<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000.
Commission File No.: 001-8833
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1443555
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
209 10TH AVENUE SOUTH, SUITE 450
NASHVILLE, TENNESSEE 37203
(Address of principal executive offices) (Zip Code)
(615) 301-3100
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
As of November 10, 2000, 21,233,474 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
INDEX TO FORM 10-Q
HEALTHSTREAM, INC.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 2000 (Unaudited)................................................ 1
Condensed Consolidated Statements of Operations (Unaudited) - Three Months
Ended September 30, 1999 and 2000............................................. 3
Condensed Consolidated Statements of Operations (Unaudited) - Nine Months
Ended September 30, 1999 and 2000............................................. 4
Condensed Consolidated Statement of Shareholders'
Equity (Unaudited)............................................................ 5
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months
Ended September 30, 1999 and 2000............................................. 7
Notes to Condensed Consolidated Financial Statements.......................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
Signature .............................................................................. 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
(NOTE 1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 13,632,144 $ 24,820,242
Accounts receivable, net of allowance for doubtful accounts
of $36,500 in 1999 and $120,000 in 2000 ................................ 544,042 4,659,043
Accounts receivable - unbilled ............................................ 18,877 174,431
Restricted cash ........................................................... -- 677,082
Work in progress .......................................................... -- 195,952
Prepaid development fees .................................................. -- 573,331
Other prepaid expenses and other current assets ........................... 263,517 1,142,915
------------ ------------
Total current assets ................................................... 14,458,580 32,242,996
Property and equipment:
Furniture and fixtures .................................................... 445,172 793,123
Equipment ................................................................. 1,109,015 3,355,537
Leasehold improvements .................................................... 369,346 606,994
------------ ------------
1,923,533 4,755,654
Less accumulated depreciation and amortization ............................ (589,632) (1,139,635)
------------ ------------
1,333,901 3,616,019
Intangible assets, net of accumulated amortization
of $213,031 in 1999 and $4,008,213 in 2000 ................................ 1,134,673 19,591,568
Investments .................................................................. 86,063 20,373,761
Other assets ................................................................. 441,488 685,346
------------ ------------
Total assets ................................................................. $ 17,454,705 $ 76,509,690
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 443,455 $ 1,569,691
Accrued liabilities ....................................................... 448,727 2,923,431
Registration liabilities .................................................. -- 677,082
Deferred revenue .......................................................... 791,424 3,339,566
Notes payable - related party ............................................. 1,293,000 --
Current portion of long-term debt - related party ......................... 12,892 --
Current portion of capital lease obligations .............................. 89,881 300,545
------------ ------------
Total current liabilities ........................................... 3,079,379 8,810,315
Capital lease obligations, less current portion .............................. 185,801 297,993
Commitments and contingencies
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(NOTE 1) (UNAUDITED)
<S> <C> <C>
Shareholders' equity:
Common stock, no par value, 20,000,000 and 75,000,000 shares authorized at
December 31, 1999 and September 30, 2000, respectively; 4,165,461 shares
and 21,233,474 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively ................. 4,008,991 90,737,325
Preferred stock, no par value, 5,000,000 and 10,000,000 shares authorized
at December 31, 1999 and September 30, 2000, respectively
Series A Convertible Preferred Stock; 76,000 and 0 shares
issued and outstanding .............................................. 760,000 --
Series B Convertible Preferred Stock, 1,228,801 and 0 shares
issued and outstanding .............................................. 12,138,000 --
Series C Convertible Preferred Stock, 627,406 and 0 shares
issued and outstanding .............................................. 6,274,060 --
Accumulated other comprehensive income (loss) ............................. (41,690) (59,239)
Accumulated deficit ....................................................... (8,949,836) (23,276,704)
------------ ------------
Total shareholders' equity .......................................... 14,189,525 67,401,382
------------ ------------
Total liabilities and shareholders' equity .......................... $ 17,454,705 $ 76,509,690
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 5
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 2000
----------- ------------
<S> <C> <C>
Revenues, net of warrant expense of $194,735 in 2000 $ 651,584 $ 2,729,214
Operating costs and expenses:
Cost of revenues ................................ 370,989 1,033,689
Product development ............................. 508,909 1,616,874
Selling, general and administrative expenses .... 1,083,150 6,408,644
----------- ------------
Total operating costs and expenses ........ 1,963,048 9,059,207
----------- ------------
Loss from operations ............................... (1,311,464) (6,329,993)
----------- ------------
Other income (expense):
Interest and other income ....................... 84,681 1,077,550
Interest expense - related parties .............. (30,989) --
Interest expense ................................ (3,426) (13,839)
----------- ------------
50,266 1,063,711
----------- ------------
Net loss ........................................... $(1,261,198) $ (5,266,282)
=========== ============
Net loss per share:
Basic ........................................... $ (0.31) $ (0.27)
=========== ============
Diluted ......................................... $ (0.31) $ (0.27)
=========== ============
Weighted average shares of common stock outstanding:
Basic ........................................... 4,021,251 19,639,809
=========== ============
Diluted ......................................... 4,021,251 19,639,809
=========== ============
</TABLE>
See accompanying notes.
3
<PAGE> 6
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
----------- ------------
<S> <C> <C>
Revenues, net of warrant expense of $524,830 in 2000 $ 1,764,103 $ 6,374,915
Operating costs and expenses:
Cost of revenues ................................ 1,073,654 2,831,475
Product development ............................. 1,250,034 4,045,506
Selling, general and administrative expenses .... 2,126,609 15,518,453
----------- ------------
Total operating costs and expenses ........ 4,450,297 22,395,434
----------- ------------
Loss from operations ............................... (2,686,194) (16,020,519)
----------- ------------
Other income (expense):
Interest and other income ....................... 120,175 1,807,594
Interest expense - related parties .............. (168,062) (34,255)
Interest expense ................................ (5,405) (79,688)
----------- ------------
(53,292) 1,693,651
----------- ------------
Net loss ........................................... $(2,739,486) $(14,326,868)
=========== ============
Net loss per share:
Basic ........................................... $ (0.76) $ (1.00)
=========== ============
Diluted ......................................... $ (0.76) $ (1.00)
=========== ============
Weighted average shares of common stock outstanding:
Basic ........................................... 3,622,662 14,326,112
=========== ============
Diluted ......................................... 3,622,662 14,326,112
=========== ============
</TABLE>
See accompanying notes.
4
<PAGE> 7
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------------- -------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ... 4,165,461 $ 4,008,991 76,000 $ 760,000 1,228,801 $ 12,138,000
----------- ------------ ------- --------- ---------- ------------
Net loss ....................... -- -- -- -- -- --
Unrealized loss on investment,
net of tax .................. -- -- -- -- -- --
Comprehensive Income (loss) .... -- -- -- -- -- --
Issuance of common stock in
acquisitions ................ 2,169,403 12,931,850 -- -- -- --
Exercise of Stock options ...... 833,709 600,786 -- -- -- --
Issuance of stock in
initial public offering ..... 5,275,000 44,151,750 -- -- -- --
Issuance of stock in
private offering ............ 1,111,111 10,000,000 -- -- -- --
Payment of expenses of
initial public offering ..... -- (1,977,629) -- -- -- --
Conversion of Preferred stock
into stock in connection with
initial public offering ..... 7,131,153 19,172,060 (76,000) (760,000) (1,228,801) (12,138,000)
Conversion of related party
Notes Payable into stock
in connection with
initial public offering ..... 553,711 1,293,000 -- -- -- --
Repurchase of stock in
Connection with the
initial public offering ..... (6,074) (14,213) -- -- -- --
Recognition of warrant
expense ..................... -- 524,830 -- -- -- --
Issuance of options for services -- 45,900 -- -- -- --
----------- ------------ ------- --------- ---------- ------------
Balance at September 30, 2000 .. 21,233,474 $ 90,737,325 -- $ -- -- $ --
=========== ============ ======= ========= ========== ============
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
ACCUMULATED
SERIES C OTHER
CONVERTIBLE COMPREHENSIVE TOTAL
PREFERRED STOCK ACCUMULATED INCOME SHAREHOLDERS
SHARES AMOUNT DEFICIT (LOSS) EQUITY
-------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ........ 627,406 $ 6,274,060 $ (8,949,836) $(41,690) $ 14,189,525
-------- ----------- ------------ -------- ------------
Net loss ............................ -- -- (14,326,868) -- (14,326,868)
Unrealized loss on
investment, net of tax ........... -- -- -- (17,549) (17,549)
-------- ------------
Comprehensive income (loss) ......... -- -- -- -- (14,344,417)
------------
Issuance of common stock in
acquisitions ..................... -- -- -- -- 12,931,850
Exercise of Stock options ........... -- -- -- -- 600,786
Issuance of stock in initial
public offering .................. -- -- -- -- 44,151,750
Issuance of stock in private offering -- -- -- -- 10,000,000
Payment of expenses of
initial public offering .......... -- -- -- -- (1,977,629)
Conversion of Preferred stock
into stock in connection with
initial public offering .......... (627,406) (6,274,060) -- -- --
Conversion of related party
Notes Payable into stock
in connection with
initial public offering .......... -- -- -- -- 1,293,000
Repurchase of stock in Connection
with the initial public offering . -- -- -- -- (14,213)
Recognition of warrant expense ...... -- -- -- -- 524,830
Issuance of options for services .... -- -- -- -- 45,900
-------- ----------- ------------ -------- ------------
Balance at September 30, 2000 ....... -- $ -- $(23,276,704) $(59,239) $ 67,401,382
======== =========== ============ ======== ============
</TABLE>
6
<PAGE> 9
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .............................................................. $ (2,739,486) $(14,326,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .................................................... 137,989 549,803
Amortization .................................................... 196,585 3,830,039
Gain on sale of investment ...................................... -- (94,438)
Provision for allowance for doubtful accounts ................... -- 25,800
Noncash warrant expense ......................................... -- 524,830
Noncash compensation expense .................................... -- 63,525
Noncash product development expense ............................. 258,278 --
Changes in operating assets and liabilities, excluding effects of
acquisitions:
Accounts receivable .......................................... 158,835 (2,003,290)
Unbilled receivables ......................................... 5,266 (155,553)
Restricted cash .............................................. -- (23,821)
Work in progress ............................................. -- (60,986)
Prepaid expenses and other current assets .................... (5,775) (1,427,902)
Other assets ................................................. (40,000) (333,248)
Accounts payable ............................................. 216,276 404,723
Accrued liabilities .......................................... (100,857) 1,546,543
Registration liabilities ..................................... -- 22,232
Deferred revenue ............................................. (66,594) 162,762
------------ ------------
Net cash used in operating activities ...................... (1,979,483) (11,295,849)
INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired ........................ (780,206) (6,716,369)
Proceeds from sale of investment ...................................... -- 122,271
Purchase of investments ............................................... (127,753) (20,145,192)
Purchase of property and equipment .................................... (261,032) (2,070,309)
------------ ------------
Net cash used in investing activities ...................... (1,168,991) (28,809,599)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of underwriting discount .. -- 54,151,750
Costs of issuing common stock ......................................... -- (1,977,629)
Repayment of note payable ............................................. -- (1,180,000)
Proceeds from notes payable - related party ........................... 18,000 --
Proceeds from issuance of preferred stock ............................. 16,802,696 --
Proceeds from exercise of stock options ............................... 225,000 600,786
Payments on long-term debt - related party ............................ (17,422) (82,559)
Repurchase of stock in connection with initial public offering ........ -- (14,213)
Payment on notes payable .............................................. -- (50,000)
Payments on capital lease obligations ................................. (16,299) (154,589)
------------ ------------
Net cash provided by financing activities .................. 17,011,975 51,293,546
------------ ------------
Net increase in cash and cash equivalents ............................. 13,863,501 11,188,098
Cash and cash equivalents at beginning of period ...................... 50,823 13,632,144
------------ ------------
Cash and cash equivalents at end of period ............................ $ 13,914,324 $ 24,820,242
============ ============
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ......................................................... $ 193,699 $ 109,415
============ ============
Capital lease obligations incurred .................................... $ 189,375 $ 343,549
============ ============
Preferred stock converted into common stock ........................... $ -- $ 19,172,060
============ ============
Notes payable - related parties converted into common stock ........... $ 1,000,000 $ 1,293,000
============ ============
Notes payable - related parties converted into preferred stock ........ $ 560,000 $ --
============ ============
Issuance of common stock in connection with acquisition of company .... $ 200,000 $ --
============ ============
Issuance of common stock in exchange for professional services ........ $ 18,800 $ --
============ ============
Effects of acquisitions:
Estimated fair value of assets acquired ...................... $ 95,713 $ 3,856,537
Purchase price in excess of net assets acquired .............. 1,374,619 22,229,304
Estimated fair value of liabilities assumed .................. (490,126) (6,236,377)
Stock issued ................................................. (200,000) (12,931,850)
------------ ------------
Cash paid .................................................... 780,206 6,917,614
Less cash acquired ........................................... -- (201,245)
------------ ------------
Net cash paid for acquisitions ............................... $ 780,206 $ 6,716,369
============ ============
</TABLE>
See accompanying notes
8
<PAGE> 11
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they 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 inter-company transactions have
been eliminated in consolidation. Operating results for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto for the year ended December 31, 1999
(included in the Company's Registration Statement on Form S-1, file no.
333-88939, filed with the Securities and Exchange Commission).
During 2000, the Company began recognizing revenues under a services
agreement with HCA Information Technology & Services, Inc., formerly Columbia
Information Services, Inc., an affiliate of HCA - The Healthcare Company,
formerly Columbia/HCA (collectively referred to herein as "HCA"). The Company
granted HCA a warrant to purchase HealthStream, Inc. Common Stock. The
accompanying Condensed Consolidated Statements of Operations reflect the
revenues related to the services provided, net of amortization of the fair value
of the warrant. Under the terms of the agreement, HCA will provide a minimum of
$12 million in revenues over the term of the four-year agreement. The Company
expects to amortize the estimated fair value of the warrant ($8.8 million) as a
reduction of revenues proportionately over the term of the agreement. The
amortization will fluctuate based on the revenues received from this agreement
and will vary as a percentage of revenues based on the estimated revenues over
the course of the agreement.
2. MERGERS AND ACQUISITIONS
SilverPlatter Education, Inc. On July 23, 1999, the Company acquired
substantially all of the assets of SilverPlatter Education, Inc., a Boston-based
company that provided CD-ROM and Internet-based continuing medical education
programs to physicians, for $0.8 million in cash and 49,202 shares of the
Company's Common Stock, and the assumption of certain liabilities. The results
of operations are included in the Company's financial statements from July 23,
1999. The acquisition was accounted for as a purchase. Intangible assets
acquired consisted of goodwill, customer lists and non-competition agreements of
$1.0 million, $0.2 million, and $0.1 million, respectively, and are being
amortized on a straight-line basis over three, two and two years, respectively.
KnowledgeReview, LLC. On January 3, 2000, the Company acquired
substantially all of the assets of KnowledgeReview, LLC (d/b/a "CMECourses.com")
for $0.3 million in cash and 17,343 shares of the Company's Common Stock. All of
the shares will be held in an escrow account for a one-year period, subject to
claims for indemnification pursuant to the asset purchase agreement.
KnowledgeReview owned and operated an Internet Web page that provided a search
engine (CMEsearch.com) that helped physicians locate continuing medical
education by specialty and facilitated online registration for such courses. The
acquisition was accounted for as a purchase. Intangible assets acquired
consisted of goodwill, customer lists and non-competition agreements of $0.4
million, $40,000 and $20,000, respectively, and are being amortized on a
straight-line basis over three years, two years and six months, respectively.
The allocation of purchase price is preliminary and may be subject to change as
a result of changes in estimates related to the acquired business.
9
<PAGE> 12
Quick Study, Inc. On January 11, 2000, the Company acquired
substantially all of the assets and liabilities of Quick Study, Inc. for $0.1
million in cash and 61,397 shares of the Company's Common Stock. In addition,
upon achievement of certain future customer revenue levels, the Company may
issue up to 34,687 additional shares of Common Stock. A portion of the shares
will be held in an escrow account for a one-year period, subject to claims for
indemnification pursuant to the agreement and plan of merger. In connection with
the acquisition, the Company assumed $0.1 million of long-term debt. Quick Study
published CD-ROM and network-based products for the healthcare industry. The
acquisition was accounted for as a purchase. Intangible assets acquired
consisted of goodwill, customer lists, and non-competition agreements of $0.5
million, $0.1 million and $0.1 million, respectively, and are being amortized on
a straight-line basis over three, three and two years, respectively. The
allocation of purchase price is preliminary and may be subject to change as a
result of contingent consideration and changes in estimates related to the
acquired business.
m3 the Healthcare Learning Company. On January 28, 2000, the Company
acquired substantially all of the assets and liabilities of Multimedia
Marketing, Inc. d/b/a m3 the Healthcare Learning Company ("m3") for $0.6 million
in cash and 818,037 shares of the Company's Common Stock. m3 provided
interactive, multimedia education and training solutions to hospitals and other
healthcare organizations. A portion of the shares will be held in an escrow
account for a one-year period, subject to claims for indemnification pursuant to
the agreement and plan of merger. In connection with the acquisition, the
Company assumed $1.2 million of long-term debt. The acquisition was accounted
for as a purchase. Intangible assets acquired consisted of goodwill and customer
lists of $8.4 million and $1.0 million, respectively, and are being amortized on
a straight-line basis over three years. The allocation of purchase price is
preliminary and may be subject to change as a result of changes in estimates
related to the acquired business.
EMINet, Inc. On January 28, 2000, the Company acquired substantially
all of the assets of EMInet for $2.9 million consisting of $0.6 million in cash
and 269,902 shares of the Company's Common Stock. A portion of the shares will
be held in an escrow account for a one-year period, subject to claims for
indemnification pursuant to the asset purchase agreement. In addition, upon the
achievement of short-term revenue targets, the Company may issue up to 26,097
additional shares of Common Stock. EMInet sold approved online medical education
content to emergency medical services personnel. The acquisition was accounted
for as a purchase. Intangible assets acquired consisted of goodwill and customer
lists of $2.8 million and $0.5 million, respectively, and are being amortized on
a straight-line basis over three years. The allocation of purchase price is
preliminary and may be subject to change as a result of contingent consideration
and changes in estimates related to the acquired business.
Education Design Inc. On July 1, 2000, the Company acquired
substantially all of the assets of Education Design, Inc. (EDI) for $3.0 million
in cash and 184,421 shares of the Company's Common Stock. Three-quarters of the
shares will be held in an escrow account for a one year period, subject to any
claims for indemnification pursuant to the asset purchase agreement. In
addition, approximately $300,000 of cash and the Company's Common Stock will be
provided to the employees of EDI, subject to certain restricted stock award
agreements. EDI provided services for live educational events that are supported
by the medical device industry. The acquisition was accounted for as a purchase.
Intangible assets acquired consisted of goodwill, content, customer lists, and a
non-competition agreement of $1.9 million, $1.5 million, $250,000, and $100,000,
respectively, and are being amortized on a straight-line basis over five years,
five years, three years and one year. The allocation of purchase price is
preliminary and may be subject to change as a result of changes in estimates
related to the acquired business.
SynQuest Technologies, Inc. On September 18, 2000, the Company acquired
substantially all of the assets of SynQuest Technologies, Inc. (SQT) for 787,087
shares of the Company's Common Stock and assumption of certain debt and other
liabilities, $2.3 million of which were repaid in connection with the purchase
transaction. Approximately two-thirds of the shares will be held in an escrow
account subject to any claims or are subject to certain stock vesting
agreements. SQT provided online training and education to hospitals and
healthcare organizations. The acquisition was accounted for as a purchase.
Intangible assets acquired consisted of goodwill, content, and customer lists of
$1.9 million, $2.0 million, $500,000, respectively, and are being amortized on a
straight-line basis over five years, three years, and three years. The
allocation of purchase price is preliminary and may be subject to change as a
result of changes in estimates related to the acquired business.
10
<PAGE> 13
The following unaudited results of operations give effect to the
operations of the acquisitions discussed above as if the acquisitions had
occurred as of the first day of 2000. The pro forma results of operations do not
purport to represent what the Company's results of operations would have been
had such transactions in fact occurred at the beginning of the period presented
or to project the Company's results of operations in any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
Revenue.................................................... $ 10,220,000
Net loss................................................... $(17,840,000)
Net loss per share:
Basic................................................. $ (0.89)
Diluted............................................... $ (0.89)
</TABLE>
In accordance with SFAS 128, escrowed shares and any shares subject to
restrictions or vesting are excluded from the weighted average shares
outstanding for purposes of calculating net loss per share since such shares are
anti-dilutive.
3. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available
to common shareholders for the period by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and dilutive potential common shares outstanding during the period. Potential
common shares, composed of incremental common shares issuable upon the exercise
of stock options and warrants, escrowed or restricted shares, shares subject to
vesting and common shares issuable on assumed conversion of Series A, B, and C
Convertible Preferred Stock, are included in diluted net loss per share only
when these shares are dilutive. The total number of shares excluded from the
calculations of dilutive loss per share was approximately 9,681,501 at September
30, 1999 and 6,164,118 at September 30, 2000.
4. INITIAL PUBLIC OFFERING
On April 14, 2000, the Company completed its initial public offering
(IPO) of 5,275,000 shares of its Common Stock for net proceeds of $44.2 million.
On April 14, 2000, the Company completed a private placement of 1,111,111 shares
of its Common Stock to WebMD, formerly Healtheon/WebMD Corporation for net
proceeds of $10.0 million. Upon consummation of the IPO, all series A, B and C
Convertible Preferred Stock converted by its terms into 7,131,153 shares of our
Common Stock. In addition, the $1,293,000 promissory note payable to Robert A.
Frist, Jr., the Company's chief executive officer and chairman, also converted
into 553,711 shares of common stock. Prior to the IPO, the Company effected a
1.85 for one common stock split. All share and per share information has been
restated to reflect the stock split.
During May 2000, the Company repaid the long-term note payable assumed
in connection with the acquisition of m3 using a portion of the proceeds of the
IPO.
5. SUBSEQUENT EVENT
On October 17, 2000, the Compensation Committee of the Board of
Directors approved the grant of 849,966 options to employees of the Company and
certain members of our advisory boards to purchase Common Stock at the closing
price on that day, or $2.125 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report includes various forward-looking statements that
are subject to risks and uncertainties. Forward-looking statements include
without limitation, statements preceded by, followed by, or that otherwise
include the words "believes," "expects," "anticipates," "intends," "estimates"
or similar expressions. For those statements, HealthStream, Inc. claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed
elsewhere in this Quarterly Report, could affect the future financial results of
the Company and could cause actual results to differ materially from those
expressed in forward-looking statements contained in this document:
- our limited operating history;
- our history of losses and expectations of continued losses;
- our ability to manage rapid growth;
- our ability to attract, retain and train qualified sales and
other personnel;
- successful implementation of the Company's operating and
growth strategy, including possible strategic acquisitions;
- fluctuations in quarterly operating results caused by a
variety of factors including the timing of sales and
development contracts, the adoption of the internet as a tool
for online training and continuing education in the healthcare
industry;
- successfully integrating past and future acquisitions in light
of challenges in retaining key employees, synchronizing
business processes and efficiently integrating facilities,
marketing and operations;
- our ability to satisfactorily resolve with WebMD
implementation of our existing agreement or to reach accord on
a revised agreement on acceptable terms;
- successfully establishing and maintaining new and existing
relationships with our content and distribution partners; and
- global and/or regional economic factors and potential changes
in laws and regulations, including, without limitation,
changes in federal, state and international laws regulating
education, training and internet transactions.
For additional information concerning risks and uncertainties that may
affect the Company's results of operations, please see the risks outlined under
the heading "Risk Factors" in the Company's Registration Statement on Form S-1
(File No. 333-88939) filed with the Securities and Exchange Commission.
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OVERVIEW
We have historically generated revenues primarily from the performance
of custom multimedia development services and from licensing our client server
training administrative software, Training Navigator, which we refer to as
T.NAV, to healthcare organizations. We have established relationships with major
healthcare institutions that license our software or contract with us to develop
custom multimedia products in a CD-ROM or Web-based format. Clients who license
our software pay a one-time license fee for the software and may purchase
maintenance, support and training content modules for an annual fee. Late in
1999, we entered into sponsorship agreements that provide for sponsorship of
online courseware. We expect our future online revenues to exceed historical
levels.
We recognize multimedia development revenues based on the percentage of
a project that is completed. Revenues from T.NAV or other software license fees
are recognized when the software is delivered. Subscriptions, upgrade,
maintenance and technical support revenues are accrued over the term of the
service period. Sponsorship revenues are recognized ratably over the term unless
usage exceeds the ratable portion, in which case recognition is accelerated to
reflect actual usage.
Going forward, we will focus our revenue generation efforts by
expanding our Web-based services to healthcare organizations including
hospitals, long-term care and outpatient facilities. The services will be
provided via our application service provider, or ASP, agreements. Specifically,
we will seek to generate revenues from healthcare workers by marketing to their
employers or sponsoring organizations. We will focus on transaction fees for
courseware paid by employers or sponsoring organizations. Our ASP model allows
us to host our system in a central data center, therefore eliminating our
customers' need for costly onsite installations of our software. Under the ASP
model, revenues are generated by charging for use of our courseware on a
subscription basis or on a per transaction basis. The ASP model also allows us
to generate revenues from healthcare organizations by entering into agreements
for administration and hosting services. We recognize administration and hosting
fees ratably over the term of these agreements. The costs of these revenues
include direct and hosting expenses. Such amounts are expensed as incurred.
We will also seek to generate revenues by marketing our educational
development services to pharmaceutical and medical device companies. Our
educational development services include: Web cast events, courseware
development, event development and registration and sponsorship of courseware
delivered through the Web distribution network. We recognize revenue related to
such services as services are rendered. Our Web distribution network includes
over 80 distribution partners and over 30 content partners. The costs of these
sales are in the form of royalties paid to third-party content owners and
distributors and costs incurred to develop content or convert content from
traditional media to a Web format.
An integral part of the Company's strategy is to acquire companies that
complement our products and services. Because of the financial impact of the
Company's recent acquisitions, the period-to-period comparisons of our financial
results are not necessarily meaningful. Additionally, due to the size of the
Company, acquisitions either individually or in the aggregate can materially
affect the Company's revenues and operating results.
We have acquired the following companies since January 1, 1999:
- SilverPlatter Education, which owns and distributes numerous
multimedia products and services targeted at providing
continuing medical education and other information to
physicians, for $0.8 million in cash and 49,202 shares of our
Common Stock;
- KnowledgeReview, which operates a search engine,
cmesearch.com, allowing physicians to locate seminars and
purchase educational CD-ROMs and online courseware, for
$310,000 in cash and 17,343 shares of our Common Stock;
- Quick Study, which owns over 60 hours of Web-based nursing and
OSHA content for $59,000 in cash, the assumption of $112,000
in long-term debt and 61,397 shares of our Common Stock;
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- m3 the Healthcare Learning Company, which provides
computer-based training to over 450 hospitals and healthcare
facilities, primarily in the areas of OSHA and regulatory
training, for $600,000 in cash, the assumption of $1.2 million
in long-term debt and 818,036 shares of our Common Stock;
- EMInet, which provides Web-based educational content for
emergency medical services personnel, for $640,000 in cash and
269,902 shares of our Common Stock;
- Education Design, Inc., which provides event development and
registration services, for $3.0 million in cash and 184,421
shares of our Common Stock; and
- SynQuest Technologies, Inc., which provides computer-based
training to over 300 hospitals and healthcare facilities, for
assumption of certain liabilities and 787,087 shares of our
Common Stock.
In February 2000, we entered into a four-year agreement with HCA
pursuant to which we will provide online training and education, courseware
development and administrative management and consulting services to HCA and its
affiliated and managed healthcare providers. Under this agreement, the Company
will be able to bill a minimum of $12 million for the aforementioned services
over the four-year term, with the minimum in the first year approximating $2.0
million. During the second quarter of 2000, the Company began recognizing
revenues under this agreement. The Company provided HCA with a warrant to
purchase HealthStream, Inc. Common Stock. The Company will reflect the revenues
related to the services provided, net of amortization of the fair value of the
warrant. The Company expects to amortize the $8.8 million of fair value of the
warrant over the term of the agreement as a reduction of the minimum revenues of
$12 million. The amortization will fluctuate based on the revenues received from
this agreement and will vary as a percentage of revenues based on the estimated
revenues over the course of the agreement. Through September 30, 2000, the
Company has included $525,000 of non-cash warrant amortization as a reduction of
gross revenues in its results of operations.
In February 2000, we entered into an agreement with WebMD which
provides that we will be the exclusive provider of education, continuing
education and training services for healthcare organizations, healthcare
professionals and healthcare workers on Web sites owned or operated by WebMD.
The agreement provides for payments to WebMD of $6.0 million per year for five
years on a quarterly basis as guaranteed minimum royalties. In the first year,
$2.0 million of the $6.0 million payment is to be applied toward mutually agreed
upon branding and promotion services. We will receive 100% of any revenues from
the sale of our products and services until we recover all payments made to
WebMD, after which we will receive 75% and WebMD will receive 25% of any
revenues. WebMD purchased $10.0 million of our Common Stock at the initial
public offering price in a concurrent private sale. The Company has encountered
delays in launching the WebMD agreement including the initial marketing
campaign. Active dialogue between the parties to address these delays continues
although the parties have not reached accord on the operational implementation
of the agreement. In May 2000, we made the first quarterly payment of $1.5
million. Due to the delays in launching the WebMD agreement, we did not make a
$1.5 million in August 2000. However, through September 30, 2000, the Company
has included $3.0 million of royalty expense related to this agreement in its
results of operations. At September 30, 2000, $1.5 million of accrued royalties
are included in accrued liabilities in the accompanying Condensed Consolidated
Balance Sheet.
To date, we have incurred substantial costs to develop our
technologies, create, license and acquire content, build brand awareness,
develop our infrastructure and expand our business, and have yet to sustain
significant revenues. As a result, we have incurred operating losses in each
fiscal quarter since 1994. We expect operating losses and negative cash flow to
continue for the foreseeable future as we plan to significantly increase our
operating expenses to help expand our business. These costs could have a
material adverse effect on our future financial condition or operating results.
We believe that period-to-period comparisons of our financial results are not
necessarily meaningful, and should not be relied upon as an indication of our
future performance.
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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 in 1999 consist primarily of sales of multimedia
development services for training modules and promotional materials for the
healthcare industry. Revenues in 1999 also include licensing fees and royalties
from product sales of proprietary client server based training software to
healthcare companies. During 1999, the Company revised its focus from
development services to online products and services. Revenues for the quarter
ended September 30, 2000 also include revenues related to product and service
lines derived from the m3, EMInet, Quick Study, Silver Platter, Knowledge
Review, EDI and SynQuest acquisitions. These revenues include installed client
server sales and support, emergency medicine and nursing online services, CD-ROM
sales, event development and registration, and subscription products. The
Company recognized approximately $90,000 of revenues related to services
provided under the HCA agreement, which included gross revenues of approximately
$280,000, net of warrant expense of $195,000.
Cost of Revenues. Cost of revenues in 1999 consist primarily of
salaries and employee benefits, materials, and depreciation associated with the
development of interactive media projects as well as royalties which are paid to
content providers based on a percentage of revenues. During 2000, cost of
revenues consist of salaries, employee benefits, materials and depreciation
associated with online services, interactive media development and certain
customer service personnel, technical support costs, direct costs and materials
related to projects, Web cast events, cost of CD-ROMs and live seminars,
personnel costs related to event development and registration, direct costs of
installed and other products as well as royalties which are paid to content
providers based on a percentage of revenues.
Product Development. Product development expenses consist primarily of
salaries and employee benefits, depreciation, costs associated with the
development of content, conversion and modification of owned content for Web
delivery, and expenditures associated with maintaining and enhancing our Web
sites, training delivery and administration products.
Selling, General and Administrative. General and administrative
expenses consist primarily of salaries and employee benefits for sales and
marketing, corporate, administrative and certain customer service personnel,
sales and marketing expenses, facility costs, depreciation, amortization of
intangibles, customer service, and fees for professional services. Royalties
paid to content providers, which are fixed fee arrangements, are also included
in general and administrative expenses. Sales and marketing expenses consist of
marketing professional fees, advertising, trade shows attendance, promotions and
related marketing costs.
Other Income/Expense. The primary component of other income is interest
and investment income. The primary component of other expense is interest
expense related to loans from related parties, capital leases and other notes
payable.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Revenues increased $2.1 million, from $652,000 in 1999 to
$2.7 million for the quarter ended September 30, 2000, due to revenues
attributable to acquired businesses and growth in our ASP business. For the
quarter ended September 30, 2000, revenues related to acquired businesses
totaled $2.0 million. Revenues related to acquired businesses include
approximately $840,000 related to EDI, $570,000 related to m3, and $580,000
related to SynQuest, Silver Platter, EMInet and Quick Study. The remainder of
the increase between 1999 and 2000 is attributable to growth in ASP revenues,
Web cast revenues, and online courseware revenues. These increases were offset
by a slight decrease in development services. This decrease is attributable to
the Company's change in focus from traditional development services to online
services.
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Cost of Revenues. Cost of revenues increased $663,000 from $371,000 in
1999 to $1.0 million in 2000. Of this increase, approximately $440,000 related
primarily to personnel and overhead costs of the 25 additional employees who
provide our products and services. In addition, the direct costs of event
development, Web cast events and product installation for installed products
related to the m3 acquisition and royalties based on a percentage of sales
resulted in an increase of approximately $160,000. The cost of revenue as a
percentage of revenues decreased from 56.9% in 1999 to 37.9% in 2000 as a result
of changes in the revenue mix to higher margin services and the shifting of
development personnel to work on additional feature sets for our proprietary
delivery platform.
Product Development. Product development expenses increased $1.1
million from $509,000 in 1999 to $1.6 million in 2000. Of this increase,
approximately $1.0 million relates to the addition of 42 systems and internal
development personnel and the use of contract labor personnel. Such personnel
have been added to implement our online services, support our acquired
technology platforms, and to accommodate increased content conversion and
development. Product development as a percentage of revenues decreased from
78.1% in 1999 to 59.2% in 2000 as a result of increased revenues, despite
additional personnel being added to develop and enhance our online and client
server products, convert content for our library, and improve our delivery
systems.
Selling, General and Administrative. Selling, general and
administrative expenses increased $5.3 million from $1.1 million in 1999 to $6.4
million in 2000. General and administrative expenses increased from $586,000 in
1999 to $3.4 million in 2000. General and administrative expenses increased by
$1.6 million related to fixed royalties to WebMD and other content partners. In
addition, general and administrative expenses increased by approximately $1.0
million due to the addition of 41 personnel, including customer service and
corporate and administrative personnel, and their related travel and overhead
expenses. These increases resulted from personnel added in connection with the
acquisitions as well as additional personnel hired to coordinate content and
distribution partner relationships, increased acquisition activities and
additional infrastructure required to accommodate growth.
Sales and marketing expenses, including personnel costs, increased from
$348,000 in 1999 to $1.2 million in 2000. Sales and marketing expenses increased
by $900,000 as a result of 35 additional sales, marketing and related support
personnel, travel, direct mail and advertising, attendance at trade shows, and
professional fees. Due to the annualized impact of the sales personnel added in
connection with the SynQuest acquisition, we anticipate that sales and marketing
expenses will continue to increase in future periods.
Depreciation and amortization expenses increased from $149,000 in 1999
to $1.8 million in 2000. The $1.7 million increase in depreciation and
amortization is attributable to the amortization of intangibles including
goodwill, content, non-competition agreements and customer lists related to the
acquisitions. As a percentage of revenues, selling, general and administrative
expenses increased from 166.2% in 1999 to 234.8% in 2000 as a result of the
increases in intangible amortization, personnel and infrastructure discussed
above.
Other Income/Expense. Interest and other income increased $993,000 from
approximately $85,000 in 1999 to $1.1 million in 2000 related to interest income
on the proceeds of the initial public offering and the concurrent private
offering. Interest expense to related parties decreased approximately $31,000 as
a result of the conversion of related party notes to preferred stock and
scheduled repayments of related party notes. Other interest expense increased by
approximately $10,000 related to debt and capital lease obligations assumed in
the acquisitions and new capital lease obligations.
Net Loss. Net loss increased $4.0 million from $1.3 million in 1999 to
$5.3 million in 2000 due to the factors described above.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenues. Revenues increased $4.6 million, from $1.8 million in 1999 to
$6.4 million for the nine months ended September 30, 2000, due to revenues
attributable to acquired businesses and growth in our ASP business. For the nine
months ended September 30, 2000, revenues related to acquired businesses totaled
$4.0 million. Revenues related to acquired businesses include approximately $2.1
million related to m3, $840,000 related to EDI, and approximately $1.0 million
related to SynQuest, Silver Platter, EMInet and Quick Study. The remainder of
the increase between 1999 and 2000 is attributable to growth in ASP revenues,
Web cast revenues, and online courseware revenues.
Cost of Revenues. Cost of revenues increased $1.7 million from $1.1
million in 1999 to $2.8 million in 2000. Of this increase, approximately $1.0
million related primarily to personnel and overhead costs of the 25 additional
employees who provide our products and services. In addition, the direct costs
of live events for EDI, product installation for m3, Web cast events and
royalties resulted in an increase of approximately $700,000. The cost of
revenues as a percentage of revenues decreased from 60.9% in 1999 to 44.4% in
2000 as a result of the change in revenue components including the lower cost
structure related to ASP and acquired product revenues.
Product Development. Product development expenses increased $2.8
million from $1.2 million in 1999 to $4.0 million in 2000. Of this increase,
approximately $1.8 million relates to the addition of 42 systems and internal
development personnel. Such personnel have been added to implement our online
services and to accommodate increased content conversion and development. In
addition, utilization of contract labor and other personnel resulted in an
increase of $740,000, including non-cash product development expense of
approximately $260,000. Product development as a percentage of revenues
decreased from 70.9% in 1999 to 63.5% in 2000.
Selling, General and Administrative. Selling, general and
administrative expenses increased $13.4 million from $2.1 million in 1999 to
$15.5 million in 2000. General and administrative expenses increased from $1.2
million in 1999 to $7.3 million in 2000. General and administrative expenses
increased by $6.1 million due to $3.1 million related to fixed royalties to
WebMD and other content partners. In addition, general and administrative
expenses increased by approximately $2.7 million related to the addition of 41
personnel, related to corporate and administrative personnel and customer
service personnel, and their related travel and overhead expenses. These
personnel were added in connection with the acquisitions as well as additional
personnel hired to coordinate content and distribution partner relationships,
increased acquisition activities and additional infrastructure required to
accommodate growth.
Sales and marketing expenses, including personnel costs, increased from
$669,000 in 1999 to $3.9 million in 2000. Sales and marketing expenses increased
to $3.2 million as a result of additional personnel, direct mail and
advertising, attendance at trade shows, and related travel. We anticipate that
sales and marketing expenses will continue to increase in future periods,
reflecting the annualized impact of the sales personnel added in connection with
the 2000 acquisitions.
Depreciation and amortization expenses increased from $335,000 in 1999
to $4.4 million in 2000. The $4.1 million increase in depreciation and
amortization is attributable to the amortization of intangibles including
goodwill, content, non-competition agreements and customer lists related to the
acquisitions. As a percentage of revenues, selling, general and administrative
expenses increased from 120.5% in 1999 to 243.4% in 2000 as a result of the
increases in intangible amortization, personnel and infrastructure discussed
above.
Other Income/Expense. Interest and other income increased $1.7 million
from approximately $120,000 in 1999 to $1.8 million in 2000 related to interest
income on the proceeds of the initial public offering and the concurrent private
offering as well as a $94,000 gain on a sale of an investment. Interest expense
to related parties decreased approximately $134,000 as a result of the
conversion of related party notes to preferred stock and scheduled repayments of
related party notes. Other interest expense increased by approximately $74,000
related to debt and capital leases assumed in the acquisitions and new capital
lease obligations.
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Net Loss. Net loss increased $11.6 million from $2.7 million in 1999 to
$14.3 million in 2000 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations largely through
the private placement of equity securities, loans from related parties and, to a
lesser extent, from revenues generated from custom development fees and product
sales. During the nine months ended September 30, 2000 we completed our initial
public offering of common stock resulting in net proceeds of $44.2 million and a
concurrent private placement of common stock to WebMD resulting in net proceeds
of $10.0 million.
Net cash used in operating activities for the nine months ended
September 30 was $2.0 million in 1999 and $11.3 million in 2000. Cash used in
operating activities during the nine months ended September 30, 1999 related to
the net loss, increases in other assets and decreases in accrued liabilities and
deferred revenue which were partially offset by decreases in accounts
receivable, increases in accounts payable, and non-cash product development
expense as well as depreciation and amortization expense. Cash used in operating
activities during the nine months ended September 30, 2000, was attributable to
the $14.3 million net loss, increases in accounts and unbilled receivables,
prepaid expenses and other current assets, and other assets which were partially
offset by increases in accounts payable, accrued liabilities, deferred revenue
and depreciation, amortization and non-cash warrant expense.
Net cash used in investing activities for the nine months ended
September 30 was $1.2 million in 1999 and $28.8 million in 2000. Cash used in
investing activities during 1999 related to the acquisition of SilverPlatter as
well as the purchase of investments, property and equipment. Investing
activities which used cash in 2000 related to the purchase of investments as
well as the acquisitions of m3, EMInet, Quick Study, KnowledgeReview, EDI and
SynQuest. These acquisitions resulted in cash paid of $6.7 million. In addition,
cash paid for the purchase of property and equipment totaled $2.1 million. In
the nine months ended September 30, 2000, these outflows were partially offset
by the receipt of $122,000 from the sale of investments by the Company.
Cash provided by financing activities for the nine months ended
September 30 was $17.0 million in 1999 and $51.3 million in 2000. Cash provided
by financing activities during the nine months ended September 30, 1999 related
primarily to $16.8 million received from the sale of Preferred Stock. During
2000, cash provided by financing activities related to $54.2 million received in
connection with the sale of common stock in the initial public offering,
concurrent private offering and the exercise of the underwriters' over-allotment
option. In addition, the exercise of stock options resulted in cash proceeds of
$601,000, which was offset by $2.0 million of expenses of the common stock
offering and $1.5 million of repayments of debt and capital leases.
In connection with our agreement with HCA, HCA will pay us revenues of
at least $12.0 million over the four-year term of the agreement. As discussed
above, the Company expects to amortize the estimated fair value of the warrant
($8.8 million) as a reduction of revenues proportionately over the term of the
agreement. The amortization will fluctuate based on the revenues received from
this agreement and will vary as a percentage of revenues based on the estimated
revenues over the course of the agreement.
We expect to incur additional product development and sales and
marketing costs, to grow our business. As a result of the anticipated growth in
personnel, development and online transactions, we expect that our capital
expenditures will be approximately $1.2 million during the remainder of 2000.
Our arrangements with distribution, content and development partners
have typically provided for payments based on revenues, and we expect to
continue similar arrangements in the future. In addition to such percentage
payments, we have fixed payment commitments of approximately $1.6 million in
2000, $6.3 million in 2001, $6.2 million in 2002, $6.0 million in 2003 and 2004
and $1.5 million in 2005. We also have fixed educational grant commitments of
approximately $ 100,000 in 2000. We have variable commitments of approximately
$250,000 related to agreements under which other organizations have agreed to
provide content development services for us. Payments under these development
arrangements are contingent upon the delivery of services.
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Our obligation to WebMD is $6.0 million a year through the end of the
five-year term of the agreement and is included in our partner commitments
described above. The Company has encountered delays in launching the WebMD
agreement including the initial marketing campaign. Active dialogue between the
parties to address these delays continues although the parties have not reached
accord on the operational implementation of the agreement. In May 2000, we made
the first quarterly payment of $1.5 million. Due to the delays in launching the
WebMD agreement, we did not make a $1.5 million in August 2000.
As of September 30, 2000, our primary source of liquidity was $24.8
million of cash and $20.4 million of investments. As of October 31, 2000, the
Company had cash and investments of approximately $43.6 million. The primary
reason for this decline was the repayment of the liabilities assumed in
connection with the acquisition of SynQuest. We believe that our existing cash
and investments will be sufficient to meet anticipated cash needs for working
capital, capital expenditures and acquisitions for at least the next 12 months.
Our growth strategy may include acquiring companies that complement our products
and services. We anticipate that these acquisitions, if any, will be effected
through issuance of Common Stock and to a lesser extent, the payment of cash.
Our inability to use our Common Stock to finance acquisitions or failure to
generate sufficient cash flow from operations or raise additional capital when
required in sufficient amounts and on acceptable terms could harm our business,
results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 September 30, 2000, we had no outstanding indebtedness other than
capital lease arrangements. Accordingly, the Company is not exposed to
significant market risk. The Company is exposed to market risk with respect to
the cash and cash equivalents that it invests. At October 31, 2000, we had
approximately $43.6 million of cash and investments, which were invested on a
combination of short and long-term investments. At this investment level a
hypothetical 10% decrease in the interest rate would decrease interest income
and increase net loss on an annualized basis by approximately $436,000. As the
Company continues to invest its excess cash, the Company's exposure to market
risk with respect to rates of return increases.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended September
30, 1999
27.2 Financial Data Schedule for the nine months ended September
30, 2000
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended September 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSTREAM, INC.
By: /s/ ARTHUR E. NEWMAN
----------------------------------------
Arthur E. Newman
Chief Financial Officer
November 13, 2000
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INDEX TO EXHIBITS
ITEM DESCRIPTION
27.1 Financial Data Schedule for the nine months ended September 30, 1999
27.2 Financial Data Schedule for the nine months ended September 30, 2000
22
