaudited) and December 31, 2002		1
	Condensed Consolidated Statements of Operations (Unaudited) — Three Months ended September 30, 2003 and 2002		2
	Condensed Consolidated Statements of Operations (Unaudited) — Nine Months ended September 30, 2003 and 2002		3
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) — Nine Months ended September 30, 2003		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) — Nine Months ended September 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
Part II.	Other Information
Item 6.	Exhibits and Reports on Form 8-K		19
	Signature		20


				September 30,			December 31,
				2003			2002

				(Unaudited)			(Note 1)
			ASSETS
Current assets:
	Cash and cash equivalents			$	8,274,112		$	4,069,631
	Investments in short term marketable securities				9,025,101			12,087,008
	Restricted cash				506,377			835,437
	Interest receivable				240,054			306,507
	Accounts receivable, net of allowance for doubtful accounts of $264,832 at September 30, 2003 and $295,704 at December 31, 2002, respectively				2,383,687			3,346,355
	Accounts receivable — unbilled				522,258			248,439
	Prepaid development fees, net of amortization				269,401			406,416
	Other prepaid expenses and other current assets				759,660			587,746

		Total current assets			21,980,650			21,887,539
Property and equipment:
	Furniture and fixtures				920,724			930,657
	Equipment				4,739,857			4,361,466
	Leasehold improvements				1,239,353			1,232,083

					6,899,934			6,524,206
		Less accumulated depreciation and amortization			(4,780,950	)		(3,855,921	)

					2,118,984			2,668,285
Goodwill					3,306,688			3,306,688
Intangible assets, net of accumulated amortization of $6,235,289 at September 30, 2003 and $5,211,965 at December 31, 2002, respectively					626,853			1,650,177
Investments in marketable securities					—			3,066,067
Notes receivable — related party					233,003			233,003
Other assets					108,692			101,457

			Total assets	$	28,374,870		$	32,913,216

			LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	813,717		$	718,803
	Accrued liabilities				861,004			1,179,795
	Accrued compensation and related expenses				161,975			763,521
	Registration liabilities				506,061			900,654
	Deferred revenue				2,993,009			3,346,224
	Current portion of capital lease obligations				45,552			66,925

		Total current liabilities			5,381,318			6,975,922
Capital lease obligations, less current portion					5,550			41,011
Commitments and contingencies					—			—
Shareholders’ equity:
	Common stock, no par value, 75,000,000 shares authorized; 20,449,046 and 20,322,687 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively				91,404,312			91,223,052
	Accumulated other comprehensive income				29,611			125,536
	Accumulated deficit				(68,445,921	)		(65,452,305	)

			Total shareholders’ equity		22,988,002			25,896,283

			Total liabilities and shareholders’ equity	$	28,374,870		$	32,913,216


			Three Months Ended September 30,
			2003			2002

Revenues, net			$	4,342,519		$	4,058,407
Operating costs and expenses:
	Cost of revenues			1,402,071			1,349,443
	Product development			770,068			1,212,022
	Sales and marketing			938,353			1,479,632
	Depreciation			342,620			395,163
	Amortization of intangibles, content fees, fixed royalties, and prepaid compensation			444,635			685,148
	Other general and administrative expenses			1,153,433			1,488,524

		Total operating costs and expenses		5,051,180			6,609,932
Loss from operations				(708,661	)		(2,551,525	)
Other income (expense):
	Interest and other income			99,533			182,629
	Interest and other expense			(14,218	)		(12,294	)

				85,315			170,335
Net loss			$	(623,346	)	$	(2,381,190	)

Net loss per share:
Basic and diluted net loss per share			$	(0.03	)	$	(0.12	)

Weighted average shares of common stock outstanding:
	Basic and diluted			20,421,337			20,290,435


			Nine Months Ended September 30,
			2003			2002

Revenues, net			$	13,428,979		$	11,726,773
Operating costs and expenses:
	Cost of revenues			4,501,476			4,739,142
	Product development			2,536,117			3,438,059
	Sales and marketing			3,303,358			4,698,381
	Depreciation			1,097,354			1,241,616
	Amortization of intangibles, content fees, fixed royalties, and prepaid compensation			1,443,228			2,131,469
	Other general and administrative expenses			3,855,227			5,018,823
	Office consolidation charge			—			97,438

		Total operating costs and expenses		16,736,760			21,364,928
Loss from operations				(3,307,781	)		(9,638,155	)
Other income (expense):
	Interest and other income			337,955			638,704
	Interest and other expense			(23,790	)		(50,522	)

				314,165			588,182
Loss, before cumulative effect of a change in accounting principle				(2,993,616	)		(9,049,973	)
Cumulative effect of a change in accounting principle				—			(5,000,000	)

Net loss			$	(2,993,616	)	$	(14,049,973	)

Net loss per share:
	Basic and diluted net loss before cumulative effect of a change in accounting principle		$	(0.15	)	$	(0.45	)
	Cumulative effect of a change in accounting principle			—			(0.25	)

Basic and diluted net loss per share			$	(0.15	)	$	(0.70	)

Weighted average shares of common stock outstanding:
	Basic and diluted			20,362,835			20,245,961

HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003


								Other			Total
	Common Stock				Accumulated			Comprehensive			Shareholders'
	Shares		Amount		Deficit			Income			Equity

Balance at December 31, 2002		20,322,687	$	91,223,052	$	(65,452,305	)	$	125,536		$	25,896,283
Net loss		—		—		(2,993,616	)		—			(2,993,616	)
Unrealized loss on investments, net of tax		—		—		—			(95,925	)		(95,925	)

Comprehensive loss		—		—		—			—			(3,089,541	)
Issuance of common stock to Employee Stock Purchase Plan		44,740		38,029		—			—			38,029
Exercise of stock options		81,619		143,231		—			—			143,231

Balance at September 30, 2003		20,449,046	$	91,404,312	$	(68,445,921	)	$	29,611		$	22,988,002


					Nine Months Ended September 30,
					2003			2002

OPERATING ACTIVITIES:
Net loss					$	(2,993,616	)	$	(14,049,973	)
Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation				1,097,354			1,241,616
		Amortization of intangibles, content fees, fixed royalties, and prepaid compensation				1,443,228			2,131,469
		Provision for doubtful accounts				122,500			265,000
		Realized loss on disposal of property & equipment				14,114			15,040
		Issuance of stock options to advisory boards				—			11,385
		Office consolidation charge				—			97,438
		Cumulative effect of a change in accounting principle				—			5,000,000
	Changes in operating assets and liabilities:
			Accounts and unbilled receivables			566,349			(537,743	)
			Restricted cash			329,060			(48,929	)
			Interest receivable			66,453			187,197
			Prepaid development fees			(206,739	)		21,719
			Other prepaid expenses and other current assets			(195,188	)		(5,625	)
			Other assets			171,917			231,606
			Accounts payable			94,914			(109,206	)
			Accrued liabilities and compensation			(920,337	)		139,006
			Registration liabilities			(394,593	)		(2,548	)
			Deferred revenue			(353,215	)		388,624

				Net cash used in operating activities		(1,157,799	)		(5,023,924	)
INVESTING ACTIVITIES:
Proceeds from maturities and sale of investments in marketable securities						5,800,000			15,568,334
Purchase of investments in marketable securities						—			(9,697,817	)
Purchase of property and equipment						(562,146	)		(530,727	)

				Net cash provided by investing activities		5,237,854			5,339,790
FINANCING ACTIVITIES:
Exercise of stock options						143,231			—
Issuance of stock to Employee Stock Purchase Plan						38,029			38,005
Payments on capital lease obligations						(56,834	)		(111,881	)

				Net cash provided by (used in) financing activities		124,426			(73,876	)
Net increase in cash and cash equivalents						4,204,481			241,990
Cash and cash equivalents at beginning of period						4,069,631			4,747,434

Cash and cash equivalents at end of period					$	8,274,112		$	4,989,424

Total cash and cash equivalents, restricted cash, investments in marketable securities and accrued interest at end of period					$	18,045,644		$	21,132,005

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid					$	18,224		$	22,212

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The balance sheet at December 31, 2002 is consistent with the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2002 (included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission).

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the effective date of FIN 46, a company generally had included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changed that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and in the first fiscal year or interim period ending after


Tennessee		62-1443555

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


209 10th Avenue South, Suite 450 Nashville, Tennessee		37203

(Address of principal executive offices)		(Zip Code)


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURE
EXHIBIT INDEX
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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