<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 March 31, 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 No X
-- --
As of May 5, 2000, 19,488,934 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
March 31, 2000 (Unaudited) ............................................... 1
Condensed Consolidated Statements of Operations (Unaudited) - Three Months
Ended March 31, 1999 and 2000 ............................................ 2
Condensed Consolidated Statement of Shareholders'
Equity (Unaudited) ....................................................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months
Ended March 31, 1999 and 2000 ............................................ 4
Notes to Condensed Consolidated Financial Statements ..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............... 14
Part II. Other Information
Item 1 Legal Proceedings ........................................................ 15
Item 2. Changes in Securities and Use of Proceeds ................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ...................... 15
Item 6. Exhibits and Reports on Form 8-K ......................................... 17
Signature ......................................................................... 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
---- ----
(NOTE 1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,632,144 $ 8,968,091
Accounts receivable, net of allowance for doubtful accounts
of $36,500 in 1999 and $54,800 in 2000 544,042 1,351,539
Accounts receivable - unbilled 18,877 11,766
Investments 86,063 224,375
Prepaid expenses and other current assets 263,517 576,642
------------ ------------
Total current assets 14,544,643
11,132,413
Property and equipment:
Furniture and fixtures 445,172 579,394
Equipment 1,109,015 1,561,328
Leasehold improvements 369,346 526,416
------------ ------------
1,923,533 2,667,138
Less accumulated depreciation and amortization (589,632) (680,098)
------------ ------------
1,333,901 1,987,040
Intangible assets, net of accumulated amortization
of $213,031 in 1999 and $1,153,087 in 2000 1,134,673 14,115,007
Other assets 441,488 1,177,279
------------ ------------
Total assets $ 17,454,705 $ 28,411,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 443,455 $ 413,697
Accrued liabilities 448,727 1,959,624
Deferred revenue 791,424 1,936,659
Notes payable - related party 1,293,000 1,293,000
Current portion of long-term debt - related party 12,892 6,543
Current portion of capital lease obligations 89,881 169,636
------------ ------------
Total current liabilities 3,079,379 5,779,159
Long-term note payable -- 1,180,000
Capital lease obligations, less current portion 185,801 269,184
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 20,000,000 shares authorized;
4,165,461 shares and 5,593,189 shares issued and outstanding
at December 31, 1999 and March 31, 2000, respectively 4,008,991 14,340,890
Preferred stock, no par value, 5,000,000 shares authorized
Series A Convertible Preferred Stock; 76,000 shares
issued and outstanding 760,000 760,000
Series B Convertible Preferred Stock, 1,228,801 shares
issued and outstanding 12,138,000 12,138,000
Series C Convertible Preferred Stock, 627,406 shares
issued and outstanding 6,274,060 6,274,060
Accumulated other comprehensive income (loss) (41,690) 124,455
Accumulated deficit (8,949,836) (12,454,009)
------------ ------------
Total shareholders' equity 14,189,525 21,183,396
------------ ------------
Total liabilities and shareholders' equity $ 17,454,705 $ 28,411,739
============ ============
</TABLE>
See accompanying notes.
1
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HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Revenues $ 653,286 $ 1,444,942
Operating costs and expenses:
Cost of revenues 294,223 758,060
Product development 286,093 1,190,070
Selling, general and administrative expenses 359,071 3,179,441
----------- -----------
Total operating costs and expenses 939,387 5,127,571
----------- -----------
Loss from operations (286,101) (3,682,629)
----------- -----------
Other income (expense):
Interest and other income 1,225 243,150
Interest expense - related parties (91,744) (27,285)
Interest expense (1,044) (37,409)
----------- -----------
(91,563) 178,456
----------- -----------
Net loss $ (377,664) $(3,504,173)
=========== ===========
Net loss per share:
Basic $ (0.12) $ (0.74)
=========== ===========
Diluted $ (0.12) $ (0.74)
=========== ===========
Weighted average shares of common stock outstanding:
Basic 3,256,307 4,743,156
=========== ===========
Diluted 3,256,307 4,743,156
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
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
gain on
investment,
net of tax -- -- -- -- -- --
Comprehensive
income -- -- -- -- -- --
Issuance of
common
stock in
acquisitions 1,166,679 10,090,200 -- -- -- --
Exercise of
Stock options 261,049 225,699 -- -- -- --
Issuance of
options for
services -- 16,000 -- -- -- --
--------- ---------- ------ -------- --------- ------------
Balance at
March 31,
2000 5,593,189 $ 14,340,890 76,000 $760,000 1,228,801 $ 12,138,000
========= ============ ====== ======== ========= ============
</TABLE>
<TABLE>
<CAPTION>
Series C
Convertible Accumulated
Preferred Stock Accumu- Other Compre- Total
------------------------- lated hensive 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 -- -- (3,504,173) -- (3,504,173)
Unrealized
gain on
investment,
net of tax -- -- -- 166,145 166,145
------- ----------
Comprehensive
income -- -- -- -- (3,338,028)
----------
Issuance of
common
stock in
acquisitions -- -- -- -- 10,090,200
Exercise of
Stock options -- -- -- -- 225,699
Issuance of
options for
services -- -- -- -- 16,000
------- ---------- ------------ --------- ------------
Balance at
March 31, 2000 627,406 $6,274,060 $(12,454,009) $ 124,455 $ 21,183,396
======= ========== ============ ========= ============
</TABLE>
3
<PAGE> 6
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 2000
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (377,664) $ (3,504,173)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 40,003 90,466
Amortization -- 957,556
Gain on sale of investment -- (94,438)
Noncash compensation expense -- 16,000
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable 125,949 103,045
Accounts receivable - unbilled 5,976 7,111
Prepaid expenses and other current assets (72,431) (311,883)
Other assets -- (749,916)
Accounts payable 64,202 (83,058)
Accrued liabilities (48,739) 1,126,446
Deferred revenue (24,860) (510,376)
------------ ------------
Net cash used in operating activities (287,564) (2,953,220)
INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired -- (1,481,807)
Proceeds from sale of investment -- 122,271
Purchase of property and equipment (89,580) (419,072)
------------ ------------
Net cash used in investing activities (89,580) (1,778,608)
FINANCING ACTIVITIES:
Proceeds from notes payable - related party 18,000 --
Proceeds from issuance of preferred stock 350,000 --
Proceeds from exercise of stock options -- 225,699
Payments on notes payable - related party (5,634) (76,016)
Payment on notes payable -- (50,000)
Payments on capital lease obligations (2,495) (31,908)
------------ ------------
Net cash provided by financing activities 359,871 67,775
------------ ------------
Net decrease in cash and cash equivalents (17,273) (4,664,053)
Cash and cash equivalents at beginning of period 50,823 13,632,144
------------ ------------
Cash and cash equivalents at end of period $ 33,550 $ 8,968,091
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 65,219 $ 60,166
============ ============
Capital lease obligations incurred $ -- $ 160,269
============ ============
Effects of acquisitions:
Estimated fair value of assets acquired $ -- $ 1,196,740
Purchase price in excess of net assets acquired -- 13,920,389
Estimated fair value of liabilities assumed -- (3,427,806)
Stock issued -- (10,090,200)
------------ ------------
Cash paid -- 1,599,123
Less cash acquired -- (117,316)
------------ ------------
Net cash paid for acquisitions $ -- $ 1,481,807
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 7
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 months ended
March 31, 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).
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 $1.0 million, consisting of $0.8 million in cash and
$0.2 million (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 list 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 $0.5 million consisting of $0.2 million (17,343 shares) of the Company's
Common Stock and $0.3 million in cash. All of the Common Stock is held in an
escrow account for a one-year period, subject to claims for indemnification
pursuant to the asset purchase agreement. KnowledgeReview, LLC 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
list 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.
5
<PAGE> 8
Quick Study, Inc. On January 11, 2000, the Company acquired
substantially all of the assets and liabilities of Quick Study, Inc. for $0.6
million consisting of $0.5 million (61,397 shares) of the Company's Common Stock
and $0.1 million in cash. 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 Common Stock is 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, Inc. 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, noncompete
agreements and customer list 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 $7.7 million
consisting of $7.1 million (818,037 shares) of the Company's Common Stock and
$0.6 million in cash. m3 provided interactive, multimedia education and training
solutions to hospitals and other healthcare organizations. A portion of the
Common Stock is 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 list 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, Inc. for $2.9 million consisting of $2.3 million
(269,902 shares) of the Company's Common Stock and $0.6 million in cash. A
portion of the Common Stock is 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, Inc. 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 list 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.
The operating results of the acquired companies have been included in
the accompanying condensed consolidated statements of operations from the
respective dates of acquisition. The following unaudited pro forma results of
operations give effect to the operations of the acquired companies as if the
respective acquisitions had occurred on January 1, 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 on January 1,
2000 or to project the Company's results of operations in any future period.
6
<PAGE> 9
<TABLE>
<CAPTION>
Three months ended
March 31, 2000
--------------
<S> <C>
Revenue $ 1,555,837
Net loss $ (4,014,256)
Net loss per share:
Basic $ (0.81)
Diluted $ (0.81)
</TABLE>
In accordance with SFAS 128, escrowed shares and any shares subject to
vesting are excluded from the weighted average shares outstanding for purposes
of calculating net loss per share.
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 common equivalent shares outstanding during the period. Common equivalent
shares, composed of incremental common shares issuable upon the exercise of
stock options and warrants, and 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
2,000,000 at March 31, 1999 and 12,800,000 at March 31, 2000.
4. SUBSEQUENT EVENTS
On April 14, 2000, the Company completed its initial public offering
(IPO) of 5,000,000 shares of its Common Stock for net proceeds of $41.8 million.
On April 14, 2000, the Company completed its private placement of 1,111,111
shares of its Common Stock to Healtheon/Web MD for net proceeds of $10.0
million. Upon consummation of the IPO, all series A, B and C 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 553,712 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. The underwriters have notified the Company that they intend to
purchase an additional 275,000 shares of Common stock to cover over-allotments.
This purchase is expected to close on May 15, 2000.
On May 1, 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. As of May 5, 2000, the Company had less than $10,000 of notes payable
outstanding.
7
<PAGE> 10
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:
- 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;
- 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.
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
training content modules for an annual fee. Late in 1999, we entered into
sponsorship agreements which provide for sponsorship of online courseware. We
expect our future online revenues to significantly exceed historical levels.
8
<PAGE> 11
We recognize multimedia development revenues based on the percentage of
a project that is completed. Revenues from T.NAV software license fees are
recognized when the software is delivered. 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.
We plan to generate revenues by marketing our Web-based services to
healthcare workers through healthcare organizations. 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. The transaction fees for courseware
resulting from this marketing may either be paid by the employer or sponsoring
organization or, in the case of healthcare professionals, may be billed directly
to the individual. Our ASP model will allow 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 will be generated
by charging for use of our courseware on a per transaction basis, based on usage
by the end user. In addition, the ASP model will allow us to generate revenues
from healthcare organizations by entering into agreements for administration and
hosting services. We will 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 also plan to generate revenues through our more than 30 third party
Web distribution network partners. We will recognize revenue through a
transaction fee charged when a healthcare professional accesses continuing
education content on one of our distribution partners' web sites and elects to
receive credit. Such fees are paid by either the healthcare professional
directly via a secured credit card transaction or by third party organizations
which sponsors the course for this audience. The costs of these sales are in the
form of royalties we pay to third-party content owners and distributors and
costs we incur 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 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 web-based hours of 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;
- 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; and
- 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.
9
<PAGE> 12
In February 2000, we entered into a four-year agreement with
Columbia/HCA pursuant to which we will provide online training and education,
courseware development and administrative management and consulting services to
Columbia/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.
In February 2000, we entered into an agreement with Healtheon/WebMD
pursuant to which 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
Healtheon/WebMD. Pursuant to this agreement, we will pay Healtheon/WebMD $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 will 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 of the guaranteed minimum royalties to Healtheon/WebMD, and after
that we will receive 75% and Healtheon/WebMD will receive 25% of any revenues.
In connection with the agreement, Healtheon/WebMD agreed to purchase $10.0
million of our common stock at the initial public offering price in a concurrent
private sale.
To date, we have incurred substantial costs to develop our
technologies, create, license and acquire our content, build brand awareness,
develop our infrastructure and expand our business, and have yet to achieve
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.
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.
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<PAGE> 13
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. Approximately $243,000 of
online revenues were recognized during the quarter ended March 31, 2000. We
expect these revenues to grow significantly in the future, in part due to the
Columbia/HCA agreement. Revenues for the quarter ended March 31, 2000 also
include revenues related to product and service lines derived from the m3,
EMInet, Quick Study, Silver Platter and Knowledge Review acquisitions. These
revenues include installed client server sales and support, emergency medicine
and nursing online services, CD-ROM sales, live seminars and subscription
products.
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 the first quarter of
2000, cost of revenues consist of salaries, employee benefits, materials and
depreciation associated with 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, 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 and 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Revenues increased $0.7 million, from $0.7 million in 1999 to
$1.4 million for the quarter ended March 31, 2000, due to revenues attributable
to acquired businesses. For the quarter ended March 31, 2000, revenues related
to acquired businesses totaled $0.8 million. Revenues related to acquired
businesses include approximately $0.5 million related to m3, $0.2 million
related to Silver Platter, and $0.1 million related to EMInet and Quick Study.
The historical business is comparable between 1999 and 2000. These revenues
include approximately $0.2 million of online revenues.
11
<PAGE> 14
Cost of Revenues. Cost of revenues increased $0.5 million from $0.3
million in 1999 to $0.8 million in 2000. Of this increase, $0.2 million related
primarily to the addition of 8 employees to support our acquisitions and growth
of our operations. In addition, the direct costs of projects and web cast events
together with technical support resulted in an increase of $0.2 million. The
remainder of the increase related primarily to the direct costs of client server
products and installations and subscription and CD-ROM products. The cost of
revenues as a percentage of revenues increased from 45.0% in 1999 to 52.5% in
2000 as a result of an increase in personnel in the production department.
Product Development. Product development expenses increased $0.9
million from $0.3 million in 1999 to $1.2 million in 2000. Of this increase,
$0.8 million relates to the addition of 38 systems and internal development
personnel. Such personnel have been added to implement our online services and
to accommodate increased content conversion and development. Product development
as a percentage of revenues increased from 43.8% in 1999 to 82.4% in 2000 as a
result of additional personnel 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 $2.8 million from $0.4 million in 1999 to $3.2
million in 2000. General and administrative expenses increased from $0.3 million
in 1999 to $1.7 million in 2000. Sales and marketing expenses, excluding
personnel costs, increased from $0.1 million in 1999 to $0.5 million in 2000.
Depreciation and amortization expenses increased from $0.1 million in 1999 to
$1.0 million in 2000. General and administrative expenses increased by $1.4
million due to the addition of 47 personnel, including 19 sales and marketing
personnel, 18 corporate and administrative personnel, and 10 customer service
personnel. 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 increased to $0.5 million as a result of additional travel, direct mail
and advertising, attendance at trade shows, and professional fees. We anticipate
that sales and marketing expenses will continue to increase in future periods.
The $0.9 million increase in depreciation and amortization is attributable to
the amortization of intangibles including goodwill, noncompete agreements and
customer lists related to the acquisitions. As a percentage of revenues,
selling, general and administrative expenses increased from 55 % in 1999 to 220%
in 2000 as a result of the increases in personnel and infrastructure discussed
above.
Other Income/Expense. Interest and other income increased $ 0.2 million
from approximately $1,000 in 1999 to $0.2 million in 2000 related to interest
income and a $0.1 million gain on the sale of investments. Interest expense to
related parties decreased approximately $60,000 related to the conversion of
related party notes to preferred stock and scheduled repayments of related party
notes. Other interest expense increased by approximately $36,000 related
primarily to capital lease obligations.
Net Loss. Net loss increased $3.1 million from $0.4 million in 1999 to
$3.5 million in 2000 due to the factors described above.
12
<PAGE> 15
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. Subsequent to the end of the quarter, in April 2000 we completed an
initial public offering of common stock resulting in net proceeds of $41.8
million and a concurrent private placement of common stock to Healtheon/WebMD
resulting in net proceeds of $10.0 million. In addition, the underwriters have
notified the Company that they intend to purchase an additional 275,000 shares
of Common stock to cover over-allotments. This purchase is expected to close on
May 15, 2000.
Net cash used in operating activities was $0.3 million in 1999 and $3.0
million in 2000. Cash used in operating activities during the quarter ended
March 31, 1999 related to the net loss, increases in prepaid expenses and other
current assets, decreases in accrued liabilities and deferred revenue, which
were partially offset by decreases in accounts receivable and increases in
accounts payable. Cash used in operating activities during the quarter ended
March 31, 2000, which excludes the effects of acquisitions, was attributable to
a $3.5 million net operating loss and increases in prepaid expenses and other
current assets, other assets and decreases in deferred revenue which were
partially offset by increases in depreciation and amortization as well as
increases in accrued liabilities and a decrease in accounts receivable.
Net cash used in investing activities was $0.1 million in 1999 and $1.8
million in 2000. Cash used in investing activities during 1999 was primarily for
the purchase of property and equipment, while cash paid for acquisitions in 2000
related to m3, EMInet, Quick Study and KnowledgeReview totaled $1.5 million and
cash paid for the purchase of property and equipment totaled $0.4 million. In
the first quarter of 2000, these outflows were partially offset by the receipt
of $0.1 million from the sale of investments by the Company.
Cash provided by financing activities was $0.4 million in 1999 and $0.1
million in 2000. Cash provided by financing activities during 1999 related
primarily to $0.4 million received from the sale of Series A Preferred Stock.
During 2000, cash provided by financing activities related to $0.2 million
received in connection with the exercise of stock options, which was offset by
$0.1 million of repayments of debt and capital leases. As of March 31, 2000, our
primary source of liquidity was $9.0 million of cash and cash equivalents.
Following our initial public offering, substantially all debt was retired and
certain debt and all preferred stock was converted into common stock. As of May
2, 2000, the Company had less than $10,000 of outstanding notes payable and cash
and cash equivalents of $57.4 million.
In connection with our agreement with Columbia/HCA, Columbia/ HCA will
pay us minimum revenues of $12.0 million over the four-year term of the
agreement. We also expect to incur significantly higher costs, particularly
content development costs 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 $3.5
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 $270,000 in 2000
and $190,000 in 2001. We also have fixed educational grant commitments of
approximately $210,000 in 2000. We have variable commitments of approximately
$900,000 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.
13
<PAGE> 16
In connection with the Healtheon/Web MD agreement, we received $10.0
million in proceeds from Healtheon/Web MD in a private placement of common stock
that closed in April. We are obligated to pay Healtheon/Web MD $6.0 million in
each of the five years of the agreement. We expect these payments to total $4.5
million in 2000, $6.0 million in 2001 through 2004 and $1.5 million in 2005.
We believe that proceeds from our initial public offering and
concurrent private placement together with the cash and cash equivalents held at
March 31, 2000, 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 also includes acquiring companies that complement our
products and services. We anticipate that these acquisitions, if any, will be
effected primarily through issuance of Common Stock. Failure to generate
sufficient cash flow from operations or raise additional capital when required
during or following that period in sufficient amounts and on terms acceptable to
us could harm our business, results of operations and financial condition.
YEAR 2000
We have conducted a comprehensive review of both information technology
and non-information systems to ensure that they are Year 2000 compliant. Based
on the results of our review and experience to date, it appears that there are
no significant Year 2000 issues within our systems that would have a negative
effect on our ability to conduct business. In addition to our systems
assessment, we have gathered information from our third-party systems and
software vendors and suppliers to identify and resolve issues involving the Year
2000 problem. Based on representations from the applicable suppliers, we believe
that the third-party software and systems that are material to our business are
Year 200 compliant.
We believe that we have identified all Year 2000 problems that could
harm our business, financial condition or operating results. We have not
experienced any significant problems with regard to Year 2000 issues.
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 March 31, 2000, we had $1.3 million of variable rate notes
payable and $1.2 million of notes payable at 13%. As of May 5, 2000, the Company
had less than $10,000 of outstanding notes payable and, accordingly, 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 May 5, 2000, we had
approximately $57.4 million of cash and cash equivalents, which were invested on
a short-term basis. 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 $344,000.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 3, 2000, a complaint was filed in the Chancery Court of Shelby
County, Tennessee against the Company and two individual officers of the
corporation from which we acquired the domain name "healthstream.com." The
complaint sought a declaratory judgment that the transaction by which we
acquired the domain name is void, alleging that the defendant officers did not
have the authority to bind the corporation from which we purchased the domain
name. The Company has conclusively settled this litigation for a de minimus
amount of consideration and a consent order has been filed with the Chancery
Court of Shelby County, Tennessee to dismiss the action with prejudice.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 10, 2000 our Registration Statement on Form S-1 (File No.
333-88939) was declared effective by the Securities and Exchange Commission.
Pursuant to the Registration Statement, we registered and sold 5,000,000 shares
of common stock at a price of $9.00 per share. The managing underwriters were
FleetBoston Robertson Stephens Inc. The aggregate price of the amount offered
and sold was $45,000,000.
The following sets forth the Company's reasonable estimates of the
total expenses incurred by the Company, in connection with the issuance and
distribution of the securities registered:
<TABLE>
<S> <C>
Underwriting discounts and commissions.................. $3,150,000
Other Expenses.......................................... $1,000,000
----------
Total................................................... $4,150,000
</TABLE>
The net offering proceeds to the Company after deducting the total
expenses set forth above were approximately $40,850,000. From the effective date
of the Registration Statement through May 5, 2000, we have not used any of the
net offering proceeds to fund general operating expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 14, 2000, the Company held its Annual Meeting of Shareholders.
At the Annual Meeting, the shareholders of the Company elected the following
persons to serve as directors for a term of one year and until their successors
are duly elected and qualified with the number of votes cast for, against or
withheld as set forth opposite their names:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST WITHHOLD AUTHORITY
<S> <C> <C> <C>
Robert A. Frist, Jr. 6,876,964 0 0
Jeffrey L. McLaren 6,876,964 0 0
Charles N. Martin, Jr. 6,876,964 0 0
Thompson S. Dent 6,876,964 0 0
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C> <C>
M. Fazle Husain 6,876,964 0 0
John H. Dayani, Sr., Ph.D. 6,876,964 0 0
James F. Daniell, M.D. 6,876,964 0 0
William W. Stead, M.D. 6,876,964 0 0
</TABLE>
The shareholders of the Company also voted to amend and restate the
Company's charter to increase the number of shares authorized to be issued and
create a classified board of directors with the following number of votes cast
for, against or abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
6,843,776 33,188 0
</TABLE>
The shareholders of the Company also voted to amend and restate the
Company's Bylaws to add certain provisions regarding shareholder voting,
meetings and other items with the following votes cast for, against or
abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C>
6,843,776 33,188 0
</TABLE>
The shareholders of the Company also voted to approve the 2000 Stock
Incentive Plan to award stock-based incentives to key employees, consultants
and non-employee directors with the following number of votes cast for,
against or abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C>
6,876,964 0 0
</TABLE>
The shareholders of the Company also voted to approve Indemnification
Agreements to be entered into with our directors with the following number of
votes cast for, against or abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C>
6,843,776 33,188 0
</TABLE>
16
<PAGE> 19
The shareholders of the Company also voted to approve the Employee
Stock Purchase Plan to provide employees with incentives by encouraging
investment in our common stock with the following number of votes cast for,
against or abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C>
6,876,964 0 0
</TABLE>
The preferred shareholders of the Company also voted to approve the
Amended and Restated Investors' Rights Agreement adding CIS Holdings, Inc. and
Healtheon/WebMD as parties thereto with the following number of votes cast
for, against or abstaining:
<TABLE>
<CAPTION>
VOTES
FOR AGAINST ABSTAIN
<S> <C> <C>
3,854,676 0 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the three months ended March 31,
2000
27.2 Financial Data Schedule for the three months ended March 31,
1999
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended March 31, 2000.
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSTREAM, INC.
By: /s/ Arthur E. Newman
---------------------------------
Arthur E. Newman
Chief Financial Officer
May 12, 2000
18
<PAGE> 21
INDEX TO EXHIBITS
Item Description
---- -----------
27.1 Financial Data Schedule for the three months ended March 31,
2000
27.2 Financial Data Schedule for the three months ended March 31,
1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHSTREAM, INC. FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,968,091
<SECURITIES> 224,375
<RECEIVABLES> 1,418,105
<ALLOWANCES> 54,800
<INVENTORY> 0
<CURRENT-ASSETS> 11,132,413
<PP&E> 2,667,138
<DEPRECIATION> 680,098
<TOTAL-ASSETS> 28,411,739
<CURRENT-LIABILITIES> 5,779,159
<BONDS> 1,449,184
0
19,172,060
<COMMON> 14,340,890
<OTHER-SE> (12,329,554)
<TOTAL-LIABILITY-AND-EQUITY> 28,411,739
<SALES> 1,444,942
<TOTAL-REVENUES> 1,444,942
<CGS> 758,060
<TOTAL-COSTS> 758,060
<OTHER-EXPENSES> 1,190,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,694
<INCOME-PRETAX> (3,504,173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,504,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,504,173)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHSTREAM, INC. FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 33,550
<SECURITIES> 0
<RECEIVABLES> 396,712
<ALLOWANCES> 36,500
<INVENTORY> 0
<CURRENT-ASSETS> 1,125,657
<PP&E> 1,071,243
<DEPRECIATION> 420,137
<TOTAL-ASSETS> 1,125,657
<CURRENT-LIABILITIES> 3,409,179
<BONDS> 29,076
0
760,000
<COMMON> 1,804,898
<OTHER-SE> (4,887,496)
<TOTAL-LIABILITY-AND-EQUITY> 1,125,657
<SALES> 653,286
<TOTAL-REVENUES> 653,286
<CGS> 294,223
<TOTAL-COSTS> 294,223
<OTHER-EXPENSES> 286,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,788
<INCOME-PRETAX> (377,664)
<INCOME-TAX> 0
<INCOME-CONTINUING> (377,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377,664)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
